November 13, 2017

Senate Republicans Release Comprehensive Tax Reform Bill That Differs Substantially From House Outline

Republicans in the U.S. Senate released their comprehensive tax reform proposal on Thursday, Nov. 9. The bill differs substantially from the House’s tax reform outline, which was introduced two weeks ago. (Click here to read our summary of that legislation.)

So how does the Senate bill address the priorities that Metals Service Center Institute (MSCI) members highlighted in a survey earlier this year and that MSCI outlined in its comments this past summer to leaders on the U.S. Senate Finance Committee? Let’s take a look:

  • Marginal Tax Rates. MSCI’s comments said the organization’s members were willing to accept certain trade-offs in exchange for “substantial” cuts to individual income tax rates (since most small businesses pay through the individual tax system) and the corporate tax rate. The Senate proposal calls for:
    • Eliminating the Alternative Minimum Tax and reducing the existing seven individual income tax rates to 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent. (The current rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.)
    • Lowering the corporate tax rate from 35 percent to 20 percent starting in 2019. (The House version of the legislation reduces the rate to 20 percent starting in 2018.)
    • Creating a new 17.4 percent deduction for pass-through income that would set the top marginal rate in the low 30s. The Tax Foundation said this deduction may be better for small businesses than the rate set in the House version, but the S-Corp Association disagrees and suggests that both the House and Senate outlines would raise taxes on pass-through companies. The House bill would create a special 25 percent rate for pass-through income, but, in many cases only 30 percent of business owner’s income would be eligible for that rate, with the other 70 percent classified as wage income and subject to the higher individual marginal rates. The Senate bill also imposes loss limitations on pass-through owners. All of the pass-through provisions in the Senate bill would take effect in 2018.
  • Interest Deduction. In its comments this summer MSCI asked that lawmakers maintain the interest deduction. Neither the House nor Senate bill achieve that goal. The Senate legislation caps net interest deduction at 30 percent of earnings before interest and taxes while the House bill would cap the interest deduction at 30 percent of a business’s earnings before interest, taxes, depreciation, and amortization (EBITDA).  
  • Current Expensing Of Equipment. While noting that preservation of the interest deduction was a higher priority, MSCI asked that lawmakers move to a system that allowed for accelerated or immediate deductions for certain capital expenditures of machinery and equipment. As the Tax Foundation explains, the Senate bill would modify taxes on new investment in three ways. It would allow full expensing of short-lived capital investment currently subject to “bonus” depreciation, such as equipment and machinery, for five years, allowing businesses to write down these costs immediately rather than across a depreciation schedule. It also would increase Section 179 expensing from $500,000 to $1 million and increase the phaseout threshold from $2 million to $2.5 million. Finally, it would reduce asset lives for residential and nonresidential real property to 20 years.
  • Last In, First Out (LIFO). MSCI called for the retention of LIFO, and the Senate bill would keep LIFO in place.
  • Territorial Tax System. MSCI recommended that lawmakers move the United States toward a territorial system and allow multinational companies to bring back profits to the United States without double taxation. The Senate bill achieves this goal, but subjects the territorial system to a number of anti-base erosion provisions. In transitioning to this new system, unrepatriated foreign earnings would be subject to a one-time tax of five percent (for illiquid assets) or 10 percent (for cash), which a U.S. shareholder may elect to pay in eight installments.
  • Estate Tax. MSCI requested that lawmakers eliminate the estate tax. The Senate bill does not do that. Instead it doubles the current estate tax exemption to $11 million for an individual and $22 million for a married couple. The House bill eliminates the estate tax.

The U.S. Senate Finance Committee will meet this week to debate and possibly amend the bill. The deliberations will stream live on the committee’s website.

MSCI has not endorsed either the House or Senate bill and is working with various coalitions to address members’ concerns. Please contact Ann D’Orazio if you would like to discuss your perspective.