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US House Ways And Means Adopts Tax Reform Law

by Mike Godfrey,, Washington

10 November 2017

The House Ways and Means Committee has passed the Tax Cuts and Jobs Act after a final markup, including in it a lower tax rate for pass-through income introduced as part of a second package of amendments.

The bill was approved by the House Ways and Means Committee on November 9.

The Committee has released a section-by-section explanation of new amendments, which were put forward on November 9. This provides that:

Section 1004 is amended to introduce a new nine percent tax rate for the first USD75,000 in net business taxable income for pass-through businesses earning less than USD150,000, reduced from 12 percent.

The tax rate will be phased in over five years starting at 11 percent in 2018 and 2019, 10 percent for 2020 and 2021, and nine percent for 2022 onwards. An amendment also preserves the current-law rules on the application of payroll taxes to amounts received through a pass-through entity.

Section 1102 is proposed to be amended to preserve the current non-refundable credit for qualified adoption expenses. Section 1103 would be amended to require the provision of a Social Security Number for a child to be able to claim the full enhanced Child Tax Credit.

Section 1205 is amended to allow rollovers between Section 529 qualified tuition programs and qualified ABLE programs (tax-advantaged savings accounts for individuals with disabilities and their families, created through the Achieving a Better Life Experience (ABLE) Act of 2014).

Section 1405 is amended to preserve the current tax treatment for the reimbursement of qualified moving expenses for active members of the US military forces.

Section 3001 on the reduction of the corporate tax rate would be amended to lower the 80 percent dividends received deduction to 65 percent, and the 70 percent deduction to 50 percent, preserving the current tax treatment of income from these dividends.

Sections 3101 and 3301 are amended to exclude net business interest for taxpayers that paid or accrued interest on "floor plan financing indebtedness" (the interest on short-term loans used by retailers to finance the purchase of high-cost goods) from the limitation on deductibility. Businesses with floor plan expensing indebtedness will no longer be eligible for full expensing.

Section 3204 is amended to modify the treatment of S corporation conversions into C corporations. Distributions from eligible terminated S corporations will be treated as paid from their accumulated adjustment accounts and from earnings and profits on a pro-rata basis.

Section 3315 is amended to require certain research or experimental expenditures to be capitalized and amortized over a five-year period (or 15 years for research conducted outside the US), beginning from 2023.

Section 3316 is amended to provide uniform treatment of expenses in contingent fee cases, disallowing an immediate deduction for litigation costs advanced by an attorney to a client until the contingency is resolved, to create parity throughout the US regarding deductible expenses in contingent fee litigation.

Section 3703 is amended to preserve current law tax treatment of insurance company deferred acquisition costs, life insurance company reserves, and pro-ration. The amendment also imposes an eight percent surtax on life insurance income. The Committee notes that this amendment is intended as a placeholder.

Section 3801 is deleted, in order to preserve the current law tax treatment of nonqualified deferred compensation.

Section 3805 is amended to clarify that restricted stock units are not eligible for section 83(b) elections.

Section 4004 is amended to update the treatment of deferred foreign income upon transition to the participation exemption system of taxation. An effective tax rate of seven percent will be applied on repatriated earnings held in illiquid assets, and of 14 percent on earnings held in liquid assets.

Section 4303 (regarding the treatment of excise tax on certain payments from domestic corporates to foreign related corporations as effectively connected income) is amended in three ways.

  • The mark-up on deemed expenses is eliminated;
  • The foreign tax credit is expanded to apply to 80 percent of foreign taxes; and
  • The measurement of foreign taxes paid will be determined through reference to section 906 of current law rather than by a formula based on financial accounting information.

Section 4969 is amended to ensure that the 1.4 percent excise tax on net investment income from the endowment assets held by private universities is applied to all assets held by organizations related to the university, as well as those directly held by the university.

Finally, Section 5201 is amended to allow all 501(c)(3) organizations exempt from Federal income tax (such as churches and charities) to make statements on political campaigns whilst retaining their non-profit tax treatment, starting from December 31, 2018, and automatically being repealed from December 31, 2023.

Tabling the amendment, Ways and Means Committee Chairman Kevin Brady (R-TX) said: "I'm pleased to offer this amendment to the Amendment in the Nature of a Substitute on behalf of the majority on the Ways and Means Committee. Similar to the amendment I offered on November 6, 2017, this amendment will refine several provisions in the Tax Cuts and Jobs Act. It also takes action on three crucial priorities – helping American families, providing tax relief to Main Street startups, and increasing American competitiveness."

TAGS: individuals | tax | investment | small business | business | interest | law | accounting | insurance | payroll | transfer pricing | United States | charities | dividends | tax reform | retail | Tax

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