Ways and Means Committee Releases Text of Tax Reform Bill

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1 Ways and Means Cmmittee Releases Text f Tax Refrm Bill Nvember 2, 2017 (updated Nvember 3) Tday, the Huse Ways and Means Cmmittee released the Tax Cuts and Jbs Act (H.R. 1) t verhaul majr aspects f the US tax system. Originally scheduled fr release n Wednesday, Nvember 1, Ways and Means Cmmittee Chairman Kevin Brady (R-TX) pstpned the bill s unveiling by ne day, largely in rder t negtiate with Republicans frm high-tax states wh threatened t ppse the bill if it eliminated the federal deductin fr state and lcal taxes (SALT). In the bill released tday, the deductin fr state and lcal taxes is eliminated, with a limited exceptin fr state and lcal prperty taxes up t $10,000. The bill wuld cut the crprate tax rate t 20%. It als wuld apply a 25% t business incme earned by wners and sharehlders f certain pass-thrugh entities. The bill wuld als adpt a territrial system f internatinal taxatin, an immediate tax n existing retained ffshre earnings, a new tax n freign subsidiary high returns, a new excise tax n certain payments frm US cmpanies t related freign cmpanies and new thin capitalizatin rules. The bill is widely seen as the beginning f an nging negtiatin. Chairman Brady indicated that he plans t release a chairman s mark as sn as tmrrw that incrprates feedback frm members. The bill is scheduled fr cmmittee markup n Mnday, Nvember 6. In additin, the Senate Finance Cmmittee is wrking n its wn tax refrm plan. Click here t view the sectin-by-sectin summary. Majr prvisins f the legislatin include: BUSINESSES - GENERAL Crprate Rate The bill reduces the crprate rate frm 35% t 20% effective fr tax years beginning after 2017, with n sunset. The bill als repeals the crprate alternative minimum tax. Pass-thrugh Rate Under current law, sle prprietrships, partnerships, limited liability cmpanies and S crpratins are generally treated fr federal incme tax purpses as pass-thrugh entities subject t tax at the wner r sharehlder level rather than at the entity level. Net incme earned by an individual wner r sharehlder f ne f these entities is reprted n the individual s incme tax return and is subject t rdinary incme tax rates, up t the tp individual marginal rate f 39.6%. The bill prvides fr a special maximum 25% rdinary incme tax rate that wuld apply t the qualified business incme f individuals engaged in business activities thrugh sle prprietrships, tax partnerships, and S crpratins. Business incme nt qualifying as such wuld remain subject t the nrmal rdinary incme tax rate schedule. The determinatin f whether incme is qualified business incme depends n whether such incme is derived frm passive r active business activities. The determinatin f whether a taxpayer is active r passive with respect t a particular business activity wuld rely n the current material participatin rules in sectin 469 and the underlying regulatins. Incme f passive wners wuld be treated entirely as qualified business incme.

2 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 A 30/70 rule wuld generally apply t incme derived frm active business activity 30% f such net incme (the capital percentage prtin f such incme) wuld be treated as qualified business incme, while the remaining 70% wuld be subject t rdinary incme tax rates. Alternatively, active business wners may elect t apply a frmula based n the facts and circumstances f their business t determine a capital percentage f greater than 30%. The frmula wuld measure the capital percentage based n a rate f return (the federal shrt-term rate plus seven percentage pints) multiplied by the capital investments f the business. The electin f this alternative frmula wuld be binding fr a five-year perid. Certain items, such as incme subject t preferential rates (e.g., net capital gains and qualified dividend incme) and certain investment incme (e.g., shrt-term capital gains, dividends, and freign currency gains and hedges nt related t the business needs) wuld nt be eligible t be recharacterized as qualified business incme. A special rule wuld apply t prevent the recharacterizatin f actual wages paid as qualified business incme. An wner s r sharehlder s capital percentage wuld be limited if actual wages r incme treated as received in exchange fr services frm the pass-thrugh entity (such as a guaranteed payment) exceeds the taxpayer s therwise applicable capital percentage. The default capital percentage fr certain persnal services businesses (such as thse invlved in the perfrmance f services in the fields f law, accunting, cnsulting, engineering, financial services, r perfrming arts) wuld be zer