The Hardwood Federation recently released the following policy alert related to Senate tax reform.
Last night, the Senate Finance Committee released its version of tax reform legislation. The bill departs from its House counterpart in a number of areas. Below is a brief analysis of areas of the proposal where the Hardwood Federation is engaged.
S Corp and Pass Through Tax Treatment
The Senate plan would create a 17.4 percent deduction for qualified “pass-through” income earned by non-corporate businesses, whose owners pay taxes on their profits as individuals. Thus the top rate of 38.5 percent for individuals would effectively become 31.8 percent on pass-through income; the 35 percent rate would instead be 28.9 percent, and so on.
- Income considered to be derived from “personal services,” such as from professional sports, medicine, law, consulting, accounting and investment management, would qualify for the full deduction on only the first $150,000 of taxable income ($75,000 for single filers), with the benefit phasing out over the next $50,000 in income ($25,000 for single filers).
- Deductions are limited to 50 percent of wages and other compensation paid by partnerships and subchapter S corporations.
- Deductions for net operating losses by active pass-through business owners, in excess of income would be capped at $250,000 for individuals and $500,000 for joint filers, indexed annually for inflation.
In the House bill, qualified pass-through business owners could choose to count 70 percent of their income as wages — subject to their individual tax rate — and 30 percent as business income, taxable at the 25 percent rate. Or, they could set the ratio of their wage income to business income based on their capital investment.
H.R. 1 also provides a 9 percent rate for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business, instead of the ordinary 12 percent rate.
Tax Incentives for Timber
Like the House bill, H.R. 1, the Senate proposal leaves untouched existing tax incentives in the tax code to encourage forest landowners to keep their forested stands in timber production. This is a very positive development.
Section 179 expensing
Expensing allowances would rise from $500,000 to $1 million, with the limit on Sec. 179-eligible expenses per year rising to $2,500,000 from $2,000,000. H.R. 1 would set limits at $5 million and $20,000,000 respectively.
Eligible property would be expanded to include lodging furnishings, and nonresidential real property such as roofs, ventilation equipment, fire protection and alarm systems.
Corporate Tax Rate
The Senate bill would set the corporate tax rate at 20 percent beginning in 2019. This differs from the House which starts the 20 percent rate in 2018.
The Senate proposal, like H.R. 1, doubles the basic exclusion from the current $5 million level to $10 million, which is indexed for inflation. Unlike the House bill, however, the Senate measure does not repeal the estate tax at a later date. H.R. 1 repeals the estate tax after 2024 and reduces the gift tax rate to 35 percent.
Alternative Minimum Tax
Like the House bill, AMT would be repealed under the Senate’s proposal
Yesterday, the House Ways & Means Committee reported out H.R. 1 on a party line vote. That bill now heads to the House floor for consideration. In the Senate, we expect a markup will be held in the Senate Finance Committee next week. We have been informed by Committee staff that this proposal is likely to change as more iterations of the bill are unveiled. But Leadership is committed to moving a tax bill out of the Finance Committee and through the Senate before Christmas.