Are You Confused About Tax Reform? Bloomberg’s Tax Reform Roadmap is Here to Help!


Is tax reform’s lightning speed giving you a headache? You’re not alone! Luckily, Bloomberg’s “Roadmap to House and Senate Tax Reform Plans” explains the moving parts of tax reform so that you can better understand what may change if tax reform passes. The roadmap compares the “Tax Cuts and Jobs Act” (H.R. 1), as passed by the House of Representatives on Nov. 16 by a 227-205 vote, with the Senate plan, as passed by Senate Finance Committee on Nov. 16 by a 14-12 vote. You can find the complete roadmap here.  

For the estate planner, here are some key topics from the roadmap to take note of:

Estates, Gifts & Trusts

Topic: Estate and Gift Taxes

House Bill (H.R.1) Senate Plan Bill Sections I.R.C. Sections
The bill would increase the federal estate and gift tax unified credit basic exclusion amount to $10,000,000 (with inflation adjustments), effective for decedents dying and gifts made after 2017. The bill would repeal the federal estate tax, effective for decedents dying after 2024 (while retaining the provision allowing a “stepped-up” income tax basis at death). The bill would lower the federal gift tax rate from 40% to 35%, effective for gifts made after 2024

The plan would increase the federal estate and gift tax unified credit basic exclusion amount to $10,000,000 (with inflation adjustments from 2011), effective for decedents dying and gifts made after 2017.

 

The plan does not provide for a repeal of the estate tax at any point in the future.

 

JCT Mod. 11/14: Would provide that the increase in the unified credit basic exclusion amount would expire for decedents dying and gifts made after 2025, and would revert back to the amount provided before Jan. 1, 2018.

House

H.R. 1, §1601, §1602

 

Senate

JCT, I.E.; JCT Mod. 11/14: II.A.1.

§1014, §2001- §2210, §2502, §2505

Topic: Generation-Skipping Transfer Tax

House Bill (H.R.1) Senate Plan Bill Sections I.R.C. Sections
The bill would increase the federal GST exemption amount to $10,000,000 (with inflation adjustments), effective for generation-skipping transfers made after 2017. The bill would repeal the federal generation-skipping transfer tax, effective for generation-skipping transfers made after 202435%, effective for gifts made after 2024

The plan would increase the federal estate and gift tax unified credit basic exclusion amount to $10,000,000 (with inflation adjustments from 2011), effective for decedents dying and gifts made after 2017.

 

The plan does not provide for a repeal of the estate tax at any point in the future.

 

JCT Mod. 11/14: Would provide that the increase in the unified credit basic exclusion amount would expire for decedents dying and gifts made after 2025, and would revert back to the amount provided before Jan. 1, 2018.

House

H.R. 1, §1601, §1602

 

Senate

JCT, I.E.; JCT Mod. 11/14: II.A.1.

§2601-§2664

For exempt organizations, here are some key topics from the roadmap to take note of:

Tax-Exempt Organizations

Topic: Elimination of Exemption for Professional Sports Leagues 

House Bill (H.R.1) Senate Plan Bill Sections I.R.C. Sections
Not addressed. The plan would eliminate language that provides exemptions for professional sports leagues and expressly exclude them from the definition of a business league under §501(c)(6).

Senate

JCT, III.L.4.

§501(c)(6)
Topic: Unrelated Business Taxable Income  
House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
The bill would increase unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed, effective for amounts paid or incurred after 2017.

The plan would not address the inclusion of certain fringe benefit expenses in unrelated business taxable income.

The plan would require that income derived from the licensing of an organization’s name or logo be treated as derived from an unrelated trade or business regularly carried on and included in the organization’s unrelated business taxable income notwithstanding provisions that otherwise exclude passive income from unrelated business taxable income.

The plan would also require that organizations that carry on more than one unrelated trade or business separately calculate unrelated business taxable income for each trade or business, effectively prohibiting using deductions relating to one trade or business to offset income from a separate trade or business.

The changes would apply to tax years beginning after 2017.

House

H.R. 1, §3308

 

Senate

JCT, III.L.2., III.L.3.

§512, §513
Topic: Modifications to Intermediate Sanctions Excise Tax on Excess Benefit Transactions 
House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
Not addressed.

The plan would impose an excise tax on a tax-exempt organization involved in an excess benefit transaction equal to 10% of the excess benefit unless the organization establishes that minimum due diligence standards have been met, or satisfies the IRS that other reasonable procedures were followed.

The plan would eliminate the rebuttable presumption of reasonableness contained in regulations and convert the regulations’ procedures into the standard by which an organization can establish that minimum due diligence has been performed.

