United States: Top 10 Topics For Directors In 2018: Special Bonus On Tax Reform

Special Bonus: Tax reform

When President Trump was inaugurated on January 20, Republicans took full control of Congress and the White House for the first time since 2007. Prior to this, the GOP had unified control of the Legislative and Executive Branches for only six and a half of the past sixty-four years. Republicans immediately set about using this historically rare opportunity to push forward long-held policy goals, including comprehensive tax reform.

With control of Congress and the White House, but a slim majority of 52 in the Senate, Republicans planned to use fast-track procedures available under the budget reconciliation process to advance tax reform legislation. However, efforts to repeal and replace the Affordable Care Act took precedence and delayed the start of tax reform by a number of months, ultimately resulting in a stalemate among Republicans over how to move forward on ACA, which remains unresolved.

Seeing the end of 2017 approaching, Republicans laid out an expedited timeline to quickly move tax reform through the House and Senate. Building on months of behind-the-scenes discussions among the so-called “Big Six” – House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Committee Chairman Orrin Hatch (R-UT), House Ways & Means Committee Chairman Kevin Brady (R-TX), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn – and their joint statement in July 2017 identifying common goals, Republican leaders aimed to move tax reform through the tax-writing committeesin November and send a bill to the President before Christmas.

To the surprise of many, this timeline has largely been met. The House approved their version of the Tax Cuts and Jobs Act (H.R. 1) on November 16 by a vote of 227-205. The same week, the Senate Finance Committee held a four day markup of their version of tax reform, ultimately sending the bill to the Senate floor under fast- track procedures that led to successful passage of the bill 51-49 during the early hours of Saturday morning, December 2. Despite a number of last minute concerns from Republican senators, retiring Senator Bob Corker (R-TN) was the lone Republican “no” vote. No Democrats voted for either the House or Senate bill. While President Trump made some public and private overtures to Democrats, the gulf between tax priorities for Democrats and Republicans was simply too large to bridge.

With significant areas of difference between the House and Senate bills, members of Congress are in the process of convening a conference committee to resolve these issues with the goal of final passage by December 22. As the conference committee gets underway, Republicans are largely united in their effort to get tax reform done this year, but a number of key differences on business, individual, and international tax reform stand between them and the finish line.

Corporate. The House and Senate approaches on corporate tax reform both highlight one of President Trump’s top priorities: a 20% corporate rate. He originally called for a 15% rate, but agreed to 20% and has recently indicated a willingness to accept a 22% rate if necessary, which makes this slightly higher rate more likely since House and Senate conferees will need extra revenue to get to a final agreement.

During final negotiations on the Senate bill, a provision to repeal the corporate Alternative Minimum Tax (AMT) was removed from the bill, leaving the current 20% AMT rate intact. The House proposal includes full repeal. This will be a major area of discussion in conference given the weakening of business credits like R&D if the AMT rate is set at the same rate as the corporate rate since R&D and many other business credits cannot be taken against AMT.

In the House, the bill includes five years of immediate expensing for qualified property (including used property, newly acquired) placed in service after September 27, 2017, in an aim to provide a jumpstart to investment. The Senate bill originally included a similar provision, but was altered to gradually phase-out the provision after five years at the request of Senator Jeff Flake (R-AZ).

In exchange for a lower corporate rate and enhanced expensing, both bills limit or eliminate a number of business credits and other provisions including the rehabilitation credit for preservation of historic properties, New Markets Tax Credit, Orphan Drug Tax Credit, private activity bonds, and renewable energy tax provisions, although there are notable differences between the approach on each in the House and Senate.

Lastly, the House and Senate proposals both limit the deductibility of net interest expenses to 30% of pretax earnings. In the House, the limitation applies to 30% of earnings before interest, tax, depreciation and amortization (EBITDA). In the Senate, the limitation applies to earnings before interest and tax (EBIT). Both proposals include carve-outs for public utilities and certain real property businesses.

Pass-throughs. Reform for businesses organized as pass-throughs will be a major focus of the conference given the significant differences between the House and Senate approaches to providing relief. The House bill includes a 25% rate for 30% of business income with the remaining 70% treated as wage income at the owner or shareholder’s regular individual rate, with a very low 9% rate for the first $75,000 of business income if earning less than $150,000. In the Senate, the bill instead provides a 23% deduction for domestic “qualified business income.” An additional difference is that the pass-through provisions in the Senate approach are temporary (expire in 2026), while the House proposal is permanent, although many assume that popular tax changes would be extended before their expiration.

Despite beginning in different places, the House and Senate bills both include a three-year holding period for long- term capital gains treatment for carried interest.

