The Senate has passed its version of the tax bill. The House and Senate Bills will now be going to joint committee. Below is a list of changes that were made in the Senate Bill compared to the initial Senate Markup. Please refer to the Initial Senate Markup that was sent out on November 15, 2017. We felt it would be easier to only see the items that were changed from the Senate Markup rather than address things that have not changed since that announcement. As always, please do not hesitate to reach out to your Somerset advisor and/or contact regarding more details of the issues below.
Latest changes to the Tax Bill passed by the Senate – Corporate and Business
| Topic | Initial Senate Markup | Tax Bill Passed by the Senate | Somerset Observations |
| Alternative Minimum Tax | Would repeal corporate AMT after 2017. | Corporate AMT would not be repealed. | Not repealing the AMT will have a negative impact on taxpayers, especially those who qualify for the R&D credit. |
| Domestic Production Activity Deduction | Effective for tax years after 12/31/18, the bill would repeal the deduction for domestic production activities. | The bill would repeal the deduction for domestic production activities for tax years beginning after 12/31/17. | The repeal of the domestic production activities deduction is a major disadvantage to affected taxpayers. This deduction was equal to 9% of a taxpayer’s income from qualifying activities. |
| Temporary 100% Expensing for Certain Business Assets | Would temporarily allow 100% first year additional depreciation for qualified property placed in service after Sept 27, 2017 and before Jan 1, 2023. | The bill would initially allow full expensing for property placed in service after Sept 27, 2017, but the percentage of expensing would be phased down from 100% by 20% each calendar year beginning in 2023. | This provision should allow most business to expense the majority of their asset purchases. The repeal in 2023 is nothing more than a way for the Senate to pay for other taxpayer favorable changes. |
| S Corporation Conversion to C Corporation | Was not addressed. | Effective for S corporations that revoke their S corporation elections during the two-year period beginning on the enactment date and have the same owners on both the enactment date and the revocation date, distributions from a terminated S corporation would be treated as paid from its accumulated adjustment account and from its earnings and profits. Adjustments under §481(a) would be accounted for over a six-year period. | This provision mirrors the House provision. |
| Carried Interest | Was not addressed. | After 2017, transfers of applicable partnership interests held less than three years would be treated as short term capital gain. | This is a disadvantage for affected taxpayers, as the previous rule was one year. This provision mirrors the House provision. |
Latest changes to the Tax Bill passed by the Senate – Individual
| Topic | Initial Senate Markup | Tax Bill Passed by the Senate | Somerset Observations |
| Tax Rates | 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5% | Seven Tax Brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. |
The top tax bracket would begin at $1,000,000 for Married Filling Jointly taxpayers. |
| Alternative Minimum Tax | After 2017, would repeal AMT. | AMT will not be repealed. There will be increased exemption amounts and phase-out thresholds for tax years beginning after 12/31/2017. Exemption amounts are as follows:
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The increased exemptions and thresholds as well as the elimination or reduction in the state and local taxes will cause less taxpayers to be in AMT but does not totally fix the problem for middle income taxpayers. Hopefully the joint committee will figure out a way to repeal. |
| Pass-Thru Business Deduction | An individual taxpayer may deduct 17.4% of domestic qualified business income from a partnership, S Corporation or Sole Proprietorship. | An individual taxpayer may deduct 23% of domestic qualified business income from a partnership, S Corporation or Sole Proprietorship.The deduction would not apply to specified service businesses such as health, law, engineering, architecture and accounting except in the case of a taxpayer whose taxable income does not exceed $500,000 for married individuals filing jointly ($250,000 for other individuals), both indexed for inflation after 2018. The benefit of the deduction for service businesses would be phased out over the next $100,000 of taxable income for joint filers ($50,000 for other individuals). | The deduction would generally be limited to 50% of the taxpayer’s allocable or pro rate share of “W-2 wages”. The wage limit would not apply to taxpayers with taxable income not exceeding $500,000 for Married Filling Jointly taxpayers and $250,000 for other individuals.Plus, the pass thru owners of specified services businesses with lower amounts of income will benefit from the 23% deduction unlike the Markup bill. |
| Property Tax Deduction | There would not be a property tax deduction allowed. | A property tax deduction of up to $10,000 would be allowed. | This is good news to taxpayers who will be itemizing deductions. |
| Child Tax Credit | The child tax credit would increase to $1,650 from $1,000 | The credit would increase to $2,000. | The child credit would be increased by $1,000 compared to current tax law. The phase out amounts are significantly higher as well, as the credit would not begin to phase out until $500,000 of income is reached. |