percent. Hwever, such businesses als culd elect t use an alternative capital percentage, subject t certain limitatins. Such an electin is intended t prvide sme relief t persnal service businesses that, nevertheless, have significant capital investments. The bill als prpses t eliminate the preferential self-emplyment tax treatment fr sharehlders f S crpratins and limited partners f partnerships by treating a labr percentage f net incme derived frm carrying n a business by any individual as earnings subject t the self-emplyment tax (whether such individual carries n such business as a sle prprietrship, a sharehlder f an S crpratin, r a partner f a tax partnership). The labr percentage is generally equal t ne minus the capital percentage used fr the special maximum 25% rate n qualified business incme. The bill als wuld repeal the partnership technical terminatin rule. Thus, a partnership wuld be treated as cntinuing even if mre than 50% f the ttal capital and prfits interests f the partnership are sld r exchanged within a year, which wuld prevent partnerships frm being required r being permitted t make new electins fr varius accunting methds, depreciatin lives, and ther purpses. The bill des nt cntain any specific changes t the treatment f carried interest. Additinally, the bill des nt include any technical changes t the new partnership audit and litigatin regime scheduled t take full effect in Such changes may be included as the bill wrks its way thrugh the legislative prcess. 2

3 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 Internatinal Prvisins Dividend-Exemptin System. Fr distributins made after 2017, the bill prpses a dividend-exemptin (r territrial ) system in which 100% f the dividends paid by a freign crpratin t a 10% US crprate sharehlder wuld be exempt frm US taxatin. N freign tax credit r deductin wuld be allwed fr any freign taxes (including withhlding taxes) with respect t any exempt dividend. (Hwever, indirect freign tax credits wuld be available t ffset US tax n subpart F incme.) In additin, n deductins fr expenses allcable t an exempt dividend wuld be taken int accunt fr purpses f determining the US crprate sharehlder s freign-surce incme. Sectin 956 wuld be repealed. In additin, a US parent wuld be required t reduce the basis f its stck in a freign subsidiary by the amunt f any exempt dividends received by the US parent frm its freign subsidiary but nly fr purpses f determining the amunt f a lss n any sale r exchange f the freign stck by its US parent. The dividend exemptin system wuld be supplemented by several anti-base ersin measures, discussed belw. Transitin Tax. T transitin t the new system, a 10% US sharehlder f a freign subsidiary wuld be required t include in incme fr the subsidiary s last tax year beginning befre 2018 the sharehlder s pr rata share f the net pst-1986 histrical earnings and prfits (E&P) f the freign subsidiary t the extent such E&P has nt been previusly subject t US tax. T the extent the E&P is retained in cash r cash equivalents, it wuld be taxed at a 12% rate. All ther E&P wuld be taxed at five percent. Freign tax credit carryfrwards wuld be fully usable and freign tax credits triggered by the deemed repatriatin wuld be partially available t ffset the US tax. The different rates reflect an acknwledgment that current tax n earnings reinvested in business assets is arguably less justified and likely harder fr cmpanies t fund. At the electin f the US sharehlder, the tax liability wuld be payable ver a perid f up t eight years, in equal annual installments f 12.5% f the ttal tax liability due. Mdificatins t Subpart F. The bill largely retains subpart F, with certain mdificatins, including making the lk-thrugh rule permanent, adjusting the de minimis exceptin fr freign base cmpany incme, repealing certain rules relating t freign shipping incme and freign base cmpany il related incme. In additin, the stck attributin rules wuld be mdified s that a US crpratin wuld be treated as cnstructively wning stck held by its freign sharehlder. The requirement that a US parent f a CFC wn stck in the freign subsidiary fr an uninterrupted perid f 30 days r mre during the year wuld als be repealed. Surce Rules fr Inventry Prperty. Incme frm the sale f inventry prperty prduced within and sld utside the United States (r vice versa) wuld be allcated and apprtined between surces within and utside the United States slely n the basis f the prductin activities with respect t the inventry. Tax n Freign High Returns. The bill wuld subject a US parent f ne r mre freign subsidiaries t current US tax n 50% f the US parent s freign high returns. Freign high returns wuld be measured as the excess f the US parent s freign subsidiaries aggregate net incme ver a rutine return (seven percent plus the federal shrt-term rate) n the freign subsidiaries aggregate adjusted bases in depreciable tangible prperty, adjusted dwnward fr interest expense. The prvisin culd result in a large tax fr US multinatinals acrss a variety f industries, especially thse with freign 3