International. The House and Senate bills propose fundamental changes to the taxation of businesses with international operations. Beginning in 2018, both bills would exempt from U.S. taxation (with important exceptions, the biggest of which are noted below) 100 percent of the foreign earnings repatriated to certain U.S. corporations. As a means of transitioning to this new “territorial” system of taxation, any U.S. corporation that owns at least 10 percent of a foreign corporation with previously untaxed (in the United States) post-1986 foreign earnings will have to pay a one-time mandatory tax of around 14 percent on its share of the cash portion of such earnings (or around 7 percent on its share of the remaining illiquid earnings), payable over eight years. The so-called “repatriation rates” were originally lower in both the House and Senate, but were raised to account for needed revenue.

Two significant new anti-base erosion measures are proposed as part of the move to territorial. The first is a sort of global minimum tax on foreign- source intangible-like income. While the House and Senate proposals differ in name (the House taxes foreign high returns, while the Senate taxes global intangible low-taxed income), they both tax essentially the same income at the same rate. They levy on certain U.S. corporations (whether they are part of a U.S.-parented multinational or a foreign-parented multinational) an effective 12.5 percent tax on all of the active, otherwise untaxed (in the U.S.) income earned by their foreign subsidiaries minus an amount of income designed to represent the return on tangible investments in the foreign jurisdictions (although the Senate provides a higher rate of return for this purpose—10 percent as opposed to 8 percent). The primary difference between the two is that the Senate adds a special patent box-like deduction (of 37.5 percent, to effect a rate of 12.5 percent) available to U.S. corporations (including those that are foreign controlled) on certain of their U.S.-source income that is foreign derived (and that would otherwise be taxed at 20 percent, beginning in 2019).

The second new anti-base erosion measure is effectively an import tax. Again, the House and Senate proposals differ in name (the House is described as an excise tax/effectively connected income election while the Senate is called the base erosion and anti-abuse tax or BEAT), but they both involve a tax on deductible payments made by a U.S. corporation (no matter if the parent is U.S. or foreign) to a related foreign corporation. That’s where the similarities end. The House’s version would impose a 20 percent tax on the payment made by the U.S. corporation (effectively negating the value of the deduction), unless the foreign corporation treats the amount received as effectively connected income, taxed in the United States at 20 percent with deductions allowed for deemed expenses and some foreign tax credits. The Senate’s version is an alternative tax regime that applies if the U.S. corporation has made a lot of base eroding payments. If the BEAT applies, it adds back into taxable income the full amount of the payments and taxes the whole amount at 10 percent (as opposed to the corporation’s regular tax liability, which taxes at 20 percent a smaller amount of income). While the House’s version appears to sweep in payments for cost of goods sold, the Senate’s version does not.

Individual. House Republicans stuck to their original goal of simplifying the individual rates by reducing the number of tax brackets and lowering the rates. The House ultimately went with four brackets, including a top bracket of 39.6% on income above $1 million. Seeing challenges in the House with making the distributional impact work under a smaller number of brackets, the Senate stuck with the current seven brackets, but still lowered the rates and adjusted the bracket breakpoints with the top bracket set at 38.5% on income over $500,000. Also, the House bill repeals individual AMT, while the Senate maintains it at a slightly higher exemption amount. The House bill would also repeal the estate tax effective in 2024, while the Senate would double the exemption amount from $5 million to $10 million.

The deduction for state and local taxes (SALT) was a major sticking point, particularly in the House where the deduction was limited to up to $10,000 for property taxes only. While not part of the Senate Finance proposal, the final bill included a concession to the House approach thanks to advocacy from Senator Susan Collins (R-ME).

On the mortgage interest deduction, the Senate bill would leave the current deduction of interest on up to $1 million, the House limited it to $500,000 and only on a primary residence.

Lastly, the Senate bill repealed the ACA’s individual mandate, which requires individuals to purchase or obtain qualified health insurance coverage and certify that to the IRS, or else pay a penalty. This provision is likely to be maintained in the conference committee.

Next steps. Conferees will have a limited window to come to an agreement on a final version of tax reform. In most cases, the Senate version is expected to prevail since it is more challenging to pass a bill in the Senate with a slim majority margin of only two votes. The conference committee will also need to consider any final changes to issues like effective dates, provisions with a phase-in or phase-out, and transition rules. Reconciliation also comes with a complex set of rules and budgetary constraints, and conferees will need to closely examine all final provisions to ensure compliance with those rules. Otherwise, the bill would lose its privileged nature in the Senate, and with it, the ability to pass it with only a simple majority.

2018 and beyond. Even if tax reform makes it to President Trump by year-end, tax policy issues will not take a backseat in 2018. Due to the expedited timeline with limited ability to review the proposed changes in a methodical fashion, technical fixes will no doubt be necessary in 2018. Monitoring the implementation process at Treasury and the IRS will also be top of mind as many of the changes will require new regulations and guidance from the Administration. Lastly, Chairman Brady has indicated an interest in continuing to work on other tax reform issues in the new year, specifically mentioning topics such as the tax treatment of financial products and retirement savings incentives.

View the full report here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions