Republicans Approve Tax Reform Bill; President to Sign First Major Tax Overhaul in Decades

Republican lawmakers are poised to fulfill their promise of final tax reform legislation and score their first major legislative victory of President Trump’s administration. The House and Senate voted to approve the Conference Committee’s compromise version of the Tax Cuts and Jobs Act. The bill passed the House on December 19, 2017 with a vote of 227-203 and then passed the Senate with a vote of 51-48 in the early morning hours of December 20, 2017. All 52 Republican Senators were in support of the legislation, but Senator John McCain (R-AZ) was not present to vote. The tax legislation hit a procedural snag when provisions that would have expanded Sec. 529 college savings accounts to include home schooling expenses and exempted universities that do not charge tuition from the 1.4% excise tax were determined to be violation of the Senate’s Byrd rule because the provisions would not have a fiscal impact. The bill’s title, the Tax Cuts and Jobs Act, was also found to be in violation, and the bill is being renamed. Due to this snag, the House was required to hold a second vote on the revised legislation. The House voted again on December 20, 2017 with a vote of 224-201, clearing the way for President Trump to sign the bill into law. President Trump is certain to sign the legislation, but the timing is pending resolution of another procedural snag known as the pay-as-you-go budget rule. It is possible that President Trump will delay signing the bill until January of 2018 if the pay-as-you-go rule is not waived as part of another expected vote on a continuing resolution (i.e., spending bill) to fund the federal government past the December 22, 2017 deadline.

What Does This Mean for Taxpayers?

The new tax reform legislation is the first major overhaul of the U.S. tax system in three decades and the first major legislative achievement for Republicans during President Trump’s tenure. The compromise tax reform package contains significant changes for both individual and business taxpayers.

Corporations will see a steep rate cut by virtue of a permanent reduced corporate tax rate (21% tax rate for C corporations, down from current 35%), but will also have to grapple with a mandatory repatriation tax on previously untaxed foreign earnings and a new territorial-style international tax structure with new anti-base erosion rules. The effect of the tax legislation must be reported in companies’ financial statements in the period in which the law is enacted (i.e., signed by the President). Many corporations are hopeful that the legislation may not be signed until 2018, which would allow corporations a little more time to definitively assess the impact of the legislation on the annual or quarterly financial statements.

Individuals are grappling with the combination of marginal rate reductions and the elimination of certain itemized deductions. Individuals, estates and trusts will be entitled to a 20% deduction for certain pass-through business income, subject to a limitation based on the W-2 wages paid by the pass-through business and/or returns to depreciable property of the pass-through business. Specified service businesses are generally excluded, except amounts below the taxable income thresholds set in the bill. The bill generally sunsets the individual provisions starting in 2026.

Please see our recent Tax Release for an overview of the agreed-upon legislation. For a more detailed analysis of key provisions in the Conference Committee’s tax reform proposals, see Conference Agreement Tax Reform Proposals – Highlights of Key Items.

The Takeaway

This is the first major overhaul of the U.S. tax code in over 30 years. While it will take time to fully comprehend the implications of this development, there are some important steps that you should take now to optimize your tax position before the January 1, 2018 effective date for most of the legislative changes. Please contact us as soon as possible so that we may assist you in positioning your business and financial affairs before year end. We are prepared to help you understand these significant changes and look forward to helping you adjust your tax position accordingly to meet this new challenge.