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Corporate and Business

November 15, 2017
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The landscape of tax reform continues to change, with further mark-ups, compromises, and changes occurring in the near future. But we believe it important to communicate to you where we are now. Below is a detailed comparison of the Senate proposed tax legislation (released on November 13, 2017) as compared to the House proposed tax legislation, which includes mark-ups.

Topic

House Bill (H.R. 1)

Senate Plan

Alternative Minimum Tax (AMT)

Beginning in 2018, would repeal alternative minimum tax. In 2019, 2020, and 2021, if taxpayer would have AMT credit carryforward, taxpayer would be able to claim a refund of 50% of remaining credits (to extent credits exceed regular tax for year). For 2022, taxpayer would be able to claim a refund of all remaining credits.

After 2017, would repeal corporate AMT.

 

The plan would allow the AMT credit to offset the taxpayer’s regular tax liability for any taxable year. For any taxable year beginning after 2017 and before 2022, the AMT credit would be refundable in an amount equal to 50% (100% in the case of taxable years beginning in 2021) 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.

Corporate Tax Rate

Beginning in 2018, 20% flat corporate tax rate; 25% flat rate for personal service corporations.

After 2018, 20% flat corporate tax rate; would eliminate the special tax rate for personal service corporations.

 

After 2018, would reduce the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%, and would repeal the maximum corporate tax rate on net capital gain as obsolete.

Cash Method of Accounting

The $5 million average gross receipts threshold for corporations and partnerships with corporate partners that are not allowed to use the cash method of accounting would be increased to $25 million (indexed for inflation) and would be extended to farm corporations and farm partnership with a corporate partner, as well as family farm corporations) for tax years beginning after 2017. The requirement that such businesses satisfy the requirement for all prior years would be repealed. 

Exemption from UNICAP for such business entities would apply to real and personal property acquired or manufactured by such business.

The $5 million average gross receipts threshold for corporations and partnerships with corporate partners that are not allowed to use the cash method of accounting would be increased to $15 million (indexed for inflation) and would be extended to farming C corporations and farming partnership with C corporation partners. Such entities would be required to meet the threshold for the three prior taxable-year period.

Accounting for Long- term Contracts

The $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts would be increased to $25 million (indexed for inflation) for tax year beginning in 2018, and businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method).

The $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts to be completed within 2 years would be increased to $15 million (indexed for inflation) for contracts entered into after 2017, and businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method).

Limitation on Losses for Taxpayers Other than Corporations

Not addressed.

Would expand the excess farm business loss limitation to excess business losses of a taxpayer other than a C corporation. An excess business loss for the taxable year would be 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 ($500,000 for married taxpayer filing jointly;

 

$250,000 for married filing separately (adjusted for inflation). The limitation would apply at the partner or S corporation shareholder level.

Other Accounting Methods

Not addressed.

After 2017, would require 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, but would provide an exception for long-term contract income.

 

Would codify the current deferral method of accounting for advance payments for goods and services provided under Rev. Proc. 2004-34, which 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.

 

Would direct taxpayers to apply the revenue recognition rules under §451 before applying the OID rules under §1272. Thus, 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 would be includible in income.

Cost Basis of Specified Securities

Not addressed.

Would require that the cost of any specified security sold, exchanged, or otherwise disposed of on or after January 1, 2018, 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). Would restrict 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.

Rollover of Publicly Traded Securities Gain into SSBICs

Effective for sales after 2017, the Bill would repeal the rule permitting gains on publically traded securities to be rolled over to an SSBIC.

Not addressed.

Increased Bonus Depreciation

The bill would extend the availability of first- year additional depreciation for qualified property and specified fruit- and nut-bearing plants for three additional years, and would increase the first-year additional depreciation percentage to 100%, effectively allowing taxpayers to deduct immediately the full cost of qualified property acquired and placed in service after September 27, 2017, and before Jan. 1, 2023 (Jan. 1, 2024 for longer production period property).

 

The bill would expand the property that is eligible for this additional depreciation (“qualified property”) to include used property acquired by the taxpayer, provided the property was not used by the taxpayer before the taxpayer acquired it.

 

Qualified property would exclude property used in a real property trade or business, certain regulated utility property, and property used in a trade or business that has floor plan financing indebtedness.

 

Under the bill, the taxpayer’s election to use AMT credits in lieu of deducting the additional depreciation would be repealed. The repeal of this election would be effective for tax years beginning after 2017.

