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115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-409
_______________________________________________________________________
TAX CUTS AND JOBS ACT
----------
R E P O R T
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ON
H.R. 1
together with
DISSENTING AND ADDITIONAL VIEWS
[Including cost estimate of the Congressional Budget Office]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
November 13, 2017.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
____________
U.S. GOVERNMENT PUBLISHING OFFICE
27-533 WASHINGTON: 2017
C O N T E N T S
----------
Page
I. SUMMARY AND BACKGROUND.........................................112
A. Purpose and Summary................................. 112
B. Background and Need for Legislation................. 112
C. Legislative History................................. 112
II. EXPLANATION OF THE BILL........................................115
TITLE I--TAX REFORM FOR INDIVIDUALS.............................. 115
A. Simplification and Reform of Rates, Standard
Deductions, and Exemptions......................... 115
1. Reduction and simplification of individual
income tax rates (secs. 1001 and 1005 of the
bill and sec. 1 of the Code)................... 115
2. Enhancement of standard deduction (sec. 1002 of
the bill and sec. 63 of the Code).............. 123
3. Repeal of deduction for personal exemptions
(sec. 1003 of the bill and secs. 151-153 of the
Code).......................................... 124
4. Maximum rate on business income of individuals
(sec. 1004 of the bill and new sec. 4 of the
Code).......................................... 126
B. Simplification and Reform of Family and Individual
Tax................................................ 135
1. Enhancement of child tax credit and new family
tax credit (sec. 1101 of the bill and sec. 24
of the Code)................................... 135
2. Repeal of credit for the elderly and permanently
disabled (sec. 1102(a) of the bill and sec. 22
of the Code)................................... 137
3. Termination of credit for interest on certain
home mortgages (sec. 1102(b) of the bill and
sec. 25 of the Code)........................... 138
4. Repeal of credit for plug-in electric drive
motor vehicles (sec. 1102(c) of the bill and
sec. 30D of the Code).......................... 138
5. Modification of taxpayer identification number
requirements for the child tax credit, earned
income credit, and American Opportunity credit
(sec. 1103 of the bill and secs. 24, 25A and 32
of the Code)................................... 139
6. Procedures to reduce improper claims of earned
income credit (sec. 1104 of the bill and new
secs. 32(c)(2)(B)(vii) and 6011(i) of the Code) 142
7. Certain income disallowed for purposes of the
earned income tax credit (sec. 1105 of the
bill, new secs. 32(n) and 32(c)(2)(C) of the
Code, and secs. 6051, 6052, 6041(a), and
6050(w) of the Code)........................... 144
C. Simplification and Reform of Education Incentives... 147
1. Reform of American opportunity tax credit and
repeal of lifetime learning credit (sec. 1201
of the bill and sec. 25A of the Code).......... 147
2. Consolidation and modification of education
savings rules (sec. 1202 of the bill and secs.
529 and 530 of the Code)....................... 149
3. Reforms to discharge of certain student loan
indebtedness (sec. 1203 of the bill and sec.
108(f) of the Code)............................ 153
4. Repeal of deduction for student loan interest
(sec. 1204 of the bill and sec. 221 of the
Code).......................................... 154
5. Repeal of deduction for qualified tuition and
related expenses (sec. 1204 of the bill and
sec. 222 of the Code).......................... 155
6. Repeal of exclusion for educational assistance
programs (sec. 1204 of the bill and sec. 127 of
the Code)...................................... 156
7. Repeal of exclusion for interest on United
States savings bonds used for higher education
expenses (sec. 1204 of the bill and sec. 135 of
the Code)...................................... 157
8. Repeal of exclusion for qualified tuition
reductions (sec. 1204 of the bill and sec.
117(d) of the Code)............................ 158
9. Rollovers between qualified tuition programs and
qualified ABLE programs (sec. 1205 of the bill
and secs. 529 and 529A of the Code)............ 159
D. Simplification and Reform of Deductions............. 162
1. Repeal of overall limitation on itemized
deductions (sec. 1301 of the bill and sec. 68
of the Code)................................... 162
2. Modification of deduction for home mortgage
interest (sec. 1302 of the bill and sec. 163(h)
of the Code)................................... 163
3. Modification of deduction for taxes not paid or
accrued in a trade or business (sec. 1303 of
the bill and sec. 164(b) of the Code).......... 165
4. Repeal of deduction for personal casualty and
theft losses (sec. 1304 of the bill and sec.
165 of the Code)............................... 166
5. Limitation on wagering losses (sec. 1305 of the
bill and sec. 165 of the Code)................. 167
6. Modifications to the deduction for charitable
contributions (sec. 1306 of the bill and sec.
170 of the Code)............................... 168
7. Repeal of deduction for tax preparation expenses
(sec. 1307 of the bill and sec. 212 of the
Code).......................................... 178
8. Repeal of deduction for medical expenses (sec.
1308 of the bill and sec. 213 of the Code)..... 179
9. Repeal of deduction for alimony payments and
corresponding inclusion in gross income (sec.
1309 of the bill and secs. 61, 71, and 215 of
the Code)...................................... 179
10. Repeal of deduction for moving expenses (sec.
1310 of the bill and secs. 134 and 217 of the
Code).......................................... 180
11. Termination of deduction and exclusions for
contributions to medical savings accounts (sec.
1311 of the bill and secs. 106(b) and 220 of
the Code)...................................... 181
12. Denial of deduction for expenses attributable
to the trade or business of being an employee,
expenses of teachers, performing artists and
certain officials (sec. 1312 of the bill and
secs. 62, 67, and new sec. 262A of the Code)... 184
E. Simplification and Reform of Exclusions and Taxable
Compensation....................................... 186
1. Limitation on exclusion for employer-provided
housing (sec. 1401 of the bill and sec. 119 of
the Code)...................................... 186
2. Modification of exclusion of gain on sale of a
principal residence (sec. 1402 of the bill and
sec. 121 of the Code).......................... 187
3. Repeal of exclusion, etc., for employee
achievement awards (sec. 1403 of the bill and
secs. 74(c) and 274(j) of the Code)............ 188
4. Sunset of exclusion for dependent care
assistance programs (sec. 1404 of the bill and
sec. 129 of the Code).......................... 188
5. Repeal of exclusion for qualified moving expense
reimbursement (sec. 1405 of the bill and sec.
132(g) of the Code)............................ 189
6. Repeal of exclusion for adoption assistance
programs (sec. 1406 of the bill and sec. 137 of
the Code)...................................... 190
F. Simplification and Reform of Savings, Pensions,
Retirement......................................... 191
1. Repeal of special rule permitting
recharacterization of IRA contributions (sec.
1501 of the bill and sec. 408A of the Code).... 191
2. Reduction in minimum age for allowable in-
service distributions (sec. 1502 of the bill
and secs. 401 and 457 of the Code)............. 194
3. Modification of rules governing hardship
distributions (sec. 1503 of the bill and secs.
401 and 403 of the Code)....................... 195
4. Modification of rules relating to hardship
withdrawals from cash or deferred arrangements
(sec. 1504 of the bill and sec. 401 of the
Code).......................................... 196
5. Extended rollover period for the rollover of
plan loan offset amounts in certain cases (sec.
1505 of the bill and sec. 402 of the Code)..... 198
6. Modification of nondiscrimination rules for
certain plans providing benefits or
contributions to older, longer service
participants (sec. 1506 of the bill and sec.
401 of the Code)............................... 199
G. Estate, Gift, and Generation-Skipping Transfer Taxes 209
1. Increase in estate and gift tax exemption,
followed by repeal of estate and generation-
skipping transfer taxes and reduction in gift
tax rate (secs. 1601 and 1602 of the bill,
secs. 2010, 2056A, 2502, and 2505 of the Code,
and new secs. 2210 and 2664 of the Code)....... 209
TITLE II--ALTERNATIVE MINIMUM TAX REPEAL......................... 219
1. Repeal of alternative minimum tax (sec. 2001 of
the bill and sec. 55 of the Code).............. 219
TITLE III--BUSINESS TAX REFORM................................... 225
A. Tax Rates........................................... 225
1. Reduction in corporate tax rate (sec. 3001 of
the bill and sec. 11 of the Code).............. 225
B. Cost Recovery....................................... 227
1. Increased expensing (sec. 3101 of the bill and
sec. 168(k) of the Code)....................... 227
C. Small Business Reforms.............................. 234
1. Expansion of section 179 expensing (sec. 3201 of
the bill and sec. 179 of the Code)............. 234
2. Small business accounting method reform and
simplification (sec. 3202 of the bill and secs.
263A, 448, 460, and 471 of the Code)........... 236
3. Small business exception from limitation on
deduction of business interest (sec. 3203 of
the bill and sec. 163(j) of the Code).......... 243
4. Modification of treatment of S corporation
conversions to C corporations (sec. 3204 of the
bill and secs. 481 and 1371 of the Code)....... 243
D. Reform of Business-related Exclusions, Deductions,
etc................................................ 246
1. Interest (sec. 3301 of the bill and sec. 163(j)
of the Code)................................... 246
2. Modification of net operating loss deduction
(sec. 3302 of the bill and sec. 172 of the
Code).......................................... 252
3. Like-kind exchanges of real property (sec. 3303
of the bill and sec. 1031 of the Code)......... 253
4. Revision of treatment of contributions to
capital (sec. 3304 of the bill and sec. 118 of
the Code)...................................... 255
5. Repeal of deduction for local lobbying expenses
(sec. 3305 of the bill and sec. 162(e) of the
Code).......................................... 257
6. Repeal of deduction for income attributable to
domestic production activities (sec. 3306 of
the bill and sec. 199 of the Code)............. 259
7. Entertainment, etc. expenses (sec. 3307 of the
bill and sec. 274 of the Code)................. 261
8. Unrelated business taxable income increased by
amount of certain fringe benefit expenses for
which deduction is disallowed (sec. 3308 of the
bill and sec. 512 of the Code)................. 265
9. Limitation on deduction for FDIC premiums (sec.
3309 of the bill and sec. 162 of the Code)..... 266
10. Repeal of rollover of publicly traded
securities gain into specialized small business
investment companies (sec. 3310 of the bill and
sec. 1044 of the Code)......................... 269
11. Certain self-created property not treated as a
capital asset (sec. 3311 of the bill and sec.
1221 of the Code).............................. 270
12. Repeal of special rule for sale or exchange of
patents (sec. 3312 of the bill and sec. 1235 of
the Code)...................................... 272
13. Repeal of technical termination of partnerships
(sec. 3313 of the bill and sec. 708(b) of the
Code).......................................... 272
14. Recharacterization of certain gains in the case
of partnership profits interests held in
connection with performance of investment
services (sec. 3314 of the bill and secs. 1 and
83 of the Code)................................ 274
15. Amortization of research and experimental
expenditures (sec. 3315 of the bill and sec.
174 of the Code)............................... 280
16. Uniform treatment of expenses in contingency
fee cases (sec. 3316 of the bill and new sec.
162(q) of the Code)............................ 283
E. Reform of Business Credits.......................... 284
1. Repeal of credit for clinical testing expenses
for certain drugs for rare diseases or
conditions (sec. 3401 of the bill and sec. 45C
of the Code)................................... 284
2. Repeal of employer-provided child care credit
(sec. 3402 of the bill and sec. 45F of the
Code).......................................... 285
3. Repeal of rehabilitation credit (sec. 3403 of
the bill and sec. 47 of the Code).............. 286
4. Repeal of work opportunity tax credit (sec. 3404
of the bill and sec. 51 of the Code)........... 287
5. Repeal of deduction for certain unused business
credits (sec. 3405 of the bill and sec. 196 of
the Code)...................................... 289
6. Termination of new markets tax credit (sec. 3406
of the bill and sec. 45D of the Code).......... 290
7. Repeal of credit for expenditures to provide
access to disabled individuals (sec. 3407 of
the bill and sec. 44 of the Code).............. 292
8. Modification of credit for portion of employer
social security taxes paid with respect to
employee tips (sec. 3408 of the bill and sec.
45B of the Code)............................... 293
F. Energy Credits...................................... 295
1. Modifications to credit for electricity produced
from certain renewable resources (sec. 3501 of
the bill and sec. 45 of the Code).............. 295
2. Modification of the energy investment tax credit
(sec. 3502 of the bill and sec. 48 of the Code) 297
3. Extension and phaseout of residential energy
efficient property credit (sec. 3503 of the
bill and sec. 25D of the Code)................. 300
4. Repeal of enhanced oil recovery credit (sec.
3504 of the bill and sec. 43 of the Code)...... 301
5. Repeal of credit for producing oil and gas from
marginal wells (sec. 3505 of the bill and sec.
45I of the Code)............................... 302
6. Modification of credit for production from
advanced nuclear power facilities (sec. 3506 of
the bill and sec. 45J of the Code)............. 303
G. Bond Reforms........................................ 305
1. Termination of private activity bonds (sec. 3601
of the bill and sec. 103 of the Code).......... 305
2. Repeal of advance refunding bonds (sec. 3602 of
the bill and sec. 149(d) of the Code).......... 307
3. Repeal of tax credit bonds (sec. 3603 of the
bill and secs. 54A, 54B, 54C, 54D, 54E, 54F and
6431 of the Code).............................. 309
4. No tax-exempt bonds for professional stadiums
(sec. 3604 of the bill and sec. 103 of the
Code).......................................... 312
H. Insurance........................................... 314
1. Net operating losses of life insurance companies
(sec. 3701 of the bill and sec. 810 of the
Code).......................................... 314
2. Repeal of small life insurance company deduction
(sec. 3702 of the bill and sec. 806 of the
Code).......................................... 315
3. Surtax on life insurance company taxable income
(sec. 3703 of the bill and sec. 801 of the
Code).......................................... 316
4. Adjustment for change in computing reserves
(sec. 3704 of the bill and sec. 807 of the
Code).......................................... 319
5. Repeal of special rule for distributions to
shareholders from pre-1984 policyholders
surplus account (sec. 3705 of the bill and sec.
815 of the Code)............................... 320
6. Modification of proration rules for property and
casualty insurance companies (sec. 3706 of the
bill and sec. 832 of the Code)................. 322
7. Modification of discounting rules for property
and casualty insurance companies (sec. 3707 of
the bill and sec. 832 of the Code)............. 323
8. Repeal of special estimated tax payments (sec.
3708 of the bill and sec. 847 of the Code)..... 326
I. Compensation........................................ 328
1. Modification of limitation on excessive employee
remuneration (sec. 3801 of the bill and sec.
162(m) of the Code)............................ 328
2. Excise tax on excess tax-exempt organization
executive compensation (sec. 3802 of the bill
and sec. 4960 of the Code)..................... 332
3. Treatment of qualified equity grants (sec. 3803
of the bill and secs. 83, 3401, and 6051 of the
Code).......................................... 335
TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS......... 343
PRESENT LAW...................................................... 343
A. Principles Common to Inbound and Outbound Taxation.. 343
1. Residence....................................... 344
2. Entity classification........................... 345
3. Source of income rules.......................... 346
4. Intercompany transfers.......................... 350
B. U.S. Tax Rules Applicable to Nonresident Aliens and
Foreign Corporations (Inbound)..................... 351
1. Gross-basis taxation of U.S.-source income...... 351
2. Net-basis taxation of U.S.-source income........ 355
3. Special rules................................... 359
C. U.S. Tax Rules Applicable to Foreign Activities of
U.S. Persons (Outbound)............................ 361
1. In general...................................... 361
2. Anti-deferral regimes........................... 361
3. Foreign tax credit.............................. 366
4. Special rules................................... 368
TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS................... 370
A. Establishment of Participation Exemption System for
Taxation of Foreign Income......................... 370
1. Deduction for foreign-source portion of
dividends received by domestic corporations
from specified 10-percent owned foreign
corporations (sec. 4001 of the bill and new
sec. 245A of the Code)......................... 370
2. Application of participation exemption to
investments in United States property (sec.
4002 of the bill sec. 956 of the Code)......... 373
3. Limitation on losses with respect to specified
10-percent owned foreign corporations (sec.
4003 of the bill secs. 367(a)(3)(C) and 961 of
the Code, and new sec. 91 of the Code)......... 373
4. Treatment of deferred foreign income upon
transition to participation exemption system of
taxation (sec. 4004 of the bill and secs. 78,
904, 907, and 965 of the Code)................. 375
B. Modifications Related to Foreign Tax Credit System.. 383
1. Repeal of section 902 indirect foreign tax
credits; determination of section 960 credit on
current year basis (sec. 4101 of the bill and
secs. 78, 902 and 960 of the Code)............. 383
2. Source of income from sales of inventory
determined solely on basis of production
activities (sec. 4102 of the bill and sec. 863
of the Code)................................... 384
C. Modifications of Subpart F Provisions............... 384
1. Repeal of inclusion based on withdrawal of
previously excluded subpart F income from
qualified investment (sec. 4201 of the bill and
sec. 955 of the Code).......................... 384
2. Repeal of treatment of foreign base company oil
related income as subpart F income (sec. 4202
of the bill and sec. 954(a) of the Code)....... 385
3. Inflation adjustment of de minimis exception for
foreign base company income (sec. 4203 of the
bill and sec. 954(b)(3) of the Code)........... 386
4. Look-thru rule for related controlled foreign
corporations made permanent (sec. 4204 of the
bill and sec. 954(c)(6) of the Code)........... 386
5. Modification of stock attribution rules for
determining status as a controlled foreign
corporation (sec. 4205 of the bill secs. 318,
958 and 6038 of the Code)...................... 387
6. Elimination of requirement that corporation must
be controlled for 30 days before subpart F
inclusions apply (sec. 4206 of the bill and
951(a)(1) of the Code)......................... 387
D. Prevention of Base Erosion.......................... 388
1. Current year inclusion by United States
shareholders with foreign high returns (sec.
4301 of the bill and secs. 78 and 960 and new
sec. 951A of the Code)......................... 388
2. Limitation on deduction of interest by domestic
corporations which are members of an
international financial reporting group (sec.
4302 of the bill and sec. 163 of the Code)..... 397
3. Excise tax on certain payments from domestic
corporations to related foreign corporations;
election to treat such payments as effectively
connected income (sec. 4303 of the bill and
secs. 882, 4491, 6038C, and 6038E of the Code). 400
E. Provisions Related to Possessions of the United
States............................................. 405
1. Extension of deduction allowable with respect to
income attributable to domestic production
activities in Puerto Rico (sec. 4401 of the
bill and sec. 199 of the Code)................. 405
2. Extension of temporary increase in limit on
cover over of rum excise taxes to Puerto Rico
and the Virgin Islands (sec. 4402 of the bill
and sec. 119(d) of the Code)................... 406
3. Extension of American Samoa economic development
credit (sec. 4403 of the bill and sec. 119 of
Pub. L. No. 109-432)........................... 407
F. Other International Reforms......................... 409
1. Restriction on insurance business exception to
the passive foreign investment company rules
(sec. 4501 of the bill and sec. 1297 of the
Code).......................................... 409
TITLE V--EXEMPT ORGANIZATIONS.......................... 412
A. Unrelated Business Income Tax....................... 412
1. Clarification of unrelated business income tax
treatment of entities exempt from tax under
section 501(a) (sec. 5001 of the bill and sec.
511 of the Code)............................... 412
2. Exclusion of research income from unrelated
business taxable income limited to publicly
available research (sec. 5002 of the bill and
sec. 512(b)(9) of the Code).................... 414
B. Excise Taxes........................................ 416
1. Simplification of excise tax on private
foundation investment income (sec. 5101 of the
bill and sec. 4940 of the Code)................ 416
2. Private operating foundation requirements
relating to operation of an art museum (sec.
5102 of the bill and sec. 4942(j) of the Code). 417
3. Excise tax based on investment income of private
colleges and universities (sec. 5103 of the
bill and new sec. 4969 of the Code)............ 420
4. Provide an exception to the private foundation
excess business holdings rules for
philanthropic business holdings (sec. 5104 of
the bill and sec. 4943 of the Code)............ 423
C. Requirements for Organizations Exempt From Tax...... 426
1. Section 501(c)(3) organizations permitted to
make statements relating to political campaign
in ordinary course of activities in carrying
out exempt purpose (sec. 5201 of the bill and
sec. 501 of the Code).......................... 426
2. Additional reporting requirements for donor
advised fund sponsoring organizations (sec.
5202 of the bill and sec. 6033 of the Code).... 428
III. VOTES OF THE COMMITTEE.........................................430
IV. BUDGET EFFECTS OF THE BILL.....................................449
A. Committee Estimate of Budgetary Effects............. 449
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 461
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 461
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.....470
A. Committee Oversight Findings and Recommendations.... 470
B. Statement of General Performance Goals and
Objectives......................................... 470
C. Information Relating to Unfunded Mandates........... 470
D. Tax Complexity Analysis............................. 470
E. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 475
F. Duplication of Federal Programs..................... 475
G. Disclosure of Directed Rule Makings................. 476
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED..........476
VII. DISSENTING VIEWS AND ADDITIONAL VIEWS..........................477
115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-409
======================================================================
TAX CUTS AND JOBS ACT
_______
November 13, 2017.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Brady of Texas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING AND ADDITIONAL VIEWS
[To accompany H.R. 1]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the bill
(H.R. 1) to provide for reconciliation pursuant to title II of the
concurrent resolution on the budget for fiscal year 2018, having
considered the same, report favorably thereon with amendments and
recommend that the bill as amended do pass.
The amendments are as follows:
Strike all after the enacting clause and insert the following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Tax Cuts and Jobs
Act''.
(b) Amendment of 1986 Code.--Except as otherwise expressly provided,
whenever in this Act an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
(c) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; etc.
TITLE I--TAX REFORM FOR INDIVIDUALS
Subtitle A--Simplification and Reform of Rates, Standard Deduction, and
Exemptions
Sec. 1001. Reduction and simplification of individual income tax rates.
Sec. 1002. Enhancement of standard deduction.
Sec. 1003. Repeal of deduction for personal exemptions.
Sec. 1004. Maximum rate on business income of individuals.
Sec. 1005. Conforming amendments related to simplification of
individual income tax rates.
Subtitle B--Simplification and Reform of Family and Individual Tax
Credits
Sec. 1101. Enhancement of child tax credit and new family tax credit.
Sec. 1102. Repeal of nonrefundable credits.
Sec. 1103. Refundable credit program integrity.
Sec. 1104. Procedures to reduce improper claims of earned income
credit.
Sec. 1105. Certain income disallowed for purposes of the earned income
tax credit.
Subtitle C--Simplification and Reform of Education Incentives
Sec. 1201. American opportunity tax credit.
Sec. 1202. Consolidation of education savings rules.
Sec. 1203. Reforms to discharge of certain student loan indebtedness.
Sec. 1204. Repeal of other provisions relating to education.
Sec. 1205. Rollovers between qualified tuition programs and qualified
ABLE programs.
Subtitle D--Simplification and Reform of Deductions
Sec. 1301. Repeal of overall limitation on itemized deductions.
Sec. 1302. Mortgage interest.
Sec. 1303. Repeal of deduction for certain taxes not paid or accrued in
a trade or business.
Sec. 1304. Repeal of deduction for personal casualty losses.
Sec. 1305. Limitation on wagering losses.
Sec. 1306. Charitable contributions.
Sec. 1307. Repeal of deduction for tax preparation expenses.
Sec. 1308. Repeal of medical expense deduction.
Sec. 1309. Repeal of deduction for alimony payments.
Sec. 1310. Repeal of deduction for moving expenses.
Sec. 1311. Termination of deduction and exclusions for contributions to
medical savings accounts.
Sec. 1312. Denial of deduction for expenses attributable to the trade
or business of being an employee.
Subtitle E--Simplification and Reform of Exclusions and Taxable
Compensation
Sec. 1401. Limitation on exclusion for employer-provided housing.
Sec. 1402. Exclusion of gain from sale of a principal residence.
Sec. 1403. Repeal of exclusion, etc., for employee achievement awards.
Sec. 1404. Sunset of exclusion for dependent care assistance programs.
Sec. 1405. Repeal of exclusion for qualified moving expense
reimbursement.
Sec. 1406. Repeal of exclusion for adoption assistance programs.
Subtitle F--Simplification and Reform of Savings, Pensions, Retirement
Sec. 1501. Repeal of special rule permitting recharacterization of Roth
IRA contributions as traditional IRA contributions.
Sec. 1502. Reduction in minimum age for allowable in-service
distributions.
Sec. 1503. Modification of rules governing hardship distributions.
Sec. 1504. Modification of rules relating to hardship withdrawals from
cash or deferred arrangements.
Sec. 1505. Extended rollover period for the rollover of plan loan
offset amounts in certain cases.
Sec. 1506. Modification of nondiscrimination rules to protect older,
longer service participants.
Subtitle G--Estate, Gift, and Generation-skipping Transfer Taxes
Sec. 1601. Increase in credit against estate, gift, and generation-
skipping transfer tax.
Sec. 1602. Repeal of estate and generation-skipping transfer taxes.
TITLE II--ALTERNATIVE MINIMUM TAX REPEAL
Sec. 2001. Repeal of alternative minimum tax.
TITLE III--BUSINESS TAX REFORM
Subtitle A--Tax Rates
Sec. 3001. Reduction in corporate tax rate.
Subtitle B--Cost Recovery
Sec. 3101. Increased expensing.
Subtitle C--Small Business Reforms
Sec. 3201. Expansion of section 179 expensing.
Sec. 3202. Small business accounting method reform and simplification.
Sec. 3203. Small business exception from limitation on deduction of
business interest.
Sec. 3204. Modification of treatment of S corporation conversions to C
corporations.
Subtitle D--Reform of Business-related Exclusions, Deductions, etc.
Sec. 3301. Interest.
Sec. 3302. Modification of net operating loss deduction.
Sec. 3303. Like-kind exchanges of real property.
Sec. 3304. Revision of treatment of contributions to capital.
Sec. 3305. Repeal of deduction for local lobbying expenses.
Sec. 3306. Repeal of deduction for income attributable to domestic
production activities.
Sec. 3307. Entertainment, etc. expenses.
Sec. 3308. Unrelated business taxable income increased by amount of
certain fringe benefit expenses for which deduction is disallowed.
Sec. 3309. Limitation on deduction for FDIC premiums.
Sec. 3310. Repeal of rollover of publicly traded securities gain into
specialized small business investment companies.
Sec. 3311. Certain self-created property not treated as a capital
asset.
Sec. 3312. Repeal of special rule for sale or exchange of patents.
Sec. 3313. Repeal of technical termination of partnerships.
Sec. 3314. Recharacterization of certain gains in the case of
partnership profits interests held in connection with performance of
investment services.
Sec. 3315. Amortization of research and experimental expenditures.
Sec. 3316. Uniform treatment of expenses in contingency fee cases.
Subtitle E--Reform of Business Credits
Sec. 3401. Repeal of credit for clinical testing expenses for certain
drugs for rare diseases or conditions.
Sec. 3402. Repeal of employer-provided child care credit.
Sec. 3403. Repeal of rehabilitation credit.
Sec. 3404. Repeal of work opportunity tax credit.
Sec. 3405. Repeal of deduction for certain unused business credits.
Sec. 3406. Termination of new markets tax credit.
Sec. 3407. Repeal of credit for expenditures to provide access to
disabled individuals.
Sec. 3408. Modification of credit for portion of employer social
security taxes paid with respect to employee tips.
Subtitle F--Energy Credits
Sec. 3501. Modifications to credit for electricity produced from
certain renewable resources.
Sec. 3502. Modification of the energy investment tax credit.
Sec. 3503. Extension and phaseout of residential energy efficient
property.
Sec. 3504. Repeal of enhanced oil recovery credit.
Sec. 3505. Repeal of credit for producing oil and gas from marginal
wells.
Sec. 3506. Modifications of credit for production from advanced nuclear
power facilities.
Subtitle G--Bond Reforms
Sec. 3601. Termination of private activity bonds.
Sec. 3602. Repeal of advance refunding bonds.
Sec. 3603. Repeal of tax credit bonds.
Sec. 3604. No tax exempt bonds for professional stadiums.
Subtitle H--Insurance
Sec. 3701. Net operating losses of life insurance companies.
Sec. 3702. Repeal of small life insurance company deduction.
Sec. 3703. Surtax on life insurance company taxable income.
Sec. 3704. Adjustment for change in computing reserves.
Sec. 3705. Repeal of special rule for distributions to shareholders
from pre-1984 policyholders surplus account.
Sec. 3706. Modification of proration rules for property and casualty
insurance companies.
Sec. 3707. Modification of discounting rules for property and casualty
insurance companies.
Sec. 3708. Repeal of special estimated tax payments.
Subtitle I--Compensation
Sec. 3801. Modification of limitation on excessive employee
remuneration.
Sec. 3802. Excise tax on excess tax-exempt organization executive
compensation.
Sec. 3803. Treatment of qualified equity grants.
TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS
Subtitle A--Establishment of Participation Exemption System for
Taxation of Foreign Income
Sec. 4001. Deduction for foreign-source portion of dividends received
by domestic corporations from specified 10-percent owned foreign
corporations.
Sec. 4002. Application of participation exemption to investments in
United States property.
Sec. 4003. Limitation on losses with respect to specified 10-percent
owned foreign corporations.
Sec. 4004. Treatment of deferred foreign income upon transition to
participation exemption system of taxation.
Subtitle B--Modifications Related to Foreign Tax Credit System
Sec. 4101. Repeal of section 902 indirect foreign tax credits;
determination of section 960 credit on current year basis.
Sec. 4102. Source of income from sales of inventory determined solely
on basis of production activities.
Subtitle C--Modification of Subpart F Provisions
Sec. 4201. Repeal of inclusion based on withdrawal of previously
excluded subpart F income from qualified investment.
Sec. 4202. Repeal of treatment of foreign base company oil related
income as subpart F income.
Sec. 4203. Inflation adjustment of de minimis exception for foreign
base company income.
Sec. 4204. Look-thru rule for related controlled foreign corporations
made permanent.
Sec. 4205. Modification of stock attribution rules for determining
status as a controlled foreign corporation.
Sec. 4206. Elimination of requirement that corporation must be
controlled for 30 days before subpart F inclusions apply.
Subtitle D--Prevention of Base Erosion
Sec. 4301. Current year inclusion by United States shareholders with
foreign high returns.
Sec. 4302. Limitation on deduction of interest by domestic corporations
which are members of an international financial reporting group.
Sec. 4303. Excise tax on certain payments from domestic corporations to
related foreign corporations; election to treat such payments as
effectively connected income.
Subtitle E--Provisions Related to Possessions of the United States
Sec. 4401. Extension of deduction allowable with respect to income
attributable to domestic production activities in Puerto Rico.
Sec. 4402. Extension of temporary increase in limit on cover over of
rum excise taxes to Puerto Rico and the Virgin Islands.
Sec. 4403. Extension of American Samoa economic development credit.
Subtitle F--Other International Reforms
Sec. 4501. Restriction on insurance business exception to passive
foreign investment company rules.
TITLE V--EXEMPT ORGANIZATIONS
Subtitle A--Unrelated Business Income Tax
Sec. 5001. Clarification of unrelated business income tax treatment of
entities treated as exempt from taxation under section 501(a).
Sec. 5002. Exclusion of research income limited to publicly available
research.
Subtitle B--Excise Taxes
Sec. 5101. Simplification of excise tax on private foundation
investment income.
Sec. 5102. Private operating foundation requirements relating to
operation of art museum.
Sec. 5103. Excise tax based on investment income of private colleges
and universities.
Sec. 5104. Exception from private foundation excess business holding
tax for independently-operated philanthropic business holdings.
Subtitle C--Requirements for Organizations Exempt From Tax
Sec. 5201. 501(c)(3) organizations permitted to make statements
relating to political campaign in ordinary course of activities.
Sec. 5202. Additional reporting requirements for donor advised fund
sponsoring organizations.
TITLE I--TAX REFORM FOR INDIVIDUALS
Subtitle A--Simplification and Reform of Rates, Standard Deduction, and
Exemptions
SEC. 1001. REDUCTION AND SIMPLIFICATION OF INDIVIDUAL INCOME TAX RATES.
(a) In General.--Section 1 is amended by striking subsection (i) and
by striking all that precedes subsection (h) and inserting the
following:
``SEC. 1. TAX IMPOSED.
``(a) In General.--There is hereby imposed on the income of every
individual a tax equal to the sum of--
``(1) 12 percent bracket.--12 percent of so much of the
taxable income as does not exceed the 25-percent bracket
threshold amount,
``(2) 25 percent bracket.--25 percent of so much of the
taxable income as exceeds the 25-percent bracket threshold
amount but does not exceed the 35-percent bracket threshold
amount, plus
``(3) 35 percent bracket.--35 percent of so much of taxable
income as exceeds the 35-percent bracket threshold amount but
does not exceed the 39.6 percent bracket threshold amount.
``(4) 39.6 percent bracket.--39.6 percent of so much of
taxable income as exceeds the 39.6-percent bracket threshold
amount.
``(b) Bracket Threshold Amounts.--For purposes of this section--
``(1) 25-percent bracket threshold amount.--The term `25-
percent bracket threshold amount' means--
``(A) in the case of a joint return or surviving
spouse, $90,000,
``(B) in the case of an individual who is the head of
a household (as defined in section 2(b)), $67,500,
``(C) in the case of any other individual (other than
an estate or trust), an amount equal to \1/2\ of the
amount in effect for the taxable year under
subparagraph (A), and
``(D) in the case of an estate or trust, $2,550.
``(2) 35-percent bracket threshold amount.--The term `35-
percent bracket threshold amount' means--
``(A) in the case of a joint return or surviving
spouse, $260,000,
``(B) in the case of a married individual filing a
separate return, an amount equal to \1/2\ of the amount
in effect for the taxable year under subparagraph (A),
and
``(C) in the case of any other individual (other than
an estate or trust), $200,000, and
``(D) in the case of an estate or trust, $9,150.
``(3) 39.6-percent bracket threshold amount.--The term `39.6-
percent bracket threshold amount' means--
``(A) in the case of a joint return or surviving
spouse, $1,000,000,
``(B) in the case of any other individual (other than
an estate or trust), an amount equal to \1/2\ of the
amount in effect for the taxable year under
subparagraph (A), and
``(C) in the case of an estate or trust, $12,500.
``(c) Inflation Adjustment.--
``(1) In general.--In the case of any taxable year beginning
after 2018, each dollar amount in subsections (b) and (e)(3)
(other than any amount determined by reference to such a dollar
amount) shall be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
this subsection for the calendar year in which the
taxable year begins by substituting `2017' for `2016'
in paragraph (2)(A)(ii).
If any increase determined under the preceding sentence is not
a multiple of $100, such increase shall be rounded to the next
lowest multiple of $100.
``(2) Cost-of-living adjustment.--For purposes of this
subsection--
``(A) In general.--The cost-of-living adjustment for
any calendar year is the percentage (if any) by which--
``(i) the C-CPI-U for the preceding calendar
year, exceeds
``(ii) the normalized CPI for calendar year
2016.
``(B) Special rule for adjustments with a base year
after 2016.--For purposes of any provision which
provides for the substitution of a year after 2016 for
`2016' in subparagraph (A)(ii), subparagraph (A) shall
be applied by substituting `C-CPI-U' for `normalized
CPI' in clause (ii).
``(3) Normalized cpi.--For purposes of this subsection, the
normalized CPI for any calendar year is the product of--
``(A) the CPI for such calendar year, multiplied by
``(B) the C-CPI-U transition multiple.
``(4) C-CPI-U transition multiple.--For purposes of this
subsection, the term `C-CPI-U transition multiple' means the
amount obtained by dividing--
``(A) the C-CPI-U for calendar year 2016, by
``(B) the CPI for calendar year 2016.
``(5) C-CPI-U.--For purposes of this subsection--
``(A) In general.--The term `C-CPI-U' means the
Chained Consumer Price Index for All Urban Consumers
(as published by the Bureau of Labor Statistics of the
Department of Labor). The values of the Chained
Consumer Price Index for All Urban Consumers taken into
account for purposes of determining the cost-of-living
adjustment for any calendar year under this subsection
shall be the latest values so published as of the date
on which such Bureau publishes the initial value of the
Chained Consumer Price Index for All Urban Consumers
for the month of August for the preceding calendar
year.
``(B) Determination for calendar year.--The C-CPI-U
for any calendar year is the average of the C-CPI-U as
of the close of the 12-month period ending on August 31
of such calendar year.
``(6) CPI.--For purposes of this subsection--
``(A) In general.--The term `Consumer Price Index'
means the last Consumer Price Index for All Urban
Consumers published by the Department of Labor. For
purposes of the preceding sentence, the revision of the
Consumer Price Index which is most consistent with the
Consumer Price Index for calendar year 1986 shall be
used.
``(B) Determination for calendar year.--The CPI for
any calendar year is the average of the Consumer Price
Index as of the close of the 12-month period ending on
August 31 of such calendar year.
``(d) Special Rules for Certain Children With Unearned Income.--
``(1) In general.--In the case of any child to whom this
subsection applies for any taxable year--
``(A) the 25-percent bracket threshold amount shall
not be more than the taxable income of such child for
the taxable year reduced by the net unearned income of
such child, and
``(B) the 35-percent bracket threshold amount shall
not be more than the sum of--
``(i) the taxable income of such child for
the taxable year reduced by the net unearned
income of such child, plus
``(ii) the dollar amount in effect under
subsection (b)(2)(D) for the taxable year.
``(C) the 39.6-percent bracket threshold amount shall
not be more than the sum of--
``(i) the taxable income of such child for
the taxable year reduced by the net unearned
income of such child, plus
``(ii) the dollar amount in effect under
subsection (b)(3)(C).
``(2) Child to whom subsection applies.--This subsection
shall apply to any child for any taxable year if--
``(A) such child--
``(i) has not attained age 18 before the
close of the taxable year, or
``(ii) has attained age 18 before the close
of the taxable year and is described in
paragraph (3),
``(B) either parent of such child is alive at the
close of the taxable year, and
``(C) such child does not file a joint return for the
taxable year.
``(3) Certain children whose earned income does not exceed
one-half of individual's support.--A child is described in this
paragraph if--
``(A) such child--
``(i) has not attained age 19 before the
close of the taxable year, or
``(ii) is a student (within the meaning of
section 7706(f)(2)) who has not attained age 24
before the close of the taxable year, and
``(B) such child's earned income (as defined in
section 911(d)(2)) for such taxable year does not
exceed one-half of the amount of the individual's
support (within the meaning of section 7706(c)(1)(D)
after the application of section 7706(f)(5) (without
regard to subparagraph (A) thereof)) for such taxable
year.
``(4) Net unearned income.--For purposes of this subsection--
``(A) In general.--The term `net unearned income'
means the excess of--
``(i) the portion of the adjusted gross
income for the taxable year which is not
attributable to earned income (as defined in
section 911(d)(2)), over
``(ii) the sum of--
``(I) the amount in effect for the
taxable year under section 63(c)(2)(A)
(relating to limitation on standard
deduction in the case of certain
dependents), plus
``(II) The greater of the amount
described in subclause (I) or, if the
child itemizes his deductions for the
taxable year, the amount of the
itemized deductions allowed by this
chapter for the taxable year which are
directly connected with the production
of the portion of adjusted gross income
referred to in clause (i).
``(B) Limitation based on taxable income.--The amount
of the net unearned income for any taxable year shall
not exceed the individual's taxable income for such
taxable year.
``(e) Phaseout of 12-percent Rate.--
``(1) In general.--The amount of tax imposed by this section
(determined without regard to this subsection) shall be
increased by 6 percent of the excess (if any) of--
``(A) adjusted gross income, over
``(B) the applicable dollar amount.
``(2) Limitation.--The increase determined under paragraph
(1) with respect to any taxpayer for any taxable year shall not
exceed 27.6 percent of the lesser of--
``(A) the taxpayer's taxable income for such taxable
year, or
``(B) the 25-percent bracket threshold amount in
effect with respect to the taxpayer for such taxable
year.
``(3) Applicable dollar amount.--For purposes of this
subsection, the term `applicable dollar amount' means--
``(A) in the case of a joint return or a surviving
spouse, $1,200,000,
``(B) in the case of a married individual filing a
separate return, an amount equal to \1/2\ of the amount
in effect for the taxable year under subparagraph (A),
and
``(C) in the case of any other individual,
$1,000,000.
``(4) Estates and trusts.--Paragraph (1) shall not apply in
the case of an estate or trust.''.
(b) Application of Current Income Tax Brackets to Capital Gains
Brackets.--
(1) In general.--
(A) 0-percent capital gains bracket.--Section 1(h)(1)
is amended by striking ``which would (without regard to
this paragraph) be taxed at a rate below 25 percent''
in subparagraph (B)(i) and inserting ``below the 15-
percent rate threshold''.
(B) 15-percent capital gains bracket.--Section
1(h)(1)(C)(ii)(I) is amended by striking ``which would
(without regard to this paragraph) be taxed at a rate
below 39.6 percent'' and inserting ``below the 20-
percent rate threshold''.
(2) Rate thresholds defined.--Section 1(h) is amended by
adding at the end the following new paragraph:
``(12) Rate thresholds defined.--For purposes of this
subsection--
``(A) 15-percent rate threshold.--The 15-percent rate
threshold shall be--
``(i) in the case of a joint return or
surviving spouse, $77,200 (\1/2\ such amount in
the case of a married individual filing a
separate return),
``(ii) in the case of an individual who is
the head of a household (as defined in section
2(b)), $51,700,
``(iii) in the case of any other individual
(other than an estate or trust), an amount
equal to \1/2\ of the amount in effect for the
taxable year under clause (i), and
``(iv) in the case of an estate or trust,
$2,600.
``(B) 20-percent rate threshold.--The 20-percent rate
threshold shall be--
``(i) in the case of a joint return or
surviving spouse, $479,000 (\1/2\ such amount
in the case of a married individual filing a
separate return),
``(ii) in the case of an individual who is
the head of a household (as defined in section
2(b)), $452,400,
``(iii) in the case of any other individual
(other than an estate or trust), $425,800, and
``(iv) in the case of an estate or trust,
$12,700.
``(C) Inflation adjustment.--In the case of any
taxable year beginning after 2018, each of the dollar
amounts in subparagraphs (A) and (B) shall be increased
by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under subsection (c)(2)(A) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2017'
for `calendar year 2016' in clause (ii)
thereof.''.
(c) Application of Section 15.--
(1) In general.--Subsection (a) of section 15 is amended by
striking ``by this chapter'' and inserting ``by section 11 (or
by reference to any such rates)''.
(2) Conforming amendments.--
(A) Section 15 is amended by striking subsections (d)
and (f) and by redesignating subsection (e) as
subsection (d).
(B) Section 15(d), as redesignated by subparagraph
(A), is amended by striking ``section 1 or 11(b)'' and
inserting ``section 11(b)''.
(C) Section 6013(c) is amended by striking ``sections
15, 443, and 7851(a)(1)(A)'' and inserting ``sections
443 and 7851(a)(1)(A)''.
(3) Application to this act.--Section 15 of the Internal
Revenue Code of 1986 shall not apply to any change in a rate of
tax imposed by chapter 1 of such Code which occurs by reason of
any amendment made by this Act (other than the amendments made
by section 3001).
(d) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2017.
(2) Subsection (c).--The amendments made by subsection (c)
shall take effect on the date of the enactment of this Act.
SEC. 1002. ENHANCEMENT OF STANDARD DEDUCTION.
(a) Increase in Standard Deduction.--Section 63(c) is amended to read
as follows:
``(c) Standard Deduction.--For purposes of this subtitle--
``(1) In general.--Except as otherwise provided in this
subsection, the term `standard deduction' means--
``(A) $24,400, in the case of a joint return (or a
surviving spouse (as defined in section 2(a)),
``(B) three-quarters of the amount in effect under
subparagraph (A) for the taxable year, in the case of
the head of a household (as defined in section 2(b)),
and
``(C) one-half of the amount in effect under
subparagraph (A) for the taxable year, in any other
case.
``(2) Limitation on standard deduction in the case of certain
dependents.--In the case of an individual who is a dependent of
another taxpayer for a taxable year beginning in the calendar
year in which the individual's taxable year begins, the
standard deduction applicable to such individual for such
individual's taxable year shall not exceed the greater of--
``(A) $500, or
``(B) the sum of $250 and such individual's earned
income (within the means of section 32).
``(3) Certain individuals, etc., not eligible for standard
deduction.--In the case of--
``(A) a married individual filing a separate return
where either spouse itemizes deductions,
``(B) a nonresident alien individual,
``(C) an individual making a return under section
443(a)(1) for a period of less than 12 months on
account of a change in his annual accounting period, or
``(D) an estate or trust, common trust fund, or
partnership,
the standard deduction shall be zero.
``(4) Unmarried individual.--For purposes of this section,
the term `unmarried individual' means any individual who--
``(A) is not married as of the close of the taxable
year (as determined by applying section 7703),
``(B) is not a surviving spouse (as defined in
section 2(a)) for the taxable year, and
``(C) is not a dependent of another taxpayer for a
taxable year beginning in the calendar year in which
the individual's taxable year begins.
``(5) Inflation adjustments.--
``(A) Standard deduction amount.--In the case of any
taxable year beginning after 2019, the dollar amount in
paragraph (1)(A) shall be increased by an amount equal
to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(c)(2)(A) for the
calendar year in which the taxable year begins,
determined by substituting `calendar year 2018'
for `calendar year 2016' in clause (ii)
thereof.
``(B) Limitation amount in case of certain
dependents.--In the case of any taxable year beginning
after 2017, each of the dollar amounts in paragraph (2)
shall be increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii)(I) in the case of the dollar amount in
paragraph (2)(A), under section 1(c)(2)(A) for
the calendar year in which the taxable year
begins determined by substituting `calendar
year 1987' for `calendar year 2016' in clause
(ii) thereof, and
``(II) in the case of the dollar amount in
paragraph (2)(B), under section 1(c)(2)(A) for
the calendar year in which the taxable year
begins determined by substituting `calendar
year 1997' for `calendar year 2016' in clause
(ii) thereof.
If any increase determined under this paragraph is not a
multiple of $100, such increase shall be rounded to the next
lowest multiple of $100.''.
(b) Conforming Amendments.--
(1) Section 63(b) is amended by striking ``, minus--'' and
all that follows and inserting ``minus the standard
deduction''.
(2) Section 63 is amended by striking subsections (f) and
(g).
(3) Section 1398(c) is amended--
(A) by striking ``Basic'' in the heading thereof,
(B) by striking ``Basic standard'' in the heading of
paragraph (3) and inserting ``Standard'', and
(C) by striking ``basic'' in paragraph (3).
(4) Section 3402(m)(3) is amended by striking ``(including
the additional standard deduction under section 63(c)(3) for
the aged and blind)''.
(5) Section 6014(b)(4) is amended by striking ``section
63(c)(5)'' and inserting ``section 63(c)(2)''.
(c) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1003. REPEAL OF DEDUCTION FOR PERSONAL EXEMPTIONS.
(a) In General.--Part V of subchapter B of chapter 1 is hereby
repealed.
(b) Definition of Dependent Retained.--Section 152, prior to repeal
by subsection (a), is hereby redesignated as section 7706 and moved to
the end of chapter 79.
(c) Application to Estates and Trusts.--Subsection (b) of section 642
is amended--
(1) by striking paragraph (2)(C),
(2) by striking paragraph (3), and
(3) by striking ``Deduction for Personal Exemption'' in the
heading thereof and inserting ``Basic Deduction''.
(d) Application to Nonresident Aliens.--Section 873(b) is amended by
striking paragraph (3).
(e) Modification of Wage Withholding Rules.--
(1) In general.--Section 3402(a) is amended by striking
paragraph (2).
(2) Conforming amendment.--Section 3402(a) is amended--
(A) by redesignating subparagraphs (A) and (B) of
paragraph (1) as paragraphs (1) and (2) and moving such
redesignated paragraphs 2 ems to the left, and
(B) by striking all that precedes ``otherwise
provided in this section'' and inserting the following:
``(a) Requirement of Withholding.--Except as''.
(3) Number of exemptions.--Section 3402(f)(1) is amended--
(A) in subparagraph (A), by striking ``an individual
described in section 151(d)(2)'' and inserting ``a
dependent of any other taxpayer'', and
(B) in subparagraph (C), by striking ``with respect
to whom, on the basis of facts existing at the
beginning of such day, there may reasonably be expected
to be allowable an exemption under section 151(c)'' and
inserting ``who, on the basis of facts existing at the
beginning of such day, is reasonably expected to be a
dependent of the employee''.
(f) Modification of Return Requirement.--
(1) In general.--Paragraph (1) of section 6012(a) is amended
to read as follows:
``(1) Every individual who has gross income for the taxable
year, except that a return shall not be required of--
``(A) an individual who is not married (determined by
applying section 7703) and who has gross income for the
taxable year which does not exceed the standard
deduction applicable to such individual for such
taxable year under section 63, or
``(B) an individual entitled to make a joint return
if--
``(i) the gross income of such individual,
when combined with the gross income of such
individual's spouse, for the taxable year does
not exceed the standard deduction which would
be applicable to the taxpayer for such taxable
year under section 63 if such individual and
such individual's spouse made a joint return,
``(ii) such individual and such individual's
spouse have the same household as their home at
the close of the taxable year,
``(iii) such individual's spouse does not
make a separate return, and
``(iv) neither such individual nor such
individual's spouse is an individual described
in section 63(c)(2) who has income (other than
earned income) in excess of the amount in
effect under section 63(c)(2)(A).''.
(2) Bankruptcy estates.--Paragraph (8) of section 6012(a) is
amended by striking ``the sum of the exemption amount plus the
basic standard deduction under section 63(c)(2)(D)'' and
inserting ``the standard deduction in effect under section
63(c)(1)(B)''.
(g) Conforming Amendments.--
(1) Section 2(a)(1)(B) is amended by striking ``a dependent''
and all that follows through ``section 151'' and inserting ``a
dependent who (within the meaning of section 7706, determined
without regard to subsections (b)(1), (b)(2) and (d)(1)(B)
thereof) is a son, stepson, daughter, or stepdaughter of the
taxpayer''.
(2) Section 36B(b)(2)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(3) Section 36B(b)(3)(B) is amended by striking ``unless a
deduction is allowed under section 151 for the taxable year
with respect to a dependent'' in the flush matter at the end
and inserting ``unless the taxpayer has a dependent for the
taxable year''.
(4) Section 36B(c)(1)(D) is amended by striking ``with
respect to whom a deduction under section 151 is allowable to
another taxpayer'' and inserting ``who is a dependent of
another taxpayer''.
(5) Section 36B(d)(1) is amended by striking ``equal to the
number of individuals for whom the taxpayer is allowed a
deduction under section 151 (relating to allowance of deduction
for personal exemptions) for the taxable year'' and inserting
``the sum of 1 (2 in the case of a joint return) plus the
number of the taxpayer's dependents for the taxable year''.
(6) Section 36B(e)(1) is amended by striking ``1 or more
individuals for whom a taxpayer is allowed a deduction under
section 151 (relating to allowance of deduction for personal
exemptions) for the taxable year (including the taxpayer or his
spouse)'' and inserting ``1 or more of the taxpayer, the
taxpayer's spouse, or any dependent of the taxpayer''.
(7) Section 42(i)(3)(D)(ii)(I) is amended--
(A) by striking ``section 152'' and inserting
``section 7706'', and
(B) by striking the period at the end and inserting a
comma.
(8) Section 72(t)(2)(D)(i)(III) is amended by striking
``section 152'' and inserting ``section 7706''.
(9) Section 72(t)(7)(A)(iii) is amended by striking ``section
152(f)(1)'' and inserting ``section 7706(f)(1)''.
(10) Section 105(b) is amended--
(A) by striking ``as defined in section 152'' and
inserting ``as defined in section 7706'',
(B) by striking ``section 152(f)(1)'' and inserting
``section 7706(f)(1)'' and
(C) by striking ``section 152(e)'' and inserting
``section 7706(e)''.
(11) Section 105(c)(1) is amended by striking ``section 152''
and inserting ``section 7706''.
(12) Section 125(e)(1)(D) is amended by striking ``section
152'' and inserting ``section 7706''.
(13) Section 132(h)(2)(B) is amended--
(A) by striking ``section 152(f)(1)'' and inserting
``section 7706(f)(1)'', and
(B) by striking ``section 152(e)'' and inserting
``section 7706(e)''.
(14) Section 139D(c)(5) is amended by striking ``section
152'' and inserting ``section 7706''.
(15) Section 162(l)(1)(D) is amended by striking ``section
152(f)(1)'' and inserting ``section 7706(f)(1)''.
(16) Section 170(g)(1) is amended by striking ``section 152''
and inserting ``section 7706''.
(17) Section 170(g)(3) is amended by striking ``section
152(d)(2)'' and inserting ``section 7706(d)(2)''.
(18) Section 172(d) is amended by striking paragraph (3).
(19) Section 220(b)(6) is amended by striking ``with respect
to whom a deduction under section 151 is allowable to'' and
inserting ``who is a dependent of''.
(20) Section 220(d)(2)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(21) Section 223(b)(6) is amended by striking ``with respect
to whom a deduction under section 151 is allowable to'' and
inserting ``who is a dependent of''.
(22) Section 223(d)(2)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(23) Section 401(h) is amended by striking ``section
152(f)(1)'' in the last sentence and inserting ``section
7706(f)(1)''.
(24) Section 402(l)(4)(D) is amended by striking ``section
152'' and inserting ``section 7706''.
(25) Section 409A(a)(2)(B)(ii)(I) is amended by striking
``section 152(a)'' and inserting ``section 7706(a)''.
(26) Section 501(c)(9) is amended by striking ``section
152(f)(1)'' and inserting ``section 7706(f)(1)''.
(27) Section 529(e)(2)(B) is amended by striking ``section
152(d)(2)'' and inserting ``section 7706(d)(2)''.
(28) Section 703(a)(2) is amended by striking subparagraph
(A) and by redesignating subparagraphs (B) through (F) as
subparagraphs (A) through (E), respectively.
(29) Section 874 is amended by striking subsection (b) and by
redesignating subsection (c) as subsection (b).
(30) Section 891 is amended by striking ``under section 151
and''.
(31) Section 904(b) is amended by striking paragraph (1).
(32) Section 931(b)(1) is amended by striking ``(other than
the deduction under section 151, relating to personal
exemptions)''.
(33) Section 933 is amended--
(A) by striking ``(other than the deduction under
section 151, relating to personal exemptions)'' in
paragraph (1), and
(B) by striking ``(other than the deduction for
personal exemptions under section 151)'' in paragraph
(2).
(34) Section 1212(b)(2)(B)(ii) is amended to read as follows:
``(ii) in the case of an estate or trust, the
deduction allowed for such year under section
642(b).''.
(35) Section 1361(c)(1)(C) is amended by striking ``section
152(f)(1)(C)'' and inserting ``section 7706(f)(1)(C)''.
(36) Section 1402(a) is amended by striking paragraph (7).
(37) Section 2032A(c)(7)(D) is amended by striking ``section
152(f)(2)'' and inserting ``section 7706(f)(2)''.
(38) Section 3402(m)(1) is amended by striking ``other than
the deductions referred to in section 151 and''.
(39) Section 3402(r)(2) is amended by striking ``the sum of--
'' and all that follows and inserting ``the standard deduction
in effect under section 63(c)(1)(B).''.
(40) Section 5000A(b)(3)(A) is amended by striking ``section
152'' and inserting ``section 7706''.
(41) Section 5000A(c)(4)(A) is amended by striking ``the
number of individuals for whom the taxpayer is allowed a
deduction under section 151 (relating to allowance of deduction
for personal exemptions) for the taxable year'' and inserting
``the sum of 1 (2 in the case of a joint return) plus the
number of the taxpayer's dependents for the taxable year''.
(42) Section 6013(b)(3)(A) is amended--
(A) by striking ``had less than the exemption amount
of gross income'' in clause (ii) and inserting ``had no
gross income'',
(B) by striking ``had gross income of the exemption
amount or more'' in clause (iii) and inserting ``had
any gross income'', and
(C) by striking the flush language following clause
(iii).
(43) Section 6103(l)(21)(A)(iii) is amended to read as
follows:
``(iii) the number of the taxpayer's
dependents,''.
(44) Section 6213(g)(2) is amended by striking subparagraph
(H).
(45) Section 6334(d)(2) is amended to read as follows:
``(2) Exempt amount.--
``(A) In general.--For purposes of paragraph (1), the
term `exempt amount' means an amount equal to--
``(i) the standard deduction, divided by
``(ii) 52.
``(B) Verified statement.--Unless the taxpayer
submits to the Secretary a written and properly
verified statement specifying the facts necessary to
determine the proper amount under subparagraph (A),
subparagraph (A) shall be applied as if the taxpayer
were a married individual filing a separate return with
no dependents.''.
(46) Section 7702B(f)(2)(C)(iii) is amended by striking
``section 152(d)(2)'' and inserting ``section 7706(d)(2)''.
(47) Section 7703(a) is amended by striking ``part V of
subchapter B of chapter 1 and''.
(48) Section 7703(b)(1) is amended by striking ``section
152(f)(1)'' and all that follows and inserting ``section
7706(f)(1),''.
(49) Section 7706(a), as redesignated by this section, is
amended by striking ``this subtitle'' and inserting ``subtitle
A''.
(50)(A) Section 7706(d)(1)(B), as redesignated by this
section, is amended by striking ``the exemption amount (as
defined in section 151(d))'' and inserting ``$4,150''.
(B) Section 7706(d), as redesignated by this section, is
amended by adding at the end the following new paragraph:
``(6) Inflation adjustment.--In the case of any calendar year
beginning after 2018, the $4,150 amount in paragraph (1)(B)
shall be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
section 1(c)(2)(A) for such calendar year, determined
by substituting `calendar year 2017' for `calendar year
2016' in clause (ii) thereof.
If any increase determined under the preceding sentence is not
a multiple of $100, such increase shall be rounded to the next
lowest multiple of $100.''.
(51) The table of sections for chapter 79 is amended by
adding at the end the following new item:
``Sec. 7706. Dependent defined.''.
(h) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1004. MAXIMUM RATE ON BUSINESS INCOME OF INDIVIDUALS.
(a) In General.--Part I of subchapter A of chapter 1 is amended by
inserting after section 3 the following new section:
``SEC. 4. 25 PERCENT MAXIMUM RATE ON BUSINESS INCOME OF INDIVIDUALS.
``(a) Reduction in Tax to Achieve 25 Percent Maximum Rate.--The tax
imposed by section 1 shall be reduced by the sum of--
``(1) 10 percent of the lesser of--
``(A) qualified business income, or
``(B) the excess (if any) of--
``(i) taxable income reduced by net capital
gain (as defined in section 1(h)(11)(A)), over
``(ii) the maximum dollar amount for the 25-
percent rate bracket which applies to the
taxpayer under section 1 for the taxable year,
and
``(2) 4.6 percent of the excess (if any) of--
``(A) the lesser of--
``(i) qualified business income, or
``(ii) the excess (if any) determined under
paragraph (1)(B), over
``(B) the excess of--
``(i) the maximum dollar amount for the 35-
percent rate bracket which applies to the
taxpayer under section 1 for the taxable year,
over
``(ii) the maximum dollar amount for the 25-
percent rate bracket which applies to the
taxpayer under section 1 for the taxable year.