4 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 businesses that are nt capital-intensive. Freign high returns wuld be treated similarly t currently-taxed subpart F incme, including fr purpses f allwing a freign tax credit. Limitatin n Interest Deductibility fr Internatinal Financial Reprting Grup. The bill wuld limit the deductin f interest by US crpratins that are members f an internatinal financial reprting grup by limiting deductible net interest expense t the extent the US crpratin s share f the grup s glbal net interest expense exceeds 110% f the US s share f the grup s glbal earnings befre interest, taxes, depreciatin, and amrtizatin (EBITDA). An internatinal financial reprting grup is any grup f entities that (a) includes at least ne freign crpratin engaged in a US trade r business r at least ne US crpratin and ne freign crpratin, (b) prepares cnslidated financial statements, and (c) reprts annual grss receipts fr the three-year reprting perid in excess f $100 millin. The limitatin wuld apply in additin t the general rules fr interest expense disallwance (i.e., the 30% f EBITDA limitatin described belw), with the interest disallwance determined under whichever prvisin denied the greater amunt. 20% Excise Tax n Payments t Related Freign Crpratins. Payments (ther than interest) made by a US crpratin t a related freign crpratin that are deductible, includible in csts f gds sld, r includible in the basis f a depreciable r amrtizable asset wuld generally be subject t a 20% excise tax, unless the related freign crpratin elected t treat the payments as incme effectively cnnected with the cnduct f a US trade r business. This prvisin wuld apply nly t internatinal financial reprting grups with payments frm US crpratins t their freign affiliates ttaling at least $100 millin annually. The prvisin wuld be effective fr tax years beginning after The prvisin is similar t a surtax advcated by University f Hustn Law Center Prfessr Bret Wells in his testimny befre the Senate Finance Cmmittee n Octber 3, PFIC Insurance Exceptin Mdificatin. Under current law, passive incme fr purpses f the PFIC prvisins des nt include incme derived in the active cnduct f an insurance business if the PFIC is predminantly engaged in an insurance business and wuld be taxed as an insurance cmpany if it were a US crpratin. This rule wuld be mdified t apply nly if the freign crpratin wuld be taxed as an insurance cmpany if it were a US crpratin and if lss and lss adjustment expenses, unearned premiums, and certain reserves cnstitute mre than 25% f the freign crpratin s ttal assets (r 10% in certain cases). The mdificatin wuld thus target certain insurance cmpany structures linked t hedge funds. Such arrangements were targeted by Treasury and the IRS in regulatins prpsed in 2015 that have nt been finalized. Limitatin n Treaty Benefits. Under the bill, if a payment f fixed r determinable, annual r peridical (FDAP) incme is deductible in the United States and the payment is made by an entity that is cntrlled by a freign parent t anther entity in a tax treaty jurisdictin that is cntrlled by the same freign parent, then the statutry 30% withhlding tax n such incme wuld nt be reduced by any treaty unless the withhlding tax wuld be reduced by a treaty if the payment were made directly t the freign parent. This prvisin wuld be effective fr payments made after the date f enactment. Similar prvisins have appeared in several lder tax bills and have been criticized as verriding US tax treaties. 4

5 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 Rules Relating t US Territries. The bill wuld als mdify certain prvisins related t territries f the United States, including extending the deductin allwable with respect t incme attributable t dmestic prductin activities in Puert Ric, extending the temprary increase in limit n cver ver f rum excise taxes t Puert Ric and the Virgin Islands, and extending the American Sama ecnmic develpment credit. Business Deductins ENERGY Interest. Under the bill, the amunt f interest that can be deducted by any business with grss receipts f $25 millin r mre is generally limited t 30% f the business s adjusted taxable incme. The prvisin wuld nt apply, hwever, t certain regulated public utilities and real prperty trades r businesses (i.e., any real prperty develpment, redevelpment, cnstructin, recnstructin, acquisitin, cnversin, rental, peratin, management, leasing, r brkerage trade r business ). Adjusted taxable incme is defined as the business s taxable incme cmputed withut regard t interest, net perating lsses, depreciatin, amrtizatin, and depletin. Any interest amunts disallwed wuld be allwed t be carried frward fr five years. Disallwance wuld be determined at the tax filer level. The bill wuld repeal the existing limitatins under sectin 163(j) but wuld apply in additin t the limitatin n interest deductibility fr internatinal financing reprting grups, discussed abve. Net Operating Lsses. The bill mdifies the treatment f net perating lsses by limiting the use f a net perating lss carryver r carryback t 90% f the taxpayer s taxable incme (similar t the effect f the alternative minimum tax rule under current law). The bill als eliminates all net perating lss carrybacks except fr a special ne-year carryback fr small businesses and farms in the case f certain casualty and disaster lsses. Depreciatin and Expensing. The bill wuld prvide fr additinal accelerated depreciatin immediate expensing f all the cst (instead f the present law 50% f cst) fr prperty described in sectin 168(k) generally prperty with a life f 20 years r less, cmputer sftware and certain ther prperty. Prperty qualifying fr immediate expensing wuld nt include regulated public utility prperty r prperty used in a real prperty trade r business. Like-Kind Exchanges. The bill wuld limit like-kind exchanges under sectin 1031 t exchanges f real prperty. The bill includes a transitin rule t allw like-kind exchanges fr persnal prperty t be cmpleted if the taxpayer has either dispsed f the relinquished prperty r acquired the replacement prperty n r befre December 31, Prductin Tax Credits Currently, a taxpayer may claim a prductin tax credit fr prducing electricity at a facility using qualified resurces during the 10-year perid beginning n the date the facility was riginally placed in service. Fr this purpse, qualified resurces cnsist f wind, clsed-lp bimass, pen-lp bimass, gethermal energy, slar energy, small irrigatin pwer, municipal slid waste, qualified hydrpwer prductin, and marine and hydrkinetic renewable energy. The base amunt f the credit is 1.5 cents per kilwatt hur. Indexed fr inflatin, the rate fr prjects where cnstructin began befre 2017 is 5

6 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, cents fr 2017 (the rate was 2.3 cents fr 2016) and 1.9 cents fr prjects where cnstructin begins in The credit is generally available fr wind facilities the cnstructin f which begins befre 2020 and fr facilities using ther qualified resurces where cnstructin began befre Under the bill, the inflatin adjustment wuld be repealed. In additin, unless there is a cntinuus prgram f cnstructin fr a facility, the cnstructin f that facility shall nt be treated as beginning befre any date. Mdificatin f the Energy Investment Tax Credit A taxpayer may claim an investment credit cmputed by reference t the basis f eligible energy prperty nce the prperty is placed in service. Eligible energy prperty cnsists f slar energy, fiber-ptic slar energy, gethermal energy, qualified fuel cell, qualified micrturbine, cmbined heat and pwer system, qualified small wind energy, and thermal energy prperties. The percentage f the credit available depends upn the type f prperty and the date when cnstructin begins. The bill wuld generally harmnize the expiratin dates and phase-ut schedules. Under the bill, the 30% credit fr slar energy, fiber-ptic slar energy, qualified fuel cell, and qualified small wind energy prperty wuld be available fr prperty the cnstructin f which begins befre 2020 and wuld be phased ut fr prperty the cnstructin f which begins befre 2022, with n credit available fr prperty the cnstructin f which begins after The 10% credit fr qualified micrturbine, cmbined heat and pwer systems, and thermal energy prperty wuld be available fr prperty the cnstructin f which begins befre The permanent 10% credit fr slar energy and gethermal energy prperty is eliminated fr prperty the cnstructin f which begins after The bill wuld clarify that the cnstructin f any facility, mdificatin, imprvement, additin, r ther prperty may nt be treated as beginning befre any date unless there is a cntinuus prgram f cnstructin which begins befre such date and ends n the date that such prperty is placed in service. Extensin and Phaseut f Residential Energy Efficient Prperty A taxpayer culd claim a 30% credit fr the purchase f qualified gethermal heat pump prperty, qualified small wind energy prperty, and qualified fuel cell pwer plants placed in service befre 2017 and