It wasn’t a short or easy journey, but sweeping tax reform has been enacted!
The U.S. tax code has not been updated since 1986. The House of Representatives, for example, has been working on comprehensive tax reform since January 2011. Over the last nearly seven years, there have been 41 House Ways and Means Committee tax reform hearings and 72 Senate Finance Committee tax reform hearings.
It all came to a successful conclusion today. After midnight, the Senate voted 51-48 to pass the Tax Cuts and Jobs Act. The vote was entirely partisan. In early afternoon, the House then voted – mostly along party lines – for the second time in less than 24 hours to approve the measure. The follow-up vote was necessary because a couple provisions in what the House originally passed violated Senate rules.
Below are key provisions that may interest you as a business leader or individual:
Overall Business Community
- A 21% top corporate tax rate effective January 1, 2018
- Shift to a territorial tax system so income earned overseas is not taxed in the U.S, which should help encourage company expansion and location to occur here rather than abroad
- Repeal of the corporate alternative minimum tax (AMT), which is overly complex and ineffective
- Immediate expensing of capital investments for five years; full expensing of capital assets runs through 2022, with a phase-down in the five years thereafter
- All businesses will be able to deduct all equipment purchases; previously small businesses could do so subject to certain limitations
- A new restriction is placed on larger businesses wanting to deduct their net interest expenses, but small businesses with gross receipts of less than $25 million will still be able to deduct theirs
- Doubles the basic death tax exclusion from $5 million to $10 million
Changes for Pass-Throughs
Pass-through businesses are sole proprietorships, subchapter S corporations and businesses classified as partnerships:
- A 20% deduction for qualified business on the first $315,000 of joint income ($157,500 for a single return) earned by a pass-through, starting in 2018 and expiring after 2025
- This deduction is on top of the overall lower tax rates for individuals and pass-throughs provided by the bill
- Reduces the top tax rate for pass-throughs to 37%
- For larger pass-throughs with higher joint income, the deduction is phased out for professional service companies and limited for other businesses based on W-2 pages paid or capital investments made.
- The standard deduction for a single filer jumps to $12,000 from $6,350
- The standard deduction for a joint filer jumps to $24,000 from $12,700
- The child tax credit doubles to $2,000 per child
- State and local income tax deduction limited to the first $10,000 in taxes paid for property, income or sales taxes
- Mortgage interest deduction changed to $750,000 limit; currently at $1 million
- Student loan interest remains tax deductible; graduate student tuition remains tax free
Once the information is available early next year, businesses will need to implement the IRS changes to the tax tables to reflect the new tax rates. Thereafter, employees should notice the difference in their paychecks.
On a procedural note, down the road it’s very likely there will be a bill to further address technical issues as a consequence of the original legislation, or the IRS will need new regulations to implement the bill.
Chamber Conference on April 17-18
To help ensure that Hoosier businesses are making the most of their savings under the new tax reform, the Indiana Chamber is offering a two-day seminar in the spring. Look for more details soon on Tax Summit: Featuring Tax Cuts and Jobs Act at www.indianachamber.com/conferences.