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With over 150 papers published in professional and academic journals, James R. Hasselback, PhD, has provided us with an insight to the new tax cuts and jobs act that was signed in to law on December 22, 2017. www.jrhasselback.com

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Published by Lonnie Young, 2018-01-12 14:17:39

Tax Cuts and Jobs Act 12.22.2017

With over 150 papers published in professional and academic journals, James R. Hasselback, PhD, has provided us with an insight to the new tax cuts and jobs act that was signed in to law on December 22, 2017. www.jrhasselback.com

Keywords: Tax Cut,Jobs Act,House Bill,Senate Bill,Tax Reform,Tax Reform 2017,Standard Deduction,Corporate Tax Cut

1

Tax Cuts and Jobs Act - Updated

A. Introduction

1. Process

a. The House and Senate each passed tax bills that were sent to the Joint Conference
C om m ittee.

b. The Joint Conference Com m ittee’s job is to reconcile the differences between the House
and Senate bills.

c. The exact same bill m ust pass both the House and Senate.

d. The Joint Conference Committee finished on Decem ber 15.

e. The Senate passed the bill early W ednesday morning, December 20, 2017.

f. The House passed the bill W ednesday afternoon, December 20, 2017.

g. The President signed the bill Friday, December 22, 2017.

2. Basic Changes in the Law

a. The final bill deals prim arily with individual and business taxation.

b. The only changes for corporations are the tax rate, dividends-received deduction, and the
$1 million compensation deduction.

c. Only one item changed for pension benefits

d. Only one item changed for capital gains.

e. Only one item changed for estate taxes.

f. No changes to employment taxes.

g. Only one change to the Affordable Care Act

3. Timing of Provisions

a. Most of the provisions begin January 1, 2018.

b. Most of the individual tax cuts are scheduled to go away after 2025.

c. Only the corporate tax rate is perm anent.

d. Only one item is retroactive to the beginning of 2017.

e. A few item s are retroactive to dates late in 2017.

4. The bill will increase the num ber of Am ericans who owe nothing in taxes from 44% to 47.5%.

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5. Size of the Final Bill

a. The final tax bill is 509 pages.

b. The com m ittee report is 576 pages.

c. The final bill was first made available Friday, December 15, 2017

6. Three Problematic Provisions – caused the House to have to revote.

a. One provision would allow 529 college savings accounts to be used for home-schooling
expenses.

b. Another set criteria to determ ine if private universities’ endowm ents will be subject to a new
excise tax.

c. The third is even m ore mundane: the short title of the bill – “The Tax Cuts and Jobs Act” –
has no budgetary im pact and will have to be nixed.

1) “An Act to provide for reconciliation pursuant to titles II and V of the concurrent
resolution on the budget for fiscal year 2018,

7. Budget Effects

a. The Joint Committee on Taxation’s report on the estim ated budget effects of the bill
predicts that is will result in a net federal revenue loss of $1.456 trillion from 2018 through
2027.

b. Under the Senate’s budget reconciliation rules, the Senate could pass the bill with only 51
votes as long as it does not increase the deficit by more than $1.5 trillion over that period.

B. Tax Provisions of the Tax Act

1. Alternative Inflation Adjustment

a. Current law: Many parameters of the tax system that are adjusted for inflation are based on
annual changes in the level of the Consum er Price Index for All Urban Consum ers (CPI-U).

b. The final bill requires the use of the Chained Consumer Price Index for All Urban
Consum ers (“C-CPI-U”) to adjust tax param eters currently indexed by the CPI-U.

2. Tax Rate Schedules

Rate Joint Return Individual Return
10% $0 - 19,050 $0 - 9,525
12% $19,050 - 77,400 $9,525 - 38,700
22% $77,400 - 165,000 $38,700 - 82,500
24% $165,000 - 315,000 $82,500 - 157,500
32% $315,000 - 400,000 $157,500 - 200,000
35% $400,000 - 600,000 $200,000 - 500,000
37% over $600,000 over $500,000

$470,700 is where the 39.6% presently begins for married filing jointly

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a. For the first five marginal tax brackets, the incom e ranges for single filers are exactly half of
those for m arried couples. This helps elim inate the marriage penalty for m ost households.

b. Under current tax law, two single individuals who each earn $150,000 would both be in the
28% tax bracket. However, if they were to get married, their combined $300,000 income
would be well into the 33% marginal tax rate. Under the proposed brackets, this couple
would be in the 24% marginal tax bracket, regardless of whether they got married or not.

c. Rate reductions and most other changes sunset after 2025.

3. Simplification of Tax on Unearned Income of Children

a. The provision sim plifies the “kiddie Tax” by effectively applying ordinary and capital gains
rates applicable to trusts and estates to the net unearned income of a child.

b. As under current law, taxable incom e attributable to earned incom e is taxed according to
an unmarried taxpayers’ brackets and rates.

c. The child’s tax is unaffected by the tax situation of the child’s parent or the unearned
income of any siblings.

4. Corporate Tax Cut

a. Current law: Corporations are taxed as high as 35%.

b. The corporate tax rate is a flat 21% rate beginning in 2018.

c. Personal services corporations are subject to a flat 21% corporate tax rate.

d. The corporate rate is perm anent.

5. Switch from S to C Corporation

a. In the case of an eligible terminated S corporation, any adjustm ent required which is
attributable to such corporation’s revocation shall be taken into account ratably during the
6-taxable year period beginning with the year of change.

1) Having to switch from the cash method to the accrual method.

b. The term ‘eligible term inated S corporation’ means any C corporations which was an S
corporation on the date before the date of the enactment of the Tax Cuts and Jobs Act, and
during the 2-year period beginning on the date of such enactment makes a revocation of its
election under Section 1262(a), and the owners of the stock of which, determ ined on the
date such revocation is m ade, are the sam e owners (and in identical proportions) as on the
date of such enactment.

6. Standard Deduction

a. Current law: $6,500 standard deduction of single taxpayers and $13,000 for married
couples, filing jointly for 2018.

b. The standard deduction is increased to $24,000 for joint filers (and surviving spouses),
$12,000 for individual filers, and head-of households can claim a standard deduction of
$18,000. These am ounts will be adjusted for inflation based on chained CPI.

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c. The final bill retains the additional standard deduction for the aged and the blind ($1,300 for
singles and $1,600 for married).

7. Personal Exemption

a. Current law: Personal exem ptions of $4,050 allowed for each fam ily mem ber.

b. The deduction for personal exemptions and the personal exemption phase-out is repealed.

8. Filing Requirements

a. Taxpayers must file a tax return if their gross income exceeds the standard deduction plus
the extra exem ptions for being over 65.

C. Income

1. Pass-Through Businesses

a. Current law: Taxed at individual rates.

b. The final bill allows a 20% deduction of the earnings and then pay at their personal income
tax rate on the remainder.

c. Businesses m ay claim the 20% deduction up to a lim it: (1) equal to 50% of the W -2 wages
(or partnership guaranteed paym ents) paid out by the business or (2) the sum of 25% of
the W -2 wages paid plus 2.5% of the unadjusted basis of certain property the business
uses to produce qualified business incom e.

d. The W -2 wages/qualified property lim it does not apply if the taxpayer’s taxable income for
the tax year is equal to or less than a $157,500 threshold am ount ($315,000 for taxpayers
filing a joint return). Fully phased out at $207,500/$415,000.

e. Item s are treated as qualified item s of incom e, gain, deduction, and loss only to the extent
they are effectively connected with the conduct of a trade or business within the United
States.

f. Hans and W endy are married. W endy has a qualified business that is not a specified
service business. For the 2018 tax year, they file a joint return reporting taxable income of
$345,000. In that tax year, 20% of the qualified business income from W endy’s business is
$15,000. W endy’s share of wages paid by the business in the tax year is $20,000, so 50%
of the W -2 wages from the business is $10,000. (For purposes of this example, assume
that no qualified property factors into the calculation.) The $15,000 am ount is reduced by
30% (($345,000 taxable income - $315,000 threshold amount) / $100,000) of $5,000
($15,000 - $10,000), which equals $1,500 (0.3 × $5,000). Hans and W endy take a Code
Sec. 199A deduction of $13,500 ($15,000 - $1,500).

g. A qualified trade or business means any trade or business other than a specified service
trade or business and other than the trade or business of being an employee.

