ISSUE UPDATE: House Tax Reform Proposal

Last week, House Ways & Means Committee Chairman Kevin Brady (R-TX) released his tax reform proposal that will be the basis for the committee mark-up to begin as early as next week.  The Tax Cuts and Jobs Act proposes to lower individual and corporate tax rates and streamline the tax code. Below is a summary of the provisions relating to ASA’s tax priorities. The proposal looks positive on many of ASA priorities, including cash accounting, interest deductions, expensing, stepped-up basis and the estate tax.

There is a limitation placed on like-kind exchanges, limiting it to real property (not personal property).  Farmer cooperatives are concerned with the repeal of the Section 199 deduction for domestic production activities, but are still analyzing the overall package to determine the effects on cooperative members.

As expected, the proposal does not include an extension of the biodiesel tax credit, and that issue will require a strong push from the Senate to get into the tax reform discussion. The Senate has indicated it will release an initial proposal as early as next week, possibly following the House Ways & Means Committee mark-up.

Below is a summary of how ASA priorities are addressed in the House proposal. Additional details, including summaries of the entire proposal can be found at: https://waysandmeans.house.gov/taxreform/

Cash Accounting                                                                    

Under the provision, the current $5 million threshold for corporations and partnerships with a corporate partner would be increased to $25 million and the requirement that such businesses satisfy the requirement for all prior years would be repealed. The increased $25 million threshold would be extended to farm corporations and farm partnerships with a corporate partner, as well as family farm corporations. Also under the provision, the average gross receipts test would be indexed to inflation

Interest Deductions

Under the proposal, businesses with average gross receipts of $25 million or less would be exempt from the limitation on interest deductions established in the proposal.

Expensing

Under the proposal, taxpayers would be able to fully and immediately expense 100 percent of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.

Under the proposal, the small business expensing limitation under section 179 would be increased to $5 million and the phase-out amount would be increased to $20 million. (Currently it is $500,000 and $5 million). The provision would modify the expensing limitation by indexing both the $5 million and $20 million limits for inflation. The provision to increase the dollar limitations would be effective for tax years beginning after 2017 through tax years beginning before 2023.

Estate Tax & Gift Tax

Under the provision, the basic exclusion amount is doubled from $5 million (as of 2011) to $10 million, which is indexed for inflation. This provision would apply to tax years beginning after 2017. Furthermore, beginning after 2023, the estate and generation-skipping taxes are repealed while maintaining a beneficiary’s stepped-up basis in estate property. The gift tax is lowered to a top rate of 35 percent and retains a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017), also indexed for inflation.

Like-Kind Exchanges

Under the provision, the special rule allowing deferral of gain on like-kind exchanges would be modified to allow for like-kind exchanges only with respect to real property. The provision would be effective for transfers after 2017. However, the provision would provide 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 December 31, 2017.