Congressional tax negotiators released the final version of tax reform this past Friday evening, December 15. The previous versions passed by the House and Senate were largely a mixed bag of results for the convenience retailing industry. The Conference report, at least at first glance, appears to be mostly positive.
The bottom line for many companies is the new tax rates. For corporations, the package reduces the tax rate to 21%. That’s up 1% from both the previous House and Senate versions but goes into effect immediately next year rather than being delayed by a year as the Senate bill had done.
For their part, pass-through entities seem to fare pretty well in the final version. The bill follows the previous Senate version more closely than the House’s in that it provides a deduction for qualified business income for pass-through taxpayers. The deduction is down to 20% from the 23% found in the Senate bill, however, the final version also lowers the top personal income tax rate to 37%. The result should put the marginal tax rates paid by pass-throughs fairly close to on par with the marginal tax rates paid by corporations. It’s also important to point out that pass-throughs formally owned by estates and trusts are eligible for the tax deduction under the final version, marking a significant change from the Senate version.
Here is a quick rundown of how some of the other issues important to our industry fare in the final package:
- Work Opportunity Tax Credit: The House version repealed WOTC while the Senate preserved it. Fortunately, the final version follows the Senate and preserves the tax credit going forward.
- Last-In First-Out Accounting: LIFO has been a popular target for raising revenue in recent tax proposals. Fortunately, like both previous versions, LIFO is left intact.
- Estate Tax: While the House bill would have ultimately repealed the estate tax, the final package leaves it intact but does double the exemption amounts protecting many small businesses.
- Alternative Minimum Tax: For individuals, the AMT is left in place but the thresholds are doubled. The Corporate AMT is repealed.
- Individual Tax Rates: The final package follows closer to the Senate bill, setting up the following rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- State and Local Tax Deduction: Both previous versions ended up with a deduction limit of $10,000 for local property taxes. The final package includes the same monetary limit but allows for deduction of property taxes along with income or sales taxes.
- Standard Deduction: Is roughly doubled, just like both previous versions had done.
Much like in the Senate bill, all of the individual tax reform changes are technically temporary. They are scheduled to expire after 2025. This was done to satisfy Senate procedural rules that do not allow bills considered under the reconciliation process to project to cause federal deficits beyond a 10-year budget window. Republican leaders have argued that it is very unlikely that a future Congress would let these changes actually expire (much like the 2001 and 2003 tax cuts were ultimately renewed a few years ago—though not without some drama).
The release of the final legislation sets up a week of potential drama in Congress. The plan, as it currently stands, is for the House to take up the legislation first—likely on Tuesday. It’s all but assumed the House has the votes to pass the bill, which moves the drama across the rotunda into the Senate chamber. That vote will likely take place Thursday. There have already been positive signs for the Republicans’ ability to pass the bill though. Senator Corker (R-TN) was the only Republican Senator to vote against the Senate version when it passed, but he has already said that he intends to vote for the final version. Same goes for Senator Rubio (R-FL), who announced he’d vote “no” unless changes were made to make the child tax credit expansion more beneficial to lower income taxpayers; he has been satisfied by the final version and has said he’ll support it.
Wild cards do remain. Both Senators Cochran (R-MI) and McCain (R-AZ) are facing serious health problems that may limit their ability to be present. Senator Collins (R-ME) supported the Senate version after reaching an agreement with Majority Leader McConnell (R-KY) on passage of separate Affordable Care Act (ACA)-related legislation. Her vote on the final version remains a question mark. While McConnell has followed through on his part of the agreement, House Speaker Paul Ryan (R-WI) was never formally part of the deal and has indicated he has no intention of moving the ACA-related bills in that chamber. With those question marks in place, Vice President Mike Pence has delayed a scheduled overseas trip in order to be preside over the Senate debate in case his vote is needed to break a tie.
Now, after dealing with tax reform, Congress also has to find a way to keep the government open beyond this Friday, December 22, when current funding runs out. But that’s a whole other story…
For those of you who want to take a deep dive into the proposal, here is the legislation and here is the joint explanatory statement, which compares the conference report to the two previous versions.