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h. A “Specified Service Activity” norm ally includes: [Sec. 1202(e)(3)(A)]
Health,
Law,
Engineering,
Architecture,
Accounting,
Actuarial Science,
Performing Arts,
Consulting,
Athletics,
Financial Services,
Brokerage Services, or
Any trade or business where the principal asset of such trade or business is the reputation
or skill of one or more of its employees.

1) The definition of “Specified Service Activity” is m odified to exclude engineering and
architecture services.

i. A disallowance of the deduction with respect to specified service trades or businesses is
also phased in above the threshold amount ($157,500/$350,000) of taxable income.

j. Exam ple: Theo has taxable income of $187,500, of which $134,000 is attributable to an
accounting sole proprietorship (i.e., a specified service business) after paying wages of
$67,000 to employees. Because his taxable income is less than the $207,500 threshold for
specified service businesses, Theo can claim the Code Sec. 199A deduction, but only for
an applicable percentage of his qualified item s of incom e, gain, deduction, or loss, and the
W -2 wages, from the accounting business. (For purposes of this example, assume that no
qualified property factors into the calculation.) Theo has a 40% applicable percentage (1 -
($187,500 - $157,500)/$50,000 = 1 - 30,000/50,000 = 1 - 0.6 = 0.4). In determining
includible qualified business incom e, Theo takes into account 40% of $134,000, or
$53,600. In determ ining the includible W -2 wages, Theo takes into account 40% of
$67,000, or $26,800. Theo calculates the deduction by taking the lesser of: 20% of $53,600
($10,720), or 50% of $26,800 ($13,400). Theo can take a Code Sec. 199A deduction for
$10,720.

k. The deduction is allowed only for Federal incom e tax purposes.

1) Does not reduce self-employm ent income.

l. Does Not Reduce Adjusted Gross Income

1) The 20% deduction is not allowed in computing adjusted gross income, and instead is
allowed as a deduction reducing taxable income.

2) Thus, for example, the 20% deduction does not affect lim itations based on adjusted
gross income.

3) The deduction is available to both item izers and non-item izers.

m. If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss is
carried over to the next tax year). Any deduction allowed in the next tax year is reduced (but
not below zero) by 20 % of any carryover qualified business loss

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n. A taxpayer who claim s the Code Sec. 199A deduction may be subject to the 20-percent

accuracy-related penalty for a substantial understatem ent of incom e tax if the
understatem ent is more than the greater of five percent (not 10 percent) of the tax required
to be shown on the return for the tax year, or $5,000. [Code Sec. 6662(d)(1)(C)]

2. Nonqualified Deferred Com pensation

a. An em ployee is taxed on com pensation as soon as there is no substantial risk of forfeiture
with regard to that com pensation (i.e., receipt of the com pensation is not subject to future
performance of substantial services.

b. A condition shall not be treated as constituting a substantial risk of forfeiture solely because
it consists of a covenant not to compete or because the condition relates (nom inally or
otherwise) to a purpose of the compensation other than the future performance of services
-- regardless of whether such condition is intended to advance a purpose of the
com pensation or is solely intended to defer taxation of the com pensation.

3. Certain Self-Created Property

a. The final bill states that gain or loss from the disposition of a self-created patent, invention,
model or design (whether or not patented), or secret formula or process is ordinary in
character.

1) This would be consistent with the treatm ent of copyrights under current law.

b. The election to treat musical compositions and copyrights in musical works as a capital
asset remains in place.

4. Sale or Exchange of Patents

a. Current law: Section 1235 provides that a transfer of all substantial rights to a patent, or an
undivided interest therein which includes a part of all such right, by an holder shall be
considered the sale or exchange of a capital asset held for more than one year.

b. Under the House bill the special rule treating the transfer of a patent prior to its comm ercial
exploitation as long-term capital gain would be repealed.

c. The final bill does not include the provision.

5. Reforms to Discharge of Certain Student Loan Indebtedness

a. The final bill excludes from taxable income any income resulting from the discharge of
student debt on account of death or total disability of the student.

b. The final bill does not include a provision that would exclude from incom e repaym ent of a
taxpayer’s loans pursuant to the Indian Health Service Loan Repaym ent Program.

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6. Em ployer-Provided Housing

a. Under the House bill the exclusion for housing provided for the convenience of the
em ployer and for employees of educational institutions would be lim ited to $50,000
($25,000 for a married individual filing separately) and would phase out for highly
com pensated individuals (incom e of $120,000 for 2017, as adjusted for inflation) at a rate
of one dollar for every two dollars of adjusted gross incom e earned by the individual beyond
the statutory threshold of being highly compensated.

b. The exclusion also would be lim ited to one residence.

c. The final bill does not include the House provision.

7. Sale of Principal Residence

a. Current law: Taxpayers can exclude up to $500,000 on the sale of a home, as long as they
have used it as a prim ary residence for at least two of the last five years.

b. The House and Senate bills both required a taxpayer would have to own and use a home
as the taxpayer’s principal residence for five out of the previous eight years to qualify for the
exclusion.

c. The exclusion would be phased out by one dollar for every dollar by which a taxpayer’s
adjusted gross income exceeds $500,000 ($250,000 for single filers) measured over the
average income for taxable and two prior years.

d. Under the final bill, no changes are made to the law.

8. Em ployee Achievement Awards

a. The House bill repeals the exclusion for employee achievem ent awards, so that such
awards would constitute taxable com pensation to the recipient.

b. The provision also would repeal the restrictions on employer deductions for such awards.

c. The final bill does not include em ployee achievem ent awards in income.

d. The final bill adds a definition of “tangible personal property” that may be considered a
deductible employee achievement award. It provides that tangible personal property shall
not include cash, cash equivalents, gift cards, gift coupons or gift certificated (other than
arrangements conferring only the right to select and receive tangible personal property from
a lim ited array of such item s pre-selected or pre-approved by the em ployer), or vacations,
m eals, lodging, tickets to theater or sporting event, stocks, bonds, other securities, and
other sim ilar item s. No inference is intended that this is a change from current law and
guidance.

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9. Consolidation of Education Savings Rules

a. New contributions to Coverdell education savings accounts after 2017 (except rollover
contributions) would be prohibited, but tax-free rollovers from Coverdell accounts into
section 529 plans would be allowed.

b. Elem entary and high school expenses of up to $10,000 per year would be qualified
expenses for section 529 plans.

c. Apprenticeship program expenses are not included in the final bill.

d. Expands use of 529 college savings accounts to include K-12 private school tuition.

e. The House provision provided that an unborn child may be treated as a designated
beneficiary or an individual under section 529 plans. An unborn child means a child in utero.
A child in utero means a mem ber of the species hom o sapiens, at any stage of
development, who is carried in the womb. The provision not included in final bill.

f. The final bill does not allow certain hom e-schooled expenses.

1) Those expenses are (1) curriculum and curricular materials; (2) books or other
instructional m aterials; (3) online educational m aterials; (4) tuition for tutoring or
educational classes outside of the hom e (but only if the tutor or instructor is not related
to the student); (5) dual enrollm ent in an institution of higher education; and (6)
educational therapies for students with disabilities.

10. Dependent Care Assistance Programs

a. Current law: An exclusion from the gross income of an employee of up to $5,000 annually
for employer-provided dependent care assistance.

b. The House proposed repealing the exclusion.

c. No provision included in final bill.

11. Moving Expense Reimbursement

a. Current law: Qualified moving expense reimbursements are excluded from an employee’s
gross income.

b. The exclusion is repealed for qualified moving expense reim bursem ents except for a
member of the Armed Forces of the United States on active duty who moves pursuant to a
military order.

12. Adoption Assistance Programs

a. Current law: An exclusion from an em ployee’s gross income is allowed for qualified
adoption expenses paid or reim bursed by an employer, if such amounts are furnished
pursuant to an adoption assistance program.

b. House proposed repealing the exclusion for adoption assistance program s.

c. Final bill does not repeal the exclusion.

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13. U.S. Savings Bonds

a. Current law: The interest on certain U.S. savings bonds are not taxed if the proceeds are
used for qualified higher education expenses.

b. The House proposed to elim inate this exception.

c. The final bill does not include the House provision.

14. Tuition W aivers

a. Current law: Em ployees of education institutions who receive reduced tuition – or a waiver
– generally not taxed on that income.

b. The House proposed to tax the benefit.

c. Tuition reduction not considered income in the final bill.

15. Em ployer-Paid Tuition

a. Current law: Amount paid by employers for tuition up to $5,250 per year is not taxable
incom e.

b. The House proposed to tax the benefit.

c. The employer-paid tuition is not considered income in the final bill.

16. Riding Bicycle to W ork

a. Current law: You can exclude up to $20 a m onth from your incom e for expenses related to
regular bicycle comm uting as long as you are not receiving other pretax comm uting
benefits from your em ployer.

b. Bike expenses are no longer excludable.

17. Private Activity Bonds

a. Current law. Interest on tax-exempt bonds used to fund low-income housing and other
projects is exempt from incom e tax but subject to the alternative minim um tax.

b. There is no change in the final law.

18. Exem pt Bonds for Professional Stadiums

a. Current law: Professional sports facilities continue to be financed with tax exem pt bonds
despite the fact that privately owned sports teams are the prim ary (if not exclusive) users of
such facilities.

b. The House provision provides that the interest on bonds, the proceeds of which are to be
used to finance or refinance capital expenditures allocable to a professional sports stadium ,
is not tax exem pt.

c. No provision in the final bill.

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19. Contributions to Capital

a. The gross incom e of a corporation would include contributions to its capital, to the extent
the amount of money and fair market value of property contributed to the corporation
exceeds the fair market value of any stock that is issued in exchange for such m oney or
property.

b. Sim ilar rules would apply to contributions to the capital of any non-corporate entity, such as
a partnership.

c. The provision would be effective for contributions made, and transactions entered into, after
the date of enactment.

d. The conference agreement follows the policy of the House bill but takes a different
approach. The conference agreement does not repeal the provision of the Internal
Revenue Code under which, generally, a corporation’s gross income does not include
contributions to capital. Rather, it preserves that provision, but provides that the term
“contributions to capital” does not include (1) any contribution in aid of construction or any
other contribution as a customer or potential customer, and (2) any contribution by any
governm ental entity or civic group (other than a contribution made by a shareholder as
such). The conferees intend that section 118, as modified, continues to apply only to
corporations.

20. Rollover of Publicly-Traded Securities

a. Current law: A corporation or individual may elect to roll over tax-free any capital gain
realized on the sale of publicly-traded securities by purchasing an SSBIC (Specialized
Small Business Investm ent Company) within 60 days. Formerly known as Minority Small
Business Investm ent Com panies.

b. The House bill repeals the provision.

c. The final bill repeals the provision.

21. Reduction in Minim um Age for Allowable In-Service Distributions

a. Under the House bill all defined benefit plans as well as State and local governm ent defined
contribution plans would be perm itted to make in-service distributions beginning at age
59½. In-Service Distributions - distributions while an employee is still working for the
em ployer.

b. The final bill does not include the provision.

22. Hardship Distributions

a. Current law: One requirem ent of a hardship distribution is that the em ployee is prohibited
from making elective deferrals and employee contributions to the plan and all other plans
m aintained by the em ployer for at least six m onths after receipt of the hardship distribution.

b. Under the House bill, the IRS would be required within one year of the date of enactment to
change its guidance to allow em ployees taking hardship distributions to continue m aking
contributions to the plan.

c. The final bill does not include the provision.

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23. Hardship W ithdrawals

a. Current law: Em ployers m ay not allow hardship distributions to include earnings and
employer contributions.

b. Under the proposed law em ployers m ay choose to allow hardship distributions to also
include account earnings and employer contributions.

c. Final bill does not include the provision.

24. Increase in Repayment Period

a. Current law: Employees whose plan terminates or who separates from employment while
they have plan loans outstanding have 60 days to contribute the loan balance to an IRA in
order to avoid the loan being taxed as a distribution.

b. Final bill allows employees whose plan terminates or who separate from employment while
they have plan loans outstanding would have until the due date for filing their tax return for
that year to contribute the loan balance to an IRA in order to avoid the loan being taxed as
a distribution.

25. The act requires accrual-m ethod taxpayers subject to the all-events test to recognize item s of
gross income for tax purposes in the year in which they recognize the income on their applicable
financial statem ent (or another financial statem ent under rules to be specified by the IRS). The
act provides an exception for taxpayers without an applicable or other specified financial
statem ent.

D. Business Deductions

1. 100% Expensing

a. Taxpayers are able to fully and im m ediately expense 100% of the cost of qualified property
acquired and placed in service after Septem ber 27, 2017, and before January 1, 2023,
(with an additional year for certain qualified property with a longer production period). The
percentage would phase down after 2023.

b. Also known as bonus depreciation or additional first-year depreciation.

c. The provision would expand the property that is eligible for this im m ediate expensing by
repealing the requirem ent that the original use of the property begin with the taxpayer.
Instead, the property would be eligible for the additional depreciation if it is the taxpayer’s
first use. Under the provision, qualified property would not include any property used by a
regulated public utility company or any property used in a real property trade or business.

d. As a conform ing am endm ent to the repeal of corporate AMT, the election to accelerate
AMT credits in lieu of bonus depreciation is repealed.

e. The final bill maintains the section 280F increase am ount for $8,000 for passenger
autom obiles placed in service after Decem ber 31, 2017. For passenger autom obiles placed
in service after December 31, 2017, and for which the additional first-year depreciation
deduction under section 168(k) is not claimed, the maximum amount of allowable
depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for
the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the
recovery period. The lim itations are indexed for inflation for passenger autom obiles placed
in service after 2018.

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2. Computer Equipment

a. Current law: A special class of depreciable property that is subject to a special set of tax
rules if it is used for business no more than 50% of the tim e. Listed property includes such
item s as vehicles, computer equipm ent, and cell phones.

b. Computer equipment is removed from listed property.

3. Section 179

a. The small business expensing lim itation under section 179 is increased to $1 m illion and
the phase-out amount is increased to $2.5 million. The provision modifies the expensing
lim itation by indexing both the $1 million and $2.5 million lim its for inflation. Indexed after
2018.

b. The final bill expands the definition of:

1) Section 179 property to include certain depreciable tangible personal property used
predominantly to furnish lodging or in connection with furnishing lodging; and

2) Qualified real property to include any of the following im provem ents to nonresidential
real property placed in service after the date such property was first placed in service:
roofs; heating, ventilation, and air-conditioning property; fire protection and alarm
systems; and security systems.

c. Heating and Air Conditioning

1) Qualified energy efficient heating and air-conditioning property means any section
1250 property:

a) W ith respect to which depreciation (or amortization in lieu of depreciation) is
allowable,

b) W hich is installed as part of a building’s heating, cooling, ventilation, or hot water
system, and

c) W hich is within the scope of Standard 90.1-2007 or any successor standard.

4. Qualified Improvement Property

a. The final bill, according to the Conference Report on H.R. 1, Tax Cuts and Jobs Act (H.
Rept. 115-466) sets a 15-year recovery period for qualified im provem ent property effective
for property placed in service after December 31, 2017. However, the text of the final bill
inadvertently omits the provision which would have given a 15-year recovery period for
qualified im provem ent property. A technical correction will be needed to create a 15-year
recovery period for qualified im provem ent property and all such property in the absence of
such a correction will be treated as 39-year nonresidential real property, effective for
property placed in service after December 31, 2017.

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b. The property classifications for 15-year qualified leasehold im provem ent property, qualified
retail im provement property, and qualified restaurant property are removed. [Code Sec.
168(e)(3)(E)] All im provements which previously qualified for a 15-year recovery period as
qualified leasehold improvement property or qualified retail improvement property fall within
the definition of qualified im provem ent property and have a 15-year recovery period,
effective for property placed in service after December 31, 2017 (assuming a correction is
made

c. Im provem ents to a restaurant will only qualify for the 15-year recovery period for qualified
im provement property if the im provem ent to is to the interior of the restaurant and does not
relate to an enlargem ent or internal structural fram ework of the building or an elevator or
escalator. External improvements to a restaurant and restaurant buildings which currently
qualify as 15-year qualified restaurant property do not meet the definitional requirem ents of
qualified im provem ent property and are not eligible for the 15-year recovery period. Such
property will be depreciated over 39 years, effective for property placed in service after
December 31, 2017.

5. Interest Lim itation

a. Every business, regardless of its form , would be subject to a disallowance of a deduction
for net interest expense in excess of 30% of the business’s adjusted taxable incom e.

b. The net interest expense disallowance would be determ ined at the tax filer level – for
example, at the partnership level instead of the partner level.

c. Adjusted taxable incom e is a business’s taxable incom e com puted without regard to
business interest expense, business interest incom e, net operating losses, and
depreciation, am ortization, and depletion.

d. Any interest amounts disallowed under the provision would be carried forward to the
succeeding five taxable years and would be an attribute of the business (as opposed to its
owners). Special rules would apply to allow a pass-through entity’s unused interest
lim itation for the taxable year to be used by the pass-through entity’s owners and to ensure
that net incom e from pass-through entities would not be double counted at the partner
level.

e. Businesses with average gross receipts of $25 million or less would be exempt from the
interest lim itation rules.

6. Local Lobbying Expenses

a. Current law: For taxpayers with $2,000 or less of in-house expenditures related to lobbying
and political activities, a de minim is exception is provided that perm its a deduction.

b. Deductions for lobbying expenses with respect to legislation before local governm ent
bodies (including Indian tribal governm ents) is disallowed.

c. The provision applies to amounts paid or incurred after the date of enactment.

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7. Excess Compensation

a. The exceptions to the $1 million deduction lim itation for comm issions and perform ance-
based com pensation are repealed

b. The provision also revises the definition of “covered em ployee: to include the chief
executive officer, the chief financial officer, and the three other highest paid employees,
realigning the definition with current SEC disclosure rules.

c. The final bill also requires that if an individual is a covered em ployee for any tax year (after
2016), that individual will rem ain a covered em ployee for all future years.

d. The am endments made by this section shall not apply to rem uneration which is provided
pursuant to a written binding contract which was in effect on Novem ber 2, 2017, and which
was not m odified in any m aterial respect on or after such date.

8. Research and Experim ental Expenditures

a. Current law: Taxpayers may elect to deduct currently the amount of certain reasonable
research or experim entation expenditures paid or incurred in connection with a trade or
business.

b. The final bill requires specified research or experim ental expenditures to be capitalized and
am ortized over a five-year period, effective for am ount paid or incurred in tax years
beginning after 2021. Specified research and experimental expenditures attributable to
research conducted outside the United States would be amortized over a 15-year period.

9. Entertainment Expenses

a. Current law: No deduction is allowed with respect to (1) an activity generally considered to
be entertainm ent, amusem ent, or recreation (“entertainm ent”), unless the taxpayer
establishes that the item was directly related to (or, in certain cases, associated with) the
active conduct of the taxpayer’s trade or business, or (2) a facility (e.g. an airplane) used in
connection with such activity. The deduction generally is lim ited to 50% of the am ount
otherwise deductible.

b. In the final bill, no deduction is allowed for entertainm ent, amusem ent, or recreation
activities, facilities, or mem bership dues relating to such activities or other social purposes.

c. The 50% lim itation under current law also would apply only to expenses for food or
beverages and to qualifying business meals under the provision, with no deduction allowed
for other entertainment expenses.

d. Furthermore, no deduction is allowed for reim bursed entertainm ent expenses paid as part
of a reim bursement arrangement that involves a tax-indifferent party such as a foreign
person or an entity exempt from tax.

10. Employee Fringe Benefits

a. Current law: Certain employer-provided fringe benefits are excluded from an employee’s
gross income and wages for employm ent tax purposes, including, but not lim ited to, de
minimis fringes, qualified transportation fringes, on-premises athletic facilities, and meals
provided for the “convenience of the employer.”

b. No deduction is allowed for qualified transportation and parking fringe benefits.

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11. On-Prem ises Athletic Facility

a. The final bill repeals the deduction for expenses associated with providing em ployees an
on-prem ises athletic facility; modifies current-law exception to perm it deduction only up to
the amount properly reported as compensation.

12. Employer-Provided Meals

a. The Senate bill disallows an employer’s deduction for expenses associated with meals
provided for the convenience of the employer on the em ployer’s business prem ises, or
provided on or near the em ployer’s business prem ises through an em ployer-operated
facility that meets certain requirem ents.

b. The final version of the bill delays this change until tax years starting after 2025.

13. Fringes of Tax-Exem pt Entities

a. Under the final bill, tax-exempt entities are taxed on the value of providing their employees
with transportation fringe benefits, and on-prem ises gym s and other athletic facilities, by
treating the funds used to pay for such benefits as unrelated business taxable income, thus
subjecting the values to those employee benefits to a tax equal to the corporate tax rate.

14. Nondisclosure Agreements

a. The final bill denies a deduction for settlem ents and attorney fees subject to nondisclosure
agreem ents paid in connection with sexual harassm ent or sexual abuse.

b. The effective date applies to am ounts paid or incurred after the date of enactment.

15. Net Operating Losses

a. Current law: A net operating loss (“NOL”) generally m eans the am ount by which a
taxpayer’s business deductions exceed its gross incom e. In general, an NOL may be
carried back two years and carried over 20 years to offset taxable income in such years.
NOLs offset taxable incom e in the order of the taxable years to which the NOL m ay be
carried.

b. Final bill lim its the net operating loss deduction to 90% (80% after 2022) of taxable incom e
(as determ ined without regard to the deduction).

c. Net operating losses are allowed to be carried forward indefinitely, but not carried back
(except for certain farming losses).

d. In the case of any net operating loss, specified liability loss, excess interest loss or eligible
loss, carrybacks are permitted in a taxpayer year beginning in 2017, as long as the NOL is
not attributable to the increased expensing that is allowed under section 3101 (bonus
deprecation).

e. A House provision would allow NOLs arising in tax years beginning after 2017 and that are
carried forward to be increased by an interest factor to preserve its value. The final bill does
not include the interest factor.

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16. Contingent Lawyer Fees

a. A House provision denies attorneys an otherwise-allowable deduction for litigation costs
paid under arrangements that are prim arily on a contingent fee basis until the contingency
ends.

b. No provision in the final bill.

17. Deduction for Living Expenses Incurred by Congressional Mem bers

a. Current law: A special provision allows m em bers of Congress a deduction of up to $3,000
per year of living expenses incurred while on official business in the District of Colum bia.

b. The provision is stricken after Decem ber 22, 2017.

E. Above-the-Line Deductions

1. Trade or Business of Being an Employee

a. Under the proposals, the only above-the-line deductions allowed for expenses attributable
to the trade or business of being an employee would be those for reim bursed expenses
and certain expenses of members of reserve components of the United States military.

1) Expenses of teachers, performing artists, and certain public officials.

b. Teacher Deduction

1) Current law: Eligible educators are elem entary or secondary school teachers,
instructors, counselors, principals, or aides in a school for at least 900 hours during a
school year. An eligible educator may take an “above-the-line” deduction for ordinary
and necessary expenses incurred 1) by reason of participation in professional
development courses related to the curriculum or students the educator teaches, or 2)
in connection with books, supplies, computer and other equipment, and
supplem entary m aterials to be used in the classroom . The deduction may not exceed
$250 (for 2017) in expenses, and is indexed for inflation.

2) House proposed elim inating the deduction.

3) Senate proposed doubling the deduction to $500.

4) Final bill keeps the deduction the sam e.

c. Perform ing Artists

1) Current law: Above the line deduction for em ployee business expenses of artists with
adjusted gross income of $16,000 or less.

2) House proposed elim inating the deduction.

3) Final bill keeps the deduction the sam e.

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d. Public Officials

1) Current law: Certain fee-basis officials can claim their employee business expenses
whether or not they itemize their other deductions on Schedule A. Fee-basis officials
are persons who are employed by a state or local government and who are paid in
whole or in part on a fee basis.

2) House proposed elim inating the deduction.
3) Final bill keeps the deduction the sam e.
2. Student Loan Interest
a. Current law: $2,500 above the line deduction
b. House proposed repealing the deduction for student loan interest.
c. Final bill has no repeal.
3. Deduction for Qualified Tuition and Related Expenses
a. Prior law before 2017: $4,000 above the line deduction.
b. House proposed to repeal the deduction for qualified tuition and related expenses after
2017.
c. The final bill does not include the one-year extension.
4. Moving Expenses
a. Current law: Individuals are perm itted an above-the-line deduction for moving expenses
paid or incurred during the taxable year in connection with the com m encement of work by
the taxpayer as an em ployee or as a self-em ployed individual at a new principal place of
work. Such expenses are deductible only if the move meets certain conditions related to
distance from the taxpayer’s previous residence and the taxpayer’s status as a full-tim e
em ployee in the new location.
b. The deduction for m oving expenses is repealed.
c. Retention of moving expenses for member of Armed Forces.
5. Medical Savings Accounts
a. Under the House bill no deduction would be allowed for contributions to an Archer MSA,
and employer contributions to an Archer MSA would not be excluded from income.
b. Existing Archer MSA balances, however, could continue to be rolled over on a tax-free
basis to an HSA.
c. Final bill does not include House provision.

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6. Alimony Payments

a. Alim ony paym ents are not deductible by the payor or includible in the incom e of the payee.

b. The provision is effective for any divorce decree or separation agreem ent executed after
2018 and to any modification after 2018 of any such instrum ent executed before such date
if expressly provided for by such m odification.

7. Recharacterization of Roth IRA Contributions

a. Current law: If an individual makes a contribution to an IRA (traditional or Roth) for a
taxable year, the individual is perm itted to recharacterize the contribution as a contribution
to the other type of IRA (traditional or Roth) by making a trustee-to-trustee transfer to the
other type of IRA before the due date for the individual’s incom e tax return for that year. In
the case of a recharacterization, the contribution will be treated as having been m ade to the
transferee IRA (and not the original, transferor IRA) as of the date of the original
contribution.

b. The rule allowing recharacterization of IRA contributions and conversions is repealed.

c. Under the final bill recharacterization cannot be used to unwind a Rother conversion,

d. However, recharacterization is still perm itted with respect to other contributions.

1) For example, an individual may make a contribution for a year to a Roth IRA and,
before the due date for the individual’s income tax return for that year, recharacterize it
as a contribution to a traditional IRA.

8. Domestic Production Activities

a. Current law: Section 199 provides a deduction for taxable income (or, in the case of an
individual, adjusted gross incom e) that is equal to nine percent of the lesser of the
taxpayer’s qualified production activities incom e or taxable incom e (determ ined without
regard to the section 199 deduction) for the taxable year.

b. The deduction of domestic production activities is repealed in the final bill.

9. W histleblower Awards

a. Current law: the Code provides an above-the-line deduction for attorneys’ fees and costs
paid by, or on behalf of, the taxpayer in connection with any action involving a claim of
unlawful discrim ination, certain claim s against the Federal governm ent, or a private cause
of action under the Medicare Secondary Payer statute.

b. The Senate bill provides an above-the-line deduction for attorneys’ fees and court costs
paid in connection with any action involving claim s under a state false claim s act, the SEC
whistleblower program , and the Com m odity Futures Trading Com m ission whistleblower
program .

c. The final bill does not include the Senate provision.

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F. Itemized Deductions

1. Medical Expenses
a. Current law: Qualified medical expenses that exceed 10% of the taxpayer’s adjusted gross
income are deductible.
b. Final bill keeps the current law except reduces the threshold to 7.5% for 2017 and 2018.

2. Home Mortgage Interest
a. Current law: Deductible mortgage is capped at loans of $1,000.000.
b. Deductible mortgage interest for new purchases of principal residences would be capped at
loans of $750,000 starting after December 15, 2017.
c. No interest deduction for home equity loans.
d. Allows interest deduct for second homes.

3. State and Local Taxes
a. Current law: Individuals can deduct the higher of state and local incom e taxes or sales
taxes and real property taxes.
b. Individuals can deduct no m ore than $10,000 of the higher of (1) state and local income
taxes or sales taxes and (2) real property taxes.
c. Prohibits taxpayers from prepaying next year’s state and local income in order to deduct the
taxes on the 2017 returns.
d. The IRS issued a notice on December 27, 2017, that a prepaym ent of anticipated real
property taxes that have not been assessed prior to 2018 are not deductible in 2017. [IR-
2017-210]

4. Charitable Contributions
a. The 50-percent lim itation for cash contributions to public charities and certain private
foundations is increased to 60 percent.
b. The provision retains the 5-year carryover period to the extent that the contribution amount
exceeds 60 percent of the donor’s AGI.

5. College Athletic Event Seating Rights
a. The special rule that provides a charitable deduction of 80 percent of the am ount paid for
the right to purchase tickets for athletic events is repealed.

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6. Charitable Mileage Rate

a. Current law: The charitable standard mileage rate is set by statute at 14 cents per mile.

b. The House bill allows the amount deductible per mile driven in service to a charitable
organization be adjustable for inflation.

c. The provision not included in final bill.

7. Personal Casualty Losses

a. The deduction for personal casualty losses is generally repealed.

b. The deduction of personal casualty losses associated with special disaster relief legislation
is not affected.

8. Tax Preparation Fees

a. An individual is not allowed an item ized deduction for tax preparation expenses.

9. Trade or Business of Being an Employee

a. Under the final bill a taxpayer is not allowed an item ized deduction for unreim bursed
employee business expenses.

b. Current law and IRS guidance provide examples of items that may not be deducted under
this provision. This non-exhaustive list includes:
• Business bad debt of an employee;
• Business liability insurance prem ium s;
• Damages paid to a form er employer for breach of an employment contract;
• Depreciation on a com puter a taxpayer’s em ployer requires him to use in his work;
• Dues to a cham ber of com m erce if m em bership helps the taxpayer perform his job;
• Dues to professional societies;
• Hom e office or part of a taxpayer’s home used regularly and exclusively in the
taxpayer’s work;
• Job search expenses in the taxpayer’s present occupation;
• Laboratory breakage fees;
• Legal fees related to the taxpayer’s job;
• Licenses and regulatory fees;
• Malpractice insurance prem ium s;
• Medical exam inations required by an em ployer;
• Occupational taxes;
• Passport fees for a business trip;
• Repaym ent of an incom e aid paym ent received under an em ployer’s plan;
• Research expenses of a college professor;
• Rural mail carriers’ vehicle expenses;
• Subscriptions to professional journals and trade magazines related to the taxpayer’s work;
• Tools and supplies used in the taxpayer’s work;
• Purchase of travel, transportation, meals, entertainm ent, gifts, and local lodging
related to the taxpayer’s work;
• Union dues and expenses;
• W ork clothes and uniform s if required and not suitable for everyday use; and
• W ork-related education.

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10. 2% Miscellaneous Itemized Deductions

a. Final bill also repeals the deduction for expenses for the production of collection of incom e.
b. Repeals other m iscellaneous item ized deduction currently subject to the two-percent floor.

1) Repaym ents of income received under a claim of right (only subject to the two percent
floor if less than $3,000);

2) Repaym ents of Social Security benefits; and
3) The share of deductible investm ent expenses from pass-through entities.
c. Current law and IRS guidance provide examples of items that may not be deducted under
this provision. This non-exhaustive list includes:
• Appraisal fees for a casualty loss or charitable contribution;
• Casualty and theft losses from property used in perform ing services as an em ployee;
• Clerical help and office rent in caring for investm ents;
• Depreciation on hom e computers used for investm ents;
• Excess deductions (including adm inistrative expenses) allowed a beneficiary on

term ination of an estate or trust;
• Fees to collect interest and dividends;
• Hobby expenses, but generally not more than hobby income;
• Indirect miscellaneous deductions from pass-through entities;
• Investment fees and expenses;
• Loss on deposits in an insolvent or bankrupt financial institution;
• Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed;
• Repaym ents of income;
• Safe deposit box rental fees, except for storing jewelry and other personal effects;
• Service charges on dividend reinvestm ent plans; and
• Trustee’s fees for an IRA, if separately billed and paid.
11. Limitation of W agering Losses
a. All deductions for expenses incurred in carrying out wagering transactions (not just
gam bling losses) are lim ited to the extent of wagering winnings.
12. Repeal of Overall Lim itation on Item ized Deductions
a. Current law: incom e above certain lim its cause a reduction in the item ized deductions.
b. The final bill repeals the overall lim itation on item ized deductions before 2026.

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G. Credits

1. Child Tax Credit
a. Current law: A $1,000 credit for each child under age 17. The credit begins phasing out for
couples earning more than $110,000. The credit partially refundable to qualified taxpayers
who earn more than $3,000.
b. The credit is doubled to $2,000 and provides it for each child under 17 through 2025.
c. The credit phases out at $200,000 for singles and $400,000 for married
d. The refundable portion of the credit is $1,400 in 2018.
e. The earned income threshold is $2,500.

2. Family Credit
a. A fam ily credit of $500 is allowed with respect to the taxpayer, spouse, and each dependent
other than a qualifying child.
b. The fam ily credit is effective for taxable years ending before January 1, 2026.
c. The credit begins to phase out at $200,000 for singles and $400,000 for married.
d. The phaseouts are not indexed for inflation.
e. The family credit is nonrefundable.

3. Refundable Credit Program Integrity
a. A taxpayer is required to provide a work-eligible SSN to claim the child tax credit or the
American Opportunity Tax Credit.
b. The IRS is granted math error authority to adjust the returns of taxpayers failing to satisfy
the identification requirem ents.
c. In order to claim the refundable Earned Income Tax Credit, a taxpayer is required to
provide a work-eligible social security number.

4. Adoption Credit
a. House proposed to repeal the adoption credit.
b. Final bill has no repeal.

5. Education Credits
a. The House bill would elim inate the Lifetim e Learning Credit and adds a fifth year to the
American Opportunity Credit at half the regular amount.
b. The final bill makes no changes to the education credits.

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6. Earned Income Credit

a. House bill required that if the earned income of a taxpayer claim ed on a return for purposes
of this section is not substantiated by statem ents or return under sections 6051, 6052,
6041(a) or 6050W with respect to such taxpayer, the Secretary may require such taxpayer
to provide books and records to substantiate such income, including for the purpose of
preventing fraud.

b. Final bill does not include the provision.

7. Prohibited Individuals and the Earned Income Credit

a. In the House bill individuals prohibited from engaging in em ploym ent in United States are
not eligible for the earned incom e tax credit.

b. Final bill does not include provision.

8. Claiming All Deductions

a. House bill clarifies that a taxpayer is required to claim all allowable deductions in computing
net earnings from self-em ploym ent for EIC purposes.

b. Final bill does not include provision.

9. Employer-Provided Child Care Credit

a. Current law: Taxpayers are eligible for a tax credit equal to 25% of qualified expenditures
for employee child care and 10% of qualified expenditures for child care resource and
referral services.

b. The House bill would repeal the credit.

c. Final bill does not repeal the credit.

10. Rehabilitation Credit

a. The final bill repeals the 10-percent credit for pre-1936 buildings; retains the 20-percent
credit for qualified rehabilitation expenditures with respect to a certified historic structure,
allowable ratably over a five-year period starting with the year the qualified rehabilitated
building is placed in service.

b. The provision applies to amounts paid or incurred after December 31, 2017. A transition
rule provides that in the case of qualified rehabilitation expenditures (for a pre-1936
building) with respect to any building owed or leased (as provided under current law) by the
taxpayer at all tim es on and after January 1, 2018, the 24-m onth period selected by the
taxpayer is to begin not later than the end of the 180-day period beginning on the date of
the enactm ent of the Act, and the am endments made by the provision apply to such
expenditures paid or incurred after the end of the taxpayer year in which such 24-m onth
period ends.

