Tax Cuts and Jobs Act!
This bill amends the Internal Revenue Code (IRC) to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.
If you need help in interpreting the new Tax Act please feel free to call me
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TITLE I–TAX REFORM FOR INDIVIDUALS
Subtitle A–Simplification and Reform of Rates, Standard Deduction, and Exemptions
(Sec. 1001) This section replaces the seven existing tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with four brackets (12%, 25%, 35%, and 39.6%) and specifies the income levels that apply for each bracket.
Under the bill, most of the income that is currently included in the 10% and 15% brackets is taxed at 12%, and most of the income currently included in the 25% and 28% brackets is taxed at 25%. The bill also raises the threshold for income that is taxed at the 39.6% rate.
The bill imposes an additional tax on taxpayers with adjusted gross income that exceeds $1 million ($1.2 million for married taxpayers filing jointly) by phasing out the benefit of the 12% tax bracket, as measured against the 39.6% bracket.
The bill also: (1) modifies the taxation of the unearned income of children, and (2) requires the chained Consumer Price Index to be used to index the brackets for inflation.
(Sec. 1002) This section increases the standard deduction to $24,400 for married individuals filing a joint return, to $18,300 for head-of-household filers, and to $12,200 for all other taxpayers. (Under current law, the standard deduction for 2017 is $6,350 for single individuals and married individuals filing separate returns, $9,350 for heads of households, and $12,700 for married individuals filing a joint return and surviving spouses.)
(Sec. 1003) This section: (1) repeals the deduction for personal exemptions (2) modifies the requirements that determine who is required to file a tax return, and (3) repeals the increased deduction for qualified disability trusts.
(Sec. 1004) This section establishes a maximum 25% rate on the qualified business income of individuals (i.e., business income of an individual from a partnership, S corporation, or sole proprietorship which is currently taxed using individual income tax rates.)
Qualified business income is all net business income from a passive business activity plus the capital percentage of net business income from an active business activity, reduced by carryover business losses and by certain net business losses from the current year, as specified in the bill.
The bill provides a reduced tax rate for certain small businesses with net active business income below an indexed threshold of $75,000 for married individuals filing jointly. The amount taxed at the rate is reduced by the excess of taxable income over an indexed threshold of $150,000.
(Sec. 1005) This section makes several conforming changes related to the modified individual tax rates.
Subtitle B–Simplification and Reform of Family and Individual Tax Credits
(Sec. 1101) This section increases the child tax credit and expands it to include a new family tax credit.
The bill allows credits of: $1,600 ($1,000 under current law) per qualifying child under the age of 17, and $300 for the taxpayer (both spouses in the case of married taxpayers filing a joint return) and each dependent of the taxpayer who is not a qualifying child under age 17.
The credits are phased out at adjusted gross income (AGI) levels of $230,000 for married taxpayers filing joint returns and $115,000 for individuals.
The refundable portion of the credit is limited to $1,000 per qualifying child, adjusted for inflation after 2017. The $300 credit for the taxpayer, spouse, and non-child dependents of the taxpayer expires after 2022.
(Sec. 1102) This section repeals the nonrefundable credits for: (1) taxpayers who are over 65 or retired on the account of permanent and total disability, (2) interest on certain home mortgages covered by a mortgage credit certificate issued by a qualified governmental unit, and (3) new plug-in electric drive motor vehicles.
(Sec. 1103) This section modifies the taxpayer identification number requirements for the child tax credit, the earned income tax credit (EITC), and the American Opportunity tax credit.
(Sec. 1104) This section specifies that a taxpayer must claim all allowable deductions when determining net earnings from self-employment for the purpose of the EITC.
It also modifies the requirements for employer reporting of wages to require employers to report, along with the aggregate wages paid and employment taxes collected, the name and address of each employee and the amount of reportable wages received by each of those employees.
(Sec. 1105) This section limits earned income, for purposes of the EITC, to amounts substantiated by the taxpayer on statements furnished or returns filed under third-party information reporting requirements or amounts substantiated by the taxpayer’s books and records.
Subtitle C–Simplification and Reform of Education Incentives
(Sec. 1201) This section repeals the Lifetime Learning credit and modifies the American Opportunity credit, which, under current law, may both be used for qualified tuition and related expenses.
The modified American Opportunity credit may be claimed with respect to a student for five taxable years (four years under current law). For a credit claimed with respect to the student’s fifth taxable year, the credit is half the value of the American Opportunity credit that is applicable to the first four taxable years. A student may claim the credit for any of the first five years of postsecondary education.
(Sec. 1202) This section consolidates and modifies several provisions regarding education savings accounts to replace Coverdell savings accounts with modified rules for tax-exempt qualified tuition programs (known as 529 plans).
The bill prohibits new contributions to Coverdell savings accounts after 2017. Rollovers from one Coverdell savings account to another are permitted after this date. 529 plans may receive rollovers from Coverdell savings accounts.
The bill modifies 529 plans to allow the plans to distribute up to $10,000 in expenses for tuition incurred during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private, or religious elementary or secondary school. The $10,000 limitation applies on a per-student basis for distributions from all 529 accounts.
The bill also modifies 529 plans to: (1) allow distributions to be used for certain expenses required for attendance in a registered apprenticeship program, and (2) specify that an unborn child may qualify as a designated beneficiary.
(Sec. 1203) This section modifies the exclusion of student loan discharges from gross income, to include within the exclusion certain discharges on account of the death or total and permanent disability of the student.
The section also modifies the gross income exclusion for amounts received under the National Health Service Corps loan repayment program or certain state loan repayment programs to include any amount received by an individual under the Indian Health Service loan repayment program.
(Sec. 1204) This section repeals several education-related deductions and exclusions, including:
• the deduction for interest on education loans,
• the deduction for qualified tuition and related expenses,
• the exclusion for income from U.S. savings bonds used to pay higher education tuition and fees,
• the exclusion for educational assistance programs, and
• the exclusion for qualified tuition reductions.
(Sec. 1205) This section allows funds from 529 accounts to be rolled over to an ABLE account without penalty if the ABLE account is owned by the designated beneficiary of that 529 account, or a member of the designated beneficiary’s family. (Tax-favored ABLE [Achieving a Better Life Experience] accounts are designed to enable individuals with disabilities to save for and pay for disability-related expenses.)
Subtitle D–Simplification and Reform of Deductions
(Sec. 1301) This section repeals the overall limitation on itemized deductions, which currently applies when AGI exceeds a specified amount.
(Sec. 1302) This section modifies the deduction for home mortgage interest to: (1) limit the deduction to mortgages for a principal residence, (2) limit the deduction for debt incurred after November 2, 2017, to mortgages of up to $500,000 (currently $1 million), and (3) prohibit the deduction from being used for interest paid on home equity loans.
(Sec. 1303) For individual taxpayers, this section prohibits the deductions for state, local, and foreign real property taxes; and state and local personal property taxes unless the taxes are paid or accrued in a trade or business or for expenses for the production of income.
The bill includes an exception that allows an individual to deduct up to $10,000 in state and local property taxes, in addition to taxes that may be deducted because they are paid or accrued in a trade or business or for expenses for the production of income.
The bill also repeals the deduction for state and local income, war profits, and excess profits taxes of individuals.
(Sec. 1304) This section repeals the deduction for personal casualty and theft losses, with an exception for the deduction, as modified by the Disaster Tax Relief and Airport and Airway Extension Act of 2017, for individuals who sustained a personal casualty loss as a result of Hurricanes Harvey, Irma, or Maria.
(Sec. 1305) This section modifies a provision that limits the deduction for wagering losses to the extent of the gains from such transactions. The bill specifies that “losses from wagering transactions” include otherwise deductible expenses incurred in carrying out a wagering transaction (e.g., expenses for traveling to or from a casino).
(Sec. 1306) This section modifies the deduction for charitable contributions to: (1) increase from 50% to 60% the income-based percentage limitations for contributions of cash to public charities, (2) prohibit a charitable deduction for college athletic event seating rights, (3) replace the statutory charitable mileage rate of 14 cents per mile with a rate that takes into account the variable cost of operating an automobile (adjusted for inflation), (4) repeal the exception to substantiation requirements for certain contributions reported by the donee organization.
(Sec. 1307) This section repeals the deduction for expenses paid or incurred in connection with determination, collection, or refund of any tax.
