Federal tax reform could mean big changes for Kentucky businesses
Members of the U.S. House and Senate continue to discuss tax reform in what Senate Majority Leader Mitch McConnell has described as a “once-in-a-generation opportunity” to spur economic growth through reforms.
Both the House and Senate have proposed their strategies for tackling tax reform. Though the details are varied, both provide for a reduction in the corporate tax rate, changes that will improve the tax situation for pass-through entities with owners that pay taxes through an individual filing, and provisions to repatriate profits from abroad, among other changes.
The two legislative bodies have already begun marking up their versions of tax reform with the House amending its original language to improve the changes for small businesses, and the Senate Finance Committee taking steps to include a repeal of the individual mandate in the Affordable Care Act in their version.
The U.S. House is expected to move the bill Thursday as the Senate continues their discussions. Additional amendments are expected to be offered and ultimately the House and Senate will need to conference to work out any differences.
The Kentucky Chamber will continue to monitor the developments and advocate for pro-growth changes that lower the corporate tax rate and lessen the tax burden on small businesses while simplifying the code.
To follow the progress on tax reform and to tell Congress you support pro-growth reforms, visit the U.S. Chamber Tax Reform Now site.
The following is the Tax Foundation’s side by side summary of House and Senate versions of tax reform as originally proposed with some amendments.
|Provision||House Version||Senate Version|
|Individual Income Tax Rates and Brackets||Consolidates current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including an income recapture provision which phases out the effect of the 12 percent bracket for high earners, sometimes called a “bubble rate.”||Retains seven brackets while reducing rates, bringing the top marginal rate to 38.5 percent and avoiding a bubble rate.|
|Standard Deduction||$12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers, indexed to chained CPI||$12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, indexed to chained CPI|
|Itemized Deductions||Retains state and local property tax deduction, capped at $10,000, while eliminating the remainder of the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business; limits the mortgage interest deduction to the first $500,000 in principle value.||Eliminates the state and local tax deduction except for taxes paid or accrued in carrying on a trade or business; keeps the mortgage interest deduction for acquisition debt, but eliminates the deduction for equity debt.|
|Child and Family Tax Credits||Increases child tax credit value to $1,600, with the phaseout for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire after five years||Increases credit value to $1,650, with the phaseout for joint filers beginning at $1 million|
|Treatment of Pass-Through Income||Caps the pass-through rate at 25 percent and adds a lower minimum rate (added in markup), then sets anti-abuse rules that begin with the rebuttable presumption that 70 percent of pass-through income is wage income (subject to the regular rate schedule), while 30 percent is business income (subject to the lower rate cap)||Adopts a 17.4 percent deduction for pass-through income, which may provide benefits to smaller businesses less able to take advantage of the House provisions; both proposals restrict many service providers from preferential treatment, though the Senate’s restrictions are broader.|
|Corporate Rate Reduction Timing||Cuts rate to 20 percent, effective tax year 2018||Cuts rate to 20 percent, delayed to tax year 2019|
|Capital Investment||Increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phaseout beginning at $20 million, and maintains current depreciation schedules for real property||Raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million, and shortens the depreciation of real property to 25 years|
|Tax Treatment of Interest||Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA)||Caps net interest deduction at 30 percent of earnings before interest and taxes (EBIT)|
|Net Operating Losses||Eliminates net operating loss (NOL) carrybacks while providing for indefinite net operating loss carryforwards, increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income||Eliminates net operating loss carrybacks while limiting NOL carryforwards to 90 percent of taxable income|
|Cash Accounting||Increases small business eligibility for small businesses, from $5 million to $25 million||Increases small business eligibility for small businesses, from $5 million to $15 million|
|Business Credits and Deductions||Eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others||Modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while retaining certain other preferences eliminated in the House version|
|International Income||Moves to a territorial system with base-erosion rules including the inclusion of 50 percent of excess returns by controlled foreign corporations in U.S. shareholders’ income, and an excise tax on payments made to foreign firms unless claimed as effectively connected income||Moves to a territorial system with anti-abuse rules and a base erosion minimum tax of the excess of 10 percent of modified taxable income over an amount equal to regular tax liability|
|Deemed Repatriation||Enacts deemed repatriation of currently deferred foreign profits at a rate of 14 percent for liquid assets and 7 percent for illiquid assets (changed in manager’s amendment)||Enacts deemed repatriation of currently deferred foreign profits at a rate of 10 percent for liquid assets and 5 percent for illiquid assets|
|Retirement Accounts||No major changes||Eliminates catch-up contributions for high-wage employees and consolidates contribution limits for 457(b)s to match 401(k)s and 403(b)s.|
|Estate Tax||Increases exemption to $10 million, indexed for inflation, with repeal after six years||Doubles the estate tax exemption|