Tax reform in our stockings after Senate bill passage?

Tax reform now seems inevitable. Granted, the dysfunction in Washington, D.C. makes any predictions risky at best, but the last minute horse trading late Friday and heading into Saturday shows some serious commitment. The Senate passed their bill on a party vote, with no Democrats voting for it and only one Republican against. Getting a final tax reform bill in front of and signed by the president before Christmas (as threatened and promised) now seems very likely. Whether that promise is an early Christmas present for tax lawyers or a curse of timing depends on your perspective.

The House of Representatives could now accept the Senate bill as is and send it to the president or they could engage in a reconciliation of their bill with the Senate version, formulating a final version. Key differences between the two bills are real, but the crossover between them is hard to ignore. Disappointingly, both versions complicate rather than simplify key areas. Yes, they both increase the standard deduction and remove numerous deductions (simplifying) but then they add a number of exceptions and dollar toggles, especially after last minute concessions hand written into the final Senate bill. I must admit that, as a tax lawyer, some changes had me rereading and scratching my head with respect to practical implementation of the code changes. Doing a quick internet search, I learned that I'm not alone (among tax lawyers and the general public).

So what are the key provisions in the Senate bill?

In the Senate bill the personal top income tax rate is reduced from 39.6 percent to 38.5 percent. Other brackets are reduced as well. Additionally, the thresholds at which top rates apply are higher. The standard deduction is doubled from $6,350 to $12,700 for an individual, and from $12,400 to $24,800 if married. Numerous itemized deductions are eliminated, including those for state/local tax and unreimbursed employee expenses. A cap on the deduction for real estate taxes is set at $10,000 and you now must own your home for five years, not two, to sell it tax-free. The child tax credit is increased from $1,000 to $2,000.

Corporate tax rates are cut from 35 percent to 20 percent in both the House and Senate bills. The Senate cut would occur in 2019 versus the House happening in 2018.

The pass through tax rate (deduction) is under the Senate bill is reduced from 39.6 percent to just under 30 percent. Service business don't get the deduction unless they meet certain requirements, including not exceeding a revenue cap.

Businesses can immediately expense numerous asset purchases, though the rate phases out thereafter by 20 percent a year over four years. Interest deductions are limited, except for landlords. Interestingly, the definition of business interest income differs slightly between the two bills. Depreciation of property for landlords has been reduced from 27.5 years to 25 years for residential property, and from 39 years to 25 years for non-residential property.

The alternative minimum tax stays in place, but it does have a higher exemption amount.

The estate, or death, tax exemption amount jumps to $10 million per person, or $20 million per couple. As this number is indexed looking backward, it is effectively just over $11 million per person in application. The House plan repealed the estate tax in five years but the Senate bill does not.

The international tax regime is changed from a deferral system to a territorial one. The bill attempts to clarify rules related to transfer of intangibles and includes a net interest expense limitation, two areas of recent scrutiny for multinationals. The provisions in this section can get complex, making their implementation somewhat dependent upon interpretation.

In the Senate bill, the Affordable Care Act individual mandate is repealed but it isn't in the House version, though the difference isn't based on ideological reasons. The Congressional Budget Office has estimated that removing the mandate will mean that roughly 13 million fewer people will have health insurance over a ten year period.

Additionally, quirky provisions discuss such oddities as private planes, various forms of alcohol and Alaska.

The individual changes and those regarding the estate tax expire on Dec. 31, 2025. The Senate made this concession to keep the cost of their bill under $1.5 trillion, as required by the budget resolution adopted in October. As a result, the cost of the Senate bill is $1.447 trillion. Under "the Byrd rule," the bill could not add to the deficit beyond the 10-year budget window.

Overall, this bill is a tax lawyer's dream. It adds complexity, except for those at the lower income levels, who tend to hire only those tax advisors who handle the most basic returns. Numerous number crunchers have shown that corporations and those at the highest income brackets benefit the most, including our President.

So, as tax advisors ponder the bill (and the resulting final version to come) they will be eying the specifics related to an individual client's circumstances. For example, when deciding whether it's best to hold assets in a C corporation or flow through entity, various material factors could include whether the property has appreciated in value, what money the owners want to take out of the company on an ongoing basis, whether the company is an operating entity (or passive) and has legitimate business expenses and how many people are owners. Looking internationally, a 20 percent corporate rate is still higher than that in numerous other jurisdictions thus complicating decisions regarding whether to repatriate business operations or bring money into the United States. Figuring out the related costs of operations in different countries, ideal cross allocations of funds and intercompany holding structures will require extensive analysis.

Many of the new provisions will require numerous calculations, especially as those of us applying whatever final law comes into place are relying mainly on code not years of tax code interpretation. Putting all of the language subtleties into an article is impossible. Lawyers who had focused more on a single discipline (corporate, partnership, estate tax) will need to now be more cognizant -- at times -- of how the areas overlap, and might need to consider income tax implications for decisions that are thus impacted by other planning decisions. This complexity is especially relevant in the estate planning area. Additionally, for California taxpayers, the loss of the state and local deduction is problematic, especially when considered in the context of the other deductions which were repealed. Clients might consider leaving high tax states, a trend which has been ongoing for a while.

The plan is murky, as tax reform often is. Some handwritten comments are illegible. It is progress. Seemingly, soon, we will have a new set of tax rules just in time for the holidays or New Year, and they have been moving forward at breathtaking speed. Under this plan, different forms of income and different taxpayers are treated very differently. This interplay creates tremendous planning opportunities. If the bill weren't so difficult to like, I'd almost guess that it was written by a tax lawyer. Obviously, I and other tax lawyers will be monitoring the reconciliation process closely.