Last week, the House passed the Tax Cuts and Jobs Act (TCJA). In addition, the Senate Finance Committee completed the markup of its own version of the TCJA and sent it to the full Senate for debate after the Thanksgiving holiday.
The Senate Finance Committee made numerous substantive changes to its initial bill introduced earlier this month, including the following.
Individual rate cuts are temporary. Reduced rates for individuals would expire Dec. 31, 2025. At that time, rates and brackets would revert back to today’s structure, and the individual alternative minimum tax would be reinstated. The lower rates related to pass-through business income also would expire in 2026.
This expiration is essentially a budget gimmick in order to bring the bill into compliance with Senate rules that the bill cannot add to the deficit beyond the 10-year budget window. This is similar to the “Bush tax cuts” that ended after a decade. Potentially, this expiration could lead to another fiscal cliff in 10 years when debate begins about extending the rate reductions.
According to the Congressional Budget Office (CBO), taxpayers would see their tax bills drop by an average of 7.4 percent in 2019; however, by 2027, their taxes would rise by an average of 0.2 percent. Lower-income taxpayers would be hardest hit, with those making between $20,000 and $30,000 seeing their tax bills start to rise in 2021 and up to 25.4 percent by 2027. Those making more than $75,000 would see their taxes go down, albeit by less than 1 percent by the final year, while everyone making under $75,000 would see some level of tax increase.
Corporate rate cuts are permanent. The Senate bill would implement a permanent corporate rate reduction to 20 percent starting in 2019. The House bill cuts the corporate rate to 20 percent starting in 2018.
Affordable Care Act individual mandate is repealed. The shared responsibility payment under the Affordable Care Act (ACA) would be reduced to zero, effectively eliminating the individual mandate to purchase health insurance. The CBO estimates this repeal would save the government roughly $300 billion in subsidies it would no longer have to pay as a result of enrollment decreases.
A coalition of leading healthcare groups, including the American Medical Association and America’s Health Insurance Plans, recently urged lawmakers to maintain the individual mandate. “Eliminating the individual mandate by itself likely will result in a significant increase in premiums, which would in turn substantially increase the number of uninsured Americans,” the groups wrote. The CBO estimates that premiums would rise 10 percent without the mandate and 13 million more people would be uninsured over a decade.
Critical Senate and House differences
Where components are similar between the Senate and House versions, such as the repeal of the corporate and individual AMT, we believe there is a greater likelihood those provisions would be included in final legislation. However, significant differences exist that may lead to intense debate as to how a compromise bill can be reconciled. Voting margins are relatively tight in both houses of Congress; the House passed the TCJA with a 227-205 vote, the Senate Finance Committee markup was approved by a party line vote of 14-12. Accordingly, this is not likely to be a quick process. If the bill passes the Senate with differences from the House version, the two bills will go to a conference committee. Major areas of contention include:
- Effective date of corporate rate reduction. The House wants the reduction in 2018 while the Senate would delay until 2019.
- Reduced rate for pass-through businesses. Both chambers use completely different methodologies for achieving the reduced rate and disagree on the types of businesses that will be eligible. The approaches are detailed in the chart below.
- Excess business losses. The Senate would create a new restriction for noncorporate taxpayers with “excess business losses.” For this purpose, excess business losses are the amount by which business deductions exceed gross business income. This provision would limit such losses to $500,000 (married filing jointly) and $250,000 for all other taxpayers per year. In other words, business losses cannot offset nonbusiness income by more than the allowed amounts in any taxable year. Any excess loss would be carried forward. This is a significant restriction over current law.
- Repeal of the individual state and local tax deduction. Both the Senate and House would repeal the deduction for state income taxes. The House would preserve a limited (up to $10,000) deduction for real property taxes. The Senate would repeal the state and local tax deduction in full. Expect a large pushback from the larger higher-taxed states where any restriction on the state and local tax deduction is unpopular. Both bills preserve this deduction for corporations but disallow it for pass-through entity state income taxes.
- Repeal of individual mandate. This was added late in the process to the Senate bill. Since the Senate failed to repeal the ACA this past summer, inclusion here could be just as divisive.
- Home mortgage interest limitation. The House would reduce the mortgage cap to $500,000 from $1 million. The Senate would leave the $1 million cap in place. Any change to the existing rules will be met by fierce opposition from the powerful real estate lobby.
- Private activity bonds. The House version would eliminate tax exemption for private activity bonds, used by universities, hospitals and lower-income housing, as well as advanced refunds, which is about one-quarter of municipal issuances. The Senate, however, proposes retaining the private activity bonds, about 20 percent of issuance. If enacted, this would likely lead to higher borrowing costs for municipal issuers and would increase the strain on local budgets.
Comparison of major components (not an all-inclusive list)
|House bill (H.R. 1 – Tax Cuts and Jobs Act)||Senate bill (approved Senate Finance Committee version)|
|Pass-through business entities|
|Net operating losses (NOL)|
|Limitation on losses for non-corporate taxpayers|
|Other business provisions|
|Other individual provisions|
|Accounting for long-term contracts|
|Estate and gift taxes|
We continue to monitor the legislative process and will publish insights and analysis as negotiations move through Congress.
For related insights and in-depth analysis, see our tax reform resource center.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.