(Sec. 1308) This section repeals the deduction for unreimbursed medical expenses.
(Sec. 1309) This section repeals the deduction for alimony or separate maintenance payments from the payer spouse and the corresponding inclusion of the payments in the gross income the recipient spouse.
(Sec. 1310) This section repeals the deduction for moving expenses, with an exception for moving expense of members of the Armed Forces.
(Sec. 1311) This section repeals the deductions and exclusions for contributions to Archer Medical Savings Accounts.
(Sec. 1312) This section prohibits any deduction for expenses attributable to the trade or business of being an employee, except for expenses that are deductible from gross income (above-the-line deductions).
This section also repeals the above-the-line deductions for: (1) certain expenses of performing artists; (2) expenses of state or local government officials performing services on a fee basis; and (3) expenses of elementary and secondary school teachers for professional development or books, supplies, equipment, and materials used in the classroom.
Subtitle E–Simplification and Reform of Exclusions and Taxable Compensation
(Sec. 1401) This section modifies the exclusion for employer-provided housing to: (1) limit the exclusion to $50,000 ($25,000 in the case of a married individual filing a separate return), subject to a phase-out for certain highly compensated employees; (2) deny the deduction to 5% owners; and (2) prohibit the exclusion from applying to more than one residence of the taxpayer at any given time.
(Sec. 1402) The section modifies the exclusion of gain from the sale of principal residence to: (1) extend the time-period during which a taxpayer must own and use the residence as a principal residence to at least five of the eight years before the sale or exchange (two of five years under current law), (2) limit the exclusion to one sale or exchange during any five-year period, and (3) phase out the exclusion when a taxpayer’s average AGI for the tax year and the two preceding years exceeds $250,000 ($500,000 if married filing a joint return).
(Sec. 1403) This section repeals: (1) the exclusion from gross income of the value of certain employee achievement awards, and (2) the limitation on the deduction for the cost of employee achievement awards.
(Sec. 1404) This section repeals the exclusions from gross income and wages for employer-provided dependent care assistance programs for taxable years beginning after December 31, 2022.
(Sec. 1405) This section repeals the exclusion from gross income and wages for qualified moving expense reimbursements.
(Sec. 1406) This section repeals the exclusion from gross income for adoption assistance programs.
Subtitle F–Simplification and Reform of Savings, Pensions, Retirement
(Sec. 1501) This section repeals the rule that allows Individual Retirement Arrangement (IRA) contributions to one type of IRA (traditional or Roth) to be recharacterized as a contribution to the other type of IRA.
(Sec. 1502) This section reduces from 62 to 59 1/2 the minimum age for in-service distributions under pension plans and deferred compensation plans of state and local government employers (governmental section 457[b] plans).
(Sec. 1503) The Department of the Treasury must modify regulations governing hardship distributions from certain retirement plans to: (1) delete the requirement that an employee be prohibited from making elective deferrals and employee contributions for six months after the receipt of a hardship distribution in order for the distribution to be deemed necessary to satisfy an immediate and heavy financial need, and (2) make any other modifications necessary to carry out the purposes of the rule allowing elective deferrals to be distributed in the case of hardship.
(Sec. 1504) This section allows earnings on elective deferrals under a section 401(k) plan, as well as qualified nonelective contributions and qualified matching contributions (and associated earnings), to be distributed on account of hardship. A distribution is not treated as failing to be on account of hardship solely because the employee does not take any available plan loan.
(Sec. 1505) This section extends the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution. A “qualified plan loan offset amount” is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a section 403(b) plan or a governmental section 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee’s separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise.
(Sec. 1506) This section modifies the nondiscrimination requirements for certain defined benefit retirement plans that: (1) limit participation or certain features to a closed class, such as individuals who were hired before a certain date; or (2) have closed or ceased benefit accruals for all participants (frozen plan).
Subtitle G–Estate, Gift, and Generation-skipping Transfer Taxes
(Sec. 1601) This section doubles the estate and gift tax exemption amount for decedents dying and gifts made after December 31, 2017, by increasing the basic exclusion amount from $5 million to $10 million. (Under current law, the amount is indexed for inflation occurring after 2011.)
