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 |
|
|
Standard Deduction |
|
|
Child and Family Tax Credits |
|
|
Medical Expense Deduction |
|
|
Mortgage Interest Deduction |
|
|
Treatment of Pass-Through Income |
|
|
Corporate Rate Reduction Timing |
|
|
Capital Investment |
|
|
Alternative Minimum Tax |
|
|
Tax Treatment of Interest |
|
Caps net interest deduction at 30 percent of earnings before interest and taxes (EBIT) |
Net Operating Losses |
|
|
Cash Accounting |
|
|
Business Credits and Deductions |
|
|
International 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 |
|
|
istock
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