Business Tax Reform Progresses – The Senate Tax Bill

In early November, the Trump administration along with the House Ways and Means Committee released their tax reform legislation known as the Tax Cuts and Jobs Act. The legislation largely followed the tax reform framework issued by the White House in September calling for a reduction in the corporate tax rate and elimination of the estate tax, among other things. On November 9th, the Senate released its own tax bill (formally known as the Description of the Chairmen’s Mark on the Tax Cuts and Jobs Act), which embraces many of the changes outlined in the House version, but also has several important deviations as well. The two bills present different options for the future of the American tax system, but one thing remains clear: change is coming. To help clients, prospects and others understand the changes that will impact businesses, Wilson Lewis has provided a summary of key provisions below.

Proposed Business Tax Reform

  • Corporate Tax Rate – Under the Senate bill, the corporate tax rate would be reduced from the current rate of 35% to 20% in 2019. The U.S. has one of the highest tax rates in the developed world, so this change will bring it in closer alignment with other countries. This varies from the House plan, which calls for an immediate reduction in the rate starting in 2018.
  • Corporate Alternative Minimum Tax – Like the House plan, the Senate bill calls for the elimination of the corporate alternative minimum tax.
  • Foreign Income Tax – Untaxed income earned by U.S. companies but held overseas will be immediately taxed at a flat rate of 10% for liquid assets such as stocks and bonds and 5% for illiquid assets such as buildings, factories, etc. The corporate tax will change to be generally territorial with a 12.5% tax on income earned from intangible assets and a 10% tax on any money moved to a foreign subsidiary.
  • Immediate Expensing of Capital Investments – Businesses will be allowed to fully expense the costs of capital assets such as equipment, machinery and other items in the year purchased. Under current regulations, short-lived capital investments must be expensed over a five-year or longer period to receive the full tax benefit. Under the Senate plan, any equipment placed into service on or after September 27, 2017 would be eligible to be fully expensed. The provision would become permanent and override the five-year rule currently in place.
  • 179d Expansion – The Section 179d deduction, which was originally enacted to encourage building owners to transition to more energy efficient systems, will be expanded. Under the Senate plan, small business 179d expense limits will increase to $1M and include an expanded list of qualifying expenses over the current regulations.
  • Bonus Depreciation – The current 50% bonus depreciation will be replaced with 100% bonus depreciation for a five-year period. This includes any investments purchased from September 27, 2017 through December 31, 2022. After the five-year window, the 100% bonus depreciation will expire and revert to existing levels.
  • Section 199 Deduction – The Section 199 deduction, also known as the Domestic Production Activities Deduction is repealed. This is the same as the House plan.
  • Meals and Entertainment Deduction – Currently businesses can reimburse 100% of qualifying meal and entertainment expenses but can only claim a 50% deduction. Under both the House and Senate bill, businesses are only allowed a 50% deduction for qualifying meal expenses.
  • Changes for Small Businesses – There are two important accounting changes in the Senate plan that will impact small businesses. First, any business with less than $15M in gross receipts will not be required to keep an inventory accounting. In addition, businesses with less than $15M in gross receipts will be eligible to use the cash method of accounting if they prefer.

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The Senate plan reinforces many of the core changes that the House and Trump administration want to make to the business tax structure. The reduction of the corporate tax rate and elimination of various tax incentives appears to be a recurring theme. It’s unlikely that the Senate plan will make it through Congress exactly as it appears. We will keep you updated on any changes. If you have questions about the Senate bill or need assistance with tax planning or compliance, Wilson Lewis can help. For additional information please call us at 770-476-1004 or click here to contact us.