While the house bill contained several landmines for the unwary, the senate bill has both hidden gems and camouflaged pitfalls in its differences. Many of the provisions of both bills are effectively the same, but there are several notable discrepancies. These are significant changes in tax law masquerading as simplifications in the code. Many don’t jump out as readily as changes in tax rates or eliminations of deductions, and aren’t commonly being discussed.
- “Kiddie Tax” would no longer apply at the parent’s tax rates, but the highly compressed fiduciary tax brackets.
- Miscellaneous itemized deductions would be fully repealed; including investment expenses (the house bill repealed most of these)
- Cash method of accounting would be available to most businesses with gross receipts under $15M (down from the current $10M), and the gross receipts threshold would be indexed for inflation.
- The requirement to keep inventories would be removed from businesses with gross receipts under $15M.
- The uniform capitalization rules of IRC 263A would be removed from reseller businesses with gross receipts under $15M (down from the current $10M).
- Percentage-of-completion-accounting would not be required for construction contracts for taxpayers with gross receipts under $15M.
- Business interest deductions would be limited to 30% for businesses with at least $15M in gross receipts (as opposed to $25M in the house bill). There is also an opt-out for real estate related business, but they would be limited to using the longer ADS depreciation lives for real assets. As in the house bill, unused interest deductions may be carried over to future years.
- Depreciation for Residential & Non-residential real estate would be reduced to 25 years.
- Qualified leasehold improvement, qualified restaurant, and qualified retail improvement property would be combined into a single qualified improvement property class with a 10 year straight line life. This definition would also remove certain building property placed in service as qualified restaurant property.
- Sales of partnership interests would be required to withhold taxes (10%) if the transferor fails to certify they are not a non-resident alien individual, or foreign corporation.
- A safe harbor for classifying service providers as employees or independent contractors would be enacted.
- 401(k), 403(b), and 457(b) retirement plans would have a single aggregate contribution limit.
- Catch up contributions to retirement plans would be eliminated for high earners (wages of $500K or more).
As an initial mark up of a bill, many of these proposed changes will likely be adjusted, added to or removed before the tax law is made into law (or isn’t).
For an overview of the more evident differences in the senate tax bill in comparison to the house bill, the AICPA has an excellent write up here.
If you would like to discuss how these proposed changes could affect your tax situation please feel free to contact us for a consultation.
Written by Damien Falato, CPA, MST, CGMA, Tax Director