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11. W ork Opportunity Credit

a. The House bill would repeal the work opportunity tax credit.
b. The final bill does not repeal the work opportunity credit.
c. Expires after 2019.
12. Unused Business Credits
a. The general business credit (“GBC”) consists of various individual tax credits allowed with

respect to certain qualified expenditures and activities. In general, the various individual tax
credits contain provisions that prohibit “double benefits,” either by denying deductions in the
case of expenditure-related credits or by requiring incom e inclusions in the case of activity
related credits. Unused credits may be carried back one year and carried forward 20 years.
Section 196 allows a deduction to the extent that certain portion of the GBC expire unused
after the end of the carry forward period. In general, 100 percent of the unused credit is
allowed as a deduction in the taxable year after such credit expired.
b. The deduction for unused business credits would be repealed by the House and Senate.
c. The final bill does not include the provision.
13. New Markets Tax Credit
a. Current law: Section 45D provides a new m arkets tax credit for qualified equity investm ents
m ade to acquire stock in a corporation, or a capital interest in a partnership, that is a
qualified com m unity developm ent entity (“CDE”).
b. Under the House bill no additional new markets tax credits would be allocated after 2017;
however, credits that would have already been allocated may be used over the course of up
to seven years as contem plated by the credit’s multi-year tim eline.
c. The final bill does not repeal the credit.
14. Credit for Access for Disabled
a. Current law: Section 44 provides a 50% credit for eligible access expenditures paid or
incurred by an eligible small business for the taxable year.
b. The House bill repeals the credit for expenditures to provide access to disabled individuals.
c. The credit is not repealed in the final bill.

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15. Credit for Portion of Em ployer Social Security Paid on Tips

a. Current law. Certain food or beverage establishm ents may elect to claim a business tax
credit equal to an em ployer’s taxes under the Federal Insurance Contributions Act (“FICA”)
paid on tips in excess of those treated as wages for purposes of meeting the minim um
wage requirem ents of the Fair Labor Standards Act (the “FLSA”) as in effect on January 1,
2007.

b. The House bill would modify this credit to reflect the current minimum wage so that it is
available with regard to tips reported only above the current minim um wage rather than tips
above $5.15 per hour.

c. No provision in the final bill.

16. Credit for the Elderly and Perm anently Disabled

a. Current law: Certain taxpayers who are over the age of 65 or retired on account of
perm anent and total disability may claim a nonrefundable credit.

b. The House bill repeals the credit.

c. The final bill does not include repeal.

17. Employer Credit for Paid Fam ily and Medical Leave

a. The paid family and medical leave credit is an amount equal to the applicable percentage of
the am ount of wages paid to qualifying em ployees during any period in which such
employees are on family and medical leave.

b. Applicable percentage m eans 12.5% increased (but not above 25%) by 0.25% point for
each percentage point by the rate of paym ent exceeds 50%.

c. The am ount of family and medical leave that may be taken into account with respect to any
em ployee for any taxable year shall not exceed 12 weeks.

d. Only available for wages paid in tax years beginning after Decem ber 31, 2017 and before
January 1, 2020.

18. Credit for Plug-in Electric Drive Motor Vehicles

a. Current law: A credit is available for new four-wheeled vehicles.

b. The House bill repeals the credit.

c. The final bill does not include repeal.

19. Residential Energy Credit

a. Current law: Section 25D provides a personal tax credit for the purchase of qualified solar
electric property and qualified solar water heating property that is used exclusively for
purposes other than heating swim m ing pools and hot tubs. The credit is equal to 30 percent
of qualifying expenditures. Section 25D also provides a 30 percent credit for the purchase
of qualified geothermal heat pump property, qualified small wind energy property, and
qualified fuel cell power plants. The credit for any fuel cell may not exceed $500 for each
0.5 kilowatt of capacity. The credit expired after 2016.

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b. Under the House bill the credit for residential energy efficient property would be extended
for all qualified property placed in service prior to 2022, subject to a reduced rate of 26
percent for property placed in service during 2020 and 22 percent of property placed in
service during 2021.

c. The provision would be effective for property placed in service after 2016.

d. The final bill does not restore the credit.

20. Enhanced Oil Recovery Credit

a. Current law: Section 43 provides a 15% credit for expenses associated with an enhanced
oil recovery (“EOR”) project.

b. The House bill would repeal the enhanced oil recovery credit.

c. The final bill does not repeal the credit.

H. Additional Taxes

1. Alternative Minimum Tax

a. The AMT is repealed for corporations.

b. The final bill allows the AMT credit to offset the regular tax liability for any taxable year. In
addition, the AMT credit is refundable for any taxable year beginning after 2017 and before
2022 in an amount equal to 50 percent (100 percent in the case of taxable years beginning
2021) of the excess of the minim um tax credit for the taxable year over the am ount of the
credit allowable for the year against regular tax liability.

c. Thus, the full amount of minim um tax credit will be allowed in taxable years beginning
before 2022.

d. Does not repeal the individual AMT but increases the exem ption am ounts and the phaseout
thresholds.

e. Increase the exemption to $70,300 for singles and $109,400 for joint filers.

f. Increase the phase-out threshold to $500,000 for singles and $1 million for joint filers.

g. The higher lim its would expire after 2025.

2. Estate Tax

a. Current law: Applies a 40% levy on estates worth more than $5.6 million for individuals and
$11.2 for couples.

b. Doubles threshold to $10 million (indexed for inflation after 2011) – $11.2 for singles and
$22.4 for couples.

c. The higher thresholds sunset after 2025.

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3. Affordable Care Act

a. Current law: An individual who fails to buy health insurance m ust pay penalties of $695
(higher for fam ilies) or 2.5 percent of their household income – whichever is higher, but
capped at the national average cost of the most basic, low-prem ium , high-deductible plan.

b. The individual m andate is repealed beginning in 2019.

4. Excise Tax on Investment Income

a. Current law: Under Section 4940(a), private foundations that are recognized as exempt
from Federal income tax under Section 501(a) (other than exempt operating foundations)
are subject to a two-percent excise tax on their net investm ent income.

b. Under the House bill certain private colleges and universities would be subject to a 1.4
percent excise tax on net investm ent income.

c. The provision would only apply to private colleges and universities that have at least 500
tuition-paying students and assets (other than those used directly in carrying out the
institution’s educational purposes) valued at the close of the preceding tax year of at least
$500,000 per full-time student.

d. State colleges and universities would not be subject to the provision.

e. The final bill includes the 1.4% tax.

5. Repatriation

a. U.S. companies’ overseas incom e held as cash are subject to a 15% rate, while non-cash
holdings face an 8% rate.

I. Other Provisions

1. Cash Method of Accounting

a. The $5 million threshold for corporations and partnerships with a corporate partner to use
the cash method of accounting is increased to $35 million and the requirem ent that such
businesses satisfy the requirem ent for all years is repealed.

b. The increased $25 m illion threshold is extended to farm corporations and farm partnerships
with a corporate partner, as well as family form corporations. Also under the provision, the
average gross receipts test is indexed for inflation.

2. Inventories

a. Businesses with average gross receipts of $25 million or less are perm itted to use the cash
m ethod of accounting even if the business has inventories.

b. Under the cash method of accounting, a business may account for inventory as non-
incidental materials and supplies.

c. Under the provision, a business with inventories that qualifies for and uses the cash method
of accounting is able to account for its inventories using its m ethod of accounting reflected
on its financial statem ent or its books and records.

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d. Non-incidential m aterials and supplies are deductible in the year they are used or paid,
whichever is later.

