In-Depth Article: Parker's Explanation of the Senate Tax Bill (TCJA 2017)

(Parker Tax Publishing December 2017)

In the early morning hours of Saturday, December 2, 2017, the Senate passed Tax Cuts and Jobs Act (the Senate Bill). The vote was 51-49, with Senator Bob Corker (R-Tenn) being the lone Republican to join the Democrats in voting against the Senate Bill. The Senate Bill has significant differences from the House Bill that passed on November 16 and the House and Senate must now work together to reconcile the two bills to produce a final package (i.e., a Conference Report) to be voted on by both chambers of Congress. Once it passes that hurdle, the bill can be sent to the President for signature. H.R. 1-Senate (December 2, 2017)

Introduction

With respect to individuals, some of the more notable items included in the Senate Bill are:

(1) the provision of seven tax brackets, rather than the four proposed in the House Bill, and a top tax rate of 38.5 percent rather than the 39.6 percent in the House Bill;

(2) a repeal of the personal exemption deductions and an increase in the standard deduction amounts, although the amounts provided by the Senate Bill are slightly lower than those provided by the House Bill;

(3) a repeal of state and local tax deductions, except that, like the House Bill, a deduction of up to $10,000 in property taxes is allowed;

(4) keeping current law provisions regarding the deduction of mortgage interest on a principal residence (a deduction the House Bill reduced) but, like the House Bill, repealing entirely interest deductions on home equity indebtedness;

(5) a repeal of the miscellaneous itemized deductions, where the House repealed several components of this deduction;

(6) the retention of a personal casualty loss deduction for events in presidentially declared disaster areas, where as the House repealed personal casualty deductions all together;

(7) a child tax credit of $2,000, which is $400 more than the House Bill's credit;

(8) an increase in the alternative minimum tax (AMT) exemption amounts and the adjusted gross income thresholds at which the exemption amount begins to phase out, as opposed to the full repeal of the individual AMT in the House Bill;

(9) a repeal of the individual shared responsibility payment enacted as part of the Affordable Care Act (ACA), the repeal of which is not included in the House Bill; and

(10) the expiration of most individual tax proposals after December 31, 2025.

Unlike the House Bill, the Senate Bill does not eliminate the deduction for medical expenses, alimony, and student loan interest. Nor does the Senate Bill make other education-related changes as were made in the House Bill, except for allowing rollovers from a Section 529 plan to a Code Sec. 529A ABLE account.

The Senate Bill also does not repeal the estate tax, as the House Bill would. Instead, the Senate Bill doubles the basic exclusion amount, thus increasing the number of estates that would be exempt from the estate tax.

Similar to the House Bill, the Senate Bill would reduce the corporate tax rate to 20 percent but the new rate would go into effect in 2019, a year later than under the House Bill.

The Senate Bill also provides a totally different tax structure for the taxation of pass-through entities. Rather than providing a maximum 25 percent tax rate, as the House Bill did, the Senate Bill provides a special 23 percent deduction for domestic qualified business income. Other important business-related changes include (1) less generous expensing under Code Sec. 179 than under the House Bill; (2) a 25-year recovery period for real property; and (3) a reduction in the gross receipts amount under which a business can qualify for certain accounting method relief.

The Senate Bill also makes changes to certain partnership rules, which were not included in the House Bill. The Senate Bill would (1) tax gain on the sale of a partnership interest on a look-through basis; (2) modify the definition of substantial built-in loss on transfers of a partnership interest; and (3) take into account charitable contributions and foreign taxes in determining the limitation on a partner's share of partnership loss.

While it's unclear whether any of these provisions will become law, if something does eventually pass, it will most likely be based on provisions in the House and Senate Bills. By understanding what the various proposed changes are, practitioners can better help to guide and explain to clients what their potential exposures and opportunities are.

Observation: To the extent that the House and Senate Bills eliminate individual deductions and eliminate provisions that would exclude certain benefits from an individual's income, the lower federal tax rates may not help individuals who are subject to state income taxes as much as individuals in states that do not have a state income tax. This is because many states that have an income tax, start the calculation of state taxable income by using federal taxable income. Thus, a decrease in deductions normally taken for federal and state tax purposes, as well as an increase in gross income due to benefits no longer being excludible from an individual's income for federal tax purposes, will increase the individual's state taxable income and, therefore, their state tax liability.

Most of the changes in the Senate Bill would go into effect for tax years beginning after 2017, the one big exception being the reduced corporate tax rate which goes into effect for tax years beginning after 2018. As noted above, the individual tax provisions would expire after December 31, 2025. An in-depth explanation of the Senate Bill follows.

I. Changes Affecting Individuals

Affordable Care Act (ACA) Individual Healthcare Mandate

Under the Senate Bill, the amount of the individual shared responsibility payment enacted as part of the ACA would be reduced to zero, effective with respect to health coverage status for months beginning after December 31, 2018.

Individual Tax Rates and Brackets

Unlike the House Bill, which reduced the number of individual tax brackets from seven to four, the Senate Bill replaces the individual income tax rate structure with a new rate structure, but keeps seven different brackets.

The Senate Bill would replace the current set of seven individual tax rates with a different set of seven individual tax rates. Under the Senate Bill, the highest marginal tax rate is 38.5%, as compared to the current top tax rate of 39.6% in the House Bill. The current tax rates of 10%, 15%, 25%, 28%, 33%, 35%, 39.6% rates would be replaced with tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. For all individuals except those filing joint returns, the maximum tax rate of 38.5% would kick in at taxable income over $500,000. For individuals filing a joint return, the maximum rate would kick in at taxable income in excess of $1,000,000.

Observation: The House Bill would replace the individual income tax rate structure with a new rate structure containing just four rates: 12%, 25%, 35%, and 39.6% percent, thus keeping the current highest tax rate. Similar to the Senate Bill, the top tax rate would apply to taxable income of $1,000,000 for joint returns and $500,000 for other individuals.

The income tax bracket thresholds are all adjusted for inflation after December 31, 2018, and then rounded to the next lowest multiple of $100 in future years. Unlike present law (which uses a measure of the consumer price index for all-urban consumers), the new inflation adjustment uses the chained consumer price index for all-urban consumers.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Estate and Trust Tax Rates and Brackets

Under the Senate Bill, the tax rate for estates and trusts would be 10% of taxable income up to $2,550, 24% of the excess over $2,550 but not over $9,150; 35% of the excess over $9,150 but not over $12,500; and 38.5% of the excess over $12,500.

Observation: Under the House Bill, the tax rate for estates and trusts are 12% of taxable income up to $2,550, 25% of the excess over $2,550 but not over $9,150; and 35% of the excess over $9,150 but not over $12,500; and 39.6% of the excess over $12,500.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Simplification of Tax on Unearned Income of Children

The Senate Bill simplifies the "kiddie tax" by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. Thus, taxable income attributable to earned income is taxed according to an unmarried taxpayer's brackets and rates. Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. The child's tax is no longer affected by the tax situation of the child's parent or the unearned income of any siblings.

Observation: This provision is similar to the House Bill, which proposed applying the rates applicable to trusts (without the 12 percent rate applicable to trusts, which the House Bill proposed) to the net unearned income of a child to whom the proposal applies.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Maximum Rates on Capital Gains and Qualified Dividends

The Senate Bill generally retains the present-law maximum rates on net capital gain and qualified dividends. The breakpoints between the zero- and 15-percent rates ("15-percent breakpoint") and the 15- and 20-percent rates ("20-percent breakpoint") are the same amounts as the breakpoints under current law, except the breakpoints are indexed using the Consumer Price Index for all Urban Consumers (C-CPI-U) in taxable years beginning after 2017. Thus, for 2018, the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals. The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

Observation: Therefore, in the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such gain is not taxed. Any adjusted net capital gain which would result in taxable income exceeding the 15-percent breakpoint but not exceeding the 20-percent breakpoint is taxed at 15 percent. The remaining adjusted net capital gain is taxed at 20 percent.

As under current law, unrecaptured Code Sec. 1250 gain generally is taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent.

Observation: The House Bill did not make any changes to capital gains and qualified dividends tax rates.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Increase in Individual AMT Exemption and Phaseout Amounts

While the Senate had originally called for eliminating the AMT, the Senate Bill instead provides for increased AMT exemptions rather than full repeal of the AMT. For 2018, the exemptions would be $109,400 (up from $84,500 in 2017) in the case of a joint return or the return of a surviving spouse; $70,300 (up from $54,300 in 2017) in the case of an individual who is unmarried and not a surviving spouse; $54,700 (up from $39,375 in 2017) in the case of a married individual filing a separate return. Additionally, the Senate Bill would increase the alternative minimum taxable income limit where the exemptions begin to phase out. Under the Senate Bill, the exemption amount of any taxpayer is reduced by an amount equal to 25 percent of the amount by which the alternative minimum taxable income of the taxpayer exceeds $208,400 (up from $160,900 in 2017) in the case of a joint return or the return of a surviving spouse; $156,300 (up from $120,700 in 2017) in the case of an individual who is unmarried and not a surviving spouse. No change was made to the phase-out amount in the case of a married individual filing a separate return.

This provision would be effective for tax years beginning after December 31, 2017.

Paid Preparer Due Diligence Requirement for Head of Household Status

The Senate Bill directs the Secretary of the Treasury to issue due diligence requirements for paid preparers in determining eligibility for a taxpayer to file as head of household. A penalty of $500 would be imposed for each failure to meet these requirements.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: There is no similar provision in the House Bill.

Increase in Standard Deduction

The Senate Bill increases the basic standard deduction for individuals across all filing statuses. Under the proposal, the amount of the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers. The amount of the standard deduction is indexed for inflation using the chained consumer price index for all-urban consumers for taxable years beginning after December 31, 2018. The additional standard deduction for the elderly and the blind is not changed by the proposal.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: The House Bill proposed raising the standard deduction to $24,400 for married individuals filing a joint return, $18,300 for head-of-household filers, $12,200 for all other taxpayers, and eliminating the additional standard deduction for the aged and the blind.

Repeal of the Deduction for Personal Exemptions

The Senate Bill repeals the deduction for personal exemptions.

In addition, the proposal modifies the requirements for those who are required to file a tax return. In the case of an individual who is not married, such individual is required to file a tax return if the taxpayer's gross income for the taxable year exceeds the applicable standard deduction. Married individuals are required to file a return if that individual's gross income, when combined with the individual's spouse's gross income for the taxable year, is more than the standard deduction applicable to a joint return, provided that: (1) such individual and his spouse, at the close of the taxable year, had the same household as their home; (2) the individual's spouse does not make a separate return; and (3) neither the individual nor his spouse is a dependent of another taxpayer who has income (other than earned income) in excess of $500 (indexed for inflation).

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

The House Bill has the same provisions as above, except the provisions in the House Bill do not have an expiration date. The House Bill also repeals the enhanced personal exemption for a qualified disability trust.

Temporary Reduction in Medical Expense Deduction Floor

The Senate Bill provides special rules for medical expense deductions for years 2013 through 2018. For a tax year beginning after 2012 and ending before 2017, in the case of a taxpayer or a taxpayer's spouse who has attained age 65 before the close of the year, and for a tax year beginning after 2016, and ending before 2019, in the case of any taxpayer, the adjusted-gross-income floor above which a medical expense is deductible is reduced from 10 percent to 7.5 percent.

The House Bill repeals the medical expense deduction.

Repeal of Most Deductions for Taxes with Limited Relief for Property Taxes

The Senate Bill repeals the deduction for individual state and local income, war profits, and excess profits taxes.

Like the House Bill, the Senate Bill also repeals the deduction for state, local and foreign property taxes and state and local sales taxes to the extent the deduction exceeds $10,000 ($5,000 in the case of a married individual filing a separate return), unless such taxes are paid or accrued in carrying on a trade or business or an activity described in Code Sec. 212 (relating to expenses for the production of income).

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Repeal of Deduction for Interest on Home Equity Debt

The Senate Bill repeals the deduction for interest on home equity indebtedness but does not make any changes to the deduction for mortgage interest.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: The House Bill also repealed the deduction for interest on home equity debt. The House Bill also disallows an interest deduction for debt used to acquire a second home. In addition, the House Bill would modify the deduction available for home mortgage interest so that no deduction is allowed for interest on a principal residence mortgage over $500,000 ($250,000 in the case of married filing separately) as principal residence acquisition indebtedness (or $1,000,000 ($500,000 in the case of married taxpayers filing separately) in the case of principal acquisition indebtedness incurred before November 2, 2017).

Repeal of Miscellaneous Itemized Deductions Subject to the 2-Percent Floor

The Senate Bill repeals all miscellaneous itemized deductions that are subject to the two-percent of adjusted-gross-income floor.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: While the House Bill does not specifically mention miscellaneous itemized deductions, it repeals many of the deductions (such as gambling losses, personal casualty losses, unreimbursed employee business expenses) that make up miscellaneous itemized deductions. However, under the Senate Bill, deductions for expenses such as IRA custodial fees and investment advice would be eliminated, while such deductions would remain under the House Bill.

Increased Percentage Limitation for Charitable Contributions of Cash to Public Charities

The Senate Bill increases the income-based percentage limit described in Code Sec. 170(b)(1)(A) for certain charitable contributions by an individual taxpayer of cash to public charities and certain other organizations from 50 percent to 60 percent.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

The House Bill contains the same provision, except there is no expiration date.

Repeal of Charitable Deduction for Athletic Event Seating

The Senate Bill provides that no charitable deduction is allowed for any amount described in Code Sec. 170(l)(2), generally, a payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

The House Bill has the same provision except there is no expiration date.

Repeal of Overall Limitation on Itemized Deductions

The Senate Bill repeals the overall limitation on itemized deductions.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

The House Bill has the same provision.

Relief for 2016 Disaster Areas

The Senate Bill provides special rules for using retirement funds and taking a casualty loss deduction with respect to a "2016 disaster area." The term "2016 disaster area" means any area with respect to which a major disaster has been declared by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016. Under the provision, the early withdrawal penalties under Code Sec. 72(t) do not apply to retirement funds withdrawn with respect to such disasters to the extent the amount withdrawn does not exceed $100,000 over the aggregate amounts treated as qualified 2016 disaster distributions received by such individual for all prior years. Amounts required to be included in income as a result of such distributions may be included ratably over a three-taxable year period. The provision also allows a casualty loss deduction with respect to a loss relating to a 2016 disaster area.

The House Bill does not include this provision.

Modification of Exclusion of Gain from the Sale of a Principal Residence

The Senate Bill extends the length of time a taxpayer must own and use a residence to qualify for the exclusion from income of $250,000 ($500,000 if married filing a joint return) of gain from the sale of a principal residence. Specifically, under the Senate proposal, the exclusion is available only if the taxpayer has owned and used the residence as a principal residence for at least five of the eight years (as opposed to two out of five years under current law) ending on the date of the sale or exchange. A taxpayer who fails to meet these requirements by reason of a change of place of employment, health, or, to the extent provided under regulations, unforeseen circumstances, is able to exclude an amount equal to the fraction of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of the five years that the ownership and use requirements are met. Under the proposal, a taxpayer may benefit from the exclusion only once every five years (as opposed to once every two years under current law).

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: The House has a similar proposal but the House proposal would phase-out the gain exclusion where the average modified adjusted gross income of the taxpayer for the tax year and the two preceding tax years exceeds $250,000 ($500,000 if married filing a joint return). Modified adjusted gross income means adjusted gross income after applying the gain exclusion rule.

Repeal of Exclusion for Qualified Bicycle Commuting Reimbursement

The Senate Bill repeals the exclusion from gross income and wages for qualified bicycle commuting reimbursements.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: The House Bill repeals the deduction for qualified transportation fringe benefits, which would include a qualified bicycle commuting reimbursement.

Repeal of Exclusion for Qualified Moving Expense Reimbursements

The Senate Bill repeals the exclusion from gross income and wages for qualified moving expense reimbursements.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

The House Bill has the same provision except there is no expiration date.

Repeal of Deduction for Moving Expenses

The Senate Bill repeals the deduction for moving expenses. However, under the proposal, rules providing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowances for these expenses) for members of the Armed Forces of the United States (or their spouse or dependents) are not repealed.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: The House Bill repeals the deduction for moving expenses. While the original House Bill did not have any allowance for members of the Armed Forces of the United States (or their spouse or dependents), subsequent amendments to the House Bill added this provision.

Repeal of Certain Deductions Relating to Employee Achievement Awards

The Senate Bill prohibits a deduction for cash, gift cards, and other non-tangible personal property given to an employee as an achievement award, effective for amounts paid or incurred after December 31, 2017.

The House Bill does not have this provision. However, it has a provision which repeals the exclusion from an employee's income of employee achievement awards. The House Bill also repeals the deduction limitation for employee achievement awards and is effective for tax years beginning after December 31, 2017.

Repeal of Deductions for Living Expenses of Members of Congress

The Senate Bill repeals a provision which allows members of Congress to deduct up to $3,000 annually for certain living expenses, effective for tax years beginning after the date of enactment.

The House does not have a similar provision.

Modification to Gambling Losses

The Senate Bill clarifies the scope of "losses from wagering transactions" as that term is used in Code Sec. 165(d). The proposal provides that this term includes any deduction otherwise allowable incurred in carrying on any wagering transaction.

The proposal is intended to clarify that the limitation on losses from wagering transactions applies not only to the actual costs of wagers incurred by an individual, but to other expenses incurred by the individual in connection with the conduct of that individual's gambling activity. The proposal clarifies, for instance, an individual's otherwise deductible expenses in traveling to or from a casino are subject to the limitation under Code Sec. 165(d).

Observation: This proposal would reverse the result reached by the Tax Court in Mayo v. Comm'r, 136 T.C. 81 (2011). In that case, the court held that a taxpayer's expenses incurred in the conduct of the trade or business of gambling, other than the cost of wagers, were not limited by Code Sec. 165(d), and were thus deductible under Code Sec. 162(a) as trade or business expenses.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

The House Bill has the same provision except there is no expiration date.

Reform of Child Tax Credit

The Senate Bill increases the child tax credit to $2,000 per qualifying child. Additionally, the age limit for a qualifying child is increased by one year, such that a taxpayer may claim the credit with respect to any qualifying child under the age of 18, rather than under the age of 17.

The credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The proposal generally retains the present-law definition of dependent.

Under the Senate Bill, the modified adjusted gross income threshold at which the credit begins to phase out is increased to $500,000 for all taxpayers. This amount is not indexed for inflation.

Observation: Thus, the $500,000 phase out threshold applies not just to MFJ filers, but to all other taxpayers as well. The Senate's original proposal was for the phase out threshold to be set at $1,000,000 for MFJ filers, and $500,000 for all other taxpayers.

The proposal lowers the earned income threshold for the refundable child tax credit to $2,500. As under present law, the maximum amount refundable may not exceed $1,000 per qualifying child. Under the proposal, this $1,000 threshold is indexed for inflation with a base year of 2017, rounding up to the nearest $100 (such that the threshold is $1,100 in 2018). In order to receive the refundable portion of the child tax credit, a taxpayer must include a social security number for each qualifying child for whom the credit is claimed on the tax return.

This provision would be effective after December 31, 2017, and expire after December 31, 2025.

Observation: The House Bill consolidates the child tax credit into a new family tax credit, which includes a $1,600 credit per qualifying child under the age of 17, and a $300 credit for the taxpayer (both spouses in the case of married taxpayers filing a joint return) and each dependent of the taxpayer who is not a qualifying child under age 17. Also, under the House Bill, the family credit phases out at adjusted gross income of $230,000 for married taxpayers filing joint returns and $115,000 for other individuals.

Corporate Alternative Minimum Tax (AMT)

The Senate originally planned to repeal the corporate AMT but reversed course. Instead, no changes were made to the corporate AMT in the Senate Bill.

Observation: The last-minute removal of the corporate AMT repeal from the Senate Bill has drawn howls of protest, including from otherwise staunch supporters of the legislation. In a statement issued Monday, the U.S. Chamber of Commerce said, "Retaining the AMT in reform is even more harmful than it is in its present form - among other things, it eviscerates the impact of certain pro-growth policies like the R&D tax credit and exacerbates the international anti-abuse rules."

The House Bill repeals the corporate AMT and also provides that the AMT credit is refundable for any taxable year beginning after 2018 and before 2023 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2022) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the minimum tax credit will be allowed in taxable years beginning before 2023.

Increased Contributions to ABLE Accounts and Allowance of Contributions to be Eligible for Saver's Credit

The Senate Bill increases the contribution limitation to ABLE accounts under certain circumstances. While the general overall limitation on contributions (the per-donee annual gift tax exclusion ($14,000 for 2017)) remains the same, the limitation is increased with respect to contributions made by the designated beneficiary of the ABLE account. Under the proposal, after the overall limitation on contributions is reached, an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the federal poverty line for a one-person household; or (b) the individual's compensation for the taxable year. Additionally, the proposal allows a designated beneficiary of an ABLE account to claim the saver's credit for contributions made to his or her ABLE account.

The proposal would be effective for tax years beginning after the date of enactment and would sunset after December 31, 2025.

The House Bill does not include this provision.

Rollovers Between Qualified Tuition Programs and Qualified ABLE Programs

The Senate Bill allows for amounts from qualified tuition programs (also known as Section 529 accounts) to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that Section 529 account, or a member of such designated beneficiary's family. Such rolled-over amounts count towards the overall limitation on amounts that can be contributed to an ABLE account within a taxable year. Any amount rolled over that is in excess of this limitation will be includible in the gross income of the distributee in a manner provided by Code Sec. 72.

The proposal applies to distributions after December 31, 2017, and sunsets after December 31, 2025.

The House Bill includes a similar provision except without the sunset clause.

Extension of Time Limit to Contest IRS Levy

The Senate Bill extends from nine months to two years the period for returning the monetary proceeds from the sale of property that has been wrongfully levied upon. The proposal also extends from nine months to two years the period for bringing a civil action for wrongful levy.

The proposal would be effective with respect to: (1) levies made after the date of enactment; and (2) levies made on or before the date of enactment provided that the nine-month period has not expired as of the date of enactment.

The House Bill does not include this provision.

Treatment of Certain Individuals Performing Services in the Sinai Peninsula of Egypt

The Senate Bill grants combat zone tax benefits to the Sinai Peninsula of Egypt, if as of the date of enactment of the proposal any member of the Armed Forces of the United States is entitled to special pay under Section 310 of title 37, United States Code (relating to special pay; duty subject to hostile fire or imminent danger), for services performed in such location. This benefit lasts only during the period such entitlement is in effect.

The proposal would generally be effective beginning June 9, 2015. The portion of the proposal related to wage withholding would apply to remuneration paid after the date of enactment.

The House Bill does not include this provision.

Modifications to User Fees Requirements for Installment Agreements

The Senate Bill generally prohibits increases in the amount of user fees charged by the IRS for installment agreements. For low-income taxpayers (those whose income falls below 250 percent of the federal poverty guidelines), it alleviates the user fee requirement in two ways. First, it waives the user fee if the low-income taxpayer enters into an installment agreement under which the taxpayer agrees to make automated installment payments through a debit account. Second, it provides that low-income taxpayers who are unable to agree to make payments electronically remain subject to the required user fee, but the fee is reimbursed upon completion of the installment agreement.

The proposal applies to agreements entered into on or after the date that is 60 days after the date of enactment.

The House Bill does not include this provision.

Extension of Statute of Limitations Waiver with Respect to Excluding from Gross Income Certain Amounts Received by Wrongly Incarcerated Individuals

The Senate Bill extends the waiver on the statute of limitations with respect to filing a claim for a credit or refund of an overpayment of tax resulting from the exclusion described above for an additional year. Thus, under the proposal, such claim for credit or refund must be filed before December 18, 2017.

The provision would be effective on the date of enactment.

The House Bill does not include this provision.

Treatment of Student Loans Discharged on Account of Death or Disability

The Senate Bill modifies the exclusion of student loan discharges from gross income, by including within the exclusion certain discharges on account of death or total and permanent disability of the student. Loans eligible for the exclusion under the proposal are loans made by (1) the United States (or an instrumentality or agency thereof), (2) a state (or any political subdivision thereof), (3) certain tax-exempt public benefit corporations that control a state, county, or municipal hospital and whose employees have been deemed to be public employees under state law, (4) an educational organization that originally received the funds from which the loan was made from the United States, a State, or a tax-exempt public benefit corporation, or (5) private education loans (for this purpose, private education loan is defined in Section 140(7) of the Consumer Protection Act).

The proposal applies to discharges of loans after December 31, 2017, and before January 1, 2026.

The House Bill does not include this provision.

Increase in Deduction for Certain Educator Expenses

The Senate Bill increases the limit for the deduction of certain expenses of eligible educators from $250 to $500, effective for tax years beginning after December 31, 2017, and before January 1, 2026.

The House Bill eliminates this deduction.

II. Estate and Gift Tax Changes

Increase in Estate and Gift Tax Exemption

The Senate Bill doubles the estate and gift tax exemption amount. This is accomplished by increasing the basic exclusion amount provided in Code Sec. 2010(c)(3) from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011.

The proposal would be effective for decedents dying, generation-skipping transfers, and gifts made after December 31, 2017, and would expire for years beginning after December 31, 2025.

Observation: The House Bill has the same proposal, but also repeals the estate and generation-skipping transfer tax for decedents dying and generation-skipping transfers made after 2024.

III. Changes to Treatment of Business Income of Individuals

Deduction of 23 Percent Allowed for Domestic Qualified Business Income

Under the Senate Bill, an individual taxpayer generally may deduct 23 percent of domestic qualified business income from a partnership, S corporation, or sole proprietorship.

Observation: The Senate Bill's approach to granting a tax break for passthrough business income stands in stark contrast to the approach in the House Bill. The House's proposal focuses on a maximum tax rate for the business income of an individual (originally a 25 percent rate but this was changed to a fluctuating rate, capped at 25 percent) and generally favors passive income over non-passive income. Consequently, the House provision provides most of its tax benefits to taxpayers in the highest tax brackets (35 percent and 39.6 percent in the House Bill) and to passive owners.

Qualified Business Income. Qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. The term "qualified trade or business" means any trade or business other than (1) a specified service trade or business, or (2) the trade or business of performing services as an employee. The term "specified service trade or business" means any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, as well as the performance of services dealing with investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

50 Percent of Wages Limitation. The qualified business income deduction is limited to 50 percent of the taxpayer's allocable or pro rata share of W-2 wages of the partnership or S corporation or 50 percent of the W-2 wages of the sole proprietorship.

Example: Susan, owns and operates a catering business as a sole proprietorship. The business is not a specified service business and Susan's filing status for Form 1040 is single. The catering business pays $100,000 in W-2 wages and has $350,000 in qualified business income. Susan has no other items of income or loss. Susan's deduction for domestic qualified business income is $50,000, which is the lesser of (a) 23 percent of $350,000 in qualified business income ($80,500), and (b) 50 percent of W-2 wages ($50,000).

Special Rules for Taxpayers with Income Below Specified Thresholds. For taxpayers with taxable income below certain threshold amounts, the Senate Bill includes two exceptions exempting them from rules that might otherwise restrict the qualified business income deduction: (1) an exception to the rule that the deduction is limited to 50 percent of W-2 wages paid by the qualifying business; and (2) an exception to the rule that income from specified services businesses is not qualified business income. The threshold amounts of taxable income at which the exceptions are phased out and the phaseout ranges are as follows: (1) $500,000 threshold for joint filers with a $100,000 phaseout range; and (2) $250,000 with a $100,000 phaseout range for all others.

Observation: Unlike most thresholds and phaseout ranges for individual tax breaks, the amounts listed above are for taxable income, not adjusted gross income or modified adjusted gross income.

Additional Rules for Calculating Qualified Business Income. Qualified business income also includes 23 percent of the aggregate amount of qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income of the taxpayer for the tax year. The determination of qualified items of income, gain, deduction, and loss takes into account these items only to the extent included or allowed in the determination of taxable income for the year.

Example: A qualified business has $100,000 of ordinary income from inventory sales, and makes an expenditure of $25,000 that is required to be capitalized and amortized over five years. The net business income is $100,000 minus $5,000 (current-year ordinary amortization deduction), or $95,000. The qualified business income is not reduced by the entire amount of the capital expenditure, only by the amount deductible in determining taxable income for the year.

If the amount of qualified business income is less than zero for a taxable year, i.e., is a loss, the amount of the loss is treated as a loss from qualified businesses in the next taxable year.

Qualified business income does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer. Similarly, qualified business income does not include any amount allocated or distributed by a partnership to a partner who is acting other than in his or her capacity as a partner for services, and does not include any amount that is a guaranteed payment for services actually rendered to or on behalf of a partnership to the extent that the payment is in the nature of remuneration for those services.

Qualified business income or loss does not include certain investment-related income, gain, deductions, or loss.

The proposal would be effective for tax years beginning after December 31, 2017.

Business Loss Limitation Rules Applicable to Individuals

Under current law, a limitation on excess farm losses applies to taxpayers other than C corporations. If a taxpayer other than a C corporation receives an applicable subsidy for the taxable year, the amount of the excess farm loss is not allowed for the taxable year, and is carried forward and treated as a deduction attributable to farming businesses in the next taxable year. An excess farm loss for a taxable year means the excess of aggregate deductions that are attributable to farming businesses over the sum of aggregate gross income or gain attributable to farming businesses plus the threshold amount. The threshold amount is the greater of (1) $300,000 ($150,000 for married individuals filing separately), or (2) for the five-consecutive-year period preceding the taxable year, the excess of the aggregate gross income or gain attributable to the taxpayer's farming businesses over the aggregate deductions attributable to the taxpayer's farming businesses.

