Comparing the House Tax Bill With the GOP Framework, Current Law

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Posted November 02, 2017, 11:18 A.M. ET
By Colleen Murphy and Laura Davison

House Republicans released their long-awaited tax reform bill today, a plan that is likely to change, perhaps drastically, in the coming days.

The bill is seen as the starting point for negotiations. House Ways and Means Committee Chairman Kevin Brady (R-Texas) plans to release a chairman’s mark, perhaps as soon as tomorrow, that will include changes based on more feedback from members.

Passthrough Rate

  • Legislation: The bill would reduce the rate for passthrough business income to 25 percent. Business owners could choose to categorize 70 percent of their income as wages, subject to ordinary rates, and 30 percent as business income, taxable at the 25 percent rate. The alternative is to set the ratio of their wage income to business income based on the level of their capital investment. Professional service firms, such as doctors, accountants, and lawyers, couldn’t take the 70/30 split and could only avail themselves of the preferential rate based on capital investment.

  • September Framework: The rate on business profits for passthrough income would drop to 25 percent. The plan includes provisions to ensure the preferential rate applies to business profits and not to compensation. 
  • Current Law: Income earned through partnerships and S corporations is passed through to the partners or shareholders and taxed at ordinary income rates.

Corporate Rate

  • Legislation: The rate would drop to 20 percent. Lawmakers have said this change would be permanent.
  • September framework: The rate would drop to 20 percent from 35 percent. The framework gives a nod to corporate integration proposed by Senate Finance Committee Chairman Orrin G. Hatch (R-Utah), inviting committees to consider methods to reduce double taxation on corporations.
  • Current law: The rate follows a graduated schedule with a maximum rate of 35 percent.

Individual Rates and Standard Deduction

  • Legislation: The bill would set brackets at 12, 25, and 35 percent. It would maintain the existing 39.6 percent rate for individuals earning more than $1 million. The brackets are as follows: households with income up to $24,000 would pay no income tax. The 12 percent bracket applies to households earning up to $90,000. The 25 percent bracket applies to households earning up to $260,000. The 35 percent bracket applies to households earning up to $1 million.
  • September framework: The plan would likely have three brackets: 12, 25, and 35 percent. Committees have leeway to create a higher fourth rate for the wealthiest individuals. The plan would nearly double the standard deduction to $12,000 for individuals and $24,000 for married taxpayers filing jointly. The proposal would consolidate the personal exemptions for the taxpayer and the spouse into the new larger standard deduction.
  • Current law: For 2017, individuals have a standard deduction of $6,350 and married couples filing jointly have a deduction of $12,700. There are seven tax brackets that start at 10 percent and top out at 39.6 percent.

State and Local Tax Deduction

  • Legislation: The bill would allow individuals to deduct the cost of state and local property taxes up to $10,000. Some members from high-tax states, such as New York and New Jersey, have said that’s not a high enough threshold.
  • September framework: The plan would eliminate the deduction.
  • Current law: Individuals who itemize can write off their property taxes, as well as their state or local income taxes or general sales taxes.

Interest Deductibility

  • Legislation: The legislation would limit the interest deduction at 30 percent of a company’s earnings before interest, tax, depreciation, and amortization (EBITDA). Businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules.
  • September Framework: Interest deductibility would be partially limited. 
  • Current law: C corporations may deduct interest paid or accrued within a tax year on indebtedness.

Business Expensing

  • Legislation: Businesses would be able to fully and immediately deduct expenses of new equipment for about five years. The tax break would apply to property placed in service from Sept. 27, 2017, and before Jan. 1, 2023. This excludes property used by a regulated public utility or a real estate trade or business.
  • September framework: The proposal would allow businesses to immediately expense the cost of new investments in depreciable assets other than structures made after Sept. 27, 2017, for at least five years.
  • Current law: The cost of capital investments generally is deducted from income over multiple years through a depreciation deduction. Taxpayers, other than trusts or estates, may elect to treat up $510,000 (in 2017) of the aggregate cost of qualified property placed in service during the tax year as a current expense rather than as a capital expenditure.

Other Business Tax Breaks

  • Legislation: The bill would preserve the research and experimentation credit, the low-income housing tax credit, and the deduction for advertising. It also extends tax credits for nuclear, and the Section 48 for renewable energy.
  • September framework: The plan would retain the research and experimentation credit and the low income housing credit. The plan encourages the committees to eliminate other business tax breaks, including the tax code Section 199 domestic production deduction for manufacturers.
  • Current law: The tax code includes dozens of tax breaks for businesses. Some, such as the research and experimentation credit, can be used by companies across industries. Others, such as the reduced tax rate for nuclear decommissioning funds, only apply to specific industries.

International Regime

  • Legislation: The bill would create a territorial tax system. There is a 10 percent tax on high-return profits, which is likely to apply to multinationals who store intellectual property overseas. There is a two-tier repatriation rate of 12 percent for cash held offshore and 5 percent for noncash.
  • September framework: The framework proposed a territorial system and deemed repatriation of accumulated foreign earnings. It also gave tax-writing committees leeway to create a base-erosion measure such as a global minimum tax.
  • Current law: Corporations are taxed on their worldwide income. There is no provision related to repatriation.

Retirement Savings Tax Provisions

  • Legislation: The bill doesn’t change pre-tax levels for retirement accounts. Republicans have considered taxing more retirement savings upfront as a pay-for.
  • September framework: Tax-writing committees were instructed to preserve tax incentives for retirement.
  • Current law: In 2018, individuals younger than 50 can put up to $18,500 into a tax-deferred 401(k) account annually.

Mortgage Interest Deduction

  • Legislation: The bill preserves the deduction for existing mortgages and sets it at $500,000 for newly purchased homes, lower than current law.
  • September framework: The framework retained the mortgage interest deduction.
  • Current law: Individuals who itemize can deduct mortgage interest paid on up to $1 million of mortgage debt principal.

Child Tax Credit

  • Legislation: The bill would increase the child tax credit to $1,600 per child under 17, and includes an additional $300 credit for each parent as part of a consolidated family tax credit. The area has been a top priority for Ivanka Trump, who has met with lawmakers to discuss it.
  • September framework: The framework called for a larger credit and would make the first $1,000 of the credit refundable. The plan created a non-refundable credit of $500 for non-child dependents.
  • Current law: There is a $1,000 credit for each qualifying child under the age of 17 that phases out at certain income levels. A portion of the credit may be refundable. A credit for dependent care expenses varies depending on the amount of expenses, income and number of dependents.

Estate Tax

  • Legislation: The bill would phase out the estate tax over six years, a compromise Republicans had to make because of revenue considerations.
  • September framework: The framework repealed the estate tax.
  • Current law: The rate is 40 percent for 2017, and applies to estates valued at more than $5.49 million for individuals and $10.98 million for married couples.

College Endowments

  • Legislation: The bill would set a 1.4 percent excise tax on the net investment income of private university and college endowments. The tax applies to schools with assets of more than $100,000 per student.
  • September framework: The framework didn’t address college endowments.
  • Current law: Nonprofit college endowment income isn’t currently taxed.

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