culd als claim a credit fr qualified slar electric prperty and qualified slar water heating prperty (nt used fr heating swimming pls and ht tubs) placed in service prir t 2022 (subject t a reduced rate f 26% fr prperty placed in service during 2020 and 22% fr prperty placed in service during 2021). Under the bill, the credit fr residential energy efficient prperty wuld be extended fr all qualified prperty placed in service prir t 2022, subject t a reduced rate f 26% fr prperty placed in service during 2020 and 22% fr prperty placed in service during Repeal f Enhanced Oil Recvery Credit Taxpayers may claim a credit equal t 15% f enhanced il recvery csts. The credit is ratably reduced ver a $6 phase-ut range when the reference price fr dmestic crude il exceeds $28 per barrel (adjusted fr inflatin after 1991). Based n current prices, the credit is fully phased-ut. 6

7 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 The bill wuld repeal the credit fr tax years after Repeal f Credit fr Prducing Oil and Gas frm Marginal Wells Prducers may claim a $3-per-barrel credit (adjusted fr inflatin) fr the dmestic prductin f crude il and a 50-cents-per-1,000-cubic-feet credit (als adjusted fr inflatin) fr the dmestic prductin f qualified natural gas. The credit is nt available fr prductin if the reference price f il exceeds $18 ($2 fr natural gas). The credit is reduced prprtinately fr reference prices between $15 and $18 ($1.67 and $2 fr natural gas). The credit is nw phased ut cmpletely based n the current price f a barrel f il. The bill wuld repeal the credit fr years after Mdificatins f Credit fr Prductin frm Advanced Nuclear Pwer Facilities INSURANCE COMPANIES A taxpayer may claim a credit fr electricity prduced at a qualifying advanced nuclear pwer facility fr an eight-year perid beginning when the facility is placed in service. The credit prvides fr a maximum 6,000 megawatts f natinal capacity allcated by the Secretary f the Treasury. T qualify, a taxpayer must have submitted an applicatin with respect t a nuclear facility befre February 1, 2014, and must have received an allcatin frm the available natinal megawatt capacity with respect t the facility. All 6,000 megawatts f natinal capacity have been allcated. The nuclear prductin tax credit may be allcated amng partners in a partnership, effectively allwing fr the transfer f such credits in certain circumstances. Under the bill, the credit allcatin prcess wuld be clarified and a credit transfer prvisin wuld be added. Beginning after January 1, 2021, the Secretary f the Treasury wuld reallcate any natinal megawatt capacity remaining under the cap, first t qualifying facilities t the extent such facilities did nt receive an allcatin equal t their full capacity and then t facilities placed in service after such date in the rder in which such facilities are placed in service. Certain public entities wuld be eligible fr an electin t transfer advanced nuclear prductin tax credits t specified prject participants invlved in design r cnstructin, persns prviding nuclear steam supply systems r nuclear fuel, persns with an wnership interest, and partners in a partnership with an wnership interest. Life Insurance Cmpanies The bill mdifies sectin 805 and repeals sectins 810 and 844 t make the peratins lss carry ver and back prvisins f Sectin 172 applicable t life insurance cmpanies. Thus, cmpanies wuld carry peratins lsses back up t tw (instead f three) years and frward up t 20 (instead f 15) years. The bill repeals the sectin 806 small life insurance cmpany deductin. The bill amends the sectin 807 reserve cmputatin rules. Cmpanies wuld cmpute reserves fr future unaccrued claims and take int accunt 76.5% f the increase r decrease in such reserves in cmputing taxable incme. Reserves fr future unaccrued claims are the life insurance reserves, discunted unpaid lsses and ther reserves reprted n the annual statement, but excluding deficiency reserves, asset adequacy reserves and ther types f reserves identified in IRS guidance. If the year-end reserve at 7

