The Senate passed its version of the Tax Cuts and Jobs Act (TCJA) by a vote of 51-49, on the heels of substantial changes–some handwritten in the margins of the bill’s text–that pushed the vote into the pre-dawn hours of December 2. Senator Bob Corker (R-TN) was the only Republican to vote against the measure, citing concerns about the bill’s effect on the deficit. These last minute alterations dramatically reshape some of the bill’s initial provisions, but were necessary to secure the final votes required for passage. The changes moved the Senate bill closer to its House counterpart in some areas and further apart in others. Contrasted with the earlier version of the Senate’s tax reform plan, the key provisions changed in the final version of the Senate’s TCJA provide context for the ensuing reconciliation in a Congressional conference committee.
Business Provisions Altered
On the business front, the proposed pass through deduction was increased to 23 percent (up from the previous 17.4 percent), resulting in a maximum effective tax rate for qualifying pass-through income from partnerships and S corporations of 29.6 percent. This rate is closer to the House’s proposed 25 percent rate, but the mechanics of this provision remain significantly different from the House’s bill.
Additionally, owners of certain interests in publicly traded partnerships would qualify for the deduction under the final Senate bill. As with previous versions, the final version of the Senate’s TCJA would limit this deduction to 50 percent of the W-2 wages paid by the partnership or S corporation to employees (such wages would not include partnership allocations subject to self-employment tax or wages paid to S corporation shareholders, however). Individuals with taxable income under $250,000 ($500,000 for MFJ) would be exempt. Because the deduction is claimed by individuals, the partnership or S corporation would not directly offset qualifying business income by the deduction.
The cost of this additional benefit for pass-through businesses will be financed by multinational businesses under the final version of the Senate’s TCJA, where the proposed rate for deemed repatriation of non-U.S. assets was increased from 10 percent on cash and cash equivalents and 5 percent on illiquid assets to 14.49 percent and 7.49 percent, respectively. This brings the Senate bill closer to the House’s proposed 14 percent and 7 percent rates.
Another change in the final version of the Senate’s TCJA was to extend the proposed eligibility for capital asset expensing, to cover property placed in service before Jan. 1, 2027 (the date in the earlier version was Jan. 1, 2023). During this additional period, the amount eligible for immediate write-off will phase out by 20 percent each year.
Auto dealers also benefitted from a major last minute change in the final version of the Senate’s TCJA, where the proposed 30 percent interest expense limitation (concerning the deductibility of interest otherwise incurred) would not apply on indebtedness used to finance the purchase of vehicle inventory.
The alternative minimum tax for individuals and corporations was restored under the final version of the Senate’s TCJA, though the proposed individual exemption amount is increased. This change was necessary to further offset the cost associated with the pass-through deduction and other last minute changes, but could be a key point of contention as the process continues, since eliminating the AMT is one of the pillars of the House’s tax reform push.
Individual Provisions Altered
On the individual side, the alternative minimum tax regime remains under the final version of the Senate’s TCJA, as previously mentioned. Additionally, the AGI limitation used to deduct medical expenses was decreased to a proposed 7.5 percent of AGI for 2017 and 2018 (the House would eliminate the medical expense deduction in its entirety). The final version of the Senate’s TCJA now also matches the House bill with respect to property tax deductions, by allowing individuals to deduct state and local property taxes up to $10,000.
Other revisions affecting individuals mirror similar provisions in the House bill. These include an amendment in the final version of the Senate’s TCJA that allows elementary and high school expenses to be paid with funds from 529 plans,.
Other Provisions Altered
Colleges and universities hoping for relief from the proposed limits on charitable contributions and the new tax on endowment income only received one piece of good news. This is the removal of a provision that would have taxed universities on name and logo royalty income. However, they did not obtain relief from the Senate bill’s requirement that they segregate income and losses from different activities. This means that, if enacted in its present form, that colleges with a loss from one activity would not be able to use that loss against the profits of another activity for purposes of UBIT taxation.
Next Steps in Conference Committees
These changes and the passage of the final version of the Senate’s TCJA set the stage for the next step in the process. This is the anticipated formation of a conference committee. This is subject to a vote in the House that could occur December 4. In lieu of choosing to move to a conference committee, the House could vote to accept the Senate bill, though this is seen as unlikely. Assuming the House proceeds to a conference committee, Senate Majority Leader Mitch McConnell (R-KY) is expected to name his appointees to the Senate’s conference committee next week. Each chamber can appoint as many conferees as desired to their respective committees, though having more members than the other chamber is not necessarily an advantage. The committee members, after their appointment, work to produce a conference report which is composed of amendments to resolve the differences between the two chambers’ bills.
The members of each chamber’s committee would vote on each of these amendments and each amendment would only be accepted if the majority of conferees in each chamber’s committee membership voted to approve the amendment. For instance, a conference amendment to adopt the House’s proposed repeal of the AMT would require a majority vote from the Senate committee members and a majority vote of the House’s committee members. Only amendments where a majority of each chamber’s members approve an amendment are included in the product of the conference committee, which is called the conference report. This conference report is then sent back to each chamber of Congress for final approval. Either the House or the Senate can act first on approving the conference report, unlike the original tax legislation, which the Constitution requires to originate in the House. The House typically acts first on the conference report.
If differences remain after the conference report has been produced, further steps are necessary as the legislation cannot be sent to the President until all differences are resolved. Also, if one chamber fails to pass the conference report, a new conference committee can be requested.
Takeaway
These last minute changes and the conference committee process show that the path to tax reform still requires significant work within the halls of Congress. Furthermore, this shows that there will most likely be significant changes to the bills, as lawmakers work to resolve the differences between the bills while still adhering to the budget reconciliation rules of the Senate. These Senate rules would appear to give that chamber the upper hand, though members of the House have committed to maintaining a balance of power in these negotiations. The House bill could not pass in the Senate in its current form, due to the reconciliation rules, so certain accommodations must be made in that regard. The goal of both chambers is to complete this process by the end of the year.
For further information on the status of these tax reform efforts, please contact your local CBIZ MHM Tax Professional.
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