``(b) Qualified Business Income.--For purposes of this section, the
term `qualified business income' means the excess (if any) of--
``(1) the sum of--
``(A) 100 percent of any net business income derived
from any passive business activity, plus
``(B) the capital percentage of any net business
income derived from any active business activity, over
``(2) the sum of--
``(A) 100 percent of any net business loss derived
from any passive business activity,
``(B) except as provided in subsection (e)(3)(A), 30
percent of any net business loss derived from any
active business activity, plus
``(C) any carryover business loss determined for the
preceding taxable year.
``(c) Determination of Net Business Income or Loss.--For purposes of
this section--
``(1) In general.--Net business income or loss shall be
determined with respect to any business activity by
appropriately netting items of income, gain, deduction, and
loss with respect to such business activity.
``(2) Wages, etc.--Any wages (as defined in section 3401),
payments described in subsection (a) or (c) of section 707, or
directors' fees received by the taxpayer which are properly
attributable to any business activity shall be taken into
account under paragraph (1) as an item of income with respect
to such business activity.
``(3) Exception for certain investment-related items.--There
shall not be taken into account under paragraph (1)--
``(A) any item of short-term capital gain, short-term
capital loss, long-term capital gain, or long-term
capital loss,
``(B) any dividend, income equivalent to a dividend,
or payment in lieu of dividends described in section
954(c)(1)(G),
``(C) any interest income other than interest income
which is properly allocable to a trade or business,
``(D) any item of gain or loss described in
subparagraph (C) or (D) of section 954(c)(1) (applied
by substituting `business activity' for `controlled
foreign corporation'),
``(E) any item of income, gain, deduction, or loss
taken into account under section 954(c)(1)(F)
(determined without regard to clause (ii) thereof and
other than items attributable to notional principal
contracts entered into in transactions qualifying under
section 1221(a)(7)),
``(F) any amount received from an annuity which is
not received in connection with the trade or business
of the business activity, and
``(G) any item of deduction or loss properly
allocable to an amount described in any of the
preceding subparagraphs.
``(4) Application of restrictions applicable to determining
taxable income.--Net business income or loss shall be
appropriately adjusted so as only to take into account any
amount of income, gain, deduction, or loss to the extent such
amount affects the determination of taxable income for the
taxable year.
``(5) Carryover business loss.--For purposes of subsection
(b)(2)(C), the carryover business loss determined for any
taxable year is the excess (if any) of the sum described in
subsection (b)(2) over the sum described in subsection (b)(1)
for such taxable year.
``(d) Passive and Active Business Activity.--For purposes of this
section--
``(1) Passive business activity.--The term `passive business
activity' means any passive activity as defined in section
469(c) determined without regard to paragraphs (3) and (6)(B)
thereof.
``(2) Active business activity.--The term `active business
activity' means any business activity which is not a passive
business activity.
``(3) Business activity.--The term `business activity' means
any activity (within the meaning of section 469) which involves
the conduct of any trade or business.
``(e) Capital Percentage.--For purposes of this section--
``(1) In general.--Except as otherwise provided in this
section, the term `capital percentage' means 30 percent.
``(2) Increased percentage for capital-intensive business
activities.--In the case of a taxpayer who elects the
application of this paragraph with respect to any active
business activity (other than a specified service activity),
the capital percentage shall be equal to the applicable
percentage (as defined in subsection (f)) for each taxable year
with respect to which such election applies. Any election made
under this paragraph shall apply to the taxable year for which
such election is made and each of the 4 subsequent taxable
years. Such election shall be made not later than the due date
(including extensions) for the return of tax for the taxable
year for which such election is made, and, once made, may not
be revoked.
``(3) Treatment of specified service activities.--
``(A) In general.--In the case of any active business
activity which is a specified service activity--
``(i) the capital percentage shall be 0
percent, and
``(ii) subsection (b)(2)(B) shall be applied
by substituting `0 percent' for `30 percent'.
``(B) Exception for capital-intensive specified
service activities.--If--
``(i) the taxpayer elects the application of
this subparagraph with respect to such activity
for any taxable year, and
``(ii) the applicable percentage (as defined
in subsection (f)) with respect to such
activity for such taxable year is at least 10
percent,
then subparagraph (A) shall not apply and the capital
percentage with respect to such activity shall be equal
to such applicable percentage.
``(C) Specified service activity.--The term
`specified service activity' means any activity
involving the performance of services described in
section 1202(e)(3)(A), including investing, trading, or
dealing in securities (as defined in section
475(c)(2)), partnership interests, or commodities (as
defined in section 475(e)(2)).
``(4) Reduction in capital percentage in certain cases.--The
capital percentage (determined after the application of
paragraphs (2) and (3)) with respect to any active business
activity shall not exceed 1 minus the quotient (not greater
than 1) of--
``(A) any amounts described in subsection (c)(2)
which are taken into account in determining the net
business income derived from such activity, divided by
``(B) such net business income.
``(f) Applicable Percentage.--For purposes of this section--
``(1) In general.--The term `applicable percentage' means,
with respect to any active business activity for any taxable
year, the quotient (not greater than 1) of--
``(A) the specified return on capital with respect to
such activity for such taxable year, divided by
``(B) the taxpayer's net business income derived from
such activity for such taxable year.
``(2) Specified return on capital.--The term `specified
return on capital' means, with respect to any active business
activity referred to in paragraph (1), the excess of--
``(A) the product of--
``(i) the deemed rate of return for the
taxable year, multiplied by
``(ii) the asset balance with respect to such
activity for such taxable year, over
``(B) an amount equal to the interest which is paid
or accrued, and for which a deduction is allowed under
this chapter, with respect to such activity for such
taxable year.
``(3) Deemed rate of return.--The term `deemed rate of
return' means, with respect to any taxable year, the Federal
short-term rate (determined under section 1274(d) for the month
in which or with which such taxable year ends) plus 7
percentage points.
``(4) Asset balance.--
``(A) In general.--The asset balance with respect to
any active business activity referred to in paragraph
(1) for any taxable year equals the taxpayer's adjusted
basis of any property described in section 1221(a)(2)
which is used in connection with such activity as of
the end of the taxable year (determined without regard
to sections 168(k) and 179).
``(B) Application to activities carried on through
partnerships and s corporations.--In the case of any
active business activity carried on through a
partnership or S corporation, the taxpayer shall take
into account such taxpayer's distributive or pro rata
share (as the case may be) of the asset balance with
respect to such activity as determined with respect to
such partnership or S corporation under subparagraph
(A) (applied by substituting `the partnership's or S
corporation's adjusted basis' for `the taxpayer's
adjusted basis').
``(g) Reduced Rate for Small Businesses With Net Active Business
Income.--
``(1) In general.--The tax imposed by section 1 shall be
reduced by 3 percent of the excess (if any) of--
``(A) the least of--
``(i) qualified active business income,
``(ii) taxable income reduced by net capital
gain (as defined in section 1(h)(11)(A)), or
``(iii) the 9-percent bracket threshold
amount, over
``(B) the excess (if any) of taxable income over the
applicable threshold amount.
``(2) Phase-in of rate reduction.--In the case of any taxable
year beginning before January 1, 2022, paragraph (1) shall be
applied by substituting for `3 percent'--
``(A) in the case of any taxable year beginning after
December 31, 2017, and before January 1, 2020, `1
percent', and
``(B) in the case of any taxable year beginning after
December 31, 2019, and before January 1, 2022, `2
percent'.
``(3) Qualified active business income.--For purposes of this
subsection, the term `qualified active business income' means
the excess (if any) of--
``(A) any net business income derived from any active
business activity, over
``(B) any net business loss derived from any active
business activity.
``(4) 9-percent bracket threshold amount.--For purposes of
this subsection, the term `9-percent bracket threshold amount'
means--
``(A) in the case of a joint return or surviving
spouse, $75,000,
``(B) in the case of an individual who is the head of
a household (as defined in section 2(b)), \3/4\ of the
amount in effect for the taxable year under
subparagraph (A), and
``(C) in the case of any other individual, \1/2\ of
the amount in effect for the taxable year under
subparagraph (A).
``(5) Applicable threshold amount.--For purposes of this
subsection, the term `applicable threshold amount' means--
``(A) in the case of a joint return or surviving
spouse, $150,000,
``(B) in the case of an individual who is the head of
a household (as defined in section 2(b)), \3/4\ of the
amount in effect for the taxable year under
subparagraph (A), and
``(C) in the case of any other individual, \1/2\ of
the amount in effect for the taxable year under
subparagraph (A).
``(6) Estates and trusts.--Paragraph (1) shall not apply to
any estate or trust.
``(7) Inflation adjustment.--In the case of any taxable year
beginning after 2018, the dollar amounts in paragraphs (4)(A)
and (5)(A) shall each be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
subsection (c)(2)(A) for the calendar year in which the
taxable year begins, determined by substituting
`calendar year 2017' for `calendar year 2016' in clause
(ii) thereof.
If any increase determined under the preceding sentence is not
a multiple of $100, such increase shall be rounded to the next
lowest multiple of $100.
``(h) Regulations.--The Secretary may issue such regulations or other
guidance as may be necessary or appropriate to carry out the purposes
of this section, including regulations or other guidance--
``(1) which ensures that no amount is taken into account
under subsection (f)(4) with respect to more than one activity,
and
``(2) which treats all specified service activities of the
taxpayer as a single business activity for purposes of this
section to the extent that such activities would be treated as
a single employer under subsection (a) or (b) of section 52 or
subsection (m) or (o) of section 414.
``(i) References.--Any reference in this title to section 1 shall be
treated as including a reference to this section unless the context of
such reference clearly indicates otherwise.''.
(b) 25 Percent Rate for Certain Dividends of Real Estate Investment
Trusts and Cooperatives.--Section 1(h), as amended by the preceding
provisions of this Act, is amended by adding at the end the following
new paragraph:
``(13) 25 percent rate for certain dividends of real estate
investment trusts and cooperatives.--
``(A) In general.--For purposes of this subsection,
net capital gain (as defined in paragraph (11)) and
unrecaptured section 1250 gain (as defined in paragraph
(6)) shall each be increased by specified dividend
income.
``(B) Specified dividend income.--For purposes of
this paragraph, the term `specified dividend income'
means--
``(i) in the case of any dividend received
from a real estate investment trust, the
portion of such dividend which is neither--
``(I) a capital gain dividend (as
defined in section 852(b)(3)), nor
``(II) taken into account in
determining qualified dividend income
(as defined in paragraph (11)), and
``(ii) any dividend which is includible in
gross income and which is received from an
organization or corporation described in
section 501(c)(12) or 1381(a).''.
(c) Clerical Amendment.--The table of sections for part I of
subchapter A of chapter 1 is amended by inserting after the item
relating to section 3 the following new item:
``Sec. 4. 25 percent maximum rate on business income of individuals.''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
(e) Transition Rule.--In the case of any taxable year which includes
December 31, 2017, the amendment made by subsection (a) shall apply
with respect to such taxable year adjusted--
(1) so as to apply with respect to the rates of tax in effect
under section 1 of the Internal Revenue Code of 1986 with
respect to such taxable year (and so as to achieve a 25 percent
effective rate of tax on the business income (determined
without regard to paragraph (2)) in the same manner as such
amendment applies to taxable years beginning after such date
with respect to the rates of tax in effect for such years), and
(2) by reducing the amount of the reduction in tax (as
otherwise determined under paragraph (1)) by the amount which
bears the same proportion to the amount of such reduction as
the number of days in the taxable year which are before January
1, 2018, bears to the number of days in the entire taxable
year.
SEC. 1005. CONFORMING AMENDMENTS RELATED TO SIMPLIFICATION OF
INDIVIDUAL INCOME TAX RATES.
(a) Amendments Related to Modification of Inflation Adjustment.--
(1) Section 32(b)(2)(B)(ii)(II) is amended by striking
``section 1(f)(3) for the calendar year in which the taxable
year begins determined by substituting `calendar year 2008' for
`calendar year 1992' in subparagraph (B) thereof'' and
inserting ``section 1(c)(2)(A) for the calendar year in which
the taxable year begins determined by substituting `calendar
year 2008' for `calendar year 2016' in clause (ii) thereof''.
(2) Section 32(j)(1)(B) is amended--
(A) in the matter preceding clause (i), by striking
``section 1(f)(3)'' and inserting ``section
1(c)(2)(A)'',
(B) in clause (i), by striking ``for `calendar year
1992' in subparagraph (B) thereof'' and inserting ``for
`calendar year 2016' in clause (ii) thereof'', and
(C) in clause (ii), by striking ``for `calendar year
1992' in subparagraph (B) of such section 1'' and
inserting ``for `calendar year 2016' in clause (ii)
thereof''.
(3) Section 36B(b)(3)(A)(ii)(II) is amended by striking
``consumer price index'' and inserting ``C-CPI-U (as defined in
section 1(c))''.
(4) Section 41(e)(5)(C) is amended to read as follows:
``(C) Cost-of-living adjustment defined.--
``(i) In general.--The cost-of-living
adjustment for any calendar year is the cost-
of-living adjustment for such calendar year
determined under section 1(c)(2)(A), by
substituting `calendar year 1987' for `calendar
year 2016' in clause (ii) thereof.
``(ii) Special rule where base period ends in
a calendar year other than 1983 or 1984.--If
the base period of any taxpayer does not end in
1983 or 1984, clause (i) shall be applied by
substituting the calendar year in which such
base period ends for 1987.''.
(5) Section 42(e)(3)(D)(ii) is amended by striking ``section
1(f)(3) for such calendar year by substituting `calendar year
2008' for `calendar year 1992' in subparagraph (B) thereof''
and inserting ``section 1(c)(2)(A) for such calendar year by
substituting `calendar year 2008' for `calendar year 2016' in
clause (ii) thereof''.
(6) Section 42(h)(3)(H)(i)(II) is amended by striking
``section 1(f)(3) for such calendar year by substituting
`calendar year 2001' for `calendar year 1992' in subparagraph
(B) thereof'' and inserting ``section 1(c)(2)(A) for such
calendar year by substituting `calendar year 2001' for
`calendar year 2016' in clause (ii) thereof''.
(7) Section 45R(d)(3)(B)(ii) is amended by striking ``section
1(f)(3) for the calendar year, determined by substituting
`calendar year 2012' for `calendar year 1992' in subparagraph
(B) thereof'' and inserting ```section 1(c)(2)(A) for such
calendar year, determined by substituting ``calendar year
2012'' for ``calendar year 2016'' in clause (ii) thereof'''.
(8) Section 125(i)(2) is amended--
(A) by striking ``section 1(f)(3) for the calendar
year in which the taxable year begins by substituting
`calendar year 2012' for `calendar year 1992' in
subparagraph (B) thereof'' in subparagraph (B) and
inserting ``section 1(c)(2)(A) for the calendar year in
which the taxable year begins'', and
(B) by striking ``$50'' both places it appears in the
last sentence and inserting ``$100''.
(9) Section 162(o)(3) is amended by inserting ``as in effect
before enactment of the Tax Cuts and Jobs Act'' after ``section
1(f)(5)''.
(10) Section 220(g)(2) is amended by striking ``section
1(f)(3) for the calendar year in which the taxable year begins
by substituting `calendar year 1997' for `calendar year 1992'
in subparagraph (B) thereof'' and inserting ``section
1(c)(2)(A) for the calendar year in which the taxable year
begins, determined by substituting `calendar year 1997' for
`calendar year 2016' in clause (ii) thereof''.
(11) Section 223(g)(1) is amended by striking all that
follows subparagraph (A) and inserting the following:
``(B) the cost-of-living adjustment determined under
section 1(c)(2)(A) for the calendar year in which the
taxable year begins, determined--
``(i) by substituting for `calendar year
2016' in clause (ii) thereof--
``(I) except as provided in clause
(ii), `calendar year 1997', and
``(II) in the case of each dollar
amount in subsection (c)(2)(A),
`calendar year 2003', and
``(ii) by substituting `March 31' for `August
31' in paragraphs (5)(B) and (6)(B) of section
1(c).
The Secretary shall publish the dollar amounts as
adjusted under this subsection for taxable years
beginning in any calendar year no later than June 1 of
the preceding calendar year.''.
(12) Section 430(c)(7)(D)(vii)(II) is amended by striking
``section 1(f)(3) for the calendar year, determined by
substituting `calendar year 2009' for `calendar year 1992' in
subparagraph (B) thereof'' and inserting ``section 1(c)(2)(A)
for the calendar year, determined by substituting `calendar
year 2009' for `calendar year 2016' in clause (ii) thereof''.
(13) Section 512(d)(2)(B) is amended by striking ``section
1(f)(3) for the calendar year in which the taxable year begins,
by substituting `calendar year 1994' for `calendar year 1992'
in subparagraph (B) thereof''and inserting ``section 1(c)(2)(A)
for the calendar year in which the taxable year begins,
determined by substituting `calendar year 1994' for `calendar
year 2016' in clause (ii) thereof''.
(14) Section 513(h)(2)(C)(ii) is amended by striking
``section 1(f)(3) for the calendar year in which the taxable
year begins by substituting `calendar year 1987' for `calendar
year 1992' in subparagraph (B) thereof'' and inserting
``section 1(c)(2)(A) for the calendar year in which the taxable
year begins, determined by substituting `calendar year 1987'
for `calendar year 2016' in clause (ii) thereof''.
(15) Section 831(b)(2)(D)(ii) is amended by striking
``section 1(f)(3) for such calendar year by substituting
`calendar year 2013' for `calendar year 1992' in subparagraph
(B) thereof'' and inserting ``section 1(c)(2)(A) for such
calendar year by substituting `calendar year 2013' for
`calendar year 2016' in clause (ii) thereof''.
(16) Section 877A(a)(3)(B)(i)(II) is amended by striking
``section 1(f)(3) for the calendar year in which the taxable
year begins, by substituting `calendar year 2007' for `calendar
year 1992' in subparagraph (B) thereof'' and inserting
``section 1(c)(2)(A) for the calendar year in which the taxable
year begins, determined by substituting `calendar year 2007'
for `calendar year 2016' in clause (ii) thereof''.
(17) Section 911(b)(2)(D)(ii)(II) is amended by striking
``section 1(f)(3) for the calendar year in which the taxable
year begins, determined by substituting `2004' for `1992' in
subparagraph (B) thereof'' and inserting ``section 1(c)(2)(A)
for the calendar year in which the taxable year begins,
determined by substituting `calendar year 2004' for `calendar
year 2016' in clause (ii) thereof''.
(18) Section 1274A(d)(2) is amended to read as follows:
``(2) Inflation adjustment.--
``(A) In general.--In the case of any debt instrument
arising out of a sale or exchange during any calendar
year after 2018, each adjusted dollar amount shall be
increased by an amount equal to--
``(i) such adjusted dollar amount, multiplied
by
``(ii) the cost-of-living adjustment
determined under section 1(c)(2)(A) for such
calendar year, determined by substituting
`calendar year 2017' for `calendar year 2016'
in clause (ii) thereof.
``(B) Adjusted dollar amounts.--For purposes of this
paragraph, the term `adjusted dollar amount' means the
dollar amounts in subsections (b) and (c), in each case
as in effect for calendar year 2018.
``(C) Rounding.--Any increase under subparagraph (A)
shall be rounded to the nearest multiple of $100.''.
(19) Section 2010(c)(3)(B)(ii) is amended by striking
``section 1(f)(3) for such calendar year by substituting
`calendar year 2010' for `calendar year 1992' in subparagraph
(B) thereof'' and inserting ``section 1(c)(2)(A) for such
calendar year, determined by substituting `calendar year 2010'
for `calendar year 2016' in clause (ii) thereof''.
(20) Section 2032A(a)(3)(B) is amended by striking ``section
1(f)(3) for such calendar year by substituting `calendar year
1997' for `calendar year 1992' in subparagraph (B) thereof''
and inserting ``section 1(c)(2)(A) for such calendar year,
determined by substituting `calendar year 1997' for `calendar
year 2016' in clause (ii) thereof''.
(21) Section 2503(b)(2)(B) is amended by striking ``section
1(f)(3) for such calendar year by substituting `calendar year
1997' for `calendar year 1992' in subparagraph (B) thereof''
and inserting ``section 1(c)(2)(A) for the calendar year,
determined by substituting `calendar year 1997' for `calendar
year 2016' in clause (ii) thereof''.
(22) Section 4161(b)(2)(C)(i)(II) is amended by striking
``section 1(f)(3) for such calendar year, determined by
substituting `2004' for `1992' in subparagraph (B) thereof''
and inserting ``section 1(c)(2)(A) for such calendar year,
determined by substituting `calendar year 2004' for `calendar
year 2016' in clause (ii) thereof''.
(23) Section 4261(e)(4)(A)(ii) is amended by striking
``section 1(f)(3) for such calendar year by substituting the
year before the last nonindexed year for `calendar year 1992'
in subparagraph (B) thereof'' and inserting ``section
1(c)(2)(A) for such calendar year, determined by substituting
the year before the last nonindexed year for `calendar year
2016' in clause (ii) thereof''.
(24) Section 4980I(b)(3)(C)(v)(II) is amended--
(A) by striking ``section 1(f)(3)'' and inserting
``section 1(c)(2)(A)'',
(B) by striking ``subparagraph (B)'' and inserting
``clause (ii)'', and
(C) by striking ``1992'' and inserting ``2016''.
(25) Section 5000A(c)(3)(D)(ii) is amended--
(A) by striking ``section 1(f)(3)'' and inserting
``section 1(c)(2)(A)'',
(B) by striking ``subparagraph (B)'' and inserting
``clause (ii)'', and
(C) by striking ``1992'' and inserting ``2016''.
(26) Section 6039F(d) is amended by striking ``section
1(f)(3), except that subparagraph (B) thereof'' and inserting
``section 1(c)(2)(A), except that clause (ii) thereof''.
(27) Section 6323(i)(4)(B) is amended by striking ``section
1(f)(3) for the calendar year, determined by substituting
`calendar year 1996' for `calendar year 1992' in subparagraph
(B) thereof'' and inserting ``section 1(c)(2)(A) for the
calendar year, determined by substituting `calendar year 1996'
for `calendar year 2016' in clause (ii) thereof''.
(28) Section 6334(g)(1)(B) is amended by striking ``section
1(f)(3) for such calendar year, by substituting `calendar year
1998' for `calendar year 1992' in subparagraph (B) thereof''
and inserting ``section 1(c)(2)(A) for such calendar year,
determined by substituting `calendar year 1999' for `calendar
year 2016' in clause (ii) thereof''.
(29) Section 6601(j)(3)(B) is amended by striking ``section
1(f)(3) for such calendar year by substituting `calendar year
1997' for `calendar year 1992' in subparagraph (B) thereof''
and inserting ``section 1(c)(2)(A) for such calendar year by
substituting `calendar year 1997' for `calendar year 2016' in
clause (ii) thereof''.
(30) Section 6651(i)(1) is amended by striking ``section
1(f)(3) determined by substituting `calendar year 2013' for
`calendar year 1992' in subparagraph (B) thereof'' and
inserting ``section 1(c)(2)(A) determined by substituting
`calendar year 2013' for `calendar year 2016' in clause (ii)
thereof''.
(31) Section 6721(f)(1) is amended--
(A) by striking ``section 1(f)(3)'' and inserting
``section 1(c)(2)(A)'',
(B) by striking ``subparagraph (B)'' and inserting
``clause (ii)'', and
(C) by striking ``1992'' and inserting ``2016''.
(32) Section 6722(f)(1) is amended--
(A) by striking ``section 1(f)(3)'' and inserting
``section 1(c)(2)(A)'',
(B) by striking ``subparagraph (B)'' and inserting
``clause (ii)'', and
(C) by striking ``1992'' and inserting ``2016''.
(33) Section 6652(c)(7)(A) is amended by striking ``section
1(f)(3) determined by substituting `calendar year 2013' for
`calendar year 1992' in subparagraph (B) thereof'' and
inserting ``section 1(c)(2)(A) determined by substituting
`calendar year 2013' for `calendar year 2016' in clause (ii)
thereof''.
(34) Section 6695(h)(1) is amended by striking ``section
1(f)(3) determined by substituting `calendar year 2013' for
`calendar year 1992' in subparagraph (B) thereof'' and
inserting ``section 1(c)(2)(A) determined by substituting
`calendar year 2013' for `calendar year 2016' in clause (ii)
thereof''.
(35) Section 6698(e)(1) is amended by striking ``section
1(f)(3) determined by substituting `calendar year 2013' for
`calendar year 1992' in subparagraph (B) thereof'' and
inserting ``section 1(c)(2)(A) determined by substituting
`calendar year 2013' for `calendar year 2016' in clause (ii)
thereof''.
(36) Section 6699(e)(1) is amended by striking ``section
1(f)(3) determined by substituting `calendar year 2013' for
`calendar year 1992' in subparagraph (B) thereof'' and
inserting ``section 1(c)(2)(A) determined by substituting
`calendar year 2013' for `calendar year 2016' in clause (ii)
thereof''.
(37) Section 7345(f)(2) is amended by striking ``section
1(f)(3) for the calendar year, determined by substituting
`calendar year 2015' for `calendar year 1992' in subparagraph
(B) thereof'' and inserting ``section 1(c)(2)(A) for the
calendar year, determined by substituting `calendar year 2015'
for `calendar year 2016' in clause (ii) thereof''.
(38) Section 7430(c)(1) is amended by striking ``section
1(f)(3) for such calendar year, by substituting `calendar year
1995' for `calendar year 1992' in subparagraph (B) thereof'' in
the flush text at the end and inserting ``section 1(c)(2)(A)
for such calendar year, determined by substituting `calendar
year 1995' for `calendar year 2016' in clause (ii) thereof''.
(39) Section 7872(g)(5) is amended to read as follows:
``(5) Inflation adjustment.--
``(A) In general.--In the case of any loan made
during any calendar year after 2018 to which paragraph
(1) applies, the adjusted dollar amount shall be
increased by an amount equal to--
``(i) such adjusted dollar amount, multiplied
by
``(ii) the cost-of-living adjustment
determined under section 1(c)(2)(A) for such
calendar year, determined by substituting
`calendar year 2017' for `calendar year 2016'
in clause (ii) thereof.
``(B) Adjusted dollar amount.--For purposes of this
paragraph, the term `adjusted dollar amount' means the
dollar amount in paragraph (2) as in effect for
calendar year 2018.
``(C) Rounding.--Any increase under subparagraph (A)
shall be rounded to the nearest multiple of $100.''.
(40) Section 219(b)(5)(C)(i)(II) is amended by striking
``section 1(f)(3) for the calendar year in which the taxable
year begins, determined by substituting `calendar year 2007'
for `calendar year 1992' in subparagraph (B) thereof'' and
inserting ``section 1(c)(2)(A) for the calendar year in which
the taxable year begins, determined by substituting `calendar
year 2007' for `calendar year 2016' in clause (ii) thereof''.
(41) Section 219(g)(8)(B) is amended by striking ``section
1(f)(3) for the calendar year in which the taxable year begins,
determined by substituting `calendar year 2005' for `calendar
year 1992' in subparagraph (B) thereof'' and inserting
``section 1(c)(2)(A) for the calendar year in which the taxable
year begins, determined by substituting `calendar year 2005'
for `calendar year 2016' in clause (ii) thereof''.
(b) Other Conforming Amendments.--
(1) Section 36B(b)(3)(B)(ii)(I)(aa) is amended to read as
follows:
``(aa) who is described in
section 1(b)(1)(B) and who does
not have any dependents for the
taxable year,''.
(2) Section 486B(b)(1) is amended--
(A) by striking ``maximum rate in effect'' and
inserting ``highest rate specified'', and
(B) by striking ``section 1(e)'' and inserting
``section 1''.
(3) Section 511(b)(1) is amended by striking ``section 1(e)''
and inserting ``section 1''.
(4) Section 641(a) is amended by striking ``section 1(e)
shall apply to the taxable income'' and inserting ``section 1
shall apply to the taxable income''.
(5) Section 641(c)(2)(A) is amended to read as follows:
``(A) Except to the extent provided in section 1(h),
the rate of tax shall be treated as being the highest
rate of tax set forth in section 1(a).''.
(6) Section 646(b) is amended to read as follows:
``(b) Taxation of Income of Trust.--Except as provided in subsection
(f)(1)(B)(ii), there is hereby imposed on the taxable income of an
electing Settlement Trust a tax at the rate specified in section
1(a)(1). Such tax shall be in lieu of the income tax otherwise imposed
by this chapter on such income.''.
(7) Section 685(c) is amended by striking ``Section 1(e)''
and inserting ``Section 1''.
(8) Section 904(b)(3)(E)(ii)(I) is amended by striking ``set
forth in subsection (a), (b), (c), (d), or (e) of section 1
(whichever applies)'' and inserting ``the highest rate of tax
specified in section 1''.
(9) Section 1398(c)(2) is amended by striking ``subsection
(d) of''.
(10) Section 3402(p)(1)(B) is amended by striking ``any
percentage applicable to any of the 3 lowest income brackets in
the table under section 1(c),'' and inserting ``12 percent, 25
percent,''.
(11) Section 3402(q)(1) is amended by striking ``the product
of third lowest rate of tax applicable under section 1(c) and''
and inserting ``25 percent of''.
(12) Section 3402(r)(3) is amended by striking ``the amount
of tax which would be imposed by section 1(c) (determined
without regard to any rate of tax in excess of the fourth
lowest rate of tax applicable under section 1(c)) on an amount
of taxable income equal to'' and inserting ``an amount equal to
the product of 25 percent multiplied by''.
(13) Section 3406(a)(1) is amended by striking ``the product
of the fourth lowest rate of tax applicable under section 1(c)
and'' and inserting ``25 percent of''.
(14) Section 6103(e)(1)(A)(iii) is amended by inserting ``(as
in effect on the day before the date of the enactment of the
Tax Cuts and Jobs Act)'' after ``section 1(g)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle B--Simplification and Reform of Family and Individual Tax
Credits
SEC. 1101. ENHANCEMENT OF CHILD TAX CREDIT AND NEW FAMILY TAX CREDIT.
(a) Increase in Credit Amount and Addition of Other Dependents.--
(1) In General.--Section 24(a) is amended to read as follows:
``(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an amount
equal to the sum of--
``(1) with respect to each qualifying child of the taxpayer,
$1,600, and
``(2) for taxable years beginning before January 1, 2023,
with respect to the taxpayer (each spouse in the case of a
joint return) and each dependent of the taxpayer to whom
paragraph (1) does not apply, $300.''.
(2) Conforming Amendments.--
(A) Section 24(c) is amended--
(i) by redesignating paragraphs (1) and (2) as
paragraphs (2) and (3), respectively,
(ii) by striking ``152(c)'' in paragraph (2) (as so
redesignated) and inserting ``7706(c)'',
(iii) by inserting before paragraph (2) (as so
redesignated) the following new paragraph:
``(1) Dependent.--
``(A) In general.--The term `dependent' shall have
the meaning given such term by section 7706.
``(B) Certain individuals not treated as
dependents.--In the case of an individual with respect
to whom a credit under this section is allowable to
another taxpayer for a taxable year beginning in the
calendar year in which the individual's taxable year
begins, the amount applicable to such individual under
subsection (a) for such individual's taxable year shall
be zero.'',
(iv) in paragraph (3) (as so redesignated)--
(I) by striking ``term `qualifying child'''
and inserting ``terms `qualifying child' and
`dependent''', and
(II) by striking ``152(b)(3)'' and inserting
``7706(b)(3)'', and
(v) in the heading by striking ``Qualifying'' and
inserting ``Dependent; Qualifying''.
(B) The heading for section 24 is amended by inserting ``and
family'' after ``child''.
(C) The table of sections for subpart A of part IV of
subchapter A of chapter 1 is amended by striking the item
relating to section 24 and inserting the following new item:
``Sec. 24. Child and family tax credit.''.
(b) Elimination of Marriage Penalty.--Section 24(b)(2) is amended--
(1) by striking ``$110,000'' in subparagraph (A) and inserting
``$230,000'',
(2) by inserting ``and'' at the end of subparagraph (A),
(3) by striking ``$75,000 in the case of an individual who is not
married'' and all that follows through the period at the end and
inserting ``one-half of the amount in effect under subparagraph (A) for
the taxable year in the case of any other individual.''.
(c) Credit Refundable up to $1,000 Per Child.--
(1) In General.--Section 24(d)(1)(A) is amended by striking all that
follows ``under this section'' and inserting the following:
``determined--
``(i) without regard to this subsection and
the limitation under section 26(a),
``(ii) without regard to subsection (a)(2),
and
``(iii) by substituting `$1,000' for `$1,600'
in subsection (a)(1), or''.
(2) Inflation Adjustment.--Section 24(d) is amended by inserting
after paragraph (2) the following new paragraph:
``(3) Inflation adjustment.--In the case of any taxable year
beginning in a calendar year after 2017, the $1,000 amount in
paragraph (1)(A)(iii) shall be increased by an amount equal
to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment under section
1(c)(2)(A) for such calendar year.
Any increase determined under the preceding sentence shall be
rounded to the next highest multiple of $100 and shall not
exceed the amount in effect under subsection (a)(2).''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1102. REPEAL OF NONREFUNDABLE CREDITS.
(a) Repeal of Section 22.--
(1) In general.--Subpart A of part IV of subchapter A of
chapter 1 is amended by striking section 22 (and by striking
the item relating to such section in the table of sections for
such subpart).
(2) Conforming amendment.--
(A) Section 86(f) is amended by striking paragraph
(1) and by redesignating paragraphs (2), (3), and (4)
as paragraphs (1), (2), and (3), respectively.
(B)(i) Subsections (c)(3)(B) and (d)(4)(A) of section
7706, as redesignated by this Act, are each amended by
striking ``(as defined in section 22(e)(3)''.
(ii) Section 7706(f), as redesignated by this Act, is
amended by redesignating paragraph (7) as paragraph (8)
and by inserting after paragraph (6) the following new
paragraph:
``(7) Permanent and total disability defined.--An individual
is permanently and totally disabled if he is unable to engage
in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than 12
months. An individual shall not be considered to be permanently
and totally disabled unless he furnishes proof of the existence
thereof in such form and manner, and at such times, as the
Secretary may require.''.
(iii) Section 415(c)(3)(C)(i) is amended by striking
``22(e)(3)'' and inserting ``7706(f)(7)''.
(iv) Section 422(c)(6) is amended by striking
``22(e)(3)'' and inserting ``7706(f)(7)''.
(b) Termination of Section 25.--Section 25, as amended by section
3601, is amended by adding at the end the following new subsection:
``(k) Termination.--No credit shall be allowed under this section
with respect to any mortgage credit certificate issued after December
31, 2017.''.
(c) Repeal of Section 30D.--
(1) In general.--Subpart B of part IV of subchapter A of
chapter 1 is amended by striking section 30D (and by striking
the item relating to such section in the table of sections for
such subpart).
(2) Conforming amendments.--
(A) Section 38(b) is amended by striking paragraph
(35).
(B) Section 1016(a) is amended by striking paragraph
(37).
(C) Section 6501(m) is amended by striking
``30D(e)(4),''.
(d) Effective Date.--
(1) In general.--Except as provided in paragraphs (2) and
(3), the amendments made by this section shall apply to taxable
years beginning after December 31, 2017.
(2) Subsection (b).--The amendment made by subsection (c)
shall apply to taxable years ending after December 31, 2017.
(3) Subsection (c).--The amendments made by subsection (d)
shall apply to vehicles placed in service in taxable years
beginning after December 31, 2017.
SEC. 1103. REFUNDABLE CREDIT PROGRAM INTEGRITY.
(a) Identification Requirements for Child and Family Tax Credit.--
(1) In general.--Section 24(e) is amended to read as follows:
``(e) Identification Requirements.--
``(1) Requirements for qualifying child.--No credit shall be
allowed under this section to a taxpayer with respect to any
qualifying child unless the taxpayer includes the name and
social security number of such qualifying child on the return
of tax for the taxable year. The preceding sentence shall not
prevent a qualifying child from being treated as a dependent
described in subsection (a)(2).
``(2) Other identification requirements.--No credit shall be
allowed under this section with respect to any individual
unless the taxpayer identification number of such individual is
included on the return of tax for the taxable year and such
identifying number was issued before the due date for filing
the return for the taxable year.
``(3) Social security number.--For purposes of this
subsection, the term `social security number' means a social
security number issued by the Social Security Administration
(but only if the social security number is issued to a citizen
of the United States or pursuant to subclause (I) (or that
portion of subclause (III) that relates to subclause (I)) of
section 205(c)(2)(B)(i) of the Social Security Act)).''.
(2) Omissions treated as mathematical or clerical error.--
(A) In general.--Section 6213(g)(2)(I) is amended to
read as follows:
``(I) an omission of a correct social security
number, or a correct TIN, required under section 24(e)
(relating to child tax credit), to be included on a
return,''.
(b) Social Security Number Must Be Provided.--
(1) In general.--Section 25A(f)(1)(A), as amended by section
1201 of this Act, is amended by striking ``taxpayer
identification number'' each place it appears and inserting
``social security number''.
(2) Omission treated as mathematical or clerical error.--
Section 6213(g)(2)(J) is amended by striking ``TIN'' and
inserting ``social security number and employer identification
number''.
(c) Individuals Prohibited From Engaging in Employment in United
States Not Eligible for Earned Income Tax Credit.--Section 32(m) is
amended--
(1) by striking ``(other than:'' and all that follows through
``of the Social Security Act)'', and
(2) by inserting before the period at the end the following:
``, but only if, in the case of subsection (c)(1)(E), the
social security number is issued to a citizen of the United
States or pursuant to subclause (I) (or that portion of
subclause (III) that relates to subclause (I)) of section
205(c)(2)(B)(i) of the Social Security Act''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1104. PROCEDURES TO REDUCE IMPROPER CLAIMS OF EARNED INCOME
CREDIT.
(a) Clarification Regarding Determination of Self-employment Income
Which Is Treated as Earned Income.--Section 32(c)(2)(B) is amended by
striking ``and'' at the end of clause (v), by striking the period at
the end of clause (vi) and inserting ``, and'', and by adding at the
end the following new clause:
``(vii) in determining the taxpayer's net
earnings from self-employment under
subparagraph (A)(ii) there shall not fail to be
taken into account any deduction which is
allowable to the taxpayer under this
subtitle.''.
(b) Required Quarterly Reporting of Wages of Employees.--Section 6011
is amended by adding at the end the following new subsection:
``(i) Employer Reporting of Wages.--Every person required to deduct
and withhold from an employee a tax under section 3101 or 3402 shall
include on each return or statement submitted with respect to such tax,
the name and address of such employee and the amount of wages for such
employee on which such tax was withheld.''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
ending after the date of the enactment of this Act.
(2) Reporting.--The Secretary of the Treasury, or his
designee, may delay the application of the amendment made by
subsection (b) for such period as such Secretary (or designee)
determines to be reasonable to allow persons adequate time to
modify electronic (or other) systems to permit such person to
comply with the requirements of such amendment.
SEC. 1105. CERTAIN INCOME DISALLOWED FOR PURPOSES OF THE EARNED INCOME
TAX CREDIT.
(a) Substantiation Requirement.--Section 32 is amended by adding at
the end the following new subsection:
``(n) Inconsistent Income Reporting.--If the earned income of a
taxpayer claimed on a return for purposes of this section is not
substantiated by statements or returns under sections 6051, 6052,
6041(a), or 6050W with respect to such taxpayer, the Secretary may
require such taxpayer to provide books and records to substantiate such
income, including for the purpose of preventing fraud.''.
(b) Exclusion of Unsubstantiated Amount From Earned Income.--Section
32(c)(2) is amended by adding at the end the following new
subparagraph:
``(C) Exclusion.--In the case of a taxpayer with
respect to which there is an inconsistency described in
subsection (n) who fails to substantiate such
inconsistency to the satisfaction of the Secretary, the
term `earned income' shall not include amounts to the
extent of such inconsistency.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years ending after the date of the enactment of this Act.
Subtitle C--Simplification and Reform of Education Incentives
SEC. 1201. AMERICAN OPPORTUNITY TAX CREDIT.
(a) In General.--Section 25A is amended to read as follows:
``SEC. 25A. AMERICAN OPPORTUNITY TAX CREDIT.
``(a) In General.--In the case of an individual, there shall be
allowed as a credit against the tax imposed by this chapter for the
taxable year an amount equal to the sum of--
``(1) 100 percent of so much of the qualified tuition and
related expenses paid by the taxpayer during the taxable year
(for education furnished to any eligible student for whom an
election is in effect under this section for such taxable year
during any academic period beginning in such taxable year) as
does not exceed $2,000, plus
``(2) 25 percent of so much of such expenses so paid as
exceeds the dollar amount in effect under paragraph (1) but
does not exceed twice such dollar amount.
``(b) Portion of Credit Refundable.--40 percent of the credit
allowable under subsection (a)(1) (determined without regard to this
subsection and section 26(a) and after application of all other
provisions of this section) shall be treated as a credit allowable
under subpart C (and not under this part). The preceding sentence shall
not apply to any taxpayer for any taxable year if such taxpayer is a
child to whom section 1(d) applies for such taxable year.
``(c) Limitation Based on Modified Adjusted Gross Income.--
``(1) In general.--The amount allowable as a credit under
subsection (a) for any taxable year shall be reduced (but not
below zero) by an amount which bears the same ratio to the
amount so allowable (determined without regard to this
subsection and subsection (b) but after application of all
other provisions of this section) as--
``(A) the excess of--
``(i) the taxpayer's modified adjusted gross
income for such taxable year, over
``(ii) $80,000 (twice such amount in the case
of a joint return), bears to
``(B) $10,000 (twice such amount in the case of a
joint return).
``(2) Modified adjusted gross income.--For purposes of this
subsection, the term `modified adjusted gross income' means the
adjusted gross income of the taxpayer for the taxable year
increased by any amount excluded from gross income under
section 911, 931, or 933.
``(d) Other Limitations.--
``(1) Credit allowed only for 5 taxable years.--An election
to have this section apply may not be made for any taxable year
if such an election (by the taxpayer or any other individual)
is in effect with respect to such student for any 5 prior
taxable years.
``(2) Credit allowed only for first 5 years of postsecondary
education.--
``(A) In general.--No credit shall be allowed under
subsection (a) for a taxable year with respect to the
qualified tuition and related expenses of an eligible
student if the student has completed (before the
beginning of such taxable year) the first 5 years of
postsecondary education at an eligible educational
institution.
``(B) Fifth year limitations.--In the case of an
eligible student with respect to whom an election has
been in effect for 4 preceding taxable years for
purposes of the fifth taxable year--
``(i) the amount of the credit allowed under
this section for the taxable year shall not
exceed an amount equal to 50 percent of the
credit otherwise determined with respect to
such student under this section (without regard
to this subparagraph), and
``(ii) the amount of the credit determined
under subsection (b) and allowable under
subpart C shall not exceed an amount equal to
40 percent of the amount determined with
respect to such student under clause (i).
``(e) Definitions.--For purposes of this section--
``(1) Eligible student.-- The term `eligible student' means,
with respect to any academic period, a student who--
``(A) meets the requirements of section 484(a)(1) of
the Higher Education Act of 1965 (20 U.S.C.
1091(a)(1)), as in effect on August 5, 1997, and
``(B) is carrying at least \1/2\ the normal full-time
work load for the course of study the student is
pursuing.
``(2) Qualified tuition and related expenses.--
``(A) In general.--The term `qualified tuition and
related expenses' means tuition, fees, and course
materials, required for enrollment or attendance of--
``(i) the taxpayer,
``(ii) the taxpayer's spouse, or
``(iii) any dependent of the taxpayer,
at an eligible educational institution for courses of
instruction of such individual at such institution.
``(B) Exception for education involving sports,
etc.--Such term does not include expenses with respect
to any course or other education involving sports,
games, or hobbies, unless such course or other
education is part of the individual's degree program.
``(C) Exception for nonacademic fees.--Such term does
not include student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an
individual's academic course of instruction.
``(3) Eligible educational institution.--The term `eligible
educational institution' means an institution--
``(A) which is described in section 481 of the Higher
Education Act of 1965 (20 U.S.C. 1088), as in effect on
August 5, 1997, and
``(B) which is eligible to participate in a program
under title IV of such Act.
``(f) Special Rules.--
``(1) Identification requirements.--
``(A) Student.--No credit shall be allowed under
subsection (a) to a taxpayer with respect to the
qualified tuition and related expenses of an individual
unless the taxpayer includes the name and taxpayer
identification number of such individual on the return
of tax for the taxable year, and such taxpayer
identification number was issued on or before the due
date for filing such return.
``(B) Taxpayer.--No credit shall be allowed under
this section if the identifying number of the taxpayer
was issued after the due date for filing the return for
the taxable year.
``(C) Institution.--No credit shall be allowed under
this section unless the taxpayer includes the employer
identification number of any institution to which
qualified tuition and related expenses were paid with
respect to the individual.
``(2) Adjustment for certain scholarships, etc.--The amount
of qualified tuition and related expenses otherwise taken into
account under subsection (a) with respect to an individual for
an academic period shall be reduced (before the application of
subsection (c)) by the sum of any amounts paid for the benefit
of such individual which are allocable to such period as--
``(A) a qualified scholarship which is excludable
from gross income under section 117,
``(B) an educational assistance allowance under
chapter 30, 31, 32, 34, or 35 of title 38, United
States Code, or under chapter 1606 of title 10, United
States Code, and
``(C) a payment (other than a gift, bequest, devise,
or inheritance within the meaning of section 102(a))
for such individual's educational expenses, or
attributable to such individual's enrollment at an
eligible educational institution, which is excludable
from gross income under any law of the United States.
``(3) Treatment of expenses paid by dependent.--If an
individual is a dependent of another taxpayer for a taxable
year beginning in the calendar year in which such individuals
taxable year begins--
``(A) no credit shall be allowed under subsection (a)
to such individual for such individual's taxable year,
and
``(B) qualified tuition and related expenses paid by
such individual during such individual's taxable year
shall be treated for purposes of this section as paid
by such other taxpayer.
``(4) Treatment of certain prepayments.--If qualified tuition
and related expenses are paid by the taxpayer during a taxable
year for an academic period which begins during the first 3
months following such taxable year, such academic period shall
be treated for purposes of this section as beginning during
such taxable year.
``(5) Denial of double benefit.--No credit shall be allowed
under this section for any amount for which a deduction is
allowed under any other provision of this chapter.
``(6) No credit for married individuals filing separate
returns.--If the taxpayer is a married individual (within the
meaning of section 7703), this section shall apply only if the
taxpayer and the taxpayer's spouse file a joint return for the
taxable year.
``(7) Nonresident aliens.--If the taxpayer is a nonresident
alien individual for any portion of the taxable year, this
section shall apply only if such individual is treated as a
resident alien of the United States for purposes of this
chapter by reason of an election under subsection (g) or (h) of
section 6013.
``(8) Restrictions on taxpayers who improperly claimed credit
in prior year.--
``(A) Taxpayers making prior fraudulent or reckless
claims.--
``(i) In general.--No credit shall be allowed
under this section for any taxable year in the
disallowance period.
``(ii) Disallowance period.--For purposes of
clause (i), the disallowance period is--
``(I) the period of 10 taxable years
after the most recent taxable year for
which there was a final determination
that the taxpayer's claim of credit
under this section was due to fraud,
and
``(II) the period of 2 taxable years
after the most recent taxable year for
which there was a final determination
that the taxpayer's claim of credit
under this section was due to reckless
or intentional disregard of rules and
regulations (but not due to fraud).
``(B) Taxpayers making improper prior claims.--In the
case of a taxpayer who is denied credit under this
section for any taxable year as a result of the
deficiency procedures under subchapter B of chapter 63,
no credit shall be allowed under this section for any
subsequent taxable year unless the taxpayer provides
such information as the Secretary may require to
demonstrate eligibility for such credit.
``(g) Inflation Adjustment.--
``(1) In general.--In the case of a taxable year beginning
after 2018, the $80,000 amount in subsection (c)(1)(A)(ii)
shall each be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
section 1(c)(2)(A) for the calendar year in which the
taxable year begins, determined by substituting
`calendar year 2017' for `calendar year 2016' in clause
(ii) thereof.
``(2) Rounding.--If any amount as adjusted under paragraph
(1) is not a multiple of $1,000, such amount shall be rounded
to the next lowest multiple of $1,000.
``(h) Regulations.--The Secretary may prescribe such regulations or
other guidance as may be necessary or appropriate to carry out this
section, including regulations providing for a recapture of the credit
allowed under this section in cases where there is a refund in a
subsequent taxable year of any amount which was taken into account in
determining the amount of such credit.''.
(b) Conforming Amendments.--
(1) Section 72(t)(7)(B) is amended by striking ``section
25A(g)(2)'' and inserting ``section 25A(f)(2)''.
(2) Section 529(c)(3)(B)(v)(I) is amended by striking
``section 25A(g)(2)'' and inserting ``section 25A(f)(2)''.
(3) Section 529(e)(3)(B)(i) is amended by striking ``section
25A(b)(3)'' and inserting ``section 25A(d)''.
(4) Section 530(d)(2)(C) is amended--
(A) by striking ``section 25A(g)(2)'' in clause
(i)(I) and inserting ``section 25A(f)(2)'', and
(B) by striking ``Hope and lifetime learning
credits'' in the heading and inserting ``American
opportunity tax credit''.
(5) Section 530(d)(4)(B)(iii) is amended by striking
``section 25A(g)(2)'' and inserting ``section 25A(d)(4)(B)''.
(6) Section 6050S(e) is amended by striking ``subsection
(g)(2)'' and inserting ``subsection (f)(2)''.
(7) Section 6211(b)(4)(A) is amended by striking ``subsection
(i)(6)'' and inserting ``subsection (b)''.
(8) Section 6213(g)(2)(J) is amended by striking ``TIN
required under section 25A(g)(1)'' and inserting ``TIN, and
employer identification number, required under section
25A(f)(1)''.
(9) Section 6213(g)(2)(Q) is amended to read as follows:
``(Q) an omission of information required by section
25A(f)(8)(B) or an entry on the return claiming the
credit determined under section 25A(a) for a taxable
year for which the credit is disallowed under section
25A(f)(8)(A).''.
(10) Section 1004(c) of division B of the American Recovery
and Reinvestment Tax Act of 2009 is amended--
(A) in paragraph (1)--
(i) by striking ``section 25A(i)(6)'' each
place it appears and inserting ``section
25A(b)'', and
(ii) by striking ``with respect to taxable
years beginning after 2008 and before 2018''
each place it appears and inserting ``with
respect to each taxable year'',
(B) in paragraph (2), by striking ``Section
25A(i)(6)'' and inserting ``Section 25A(b)'', and
(C) in paragraph (3)(C), by striking ``subsection
(i)(6)'' and inserting ``subsection (b)''.
(11) The table of sections for subpart A of part IV of
subchapter A of chapter 1 is amended by striking the item
relating to section 25A and inserting the following new item:
``Sec. 25A. American opportunity tax credit.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1202. CONSOLIDATION OF EDUCATION SAVINGS RULES.
(a) No New Contributions to Coverdell Education Savings Account.--
Section 530(b)(1)(A) is amended to read as follows:
``(A) Except in the case of rollover contributions,
no contribution will be accepted after December 31,
2017.''.
(b) Limited Distribution Allowed for Elementary and Secondary
Tuition.--
(1) In general.--Section 529(c) is amended by adding at the
end the following new paragraph:
``(7) Treatment of elementary and secondary tuition.--Any
reference in this subsection to the term `qualified higher
education expense' shall include a reference to expenses for
tuition in connection with enrollment at an elementary or
secondary school.''.
(2) Limitation.--Section 529(e)(3)(A) is amended by adding at
the end the following: ``The amount of cash distributions from
all qualified tuition programs described in subsection
(b)(1)(A)(ii) with respect to a beneficiary during any taxable
year, shall, in the aggregate, include not more than $10,000 in
expenses for tuition incurred during the taxable year in
connection with the enrollment or attendance of the beneficiary
as an elementary or secondary school student at a public,
private, or religious school.''.
(c) Rollovers to Qualified Tuition Programs Permitted.--Section
530(d)(5) is amended by inserting ``, or into (by purchase or
contribution) a qualified tuition program (as defined in section
529),'' after ``into another Coverdell education savings account''.
(d) Distributions From Qualified Tuition Programs for Certain
Expenses Associated With Registered Apprenticeship Programs.--Section
529(e)(3) is amended by adding at the end the following new
subparagraph:
``(C) Certain expenses associated with registered
apprenticeship programs.--The term `qualified higher
education expenses' shall include books, supplies, and
equipment required for the enrollment or attendance of
a designated beneficiary in an apprenticeship program
registered and certified with the Secretary of Labor
under section 1 of the National Apprenticeship Act (29
U.S.C. 50).''.
(e) Unborn Children Allowed as Account Beneficiaries.--Section 529(e)
is amended by adding at the end the following new paragraph:
``(6) Treatment of unborn children.--
``(A) In general.--Nothing shall prevent an unborn
child from being treated as a designated beneficiary or
an individual under this section.
``(B) Unborn child.--For purposes of this paragraph--
``(i) In general.--The term `unborn child'
means a child in utero.
``(ii) Child in utero.--The term `child in
utero' means a member of the species homo
sapiens, at any stage of development, who is
carried in the womb.''.
(f) Effective Dates.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
contributions made after December 31, 2017.
(2) Rollovers to qualified tuition programs.--The amendments
made by subsection (b) shall apply to distributions after
December 31, 2017.
SEC. 1203. REFORMS TO DISCHARGE OF CERTAIN STUDENT LOAN INDEBTEDNESS.
(a) Treatment of Student Loans Discharged on Account of Death or
Disability.--Section 108(f) is amended by adding at the end the
following new paragraph:
``(5) Discharges on account of death or disability.--
``(A) In general.--In the case of an individual,
gross income does not include any amount which (but for
this subsection) would be includible in gross income by
reasons of the discharge (in whole or in part) of any
loan described in subparagraph (B) if such discharge
was--
``(i) pursuant to subsection (a) or (d) of
section 437 of the Higher Education Act of 1965
or the parallel benefit under part D of title
IV of such Act (relating to the repayment of
loan liability),
``(ii) pursuant to section 464(c)(1)(F) of
such Act, or
``(iii) otherwise discharged on account of
the death or total and permanent disability of
the student.
``(B) Loans described.--A loan is described in this
subparagraph if such loan is--
``(i) a student loan (as defined in paragraph
(2)), or
``(ii) a private education loan (as defined
in section 140(7) of the Consumer Credit
Protection Act (15 U.S.C. 1650(7))).''.
(b) Exclusion From Gross Income for Payments Made Under Indian Health
Service Loan Repayment Program.--
(1) In general.--Section 108(f)(4) is amended by inserting
``under section 108 of the Indian Health Care Improvement
Act,'' after ``338I of such Act,''.
(2) Clerical amendment.--The heading for section 108(f)(4) is
amended by striking ``and certain'' and inserting ``, indian
health service loan repayment program, and certain''.
(c) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)(1)
shall apply to discharges of indebtedness after December 31,
2017.
(2) Subsection (b).--The amendments made by subsection (b)
shall apply to amounts received in taxable years beginning
after December 31, 2017.
SEC. 1204. REPEAL OF OTHER PROVISIONS RELATING TO EDUCATION.
(a) In General.--Subchapter B of chapter 1 is amended--
(1) in part VII by striking sections 221 and 222 (and by
striking the items relating to such sections in the table of
sections for such part),
(2) in part VII by striking sections 135 and 127 (and by
striking the items relating to such sections in the table of
sections for such part), and
(3) by striking subsection (d) of section 117.
(b) Conforming Amendment Relating to Section 221.--
(1) Section 62(a) is amended by striking paragraph (17).
(2) Section 74(d) is amended by striking ``221,''.
(3) Section 86(b)(2)(A) is amended by striking ``221,''.
(4) Section 219(g)(3)(A)(ii) is amended by striking ``221,''.
(5) Section 163(h)(2) is amended by striking subparagraph
(F).
(6) Section 6050S(a) is amended--
(A) by inserting ``or'' at the end of paragraph (1),
(B) by striking ``or'' at the end of paragraph (2),
and
(C) by striking paragraph (3).
(7) Section 6050S(e) is amended by striking all that follows
``thereof)'' and inserting a period.
(c) Conforming Amendments Related to Section 222.--
(1) Section 62(a) is amended by striking paragraph (18).
(2) Section 74(d)(2)(B) is amended by striking ``222,''.
(3) Section 86(b)(2)(A) is amended by striking ``222,''.
(4) Section 219(g)(3)(A)(ii) is amended by striking ``222,''.
(d) Conforming Amendments Relating to Section 127.--
(1) Section 125(f)(1) is amended by striking ``127,''.
(2) Section 132(j)(8) is amended by striking ``which are not
excludable from gross income under section 127''.
(3) Section 414(n)(3)(C) is amended by striking ``127,''.
(4) Section 414(t)(2) is amended by striking ``127,''.
(5) Section 3121(a)(18) is amended by striking ``127,''.
(6) Section 3231(e) is amended by striking paragraph (6).
(7) Section 3306(b)(13) is amended by ``127,''.
(8) Section 3401(a)(18) is amended by striking ``127,''.
(9) Section 6039D(d)(1) is amended by striking ``, 127''.
(e) Conforming Amendments Relating to Section 117(d).--
(1) Section 117(c)(1) is amended--
(A) by striking ``subsections (a) and (d)'' and
inserting ``subsection (a)'', and
(B) by striking ``or qualified tuition reduction''.
(2) Section 414(n)(3)(C) is amended by striking ``117(d),''.
(3) Section 414(t)(2) is amended by striking ``117(d),''.
(f) Conforming Amendments Related to Section 135.--
(1) Section 74(d)(2)(B) is amended by striking ``135,''.
(2) Section 86(b)(2)(A) is amended by striking ``135,''.
(3) Section 219(g)(3)(A)(ii) is amended by striking ``135,''.
(g) Effective Dates.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2017.
(2) Amendments relating to section 117(d).--The amendments
made by subsections (a)(3) and (e) shall apply to amounts paid
or incurred after December 31, 2017.
SEC. 1205. ROLLOVERS BETWEEN QUALIFIED TUITION PROGRAMS AND QUALIFIED
ABLE PROGRAMS.
(a) Rollovers From Qualified Tuition Programs to Qualified ABLE
Programs.--Section 529(c)(3)(C)(i) is amended by striking ``or'' at the
end of subclause (I), by striking the period at the end of subclause
(II) and inserting ``, or'', and by adding at the end the following new
subclause:
``(III) to an ABLE account (as
defined in section 529A(e)(6)) of the
designated beneficiary or a member of
the family of the designated
beneficiary.
Subclause (III) shall not apply to so much of a
distribution which, when added to all other
contributions made to the ABLE account for the
taxable year, exceeds the limitation under
section 529A(b)(2)(B).''.
(b) Effective Date.--The amendments made by this section shall apply
to distributions after December 31, 2017.
Subtitle D--Simplification and Reform of Deductions
SEC. 1301. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.
(a) In General.--Part 1 of subchapter B of chapter 1 is amended by
striking section 68 (and the item relating to such section in the table
of sections for such part).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1302. MORTGAGE INTEREST.
(a) Modification of Limitations.--
(1) In general.--Section 163(h)(3) is amended to read as
follows:
``(3) Qualified residence interest.--For purposes of this
subsection--
``(A) In general.--The term `qualified residence
interest' means any interest which is paid or accrued
during the taxable year on indebtedness which--
``(i) is incurred in acquiring, constructing,
or substantially improving any qualified
residence (determined as of the time the
interest is accrued) of the taxpayer, and
``(ii) is secured by such residence.
Such term also includes interest on any indebtedness
secured by such residence resulting from the
refinancing of indebtedness meeting the requirements of
the preceding sentence (or this sentence); but only to
the extent the amount of the indebtedness resulting
from such refinancing does not exceed the amount of the
refinanced indebtedness.
``(B) Limitation.--The aggregate amount of
indebtedness taken into account under subparagraph (A)
for any period shall not exceed $500,000 (half of such
amount in the case of a married individual filing a
separate return).
``(C) Treatment of indebtedness incurred on or before
november 2, 2017.--
``(i) In general.--In the case of any pre-
November 2, 2017, indebtedness, this paragraph
shall apply as in effect immediately before the
enactment of the Tax Cuts and Jobs Act.
``(ii) Pre-november 2, 2017, indebtedness.--
For purposes of this subparagraph, the term
`pre-November 2, 2017, indebtedness' means--
``(I) any principal residence
acquisition indebtedness which was
incurred on or before November 2, 2017,
or
``(II) any principal residence
acquisition indebtedness which is
incurred after November 2, 2017, to
refinance indebtedness described in
clause (i) (or refinanced indebtedness
meeting the requirements of this
clause) to the extent (immediately
after the refinancing) the principal
amount of the indebtedness resulting
from the refinancing does not exceed
the principal amount of the refinanced
indebtedness (immediately before the
refinancing).
``(iii) Limitation on period of
refinancing.--clause (ii)(II) shall not apply
to any indebtedness after--
``(I) the expiration of the term of
the original indebtedness, or
``(II) if the principal of such
original indebtedness is not amortized
over its term, the expiration of the
term of the 1st refinancing of such
indebtedness (or if earlier, the date
which is 30 years after the date of
such 1st refinancing).
``(iv) Binding contract exception.--In the
case of a taxpayer who enters into a written
binding contract before November 2, 2017, to
close on the purchase of a principal residence
before January 1, 2018, and who purchases such
residence before April 1, 2018, subparagraphs
(A) and (B) shall be applied by substituting
`April 1, 2018' for `November 2, 2017'.''.
(2) Conforming amendments.--
(A) Section 108(h)(2) is by striking ``for
`$1,000,000 ($500,000' in clause (ii) thereof'' and
inserting ``for `$500,000 ($250,000' in paragraph
(2)(A), and `$1,000,000' for `$500,000' in paragraph
(2)(B), thereof''.
(B) Section 163(h) is amended by striking
subparagraphs (E) and (F) in paragraph (4).
(b) Taxpayers Limited to 1 Qualified Residence.--Section
163(h)(4)(A)(i) is amended to read as follows:
``(i) In general.--The term `qualified
residence' means the principal residence
(within the meaning of section 121) of the
taxpayer.''.
(c) Effective Dates.--
(1) In general.--The amendments made by this section shall
apply to interest paid or accrued in taxable years beginning
after December 31, 2017, with respect to indebtedness incurred
before, on, or after such date.
(2) Treatment of grandfathered indebtedness.--For application
of the amendments made by this section to grandfathered
indebtedness, see paragraph (3)(C) of section 163(h) of the
Internal Revenue Code of 1986, as amended by this section.
SEC. 1303. REPEAL OF DEDUCTION FOR CERTAIN TAXES NOT PAID OR ACCRUED IN
A TRADE OR BUSINESS.
(a) In General.--Section 164(b)(5) is amended to read as follows:
``(5) Limitation in case of individuals.--In the case of a
taxpayer other than a corporation--
``(A) foreign real property taxes (other than taxes
which are paid or accrued in carrying on a trade or
business or an activity described in section 212) shall
not be taken into account under subsection (a)(1),
``(B) the aggregate amount of taxes (other than taxes
which are paid or accrued in carrying on a trade or
business or an activity described in section 212) taken
into account under subsection (a)(1) for any taxable
year shall not exceed $10,000 ($5,000 in the case of a
married individual filing a separate return),
``(C) subsection (a)(2) shall only apply to taxes
which are paid or accrued in carrying on a trade or
business or an activity described in section 212, and
``(D) subsection (a)(3) shall not apply to State and
local taxes.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1304. REPEAL OF DEDUCTION FOR PERSONAL CASUALTY LOSSES.
(a) In General.--Section 165(c) is amended by inserting ``and'' at
the end of paragraph (1), by striking ``; and'' at the end of paragraph
(2) and inserting a period, and by striking paragraph (3).
(b) Conforming Amendments.--
(1) Section 165(h) is amended to read as follows:
``(h) Special Rule Where Personal Casualty Gains Exceed Personal
Casualty Losses.--
``(1) In general.--If the personal casualty gains for any
taxable year exceed the personal casualty losses for such
taxable year--
``(A) all such gains shall be treated as gains from
sales or exchanges of capital assets, and
``(B) all such losses shall be treated as losses from
sales or exchanges of capital assets.
``(2) Definitions of personal casualty gain and personal
casualty loss.--For purposes of this subsection--
``(A) Personal casualty loss.--The term `personal
casualty loss' means any loss of property not connected
with a trade or business or a transaction entered into
for profit, if such loss arises from fire, storm,
shipwreck, or other casualty, or from theft.
``(B) Personal casualty gain.--The term `personal
casualty gain' means the recognized gain from any
involuntary conversion of property which is described
in subparagraph (A) arising from fire, storm,
shipwreck, or other casualty, or from theft.''.
(2) Section 165 is amended by striking subsection (k).
(3)(A) Section 165(l)(1) is amended by striking ``a loss
described in subsection (c)(3)'' and inserting ``an ordinary
loss described in subsection (c)(2)''.
(B) Section 165(l) is amended--
(i) by striking paragraph (5),
(ii) by redesignating paragraphs (2), (3), and (4) as
paragraphs (3), (4), and (5), respectively, and
(iii) by inserting after paragraph (1) the following
new paragraph:
``(2) Limitations.--
``(A) Deposit may not be federally insured.--No
election may be made under paragraph (1) with respect
to any loss on a deposit in a qualified financial
institution if part or all of such deposit is insured
under Federal law.
``(B) Dollar limitation.--With respect to each
financial institution, the aggregate amount of losses
attributable to deposits in such financial institution
to which an election under paragraph (1) may be made by
the taxpayer for any taxable year shall not exceed
$20,000 ($10,000 in the case of a separate return by a
married individual). The limitation of the preceding
sentence shall be reduced by the amount of any
insurance proceeds under any State law which can
reasonably be expected to be received with respect to
losses on deposits in such institution.''.
(4) Section 172(b)(1)(E)(ii), prior to amendment under title
III, is amended by striking subclause (I) and by redesignating
subclauses (II) and (III) as subclauses (I) and (II),
respectively.
(5) Section 172(d)(4)(C) is amended by striking ``paragraph
(2) or (3) of section 165(c)'' and inserting ``section
165(c)(2)''.
(6) Section 274(f) is amended by striking ``Casualty
Losses,'' in the heading thereof.
(7) Section 280A(b) is amended by striking ``Casualty
Losses,'' in the heading thereof.
(8) Section 873(b), as amended by the preceding provisions of
this Act, is amended by striking paragraph (1) and by
redesignating paragraphs (2) and (3) as paragraphs (1) and (2),
respectively.
(9) Section 504(b) of the Disaster Tax Relief and Airport and
Airway Extension Act of 2017 is amended by adding at the end
the following new paragraph:
``(4) Coordination with tax reform.--This subsection shall be
applied without regard to the amendments made by section 1304
of the Tax Cuts and Jobs Act.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1305. LIMITATION ON WAGERING LOSSES.
(a) In General.--Section 165(d) is amended by adding at the end the
following: ``For purposes of the preceding sentence, the term `losses
from wagering transactions' includes any deduction otherwise allowable
under this chapter incurred in carrying on any wagering transaction.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1306. CHARITABLE CONTRIBUTIONS.
(a) Increased Limitation for Cash Contributions.--Section 170(b)(1)
is amended by redesignating subparagraph (G) as subparagraph (H) and by
inserting after subparagraph (F) the following new subparagraph:
``(G) Increased limitation for cash contributions.--
``(i) In general.--In the case of any
contribution of cash to an organization
described in subparagraph (A), the total amount
of such contributions which may be taken into
account under subsection (a) for any taxable
year shall not exceed 60 percent of the
taxpayer's contribution base for such year.
``(ii) Carryover.--If the aggregate amount of
contributions described in clause (i) exceeds
the applicable limitation under clause (i),
such excess shall be treated (in a manner
consistent with the rules of subsection (d)(1))
as a charitable contribution to which clause
(i) applies in each of the 5 succeeding years
in order of time.
``(iii) Coordination with subparagraphs (A)
and (B).--
``(I) In general.--Contributions
taken into account under this
subparagraph shall not be taken into
account under subparagraph (A).
``(II) Limitation reduction.--
Subparagraphs (A) and (B) shall be
applied by reducing (but not below
zero) the aggregate contribution
limitation allowed for the taxable year
under each such subparagraph by the
aggregate contributions allowed under
this subparagraph for such taxable
year.''.
(b) Denial of Deduction for College Athletic Event Seating Rights.--
Section 170(l)(1) is amended to read as follows:
``(1) In general.--No deduction shall be allowed under this
section for any amount described in paragraph (2).''.
(c) Charitable Mileage Rate Adjusted for Inflation.--Section 170(i)
is amended by striking ``shall be 14 cents per mile'' and inserting
``shall be a rate which takes into account the variable cost of
operating an automobile''.
(d) Repeal of Substantiation Exception in Case of Contributions
Reported by Donee.--Section 170(f)(8) is amended by striking
subparagraph (D) and by redesignating subparagraph (E) as subparagraph
(D).
(e) Effective Date.--The amendments made by this section shall apply
to contributions made in taxable years beginning after December 31,
2017.
SEC. 1307. REPEAL OF DEDUCTION FOR TAX PREPARATION EXPENSES.
(a) In General.--Section 212 is amended by adding ``or'' at the end
of paragraph (1), by striking ``; or'' at the end of paragraph (2) and
inserting a period, and by striking paragraph (3).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1308. REPEAL OF MEDICAL EXPENSE DEDUCTION.
(a) In General.--Part VII of subchapter B is amended by striking by
striking section 213 (and by striking the item relating to such section
in the table of sections for such subpart).
(b) Conforming Amendments.--
(1)(A) Section 105(f) is amended to read as follows:
``(f) Medical Care.--For purposes of this section--
``(1) In general.--The term `medical care' means amounts
paid--
``(A) for the diagnosis, cure, mitigation, treatment,
or prevention of disease, or for the purpose of
affecting any structure or function of the body,
``(B) for transportation primarily for and essential
to medical care referred to in subparagraph (A),
``(C) for qualified long-term care services (as
defined in section 7702B(c)), or
``(D) for insurance (including amounts paid as
premiums under part B of title XVIII of the Social
Security Act, relating to supplementary medical
insurance for the aged) covering medical care referred
to in subparagraphs (A) and (B) or for any qualified
long-term care insurance contract (as defined in
section 7702B(b)).
In the case of a qualified long-term care insurance contract
(as defined in section 7702B(b)), only eligible long-term care
premiums (as defined in paragraph (7)) shall be taken into
account under subparagraph (D).
``(2) Amounts paid for certain lodging away from home treated
as paid for medical care.--Amounts paid for lodging (not lavish
or extravagant under the circumstances) while away from home
primarily for and essential to medical care referred to in
paragraph (1)(A) shall be treated as amounts paid for medical
care if--
``(A) the medical care referred to in paragraph
(1)(A) is provided by a physician in a licensed
hospital (or in a medical care facility which is
related to, or the equivalent of, a licensed hospital),
and
``(B) there is no significant element of personal
pleasure, recreation, or vacation in the travel away
from home.
The amount taken into account under the preceding sentence
shall not exceed $50 for each night for each individual.
``(3) Physician.--The term `physician' has the meaning given
to such term by section 1861(r) of the Social Security Act (42
U.S.C. 1395x(r)).
``(4) Contracts covering other than medical care.--In the
case of an insurance contract under which amounts are payable
for other than medical care referred to in subparagraphs (A),
(B) and (C) of paragraph (1)--
``(A) no amount shall be treated as paid for
insurance to which paragraph (1)(D) applies unless the
charge for such insurance is either separately stated
in the contract, or furnished to the policyholder by
the insurance company in a separate statement,
``(B) the amount taken into account as the amount
paid for such insurance shall not exceed such charge,
and
``(C) no amount shall be treated as paid for such
insurance if the amount specified in the contract (or
furnished to the policyholder by the insurance company
in a separate statement) as the charge for such
insurance is unreasonably large in relation to the
total charges under the contract.
``(5) Certain pre-paid contracts.--Subject to the limitations
of paragraph (4), premiums paid during the taxable year by a
taxpayer before he attains the age of 65 for insurance covering
medical care (within the meaning of subparagraphs (A), (B), and
(C) of paragraph (1)) for the taxpayer, his spouse, or a
dependent after the taxpayer attains the age of 65 shall be
treated as expenses paid during the taxable year for insurance
which constitutes medical care if premiums for such insurance
are payable (on a level payment basis) under the contract for a
period of 10 years or more or until the year in which the
taxpayer attains the age of 65 (but in no case for a period of
less than 5 years).
``(6) Cosmetic surgery.--
``(A) In general.--The term `medical care' does not
include cosmetic surgery or other similar procedures,
unless the surgery or procedure is necessary to
ameliorate a deformity arising from, or directly
related to, a congenital abnormality, a personal injury
resulting from an accident or trauma, or disfiguring
disease.
``(B) Cosmetic surgery defined .--For purposes of
this paragraph, the term `cosmetic surgery' means any
procedure which is directed at improving the patient's
appearance and does not meaningfully promote the proper
function of the body or prevent or treat illness or
disease.
``(7) Eligible long-term care premiums.--
``(A) In general.--For purposes of this section, the
term `eligible long-term care premiums' means the
amount paid during a taxable year for any qualified
long-term care insurance contract (as defined in
section 7702B(b)) covering an individual, to the extent
such amount does not exceed the limitation determined
under the following table:
------------------------------------------------------------------------
``In the case of an individual with
an attained age before the close of The limitation is:
the taxable year of:
------------------------------------------------------------------------
40 or less $200
More than 40 but not more than 50 $375
More than 50 but not more than 60 $750
More than 60 but not more than 70 $2,000
More than 70 $2,500
------------------------------------------------------------------------
``(B) Indexing.--
``(i) In general.--In the case of any taxable
year beginning after 1997, each dollar amount
in subparagraph (A) shall be increased by the
medical care cost adjustment of such amount for
such calendar year. Any increase determined
under the preceding sentence shall be rounded
to the nearest multiple of $10.
``(ii) Medical care cost adjustment.--For
purposes of clause (i), the medical care cost
adjustment for any calendar year is the
adjustment prescribed by the Secretary, in
consultation with the Secretary of Health and
Human Services, for purposes of such clause. To
the extent that CPI (as defined section 1(c)),
or any component thereof, is taken into account
in determining such adjustment, such adjustment
shall be determined by taking into account C-
CPI-U (as so defined), or the corresponding
component thereof, in lieu of such CPI (or
component thereof), but only with respect to
the portion of such adjustment which relates to
periods after December 31, 2017.
``(8) Certain payments to relatives treated as not paid for
medical care.--An amount paid for a qualified long-term care
service (as defined in section 7702B(c)) provided to an
individual shall be treated as not paid for medical care if
such service is provided--
``(A) by the spouse of the individual or by a
relative (directly or through a partnership,
corporation, or other entity) unless the service is
provided by a licensed professional with respect to
such service, or
``(B) by a corporation or partnership which is
related (within the meaning of section 267(b) or
707(b)) to the individual.
For purposes of this paragraph, the term `relative' means an
individual bearing a relationship to the individual which is
described in any of subparagraphs (A) through (G) of section
7706(d)(2). This paragraph shall not apply for purposes of
subsection (b) with respect to reimbursements through
insurance.''.
(B) Section 72(t)(2)(D)(i)(III) is amended by striking
``section 213(d)(1)(D)'' and inserting ``section
105(f)(1)(D)''.
(C) Section 104(a) is amended by striking ``section
213(d)(1)'' in the last sentence and inserting ``section
105(f)(1)''.
(D) Section 105(b) is amended by striking ``section 213(d)''
and inserting ``section 105(f)''.
(E) Section 139D is amended by striking ``section 213'' and
inserting ``section 223''.
(F) Section 162(l)(2) is amended by striking ``section
213(d)(10)'' and inserting ``section 105(f)(7)''.
(G) Section 220(d)(2)(A) is amended by striking ``section
213(d)'' and inserting ``section 105(f)''.
(H) Section 223(d)(2)(A) is amended by striking ``section
213(d)'' and inserting ``section 105(f)''.
(I) Section 419A(f)(2) is amended by striking ``section
213(d)'' and inserting ``section 105(f)''.
(J) Section 501(c)(26)(A) is amended by striking ``section
213(d)'' and inserting ``section 105(f)''.
(K) Section 2503(e) is amended by striking ``section 213(d)''
and inserting ``section 105(f)''.
(L) Section 4980B(c)(4)(B)(i)(I) is amended by striking
``section 213(d)'' and inserting ``section 105(f)''.
(M) Section 6041(f) is amended by striking ``section 213(d)''
and inserting ``section 105(f)''.
(N) Section 7702B(a)(2) is amended by striking ``section
213(d)'' and inserting ``section 105(f)''.
(O) Section 7702B(a)(4) is amended by striking ``section
213(d)(1)(D)'' and inserting ``section 105(f)(1)(D)''.
(P) Section 7702B(d)(5) is amended by striking ``section
213(d)(10)'' and inserting ``section 105(f)(7)''.
(Q) Section 9832(d)(3) is amended by striking ``section
213(d)'' and inserting ``section 105(f)''.
(2) Section 72(t)(2)(B) is amended to read as follows:
``(B) Medical expenses.--Distributions made to an
individual (other than distributions described in
subparagraph (A), (C), or (D) to the extent such
distributions do not exceed the excess of--
``(i) the expenses paid by the taxpayer
during the taxable year, not compensated for by
insurance or otherwise, for medical care (as
defined in 105(f)) of the taxpayer, his spouse,
or a dependent (as defined in section 7706,
determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof), over
``(ii) 10 percent of the taxpayer's adjusted
gross income.''.
(3) Section 162(l) is amended by striking paragraph (3).
(4) Section 402(l) is amended by striking paragraph (7) and
redesignating paragraph (8) as paragraph (7).
(5) Section 220(f) is amended by striking paragraph (6).
(6) Section 223(f) is amended by striking paragraph (6).
(7) Section 7702B(e) is amended by striking paragraph (2).
(8) Section 7706(f)(7), as redesignated by this Act, is
amended by striking ``sections 105(b), 132(h)(2)(B), and
213(d)(5)'' and inserting ``sections 105(b) and 132(h)(2)(B)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1309. REPEAL OF DEDUCTION FOR ALIMONY PAYMENTS.
(a) In General.--Part VII of subchapter B is amended by striking by
striking section 215 (and by striking the item relating to such section
in the table of sections for such subpart).
(b) Conforming Amendments.--
(1) Corresponding repeal of provisions providing for
inclusion of alimony in gross income.--
(A) Subsection (a) of section 61 is amended by
striking paragraph (8) and by redesignating paragraphs
(9) through (15) as paragraphs (8) through (14),
respectively.
(B) Part II of subchapter B of chapter 1 is amended
by striking section 71 (and by striking the item
relating to such section in the table of sections for
such part).
(C) Subpart F of part I of subchapter J of chapter 1
is amended by striking section 682 (and by striking the
item relating to such section in the table of sections
for such subpart).
(2) Related to repeal of section 215.--
(A) Section 62(a) is amended by striking paragraph
(10).
(B) Section 3402(m)(1) is amended by striking
``(other than paragraph (10) thereof)''.
(3) Related to repeal of section 71.--
(A) Section 121(d)(3) is amended--
(i) by striking ``(as defined in section
71(b)(2))'' in subparagraph (B), and
(ii) by adding at the end the following new
subparagraph:
``(C) Divorce or separation instrument.--For purposes
of this paragraph, the term `divorce or separation
instrument' means--
``(i) a decree of divorce or separate
maintenance or a written instrument incident to
such a decree,
``(ii) a written separation agreement, or
``(iii) a decree (not described in clause
(i)) requiring a spouse to make payments for
the support or maintenance of the other
spouse.''.
(B) Section 220(f)(7) is amended by striking
``subparagraph (A) of section 71(b)(2)'' and inserting
``clause (i) of section 121(d)(3)(C)''.
(C) Section 223(f)(7) is amended by striking
``subparagraph (A) of section 71(b)(2)'' and inserting
``clause (i) of section 121(d)(3)(C)''.
(D) Section 382(l)(3)(B)(iii) is amended by striking
``section 71(b)(2)'' and inserting ``section
121(d)(3)(C)''.
(E) Section 408(d)(6) is amended by striking
``subparagraph (A) of section 71(b)(2)'' and inserting
``clause (i) of section 121(d)(3)(C)''.
(c) Effective Date.--The amendments made by this section shall apply
to--
(1) any divorce or separation instrument (as defined in
section 71(b)(2) of the Internal Revenue Code of 1986 as in
effect before the date of the enactment of this Act) executed
after December 31, 2017, and
(2) any divorce or separation instrument (as so defined)
executed on or before such date and modified after such date if
the modification expressly provides that the amendments made by
this section apply to such modification.
SEC. 1310. REPEAL OF DEDUCTION FOR MOVING EXPENSES.
(a) In General.--Part VII of subchapter B is amended by striking by
striking section 217 (and by striking the item relating to such section
in the table of sections for such subpart).
(b) Retention of Moving Expenses for Members of Armed Forces.--
Section 134(b) is amended by adding at the end the following new
paragraph:
``(7) Moving expenses.--The term `qualified military benefit'
includes any benefit described in section 217(g) (as in effect
before the enactment of the Tax Cuts And Jobs Act).''.
(c) Conforming Amendments.--
(1) Section 62(a) is amended by striking paragraph (15).
(2) Section 274(m)(3) is amended by striking ``(other than
section 217)''.
(3) Section 3121(a) is amended by striking paragraph (11).
(4) Section 3306(b) is amended by striking paragraph (9).
(5) Section 3401(a) is amended by striking paragraph (15).
(6) Section 7872(f) is amended by striking paragraph (11).
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1311. TERMINATION OF DEDUCTION AND EXCLUSIONS FOR CONTRIBUTIONS TO
MEDICAL SAVINGS ACCOUNTS.
(a) Termination of Income Tax Deduction.--Section 220 is amended by
adding at the end the following new subsection:
``(k) Termination.--No deduction shall be allowed under subsection
(a) with respect to any taxable year beginning after December 31,
2017.''.
(b) Termination of Exclusion for Employer-Provided Contributions.--
Section 106 is amended by striking subsection (b).
(c) Conforming Amendments.--
(1) Section 62(a) is amended by striking paragraph (16).
(2) Section 106(d) is amended by striking paragraph (2), by
redesignating paragraph (3) as paragraph (6), and by inserting
after paragraph (1) the following new paragraphs:
``(2) No constructive receipt.--No amount shall be included
in the gross income of any employee solely because the employee
may choose between the contributions referred to in paragraph
(1) and employer contributions to another health plan of the
employer.
``(3) Special rule for deduction of employer contributions.--
Any employer contribution to a health savings account (as so
defined), if otherwise allowable as a deduction under this
chapter, shall be allowed only for the taxable year in which
paid.
``(4) Employer health savings account contribution required
to be shown on return.--Every individual required to file a
return under section 6012 for the taxable year shall include on
such return the aggregate amount contributed by employers to
the health savings accounts (as so defined) of such individual
or such individual's spouse for such taxable year.
``(5) Health savings account contributions not part of cobra
coverage.--Paragraph (1) shall not apply for purposes of
section 4980B.''.
(3) Section 223(b)(4) is amended by striking subparagraph
(A), by redesignating subparagraphs (B) and (C) as
subparagraphs (A) and (B), respectively, and by striking the
second sentence thereof.
(4) Section 223(b)(5) is amended by striking ``under
paragraph (3))'' and all that follows through ``shall be
divided equally between them'' and inserting the following:
``under paragraph (3)) shall be divided equally between the
spouses''.
(5) Section 223(c) is amended by striking paragraph (5).
(6) Section 3231(e) is amended by striking paragraph (10).
(7) Section 3306(b) is amended by striking paragraph (17).
(8) Section 3401(a) is amended by striking paragraph (21).
(9) Chapter 43 is amended by striking section 4980E (and by
striking the item relating to such section in the table of
sections for such chapter).
(10) Section 4980G is amended to read as follows:
``SEC. 4980G. FAILURE OF EMPLOYER TO MAKE COMPARABLE HEALTH SAVINGS
ACCOUNT CONTRIBUTIONS.
``(a) In General.--In the case of an employer who makes a
contribution to the health savings account of any employee during a
calendar year, there is hereby imposed a tax on the failure of such
employer to meet the requirements of subsection (d) for such calendar
year.
``(b) Amount of Tax.--The amount of the tax imposed by subsection (a)
on any failure for any calendar year is the amount equal to 35 percent
of the aggregate amount contributed by the employer to health savings
accounts of employees for taxable years of such employees ending with
or within such calendar year.
``(c) Waiver by Secretary.--In the case of a failure which is due to
reasonable cause and not to willful neglect, the Secretary may waive
part or all of the tax imposed by subsection (a) to the extent that the
payment of such tax would be excessive relative to the failure
involved.
``(d) Employer Required To Make Comparable Health Savings Account
Contributions for All Participating Employees.--
``(1) In general.--An employer meets the requirements of this
subsection for any calendar year if the employer makes
available comparable contributions to the health savings
accounts of all comparable participating employees for each
coverage period during such calendar year.
``(2) Comparable contributions.--
``(A) In general.--For purposes of paragraph (1), the
term `comparable contributions' means contributions--
``(i) which are the same amount, or
``(ii) which are the same percentage of the
annual deductible limit under the high
deductible health plan covering the employees.
``(B) Part-year employees.--In the case of an
employee who is employed by the employer for only a
portion of the calendar year, a contribution to the
health savings account of such employee shall be
treated as comparable if it is an amount which bears
the same ratio to the comparable amount (determined
without regard to this subparagraph) as such portion
bears to the entire calendar year.
``(3) Comparable participating employees.--
``(A) In general.--For purposes of paragraph (1), the
term `comparable participating employees' means all
employees--
``(i) who are eligible individuals covered
under any high deductible health plan of the
employer, and
``(ii) who have the same category of
coverage.
``(B) Categories of coverage.--For purposes of
subparagraph (B), the categories of coverage are self-
only and family coverage.
``(4) Part-time employees.--
``(A) In general .--Paragraph (3) shall be applied
separately with respect to part-time employees and
other employees.
``(B) Part-time employee.--For purposes of
subparagraph (A), the term `part-time employee' means
any employee who is customarily employed for fewer than
30 hours per week.
``(5) Special rule for non-highly compensated employees.--For
purposes of applying this section to a contribution to a health
savings account of an employee who is not a highly compensated
employee (as defined in section 414(q)), highly compensated
employees shall not be treated as comparable participating
employees.
``(e) Controlled Groups.--For purposes of this section, all persons
treated as a single employer under subsection (b), (c), (m), or (o) of
section 414 shall be treated as 1 employer.
``(f) Definitions.--Terms used in this section which are also used in
section 223 have the respective meanings given such terms in section
223.
``(g) Regulations.--The Secretary shall issue regulations to carry
out the purposes of this section.''.
(11) Section 6051(a) is amended by striking paragraph (11).
(12) Section 6051(a)(14)(A) is amended by striking
``paragraphs (11) and (12)'' and inserting ``paragraph (12)''.
(d) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1312. DENIAL OF DEDUCTION FOR EXPENSES ATTRIBUTABLE TO THE TRADE
OR BUSINESS OF BEING AN EMPLOYEE.
(a) In General.--Part IX of subchapter B of chapter 1 is amended by
inserting after the item relating to section 262 the following new
item:
``SEC. 262A. EXPENSES ATTRIBUTABLE TO BEING AN EMPLOYEE.
``(a) In General.--Except as otherwise provided in this section, no
deduction shall be allowed with respect to any trade or business of the
taxpayer which consists of the performance of services by the taxpayer
as an employee.
``(b) Exception for Above-the-line Deductions.--Subsection (a) shall
not apply to any deduction allowable (determined without regard to
subsection (a)) in determining adjusted gross income.''.
(b) Repeal of Certain Above-the-line Trade and Business Deductions of
Employees.--
(1) In general.--Section 62(a)(2) is amended--
(A) by striking subparagraphs (B), (C), and (D), and
(B) by redesignating subparagraph (E) as subparagraph
(B).
(2) Conforming amendments.--
(A) Section 62 is amended by striking subsections (b)
and (d) and by redesignating subsections (c) and (e) as
subsections (b) and (c), respectively.