The Senate Bill expands the limitation on excess farm losses. The Senate Bill also provides that excess business losses of a taxpayer other than a C corporation are not allowed for the tax year. Such losses are carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent taxable years. NOL carryovers are allowed for a taxable year up to the lesser of the carryover amount or 90 percent of taxable income determined without regard to the deduction for NOLs.

An excess business loss for the taxable year is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a taxable year is $500,000 for married individuals filing jointly, and $250,000 for other individuals. The $500,000 and $250,000 thresholds are indexed for inflation.

In the case of a partnership or S corporation, the proposal applies at the partner or shareholder level. Each partner's or S corporation shareholder's share of items of income, gain, deduction, or loss of the partnership or S corporation is taken into account in applying the limitation under the proposal for the taxable year of the partner or S corporation. Regulatory authority is to be provided to apply the proposal to any other pass-through entity to the extent necessary to carry out the proposal. Regulatory authority is also to be provided to require any additional reporting as the Secretary determines is appropriate to carry out the purposes of the proposal.

These proposals would be effective for taxable years beginning after December 31, 2017.

Observation: The House Bill limits the NOL deduction to 90 percent of taxable income (determined without regard to the deduction). Carryovers to other years are adjusted to take account of this limitation, and may be carried forward indefinitely. In addition, NOL carryovers attributable to losses arising in taxable years beginning after December 31, 2017, are increased annually by an inflation adjustment. The House Bill also repeals the current law two-year carryback and special carryback provisions, but provides a one-year carryback in the case of certain disaster losses incurred in the trade or business of farming, or by certain small businesses.

Increased Holding Period for Certain Investment Managers to Obtain Capital Gain Rates (Carried Interest Rules)

The Senate Bill provides a three-year holding period requirement for certain specified assets held by investment managers. The term "specified asset" means securities (as defined in Code Sec. 475(c)(2) without regard to the last sentence thereof), commodities (as defined in Code Sec. 475(e)(2)), real estate held for rental or investment, cash or cash equivalents, options or derivative contracts with respect to any of the foregoing, and an interest in a partnership to the extent of the partnership's proportionate interest in any of the foregoing.

The House Bill has the same proposal.

IV. Business-Related Changes

Reduction in Corporate Tax Rate

The Senate Bill eliminates the graduated corporate rate structure and instead taxes corporate taxable income at 20 percent. It also eliminates the special tax rate for personal service corporations and repeals the maximum corporate tax rate on net capital gain as obsolete. For taxpayers subject to the normalization method of accounting (e.g., regulated public utilities), the proposal provides for the normalization of excess deferred tax reserves resulting from the reduction of corporate income tax rates (with respect to prior depreciation or recovery allowances taken on assets placed in service before the date of enactment).

These proposals would be effective for taxable years beginning after December 31, 2018.

Observation: The House has a similar proposal except the House proposal is effective for tax years beginning after December 31, 2017, and personal service corporations are taxed at 25 percent, rather than 20 percent.

Reduction of Dividends Received Deductions to Reflect Lower Corporate Tax Rate

The Senate Bill reduces the 70 percent dividends received deduction available to corporations who receive a dividend from another taxable domestic corporation to 50 percent. It also reduces the 80 percent dividends received deduction for dividends received from a 20-percent owned corporation to 65 percent.

These proposals would be effective for taxable years beginning after December 31, 2018.

Observation: The House Bill has no similar provision.

Enhanced Expensing Through Bonus Depreciation

The Senate Bill extends and modifies the additional first-year (i.e., "bonus") depreciation deduction through 2022 (through 2023 for longer production period property and certain aircraft). Under current law, the bonus depreciation is scheduled to end for qualified property acquired and placed in service before January 1, 2020 (January 1, 2021, for longer production period property and certain aircraft) and the 50-percent bonus depreciation amount is scheduled to be phased down for property placed in service after December 31, 2017. Under the Senate Bill, the 50-percent allowance is increased to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after September 27, 2017, and before January 1, 2023.

For property placed in service after December 31, 2022, the Senate Bill phases out bonus depreciation by applying annually declining bonus percentages of 80 percent, 60 percent, 40 percent, and 20 percent (all percentages are available for one additional year for longer production period property and certain aircraft).

Observation: The phaseout of bonus depreciation was a late change to the Senate Bill. There is no similar provision in the House Bill. Supporters of the phaseout have argued that the gradual reduction of the bonus percentage will make it more likely the tax break will expire as scheduled by reducing the inevitable pressure on Congress to extend it.

The Senate Bill also maintains the Code Sec. 280F increase amount of $8,000 for passenger automobiles placed in service after December 31, 2017, whereas current law had that amount being phased down to $6,400 and $4,800 for property placed in service in 2018 and 2019, respectively. The Senate Bill removes computer equipment from the category of listed property.

The Senate Bill excludes from the definition of qualified property certain public utility property, i.e., property used predominantly in the trade or business of the furnishing or sale of -

(1) electrical energy, water, or sewage disposal services;

(2) gas or steam through a local distribution system; or

(3) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a state or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any state or political subdivision thereof.

The proposal would generally apply to property placed in service after September 27, 2017, and to specified plants planted or grafted after such date. A transition rule would provide that, for a taxpayer's first taxable year ending after September 27, 2017, the taxpayer may elect to apply a 50-percent allowance.

Observation: The House Bill has similar provisions except, as discussed below, it bumped up the $8,000 increase for a first-year deduction for qualifying automobiles to $16,000.

The Senate Bill also expands the definition of qualified property eligible for the additional first-year depreciation allowance to include qualified film, television and live theatrical productions, effective for productions placed in service after September 27, 2017, and before January 1, 2023. For this purpose, a production is considered placed in service at the time of initial release, broadcast, or live staged performance (i.e., at the time of the first commercial exhibition, broadcast, or live staged performance of a production to an audience).

These bonus depreciation provisions generally apply to property placed in service after September 27, 2017, and to specified plants planted or grafted after such date. A transition rule provides that, for a taxpayer's first taxable year ending after September 27, 2017, the taxpayer may elect to apply a 50-percent allowance.

Enhanced Expensing Through Section 179 Expense Deductions

The Senate Bill increases the maximum amount a taxpayer may expense under Code Sec. 179 to $1,000,000, and increases the phase-out threshold amount to $2,500,000. Thus, the proposal provides that the maximum amount a taxpayer may expense, for taxable years beginning after 2017, is $1,000,000 of the cost of qualifying property placed in service for the taxable year. The $1,000,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2,500,000. The $1,000,000 and $2,500,000 amounts, as well as the $25,000 sport utility vehicle limitation, are indexed for inflation for taxable years beginning after 2018.

The Senate Bill expands the definition of Code Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging.

Observation: Property used predominantly to furnish lodging or in connection with furnishing lodging generally includes, for example, beds and other furniture, refrigerators, ranges, and other equipment used in the living quarters of a lodging facility such as an apartment house, dormitory, or any other facility (or part of a facility) where sleeping accommodations are provided.

The Senate Bill also expands the definition of qualified real property eligible for Code Sec. 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Observation: Under the House Bill the small business expensing limitation under Code Sec. 179 would be increased to $5 million and the phase-out amount would be increased to $20 million. The provision would modify the expensing limitation by indexing both the $5 million and $20 million limits for inflation.

These proposals would apply to property placed in service in taxable years beginning after December 31, 2017.

Modifications to Depreciation Limitations on Luxury Automobiles and Personal Use Property

The Senate Bill increases the depreciation limitations under Code Sec. 280F that apply to listed property. For passenger automobiles placed in service after December 31, 2017, and for which the additional first-year depreciation deduction is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. The limitations are indexed for inflation for passenger automobiles placed in service after 2018.

The Senate Bill removes computer or peripheral equipment from the definition of listed property. Such property is therefore not subject to the heightened substantiation requirements that apply to listed property.

The proposal would be effective for property placed in service after December 31, 2017.

Observation: Under the House Bill, the $8,000 increase amount in the limitation on the depreciation deductions allowed with respect to certain passenger automobiles is increased to $16,000 for passenger automobiles acquired and placed in service after September 27, 2017, and before January 1, 2023.

Modifications of Treatment of Certain Farm Property

The Senate Bill shortens the recovery period from 7 to 5 years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer and is placed in service after December 31, 2017.

The Senate Bill also repeals the required use of the 150-percent declining balance method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property). The 150-percent declining balance method will continue to apply to any 15-year or 20-year property used in the farming business to which the straight line method does not apply, or to property for which the taxpayer elects the use of the 150-percent declining balance method.

The proposal would be effective for property placed in service after December 31, 2017.

The House Bill does not include a similar provision.

Modification of Net Operating Loss (NOL) Deduction

The Senate Bill limits the NOL deduction to 90 percent (80 percent for taxable years beginning after December 31, 2022) of taxable income (determined without regard to the deduction). Carryovers to other years are adjusted to take account of this limitation, and may be carried forward indefinitely.

The proposal repeals the two-year carryback and the special carryback provisions, but provides a two-year carryback in the case of certain losses incurred in the trade or business of farming.

The proposal allowing indefinite carryovers and modifying carrybacks would apply to losses arising in taxable years beginning after December 31, 2017.

The proposal limiting the NOL deduction would apply to losses arising in taxable years beginning after December 31, 2017.

Observation: Under the House Bill, taxpayers would be able to deduct an NOL carryover or carryback only to the extent of 90 percent of the taxpayer's taxable income (determined without regard to the NOL deduction). The House Bill also would generally repeal all carrybacks but provide a special one-year carryback for small businesses and farms in the case of certain casualty and disaster losses.

Modification of Like-Kind Exchange Rules

The Senate Bill modifies the provision providing for nonrecognition of gain in the case of like-kind exchanges by limiting its application to real property that is not held primarily for sale.

The proposal would generally apply to exchanges completed after December 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017, or the property received by the taxpayer in the exchange is received on or before such date.

The House Bill has the same provision.

Modification of Applicable Recovery Period for Real Property

The Senate Bill shortens the recovery period for determining the depreciation deduction with respect to nonresidential real and residential rental property to 25 years. Such property placed in service before 2018 may be treated as having a new placed-in-service date of January 1, 2018, if it results in more advantageous deductions. As a conforming amendment, the proposal changes the statutory recovery period for nonresidential real and residential rental property to 25 years for purposes of determining whether a rental agreement is a long-term agreement under the Code Sec. 467 rules applicable to certain payments for the use of property or services. The Senate Bill shortens the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.

The Senate Bill also eliminates the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property, and provides a general 10-year recovery period for qualified improvement property, and a 20-year alternative depreciation system (ADS) recovery period for such property.

Observation: Thus, for example, qualified improvement property placed in service after December 31, 2017, would generally be depreciable over 10 years using the straight line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building. Restaurant building property placed in service after December 31, 2017, that does not meet the definition of qualified improvement property would be depreciable over 25 years as nonresidential real property, using the straight line method and the mid-month convention.

As a conforming amendment, the Senate Bill replaces the references in Code Sec. 179(f) to qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property with a reference to qualified improvement property.

Observation: This means that, under the Senate Bill, Code Sec. 179 expensing is allowed for improvement property without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building. Restaurant building property placed in service after December 31, 2017, that does not meet the definition of qualified improvement property would not be eligible for Code Sec. 179 expensing.

The Senate Bill also requires a real property trade or business electing out of the limitation on the deduction for interest to use ADS to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property.

The proposals would effective for property placed in service after December 31, 2017.

Observation: The House Bill does not have a similar proposal.

Modification of Treatment of S Corporation Conversions to C Corporations

The Senate Bill provides that distributions from an eligible terminated S corporation would be treated as paid from its accumulated adjustments account and from its earnings and profits on a pro-rata basis. Any Code Sec. 481(a) adjustment would be taken into account ratably over a six-year period. For this purpose, an eligible terminated S corporation means any C corporation which (1) was an S corporation on the date before the enactment date, (2) revoked its S corporation election during the two-year period beginning on the enactment date, and (3) had the same owners on the enactment date and on the revocation date. The provision would apply to distributions after the date of enactment.

The House Bill has the same provision.

Modification of Orphan Drug Credit

The Senate Bill puts the Orphan Drug Credit rate at 27.5 percent (instead of current law's 50 percent rate), has reporting requirements similar to those required in Code Sec. 48C and Code Sec. 48D, and, would strike any base amount calculation and strike the limitation regarding qualified clinical testing expenses to the extent such testing relates to a drug which has previously been approved under Section 505 of the Federal Food, Drug, and Cosmetic Act.

The House Bill does not contain this provision.

Modifications of Gross Receipts Test for Use of Cash Method of Accounting by Corporations and Partnerships

The Senate Bill expands the universe of taxpayers that may use the cash accounting method. Under the proposal, the cash method of accounting may be used by taxpayers, other than tax shelters, that satisfy the gross receipts test. The gross receipts test allows taxpayers with annual average gross receipts that do not exceed $15 million for the three prior taxable-year period (the "$15 million gross receipts test") to use the cash method. The $15 million amount is indexed for inflation for taxable years beginning after 2018.

The proposal retains the exceptions from the required use of the accrual method for qualified personal service corporations and taxpayers other than C corporations. Thus, qualified personal service corporations, partnerships without C corporation partners, S corporations, and other passthrough entities are allowed to use the cash method without regard to whether they meet the $15 million gross receipts test, so long as the use of such method clearly reflects income.

The proposal expands the universe of farming C corporations (and farming partnerships with a C corporation partner) that may use the cash method to include any farming C corporation (or farming partnership with a C corporation partner) that meets the $15 million gross receipts test. The proposal retains the $25 million dollar limit for family farming corporations, but uses the $15 million gross receipts test in Code Sec. 448 (substituting a $25 million threshold for the $15 million threshold). The $25 million amount is indexed for inflation for taxable years beginning after 2018.

Under the Senate Bill, if a taxpayer changes its method of accounting because it is either prohibited or no longer prohibited from using the cash method by reason of this proposal, such change is treated as initiated by the taxpayer and made with the consent of the Secretary.

The proposal would apply to taxable years beginning after December 31, 2017. Application of these rules is a change in the taxpayer's method of accounting for purposes of Code Sec. 481.

The House Bill has a similar provision but uses a gross receipts test of $25 million rather than $15 million.

Modification of Inventory Classification Rules for Small Businesses

The Senate Bill exempts certain taxpayers from the requirement to keep inventories. Specifically, taxpayers that meet the $15 million gross receipts test are not required to account for inventories under Code Sec. 471, but rather may use an accounting method for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer's financial accounting treatment of inventories.

If a taxpayer changes its method of accounting because it is either no longer required or is required to use inventories by reason of this proposal, such change would be treated as initiated by the taxpayer and made with the consent of the Secretary.

The proposal would apply to taxable years beginning after December 31, 2017. Application of these rules would be a change in the taxpayer's method of accounting for purposes of Code Sec. 481.

The House Bill has a similar proposal but uses a $25 million threshold, rather than $15 million.

Modification of Rules for Uniform Capitalization of Certain Expenses

The Senate Bill expands the exception for small taxpayers being subject to the uniform capitalization accounting method rules. Under the proposal, any producer or reseller that meets a $15 million gross receipts test is exempted from the application of Code Sec. 263A. The proposal retains the exemptions from the uniform capitalization rules that are not based on a taxpayer's gross receipts.

If a taxpayer changes its method of accounting because it is either no longer required or is required to apply Code Sec. 263A by reason of this proposal, such change is treated as initiated by the taxpayer and made with the consent of the Secretary.

The proposal would apply to taxable years beginning after December 31, 2017. Application of these rules would be a change in the taxpayer's method of accounting for purposes of Code Sec. 481.

The House Bill has a similar provision but uses a $25 million threshold, rather than $15 million.

Increase in Gross Receipts Test for Construction Contract Exception to Percentage of Completion Accounting Method

The Senate Bill expands the exception for small construction contracts from the requirement to use the percentage-of-completion accounting method. Under the proposal, contracts within this exception are those contracts for the construction or improvement of real property if the contract:

(1) is expected (at the time such contract is entered into) to be completed within two years of commencement of the contract; and

(2) is performed by a taxpayer that (for the taxable year in which the contract was entered into) meets the $15 million gross receipts test.

The proposal would apply to contracts entered into after December 31, 2017, in taxable years ending after such date. Application of this rule would be a change in the taxpayer's method of accounting for purposes of Code Sec. 481, but is applied on a cutoff basis for all similarly classified contracts (hence there is no adjustment under Code Sec. 481(a) for contracts entered into before January 1, 2018).

The House Bill has a similar provision but uses a threshold of $25 million, rather than $15 million.

Modification of Accounting Method Rules Relating to Income Recognition

The Senate Bill revises the rules associated with the recognition of income. Specifically, the proposal requires a taxpayer to recognize income no later than the taxable year in which such income is taken into account as income on an applicable financial statement or another financial statement under rules specified by the Secretary, but provides an exception for long-term contract income to which Code Sec. 460 applies.

The proposal also codifies the current deferral method of accounting for advance payments for goods and services provided by the IRS under Rev. Proc. 2004-34. That is, the proposal allows taxpayers to defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if such income also is deferred for financial statement purposes.

In addition, the proposal directs taxpayers to apply the revenue recognition rules under Code Sec. 451 before applying the OID rules under Code Sec.1272.

Observation: Thus, for example, to the extent amounts are included in income for financial statement purposes when received (e.g., late payment fees, cash-advance fees, or interchange fees), such amounts generally are includable in income at such time in accordance with the general recognition principles under Code Sec. 451.

In the case of any taxpayer required by this proposal to change its method of accounting for its first taxable year beginning after December 31, 2017, such change is treated as initiated by the taxpayer and made with the consent of the Secretary.

The proposal would apply to taxable years beginning after December 31, 2017, and application of these rules would be a change in the taxpayer's method of accounting for purposes of Code Sec. 481.

Observation: The House Bill does not have a similar provision.

Changes to Interest Deduction Rules

Under the Senate Bill, in the case of any taxpayer for any taxable year, the deduction for business interest is limited to the sum of business interest income plus 30 percent of the adjusted taxable income of the taxpayer for the taxable year. There is an exception to this limitation, however, for floor plan financing, which is a specialized type of financing used by car dealerships and certain regulated utilities. The amount of any interest not allowed as a deduction for any taxable year may be carried forward indefinitely. The limitation applies at the taxpayer level. In the case of a group of affiliated corporations that file a consolidated return, it applies at the consolidated tax return filing level. A farming business, including agricultural and horticultural cooperatives, may elect not to be subject to this limitation if the business uses the alternative depreciation system to depreciate any property used in the farming business with a recovery period of 10 years or more. An electing real property trade or business may also elect out of the interest deduction limitation if the business also uses the alternative depreciation system to depreciate its property.

Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Any amount treated as interest for purposes of the Internal Revenue Code is interest for purposes of the proposal. Business interest income means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. Business interest does not include investment interest, and business interest income does not include investment income, within the meaning of Code Sec. 163(d).

By including business interest income in the limitation, the rule operates to limit the deduction for net interest expense to 30 percent of adjusted taxable income. That is, a deduction for business interest is permitted to the full extent of business interest income. To the extent that business interest exceeds business interest income, the deduction for the net interest expense is limited to 30 percent of adjusted taxable income.

