The U.S. Senate’s tax-reform bill released late Thursday would keep more tax brackets and maintain the estate tax, but also would still keep several tax provisions important to farmers regarding equipment expensing and pass-through income.
With the House advancing its tax-reform package on Thursday to floor debate next week, the Senate Finance Committee released details of its plan as well. The Senate Finance Committee is set to start markup and debate on its bill starting Monday, Nov. 13.
Like the House, the Senate lowers the corporate tax rate from 35% to 20%, but the Senate delays that lower 20% corporate rate until 2019. That provision has already been panned by business and conservative groups — and was cited as a reason stocks fell on Thursday. But the delay was included as a way to keep the 10-year cost of the tax bill under $1.5 trillion. The Republican-led Senate can avoid facing a 60-vote threshold for its bill if the tax changes do not add more than $1.5 trillion in tax costs over 10 years.
Congress is pushing to get a tax-reform bill to President Donald Trump’s desk before the end of the year. Most provisions in the House and Senate bills would take effect in 2018.
1- BUSINESS EXPENSING
Like the House bill, the Senate bill would allow 100% expensing for equipment put into service before Jan. 1, 2023.
The bill then also expands the small-business Section 179 immediate business expensing to $1 million in property and increases the phase-out to $2.5 million. The proposal also expands the type of property that can be used for a Section 179.
With respect to standard depreciation, the Senate plan shortens depreciation for certain farm machinery and equipment from a seven-year schedule to a five-year schedule. The Senate also makes multiple other changes to reduce the timeframe to depreciate rental properties or other commercial buildings.
2- RENTAL INCOME
The Senate bill does not appear to have language that would subject rental income to 15.3% self-employment taxes. That issue had become a major sticking point in the House bill because landlords, including farm landlords, would have been subject to self-employment taxes. The House Ways and Means Committee removed that language Thursday before the committee vote to advance its bill to the House floor.
3- OTHER BUSINESS PROVISIONS
- In a blow to farmer cooperatives, the Senate also follows the House and repeals the Section 199 Domestic Production Activities Deduction. The National Council of Farmer Cooperatives has warned this 9% deduction is worth about $2 billion in deductions to cooperatives that are directly passed on to co-op members. But both chambers now have agreed to eliminate the deduction.
- Farmers could benefit from a provision in the Senate bill allowing a 17.4% deduction of certain pass-through income. This includes income from a partnership, an S corporation or a sole proprietorship. Yet the provision would limit the deduction to 50% of W-2 wages of the taxpayer.
- The House Ways and Means Committee, however, also made changes to their bill on Thursday that would create a new 9% tax rate for the first $75,000 in pass-through income for an individual business owner and $150,000 for a married couple.
- Regarding passive losses, the Senate also expands the limit on excessive farm losses. Net operating loss carryovers for passive income would be allowed for up to 90% of taxable income, though this limit is capped for couples making up to $500,000 or $250,000 for individuals.
- For active business loses, net operating loss carryovers would be limited to 90% of taxable income, but may be carried forward indefinitely. Farmers would retain the two-year carryback as well.
- While farm groups have been concerned about the loss of cash accounting methods, the Senate plan retains cash accounting for farmers with annual average gross receipts that do not exceed $25 million over a three-year average.
- Like the House, the Senate bill limits business interest. The Senate bill would limit deductible business interest to the sum of business-interest income plus 30% of adjusted taxable income. Remaining unclaimed business interest would be allowed to be carried forward for businesses that have $15 million or less of income over a three-year average.
4- ESTATE TAX
While several major farm groups have pushed for full elimination of the estate tax, the Senate bill does not repeal it. The Senate plan increases the estate-tax exemption from $5.49 million to $11 million for an individual or $22 million for a couple, which is also indexed for inflation. The Senate would keep a special valuation clause for real estate on smaller farms.
The House bill doubles the estate-tax exemption to $11 million then phases out the estate tax by 2023.
5- INDIVIDUAL TAX CHANGES
For individual families, including Schedule F filers, the Senate bill maintains seven income brackets ranging from 10% to 38.5%. That compares to the House bill that has four brackets that range from 12% to 39.6%.
Like the House plan, the Senate bill doubles the standard deduction for a married couple filing jointly to $24,000, but the bill repeals the current deductions for personal exemptions in a household, which is currently $4,050 per person.
The Senate bill preserves the mortgage-interest deduction, but would eliminate all deduction of state and local taxes. The House bill eliminates some local-tax deductions and caps a property-tax deduction to $10,000.
Businesses, however, such as farms, would still be allowed to deduct state and local taxes on a Schedule C, Schedule E or Schedule F on an individual tax return.
The Senate bill also would set the Child Tax Credit at $1,650, up from $1,600 in the House bill.
Full details of the Senate tax proposal can be found at https://goo.gl/….
Chris Clayton can be reached at Chris.Clayton@dtn.com
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