While you were sleeping last night…

The Senate passed tax “Reform”.  1 Senate Republican dissented.  All Dem’s voted “no”.  Final tally 51-49 for the bill.   All that needs to happen for the tax bills to become law is:

  1. A single bill to come out of the House / Senates Conference Committee to iron out their differences, and
  2. The real bill from the Conference Committee passes each House, (with zero Democratic votes) but with enough Republican votes.
  3.  We’ve all now seen lots of Republican votes on the record for tax “Reform”.
  4. How many of those Republicans do you think will take a principled stand against whatever comes out of the Conference Committee?
  5. And you better believe the Conference Committee will be counting votes well before a bill comes out.
  6. And we all know President Trump will sign it… whatever “it” is.

I’ve got to hand it to the Republicans.  They learned well at the whip hand of the Democrats in 2010 who passed the Affordable Care Act (an overhaul of 1/6th of the American economy) EXACTLY THIS WAY….Which is why this tax bill reminds me of the ACA chaos.

While Congress is radically changing rates and policy in a way that has not happened in 31 years, it basically repeals nothing and adds complexity (translation = OPPORTUNITY).


For those keeping score, here are some highlights of the Senate bill:

  • The top individual rate is reduced from 39.6% to 38.5%, and the threshold at which the top rate kicks in is increased from $418,000 for a single/$480,000 for married filing jointly to $500,000/$1,000,000. Further down the brackets, rates are reduced as well, for full detail, see here.
  • The top rate on the income earned by owners of “flow through” businesses — S corporations and partnerships — is reduced from 39.6% to a shade below 30% (this was an added goodie last night).
  • Many popular itemized deductions — state and local income taxes, casualty losses, and unreimbursed employee expenses, among others — are eliminated.  Medical expenses and property tax deductions made a comeback.
  • The estate tax exemption is doubled, to $11 million for a single taxpayer and $22 million for married taxpayers.
  • The alternative minimum tax remains intact (it was repealed on Friday but all that complexity was welcomed back today), although with a higher exemption amount.
  • The corporate rate is reduced from 35% to 20%.
  • Businesses will be able to immediately expense many asset purchases; after five years of 100% expensing, the rate will phase out at 80%/60%/40%/20% rates over the ensuing four years.
  • The international tax regime is completely revamped, shifting from a deferral system to a territorial system.

It bears repeating: in the Senate bill, EVERY. SINGLE. INDIVIDUAL. TAX. CUT will expire on December 31, 2025. Why? Because as I’ve discussed at length, the bill needed to comply with the Byrd Rule, and couldn’t add to the deficit beyond the ten-year budget window. (Which is also why the ACA Individual Mandate is now toast in the Senate bill). The quick fix? Simply make all of the individual cuts being offered turn back into a pumpkin when the clock strikes midnight on New Year’s Eve of 2025. The corporate cuts in the bill, however, are all permanent.

So the Senate is now in full on Cinderella mode…  They hope to fix EVERY SINGLE INDIVIDUAL TAX CUT before the stroke of midnight in 2025.  And for those of us doing tax planning, how many Republican’s will remain in power after walking the plank for big corporations at the expense of individuals?  Arrgghh….

Why would Republican leaders, keenly aware of a distrusting public’s view that these cuts were truly earmarked for big corporations rather than the middle class, fuel these concerns by making individual cuts temporary and corporate cuts permanent? Because Republicans are also keenly aware that should things swing, and a Democrat win the White House in 2024 (or in 3 years?), the future President will face tremendous pressure — even by a Dem-controlled Congress — to extend any expiring individual cuts. Should the corporate cuts have been made temporary, however, a future Democratic President would have had a much easier time allowing those cuts to expire. Thus, by structuring the bill in the manner. in which it did, Republican leaders ensure that both the individual and corporate cuts will survive.

However, it is now plain (from the Dem’s via their ACA victory and the Rep’s Tax bill this morning) that major tax / health care law takes 30 days and control of all leavers of Congress + the White House.  So, if you are going to make long term bets on tax strategy, you need to realize the pendulum swings much more rapidly now.

So let’s celebrate some winners….

How about Real Estate!!!  It is a great time to be a landlord. For starters, the life over which you can depreciate your property has been reduced — from 27.5 years to 25 years for residential property and from 39 years to 25 years for nonresidential property. In addition, while most other businesses will find their interest deduction limited under the Senate bill, that limitation doesn’t apply to landlords, who can continue to deduct their mortgage interest in full.

Real estate owners will really enjoy a windfall, however, if the final bill adopts the House version of “pass-through” taxation. Under the House bill, all rental income will be subject to a top rate of 25%, as opposed to 39.6% under current law. Under the Senate bill, however, it appears that for those large landlords earning more than $700,000 annually, unless the rental properties or a management company pays out significant W-2 wages, the owners would be stuck paying a top rate of 38.5% on the income, a rate 13.5% higher than under the House bill.

But the larger winner is…

C Corporations are the big winner under both the House and Senate bills. The drop in tax rate from 35% to 20% is monumental, and even after accounting for some base-broadening tax increases on the corporate side, these businesses will enjoy half of the total cuts provided for in the plan.  Also, going to a “territorial” system, eliminates double taxation for those US based companies doing business abroad.  Until the pendulum swings back…

This is not really Tax Reform (which requires consensus and thought).  It is an overlay of new rules on top of the old rules.  Query what happens when (inevitably) the balance of power shifts and all the Democrat’s do is dial up the rates.   As I see it, we should take full advantage of the goodies at the trough, but be careful of putting our nose in to deep.  Because we all know – pigs get fat, but hogs get slaughtered.

Because I am a pessimist here are 2 reasons why Tax Reform will not pass.

  1. The Conference Committee can’t count Republican votes and will submit a bill unpassable in one house of Congress
  2. The House won’t accept the compromises needed to pass a bill in the Senate.

Because I am an optimist here are 2 reasons why Tax Reform will pass.

  1. Republicans can count.
  2. The House knows Senate Rules.

Conference Committee will probably have something soon.   Then the planning madness truly begins.

Bill Collier, CPA

Vice President

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