(B) Section 62(a)(20) is amended by striking
``subsection (e)'' and inserting ``subsection (c)''.
(c) Continued Exclusion of Working Condition Fringe Benefits.--
Section 132(d) is amended by inserting ``(determined without regard to
section 262A)'' after ``section 162''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle E--Simplification and Reform of Exclusions and Taxable
Compensation
SEC. 1401. LIMITATION ON EXCLUSION FOR EMPLOYER-PROVIDED HOUSING.
(a) In General.--Section 119 is amended by adding at the end the
following new subsection:
``(e) Limitation on Exclusion of Lodging.--
``(1) In general.--The aggregate amount excluded from gross
income of the taxpayer under subsections (a) and (d) with
respect to lodging for any taxable year shall not exceed
$50,000 (half such amount in the case of a married individual
filing a separate return).
``(2) Limitation to 1 home.--Subsections (a) and (d)
(separately and in combination) shall not apply with respect to
more than 1 residence of the taxpayer at any given time. In the
case of a joint return, the preceding sentence shall apply
separately to each spouse for any period during which each
spouse resides separate from the other spouse in a residence
which is provided in connection with the employment of each
spouse, respectively.
``(3) Limitation for highly compensated employees.--
``(A) Reduced for excess compensation.--In the case
of an individual whose compensation for the taxable
year exceeds the amount in effect under section
414(q)(1)(B)(i) for the calendar in which such taxable
year begins, the $50,000 amount under paragraph (1)
shall be reduced (but not below zero) by an amount
equal to 50 percent of such excess. For purposes of the
preceding sentence, the term `compensation' means wages
(as defined in section 3121(a) (without regard to the
contribution and benefit base limitation in section
3121(a)(1)).
``(B) Exclusion denied for 5-percent owners.--In the
case of an individual who is a 5-percent owner (as
defined in section 416(i)(1)(B)(i)) of the employer at
any time during the taxable year, the amount under
paragraph (1) shall be zero.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1402. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL RESIDENCE.
(a) Requirement That Residence Be Principal Residence for 5 Years
During 8-year Period.--Subsection (a) of section 121 is amended--
(1) by striking ``5-year period'' and inserting ``8-year
period'', and
(2) by striking ``2 years'' and inserting ``5 years''.
(b) Application to Only 1 Sale or Exchange Every 5 Years.--Paragraph
(3) of section 121(b) is amended to read as follows:
``(3) Application to only 1 sale or exchange every 5 years.--
Subsection (a) shall not apply to any sale or exchange by the
taxpayer if, during the 5-year period ending on the date of
such sale or exchange, there was any other sale or exchange by
the taxpayer to which subsection (a) applied.''.
(c) Phaseout Based on Modified Adjusted Gross Income.--Section 121 is
amended by adding at the end the following new subsection:
``(h) Phaseout Based on Modified Adjusted Gross Income.--
``(1) In general.--If the average modified adjusted gross
income of the taxpayer for the taxable year and the 2 preceding
taxable years exceeds $250,000 (twice such amount in the case
of a joint return), the amount which would (but for this
subsection) be excluded from gross income under subsection (a)
for such taxable year shall be reduced (but not below zero) by
the amount of such excess.
``(2) Modified adjusted gross income.--For purposes of this
subsection, the term `modified adjusted gross income' means,
with respect to any taxable year, adjusted gross income
determined after application of this section (but without
regard to subsection (b)(1) and this subsection).
``(3) Special rule for joint returns.--In the case of a joint
return, the average modified adjusted gross income of the
taxpayer shall be determined without regard to any taxable year
with respect to which the taxpayer did not file a joint
return.''.
(d) Conforming Amendments.--
(1) The following provisions of section 121 are each amended
by striking ``5-year period'' each place it appears therein and
inserting ``8-year period'':
(A) Subsection (b)(5)(C)(ii)(I).
(B) Subsection (c)(1)(B)(i)(I).
(C) Subsection (d)(7)(B).
(D) Subparagraphs (A) and (B) of subsection (d)(9).
(E) Subsection (d)(10).
(F) Subsection (d)(12)(A).
(2) Section 121(c)(1)(B)(ii) is amended by striking ``2
years'' and inserting ``5 years'':
(e) Effective Date.--The amendments made by this section shall apply
to sales and exchanges after December 31, 2017.
SEC. 1403. REPEAL OF EXCLUSION, ETC., FOR EMPLOYEE ACHIEVEMENT AWARDS.
(a) In General.--Section 74 is amended by striking subsection (c).
(b) Repeal of Limitation on Deduction.--Section 274 is amended by
striking subsection (j).
(c) Conforming Amendments.--
(1) Section 102(c)(2) is amended by striking the first
sentence.
(2) Section 414(n)(3)(C) is amended by striking ``274(j),''.
(3) Section 414(t)(2) is amended by striking ``274(j),''.
(4) Section 3121(a)(20) is amended by striking ``74(c)''.
(5) Section 3231(e)(5) is amended by striking ``74(c),''.
(6) Section 3306(b)(16) is amended by striking ``74(c),''.
(7) Section 3401(a)(19) is amended by striking ``74(c),''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1404. SUNSET OF EXCLUSION FOR DEPENDENT CARE ASSISTANCE PROGRAMS.
(a) In General.--Section 129 is amended by adding at the end the
following new subsection:
``(f) Termination.--Subsection (a) shall not apply to taxable years
beginning after December 31, 2022.''.
(b) Effective Date.--The amendment made by this section shall take
effect on the date of the enactment of this Act.
SEC. 1405. REPEAL OF EXCLUSION FOR QUALIFIED MOVING EXPENSE
REIMBURSEMENT.
(a) In General.--Section 132(a) is amended by striking paragraph (6).
(b) Conforming Amendments.--
(1) Section 82 is amended by striking ``Except as provided in
section 132(a)(6), there'' and inserting ``There''.
(2) Section 132 is amended by striking subsection (g).
(3) Section 132(l) is amended by striking by striking
``subsections (e) and (g)'' and inserting ``subsection (e)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1406. REPEAL OF EXCLUSION FOR ADOPTION ASSISTANCE PROGRAMS.
(a) In General.--Part III of subchapter B of chapter 1 is amended by
striking section 137 (and by striking the item relating to such section
in the table of sections for such part).
(b) Conforming Amendments.--
(1) Sections 414(n)(3)(C), 414(t)(2), 74(d)(2)(B),
86(b)(2)(A), 219(g)(3)(A)(ii) are each amended by striking ``,
137''.
(2) Section 1016(a), as amended by the preceding provision of
this Act, is amended by striking paragraph (26).
(3) Section 6039D(d)(1), as amended by the preceding
provisions of this Act, is amended--
(A) by striking ``, or 137'', and
(B) by inserting ``or'' before ``125''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle F--Simplification and Reform of Savings, Pensions, Retirement
SEC. 1501. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZATION OF ROTH
IRA CONTRIBUTIONS AS TRADITIONAL IRA CONTRIBUTIONS.
(a) In General.--Section 408A(d) is amended by striking paragraph (6)
and by redesignating paragraph (7) as paragraph (6).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1502. REDUCTION IN MINIMUM AGE FOR ALLOWABLE IN-SERVICE
DISTRIBUTIONS.
(a) In General.--Section 401(a)(36) is amended by striking ``age 62''
and inserting ``age 59 \1/2\''.
(b) Application to Governmental Section 457(b) Plans.--Clause (i) of
section 457(d)(1)(A) is amended by inserting ``(in the case of a plan
maintained by an employer described in subsection (e)(1)(A), age 59 \1/
2\)'' before the comma at the end.
(c) Effective Date.--The amendments made by this section shall apply
to plan years beginning after December 31, 2017.
SEC. 1503. MODIFICATION OF RULES GOVERNING HARDSHIP DISTRIBUTIONS.
(a) In General.--Not later than 1 year after the date of the
enactment of this Act, the Secretary of the Treasury shall modify
Treasury Regulation section 1.401(k)-1(d)(3)(iv)(E) to--
(1) delete the 6-month prohibition on contributions imposed
by paragraph (2) thereof, and
(2) make any other modifications necessary to carry out the
purposes of section 401(k)(2)(B)(i)(IV) of the Internal Revenue
Code of 1986.
(b) Effective Date.--The revised regulations under this section shall
apply to plan years beginning after December 31, 2017.
SEC. 1504. MODIFICATION OF RULES RELATING TO HARDSHIP WITHDRAWALS FROM
CASH OR DEFERRED ARRANGEMENTS.
(a) In General.--Section 401(k) is amended by adding at the end the
following:
``(14) Special rules relating to hardship withdrawals.--For
purposes of paragraph (2)(B)(i)(IV)--
``(A) Amounts which may be withdrawn.--The following
amounts may be distributed upon hardship of the
employee:
``(i) Contributions to a profit-sharing or
stock bonus plan to which section 402(e)(3)
applies.
``(ii) Qualified nonelective contributions
(as defined in subsection (m)(4)(C)).
``(iii) Qualified matching contributions
described in paragraph (3)(D)(ii)(I).
``(iv) Earnings on any contributions
described in clause (i), (ii), or (iii).
``(B) No requirement to take available loan.--A
distribution shall not be treated as failing to be made
upon the hardship of an employee solely because the
employee does not take any available loan under the
plan.".''.
(b) Conforming Amendment.--Section 401(k)(2)(B)(i)(IV) is amended to
read as follows:
``(IV) subject to the provisions of
paragraph (14), upon hardship of the
employee, or".''.
(c) Effective Date.--The amendments made by this section shall apply
to plan years beginning after December 31, 2017.
SEC. 1505. EXTENDED ROLLOVER PERIOD FOR THE ROLLOVER OF PLAN LOAN
OFFSET AMOUNTS IN CERTAIN CASES.
(a) In General.--Paragraph (3) of section 402(c) is amended by adding
at the end the following new subparagraph:
``(C) Rollover of certain plan loan offset amounts.--
``(i) In general.--In the case of a qualified
plan loan offset amount, paragraph (1) shall
not apply to any transfer of such amount made
after the due date (including extensions) for
filing the return of tax for the taxable year
in which such amount is treated as distributed
from a qualified employer plan.
``(ii) Qualified plan loan offset amount.--
For purposes of this subparagraph, the term
`qualified plan loan offset amount' means a
plan loan offset amount which is treated as
distributed from a qualified employer plan to a
participant or beneficiary solely by reason
of--
``(I) the termination of the
qualified employer plan, or
``(II) the failure to meet the
repayment terms of the loan from such
plan because of the separation from
service of the participant (whether due
to layoff, cessation of business,
termination of employment, or
otherwise).
``(iii) Plan loan offset amount.--For
purposes of clause (ii), the term `plan loan
offset amount' means the amount by which the
participant's accrued benefit under the plan is
reduced in order to repay a loan from the plan.
``(iv) Limitation.--This subparagraph shall
not apply to any plan loan offset amount unless
such plan loan offset amount relates to a loan
to which section 72(p)(1) does not apply by
reason of section 72(p)(2).
``(v) Qualified employer plan.--For purposes
of this subsection, the term `qualified
employer plan' has the meaning given such term
by section 72(p)(4).''.
(b) Conforming Amendment.--Subparagraph (A) of section 402(c)(3) is
amended by striking ``subparagraph (B)'' and inserting ``subparagraphs
(B) and (C)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 1506. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT OLDER,
LONGER SERVICE PARTICIPANTS.
(a) In General.--Section 401 is amended--
(1) by redesignating subsection (o) as subsection (p), and
(2) by inserting after subsection (n) the following new
subsection:
``(o) Special Rules for Applying Nondiscrimination Rules to Protect
Older, Longer Service and Grandfathered Participants.--
``(1) Testing of defined benefit plans with closed classes of
participants.--
``(A) Benefits, rights, or features provided to
closed classes.--A defined benefit plan which provides
benefits, rights, or features to a closed class of
participants shall not fail to satisfy the requirements
of subsection (a)(4) by reason of the composition of
such closed class or the benefits, rights, or features
provided to such closed class, if--
``(i) for the plan year as of which the class
closes and the 2 succeeding plan years, such
benefits, rights, and features satisfy the
requirements of subsection (a)(4) (without
regard to this subparagraph but taking into
account the rules of subparagraph (I)),
``(ii) after the date as of which the class
was closed, any plan amendment which modifies
the closed class or the benefits, rights, and
features provided to such closed class does not
discriminate significantly in favor of highly
compensated employees, and
``(iii) the class was closed before April 5,
2017, or the plan is described in subparagraph
(C).
``(B) Aggregate testing with defined contribution
plans permitted on a benefits basis.--
``(i) In general.--For purposes of
determining compliance with subsection (a)(4)
and section 410(b), a defined benefit plan
described in clause (iii) may be aggregated and
tested on a benefits basis with 1 or more
defined contribution plans, including with the
portion of 1 or more defined contribution plans
which--
``(I) provides matching contributions
(as defined in subsection (m)(4)(A)),
``(II) provides annuity contracts
described in section 403(b) which are
purchased with matching contributions
or nonelective contributions, or
``(III) consists of an employee stock
ownership plan (within the meaning of
section 4975(e)(7)) or a tax credit
employee stock ownership plan (within
the meaning of section 409(a)).
``(ii) Special rules for matching
contributions.--For purposes of clause (i), if
a defined benefit plan is aggregated with a
portion of a defined contribution plan
providing matching contributions--
``(I) such defined benefit plan must
also be aggregated with any portion of
such defined contribution plan which
provides elective deferrals described
in subparagraph (A) or (C) of section
402(g)(3), and
``(II) such matching contributions
shall be treated in the same manner as
nonelective contributions, including
for purposes of applying the rules of
subsection (l).
``(iii) Plans described.--A defined benefit
plan is described in this clause if--
``(I) the plan provides benefits to a
closed class of participants,
``(II) for the plan year as of which
the class closes and the 2 succeeding
plan years, the plan satisfies the
requirements of section 410(b) and
subsection (a)(4) (without regard to
this subparagraph but taking into
account the rules of subparagraph (I)),
``(III) after the date as of which
the class was closed, any plan
amendment which modifies the closed
class or the benefits provided to such
closed class does not discriminate
significantly in favor of highly
compensated employees, and
``(IV) the class was closed before
April 5, 2017, or the plan is described
in subparagraph (C).
``(C) Plans described.--A plan is described in this
subparagraph if, taking into account any predecessor
plan--
``(i) such plan has been in effect for at
least 5 years as of the date the class is
closed, and
``(ii) during the 5-year period preceding the
date the class is closed, there has not been a
substantial increase in the coverage or value
of the benefits, rights, or features described
in subparagraph (A) or in the coverage or
benefits under the plan described in
subparagraph (B)(iii) (whichever is
applicable).
``(D) Determination of substantial increase for
benefits, rights, and features.--In applying
subparagraph (C)(ii) for purposes of subparagraph
(A)(iii), a plan shall be treated as having had a
substantial increase in coverage or value of the
benefits, rights, or features described in subparagraph
(A) during the applicable 5-year period only if, during
such period--
``(i) the number of participants covered by
such benefits, rights, or features on the date
such period ends is more than 50 percent
greater than the number of such participants on
the first day of the plan year in which such
period began, or
``(ii) such benefits, rights, and features
have been modified by 1 or more plan amendments
in such a way that, as of the date the class is
closed, the value of such benefits, rights, and
features to the closed class as a whole is
substantially greater than the value as of the
first day of such 5-year period, solely as a
result of such amendments.
``(E) Determination of substantial increase for
aggregate testing on benefits basis.--In applying
subparagraph (C)(ii) for purposes of subparagraph
(B)(iii)(IV), a plan shall be treated as having had a
substantial increase in coverage or benefits during the
applicable 5-year period only if, during such period--
``(i) the number of participants benefitting
under the plan on the date such period ends is
more than 50 percent greater than the number of
such participants on the first day of the plan
year in which such period began, or
``(ii) the average benefit provided to such
participants on the date such period ends is
more than 50 percent greater than the average
benefit provided on the first day of the plan
year in which such period began.
``(F) Certain employees disregarded.--For purposes of
subparagraphs (D) and (E), any increase in coverage or
value or in coverage or benefits, whichever is
applicable, which is attributable to such coverage and
value or coverage and benefits provided to employees--
``(i) who became participants as a result of
a merger, acquisition, or similar event which
occurred during the 7-year period preceding the
date the class is closed, or
``(ii) who became participants by reason of a
merger of the plan with another plan which had
been in effect for at least 5 years as of the
date of the merger,
shall be disregarded, except that clause (ii) shall
apply for purposes of subparagraph (D) only if, under
the merger, the benefits, rights, or features under 1
plan are conformed to the benefits, rights, or features
of the other plan prospectively.
``(G) Rules relating to average benefit.--For
purposes of subparagraph (E)--
``(i) the average benefit provided to
participants under the plan will be treated as
having remained the same between the 2 dates
described in subparagraph (E)(ii) if the
benefit formula applicable to such participants
has not changed between such dates, and
``(ii) if the benefit formula applicable to 1
or more participants under the plan has changed
between such 2 dates, then the average benefit
under the plan shall be considered to have
increased by more than 50 percent only if--
``(I) the total amount determined
under section 430(b)(1)(A)(i) for all
participants benefitting under the plan
for the plan year in which the 5-year
period described in subparagraph (E)
ends, exceeds
``(II) the total amount determined
under section 430(b)(1)(A)(i) for all
such participants for such plan year,
by using the benefit formula in effect
for each such participant for the first
plan year in such 5-year period, by
more than 50 percent.
In the case of a CSEC plan (as defined in
section 414(y)), the normal cost of the plan
(as determined under section 433(j)(1)(B))
shall be used in lieu of the amount determined
under section 430(b)(1)(A)(i).
``(H) Treatment as single plan.--For purposes of
subparagraphs (E) and (G), a plan described in section
413(c) shall be treated as a single plan rather than as
separate plans maintained by each participating
employer.
``(I) Special rules.--For purposes of subparagraphs
(A)(i) and (B)(iii)(II), the following rules shall
apply:
``(i) In applying section 410(b)(6)(C), the
closing of the class of participants shall not
be treated as a significant change in coverage
under section 410(b)(6)(C)(i)(II).
``(ii) 2 or more plans shall not fail to be
eligible to be aggregated and treated as a
single plan solely by reason of having
different plan years.
``(iii) Changes in the employee population
shall be disregarded to the extent attributable
to individuals who become employees or cease to
be employees, after the date the class is
closed, by reason of a merger, acquisition,
divestiture, or similar event.
``(iv) Aggregation and all other testing
methodologies otherwise applicable under
subsection (a)(4) and section 410(b) may be
taken into account.
The rule of clause (ii) shall also apply for purposes
of determining whether plans to which subparagraph
(B)(i) applies may be aggregated and treated as 1 plan
for purposes of determining whether such plans meet the
requirements of subsection (a)(4) and section 410(b).
``(J) Spun-off plans.--For purposes of this
paragraph, if a portion of a defined benefit plan
described in subparagraph (A) or (B)(iii) is spun off
to another employer and the spun-off plan continues to
satisfy the requirements of--
``(i) subparagraph (A)(i) or (B)(iii)(II),
whichever is applicable, if the original plan
was still within the 3-year period described in
such subparagraph at the time of the spin off,
and
``(ii) subparagraph (A)(ii) or (B)(iii)(III),
whichever is applicable,
the treatment under subparagraph (A) or (B) of the
spun-off plan shall continue with respect to such other
employer.
``(2) Testing of defined contribution plans.--
``(A) Testing on a benefits basis.--A defined
contribution plan shall be permitted to be tested on a
benefits basis if--
``(i) such defined contribution plan provides
make-whole contributions to a closed class of
participants whose accruals under a defined
benefit plan have been reduced or eliminated,
``(ii) for the plan year of the defined
contribution plan as of which the class
eligible to receive such make-whole
contributions closes and the 2 succeeding plan
years, such closed class of participants
satisfies the requirements of section
410(b)(2)(A)(i) (determined by applying the
rules of paragraph (1)(I)),
``(iii) after the date as of which the class
was closed, any plan amendment to the defined
contribution plan which modifies the closed
class or the allocations, benefits, rights, and
features provided to such closed class does not
discriminate significantly in favor of highly
compensated employees, and
``(iv) the class was closed before April 5,
2017, or the defined benefit plan under clause
(i) is described in paragraph (1)(C) (as
applied for purposes of paragraph
(1)(B)(iii)(IV)).
``(B) Aggregation with plans including matching
contributions.--
``(i) In general.--With respect to 1 or more
defined contribution plans described in
subparagraph (A), for purposes of determining
compliance with subsection (a)(4) and section
410(b), the portion of such plans which
provides make-whole contributions or other
nonelective contributions may be aggregated and
tested on a benefits basis with the portion of
1 or more other defined contribution plans
which--
``(I) provides matching contributions
(as defined in subsection (m)(4)(A)),
``(II) provides annuity contracts
described in section 403(b) which are
purchased with matching contributions
or nonelective contributions, or
``(III) consists of an employee stock
ownership plan (within the meaning of
section 4975(e)(7)) or a tax credit
employee stock ownership plan (within
the meaning of section 409(a)).
``(ii) Special rules for matching
contributions.--Rules similar to the rules of
paragraph (1)(B)(ii) shall apply for purposes
of clause (i).
``(C) Special rules for testing defined contribution
plan features providing matching contributions to
certain older, longer service participants.--In the
case of a defined contribution plan which provides
benefits, rights, or features to a closed class of
participants whose accruals under a defined benefit
plan have been reduced or eliminated, the plan shall
not fail to satisfy the requirements of subsection
(a)(4) solely by reason of the composition of the
closed class or the benefits, rights, or features
provided to such closed class if the defined
contribution plan and defined benefit plan otherwise
meet the requirements of subparagraph (A) but for the
fact that the make-whole contributions under the
defined contribution plan are made in whole or in part
through matching contributions.
``(D) Spun-off plans.--For purposes of this
paragraph, if a portion of a defined contribution plan
described in subparagraph (A) or (C) is spun off to
another employer, the treatment under subparagraph (A)
or (C) of the spun-off plan shall continue with respect
to the other employer if such plan continues to comply
with the requirements of clauses (ii) (if the original
plan was still within the 3-year period described in
such clause at the time of the spin off) and (iii) of
subparagraph (A), as determined for purposes of
subparagraph (A) or (C), whichever is applicable.
``(3) Definitions.--For purposes of this subsection--
``(A) Make-whole contributions.--Except as otherwise
provided in paragraph (2)(C), the term `make-whole
contributions' means nonelective allocations for each
employee in the class which are reasonably calculated,
in a consistent manner, to replace some or all of the
retirement benefits which the employee would have
received under the defined benefit plan and any other
plan or qualified cash or deferred arrangement under
subsection (k)(2) if no change had been made to such
defined benefit plan and such other plan or
arrangement. For purposes of the preceding sentence,
consistency shall not be required with respect to
employees who were subject to different benefit
formulas under the defined benefit plan.
``(B) References to closed class of participants.--
References to a closed class of participants and
similar references to a closed class shall include
arrangements under which 1 or more classes of
participants are closed, except that 1 or more classes
of participants closed on different dates shall not be
aggregated for purposes of determining the date any
such class was closed.
``(C) Highly compensated employee.--The term `highly
compensated employee' has the meaning given such term
in section 414(q).".''.
(b) Participation Requirements.--Paragraph (26) of section 401(a) is
amended by adding at the end the following new subparagraph:
``(I) Protected participants.--
``(i) In general.--A plan shall be deemed to
satisfy the requirements of subparagraph (A)
if--
``(I) the plan is amended--
``(aa) to cease all benefit
accruals, or
``(bb) to provide future
benefit accruals only to a
closed class of participants,
``(II) the plan satisfies
subparagraph (A) (without regard to
this subparagraph) as of the effective
date of the amendment, and
``(III) the amendment was adopted
before April 5, 2017, or the plan is
described in clause (ii).
``(ii) Plans described.--A plan is described
in this clause if the plan would be described
in subsection (o)(1)(C), as applied for
purposes of subsection (o)(1)(B)(iii)(IV) and
by treating the effective date of the amendment
as the date the class was closed for purposes
of subsection (o)(1)(C).
``(iii) Special rules.--For purposes of
clause (i)(II), in applying section
410(b)(6)(C), the amendments described in
clause (i) shall not be treated as a
significant change in coverage under section
410(b)(6)(C)(i)(II).
``(iv) Spun-off plans.--For purposes of this
subparagraph, if a portion of a plan described
in clause (i) is spun off to another employer,
the treatment under clause (i) of the spun-off
plan shall continue with respect to the other
employer.''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall take effect on the date
of the enactment of this Act, without regard to whether any
plan modifications referred to in such amendments are adopted
or effective before, on, or after such date of enactment.
(2) Special rules.--
(A) Election of earlier application.--At the election
of the plan sponsor, the amendments made by this
section shall apply to plan years beginning after
December 31, 2013.
(B) Closed classes of participants.--For purposes of
paragraphs (1)(A)(iii), (1)(B)(iii)(IV), and (2)(A)(iv)
of section 401(o) of the Internal Revenue Code of 1986
(as added by this section), a closed class of
participants shall be treated as being closed before
April 5, 2017, if the plan sponsor's intention to
create such closed class is reflected in formal written
documents and communicated to participants before such
date.
(C) Certain post-enactment plan amendments.--A plan
shall not be treated as failing to be eligible for the
application of section 401(o)(1)(A), 401(o)(1)(B)(iii),
or 401(a)(26) of such Code (as added by this section)
to such plan solely because in the case of--
(i) such section 401(o)(1)(A), the plan was
amended before the date of the enactment of
this Act to eliminate 1 or more benefits,
rights, or features, and is further amended
after such date of enactment to provide such
previously eliminated benefits, rights, or
features to a closed class of participants, or
(ii) such section 401(o)(1)(B)(iii) or
section 401(a)(26), the plan was amended before
the date of the enactment of this Act to cease
all benefit accruals, and is further amended
after such date of enactment to provide benefit
accruals to a closed class of participants. Any
such section shall only apply if the plan
otherwise meets the requirements of such
section and in applying such section, the date
the class of participants is closed shall be
the effective date of the later amendment.
Subtitle G--Estate, Gift, and Generation-skipping Transfer Taxes
SEC. 1601. INCREASE IN CREDIT AGAINST ESTATE, GIFT, AND GENERATION-
SKIPPING TRANSFER TAX.
(a) In General.--Section 2010(c)(3) is amended by striking
``$5,000,000'' and inserting ``$10,000,000''.
(b) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying, generation-skipping transfers, and gifts
made, after December 31, 2017.
SEC. 1602. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER TAXES.
(a) Estate Tax Repeal.--
(1) In general.--Subchapter C of chapter 11 is amended by
adding at the end the following new section:
``SEC. 2210. TERMINATION.
``(a) In General.--Except as provided in subsection (b), this chapter
shall not apply to the estates of decedents dying after December 31,
2024.
``(b) Certain Distributions From Qualified Domestic Trusts.--In
applying section 2056A with respect to the surviving spouse of a
decedent dying on or before December 31, 2024--
``(1) section 2056A(b)(1)(A) shall not apply to distributions
made after the 10-year period beginning on such date, and
``(2) section 2056A(b)(1)(B) shall not apply after such
date.''.
(2) Conforming amendments.--Section 1014(b) is amended--
(A) in paragraph (6), by striking ``was includible in
determining'' and all that follows through the end and
inserting ``was includible (or would have been
includible without regard to section 2210) in
determining the value of the decedent's gross estate
under chapter 11 of subtitle B'' ,
(B) in paragraph (9), by striking ``required to be
included'' through ``Code of 1939'' and inserting
``required to be included (or would have been required
to be included without regard to section 2210) in
determining the value of the decedent's gross estate
under chapter 11 of subtitle B'', and
(C) in paragraph (10), by striking ``Property
includible in the gross estate'' and inserting
``Property includible (or which would have been
includible without regard to section 2210) in the gross
estate''.
(3) Clerical amendment.--The table of sections for subchapter
C of chapter 11 is amended by adding at the end the following
new item:
``Sec. 2210. Termination.''.
(b) Generation-skipping Transfer Tax Repeal.--
(1) In general.--Subchapter G of chapter 13 of subtitle B of
such Code is amended by adding at the end the following new
section:
``SEC. 2664. TERMINATION.
``This chapter shall not apply to generation-skipping transfers after
December 31, 2024.''.
(2) Clerical amendment.--The table of sections for subchapter
G of chapter 13 of such Code is amended by adding at the end
the following new item:
``Sec. 2664. Termination.''.
(c) Conforming Amendments Related to Gift Tax.--
(1) Computation of gift tax.--Section 2502 is amended by
adding at the end the following new subsection:
``(d) Gifts Made After 2024.--
``(1) In general.--In the case of a gift made after December
31, 2024, subsection (a) shall be applied by substituting
`subsection (d)(2)' for `section 2001(c)' and `such subsection'
for `such section'.
``(2) Rate schedule.--
``If the amount with respect to which The tentative tax is:
the tentative tax to be computed is:.
Not over $10,000....................... 18% of such amount.
Over $10,000 but not over $20,000...... $1,800, plus 20% of the excess
over $10,000.
Over $20,000 but not over $40,000...... $3,800, plus 22% of the excess
over $20,000.
Over $40,000 but not over $60,000...... $8,200, plus 24% of the excess
over $40,000.
Over $60,000 but not over $80,000...... $13,000, plus 26% of the excess
over $60,000.
Over $80,000 but not over $100,000..... $18,200, plus 28% of the excess
over $80,000.
Over $100,000 but not over $150,000.... $23,800, plus 30% of the excess
over $100,000.
Over $150,000 but not over $250,000.... $38,800, plus 32% of the excess
of $150,000.
Over $250,000 but not over $500,000.... $70,800, plus 34% of the excess
over $250,000.
Over $500,000.......................... $155,800, plus 35% of the
excess of $500,000.''.
(2) Lifetime gift exemption.--Section 2505 is amended by
adding at the end the following new subsection:
``(d) Gifts Made After 2024.--
``(1) In general.--In the case of a gift made after December
31, 2024, subsection (a)(1) shall be applied by substituting
`the amount of the tentative tax which would be determined
under the rate schedule set forth in section 2502(a)(2) if the
amount with respect to which such tentative tax is to be
computed were $10,000,000' for `the applicable credit amount in
effect under section 2010(c) which would apply if the donor
died as of the end of the calendar year'.
``(2) Inflation adjustment.--
``(A) In general.--In the case of any calendar year
after 2024, the dollar amount in subsection (a)(1)
(after application of this subsection) shall be
increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(c)(2)(A) of such
calendar year by substituting `calendar year
2011' for `calendar year 2016' in clause (ii)
thereof.
``(B) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $10,000, such amount
shall be rounded to the nearest multiple of $10,000.''.
(3) Other conforming amendments related to gift tax.--Section
2801 is amended by adding at the end the following new
subsection:
``(g) Gifts Received After 2024.--In the case of a gift received
after December 31, 2024, subsection (a)(1) shall be applied by
substituting `section 2502(a)(2)' for `section 2001(c) as in effect on
the date of such receipt'.''.
(d) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying, generation-skipping transfers, and gifts
made, after December 31, 2024.
TITLE II--ALTERNATIVE MINIMUM TAX REPEAL
SEC. 2001. REPEAL OF ALTERNATIVE MINIMUM TAX.
(a) In General.--Subchapter A of chapter 1 is amended by striking
part VI (and by striking the item relating to such part in the table of
parts for subchapter A).
(b) Credit for Prior Year Minimum Tax Liability.--
(1) Limitation.--Subsection (c) of section 53 is amended to
read as follows:
``(c) Limitation.--The credit allowable under subsection (a) shall
not exceed the regular tax liability of the taxpayer reduced by the sum
of the credits allowed under subparts A, B, and D.''.
(2) Credits treated as refundable.--Section 53 is amended by
adding at the end the following new subsection:
``(e) Portion of Credit Treated as Refundable.--
``(1) In general.--In the case of any taxable year beginning
in 2019, 2020, 2021, or 2022, the limitation under subsection
(c) shall be increased by the AMT refundable credit amount for
such year.
``(2) AMT refundable credit amount.--For purposes of
paragraph (1), the AMT refundable credit amount is an amount
equal to 50 percent (100 percent in the case of a taxable year
beginning in 2022) of the excess (if any) of--
``(A) the minimum tax credit determined under
subsection (b) for the taxable year, over
``(B) the minimum tax credit allowed under subsection
(a) for such year (before the application of this
subsection for such year).
``(3) Credit refundable.--For purposes of this title (other
than this section), the credit allowed by reason of this
subsection shall be treated as a credit allowed under subpart C
(and not this subpart).
``(4) Short taxable years.--In the case of any taxable year
of less than 365 days, the AMT refundable credit amount
determined under paragraph (2) with respect to such taxable
year shall be the amount which bears the same ratio to such
amount determined without regard to this paragraph as the
number of days in such taxable year bears to 365.''.
(3) Treatment of references.--Section 53(d) is amended by
adding at the end the following new paragraph:
``(3) AMT term references.--Any references in this subsection
to section 55, 56, or 57 shall be treated as a reference to
such section as in effect before its repeal by the Tax Cuts and
Jobs Act.''.
(c) Conforming Amendments Related to AMT Repeal.--
(1) Section 2(d) is amended by striking ``sections 1 and 55''
and inserting ``section 1''.
(2) Section 5(a) is amended by striking paragraph (4).
(3) Section 11(d) is amended by striking ``the taxes imposed
by subsection (a) and section 55'' and inserting ``the tax
imposed by subsection (a)''.
(4) Section 12 is amended by striking paragraph (7).
(5) Section 26(a) is amended to read as follows:
``(a) Limitation Based on Amount of Tax.--The aggregate amount of
credits allowed by this subpart for the taxable year shall not exceed
the taxpayer's regular tax liability for the taxable year.''.
(6) Section 26(b)(2) is amended by striking subparagraph (A).
(7) Section 26 is amended by striking subsection (c).
(8) Section 38(c) is amended--
(A) by striking paragraphs (1) through (5),
(B) by redesignating paragraph (6) as paragraph (2),
(C) by inserting before paragraph (2) (as so
redesignated) the following new paragraph:
``(1) In general.--The credit allowed under subsection (a)
for any taxable year shall not exceed the excess (if any) of--
``(A) the sum of--
``(i) so much of the regular tax liability as
does not exceed $25,000, plus
``(ii) 75 percent of so much of the regular
tax liability as exceeds $25,000, over
``(B) the sum of the credits allowable under subparts
A and B of this part.'', and
(D) by striking ``subparagraph (B) of paragraph (1)''
each place it appears in paragraph (2) (as so
redesignated) and inserting ``clauses (i) and (ii) of
paragraph (1)(A)''.
(9) Section 39(a) is amended--
(A) by striking ``or the eligible small business
credits'' in paragraph (3)(A), and
(B) by striking paragraph (4).
(10) Section 45D(g)(4)(B) is amended by striking ``or for
purposes of section 55''.
(11) Section 54(c)(1) is amended to read as follows:
``(1) regular tax liability (as defined in section 26(b)),
over''.
(12) Section 54A(c)(1)(A) is amended to read as follows:
``(A) regular tax liability (as defined in section
26(b)), over''.
(13) Section 148(b)(3) is amended to read as follows:
``(3) Tax-exempt bonds not treated as investment property.--
The term `investment property' does not include any tax-exempt
bond.''.
(14) Section 168(k)(2) is amended by striking subparagraph
(G).
(15) Section 168(k) is amended by striking paragraph (4).
(16) Section 168(k)(5) is amended by striking subparagraph
(E).
(17) Section 168(m)(2)(B)(i) is amended by striking
``(determined without regard to paragraph (4) thereof)''.
(18) Section 168(m)(2) is amended by striking subparagraph
(D).
(19) Section 173 is amended by striking subsection (b).
(20) Section 263(c) is amended by striking ``section 59(e) or
291'' and inserting ``section 291''.
(21) Section 263A(c) is amended by striking paragraph (6) and
by redesignating paragraph (7) (as amended) as paragraph (6).
(22) Section 382(l) is amended by striking paragraph (7) and
by redesignating paragraph (8) as paragraph (7).
(23) Section 443 is amended by striking subsection (d) and by
redesignating subsection (e) as subsection (d).
(24) Section 616 is amended by striking subsection (e).
(25) Section 617 is amended by striking subsection (i).
(26) Section 641(c) is amended--
(A) in paragraph (2) by striking subparagraph (B) and
by redesignating subparagraphs (C) and (D) as
subparagraphs (B) and (C), respectively, and
(B) in paragraph (3), by striking ``paragraph
(2)(C)'' and inserting ``paragraph (2)(B)''.
(27) Subsections (b) and (c) of section 666 are each amended
by striking ``(other than the tax imposed by section 55)''.
(28) Section 848 is amended by striking subsection (i).
(29) Section 860E(a) is amended by striking paragraph (4).
(30) Section 871(b)(1) is amended by striking ``or 55''.
(31) Section 882(a)(1) is amended by striking ``55,''.
(32) Section 897(a) is amended to read as follows:
``(a) Treatment as Effectively Connected With United States Trade or
Business.--For purposes of this title, gain or loss of a nonresident
alien individual or a foreign corporation from the disposition of a
United States real property interest shall be taken into account--
``(1) in the case of a nonresident alien individual, under
section 871(b)(1), or
``(2) in the case of a foreign corporation, under section
882(a)(1),
as if the taxpayer were engaged in a trade or business within the
United States during the taxable year and as if such gain or loss were
effectively connected with such trade or business.''.
(33) Section 904(k) is amended to read as follows:
``(k) Cross Reference.--For increase of limitation under subsection
(a) for taxes paid with respect to amounts received which were included
in the gross income of the taxpayer for a prior taxable year as a
United States shareholder with respect to a controlled foreign
corporation, see section 960(b).''.
(34) Section 911(f) is amended to read as follows:
``(f) Determination of Tax Liability.--
``(1) In general.--If, for any taxable year, any amount is
excluded from gross income of a taxpayer under subsection (a),
then, notwithstanding section 1, if such taxpayer has taxable
income for such taxable year, the tax imposed by section 1 for
such taxable year shall be equal to the excess (if any) of--
``(A) the tax which would be imposed by section 1 for
such taxable year if the taxpayer's taxable income were
increased by the amount excluded under subsection (a)
for such taxable year, over
``(B) the tax which would be imposed by section 1 for
such taxable year if the taxpayer's taxable income were
equal to the amount excluded under subsection (a) for
such taxable year.
For purposes of this paragraph, the amount excluded under
subsection (a) shall be reduced by the aggregate amount of any
deductions or exclusions disallowed under subsection (d)(6)
with respect to such excluded amount.
``(2) Treatment of capital gain excess.--
``(A) In general.--In applying section 1(h) for
purposes of determining the tax under paragraph (1)(A)
for any taxable year in which, without regard to this
subsection, the taxpayer's net capital gain exceeds
taxable income (hereafter in this subparagraph referred
to as the capital gain excess)--
``(i) the taxpayer's net capital gain
(determined without regard to section 1(h)(11))
shall be reduced (but not below zero) by such
capital gain excess,
``(ii) the taxpayer's qualified dividend
income shall be reduced by so much of such
capital gain excess as exceeds the taxpayer's
net capital gain (determined without regard to
section 1(h)(11) and the reduction under clause
(i)), and
``(iii) adjusted net capital gain,
unrecaptured section 1250 gain, and 28-percent
rate gain shall each be determined after
increasing the amount described in section
1(h)(4)(B) by such capital gain excess.
``(B) Definitions.--Terms used in this paragraph
which are also used in section 1(h) shall have the
respective meanings given such terms by section
1(h).''.
(35) Section 962(a)(1) is amended--
(A) by striking ``sections 1 and 55'' and inserting
``section 1'', and
(B) by striking ``sections 11 and 55'' and inserting
``section 11''.
(36) Section 1016(a) is amended by striking paragraph (20).
(37) Section 1202(a)(4) is amended by inserting ``and'' at
the end of subparagraph (A), by striking ``, and'' and
inserting a period at the end of subparagraph (B), and by
striking subparagraph (C).
(38) Section 1374(b)(3)(B) is amended by striking the last
sentence thereof.
(39) Section 1561(a) is amended--
(A) by inserting ``and'' at the end of paragraph (1),
by striking ``, and'' at the end of paragraph (2) and
inserting a period, and by striking paragraph (3), and
(B) by striking the last sentence.
(40) Section 6015(d)(2)(B) is amended by striking ``or 55''.
(41) Section 6211(b)(4)(A) is amended by striking``,
168(k)(4)''.
(42) Section 6425(c)(1)(A) is amended to read as follows:
``(A) the tax imposed under section 11 or subchapter
L of chapter 1, whichever is applicable, over''.
(43) Section 6654(d)(2) is amended--
(A) in clause (i) of subparagraph (B), by striking
``, alternative minimum taxable income,'', and
(B) in clause (i) of subparagraph (C), by striking
``, alternative minimum taxable income,''.
(44) Section 6655(e)(2)(B)(i) is amended by striking ``The
taxable income and alternative minimum taxable income shall''
and inserting ``Taxable income shall''.
(45) Section 6655(g)(1)(A) is amended by adding ``plus'' at
the end of clause (i), by striking clause (ii), and by
redesignating clause (iii) as clause (ii).
(46) Section 6662(e)(3)(C) is amended by striking ``the
regular tax (as defined in section 55(c))'' and inserting ``the
regular tax liability (as defined in section 26(b))''.
(d) Effective Dates.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2017.
(2) Prior elections with respect to certain tax
preferences.--So much of the amendment made by subsection (a)
as relates to the repeal of section 59(e) of the Internal
Revenue Code of 1986 shall apply to amounts paid or incurred
after December 31, 2017.
(3) Treatment of net operating loss carrybacks.--For purposes
of section 56(d) of the Internal Revenue Code of 1986 (as in
effect before its repeal), the amount of any net operating loss
which may be carried back from a taxable year beginning after
December 31, 2017, to taxable years beginning before January 1,
2018, shall be determined without regard to any adjustments
under section 56(d)(2)(A) of such Code (as so in effect).
TITLE III--BUSINESS TAX REFORM
Subtitle A--Tax Rates
SEC. 3001. REDUCTION IN CORPORATE TAX RATE.
(a) In General.--Section 11(b) is amended to read as follows:
``(b) Amount of Tax.--
``(1) In general.--Except as otherwise provided in this
subsection, the amount of the tax imposed by subsection (a)
shall be 20 percent of taxable income.
``(2) Special rule for personal service corporations.--
``(A) In general.--In the case of a personal service
corporation (as defined in section 448(d)(2)), the
amount of the tax imposed by subsection (a) shall be 25
percent of taxable income.
``(B) References to corporate rate.--Any reference to
the rate imposed under this section or to the highest
rate in effect under this section (or any similar
reference) shall be determined without regard to the
rate imposed with respect to personal service
corporations (as so defined).''.
(b) Conforming Amendments.--
(1)(A) Part I of subchapter P of chapter 1 is amended by
striking section 1201 (and by striking the item relating to
such section in the table of sections for such part).
(B) Section 12 is amended by striking paragraph (4).
(C) Section 527(b) is amended--
(i) by striking paragraph (2), and
(ii) by striking all that precedes ``is hereby
imposed'' and inserting:
``(b) Tax Imposed.--A tax''.
(D) Section 594(a) is amended by striking ``taxes imposed by
section 11 or 1201(a)'' and inserting ``tax imposed by section
11''.
(E) Section 691(c)(4) is amended by striking ``1201,''.
(F) Section 801(a) is amended--
(i) by striking paragraph (2), and
(ii) by striking all that precedes ``is hereby
imposed'' and inserting:
``(a) Tax Imposed.--A tax''.
(G) Section 831(e) is amended by striking paragraph (1) and
by redesignating paragraphs (2) and (3) as paragraphs (1) and
(2), respectively.
(H) Sections 832(c)(5) and 834(b)(1)(D) are each amended by
striking ``sec. 1201 and following,''.
(I) Section 852(b)(3)(A) is amended by striking ``section
1201(a)'' and inserting ``section 11(b)(1)''.
(J) Section 857(b)(3) is amended--
(i) by striking subparagraph (A) and redesignating
subparagraphs (B) through (F) as subparagraphs (A)
through (E), respectively,
(ii) in subparagraph (C), as so redesignated--
(I) by striking ``subparagraph (A)(ii)'' in
clause (i) thereof and inserting ``paragraph
(1)'',
(II) by striking ``the tax imposed by
subparagraph (A)(ii)'' in clauses (ii) and (iv)
thereof and inserting ``the tax imposed by
paragraph (1) on undistributed capital gain'',
(iii) in subparagraph (E), as so redesignated, by
striking ``subparagraph (B) or (D)'' and inserting
``subparagraph (A) or (C)'', and
(iv) by adding at the end the following new
subparagraph:
``(F) Undistributed capital gain.--For purposes of
this paragraph, the term `undistributed capital gain'
means the excess of the net capital gain over the
deduction for dividends paid (as defined in section
561) determined with reference to capital gain
dividends only.''.
(K) Section 882(a)(1) is amended by striking ``, or
1201(a)''.
(L) Section 1374(b) is amended by striking paragraph (4).
(M) Section 1381(b) is amended by striking ``taxes imposed by
section 11 or 1201'' and inserting ``tax imposed by section
11''.
(N) Section 6655(g)(1)(A)(i) is amended by striking ``or
1201(a),''.
(O) Section 7518(g)(6)(A) is amended by striking ``or
1201(a)''.
(2) Section 1445(e)(1) is amended by striking ``35 percent
(or, to the extent provided in regulations, 20 percent)'' and
inserting ``20 percent''.
(3) Section 1445(e)(2) is amended by striking ``35 percent''
and inserting ``20 percent''.
(4) Section 1445(e)(6) is amended by striking ``35 percent
(or, to the extent provided in regulations, 20 percent)'' and
inserting ``20 percent''.
(5)(A) Part I of subchapter B of chapter 5 is amended by
striking section 1551 (and by striking the item relating to
such section in the table of sections for such part).
(B) Section 12 is amended by striking paragraph (6).
(C) Section 535(c)(5) is amended to read as follows:
``(5) Cross reference.--For limitation on credit provided in
paragraph (2) or (3) in the case of certain controlled
corporations, see section 1561.''.
(6)(A) Section 1561, as amended by the preceding provisions
of this Act, is amended to read as follows:
``SEC. 1561. LIMITATION ON ACCUMULATED EARNINGS CREDIT IN THE CASE OF
CERTAIN CONTROLLED CORPORATIONS.
``(a) In General.--The component members of a controlled group of
corporations on a December 31 shall, for their taxable years which
include such December 31, be limited for purposes of this subtitle to
one $250,000 ($150,000 if any component member is a corporation
described in section 535(c)(2)(B)) amount for purposes of computing the
accumulated earnings credit under section 535(c)(2) and (3). Such
amount shall be divided equally among the component members of such
group on such December 31 unless the Secretary prescribes regulations
permitting an unequal allocation of such amount.
``(b) Certain Short Taxable Years.--If a corporation has a short
taxable year which does not include a December 31 and is a component
member of a controlled group of corporations with respect to such
taxable year, then for purposes of this subtitle, the amount to be used
in computing the accumulated earnings credit under section 535(c)(2)
and (3) of such corporation for such taxable year shall be the amount
specified in subsection (a) with respect to such group, divided by the
number of corporations which are component members of such group on the
last day of such taxable year. For purposes of the preceding sentence,
section 1563(b) shall be applied as if such last day were substituted
for December 31.''.
(B) The table of sections for part II of subchapter B of
chapter 5 is amended by striking the item relating to section
1561 and inserting the following new item:
``Sec. 1561. Limitation on accumulated earnings credit in the case of
certain controlled corporations.''.
(7) Section 7518(g)(6)(A) is amended--
(A) by striking ``With respect to the portion'' and
inserting ``In the case of a taxpayer other than a
corporation, with respect to the portion'', and
(B) by striking ``(34 percent in the case of a
corporation)''.
(c) Reduction in Dividend Received Deductions to Reflect Lower
Corporate Income Tax Rates.--
(1) Dividends received by corporations.--
(A) In general.--Section 243(a)(1) is amended by
striking ``70 percent'' and inserting ``50 percent''.
(B) Dividends from 20-percent owned corporations.--
Section 243(c)(1) is amended--
(i) by striking ``80 percent'' and inserting
``65 percent'', and
(ii) by striking ``70 percent'' and inserting
``50 percent''.
(C) Conforming amendment.--The heading for section
243(c) is amended by striking ``Retention of 80-percent
Dividend Received Deduction'' and inserting ``Increased
Percentage''.
(2) Dividends received from fsc.--Section 245(c)(1)(B) is
amended--
(A) by striking ``70 percent'' and inserting ``50
percent'', and
(B) by striking ``80 percent'' and inserting ``65
percent''.
(3) Limitation on aggregate amount of deductions.--Section
246(b)(3) is amended--
(A) by striking ``80 percent'' in subparagraph (A)
and inserting ``65 percent'', and
(B) by striking ``70 percent'' in subparagraph (B)
and inserting ``50 percent''.
(4) Reduction in deduction where portfolio stock is debt-
financed.--Section 246A(a)(1) is amended--
(A) by striking ``70 percent'' and inserting ``50
percent'', and
(B) by striking ``80 percent'' and inserting ``65
percent''.
(5) Income from sources within the united states.--Section
861(a)(2) is amended--
(A) by striking ``100/70th'' and inserting ``100/
50th'' in subparagraph (B), and
(B) in the flush sentence at the end--
(i) by striking ``100/80th'' and inserting
``100/65th'', and
(ii) by striking ``100/70th'' and inserting
``100/50th''.
(d) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2017.
(2) Certain conforming amendments.--The amendments made by
paragraphs (2), (3), and (4) of subsection (b) shall apply to
distributions after December 31, 2017.
(e) Normalization Requirements.--
(1) In general.--A normalization method of accounting shall
not be treated as being used with respect to any public utility
property for purposes of section 167 or 168 of the Internal
Revenue Code of 1986 if the taxpayer, in computing its cost of
service for ratemaking purposes and reflecting operating
results in its regulated books of account, reduces the excess
tax reserve more rapidly or to a greater extent than such
reserve would be reduced under the average rate assumption
method.
(2) Alternative method for certain taxpayers.--If, as of the
first day of the taxable year that includes the date of
enactment of this Act--
(A) the taxpayer was required by a regulatory agency
to compute depreciation for public utility property on
the basis of an average life or composite rate method,
and
(B) the taxpayer's books and underlying records did
not contain the vintage account data necessary to apply
the average rate assumption method,
the taxpayer will be treated as using a normalization method of
accounting if, with respect to such jurisdiction, the taxpayer
uses the alternative method for public utility property that is
subject to the regulatory authority of that jurisdiction.
(3) Definitions.--For purposes of this subsection--
(A) Excess tax reserve.--The term ``excess tax
reserve'' means the excess of--
(i) the reserve for deferred taxes (as
described in section 168(i)(9)(A)(ii) of the
Internal Revenue Code of 1986 as in effect on
the day before the date of the enactment of
this Act), over
(ii) the amount which would be the balance in
such reserve if the amount of such reserve were
determined by assuming that the corporate rate
reductions provided in this Act were in effect
for all prior periods.
(B) Average rate assumption method.--The average rate
assumption method is the method under which the excess
in the reserve for deferred taxes is reduced over the
remaining lives of the property as used in its
regulated books of account which gave rise to the
reserve for deferred taxes. Under such method, if
timing differences for the property reverse, the amount
of the adjustment to the reserve for the deferred taxes
is calculated by multiplying--
(i) the ratio of the aggregate deferred taxes
for the property to the aggregate timing
differences for the property as of the
beginning of the period in question, by
(ii) the amount of the timing differences
which reverse during such period.
(C) Alternative method.--The ``alternative method''
is the method in which the taxpayer--
(i) computes the excess tax reserve on all
public utility property included in the plant
account on the basis of the weighted average
life or composite rate used to compute
depreciation for regulatory purposes, and
(ii) reduces the excess tax reserve ratably
over the remaining regulatory life of the
property.
(4) Tax increased for normalization violation.--If, for any
taxable year ending after the date of the enactment of this
Act, the taxpayer does not use a normalization method of
accounting, the taxpayer's tax for the taxable year shall be
increased by the amount by which it reduces its excess tax
reserve more rapidly than permitted under a normalization
method of accounting.
Subtitle B--Cost Recovery
SEC. 3101. INCREASED EXPENSING.
(a) 100 Percent Expensing.--Section 168(k)(1)(A) is amended by
striking ``50 percent'' and inserting ``100 percent''.
(b) Extension Through January 1, 2023.--Section 168(k)(2) is
amended--
(1) in subparagraph (A)(iii), by striking ``January 1, 2020''
and inserting ``January 1, 2023'',
(2) in subparagraph (B)(i)(II), by striking ``January 1,
2021'' and inserting ``January 1, 2024'',
(3) in subparagraph (B)(i)(III), by striking ``January 1,
2020'' and inserting ``January 1, 2023'',
(4) in subparagraph (B)(ii), by striking ``January 1, 2020''
in each place it appears and inserting ``January 1, 2023'', and
(5) in subparagraph (E)(i), by striking ``January 1, 2020''
and replacing it with ``January 1, 2023''.
(c) Application to Used Property.--
(1) In general.--Section 168(k)(2)(A)(ii) is amended to read
as follows:
``(ii) the original use of which begins with
the taxpayer or the acquisition of which by the
taxpayer meets the requirements of clause (ii)
of subparagraph (E), and''.
(2) Acquisition requirements.--Section 168(k)(2)(E)(ii) is
amended to read as follows:
``(ii) Acquisition requirements.--An
acquisition of property meets the requirements
of this clause if--
``(I) such property was not used by
the taxpayer at any time prior to such
acquisition, and
``(II) the acquisition of such
property meets the requirements of
paragraphs (2)(A), (2)(B), (2)(C), and
(3) of section 179(d).'',
(3) Anti-abuse rules.--Section 168(k)(2)(E) is further
amended by amending clause (iii)(I) to read as follows:
``(I) property is used by a lessor of
such property and such use is the
lessor's first use of such property,''.
(d) Exception for Certain Trades and Businesses Not Subject to
Limitation on Interest Expense.--Section 168(k)(2), as amended by
section 2001, is amended by inserting after subparagraph (F) the
following new subparagraph:
``(G) Exception for property of certain businesses
not subject to limitation on interest expense.--The
term `qualified property' shall not include any
property used in--
``(i) a trade or business described in
subparagraph (B) or (C) of section 163(j)(7),
or
``(ii) a trade or business that has had floor
plan financing indebtedness (as defined in
paragraph (9) of section 163(j)), if the floor
plan financing interest related to such
indebtedness was taken into account under
paragraph (1)(C) of such section.''.
(e) Coordination With Section 280F.--Section 168(k)(2)(F) is
amended--
(1) by striking ``$8,000'' in clauses (i) and (iii) and
inserting ``$16,000'', and
(2) in clause (iii)--
(A) by striking ``placed in service by the taxpayer
after December 31, 2017'' and inserting ``acquired by
the taxpayer before September 28, 2017, and placed in
service by the taxpayer after September 27, 2017'', and
(B) by redesignating subclauses (I) and (II) as
subclauses (II) and (III) respectively, and inserting
before clause (II), as so redesignated, the following
new subclause:
``(I) in the case of a passenger
automobile placed in service before
January 1, 2018, `$8,000',''.
(f) Conforming Amendments.--
(1) Section 168(k)(2)(B)(i)(III), as amended, is amended by
inserting ``binding'' before ``contract''.
(2) Section 168(k)(5) is amended by--
(A) by striking ``January 1, 2020'' in subparagraph
(A) and inserting ``January 1, 2023'',
(B) by striking ``50 percent'' in subparagraph (A)(i)
and inserting ``100 percent'', and
(C) by striking subparagraph (F).
(3) Section 168(k)(6) is amended to read as follows:
``(6) Phase down.--In the case of qualified property acquired
by the taxpayer before September 28, 2017, and placed in
service by the taxpayer after September 27, 2017, paragraph
(1)(A) shall be applied by substituting for `100 percent'--
``(A) `50 percent' in the case of--
``(i) property placed in service before
January 1, 2018, and
``(ii) property described in subparagraph (B)
or (C) of paragraph (2) which is placed in
service in 2018,
``(B) `40 percent' in the case of--
``(i) property placed in service in 2018
(other than property described in subparagraph
(B) or (C) of paragraph (2)), and
``(ii) property described in subparagraph (B)
or (C) of paragraph (2) which is placed in
service in 2019, and
``(C) `30 percent' in the case of--
``(i) property placed in service in 2019
(other than property described in subparagraph
(B) or (C) of paragraph (2)), and
``(ii) property described in subparagraph (B)
or (C) of paragraph (2) which is placed in
service in 2020.''.
(4) The heading of section 168(k) is amended by striking
``Special Allowance for Certain Property Acquired After
December 31, 2007, and Before January 1, 2020'' and inserting
``Full Expensing of Certain Property''.
(5) Section 460(c)(6)(B)(ii) is amended by striking ``January
1, 2020 (January 1, 2021 in the case of property described in
section 168(k)(2)(B))'' and inserting ``January 1, 2023
(January 1, 2024 in the case of property described in section
168(k)(2)(B))''.
(g) Effective Date.--
(1) In general.--Except at provided by paragraph (2), the
amendments made by this section shall apply to property which--
(A) is acquired after September 27, 2017, and
(B) is placed in service after such date.
For purposes of the preceding sentence, property shall not be
treated as acquired after the date on which a written binding
contract is entered into for such acquisition.
(2) Specified plants.--The amendments made by subsection
(f)(2) shall apply to specified plants planted or grafted after
September 27, 2017.
(3) Transition rule.--In the case of any taxpayer's first
taxable year ending after September 27, 2017, the taxpayer may
elect (at such time and in such form and manner as the
Secretary of the Treasury, or his designee, may provide) to
apply section 168 of the Internal Revenue Code of 1986 without
regard to the amendments made by this section.
(4) Limitation on net operating loss carrybacks attributable
to full expensing.--In the case of any taxable year which
includes any portion of the period beginning on September 28,
2017, and ending on December 31, 2017, the amount of any net
operating loss for such taxable year which may be treated as a
net operating loss carryback (including any such carryback
attributable to any specified liability loss under section
172(b)(1)(C), any corporate equity reduction interest loss
under section 172(b)(1)(D), any eligible loss under section
172(b)(1)(E), and any farming loss under section 172(b)(1)(F))
shall be determined without regard to the amendments made by
this section. For purposes of this paragraph, terms which are
used in section 172 of the Internal Revenue Code of 1986
(determined without regard to the amendments made by section
3302) shall have the same meaning as when used in such section.
Subtitle C--Small Business Reforms
SEC. 3201. EXPANSION OF SECTION 179 EXPENSING.
(a) Increased Dollar Limitations.--
(1) In general.--Section 179(b) is amended--
(A) by inserting ``($5,000,000, in the case of
taxable years beginning before January 1, 2023)'' after
``$500,000'' in paragraph (1), and
(B) by inserting ``($20,000,000, in the case of
taxable years beginning before January 1, 2023)'' after
``$2,000,000'' in paragraph (2).