8 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 the end f the pre-effective date year differs frm the pening reserve f the effective date year the difference is taken int accunt ratably ver an eight-year spread perid. The bill amends sectin 807(f) t eliminate the special rule fr changes in cmputing reserves and t require instead use f the generally applicable sectin 481 change in accunting methd rules. The bill amends sectin 812 t specify that fr prratin purpses the cmpany s share is 40% and the plicyhlders share is 60%. The bill repeals sectin 815, which applies t distributins frm a stck life insurer s pre plicy hlders surplus accunt. If a cmpany has a remaining balance in such accunt at the end f the pre-effective date year that balance is brught int incme ratably ver eight years. The bill amends the sectin 848 plicy acquisitin expense rules by replacing the three categries f specified insurance cntracts with tw categries: grup cntracts and all ther specified cntracts. Fr grup cntracts, the specified plicy acquisitin expenses are net premiums times fur percent and fr ther cntracts the specified plicy acquisitin expenses are net premiums times 11%. Nn-life Insurance Cmpanies The bill amends sectin 832 t prvide that, fr prratin purpses, the reductin in the lsses incurred deductin attributable t tax-exempt interest and the dividends received deductin is increased frm 15% t 26.25% f such amunts. The bill amends sectin 846 t amend the discunting rules used t determine discunted unpaid lsses. First, the applicable interest rate fr determining discunted unpaid lsses is the crprate bnd yield curve specified by Treasury. Secnd, the cmputatinal rules fr lss payment patterns are mdified by applying the lss payment pattern fr lng-tailed business lines t all lines f business, but with the five-year limitatin n extensins t the payment perid increased t 15 years. In additin, the electin t use a cmpany s histric payment pattern is repealed. Any transitin adjustment is taken int accunt ratably ver eight years. The bill repeals sectin 847 and the special estimated tax payment rules related t the difference between discunted and undiscunted reserves. COMPENSATION AND RETIREMENT SAVINGS Cmpensatin The prvisins gverning deferred cmpensatin cntained in sectin 409A wuld be repealed and replaced by sectin 409B which wuld make cmpensatin taxable when the substantial risk f frfeiture (i.e., vesting prvisins lapse), effective fr services perfrmed after December 31, Fr this purpse, stck ptins and stck appreciatin rights are treated as deferred cmpensatin s such rights wuld becme immediately taxable when vested. This prvisin wuld essentially eliminate the efficacy f stck ptins and SARS. Transfers f prperty under sectin 83, hwever, wuld be unaffected by the bill. The rules fr deferred cmpensatin fr tax exempt rganizatin emplyees under sectins 457(f), 457(b), and 457A wuld be repealed with respect t services perfrmed after December 31, Presumably, these amunts will be gverned by new sectin 8

9 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, B. Sectin 457(b) wuld nt be repealed fr certain gvernmental emplyers. The $1 millin deductin cap n executive cmpensatin under sectin 162(m) wuld be changed t include perfrmance-based cmpensatin in the calculatin f the $1 millin cap, thereby discuraging excess cmpensatin, and t change the executives t whm sectin 162(m) applies. Incme exclusins wuld be limited r repealed fr emplyer-prvided husing; gain frm the sale f a principal residence; emplyee achievement awards; dependent care assistance prgrams; qualified mving expense reimbursement; and adptin assistance prgrams. A new 20% excise tax wuld be impsed n the cmpensatin in excess f $1 millin fr certain highly cmpensated emplyees f tax exempt rganizatins, including, fr example, caches at public clleges and universities. An excise tax similar t the parachute tax under sectin 280G wuld be included fr certain executives f certain taxexempt rganizatins fr payments cntingent upn a separatin frm emplyment, rather than upn a change in cntrl. Retirement Savings The bill wuld repeal a special rule that allws an individual t re-characterize a cntributin t a traditinal IRA as a cntributin t a Rth IRA (and vice versa). The bill wuld reduce the minimum age fr in-service distributins by permitting all defined benefit plans, as well as state and lcal gvernment defined cntributin plans, t make in-service distributins beginning at age 59½. The bill wuld mdify the rules gverning hardship distributins by requiring the IRS t change its guidance within a year t allw emplyees wh receive hardship distributins t cntinue t make plan cntributins, withut waiting the six mnths. It wuld als allw plans t permit hardship distributins f emplyer cntributins as well as earnings. The bill wuld extend the perid f time during which a plan participant may rllver a plan lan in the event the emplyee separates frm service, r the plan terminates, while a lan is utstanding. The time perid wuld be extended frm 60 days t the due date f the emplyee s tax return. The bill wuld mdify certain nndiscriminatin rules in an effrt t prtect lder, lnger service participants by expanding an emplyer s ability t crss-test between defined benefit and defined cntributin plans. The bill makes n change t current 401(k) limits, which