The plan would eliminate the special rule regarding organization managers being treated as not “knowingly” participating where the manager relied on professional advice and the regulatory rule that a manager does not act knowingly where the organization satisfies the rebuttable presumption. However, the plan would retain reliance on professional advice as a factor in determining whether the manager “knowingly” participated in the transaction.

The plan would add investment advisors and athletic coaches to the definition of “disqualified persons” for purposes of the excess benefit transaction rules. The plan would also extend the intermediate sanctions excess benefit transaction rules to organizations described in §501(c)(5) (labor and certain other organizations) and §501(c)(6) (business leagues and certain other organizations). The changes would apply to tax years beginning after 2017.

Senate

JCT, III.L.5.

§4958

Topic: Excise Tax on Tax Exempt Organization Executive Compensation

House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections

The bill would impose a 20% excise tax on compensation in excess of $1 million paid to an applicable tax-exempt organization’s five highest-paid employees for the tax year (or any person who was such an employee in any prior tax year beginning after 2016). The bill would also apply the 20% excise tax to any parachute payment exceeding the portion of the base amount (defined as the average annual compensation of the employee for the five tax years before the employee’s separation from employment) that is allocated to the payment. The tax on excess parachute payments applies to all employees regardless of whether they were covered employees.

 

The changes would apply to tax years beginning after 2017.

Same as H.R. 1.

House

H.R. 1, §3802

 

Senate

JCT, III.H.3.

§4960

Topic: Private Foundation Excise Tax on Investment Income

House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
The bill would simplify the private foundation excise tax on investment income and would reduce the rate from 2% to 1.4%, effective for tax years beginning after 2017. Not addressed.

House

H.R. 1, §5101

§4940
Topic: Private Foundation Excise Tax on Failure to Distribute Income  
House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
For purposes of the private foundation excise tax on failure to distribute income, the bill would exclude organizations operating art museums from the definition of operating foundations, unless the museum is open for at least 1,000 hours during the tax year, effective for tax years beginning after 2017. Not addressed.

House

H.R. 1, §5102

§4942

Topic: Excise Tax on Investment Income of Private Colleges and Universities

House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
The bill would impose a 1.4% excise tax on certain private colleges and universities and their related organizations. This provision would apply only to private institutions that have more than 500 students and assets of at least $250,000 per full-time student (not including assets used directly by the institution in carrying out the institution’s educational purpose). The assets and net investment income of related organizations would be treated as the assets of the private college or university. The changes would apply for tax years beginning after 2017.

Same as H.R. 1.

 

Manager’s Amend. 11/16: Clarifies that related-organization rule would apply only to assets held for the educational institution and investment income that relates to such assets.

House

H.R. 1, §5103

 

Senate

JCT, III.L.1.; Manager’s Amend. 11/16

§4969

Topic: Exception From Excess Business Holding Tax For Independently-operated Philanthropic Business Holdings

House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
The bill would exempt certain private foundations (PFs) from the 10% excise tax for holding a 20% interest in a for-profit business, as well as the 200% excise tax for PFs that do not divest the holding by the close of the subsequent tax year. To qualify for the exception, the PF would have to satisfy the following four conditions: (i) the PF must own 100% of the for-profit business’ voting stock, (ii) the PF must not have acquired the forprofit business by a means other than purchasing the business, (iii) the for-profit business must distribute all of its net operating income for any given tax year to the PF within 120 days of the close of the tax year, and (iv) the for-profit business’ directors and shareholders cannot be substantial contributors nor make up a majority of the PF’s board of directors. The changes would apply for tax years beginning after 2017. JCT Mod. 11/14: Same as H.R. 1.

House

H.R. 1, §5104

 

Senate

JCT Mod. 11/14: III.B.13.

§4943
Topic: 501(c)(3) Organizations Permitted to Make Statements Relating to Political Campaign in Ordinary Course of Activities 
House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
The bill would provide that 501(c)(3) organizations could make political statements in the ordinary course of activities in carrying out exempt purposes if the incremental expenses incurred are de minimis, effective for tax years beginning after Dec. 31, 2018. The provision would sunset for tax years beginning after Dec. 31, 2023. Not addressed.

House

H.R. 1, §5201

§501

Topic: Additional Reporting Requirements for Donor Advised Fund Sponsoring Organizations

House Bill (H.R.1)Senate PlanBill SectionsI.R.C. Sections
The bill would require donor advised funds to annually disclose (i) the average amount of grants made from their donor advised funds, and (2) their policies on inactive donor advised funds for frequency and minimum level of distributions, effective for returns filed for tax years beginning after 2017. Not addressed.

House

H.R. 1, §5202

§6033