Adjusted taxable income means the taxable income of the taxpayer computed without regard to:

(1) any item of income, gain, deduction, or loss which is not properly allocable to a trade or business;

(2) any business interest or business interest income;

(3) the 23 percent deduction for certain pass-through income; and

(4) the amount of any net operating loss deduction.

The Senate bill would authorize the IRS to provide other adjustments to the computation of adjusted taxable income.

Application to pass-through entities. In the case of any partnership, the limitation is applied at the partnership level. Any deduction for business interest is taken into account in determining the nonseparately stated taxable income or loss of the partnership. To prevent double counting, special rules are provided for the determination of the adjusted taxable income of each partner of the partnership. Similarly, to allow for additional interest deduction by a partner in the case of an excess amount of unused adjusted taxable income limitation of the partnership, special rules apply. Similar rules apply with respect to any S corporation and its shareholders.

Double counting rule. The adjusted taxable income of each partner (or shareholder, as the case may be) is determined without regard to such partner's distributive share of the nonseparately stated income or loss of such partnership. In the absence of such a rule, the same dollars of adjusted taxable income of a partnership could generate additional interest deductions as the income is passed through to the partners.

Example: ABC is a partnership owned 50-50 by XYZ Corporation and an individual. ABC generates $200 of noninterest income. Its only expense is $60 of business interest. Under the proposal, the deduction for business interest is limited to 30 percent of adjusted taxable income, that is, 30 percent x $200 = $60. ABC deducts $60 of business interest and reports ordinary business income of $140. XYZ's distributive share of the ordinary business income of ABC is $70. XYZ has net taxable income of zero from its other operations, none of which is attributable to interest income and without regard to its business interest expense. XYZ has business interest expense of $25. In the absence of a double counting rule, the $70 of taxable income from XYZ's distributive share of ABC's income would permit XYZ to deduct up to an additional $21 of interest (30 percent x $70 = $21), and XYZ's $100 share of ABC's adjusted taxable income would generate $51 of interest deductions, well in excess of the intended 30 percent limitation. If XYZ were a pass-through entity rather than a corporation, additional deductions might be available to its partners as well, and so on. The double counting rule prevents this result by providing that XYZ has adjusted taxable income computed without regard to the $70 distributive share of the nonseparately stated income of ABC. As a result it has adjusted taxable income of $0. XYZ's deduction for business interest is limited to 30 percent x $0 = $0, resulting in a deduction disallowance of $25.

Additional deduction limit. The limit on the amount allowed as a deduction for business interest is increased by a partner's distributive share of the partnership's excess taxable income. The excess taxable income with respect to any partnership is the amount which bears the same ratio to the partnership's adjusted taxable income as the excess (if any) of 30 percent of the adjusted taxable income of the partnership over the amount (if any) by which the business interest of the partnership exceeds the business interest income of the partnership bears to 30 percent of the adjusted taxable income of the partnership. This allows a partner of a partnership to deduct additional interest expense the partner may have paid or incurred to the extent the partnership could have deducted more business interest. The Senate Bill requires that excess taxable income be allocated in the same manner as nonseparately stated income and loss.

Example: The facts are the same as in the above example except ABC has only $40 of business interest. As in the above example, ABC has a limit on its interest deduction of $60. The excess of this limit over the business interest of the partnership is $60 - $40 = $20. The excess taxable income for ABC is $20 / $60 x $200 = $66.67. XYZ's distributive share of the excess taxable income from ABC partnership is $33.33. XYZ's deduction for business interest is limited to 30 percent of the sum of its adjusted taxable income plus its distributive share of the excess taxable income from ABC partnership (30 percent x ($0 + $33.33) = $10). As a result of the rule, XYZ may deduct $10 of business interest and has an interest deduction disallowance of $15.

Carryforward of disallowed business interest. The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year. Business interest may be carried forward indefinitely. With respect to the limitation on deduction of interest by domestic corporations which are United States shareholders that are members of worldwide affiliated groups with excess domestic indebtedness, whichever rule imposes the lower limitation on the deduction of interest with respect to the taxable year (and therefore the greatest amount of interest to be carried forward) governs.

Exceptions. The limitation does not apply to any taxpayer that meets the $15 million gross receipts test of Code Sec. 448(c), that is, if the average annual gross receipts for the three-taxable-year period ending with the prior taxable year does not exceed $15 million.

The trade or business of performing services as an employee is not treated as a trade or business for purposes of the limitation. As a result, for example, the wages of an employee are not counted in the adjusted taxable income of the taxpayer for purposes of determining the limitation.

At the taxpayer's election, any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business is not treated as a trade or business for purposes of the limitation, and therefore the limitation does not apply to such trades or businesses. The limitation also does not apply to certain regulated public utilities. Specifically, the trade or business of the furnishing or sale of (1) electrical energy, water, or sewage disposal services, (2) gas or steam through a local distribution system, or (3) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof is not treated as a trade or business for purposes of the limitation.

The proposal would apply to taxable years beginning after December 31, 2017.

The House Bill has a similar provision except that the gross receipts limitation in the House Bill is $25 million, rather than the $15 million in the Senate Bill.

Deductions

Repeal of Domestic Activities Production Deduction. Under the Senate Bill, the deduction in Code Sec. 199 for domestic production activities is repealed for taxpayers other than C corporations, effective for tax years beginning after 2017. The Code Sec. 199 deduction is repealed for C corporations, effective for tax years beginning after 2018.

Observation: The House Bill would repeal this deduction for all taxpayers, effective for tax years beginning after 2017.

Limitation on Deduction by Employers of Expenses for Fringe Benefits. The Senate Bill provides that no deduction is allowed with respect to -

(1) an activity generally considered to be entertainment, amusement or recreation;

(2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes; or

(3) a facility or portion thereof used in connection with any of the above items.

Thus, the proposal repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer's trade or business (and the related rule applying a 50 percent limit to such deductions). The Senate Bill also disallows an employer's deduction for expenses associated with meals provided for the convenience of the employer on the employer's business premises, or provided on or near the employer's business premises through an employer-operated facility that meets certain requirements. While taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel), the proposal expands this 50 percent limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes. In addition, the proposal disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee's residence and place of employment.

The proposal is generally effective for amount paid or incurred after December 31, 2017, except that the provision disallowing expenses for certain meals provided for the convenience of the employer would apply to tax years beginning after December 31, 2025.

The House Bill contains many of the same of the same provisions as the Senate Bill.

Repeal of Deduction for Local Lobbying Expenses. The Senate Bill disallows deductions for lobbying expenses with respect to legislation before local government bodies (including Indian tribal governments), effective for amounts paid or incurred on or after the date of enactment.

The House Bill contains a similar provision.

Limitation on Deduction Relating to FDIC Premiums. Under the Senate Bill, no deduction is allowed for the applicable percentage of any FDIC premium paid or incurred by certain large financial institutions. For taxpayers with total consolidated assets of $50 billion or more, the applicable percentage is 100 percent. Otherwise, the applicable percentage is the ratio of the excess of total consolidated assets over $10 billion to $40 billion. The proposal does not apply to taxpayers with total consolidated assets (as of the close of the taxable year) that do not exceed $10 billion. The provision applies to taxable years beginning after December 31, 2017.

Observation: The House Bill contains a limitation on the deduction for FDIC premiums.

Tax Credits

The Senate Bill does the following with respect to various business credits:

(1) modifies the credit in Code Sec. 45C for clinical testing expenses for certain drugs for rare diseases or conditions;

(2) modifies the rehabilitation credit in Code Sec. 47; and

(3) repeals the deduction in Code Sec. 196 for certain unused business credits.

The House Bill repeals the credits in Code Sec. 45C, Code Sec. 47, and Code Sec. 196.

Change in Determination of Cost Basis of Specified Securities

The Senate Bill requires that the cost of any specified security sold, exchanged, or otherwise disposed of on or after January 1, 2018, generally be determined on a first-in first-out basis except to the extent the average basis method is otherwise allowed (as in the case of stock of a RIC). The proposal includes several conforming amendments, including a rule restricting a broker's basis reporting method to the first-in first-out method in the case of the sale of any stock for which the average basis method is not permitted.

The proposal would apply to sales, exchanges, and other dispositions after December 31, 2017.

Observation: The House Bill does not contain this provision.

Compensation and Benefits

Modification of Limitation on Excessive Employee Remuneration. The Senate Bill revises the definition of covered employee to include both the principal executive officer and the principal financial officer. Further, an individual is a covered employee if the individual holds one of these positions at any time during the taxable year. The proposal also defines as a covered employee the three (rather than four) most highly compensated officers for the taxable year (other than the principal executive officer or principal financial officer) who are required to be reported on the company's proxy statement for the taxable year (or who would be required to be reported on such a statement for a company not required to make such a report to shareholders). The proposal would apply to tax years beginning after December 31, 2017. However, there is a transition rule which provides that the proposed changes do not apply to any remuneration under a written binding contract which was in effect on November 2, 2017, and which was not modified after this date in any material respect, and to which the right of the covered employee was no longer subject to a substantial risk of forfeiture on or before December 31, 2016.

Excise Tax on Excess Tax-Exempt Organization Executive Compensation. Under the Senate Bill, an employer is liable for an excise tax equal to 20 percent of the sum of the (1) remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee by an applicable tax-exempt organization for a taxable year, and (2) any excess parachute payment (under a new definition for this purpose that relates solely to separation pay) paid by the applicable tax-exempt organization to a covered employee. Accordingly, the excise tax applies as a result of an excess parachute payment, even if the covered employee's remuneration does not exceed $1 million. The proposal would apply to tax years beginning after December 31, 2017.

