Individual Income Tax Rates and Thresholds Lowered. The TCJA would create four personal tax rates of 12%, 25%, 35%, and 39.6% that generally would kick in at higher thresholds than current law, effective in 2018. For example, the 39.6% rate (before the ACA taxes) would apply to joint incomes above $1 million, instead of $470,700 under current law.
Maximum Corporate Tax Rate Lowered to 20 Percent. The TCJA would reduce the 35% maximum corporate tax rate to a maximum 20% corporate rate, effective in 2018.
Pass-Through Business Rate Lowered to 25 Percent. The TCJA would reduce the tax rate applied to business-related income from pass-through entities, such as partnerships, limited liability companies, S corporations and REITs, to 25%, effective in 2018. Service-related income provided by an owner would continue to be taxed at ordinary income rates.
Expensing for Equipment, No Change in Cost Recovery for Structures. Tangible personal property could be expensed under the TCJA for property placed in service from Sept. 27, 2017 and before Jan. 1, 2023. However, cost recovery for structures, including buildings, would remain under the current law approach: 27.5-year straight line depreciation for residential buildings and 39-year straight line depreciation for nonresidential buildings.
Limitations on Interest Deductibility; Real Estate Trades or Businesses Excluded.TCJA would limit the deductibility of business interest for every business, regardless of its form, to 30% of its adjusted taxable income, effective in 2018. Real estate trades or businesses like REITs would be exempt from this rule since they, together with regulated utilities, do not benefit from full expensing provided to tangible personal property. Additionally, TCJA would provide an exemption from this rule for all businesses with average annual gross receipts of $25 million or less.
Like Kind Exchanges Eliminated Generally, But Retained for Real Estate. The TCJA would end the use of Section 1031 Like Kind Exchanges after 2017 for all assets other than real estate.
International Provisions. Under the TCJA, the United States would move from a worldwide to a territorial tax system. Nonetheless, non-U.S. activities by U.S. taxpayers would be subject to certain base erosion tax provisions. In addition, deferred foreign income of controlled foreign corporations would be taxed at a 12% rate for earnings and profits (E&P) comprising cash or cash equivalents and at a 5% rate for remaining E&P.
Other Provisions. The TCJA would make many other significant changes to the tax code, such as repealing the estate tax (over a six year phase-out); ending the alternative minimum tax; doubling an individual taxpayer’s standard deduction, while repealing all other itemized deductions, other than charitable contributions; limiting the interest deduction on a mortgage for a newly acquired principal residence to $500,000 of debt; and ending the deductibility of an individual’s state and local income taxes, but with retention of a deduction for an individual’s real property taxes up to $10,000.
Outlook. The House Committee on Ways and Means expects to release an amended version of the TCJA in the coming days and to begin its formal consideration of the bill on Monday.
Shortly thereafter, the Senate Committee on Finance is expected to release its version of the tax reform bill and to begin its formal work.
Release of the TCJA today is just the beginning of the end game of the quest for comprehensive tax reform this year. It is sure to be a complex and difficult process in the coming weeks, due in part to the likelihood that Democrats will not support the bill and in part to the fact that the Senate will consider the bill as part of budget reconciliation rules, requiring a minimum of 50 senators to support it within the budget framework and without the support of Democrats.