allw 401(k) plan participants t vluntarily cntribute up t $18,000 per year (plus an additinal $6,000 if they are age 50 r ver) n a pre-tax basis. Early drafts f the prpsal wuld have limited the pre-tax cntributin amunt t as little as $2,400 per year, and required that additinal cntributins be made n an after-tax basis thrugh a s-called Rth 401(k) feature. Hwever, the 401(k) limits were drpped frm the prpsal after receiving criticism by the financial services industry, plan spnsrs and the White Huse ver cncerns that participants wuld react by decreasing their cntributins. The bill wuld subject gvernmental pensin plans and ther entities t the unrelated business incme tax (UBIT) rules. The bill prvides that all entities exempt frm tax under Cde sectin 501(a) are subject t the UBIT rules, ntwithstanding the entity s exemptin under any ther prvisin f the Cde (including sectin 115 in the case f gvernmental 9

10 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 INDIVIDUALS plans). The change wuld be particularly significant fr large public pensin funds. Individual Rates and Standard Deductin Individual incme tax brackets are set at 12, 25, 35, and 39.6%. The highest individual tax rate f 39.6% wuld apply t taxpayers with ver $1 millin in annual incme. The standard deductin is increased t $12,000 fr individuals and $24,000 fr married cuples. State and Lcal Tax Deductin The bill generally eliminates the deductin fr state and lcal taxes, except fr a limited deductin fr state and lcal prperty taxes up t $10,000. Mrtgage Interest Deductin The bill wuld further limit the individual deductin f hme mrtgage interest. Fr mrtgage debt incurred after Nvember 2, 2017, the current lan limit f $1 millin fr deductible interest is reduced t $500,000. The bill wuld als nly allw interest t be deductible n a mrtgage f a principal residence, rather than a principal residence and ne ther residence as permitted under existing law. The bill wuld nt allw interest n hme equity debt incurred after Nvember 2, Child Tax Credit Estate Tax Under the bill, debt incurred prir t Nvember 2, 2017 that is refinanced after Nvember 2, 2017 is treated as incurred n the date the riginal debt was incurred. The bill wuld treat debt pursuant t lans subject t a binding written cntract befre Nvember 2, 2017 as incurred prir t Nvember 2, The child tax credit is increased t $1,600 frm $1,000 per child under 17, with an additinal $300 credit fr nn-dependent children. The bill intrduces a new family flexibility credit f $300 fr each parent effective fr taxable years ending befre January 1, The bill dubles the exemptin frm the estate tax frm $5 millin t $10 millin (adjusted fr inflatin frm 2011) and repeals the estate tax cmpletely n January 1, The bill als includes the basic exclusin amunt fr gift and generatin-skipping transfers t $10 millin (adjusted fr inflatin). The bill wuld eliminate the estate tax fr decedents dying after December 31, The generatin-skipping transfer tax is als eliminated fr transfers after December 31, Estate, gift and generatin-skipping transfers made n r befre December 31, 2023 wuld still be subject t a maximum tax rate f 40% (n change in rates). The bill des nt eliminate the gift tax. Gifts made after December 31, 2023 wuld be subject t a maximum gift tax rate f 35% (reduced frm the current maximum rate f 40%). 10

11 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 EXEMPT ORGANIZATIONS Under the bill, the basis step up under sectin 1014 fr prperty received frm a decedent at death wuld be retained even after the estate and generatin skipping transfer taxes are repealed. Charitable Cntributin Incentive The bill wuld increase the standard deductin while many ther itemized deductins wuld be repealed r limited (including the deductin fr state and lcal incme tax). This is expected t reduce the number f taxpayers taking itemized deductins and, cnsequently, limit the benefit f the current charitable cntributin deductin, which wuld nt be changed by the bill. The bill wuld reduce the marginal rates fr individuals, crpratins, and certain passthrugh business incme generally, weakening the tax incentive t make charitable cntributins. Hwever, the tp marginal rate f 39.6% fr individuals wuld be retained but wuld nly apply t jint filers with adjusted grss incme f $1 millin r mre. The bill wuld duble the credit against estate, gift, and generatin-skipping transfer (GST) tax, and repeal the estate and GST taxes after six years, which wuld weaken the tax incentive t make charitable cntributins at death. The bill als wuld make revisins t the charitable cntributin deductin, including increasing the percentage-f-incme limitatin fr cash cntributins