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House Prepares to Vote on Tax Reform; Senate Makes Dozens of Changes to Its Bill, Adds Repeal of ACA Individual Mandate

(Parker Tax Publishing November 2017)

With the House getting ready to vote on H.R. 1, the Tax Cuts and Jobs Act (TCJA), the Senate made dozens of changes to its own version of the tax reform bill just two days into the Finance Committee's markup process, including adding a provision to repeal the Affordable Care Act's (ACA) individual mandate penalties.

The House vote on its version of H.R. 1 (House Bill), which was approved by the Ways and Means committee by a 24-16 party line vote on November 9, 2017, could come as early as today.

Although the House leadership is reportedly facing some last-minute pushback from various conservative members questioning whether their bill actually delivers promised tax cuts to average families, the bill is widely expected to pass the House. Matt Fuller of the HuffPost reports that there are currently just ten hard no votes among House Republicans, and four others leaning no. If all House Democrats vote against the bill, Republicans can afford to lose up to 22 votes from their caucus.

As the House prepares to vote, the Senate Finance Committee has been making extensive changes to its own version of the tax reform bill (Senate Bill). On Tuesday night, the Joint Committee on Taxation released in JCX-56-17 a hundred-page summary of amendments that the committee was making to the Senate Bill just two days into the markup process.

Headlining the list of changes was the addition of a provision repealing the ACA's shared responsibility payments (a.k.a., "the individual mandate") beginning in 2019.

Other key amendments to the Senate Bill affecting individual tax reform include -

(1) Setting a December 31, 2025, expiration date for all provisions in Title 1 of the bill (the title relating to individual tax reform) except for the ones affecting inflation indexing methodology;

(2) Further reducing proposed tax rates for taxpayers in the middle three (of seven) tax brackets by amounts ranging from 0.5 percent to 1 percent;

(3) Further increasing the Child Tax Credit from $1,650 in the original bill to $2,000, but reducing to $500,000 a phaseout threshold for MFJ that had been increased to $1 million in the original Senate Bill;

(4) Limiting the 17.4-percent deduction for certain pass-through and sole proprietor income to 50 percent of the taxpayer's allocable or pro rata share of W-2 wages in the case of taxpayers with taxable income exceeding $500,000 for MFJ or $250,000 for other individuals;

(5) Repealing the special rule permitting recharacterization of IRA contributions from traditional to Roth and vice versa;

(6) Doubling the maximum deduction for certain educator expenses from $250 to $500;

Key amendments to the Senate Bill affecting business tax reform include -

(1) Requiring that specified research and experimental expenditures be capitalized and amortized over five years (15 years for research conducted outside the U.S.);

(2) Creating a new employer credit for paid family and medical leave ranging from 12.5 percent to 25 percent (the higher the percentage of normal wages paid, the higher the credit percentage);

(3) Adding a new provision disallowing an employer's deduction for expenses associated with meals provided for the convenience of the employer on, or nearby, the employer's business premises;

(4) Shortening the alternative depreciation system recovery period for residential rental property from 40 years to 30 years;

(5) Extending 100-percent expensing to qualified film, television and live theatrical productions;

(6) Limiting the net operating loss deduction to 80 percent of taxable income;

(7) Allowing certain farms to elect out of the limitation on the deduction of business interest;

(8) Allowing qualified employees to elect to defer the inclusion income amounts attributable to qualified stock transfers from the employer to the employee;

(9) Eliminating a provision that would have required the inclusion in income of certain compensation deferred under a nonqualified deferred compensation plan;

(10) Eliminating a provision that would have ended catch-up contributions for high-wage employees (those with incomes of $500,000 or more);

(11) Creating a new tax break allowing temporary deferral of capital gains reinvested in "qualified opportunity zones" and the permanent deferral of capital gains from the sale or exchange investments in such zones;

(12) Eliminating a provision that would have provided a safe harbor for worker classification; and

(13) Denying deductions for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.

JCX-56-17 also includes several amendments to the Senate Bill affecting international tax reform, most of which would be effective for tax years beginning after December 31, 2025.

The Senate Finance Committee is expected to complete the markup of the Senate Bill this week. If the bill is approved by the committee, the full Senate is expected to begin debating the bill shortly after the Thanksgiving recess.

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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