This week, the House Ways and Means Committee unveiled the legislative text of H.R. 1, the “Tax Cuts and Jobs Act,” as well as a section-by-section summary of the proposed legislation. For a high level view of the contents of the act, we have provided the most pertinent items in the bulleted list below. For the more details, you can read the detailed language of the act (429 pages), as well as the section-by-section summary (89 pages) provided by the Committee.

Business Provisions

  • A permanent cut in the federal marginal tax rate to a flat-rate 20%
  • Full capital expenditure expensing on qualified property acquired and in service between 27 September 2017 and 1 January 2023
  • Interest deductibility is disallowed for net interest expense in excess of 30% of businesses’ adjusted taxable income
  • One-off deemed repatriation 12% tax rate on liquid assets and 5% on illiquid assets
  • A move to a territorial tax system (with tax-free remittance of foreign dividends)
  • 25% flat tax rate for pass-through businesses (S corporations and partnerships), including detailed guardrails to prevent tax avoidance
  • Preservation of the R&D tax credit
  • Businesses would lose the ability to deduct certain executive compensation above $1 million which they can now do for performance-based pay
  • Repeal the section 199 domestic manufacturing deduction
  • Impose a 30% limit on interest deductibility (based on an alternate version of taxable income and with an exception for interest incurred with respect to a real property trade or business)
  • Limit the use of net operating losses
  • Repeal tax credits including WOTC, New Markets Tax Credit, and several others

Individual Provisions

  • Individual tax rates are simplified, with three tax bands instead of seven
  • The 39.6% top rate of tax has been maintained
  • New individual tax brackets are introduced
    • 12% for individual incomes up to $45,000 (couples $90,000)
    • 25% for incomes up to $200,000 (couples $260,000)
    • 35% for income up to $500,000 (couples ($1 million)
  • Significant increases in standard deductions for individuals ($6,350 to $12,000) and married couples ($12,700 to $24,000)
  • Personal exemptions are repealed
  • New family tax credits
  • Preservation of mortgage interest deductions (maintaining the current deduction of $1 million for current homeowners but cutting it to $500,000 on new homes)
  • State and local property tax deductions capped at $10,000. The majority of the SALT deductions have been removed
  • 401k and IRAs unchanged
  • Repeal of alternative minimum tax (AMT)
  • The individual AMT, like the corporate AMT, would be repealed
  • There are no changes to the capital gains and dividends tax rate
  • The bill also does not include a repeal of the net investment income tax

Keep in mind, of course, that this draft is just the first step on the long road to potential tax reform. There are numerous other steps, and imminent changes, that will occur before we have new tax law. This process will continue next week when the Senate Finance Committee is expected to issue its version of a tax cut bill. Each bill will go through a mark-up in their respective chambers, and then congress will attempt to reconcile the two bills to present a final, passable, bill by year end. We fully expect that there will be significant changes to this proposed bill prior to its expected presentation to the President for signature.

As always, if you have questions about this act, or any other legislation and how it might impact your tax situation, please contact us.

Paul Rozek

Paul Rozek provides tax research, consulting and compliance services to closely held businesses, tax-exempt organizations, individuals and fiduciaries. His clients include family offices, private foundations, trade associations, charitable organizations, schools, credit unions and other nonprofit entities.