(Sec. 1602) This section repeals the estate and generation-skipping transfer taxes for the estates of decedents dying or generation-skipping transfers after December 31, 2024.
TITLE II–ALTERNATIVE MINIMUM TAX REPEAL
(Sec. 2001) This section repeals the individual and corporate alternative minimum taxes.
If you need help in interpreting the new Tax Act please feel free to call me
301-770-4901 or email me at: Haldana@aldanas.com
TITLE III–BUSINESS TAX REFORM
Subtitle A–Tax Rates
(Sec. 3001) This section reduces the corporate tax rate from a maximum of 35% under the existing graduated rate structure to a flat 20% rate (25% for personal services corporations).
The bill also reduces the 70% dividends received deduction to 50% and the 80% dividends received deduction to 65%.
The bill imposes an increased tax on taxpayers who violate rules requiring the use of a normalization method of accounting.
This section applies to tax years beginning after 2017.
Subtitle B–Cost Recovery
(Sec. 3101) This section allows increased expensing of the costs of certain business property. The bill:
• allows 100% expensing for certain business property acquired and placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024 for longer production period property and certain aircraft);
• removes the requirement that the original use of qualified property must commence with the taxpayer, subject to certain acquisition requirements and anti-abuse rules;
• excludes from the definition of “qualified property” the property of certain businesses that are not subject to the limitation on interest expenses; and
• increases from $8,000 to $16,000 the limit on depreciation deductions for certain passenger automobiles acquired and placed in service after September 27, 2017, and before January 1, 2023.
Subtitle C–Small Business Reforms
(Sec. 3201) This section expands the expensing of certain depreciable business assets that is currently permitted under section 179 of the IRC.
The provision modifies section 179 to:
• increase the maximum amount a taxpayer may expense to $5 million (currently $500,000) for taxable years beginning before January 1, 2023;
• increase the phaseout threshold amount to $20 million (currently $2 million) for taxable years beginning before January 1, 2023;
• index the amounts for inflation after 2018, and
• expand the definition of qualified real property to include qualified energy efficient heating and air-conditioning property acquired and placed in service by the taxpayer after November 2, 2017.
(Sec. 3202) This section modifies the accounting rules for small businesses to:
• expand the group of taxpayers who qualify for the cash accounting method by increasing the limit for the gross receipts test from $5 million to $25 million (adjusted for inflation after 2018),
• allow any farming C corporation (or farming partnership with a C corporation partner) that meets the gross receipts test to use the cash method of accounting,
• exempt taxpayers that meet the gross receipts test from certain requirements to account for inventories,
• expand the exceptions for small taxpayers from the uniform capitalization rules to include any producer or reseller that meets the gross receipts test, and
• expand the exception for small construction contracts from the requirement to use the percentage-of-completion method.
(Sec. 3203) This section exempts certain small businesses that meet the gross receipts test from the limitation on the deduction for business interest.
(Sec. 3204) This section modifies the tax treatment of S corporation conversions to C corporations.
Subtitle D–Reform of Business-related Exclusions, Deductions, etc.
(Sec. 3301) This section limits the deduction for business interest to the sum of: (1) business interest income for the year, (2) 30% of the adjusted taxable income of the taxpayer for the taxable year, and (3) the floor plan financing interest of the taxpayer for the taxable year.
The amount of any business interest not allowed as a deduction for any year may be carried forward for up to five years beyond the year in which the business interest was paid or accrued, treating business interest as allowed as a deduction on a first-in, first-out basis.
“Business interest income” is the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. It does not include investment interest or investment income.
“Floor plan financing interest” is interest paid on debt used to finance the acquisition of motor vehicles held for sale to retail customers and secured by the inventory so acquired.
The bill includes exceptions for:
• small businesses that meet the gross receipts test,
• the trade or business of performing services as an employee,
• a real property trade or business, and
• certain regulated public utilities.
(Sec. 3302) This section modifies the net operating loss deduction to: (1) limit the deduction to 90% of taxable income, (2) adjust carryover amounts to account for the new limitation allow and allow an indefinite carryforward of net operating losses, (3) repeal the two-year and other specified carryback provisions, and (4) allow a one-year carryback for certain disaster losses incurred in the trade or business of farming or by certain small businesses.
