On Nov. 16, 2017, the U.S. House of Representatives passed a tax reform bill, called the Tax Cuts and Jobs Act. Then, on Dec. 2, the U.S. Senate passed its own tax reform bill, also called the Tax Cuts and Jobs Act. These tax reform bills differ in some ways, and will need to be reconciled by both the House and Senate before moving on to President Trump to be signed into law.
These tax reform bills, drafted based on a tax reform plan that was developed in consultation with the Trump administration, are designed to make significant changes to the federal tax code. Both tax reform bills would have a substantial impact on businesses. For example, they would:
- Lower the corporate tax rate—Both bills reduce the corporate tax rate to 20 percent and eliminate the corporate Alternative Minimum Tax (AMT), in an effort to make American corporations more competitive globally.
- Create a new lower tax rate structure for small businesses—The House bill limits the maximum tax rate for small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25 percent. The Senate bill leaves this tax rate unchanged, but establishes a new deduction for these businesses.
- Allow “expensing” of capital investments—Both bills allow businesses to immediately write off (or “expense”) the cost of new investments for at least five years.
- Repeal or restrict many existing business deductions and credits—Because both bills substantially reduce the tax rate for all businesses, they also eliminate the existing domestic production (Section 199) deduction, and repeal or restrict numerous other special exclusions and deductions (including those for employer provided dependent care assistance programs (DCAPs), education assistance programs and adoption assistance programs). However, both bills explicitly preserve business credits related to research and development and low-income housing.
- End “offshoring” incentives—Both bills end the incentive to offshore jobs and keep foreign profits overseas by exempting them when they are repatriated to the United States. They impose a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keep the money offshore.
The Senate bill also repeals the individual mandate tax penalty imposed under the Affordable Care Act (ACA).
However, neither tax reform bill affects the following tax provisions:
- Tax treatment of employer-sponsored health plans; and
- The ACA’s Cadillac tax on high-cost employer-sponsored health coverage.
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