3. Uniform Capitalization Rules

a. Current law. The uniform capitalization rules require certain direct and indirect costs
allocable to real or tangible personal property produced by the taxpayer to be included in
either inventory or capitalized into the basis of such property , as applicable.

b. Businesses with average gross receipts of $25 million or less are fully exempt from the
UNICAP rules.

c. This exemption applies to real and personal property acquired or manufactured by such
business.

4. Completed-Contract Method

a. The $10 million average gross receipts exception to the percentage-of-completion method
increased to $25 million.

b. Businesses that m eet the increased average gross receipts test are perm itted to use the
com pleted-contract method (or any other permissible exem pt contract method).

5. Like-Kind Exchanges

a. Current law: An exchange of property, like a sale, generally is a taxable event. However, no
gain or loss is recognized if property held for productive use in a trade or business or for
investm ent is exchanged for property of a “like kind” which is to be held for productive use
in a trade or business or for investment.

b. The special rule allowing deferral of gain on like-king exchanges is m odified to allow for
like-kind exchanges only with respect to real property.

c. However, the provision provides a transition rule to allow like-kind exchanges of personal
property to be completed if the taxpayer has either disposed of the relinquished property or
acquired the replacement property on or before Decem ber 31, 2017.

6. Technical Termination of a Partnership

a. The technical term ination rule is repealed.

b. Thus, the partnership is treated as continuing even if m ore than 50 percent of the total
capital and profits interests of the partnership are sold or exchanged, and new elections are
not required or perm itted.

7. Fines, Penalties, and Other Am ounts

a. Current law: The Code denies a deduction for fines or penalties paid to a government for
the violation of any law.

b. The final bill denies deductibility for any otherwise deductible amount paid or incurred
(whether by suit, agreement, or otherwise) to or at the direction of a governm ent or
specified nongovernm ental entity in relation to the violation of any law or the investigation or
inquiry by such government or entity into the potential violation of any law.

Tax Cuts and Jobs Act by Hasselback

29

c. An exception applies to paym ents that the taxpayer establishes are either restitution
(including rem ediation of property) or amounts required to come into compliance with any
law that was violated or involved in the investigation or inquiry, that are identified in the
court order or settlem ent agreem ent as restitution, remediation, or required to com e into
com pliance.

d. In the case of any amount of restitution for failure to pay any tax and assessed as
restitution under the Code, such restitution is deductible only to the extent it would have
been allowed as a deduction if it had been tim ely paid. The IRS rem ains free to challenge
the characterization of an am ount so identified; however, no deduction is allowed unless the
identification is m ade. Restitution or included rem ediation of property does not include
reim bursement of government investigative or litigation costs.

e. The provision applies only where a governm ent (or other entity treated in a m anner sim ilar
to a government under the provision) is a complainant or investigator with respect to the
violation or potential violation of any law. An exception also applies to any amount paid or
incurred as taxes due.

f. The provision requires governm ent agencies (or entities treated as such agencies under
the provision) to report to the IRS and to the taxpayer the am ount of each settlement
agreem ent or order entered into where the aggregate amount required to be paid or
incurred to or at the direction of the government is at least $600 (or such other amount as
m ay be specified by the Secretary of the Treasury as necessary to ensure the efficient
administration of the Internal Revenue laws).

g. The report must separately identify any amounts that are for restitution or remediation of
property, or correction of noncompliance.

h. The report m ust be m ade at the tim e the agreem ent is entered into, as determ ined by the
Secretary of the Treasury.

8. Churches and Politics

a. Current law: The Johnson Am endm ent, which has been in place since 1954, prevents
religious institutions and nonprofits from involvem ent in elections via fundraising or
endorsem ents.

b. Under the House proposal churches are permitted to make statements relating to political
cam paigns in the ordinary course of religious services and activities.

c. The proposal includes all 501(c)(3) nonprofits, not just churches.

d. Final bill does not include the House proposal.

9. Qualified Dividends and Capital Gains

a. The final bill does not change the current tax treatm ent of qualified dividends and capital
gains.

10. Dividends Received

a. The final bill reduces the current 70% dividends-received deduction to 50% and the 80%
dividends-received deduction to 65%.

Tax Cuts and Jobs Act by Hasselback

30

11. Reporting Stock Transactions

a. Current law: if a taxpayer makes an adequate identification (“specific identification”) of
shares of stock that is sells, the shares of stock treated as sold are the shares that have
been identified.

b. The Senate bill would require sales of stock would be reported on the First-In, First-Out
m ethod.

c. The final bill does not include the First-In, First-Out reporting requirem ent.

J. GOP leaders in Congress have signaled that a technical corrections bill m ay be necessary in 2018 to
"fix" drafting mistakes in H.R. 1. It is unclear at this tim e how extensive those technical corrections
could be or if they could move under the reconciliation process and not require a super-m ajority for
passage in the Senate.

K. Impacting Average Am ericans

1. Single.

a. The average single filer reported AGI of $31,630. More than three-fourths of single
taxpayers claim the standard deduction, including 81% of those with income in the
$30,000-$40,000 range, so we can say that the average single filer uses the standard
deduction.

b. Under the current 2018 tax structure, the average single filer would be entitled to a
standard deduction of $6,500, and would also get a $4,150 personal exemption, reducing
their taxable income to $20,980. Plugging this into the previously announced 2018 tax
brackets results in a tax of $2,671.

c. Under the new tax bill, a single filer would receive a $12,000 standard deduction but no
personal exemption, resulting in an average taxable incom e of $19,630. In the new tax
brackets, this would produce a tax of $2,165 for 2018, a savings of $506.

2. Married Filing Jointly

a. The average Am erican married couple filing jointly reported AGI of $122,073. They had a
household size of just under three people. So, for calculation purposes, we'll say that the
average m arried couple filing jointly has one child. And, since the average taxable income
for this group was $91,758, this implies that the average married couple had $30,315 in
deductions.

b. The married couple with one child. Under previous tax law, this couple would have
deductions of $30,315, and personal exemptions totaling $12,450, reducing the average
taxable income to $79,308. Based on the previous tax brackets, this would result in a
$11,135 tax, which would be reduced by roughly $400 by the child tax credit. (Note: Since
the Child Tax Credit phases out above AGI of $110,000, the average couple's $1,000 credit
would be reduced.) This results in a final tax bill of $10,735.

c. Under the new bill, this couple will get their deductions (we'll assume it's mortgage interest
and other deductions that are kept in place), but no more personal exemptions. This
produces an average taxable income of $91,758, which corresponds to a $12,066 tax
under the new brackets. However, this couple would get the full, expanded $2,000 child tax
credit, bringing their tax bill down to $10,066. A cut of $669.

Tax Cuts and Jobs Act by Hasselback

31
L. Head of Household

a. The average Am erican filing as head of household reported AGI of $37,197. They had a
household size of just over 2.5 people, so we'll round this to one adult and two children.
83% of head of household filers took the standard deduction, so it's fair to say that the
average head of household filer did.

b. The head of household would get a $9,550 standard deduction and three personal
exemptions totaling $10,450. This would reduce the average head of household's taxable
incom e to $17,197, which would result in a tax of $1,900 under the old law. They would also
get two $1,000 child tax credits, which would result in a negative $100 in tax liability since
the child tax credit is refundable.

c. Under the new tax law, they would lose their personal exemptions, but would get a higher
$18,000 standard deduction, bringing taxable income to $19,197. This would result in a tax
of $2,032 under the new brackets, but two $2,000 child tax credits would result in a tax of
negative $1,968, since up to $1,400 of each child tax credit is refundable. A cut of $1,868.

Tax Cuts and Jobs Act by Hasselback


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XXII Convención 2010