(Sec. 3303) This section modifies the rule providing for the nonrecognition of gain in the case of like-kind exchanges to limit the application of the rule to real property that is not held primarily for sale.
(Sec. 3304) This section requires a contribution to capital, other than a contribution of money or property made in exchange for stock of a corporation or any interest in an entity, to be included in the gross income of a corporation.
(Sec. 3305) This section eliminates the deduction for lobbying expenditures to influence the legislation of any local council or similar governing body, including an Indian tribal government.
(Sec. 3306) This section repeals the deduction for income attributable to domestic production activities.
(Sec. 3307) This section modifies the tax treatment of certain expenses for entertainment and fringe benefits.
The bill denies deductions for amounts paid or incurred for:
• an activity generally considered to be entertainment, amusement or recreation;
• membership dues for any club organized for business, pleasure, recreation or other social purposes;
• a de minimis fringe that is primarily personal in nature and involving property or services that are not directly related to the taxpayer’s trade or business;
• a facility or portion thereof used in connection with any of the above items;
• a qualified transportation fringe, including costs of operating a facility used for qualified parking, and
• an on-premises athletic facility provided by an employer to its employees.
The bill specifies requirements for the IRS regulations implementing this section.
The bill also: (1) includes exceptions for certain expenses that are treated as compensation or includible in the income of the recipient, (2) modifies the rules regarding reimbursed expenses, and (3) specifies that the exception to the 50% deduction limit for food or beverages applies to any expense excludable from the gross income of the recipient related to meals furnished for the convenience of the employer.
(Sec. 3308) This section includes in unrelated business taxable income of a tax-exempt organization any expenses paid or incurred by the organization for certain fringe benefits for which a deduction is not allowed under section 274 of the IRC, including qualified transportation fringe benefits, a parking facility used in connection with qualified parking, or any on-premises athletic facility.
(Sec. 3309) This section limits the deduction for Federal Deposit Insurance Corporation premiums for certain financial institutions with consolidated assets that exceed $10 billion.
(Sec. 3310) This section repeals a provision that permits the tax-free rollover of certain gains from the sale of publicly traded securities into common stock or a partnership interest in a specialized small business investment company.
(Sec. 3311) This section excludes certain patents, inventions, models, designs, secret formulas, or processes created by the taxpayer from the definition of a ”capital asset.”
(Sec. 3312) This section repeals the special rule for the sale or exchange of patents by the holder of the patent that treats the sale or exchange as the sale of a capital asset.
(Sec. 3313) This section repeals the rule that provides for a technical termination of partnerships if, within any 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.
(Sec. 3314) This section requires a three-year holding period (one year under current law) for certain net long-term capital gains with respect to partnership interests held in connection with the performance of investment services. If the holder of an applicable partnership interest is allocated gain from the sale of property held for less than three years, that gain is treated as short-term capital gain and is taxed as ordinary income.
(Sec. 3315) This section adjusts the amortization rules and schedules for certain research and experimentation expenditures.
(Sec. 3316) This section prohibits attorneys from deducting legal expenses paid or incurred for contingency fee cases until the contingency is resolved.
Subtitle E–Reform of Business Credits
(Sec. 3401) This section repeals the credit for clinical testing expenses incurred in testing certain drugs for rare diseases or conditions (commonly referred to as orphan drugs).
(Sec. 3402) This section repeals the credit for employer-provided child care.
(Sec. 3403) This section repeals the credit for rehabilitation expenditures for certain buildings.
(Sec. 3404) This section repeals the work opportunity tax credit.
(Sec. 3405) This section repeal the deduction for certain unused business credits.
(Sec. 3406) This section repeals the new markets tax credit.
(Sec. 3407) This section repeals the credit for eligible expenditures of a small business to comply with requirements under the Americans with Disabilities Act of 1990.
(Sec. 3408) This section revises the amount of the credit for the portion of employer Social Security taxes that are paid with respect to employee tips.
Subtitle F–Energy Credits
(Sec. 3501) This section modifies the credit for electricity produced from certain renewable resources to: (1) terminate the inflation adjustment for wind facilities with construction that begins after enactment of this bill to allow a credit of 1.5 cents per kilowatt hour (currently 2.4 cents for 2017), and (2) specify requirements for determining the beginning of construction.
(Sec. 3502) This section modifies the credit for investment in energy property to extend the energy credit for fiber optic solar, fuel cell, microturbine, and combined heat and power system, geothermal heat pump, and small wind property for property with construction that begins before January 1, 2022.
With respect to fiber optic solar, fuel cell, and small wind property, the bill reduces the 30% credit rate to 26% for property with construction that begins in 2020 and to 22% for property with construction that begins in 2021. For fuel cell property or small wind energy property, the credit rate is reduced to 10% if the property is not paced in service before 2024.
The bill terminates the permanent credits for solar and geothermal property after 2027.
The bill also specifies that construction may not be treated as beginning before any date unless there is a continuous program of construction which begins before the date and ends on the date that the property is placed in service.
(Sec. 3503) This section extends the residential energy efficient property credit for fuel cell, small wind, and geothermal heat pump property expenditures through December 31, 2021. The bill reduces the credit rate for the property from 30% to 26% for property placed in service in 2020 and to 22% for property placed in service 2021.
(Sec. 3504) This section repeals the enhanced oil recovery credit.
(Sec. 3505) This section repeals the credit for producing oil and gas from marginal wells.
(Sec. 3506) This section modifies the tax credit for the production of electricity from advanced nuclear power facilities to: (1) establish requirements for the allocation of unutilized portions of the national megawatt capacity limitation, and (2) allow public entities to transfer the credit to project partners.
Subtitle G–Bond Reforms
(Sec. 3601) This section terminates the exclusion for interest on qualified private activity bonds.
(Sec. 3602) This section repeals the exclusion from gross income for interest on a bond issued to advance refund another bond.
(Sec. 3603) This section repeals the authority to issue tax-credit bonds and direct-pay bonds.
(Sec. 3604) This section prohibits tax-exempt bonds from being used to finance professional sports stadiums.
(Sec. 3701) This section repeals the operations losses deduction for life insurance companies and allows the net operating loss deduction under section 172 of the IRC.
(Sec. 3702) This section repeals the small life insurance company deduction.
(Sec. 3703) This section imposes an additional 8% income tax on life insurance company taxable income.
(Sec. 3704) This section revises the tax treatment of income or loss resulting from a change in the method of computing life insurance company reserves. The bill eliminates the 10-year period for taking into account the changes and requires the changes to be taken into account as adjustments attributable to a change in method of accounting.
(Sec. 3705) This section repeals the special rule for distributions to shareholders of a stock life insurance company from a pre-1984 policyholders surplus account, which provides that amounts in the account are not taxed unless the amounts are treated as distributed to shareholders or subtracted from the account. The bill requires a life insurance company with such an account to pay taxes on the balance of the account ratably over the first eight taxable years beginning after December 31, 2017.
(Sec. 3706) This section modifies the proration rules for property and casualty insurance companies to replace the 15% reduction under current law with a 26.25% reduction. (Under the proration rules, in calculating the deductible amount of its reserve for losses incurred, a property or casualty insurance company must reduce the amount of the losses incurred by a specified percentage of: (1) the insurer’s tax-exempt interest, (2) the deductible portion of dividends received, and (3) the increase for the taxable year in the cash value of life insurance, endowment, or annuity contracts the company owns.)
(Sec. 3707) This section modifies the reserve discounting rules applicable to property and casualty insurance companies to: (1) modify the interest rate, (2) extend the periods applicable under the loss payment pattern, and (3) repeal the election to use a taxpayer’s historical loss payment pattern.
(Sec. 3708) This section repeals the special estimated tax payment rules for insurance companies.
(Sec. 3801) This section modifies a provision that limits the deduction for compensation of covered employees of a publicly held corporation to salaries of no more than $1 million per year. The bill: (1) repeals the performance-based compensation and commission exceptions, (2) modifies the definition of “covered employee,” and (3) expands the definition of “publicly held corporation.”
(Sec. 3802) This section imposes an excise tax on excess tax-exempt organization executive compensation. The tax is equal to 20% of the sum of: (1) any remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee by an applicable tax-exempt organization for a taxable year, and (2) any excess parachute payment (separation pay), as specified in the bill.
(Sec. 3803) This section allows qualified employees to elect to defer, for income tax purposes, income attributable to certain stock transferred to the employee by an employer.
Employees are excluded if they: (1) are a 1% owner, the chief executive officer, or the chief financial officer of the corporation or have been at any time during the 10 preceding calendar years; (2) are a family member of the specified individuals; or (3) have been one of the four highest compensated officers of the corporation during any of the 10 preceding taxable years.
TITLE IV–TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS
Under current law, the earnings of foreign subsidiaries of U.S. multinational corporations are not taxed until the income is repatriated (paid as dividends) into the United States. The corporations are allowed a tax credit against U.S. taxes for taxes paid to foreign jurisdictions. This title establishes a territorial system in which foreign source income is not subject to regular U.S. taxes.
Subtitle A–Establishment of Participation Exemption System for Taxation of Foreign Income
(Sec. 4001) This section establishes a participation exemption system for foreign income. Under the system, the bill allows a 100% deduction for the foreign-source portion of dividends received from specified 10% owned foreign corporations by domestic corporations that are U.S. shareholders of those foreign corporations.
A “specified 10% owned foreign corporation” is any foreign corporation with respect to which any domestic corporation is a U.S. shareholder. It does not include a passive foreign investment company that is not a controlled foreign corporation (CFC).
No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to any dividend for which a deduction is allowed under this section
The bill establishes a six-month holding period requirement for dividends of a domestic corporation to be eligible for a participation dividends received deduction.
(Sec. 4002) This section applies the participation exemption to investments in U.S. property by specifying that the tax for CFC investments in U.S. property with respect to a domestic corporation is zero.
(Sec. 4003) This section specifies that, solely for the purpose of determining a loss, a domestic corporate shareholder’s adjusted basis in the stock of a specified 10% owned foreign corporation is reduced by the portion of any dividend received with respect to such stock from such foreign corporation that was not taxed by reason of a dividends received deduction.
If a domestic corporation transfers substantially all of the assets of a foreign branch to a foreign corporation which, after such transfer, is a specified 10% owned foreign corporation with respect to which the domestic corporation is a U.S. shareholder, the domestic corporation must include in gross income an amount equal to the transferred loss amount, subject to certain limitations.
(Sec. 4004) This section specifies rules for the tax treatment of deferred foreign income upon transition to the participation exemption system of taxation. The bill deems the earnings to be repatriated and impose taxes of: (1) 14% for earnings held in liquid form, and (2) 7% for accumulated foreign earnings that have been reinvested in the foreign subsidiary’s business.
Subtitle B–Modifications Related to Foreign Tax Credit System
(Sec. 4101) This section repeals the deemed-paid credit with respect to dividends received by a domestic corporation that owns 10% or more of the voting stock of a foreign corporation. The bill allows a deemed-paid credit with respect to any income inclusion under subpart F. The credit is limited to the amount of foreign income taxes properly attributable to the subpart F inclusion.
(Sec. 4102) This section requires gains, profits, and income from the sale or exchange of inventory property produced partly in, and partly outside, the United States to be allocated and apportioned between sources within and without the United States solely on the basis of the production activities with respect to the property.
Subtitle C–Modification of Subpart F Provisions
(Sec. 4201) This section repeals the requirement for a U.S. shareholder in a CFC that invested previously excluded subpart F income in foreign base company shipping operations to include in income a pro rata share of the previously excluded subpart F income when the CFC decreases the investments.
(Sec. 4202) This section repeals provisions that treat foreign base company oil related income as category of subpart F income.
(Sec. 4203) This section adds an inflation adjustment for the de minimis exception for foreign base company income.
(Sec. 4204) The provision makes permanent the exclusion from foreign personal holding company income for certain dividends, interest, rents, and royalties received or accrued by one CFC from a related CFC.
(Sec. 4205) This section modifies the stock attribution rules for determining status as a CFC. Certain stock of a foreign corporation owned by a foreign person must be attributed to a related U.S. person for purposes of determining whether the related U.S. person is a U.S. shareholder of the foreign corporation.
(Sec. 4206) This section eliminates the requirement for a corporation to be controlled for an uninterrupted period of 30 days before subpart F inclusions apply.