The plan would extend and modify the availability of first-year additional depreciation for qualified property and specified fruit- and nut- bearing plants through 2022, and would increase the first- year additional depreciation percentage to 100% for property placed in service after September 27, 2017, and before Jan. 1, 2023.

 

The plan would exclude certain public utility property from the definition of qualified property. Under the plan, the taxpayer’s election to accelerate AMT credits in lieu of bonus deprecation would be repealed because of the plan’s elimination of AMT.

Depreciation Limitation for Luxury Automobiles and Personal Use Property

Not addressed.

The plan would increase the depreciation limitations under §280F for passenger automobiles placed in service after Dec. 31, 2017 to $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. The plan provides that the amounts will be indexed for inflation for automobiles placed in service after 2018. The plan would also remove computer or peripheral equipment from the definition of listed property.

Recovery Period for Farming Property

Not addressed.

The plan would shorten the recovery period from 7 years to 5 years for machinery or equipment used in a farming business that is placed in service after Dec. 31, 2017.

 

Additionally, the plan would repeal the requirement that property used in a farming business use the 150-percent declining balance method. However, the plan would provide that the 150-percent declining balance method would continue to apply to any 15-year or 20-year property used in the farming business when the straight line method is inapplicable, or if the taxpayer elects the 150-percent declining balance method.

Depreciation Deductions for Nonresidential Real and Residential Rental Property

Not addressed.

The plan would shorten the recovery period for nonresidential real and residential rental property to 25 years.

 

Additionally, the plan would eliminate the separate definitions of qualified leasehold property, qualified restaurant, and qualified retail improvement property, and a 20-year ADS recovery period for such property.

Local Lobbying Expenses

The bill would eliminate the deduction for lobbying expenses regarding legislation before local government bodies, including Indian tribal governments, effective for amounts paid or incurred after 2017.

Not addressed.

Modification of the Energy Investment Tax Credit

The bill would harmonize the expiration dates and phase-out schedules for different properties.

 

Under the bill, the 30 percent investment tax credit (ITC) for solar energy, fiber-optic solar energy, qualified fuel cell, and qualified small wind energy property is available for property the construction of which begins before 2020 and is then phased out for property the construction of which begins before 2022, with no ITC available for property the construction of which begins after 2021 (2027 for solar energy property).

 

Additionally, the 10 percent ITC for qualified microturbine, combined heat and power system, and thermal energy property is made available for property the construction of which begins before 2022.

 

Finally, the permanent 10% ITC available for geothermal energy property is eliminated for property, the construction of which begins after 2027.

Not addressed.

Extension and Phase-out of Residential Energy Efficient Property

Under the bill, the credit for residential energy efficient property would be extended for all qualified property placed in service prior to 2022, subject to a reduced rate of 26 percent for property placed in service during 2020 and 22 percent for property placed in service during 2021.

 

The provision would be effective for property placed in service after 2016.

Not addressed.

Interest Expense Deduction

Effective for tax years beginning after 2017, the Bill would limit the deduction for net interest expenses incurred by a business in excess of 30 percent of the business’s adjusted taxable income.

The plan would limit the deduction for net interest expense to 30 percent of adjusted taxable income, and the limit would be applied at the taxpayer level (for affiliated corporations filing a consolidate return it would apply at the consolidate tax return filing level). Any interest not allowed as a deduction may be carried forward indefinitely.

Section 179 Expensing

Effective for tax years 2018 through 2022, the bill would increase the small business expensing limitation to $5 million and the phase out amount to $20 million.  The new limitations would be adjusted for inflation. Effective beginning after Nov. 2, 2017, section 179 property would include qualified energy efficient heating and air-conditioning property.

The plan would increase the amount that a taxpayer may expense under section 179 to
$1,000,000. The plan would also increase the phase-out threshold to $2,500,000. These amounts would be indexed for inflation for tax years beginning in 2018.
The plan would expand the definition of section 179 property to include certain depreciable tangible personal property (property used to furnish lodging).
The plan would also expand the definition of qualified real property for improvements made to nonresidential real property. The types of improvements falling under that definition include: roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems.

Small Business Exception from Limitation on Deduction of Business Interest

Under the Bill, businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules (described in section 3301 of the Bill). This provision would be effective for tax years beginning after December 31, 2017.

Under the plan, businesses that satisfy the $15 million gross receipts test would be exempt from the interest limitation rules (described in JCT. III.C.1.). This provision would be effective for tax years beginning after Dec. 31, 2017.