Treatment of Qualified Equity Grants. Under the Senate Bill, a qualified employee can elect to defer, for income tax purposes, the inclusion in income of the amount of income attributable to qualified stock transferred to the employee by the employer. An election to defer income inclusion (inclusion deferral election) with respect to qualified stock must be made no later than 30 days after the first time the employee's right to the stock is substantially vested or is transferable, whichever occurs earlier. If an employee elects to defer income inclusion under the provision, the income must be included in the employee's income for the taxable year that includes the earliest of (1) the first date the qualified stock becomes transferable, including, solely for this purpose, transferable to the employer; (2) the date the employee first becomes an excluded employee (as described below); (3) the first date on which any stock of the employer becomes readily tradable on an established securities market; (4) the date five years after the first date the employee's right to the stock becomes substantially vested; or (5) the date on which the employee revokes her inclusion deferral election. Deferred income inclusion applies also for purposes of the employer's deduction of the amount of income attributable to the qualified stock. The provision generally applies with respect to stock attributable to options exercised or RSUs settled after December 31, 2017.

The House Bill has a similar provision.

Excise Tax on Stock Compensation in an Inversion Transaction. The Senate Bill increases the excise tax on stock compensation in an inversion transaction from 15 percent to 20 percent.

Partnerships

Tax Gain on the Sale of a Partnership Interest on a Look-through Basis. Under the Senate Bill, gain or loss from the sale or exchange of a partnership interest is effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange. The proposal requires that any gain or loss from the hypothetical asset sale by the partnership be allocated to interests in the partnership in the same manner as nonseparately stated income and loss.

The Senate Bill also requires the transferee of a partnership interest to withhold 10 percent of the amount realized on the sale or exchange of a partnership interest unless the transferor certifies that the transferor is not a nonresident alien individual or foreign corporation. If the transferee fails to withhold the correct amount, the partnership is required to deduct and withhold from distributions to the transferee partner an amount equal to the amount the transferee failed to withhold.

The proposal provides the Secretary of the Treasury with specific regulatory authority to address coordination with the nonrecognition provisions of the Code.

The proposal would be effective for sales and exchanges after December 31, 2017.

Observation: The House Bill does not include this provision.

Modification of the Definition of Substantial Built-in Loss on Transfers of a Partnership Interest. The Senate Bill modifies the definition of a substantial built-in loss for purposes of Code Sec. 743(d), affecting transfers of partnership interests. Under the proposal, in addition to the present-law definition, a substantial built-in loss also exists if the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all partnership's assets in a fully taxable transaction for cash equal to the assets' fair market value, immediately after the transfer of the partnership interest.

Example: ABC Partnership has three taxable partners (partners A, B, and C). ABC has not made an election pursuant to Code Sec. 754. The partnership has two assets, one of which, Asset X, has a built-in gain of $1 million, while the other asset, Asset Y, has a built-in loss of $900,000. Pursuant to the ABC partnership agreement, any gain on sale or exchange of Asset X is specially allocated to partner A. The three partners share equally in all other partnership items, including in the built-in loss in Asset Y. In this case, each of partner B and partner C has a net built-in loss of $300,000 (one third of the loss attributable to asset Y) allocable to his partnership interest. Nevertheless, the partnership does not have an overall built-in loss, but a net built-in gain of $100,000 ($1 million minus $900,000). Partner C sells his partnership interest to another person, D, for $33,333. Under the Senate's proposal, the test for a substantial built-in loss applies both at the partnership level and at the transferee partner level. If the partnership were to sell all its assets for cash at their fair market value immediately after the transfer to D, D would be allocated a loss of $300,000 (one third of the built-in loss of $900,000 in Asset Y). The partnership does not have a substantial built-in loss, but a substantial built-in loss exists under the partner-level test, and the partnership adjusts the basis of its assets accordingly with respect to D.

The proposal applies to transfers of partnership interests after December 31, 2017.

The House Bill does not include this provision.

Charitable Contributions and Foreign Taxes Taken into Account in Determining Limitation on Allowance of Partner's Share of Loss. The Senate Bill modifies the basis limitation on partner losses to provide that a partner's distributive share of items that are not deductible in computing the partnership's taxable income, and not properly chargeable to capital account, are allowed only to the extent of the partner's adjusted basis in its partnership interest at the end of the partnership taxable year in which the expenditure occurs. Thus, the basis limitation on partner losses applies to a partner's distributive share of charitable contributions and foreign taxes. A partner's distributive share of loss takes into account the partner's distributive share of charitable contributions and foreign taxes for purposes of the basis limitation on partner losses. In the case of a charitable contribution of property whose fair market value exceeds its adjusted basis, the basis limitation on partner losses does not apply to the extent of the partner's distributive share of such excess.

The proposal would apply to partnership taxable years beginning after December 31, 2017.

The House Bill does not include this provision.

Amortization of Research and Experimental Expenditures

Under the Senate Bill, amounts defined as specified research or experimental expenditures are required to be capitalized and amortized ratably over a five-year period, beginning with the midpoint of the taxable year in which the specified research or experimental expenditures were paid or incurred. Specified research or experimental expenditures which are attributable to research that is conducted outside of the United States are required to be capitalized and amortized ratably over a period of 15 years, beginning with the midpoint of the taxable year in which such expenditures were paid or incurred. Specified research or experimental expenditures subject to capitalization include expenditures for software development. Specified research or experimental expenditures do not include expenditures for land or for depreciable or depletable property used in connection with the research or experimentation, but do include the depreciation and depletion allowances of such property. Also excluded are exploration expenditures incurred for ore or other minerals (including oil and gas).

This rule would be applied on a cutoff basis to research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2025 (hence there is no adjustment under Code Sec. 481(a) for research or experimental expenditures paid or incurred in taxable years beginning before January 1, 2026).The proposal would apply to amounts paid or incurred in taxable years beginning after December 31, 2025.

The House Bill includes a similar provision.

Employer Credit for Paid Family and Medical Leave

This Senate Bill allows eligible employers to claim a general business credit equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment under the program is 50 percent of the wages normally paid to an employee. The credit would be increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent.

The proposal would generally be effective for wages paid in taxable years beginning after December 31, 2017.

The House Bill does not include this provision.

Modify Tax Treatment of Alaska Native Corporations and Settlement Trusts

The Senate Bill addresses the tax treatment of Alaska Native Corporations and settlement trusts in three separate but related sections. The first section would allow a Native Corporation to assign certain payments described in the Alaska Native Claims Settlement Act (ANCSA) to a Settlement Trust without having to recognize gross income from those payments, provided the assignment is in writing and the Native Corporation has not received the payment prior to assignment. The Settlement Trust is required to include the assigned payment in gross income when received. The second section allows a Native Corporation to elect annually to deduct contributions made to a Settlement Trust. The third section of the proposal requires any Native Corporation which has made an election to deduct contributions to a Settlement Trust as described above to furnish a statement to the Settlement Trust containing: (1) the total amount of contributions; (2) whether such contribution was in cash; (3) for non-cash contributions, the date that such property was acquired by the Native Corporation and the adjusted basis of such property on the contribution date; (4) the date on which each contribution was made to the Settlement Trust; and (5) such information as the Secretary determines is necessary for the accurate reporting of income relating to such contributions.

The proposal relating to the exclusion for ANCSA payments assigned to Settlement Trusts would be effective to taxable years beginning after December 31, 2016. The proposal relating to the reporting requirement would apply to taxable years beginning after December 31, 2016.

The House Bill does not include this provision.

Low Income Housing Credit Modification

Under Code Sec. 42(g)(c)(9), a low-income housing project does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor certain tenants. The Senate Bill adds veterans of the Armed Forces to that list of tenants.

The House Bill does not include this provision.

Expansion of Qualifying Beneficiaries of an Electing Small Business Trust (ESBT)

The Senate Bill allows a nonresident alien individual to be a potential current beneficiary of an ESBT. The proposal takes effect on January 1, 2018.

The House Bill does not include this provision.

Charitable Contribution Deduction for ESBTs

The Senate Bill provides that the charitable contribution deduction of an ESBT is not determined by the rules generally applicable to trusts but rather by the rules applicable to individuals. Thus, the percentage limitations and carryforward provisions applicable to individuals apply to charitable contributions made by the portion of an ESBT holding S corporation stock. The proposal applies to taxable years beginning after December 31, 2017.

The House Bill does not include this provision.

Deductibility of Penalties and Fines for Federal Income Tax Purposes

The Senate Bill denies deductibility for any otherwise deductible amount paid or incurred (whether by suit, agreement, or otherwise) to or at the direction of a government or specified nongovernmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. An exception applies to payments that the taxpayer establishes are either restitution (including remediation of property) or amounts required to come into compliance with any law that was violated or involved in the investigation or inquiry, that are identified in the court order or settlement agreement as restitution, remediation, or required to come into compliance. In the case of any amount of restitution for failure to pay any tax and assessed as restitution under the Code, such restitution is deductible only to the extent it would have been allowed as a deduction if it had been timely paid. Restitution or included remediation of property does not include reimbursement of government investigative or litigation costs.

The proposal applies only where a government (or other entity treated in a manner similar to a government under the provision) is a complainant or investigator with respect to the violation or potential violation of any law. An exception also applies to any amount paid or incurred as taxes due. The proposal is effective for amounts paid or incurred after the date of enactment, except that it would not apply to amounts paid or incurred under any binding order or agreement entered into before such date. Such exception does not apply to an order or agreement requiring court approval unless the approval was obtained before such date.

The House Bill does not include this provision.

Aircraft Management Services

The Senate Bill exempts certain payments related to the management of private aircraft from the excise taxes imposed on taxable transportation by air, effective for amounts paid after the date of enactment.

The House Bill does not include this provision.

Qualified Opportunity Zones

The Senate Bill provides for the temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund. The proposal allows for the designation of certain low-income community population census tracts as qualified opportunity zones, where low-income communities are defined in Code Sec. 45D(e). The designation of a population census tract as a qualified opportunity zone remains in effect for the period beginning on the date of the designation and ending at the close of the tenth calendar year beginning on or after the date of designation. The proposal is effective on the date of enactment.

The House Bill does not include this provision.

