Early Saturday morning (December 2, 2017), the U.S. Senate passed a version of the Tax Cuts and Jobs Bill. If you recall “School House Rock’s I’m Just a Bill,” you’ll know that there are still a few steps in the process of a bill becoming law. The major one now is a “conference committee” comprised of members of the Senate and House. The members of the conference committee must agree on an identical version of the bill that must then gain passage by both chambers of Congress. That version must then be signed into law by the President. Because the versions passed by the Senate and House were each over 500 pages, the chart below is a drastically shortened comparison of the versions; specifically, the provisions in each version that relate in some way to small businesses.

(Note: This chart is merely an overview. For information that can be applied specifically to your business, refer to your trusted tax and legal advisors.)

 

Provision House Version Senate Version
Individual Income Tax Rates and Brackets
  • Consolidates current seven income tax rates into four
  • Retains top marginal rate of 39.6 percent
  • Rates are permanent
  • Single Filer Rate Schedule
12% > $0
25% > $45,000
35% > $200,000
39.6% > $500,000
  • Retains seven brackets while reducing rates
  • Brings top marginal rate to 38.5 percent
  • Individual income tax rate changes sunset at the end of 2025
  • Single Filer Rate Schedule
10% > $0
12% > $9,525
22% > $38,700
24% > $70,000
32% > $160,000
35% > $200,000
38.5% > $500,000

 

Standard Deduction  

  • $12,200 for single filers
  • $18,300 for heads of household
  • $24,400 for joint filers, indexed to chained CPI

 

  • $12,000 for single filers,
  • $18,000 for heads of household
  • $24,000 for joint filers, indexed to chained CPI
Child and Family Tax Credits  

 

  • Increases child tax credit value to $1,600
  • Phase-out for joint filers beginning at $230,000
  • Creates new $300 per-person family tax credit for those not eligible for the child tax credit
  • Expires after five years

 

  • Increases credit value to $2,000
  • Phase-out for joint filers beginning at $500,000
  • Provision sunsets at the end of 2025
Medical Expense Deduction
  • Repeals the expense deduction
 

  • Retains the expense deduction

 

Mortgage Interest Deduction  

  • Limits the mortgage interest deduction to the first $500,000 in principle value

 

  • Keeps the mortgage interest deduction for acquisition debt
  • Eliminates the deduction for equity debt
Treatment of Pass-Through Income  

  • Caps pass-through rate at 25 percent
  • Presumes that 70 percent of pass-through income is wage income (subject to the regular rate schedule)
  • Presumes 30 percent is business income (subject to the lower rate cap)
  • Excludes many professional service companies from the preferential rate

 

  • Adopts a 23 percent deduction for pass-through income (limited to 50 percent of wage income) for qualifying businesses
  • Includes publicly traded partnerships but with a slightly longer list of ineligible service providers
  • The provision expires at the end of 2025
Corporate Rate Reduction Timing  

  • Cuts rate to 20 percent
  • Effective tax year 2018

 

  • Cuts rate to 20 percent
  • Effective tax year 2019
Capital Investment
  • Allows full expensing of short-lived capital investment, such as machinery and equipment, for five years
  • Increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phase-out beginning at $20 million
  • Maintains current depreciation schedules for real property
 

  • Allows full expensing of short-lived capital investment, such as machinery and equipment, for five years
  • Phases out the provision over the subsequent five
  • Raises Section 179 small business expensing cap to $1 million with a phase-out starting at $2.5 million
  • Shortens the depreciation of real property to 25 years

 

Alternative Minimum Tax
  • Repeals both the individual and corporate alternative minimum taxes (AMTs)
 

  • Retains the corporate AMT in its current form
  • Retains the individual AMT with higher exemption amounts (about 40 percent higher than current law)
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 80 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
  • Limits the deduction for FDIC premiums
  • Retains 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
Estate (or “Death”) Tax
  • Increases exemption to $10 million
  • Indexed for inflation, with repeal after six years
  • Doubles the estate (death) tax exemption

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Bottomline: There is a lot the two versions agree on – but some major differences

They both would cut the corporate tax rate to 20 percent from 35 percent (though the Senate version would make that change in 2019, a year later than the House bill would. But there are some major differences that won’t be easy to resolve, and any changes could increase the bill’s cost or force painful tradeoffs.

Pass-Through Tax Breaks

House: Pass-through business income is taxed at 25 percent, with some limits. A lower rate of 9 percent is also available for some lesser-earning businesses.

Senate: Pass-through income gets a 23 percent deduction, subject to limitations, including the same expiration date — end of 2025 — as the individual tax provisions.

Why it matters: Pass-through businesses, including partnerships, limited liability companies and S corporations, don’t pay taxes themselves but pass their earnings to their owners, who then pay at their individual tax rate. Many House Republicans have insisted the pass-through rate mustn’t be higher than 25 percent. The initial Senate approach would have pushed it north of 30 percent for many of the highest-earning pass throughs. The Senate bill has since been amended to provide a more generous break, but it remains to be seen which will carry the day.

How to resolve it: A deeper break for pass-throughs means raising revenue elsewhere to keep it within the parameters. The price tag of the overall legislation must stay within the $1.5 trillion allowance for the first decade and red ink must be wiped out in each year after that.

Business Expensing

House: Full and immediate expensing on equipment purchases that expires in five years.

Senate: A “step-down” approach that phases out the expensing benefit after five years rather than an immediate cliff.

Individual State and Local Tax Deductions

House: Repealed, with a property tax exemption up to $10,000.

Senate: Same.

Why it matters: A last-minute add-on to the Senate bill — which initially sought to kill SALT entirely — mirrors the House exemption. That’s key to winning over Senator Susan Collins of Maine and holding on to a few-dozen House Republicans in high-tax states like New York and New Jersey that rely on the deduction.

How to resolve it: Don’t mess with the exemption, or crucial votes could disappear. It’s an expensive tax break and last-minute searches for revenue in conference committee could tempt negotiators to look at it.

Estate Tax

House: Limits the number of multimillion-dollar estates that would pay the tax by doubling the threshold at which it applies, then fully repeals the levy in 2025.

Senate: Doubles the exemption amount until 2026, then reverts to lower thresholds.

Why it matters: Eliminating the current 40 percent levy applied to estates worth more than $5.49 million for individuals has been a long-sought Republican goal.

How to resolve it: Persuade House Republicans to accept that the tax isn’t going away, or be forced to find revenue elsewhere — the levy brought in $18 billion last year.


School House Rock: I’m Just a Bill