frm 50% t 60%, strengthening the incentive fr certain large cash cntributins; adjusting the amunt deductible fr use f a passenger autmbile fr charitable purpses frm the current fixed 14 cents per mile, t an amunt that reflects the current variable cst f perating an autmbile (as is currently used t calculate the medical and mving expense deductins); denying a deductin fr cntributins assciated with receipt f rights t purchase tickets t cllege athletic events; and repealing the cntrversial ptin in sectin 170(f)(8)(D) under which the IRS currently may allw dnee rganizatins t reprt charitable cntributins t the IRS instead f sending a cntempraneus acknwledgement t the dnr. Prvisins Affecting Charity Funding The bill wuld increase tax n the revenue f sme tax-exempt rganizatins. Fr example, the bill wuld create a 1.4% excise tax n the net investment incme f private clleges and universities with ver 500 students and assets in excess f $100,000 per student. In additin, the current tw-tier private fundatin excise tax n investment incme wuld be replaced by a flat 1.4% excise tax as well a higher rate than similar prpsals in the past. The bill wuld narrw the UBIT exclusin fr research incme, limiting its applicatin t incme frm research that is freely available t the public. The bill als wuld expand UBIT t certain fringe benefits (qualified transprtatin, qualified parking, and npremises athletic facilities) prvided t emplyees f tax-exempt rganizatins. The bill wuld repeal the New Markets Tax Credit, which prvides funding fr cmmunity ecnmic develpment in distressed cmmunities thrugh credit allcatins, ften t taxexempt rganizatins. 11

12 Ways and Means Cmmittee Release Text f Tax Refrm Bill Nvember 2, 2017 The bill wuld make many tax-exempt bnds issued after December 31, 2017 taxable, by repealing the current incme tax exclusin fr interest n private activity bnds, including qualified 501(c)(3) bnds, which are frequently used by charities t fund capital imprvements, and by making interest n advance refunding bnds taxable. Other Prvisins Affecting Charities UPDATE NOV. 3 Churches wuld be permitted t make statements relating t plitical candidates in the rdinary curse f religius services and activities, prvided the church incurred nly de minimus incremental expenses. The bill wuld impse a 20% excise tax n cmpensatin f certain emplyees paid by tax-exempt emplyers in excess f $1 millin per year. In additin, the bill wuld impse an excise tax similar t the parachute tax under sectin 280G fr executives f certain tax-exempt rganizatins fr payments cntingent upn a separatin frm emplyment. The rules fr deferred cmpensatin fr tax tax-exempt rganizatin emplyees under sectins 457(f), 457(b), and 457A wuld be repealed with respect t services perfrmed after December 31, Presumably, these amunts wuld be gverned by prpsed new sectin 409B, which generally makes cmpensatin taxable when there is n substantial risk f frfeiture (i.e., vesting prvisins lapse). Repeal certain exclusins frm emplyee incme, such as fr dependent care assistance and adptin assistance prgrams, and limit the exclusin fr emplyer-prvided husing (including that prvided by educatinal institutins) t $50,000 fr ne residence with a phase-ut fr highly-cmpensated emplyees (currently, thse earning ver $120,000 per year). In additin, UBIT wuld be expanded t tax certain fringe benefits (qualified transprtatin, qualified parking, and n-premises athletic facilities) prvided t emplyees f tax-exempt rganizatins. (The act wuld disallw a deductin fr the same benefits prvided by taxable emplyers.) A limited exceptin t the excess business hlding rules fr private fundatins wuld be created fr certain whlly-wned and independently perated businesses where all net perating incme prmptly is distributed fr use in the fundatin s charitable purpses. Dnr advised fund spnsring rganizatins wuld be subject t additinal reprting requirements. Organizatins that perate an art museum as a substantial activity wuld nt qualify as private perating fundatins unless the museum is pen during nrmal business hurs t the public fr at least 1,000 hurs per year. On Nvember 3, Ways & Means Cmmittee Chairman Kevin Brady (R-TX) released the chairman s mark the Tax Cuts and Jbs Act (H.R. 1), which makes a few amendments t the bill released n Nvember 2. The mark eliminates a prvisin that wuld have prevented a crprate subsidiary frm taking advantage f sme treaty benefits with respect t tax-deductible payments t a freign affiliate if the cmmn freign parent is nt eligible fr the benefits. (This prpsal is described in Stepte s riginal summary under Limitatin n Treaty Benefits. ) The cmmittee markup is scheduled t begin n Nvember 6. 12