Expensing of Certain Costs of Replanting Citrus Plants Lost by Reason of Casualty

The Senate Bill modifies the special rule for costs incurred by persons other than the taxpayer in connection with replanting an edible crop for human consumption following loss or damage due to casualty. Under the proposal, with respect to replanting costs paid or incurred after the date of enactment, but no later than a date which is ten years after such date of enactment, for citrus plants lost or damaged due to casualty, such costs may also be deducted by a person other than the taxpayer if (1) the taxpayer has an equity interest of not less than 50 percent in the replanted citrus plants at all times during the taxable year in which the replanting costs are paid or incurred and such other person holds any part of the remaining equity interest, or (2) such other person acquires all of the taxpayer's equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land.

The House Bill does not include this provision.

Denial of Deduction for Settlements Subject to a Nondisclosure Agreement Paid in Connection with Sexual Harassment or Sexual Abuse

Under the Senate Bill, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement. The proposal is effective for amounts paid or incurred after the date of enactment.

The House Bill does not include this provision.

Repeal of Charitable Contribution Substantiation Exception for Contributions Reported By Donee Organization

The Senate Bill repeals the Code Sec. 170(f)(8)(D) exception to the contemporaneous written acknowledgment requirement. The proposal is effective for contributions made in taxable years beginning after December 31, 2016.

The House Bill includes this provision, except the House provision would apply for contributions made in tax years beginning after December 31, 2016.

V. Foreign-Related Changes

Deduction for Foreign-Source Portion of Dividends Received by Domestic Corporations from Specified 10-Percent Owned Foreign Corporations

The Senate Bill provides for an exemption for certain foreign income. This exemption is provided for by means of a 100-percent deduction for the foreign-source portion of dividends received from specified 10-percent owned foreign corporations by domestic corporations that are United States shareholders of those foreign corporations within the meaning of Code Sec. 951(b) (referred to as "DRD"). The proposal would be effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

Special Rules Relating to Sales or Transfers Involving Specified 10-Percent Owned Foreign Corporations

In the case of the sale or exchange by a domestic corporation of stock in a foreign corporation held for one year or more, the Senate Bill provides that any amount received by the domestic corporation which is treated as a dividend for purposes of Code Sec. 1248, is treated as a dividend for purposes of applying the proposal.

Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation

The Senate Bill generally requires that, for the last taxable year beginning before January 1, 2018, any U.S. shareholder of a specified foreign corporation must include in income its pro rata share of the undistributed, non-previously-taxed post-1986 foreign earnings of the corporation ("mandatory inclusion"). A special rule permits deferral of the transition net tax liability for shareholders of a U.S. shareholder that is an S corporation. The proposal would be effective for the last taxable year of foreign corporations beginning before January 1, 2018, and all subsequent taxable years of a foreign corporation and for the taxable years of a U.S. shareholder with or within which such taxable years end.

Current Year Inclusion of Global Intangible Low-Taxed Income by U.S. Shareholders

Under the Senate Bill, a U.S. shareholder of any CFC must include in gross income for a taxable year its global intangible low-taxed income (GILTI) in a manner generally similar to inclusions of subpart F income. GILTI means, with respect to any U.S. shareholder for the shareholder's taxable year, the excess (if any) of the shareholder's net CFC tested income over the shareholder's net deemed tangible income return. The shareholder's net deemed tangible income return is an amount equal to 10 percent of the aggregate of the shareholder's pro rata share of the qualified business asset investment (QBAI) of each CFC with respect to which it is a U.S. shareholder. The proposal would be effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

Deduction for Foreign-Derived Intangible Income

In the case of a domestic corporation for its taxable year, the Senate Bill allows a deduction equal to 37.5 percent (21.875 percent for tax years beginning after 2025) of the lesser of (1) the sum of its foreign-derived intangible income plus the amount of GILTI that is included in its gross income, or (2) its taxable income, determined without regard to this proposal. The foreign-derived intangible income of any domestic corporation is the amount which bears the same ratio to the corporation's deemed intangible income as its foreign-derived deduction eligible income bears to its deduction eligible income. The proposal would be effective for taxable years beginning after December 31, 2017.

Special Rules for Transfers of Intangible Property from Controlled Foreign Corporations (CFCs) to U.S. Shareholders

For certain distributions of intangible property held by a CFC on the date of enactment, the fair market value of the property on the date of the distribution is treated as not exceeding the adjusted basis of the property immediately before the distribution. If the distribution is not a dividend, a U.S. shareholder's adjusted basis in the stock of the CFC with respect to which the distribution is made is increased by the amount (if any) of the distribution that would, but for this proposal, be includible in gross income. The adjusted basis of the property in the hands of the U.S. shareholder immediately after the distribution is the adjusted basis immediately before the distribution, reduced by the amount of the increase (if any) described previously. The proposal would be effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

Modifications of Subpart F Provisions

The Senate Bill would -

(1) eliminate the inclusion of foreign base company oil related income as a category of foreign base company income;

(2) index for inflation the $1 million de minimis amount for foreign base company income;

(3) repeal Code Sec. 955;

(4) amend the ownership attribution rules of Code Sec. 958(b);

(5) modify the definition of U.S. shareholder;

(6) eliminate the requirement that a corporation must be controlled for 30 days before subpart F inclusions apply;

(7) make permanent the exclusion from foreign personal holding company income for certain dividends, interest (including factoring income that is treated as equivalent to interest under Code Sec. 954(c)(1)(E)), rents, and royalties received or accrued by one CFC from a related CFC; and

(8) amend the requirement in subpart F that U.S. shareholders recognize income when earnings are repatriated in the form of increases in investment by a CFC in U.S. property to provide an exception for domestic corporations that are U.S. shareholders in the CFC either directly or through a domestic partnership.

Prevention of Base Erosion

The Senate Bill would -

(1) deny a deduction for interest expense of United States shareholders which are members of worldwide affiliated groups with excess domestic indebtedness;

(2) place limitations on income shifting through intangible property transfers;

(3) deny a deduction for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity;

(4) provide rules that surrogate foreign corporations are not eligible for reduced rate on dividends; and

(5) modify the tax rate on base erosion payments of taxpayers with substantial gross receipts.

Modifications Related to Foreign Tax Credit System

The Senate Bill would (1) repeal the Code Sec. 902 indirect foreign tax credits and provide for the determination of Code Sec. 960 credit on current year basis; (2) require foreign branch income to be allocated to a specific foreign tax credit basket; (3) accelerate the effective date of the worldwide interest allocation rules to apply to taxable years beginning after December 31, 2017, rather than to taxable years beginning after December 31, 2020; and (4) allocate and apportion gains, profits, and income from the sale or exchange of inventory property produced partly in, and partly outside, the United States on the basis of the location of production with respect to the property.

Inbound Provisions

Under the Senate Bill, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year. The base erosion minimum tax amount means, with respect to an applicable taxpayer for any taxable year, the excess of 10-percent of the modified taxable income of the taxpayer for the taxable year over an amount equal to the regular tax liability of the taxpayer for the taxable year reduced (but not below zero) by the excess (if any) of credits allowed under Chapter 1 over the credit allowed under Code Sec. 38 (general business credits) for the taxable year allocable to the research credit under Code Sec. 41(a).

Modification of Insurance Exception to the Passive Foreign Investment Company Rules

The Senate Bill modifies the requirements for a corporation the income of which is not included in passive income for purposes of the PFIC rules. The proposal replaces the test based on whether a corporation is predominantly engaged in an insurance business with a test based on the corporation's insurance liabilities. The requirement that the foreign corporation would be subject to tax under subchapter L if it were a domestic corporation is retained.

Repeal of Fair Market Value of Interest Expense Apportionment

The proposal prohibits members of a U.S. affiliated group from allocating interest expense on the basis of the fair market value of assets for purposes of Code Sec. 864(e). Instead, the members must allocate interest expense based on the adjusted tax basis of assets.

VI. Retirement Plan-Related Changes

Repeal of Special Rule Permitting Recharacterization of IRA Contributions. The Senate Bill repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus, for example, under the proposal, a conversion contribution establishing a Roth IRA during a taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion). The proposal is effective for taxable years beginning after December 31, 2017.

The House Bill repeals the special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions.

Extended Rollover Period for the Rollover of Plan Loan Offset Amounts in Certain Cases. Under the Senate Bill, the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the federal income tax return for the taxable year in which the plan loan offset occurs, that is, the taxable year in which the amount is treated as distributed from the plan. Under the proposal, a qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a Code Sec. 403(b) plan or a governmental Code Sec. 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee's separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise. As under present law, a loan offset amount under the proposal is the amount by which an employee's account balance under the plan is reduced to repay a loan from the plan. The proposal applies to taxable years beginning after December 31, 2017.

The House Bill contains a similar provision.

Length of Service Award Programs for Bona Fide Public Safety Volunteers. The Senate Bill increases the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service to $6,000 and adjusts that amount to reflect changes in cost-of-living for years after the first year the proposal is effective. In addition, under the proposal, if the plan is a defined benefit plan, the limit applies to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service. Actuarial present value is to be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant's age at the time of the calculation. The proposal is effective for taxable years beginning after December 31, 2017.

The House Bill does not include this provision.

VII. Miscellaneous

Whistleblower Program

The Senate Bill provides an above-the-line deduction for attorney fees and courts costs paid by, or on behalf of, a taxpayer in connection with any action involving a claim under State False Claims Acts, the SEC whistleblower program, and the Commodity Futures Trading Commission whistleblower program.

The Senate Bill also modifies Code Sec. 7623 to define collected proceeds eligible for awards to include: (1) penalties, interest, additions to tax, and additional amounts, and (2) any proceeds under enforcement programs that the Treasury has delegated to the IRS the authority to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements. This definition would also be used to determine eligibility for the enhanced reward program under which proceeds and additional amounts in dispute exceed $2,000,000. Collected proceeds amounts would be determined without regard to whether such proceeds are available to the Treasury Secretary.

The House Bill does not contain this provision.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

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Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com