Highlights from Modified Senate Proposal

Last night, the Joint Committee on Taxation published amendments to the Senate’s proposal on tax reform.  Consistent with the JCT’s release last week, this release was in the form of a description of the “Chairman’s Modification to the Chairman’s Mark of the Tax Cuts and Jobs Act.”  See Sullivan & Cromwell LLP’s November 10, 2017 memorandum on the Senate proposal released last week. November 15, 2017
A number of the changes to the Senate proposal are tweaks to existing proposals (with a few notable additions) to address potential revenue concerns with the bill---to ensure the legislation complies with the so-called “Byrd Rule” (the Senate budgetary rules for reconciliation).  Further amendments to the Senate proposal are expected over the course of this week, with draft legislation expected on Monday, November 27.  Separately, the House bill has been reported to the House floor and a vote on the bill is expected on Thursday or Friday of this week.
Notable changes to the Senate proposal include:
  • Tax for failure to maintain required health coverage under ACA (referred to as the “individual mandate”) would be reduced to zero, which is expected to increase the revenue score for the Senate proposal, but is a controversial point carried-over from the Republican’s failed attempt to repeal ACA.
  • Business tax reform
    • Senate’s proposal to repeal current rules with respect to nonqualified deferred comp was removed (consistent with changes made to the House proposal).
    • NOLs would only be deductible up to 80% of taxable income for years beginning after 2023
    • Deductibility of litigation settlements with governmental authorities limited to certain restitution and remediation payments that would have been deductible if timely paid.  Limitation generally applies to amounts paid/incurred after date of enactment pursuant to binding orders/agreements entered into after such date.
    • Employers would no longer be entitled to a deduction for meals provided to employees on the employer’s business premises.
  • Passthrough tax reform
    • Professional service partnerships would benefit from lower rates (but limited to those with income of less than $600,000).
    • Proposal would permit NRA individuals to be potential current beneficiaries of an ESBT (an electing trust shareholder of an S corp), which could allow a business currently in form of a C corp with foreign individual shareholders to be treated as an S corp (and possibly expands the marketability of S corp shares to NRA individuals).
    • Clarified ESBT charitable deductions would be subject to limitations applicable to individuals.
  • International tax reform
    • For tax years beginning after 2025, foreign-derived intangible income would be subject to an effective 15.625% rate (although the proposal with respect to such income remains unchanged with an effective tax rate of 12.5% for tax years beginning after 2017 until 2026).
    • For tax years beginning after 2025, the proposed base erosion minimum tax (calculated on a base equal to the taxpayer’s income determined without tax deductions or other benefits from “base erosion” payments”) would increase from 10% to 12.5%.