Subtitle D–Prevention of Base Erosion
(Sec. 4301) This section requires a U.S. shareholder of any CFC to include in gross income 50% of shareholder’s foreign high return amount for the year, as calculated using a formula specified in this bill.
(Sec. 4302) This section limits the deduction for interest expenses of domestic corporations which are members of an international financial reporting group.
For a domestic corporation which is a member of any international financial reporting group, the deduction for interest paid or accrued during the year may not exceed the sum of the member’s interest income plus the allowable percentage of 110% of net interest expense.
An “international financial reporting group” is a group that: (1) includes at least one foreign corporation engaged in a U.S. trade or business or at least one domestic corporation and one foreign corporation at any time during the group’s reporting year, (2) prepares consolidated financial statements in accordance specified principles or standards, and (3) has average annual gross receipts that exceed $100 million.
(Sec. 4303) This section imposes a 20% excise tax on payments from domestic corporations to related foreign corporations to the extent that the amounts are deductible by the U.S. payor. The excise tax does not apply if the foreign recipient elects to be subject to U.S. income tax on the amounts received.
Subtitle E–Provisions Related to Possessions of the United States
(Sec. 4401) This section extends the rules that apply to the deduction for income attributable to domestic production activities in Puerto Rico.
(Sec. 4402) This section suspends for six years the increase in the limit on the amount of excise taxes on rum covered over to Puerto Rico and the Virgin Islands. (Under the provision, the limitation of $13.25 per proof gallon is extended for rum brought into the United States after December 31, 2016, and before January 1, 2023. After December 31, 2022, the limit reverts to $10.50 per proof gallon.)
(Sec. 4403) This section extends the American Samoa economic development credit for five years.
Subtitle F–Other International Reforms
(Sec. 4501) This section modifies the exception from the passive foreign investment company rules for insurance businesses. The bill replaces the test based on whether a corporation is predominantly engaged in an insurance business with a test based on the corporation’s insurance liabilities.
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TITLE V–EXEMPT ORGANIZATIONS
Subtitle A–Unrelated Business Income Tax
(Sec. 5001) This section specifies that a tax-exempt organization does not fail to be subject to tax on its unrelated business income solely because the organization also is exempt, or excludes amounts from gross income, by reason of another provision of the IRC.
(Sec. 5002) This section modifies the exclusion of research income from the tax on unrelated business income to limit the exclusion to fundamental research the results of which are freely available to the general public.
Subtitle B–Excise Taxes
(Sec. 5101) This section replaces the two excise tax rates for the net investment income of tax-exempt private foundations with a single tax rate of 1.4%. It repeals the reduced excise tax rate for private foundations that exceed their historical level of qualifying distributions.
(Sec. 5102) This section prohibits an organization that operates an art museum as a substantial activity from qualifying as a private operating foundation unless the museum is open during normal business hours to the public for at least 1,000 hours during the taxable year.
(Sec. 5103) This section imposes a 1.4% excise tax on the net investment income of certain private colleges and universities that have at least 500 students.
(Sec. 5104) This section creates an exception to the excise taxes on excess business holdings for the holdings of a private foundation in any business enterprise that meets specified requirements relating to exclusive ownership, minimum distribution of net operating income for the charitable purpose (all profits to charity distribution requirement), and independent operation (not controlled by a substantial contributor or family members) from the excise taxes on excess business holdings.
Subtitle C–Requirements for Organizations Exempt From Tax
(Sec. 5201) This section permits a tax-exempt organization to make certain statements related to a political campaign without losing its tax-exempt status.
An organization may not lose its tax-exempt status under section 501(c)(3) or be deemed to have participated in, or intervened in any political campaign on behalf of (or in opposition to) any candidate for public office, solely because of the content of any statement that: (1) is made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose, and (2) results in the organization incurring not more than de minimis incremental expenses.
(Sec. 5202) This section establishes additional reporting requirements for organizations that sponsor donor-advised funds. (A donor advised fund is a fund or account that is separately identified by reference to contributions of a donor or donors. The account is owned and controlled by a sponsoring charitable organization, while the donor retains advisory privileges with respect to the distribution and investment of funds in the account.)
If you need help in interpreting the new Tax Act please feel free to call me
301-770-4901 or email me at: Haldana@aldanas.com