Insights: Article

Tax Reform Moving Through Senate and House

November 17, 2017

Late in the evening of November 16, in a process that at times saw the discussion become very heated, the Senate Finance Committee completed work on their version of tax reform.

Earlier on the same day, despite losing the votes of 13 Republican members from high tax states, the House of Representatives passed its version of the “Tax Cuts and Jobs Act” by a vote of 227-205. No Democrats voted for the act.

These actions now place the focus of tax reform legislation squarely on the Senate—temporarily, at least, as the House now waits for the Senate to approve their version of the act. For background, see our previous articles “Tax Reform Bill Released” and “Senate Finance Committee Releases Its Tax Reform Proposal.”

House Key Provisions Intact
The House version of the act, generally effective beginning in 2018, contains many of its original provisions. It reduces the corporate tax rate from 35 percent to 20 percent, provides for a new top 25 percent tax rate on business income earned by partnerships, S corporations and sole-proprietorships, subject to detailed rules on the types and amounts of income qualifying for the lower rate, permits expensing of qualifying new or used depreciable property purchases (through 2022), consolidates the seven individual income tax brackets into four and increases the income level subject to the top rate of 39.6 percent to $500,000 for single filers and $1 million for married filing joint filers, eliminates the estate tax after 2024 and transforms the taxation of businesses that earn income overseas.

Revisions to the Act
As the act progressed in the House, some significant changes were made to the original bill, including amendments to: 

  • Reduce the tax rates on business income of pass-through entities that would otherwise be taxed to owners in the 12 percent tax bracket
  • Eliminate a provision that would have subjected certain pass-through income to the self-employment tax
  • Postpone the repeal of the estate and generation skipping taxes until 2025 (rather than 2024 under the original bill)
  • Strike a provision that would have curtailed the use of deferred compensation plans
  • Introduce an exception to the limitation on the deductibility of net interest expense for floor plan financing
  • Add a three-year holding period requirement for long-term capital gain treatment for partnership interests received for services (so-called “carried interests”)
  • Increase the tax rates on the deemed repatriation of foreign earnings

A ‘Pass’ or ‘Fail’ Test for the Senate
The House effectively told the Senate “tag, you’re it.” In response, the Senate Finance Committee approved, and moved forward its version of tax reform. Now, the Senate Budget Committee will review the Senate Finance Committee proposal for compliance with the fiscal year 2018 budget resolution passed in October. Then, assuming, the Budget Committee finds no violations, Senate leadership will schedule the tax reform legislation for consideration by the full Senate.   

However, even as the Republican-led Senate Finance Committee was moving their version of the act forward, opposition from a few Republican Senators was being discussed. And, in this case, a few Republican Senators in opposition could create a significant risk of passage once the full Senate begins to vote. With 52 Republican Senators, and assuming no Senate Democrats will vote in favor of the tax reform plan, the Republicans cannot have more than two of their Senators vote “no.”

A vote in the Senate should happen by the end of the week after Thanksgiving (December 1), depending on whether Republican leaders can garner the necessary votes and keep to their fast-paced schedule through the process of debate and voting on numerous anticipated amendments that will be brought forth related to the Senate Finance Committee version.

Conference Committee on Standby
Once, or if, the Senate passes its version of tax reform, the House and Senate will need to reconcile the differences in their respective versions of tax reform. A conference committee will be convened to discuss the House and Senate versions of the act and blend them into a single, reconciled version. Once that task has been completed, the reconciled version is then voted on by both the House and the Senate. If passed by both, the reconciled version of the act will be presented to the president for signature into law. 

Due to the narrow majority of Republicans in the Senate, and the uncertainties surrounding the Alabama special senatorial election that is scheduled for December 12, more pressure has been placed on Republican House and Senate leaders to complete action on tax reform legislation by mid-December.

Progress
Tax reform legislation is still moving forward. However, as we have noted before, any procedural or political difficulties could result in delays in the process, or even derail it altogether. 

All eyes are now on the Senate as the Senate Finance Committee tax reform proposals (which vary in some significant ways from the House legislation) move through the full Senate for debate and passage. It is important to watch how the Senate’s proposals are finalized, because, traditionally, due to its stricter voting and procedural requirements, Senate proposals usually come out on top during any final conference committee negotiations, should this legislation make it that far.  

Contact your Eide Bailly, LLP professional with questions concerning the tax reform process or specific provisions.

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