With the recent release of the Tax Cuts and Jobs Act, the Republican Party is moving tax reform forward. Compiled by The House Ways and Means Committee, the tax reform legislation draft incorporates many provisions initially outlined in the Big Six Tax Framework which debuted in September of this year.

Touted as the first major tax reform since the Tax Reform Act of 1986, the Act would simplify the U.S. tax codification and reduce the average American middle-class family’s tax liabilities. However, it’s unlikely the Act will be signed into law without material adjustments. It still hasn’t cleared all of Congress, and ultimately needs the seal of approval from President Trump – which is targeted for some time before year end.

To help gain insight on how the proposed legislation might impact you or your business, Doeren Mayhew’s tax advisors have highlighted its key tax provisions below:

Individual Provisions

  • Reduces individual tax rates from seven brackets to the following four brackets below effective for the tax years after 2017:

  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers indexed for inflation, up from $6,350, $9,350 and $12,700 respectively
  • Eradicates the additional standard deduction and personal exemption
  • Eliminates most itemized deductions, including those related to:
    • State and local income and sales tax, unless paid in connection with a trade or business
    • Moving expenses
    • Medical expenses
    • Alimony payments
    • Casualty loss
    • Tax preparation fees
    • Un-reimbursed business expenses paid by the employee
  • Limits the state and local property tax to a $10,000 maximum deduction
  • Caps the mortgage debt interest deduction to $500,000 of principal for new home purchases
  • Increases limitation on charitable contributions from 50 percent to 60 percent of adjusted gross income for cash contributions
  • Repeals various tax credits related to:
    • Adoption
    • Student loan interest
    • Qualified tuition and related expenses
    • Plug-in vehicles
    • Mortgage credit certificates
  • Boosts the child tax credit from $1,000 to $1,600 with increased phase-out thresholds
  • Consolidates the American Opportunity Tax credit, the Hope Scholarship credit and the lifetime learning credit into one – providing 100 percent tax credit on the first $2,000 of eligible higher education expenses and a 25 percent credit on the next $2,000
  • Eliminates Coverdell education savings accounts, but allows tax-free rollover into 529 savings plan
  • Nullifies alternative minimum tax
  • Increases basic exclusion for estate and generation-skipping transfer taxes to double its current $5,490,000 amount until 2023, at which point it would be repealed
  • Disqualifies the ability for IRA contributions to be re-characterized as Roth contributions

Business Provisions

  • Lowers the corporate tax income rate from 35 percent to 20 percent
  • Gives a 25 percent tax rate to 30 percent of a pass-through entity’s earnings, while the other 70 percent would be taxed at the ordinary income tax rate
    • Expected to change to be more lenient
    • Not applicable to professional service entities
  • Increases Section 179 limits to allow up to $5 million of property to be immediately expensed with an increased phase-out limit of $20 million for tax years after 2017 and before 2023
  • Repeals various business credits and deductions, such as:
    • Section 199 Domestic Production Activity Deduction
    • New Market Tax Credit
    • Work Opportunity Tax Credit
    • Rehabilitation credit
    • Employer-provided child care credit
    • Expenditures to provide access to disabled individuals
    • Like-kind exchanges for personal property
    • Private activity bonds
    • Energy
    • Other entertainment, amusement, recreational activities or membership dues
  • Grants accounting method simplifications for entities with less than $25 million in gross receipts, including cash method of accounting, exemption from Section 263A UNICAP rules and new interest limitation provision, and exception to percentage-of-completion method.
  • Caps the deductibility of net interest expense on future loans to 30 percent of earnings before interest, taxes, depreciation and amortization (EBIDTA), with a five-year carryforward for all businesses with gross receipts of $25 million or more
  • Modifies the treatment of Net Operating Losses (NOLs) by restricting the offset of taxable income to 90 percent and eliminating the NOL carrybacks with the exception of a one-year carryback for certain disaster losses
  • Accepts the treatment of the gain or loss from disposition of a self-created patent, invention, model, design, secret formula or process as an ordinary gain or loss
  • Eliminates corporate alternative minimum tax

Foreign Provisions

  • Dividends or earnings from foreign sources will not be taxable with certain limitations of the amount of foreign profits earned, yet to be determined
  • Enacts deemed repatriation of currently deferred foreign profits at a rate of 12 percent for cash and cash-equivalents profits and 5 percent for reinvested foreign earnings, for a U.S. shareholder owning at least 10 percent of the foreign subsidiary
  • Repeals the foreign shipping income and foreign-based company oil-related income rules
  • Adjusts de minimis exception for inflation

When considering year-end tax planning proceed with caution – this is just proposed legislation and not signed into law. Look to our tax advisors to help keep you informed as new developments happen on the tax reform front. If you have questions, regarding the potential impact of proposed laws, contact Doeren Mayhew. Our tax advisors stand ready to help you navigate any changes.