NOL Deduction

The Bill would allow a taxpayer to deduct an NOL carryover or carryback of up to 90 percent of the taxpayer’s taxable income. Additionally, the Bill would generally repeal all carrybacks but for a special one-year carryback for small businesses and farms in the event of certain casualty and disaster losses arising in tax years beginning after 2017. Under the Bill, any net operating loss, specified liability loss, excess interest loss, or eligible loss, carryback would be permitted in a taxable year beginning in 2017, unless the NOL is attributable to the increased expensing allowed under section 3101 of the Bill. The Bill would also allow NOLs arising in tax years beginning after 2017 that are carried forward to be increased by an interest factor.

The plan would limit the NOL deduction to 90 percent of taxable income and provide that amounts carried to other years be adjusted to account for the limitation.

 

The plan would further provide that amounts may be carried forward indefinitely.

Like-Kind Exchanges of Real Property

The bill would limit deferral of gain on like- kind exchanges after 2017 to real property.

The plan would limit the nonrecognition of gain in the case of like-kind exchanges to real property that is not held primarily for sale. This portion of the plan would generally apply to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if either the property being exchanged or received is exchanged or received on or before Dec. 31, 2017.

Deductions for Income Attributable to Domestic Production Activities

Effective for tax years beginning after 2017, the Bill would repeal the deduction allowed for domestic production activities.

Effective for taxable years beginning after Dec. 31, 2018, the plan would repeal the deduction allowed for domestic production activities.

Entertainments, etc. Expenses

The Bill would disallow deductions for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. No deduction would be allowed for transportation fringe  benefits, benefits in the form of on-premises gyms and other athletic facilities, or for personal amenities provided to an employee that are not directly related to the employer’s  trade or business, except to the extent that the benefit is treated as taxable compensation to the employee. The Bill would also disallow deductions for reimbursed entertainment expenses paid as part of a reimbursement arrangement involving a tax-indifferent party. This provision would be effective for amounts paid or incurred after 2017.

No deduction allowed generally for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.

 

Would repeal the 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% limit).

 

Deduction for 50% of food and beverage expenses associated with operating a trade or business generally would be retained.

 

Would expand 50% limit to include employer expenses associated with providing food and beverages to employees through an eating facility meeting de minimis fringe requirements.

 

Deduction disallowed for expenses associated with providing any qualified transportation fringe to employees, and except for ensuring employee safety of employees, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment. Applicable to amounts paid or incurred after Dec. 31, 2017

Self-Created Property not Treated as a Capital Asset

The Bill would treat gain or loss from the disposition of a self-created patent, invention, model or design, or secret formula or process as ordinary in character. The Bill would also repeal the election to treat musical composition and copyright in musical works as a capital asset. This provision would be effective for disposition of such property after 2017.

Not addressed.

Sale or Exchange of Patents

Effective for dispositions after 2017, the Bill would repeal the special rule treating the transfer of a patent prior to its commercial exploitation as long-term capital gain.

Not addressed.

Research and Development Credit

The House Ways and Means Committee talking points explicitly preserve the research and development credit.

Would preserve the research and development credit.

Low Income Housing Credit

The House Ways and Means talking points explicitly preserve the low-income housing tax credit.

Would preserve the low-income housing tax credit.

Rehabilitation Credit

The bill would repeal the rehabilitation tax credit, which provides an incentive for the rehabilitation of certain real property.

 

The bill would provide a transition rule for expenditures that are incurred through the end of a 24-month period, which is required to begin within 180 on the date of the enactment.

The plan would repeal the 10% credit for pre-1936 buildings. The bill would also reduce the credit for qualified rehabilitation expenditures with respect to a certified historic structure to 10%.

 

The proposal would generally be effective for amounts paid or incurred after Dec. 31, 2017 – with a transition rule for expenditures incurred (with respect to any building owned or leased by the taxpayer at all times on and after Jan. 1, 2018) through the end of a 24- month period required to begin within 180 days after enactment of the Act.

Work Opportunity Tax Credit

The bill would repeal the work opportunity credit, which is a nonrefundable tax credit for a portion (40 percent) of wages paid to certain employees who qualify as members of disadvantaged groups.

Not addressed.

Unused Business Credits

The bill would repeal the deduction for unused business credits that may currently be carried back one year and forward 20 years.

Effective for taxable years beginning after Dec. 31, 2017, the plan would repeal the deduction for certain unused business credits.

New Markets Tax Credit

The bill would terminate the new markets tax credit, which is a credit available for taxpayers investing in qualified community development entities. The program was extended to 2019, but the bill would end the program at the end of 2017.
The bill would permit the usage of credits that have previously been allocated for up to seven years.

Not addressed.