(2) Inflation adjustment.--Section 179(b)(6) is amended to
read as follows:
``(6) Inflation adjustment.--
``(A) In general.--In the case of a taxable year
beginning after 2015 (2018 in the case of the
$5,000,000 and $20,000,000 amounts in subsection (b)),
each dollar amount in subsection (b) shall be increased
by an amount equal to such dollar amount multiplied
by--
``(i) in the case of the $500,000 and
$2,000,000 amounts in subsection (b), the cost-
of-living adjustment determined under section
1(c)(2) for the calendar year in which the
taxable year begins, determined by substituting
`calendar year 2014' for `calendar year 2016'
in subparagraph (A)(ii) thereof, and
``(ii) in the case of the $5,000,000 and
$20,000,000 amounts in subsection (b), the
cost-of-living adjustment determined under
section 1(c)(2) for the calendar year in which
the taxable year begins, determined by
substituting `calendar year 2017' for `calendar
year 2016' in subparagraph (A)(ii) thereof.
``(B) Rounding.--The amount of any increase under
subparagraph (A) shall be rounded to the nearest
multiple of $10,000 ($100,000 in the case of the
$5,000,000 and $20,000,000 amounts in subsection
(b)).''.
(b) Application to Qualified Energy Efficient Heating and Air-
conditioning Property.--
(1) In general.--Section 179(f)(2) is amended by striking
``and'' at the end of subparagraph (B), by striking the period
at the end of subparagraph (C) and inserting ``, and'', and by
adding at the end the following new subparagraph:
``(D) qualified energy efficient heating and air-
conditioning property.''.
(2) Qualified energy efficient heating and air-conditioning
property.--Section 179(f) is amended by adding at the end the
following new paragraph:
``(3) Qualified energy efficient heating and air-conditioning
property.--For purposes of this subsection--
``(A) In general.--The term `qualified energy
efficient heating and air-conditioning property' means
any section 1250 property--
``(i) with respect to which depreciation (or
amortization in lieu of depreciation) is
allowable,
``(ii) which is installed as part of a
building's heating, cooling, ventilation, or
hot water system, and
``(iii) which is within the scope of Standard
90.1-2007 or any successor standard.
``(B) Standard 90.1-2007.--The term `Standard 90.1-
2007' means Standard 90.1-2007 of the American Society
of Heating, Refrigerating and Air-Conditioning
Engineers and the Illuminating Engineering Society of
North America (as in effect on the day before the date
of the adoption of Standard 90.1-2010 of such
Societies).''.
(c) Effective Date.--
(1) Increased dollar limitations.--The amendments made by
subsection (a) shall apply to taxable years beginning after
December 31, 2017.
(2) Application to qualified energy efficient heating and
air-conditioning property.--The amendments made by subsection
(b) shall apply to property acquired and placed in service
after November 2, 2017. For purposes of the preceding sentence,
property shall not be treated as acquired after the date on
which a written binding contract is entered into for such
acquisition.
SEC. 3202. SMALL BUSINESS ACCOUNTING METHOD REFORM AND SIMPLIFICATION.
(a) Modification of Limitation on Cash Method of Accounting.--
(1) Increased limitation.--So much of section 448(c) as
precedes paragraph (2) is amended to read as follows:
``(c) Gross Receipts Test.--For purposes of this section--
``(1) In general.--A corporation or partnership meets the
gross receipts test of this subsection for any taxable year if
the average annual gross receipts of such entity for the 3-
taxable-year period ending with the taxable year which precedes
such taxable year does not exceed $25,000,000.''.
(2) Application of exception on annual basis.--Section
448(b)(3) is amended to read as follows:
``(3) Entities which meet gross receipts test.--Paragraphs
(1) and (2) of subsection (a) shall not apply to any
corporation or partnership for any taxable year if such entity
(or any predecessor) meets the gross receipts test of
subsection (c) for such taxable year.''.
(3) Inflation adjustment.--Section 448(c) is amended by
adding at the end the following new paragraph:
``(4) Adjustment for inflation.--In the case of any taxable
year beginning after December 31, 2018, the dollar amount in
paragraph (1) shall be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under
section 1(c)(2) for the calendar year in which the
taxable year begins, by substituting `calendar year
2017' for `calendar year 2016' in subparagraph (A)(ii)
thereof.
If any amount as increased under the preceding sentence is not
a multiple of $1,000,000, such amount shall be rounded to the
nearest multiple of $1,000,000.''.
(4) Coordination with section 481.--Section 448(d)(7) is
amended to read as follows:
``(7) Coordination with section 481.--Any change in method of
accounting made pursuant to this section shall be treated for
purposes of section 481 as initiated by the taxpayer and made
with the consent of the Secretary.''.
(5) Application of exception to corporations engaged in
farming.--
(A) In general.--Section 447(c) is amended--
(i) by inserting ``for any taxable year''
after ``not being a corporation'' in the matter
preceding paragraph (1), and
(ii) by amending paragraph (2) to read as
follows:
``(2) a corporation which meets the gross receipts test of
section 448(c) for such taxable year.''.
(B) Coordination with section 481.--Section 447(f) is
amended to read as follows:
``(f) Coordination With Section 481.--Any change in method of
accounting made pursuant to this section shall be treated for purposes
of section 481 as initiated by the taxpayer and made with the consent
of the Secretary.''.
(C) Conforming amendments.--Section 447 is amended--
(i) by striking subsections (d), (e), (h),
and (i), and
(ii) by redesignating subsections (f) and (g)
(as amended by subparagraph (B)) as subsections
(d) and (e), respectively.
(b) Exemption From UNICAP Requirements.--
(1) In general.--Section 263A is amended by redesignating
subsection (i) as subsection (j) and by inserting after
subsection (h) the following new subsection:
``(i) Exemption for Certain Small Businesses.--
``(1) In general.--In the case of any taxpayer (other than a
tax shelter prohibited from using the cash receipts and
disbursements method of accounting under section 448(a)(3))
which meets the gross receipts test of section 448(c) for any
taxable year, this section shall not apply with respect to such
taxpayer for such taxable year.
``(2) Application of gross receipts test to individuals,
etc.-- In the case of any taxpayer which is not a corporation
or a partnership, the gross receipts test of section 448(c)
shall be applied in the same manner as if each trade or
business of such taxpayer were a corporation or partnership.
``(3) Coordination with section 481.--Any change in method of
accounting made pursuant to this subsection shall be treated
for purposes of section 481 as initiated by the taxpayer and
made with the consent of the Secretary.''.
(2) Conforming amendment.--Section 263A(b)(2) is amended to
read as follows:
``(2) Property acquired for resale.--Real or personal
property described in section 1221(a)(1) which is acquired by
the taxpayer for resale.''.
(c) Exemption From Inventories.--Section 471 is amended by
redesignating subsection (c) as subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Exemption for Certain Small Businesses.--
``(1) In general.--In the case of any taxpayer (other than a
tax shelter prohibited from using the cash receipts and
disbursements method of accounting under section 448(a)(3))
which meets the gross receipts test of section 448(c) for any
taxable year--
``(A) subsection (a) shall not apply with respect to
such taxpayer for such taxable year, and
``(B) the taxpayer's method of accounting for
inventory for such taxable year shall not be treated as
failing to clearly reflect income if such method
either--
``(i) treats inventory as non-incidental
materials and supplies, or
``(ii) conforms to such taxpayer's method of
accounting reflected in an applicable financial
statement of the taxpayer with respect to such
taxable year or, if the taxpayer does not have
any applicable financial statement with respect
to such taxable year, the books and records of
the taxpayer prepared in accordance with the
taxpayer's accounting procedures.
``(2) Applicable financial statement.--For purposes of this
subsection, the term `applicable financial statement' means--
``(A) a financial statement which is certified as
being prepared in accordance with generally accepted
accounting principles and which is--
``(i) a 10-K (or successor form), or annual
statement to shareholders, required to be filed
by the taxpayer with the United States
Securities and Exchange Commission,
``(ii) an audited financial statement of the
taxpayer which is used for--
``(I) credit purposes,
``(II) reporting to shareholders,
partners, or other proprietors, or to
beneficiaries, or
``(III) any other substantial nontax
purpose,
but only if there is no statement of the
taxpayer described in clause (i), or
``(iii) filed by the taxpayer with any other
Federal or State agency for nontax purposes,
but only if there is no statement of the
taxpayer described in clause (i) or (ii), or
``(B) a financial statement of the taxpayer which--
``(i) is used for a purpose described in
subclause (I), (II), or (III) of subparagraph
(A)(ii), or
``(ii) filed by the taxpayer with any
regulatory or governmental body (whether
domestic or foreign) specified by the
Secretary,
but only if there is no statement of the taxpayer
described in subparagraph (A).
``(3) Application of gross receipts test to individuals,
etc.--In the case of any taxpayer which is not a corporation or
a partnership, the gross receipts test of section 448(c) shall
be applied in the same manner as if each trade or business of
such taxpayer were a corporation or partnership.
``(4) Coordination with section 481.--Any change in method of
accounting made pursuant to this subsection shall be treated
for purposes of section 481 as initiated by the taxpayer and
made with the consent of the Secretary.''.
(d) Exemption From Percentage Completion for Long-term Contracts.--
(1) In general.--Section 460(e)(1)(B) is amended--
(A) by inserting ``(other than a tax shelter
prohibited from using the cash receipts and
disbursements method of accounting under section
448(a)(3))'' after ``taxpayer'' in the matter preceding
clause (i), and
(B) by amending clause (ii) to read as follows:
``(ii) who meets the gross receipts test of
section 448(c) for the taxable year in which
such contract is entered into.''.
(2) Conforming amendments.--Section 460(e) is amended by
striking paragraphs (2) and (3), by redesignating paragraphs
(4), (5), and (6) as paragraphs (3), (4), and (5),
respectively, and by inserting after paragraph (1) the
following new paragraph:
``(2) Rules related to gross receipts test.--
``(A) Application of gross receipts test to
individuals, etc.-- For purposes of paragraph
(1)(B)(ii), in the case of any taxpayer which is not a
corporation or a partnership, the gross receipts test
of section 448(c) shall be applied in the same manner
as if each trade or business of such taxpayer were a
corporation or partnership.
``(B) Coordination with section 481.--Any change in
method of accounting made pursuant to paragraph
(1)(B)(ii) shall be treated as initiated by the
taxpayer and made with the consent of the Secretary.
Such change shall be effected on a cut-off basis for
all similarly classified contracts entered into on or
after the year of change.''.
(e) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2017.
(2) Preservation of suspense account rules with respect to
any existing suspense accounts.--So much of the amendments made
by subsection (a)(5)(C) as relate to section 447(i) of the
Internal Revenue Code of 1986 shall not apply with respect to
any suspense account established under such section before the
date of the enactment of this Act.
(3) Exemption from percentage completion for long-term
contracts.--The amendments made by subsection (d) shall apply
to contracts entered into after December 31, 2017, in taxable
years ending after such date.
SEC. 3203. SMALL BUSINESS EXCEPTION FROM LIMITATION ON DEDUCTION OF
BUSINESS INTEREST.
(a) In General.--Section 163(j)(2), as amended by section 3301, is
amended to read as follows:
``(2) Exemption for certain small businesses.--In the case of
any taxpayer (other than a tax shelter prohibited from using
the cash receipts and disbursements method of accounting under
section 448(a)(3)) which meets the gross receipts test of
section 448(c) for any taxable year, paragraph (1) shall not
apply to such taxpayer for such taxable year. In the case of
any taxpayer which is not a corporation or a partnership, the
gross receipts test of section 448(c) shall be applied in the
same manner as if such taxpayer were a corporation or
partnership.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3204. MODIFICATION OF TREATMENT OF S CORPORATION CONVERSIONS TO C
CORPORATIONS.
(a) Adjustments Attributable to Conversion From S Corporation to C
Corporation.--Section 481 is amended by adding at the end the following
new subsection:
``(d) Adjustments Attributable to Conversion From S Corporation to C
Corporation.--
``(1) In general.--In the case of an eligible terminated S
corporation, any adjustment required by subsection (a)(2) which
is attributable to such corporation's revocation described in
paragraph (2)(A)(ii) shall be taken into account ratably during
the 6-taxable year period beginning with the year of change.
``(2) Eligible terminated s corporation.--For purposes of
this subsection, the term `eligible terminated S corporation'
means any C corporation--
``(A) which--
``(i) was an S corporation on the day before
the date of the enactment of the Tax Cuts and
Jobs Act, and
``(ii) during the 2-year period beginning on
the date of such enactment makes a revocation
of its election under section 1362(a), and
``(B) the owners of the stock of which, determined on
the date such revocation is made, are the same owners
(and in identical proportions) as on the date of such
enactment.''.
(b) Cash Distributions Following Post-termination Transition Period
From S Corporation Status.--Section 1371 is amended by adding at the
end the following new subsection:
``(f) Cash Distributions Following Post-termination Transition
Period.--In the case of a distribution of money by an eligible
terminated S corporation (as defined in section 481(d)) after the post-
termination transition period, the accumulated adjustments account
shall be allocated to such distribution, and the distribution shall be
chargeable to accumulated earnings and profits, in the same ratio as
the amount of such accumulated adjustments account bears to the amount
of such accumulated earnings and profits.''.
Subtitle D--Reform of Business-related Exclusions, Deductions, etc.
SEC. 3301. INTEREST.
(a) In General.--Section 163(j) is amended to read as follows:
``(j) Limitation on Business Interest.--
``(1) In general.--In the case of any taxpayer for any
taxable year, the amount allowed as a deduction under this
chapter for business interest shall not exceed the sum of--
``(A) the business interest income of such taxpayer
for such taxable year,
``(B) 30 percent of the adjusted taxable income of
such taxpayer for such taxable year, plus
``(C) the floor plan financing interest of such
taxpayer for such taxable year.
The amount determined under subparagraph (B) (after any
increases in such amount under paragraph (3)(A)(iii)) shall not
be less than zero.
``(2) Exemption for certain small businesses.--For exemption
for certain small businesses, see the amendment made by section
3203 of the Tax Cuts and Jobs Act.
``(3) Application to partnerships, etc.--
``(A) In general.--In the case of any partnership--
``(i) this subsection shall be applied at the
partnership level and any deduction for
business interest shall be taken into account
in determining the non-separately stated
taxable income or loss of the partnership,
``(ii) the adjusted taxable income of each
partner of such partnership shall be determined
without regard to such partner's distributive
share of the non-separately stated taxable
income or loss of such partnership, and
``(iii) the amount determined under paragraph
(1)(B) with respect to each partner of such
partnership shall be increased by such
partner's distributive share of such
partnership's excess amount.
``(B) Excess amount.--The term `excess amount' means,
with respect to any partnership, the excess (if any)
of--
``(i) 30 percent of the adjusted taxable
income of the partnership, over
``(ii) the amount (if any) by which the
business interest of the partnership, reduced
by floor plan financing interest, exceeds the
business interest income of the partnership.
``(C) Application to s corporations.--Rules similar
to the rules of subparagraphs (A) and (B) shall apply
with respect to any S corporation and its shareholders.
``(4) Business interest.--For purposes of this subsection,
the term `business interest' means any interest paid or accrued
on indebtedness properly allocable to a trade or business. Such
term shall not include investment interest (within the meaning
of subsection (d)).
``(5) Business interest income.--For purposes of this
subsection, the term `business interest income' means the
amount of interest includible in the gross income of the
taxpayer for the taxable year which is properly allocable to a
trade or business. Such term shall not include investment
income (within the meaning of subsection (d)).
``(6) Adjusted taxable income.--For purposes of this
subsection, the term `adjusted taxable income' means the
taxable income of the taxpayer--
``(A) computed without regard to--
``(i) any item of income, gain, deduction, or
loss which is not properly allocable to a trade
or business,
``(ii) any business interest or business
interest income,
``(iii) the amount of any net operating loss
deduction under section 172, and
``(iv) any deduction allowable for
depreciation, amortization, or depletion, and
``(B) computed with such other adjustments as the
Secretary may provide.
``(7) Trade or business.--For purposes of this subsection,
the term `trade or business' shall not include--
``(A) the trade or business of performing services as
an employee,
``(B) a real property trade or business (as such term
is defined in section 469(c)(7)(C)), or
``(C) the trade or business of the furnishing or sale
of--
``(i) electrical energy, water, or sewage
disposal services,
``(ii) gas or steam through a local
distribution system, or
``(iii) transportation of gas or steam by
pipeline,
if the rates for such furnishing or sale, as the case
may be, have been established or approved by a State or
political subdivision thereof, by any agency or
instrumentality of the United States, or by a public
service or public utility commission or other similar
body of any State or political subdivision thereof.
``(8) Carryforward of disallowed interest.--For carryforward
of interest disallowed under paragraph (1), see subsection (o).
``(9) Floor plan financing interest defined.--For purposes of
this subsection--
``(A) In general.--The term `floor plan financing
interest' means interest paid or accrued on floor plan
financing indebtedness.
``(B) Floor plan financing indebtedness.--The term
`floor plan financing indebtedness' means
indebtedness--
``(i) used to finance the acquisition of
motor vehicles held for sale to retail
customers, and
``(ii) secured by the inventory so acquired.
``(C) Motor vehicle.--The term `motor vehicle' means
a motor vehicle that is any of the following:
``(i) An automobile.
``(ii) A truck.
``(iii) A recreational vehicle.
``(iv) A motorcycle.
``(v) A boat.
``(vi) Farm machinery or equipment.
``(vii) Construction machinery or
equipment.''.
(b) Carryforward of Disallowed Business Interest.--Section 163, after
amendment by section 4302(a) and before amendment by section 4302(b),
is amended by inserting after subsection (n) the following new
subsection:
``(o) Carryforward of Disallowed Business Interest.--The amount of
any business interest not allowed as a deduction for any taxable year
by reason of subsection (j) shall be treated as business interest paid
or accrued in the succeeding taxable year. Business interest paid or
accrued in any taxable year (determined without regard to the preceding
sentence) shall not be carried past the 5th taxable year following such
taxable year, determined by treating business interest as allowed as a
deduction on a first-in, first-out basis.''.
(c) Treatment of Carryforward of Disallowed Business Interest in
Certain Corporate Acquisitions.--
(1) In general.--Section 381(c) is amended by inserting after
paragraph (19) the following new paragraph:
``(20) Carryforward of disallowed interest.--The carryover of
disallowed interest described in section 163(o) to taxable
years ending after the date of distribution or transfer.''.
(2) Application of limitation.--Section 382(d) is amended by
adding at the end the following new paragraph:
``(3) Application to carryforward of disallowed interest.--
The term `pre-change loss' shall include any carryover of
disallowed interest described in section 163(o) under rules
similar to the rules of paragraph (1).''.
(3) Conforming amendment.--Section 382(k)(1) is amended by
inserting after the first sentence the following: ``Such term
shall include any corporation entitled to use a carryforward of
disallowed interest described in section 381(c)(20).''
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3302. MODIFICATION OF NET OPERATING LOSS DEDUCTION.
(a) Indefinite Carryforward of Net Operating Losses.--Section
172(b)(1)(A)(ii) is amended by striking ``to each of the 20 taxable
years'' and inserting ``to each taxable year''.
(b) Repeal of Net Operating Loss Carrybacks Other Than 1-year
Carryback of Eligible Disaster Losses.--
(1) In general.--Section 172(b)(1)(A)(i) is amended to read
as follows:
``(i) in the case of any portion of a net
operating loss for the taxable year which is an
eligible disaster loss with respect to the
taxpayer, shall be a net operating loss
carryback to the taxable year preceding the
taxable year of such loss, and''.
(2) Conforming amendments.--
(A) Section 172(b)(1) is amended by striking
subparagraphs (B) through (F) and inserting the
following:
``(B) Eligible disaster loss.--
``(i) In general.--For purposes of
subparagraph (A)(i), the term `eligible
disaster loss' means--
``(I) in the case of a taxpayer which
is a small business, net operating
losses attributable to federally
declared disasters (as defined by
section 165(i)(5)), and
``(II) in the case of a taxpayer
engaged in the trade or business of
farming, net operating losses
attributable to such federally declared
disasters.
``(ii) Small business.--For purposes of this
subparagraph, the term `small business' means a
corporation or partnership which meets the
gross receipts test of section 448(c)
(determined by substituting `$5,000,000' for
`$25,000,000' each place it appears therein)
for the taxable year in which the loss arose
(or, in the case of a sole proprietorship,
which would meet such test if such
proprietorship were a corporation).
``(iii) Trade or business of farming.--For
purposes of this subparagraph, the trade or
business of farming shall include the trade or
business of--
``(I) operating a nursery or sod
farm, or
``(II) the raising or harvesting of
trees bearing fruit, nuts, or other
crops, or ornamental trees.
For purposes of subclause (II), an evergreen
tree which is more than 6 years old at the time
severed from the roots shall not be treated as
an ornamental tree.''.
(B) Section 172 is amended by striking subsections
(f), (g), and (h).
(c) Limitation of Net Operating Loss to 90 Percent of Taxable
Income.--
(1) In general.--Section 172(a) is amended to read as
follows:
``(a) Deduction Allowed.--There shall be allowed as a deduction for
the taxable year an amount equal to the lesser of--
``(1) the aggregate of the net operating loss carryovers to
such year, plus the net operating loss carrybacks to such year,
or
``(2) 90 percent of taxable income computed without regard to
the deduction allowable under this section.
For purposes of this subtitle, the term `net operating loss deduction'
means the deduction allowed by this subsection.''.
(2) Coordination of limitation with carrybacks and
carryovers.--Section 172(b)(2) is amended by striking ``shall
be computed--'' and all that follows and inserting ``shall--
``(A) be computed with the modifications specified in
subsection (d) other than paragraphs (1), (4), and (5)
thereof, and by determining the amount of the net
operating loss deduction without regard to the net
operating loss for the loss year or for any taxable
year thereafter,
``(B) not be considered to be less than zero, and
``(C) not exceed the amount determined under
subsection (a)(2) for such prior taxable year.''.
(3) Conforming amendment.--Section 172(d)(6) is amended by
striking ``and'' at the end of subparagraph (A), by striking
the period at the end of subparagraph (B) and inserting ``;
and'', and by adding at the end the following new subparagraph:
``(C) subsection (a)(2) shall be applied by
substituting `real estate investment trust taxable
income (as defined in section 857(b)(2) but without
regard to the deduction for dividends paid (as defined
in section 561))' for `taxable income'.''.
(d) Annual Increase of Indefinite Carryover Amounts.--Section 172(b)
is amended by redesignating paragraph (3) as paragraph (4) and by
inserting after paragraph (2) the following new paragraph:
``(3) Annual increase of indefinite carryover amounts.--For
purposes of paragraph (2)--
``(A) the amount of any indefinite net operating loss
which is carried to the next succeeding taxable year
after the loss year (within the meaning of paragraph
(2)) shall be increased by an amount equal to--
``(i) the amount of the loss which may be so
carried over to such succeeding taxable year
(determined without regard to this paragraph),
multiplied by
``(ii) the sum of--
``(I) the annual Federal short-term
rate (determined under section 1274(d))
for the last month ending before the
beginning of such taxable year, plus
``(II) 4 percentage points, and
``(B) the amount of any indefinite net operating loss
which is carried to any succeeding taxable year (after
such next succeeding taxable year) shall be an amount
equal to--
``(i) the excess of--
``(I) the amount of the loss carried
to the prior taxable year (after any
increase under this paragraph with
respect to such amount), over
``(II) the amount by which such loss
was reduced under paragraph (2) by
reason of the taxable income for such
prior taxable year, multiplied by
``(ii) a percentage equal to 100 percent plus
the percentage determined under subparagraph
(A)(ii) with respect to such succeeding taxable
year.
For purposes of the preceding sentence, the term
`indefinite net operating loss' means any net operating
loss arising in a taxable year beginning after December
31, 2017.''.
(e) Effective Date.--
(1) Carryforwards and carrybacks.--The amendments made by
subsections (a) and (b) shall apply to net operating losses
arising in taxable years beginning after December 31, 2017.
(2) Net operating loss limited to 90 percent of taxable
income.--The amendments made by subsection (c) shall apply to
taxable years beginning after December 31, 2017.
(3) Annual increase in carryover amounts.--The amendments
made by subsection (d) shall apply to amounts carried to
taxable years beginning after December 31, 2017.
(4) Special rule for net disaster losses.--Notwithstanding
paragraph (1), the amendments made by subsection (b) shall not
apply to the portion of the net operating loss for any taxable
year which is a net disaster loss to which section 504(b) of
the Disaster Tax Relief and Airport and Airway Extension Act of
2017 applies.
SEC. 3303. LIKE-KIND EXCHANGES OF REAL PROPERTY.
(a) In General.--Section 1031(a)(1) is amended by striking
``property'' each place it appears and inserting ``real property''.
(b) Conforming Amendments.--
(1) Paragraph (2) of section 1031(a) is amended to read as
follows:
``(2) Exception for real property held for sale.--This
subsection shall not apply to any exchange of real property
held primarily for sale.''.
(2) Section 1031 is amended by striking subsections (e) and
(i).
(3) Section 1031, as amended by paragraph (2), is amended by
inserting after subsection (d) the following new subsection:
``(e) Application to Certain Partnerships.--For purposes of this
section, an interest in a partnership which has in effect a valid
election under section 761(a) to be excluded from the application of
all of subchapter K shall be treated as an interest in each of the
assets of such partnership and not as an interest in a partnership.''.
(4) Section 1031(h) is amended to read as follows:
``(h) Special Rules for Foreign Real Property.--Real property located
in the United States and real property located outside the United
States are not property of a like kind.''.
(5) The heading of section 1031 is amended by striking
``property'' and inserting ``real property''.
(6) The table of sections for part III of subchapter O of
chapter 1 is amended by striking the item relating to section
1031 and inserting the following new item:
``Sec. 1031. Exchange of real property held for productive use or
investment.''.
(c) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
exchanges completed after December 31, 2017.
(2) Transition rule.--The amendments made by this section
shall not apply to any exchange if--
(A) the property disposed of by the taxpayer in the
exchange is disposed of on or before December 31 2017,
or
(B) the property received by the taxpayer in the
exchange is received on or before December 31, 2017.
SEC. 3304. REVISION OF TREATMENT OF CONTRIBUTIONS TO CAPITAL.
(a) Inclusion of Contributions to Capital.--Part II of subchapter B
of chapter 1 is amended by inserting after section 75 the following new
section:
``SEC. 76. CONTRIBUTIONS TO CAPITAL.
``(a) In General.--Gross income includes any contribution to the
capital of any entity.
``(b) Treatment of Contributions in Exchange for Stock, etc.--
``(1) In general.--In the case of any contribution of money
or other property to a corporation in exchange for stock of
such corporation--
``(A) such contribution shall not be treated for
purposes of subsection (a) as a contribution to the
capital of such corporation (and shall not be
includible in the gross income of such corporation),
and
``(B) no gain or loss shall be recognized to such
corporation upon the issuance of such stock.
``(2) Treatment limited to value of stock.--For purposes of
this subsection, a contribution of money or other property to a
corporation shall be treated as being in exchange for stock of
such corporation only to the extent that the fair market value
of such money and other property does not exceed the fair
market value of such stock.
``(3) Application to entities other than corporations.--In
the case of any entity other than a corporation, rules similar
to the rules of paragraphs (1) and (2) shall apply in the case
of any contribution of money or other property to such entity
in exchange for any interest in such entity.
``(c) Treasury Stock Treated as Stock.--Any reference in this section
to stock shall be treated as including a reference to treasury
stock.''.
(b) Basis of Corporation in Contributed Property.--
(1) Contributions to capital.--Subsection (c) of section 362
is amended to read as follows:
``(c) Contributions to Capital.--If property other than money is
transferred to a corporation as a contribution to the capital of such
corporation (within the meaning of section 76) then the basis of such
property shall be the greater of--
``(1) the basis determined in the hands of the transferor,
increased by the amount of gain recognized to the transferor on
such transfer, or
``(2) the amount included in gross income by such corporation
under section 76 with respect to such contribution.''.
(2) Contributions in exchange for stock.--Paragraph (2) of
section 362(a) is amended by striking ``contribution to
capital'' and inserting ``contribution in exchange for stock of
such corporation (determined under rules similar to the rules
of paragraphs (2) and (3) of section 76(b))''.
(c) Conforming Amendments.--
(1) Section 108(e) is amended by striking paragraph (6).
(2) Part III of subchapter B of chapter 1 is amended by
striking section 118 (and by striking the item relating to such
section in the table of sections for such part).
(3) The table of sections for part II of subchapter B of
chapter 1 is amended by inserting after the item relating to
section 75 the following new item:
``Sec. 76. Contributions to capital.''.
(d) Effective Date.--The amendments made by this section shall apply
to contributions made, and transactions entered into, after the date of
the enactment of this Act.
SEC. 3305. REPEAL OF DEDUCTION FOR LOCAL LOBBYING EXPENSES.
(a) In General.--Section 162(e) is amended by striking paragraphs (2)
and (7) and by redesignating paragraphs (3), (4), (5), (6), and (8) as
paragraphs (2), (3), (4), (5), and (6), respectively.
(b) Conforming Amendment.--Section 6033(e)(1)(B)(ii) is amended by
striking ``section 162(e)(5)(B)(ii)'' and inserting ``section
162(e)(4)(B)(ii)''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred after December 31, 2017.
SEC. 3306. REPEAL OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC
PRODUCTION ACTIVITIES.
(a) In General.--Part VI of subchapter B of chapter 1 is amended by
striking section 199 (and by striking the item relating to such section
in the table of sections for such part).
(b) Conforming Amendments.--
(1) Sections 74(d)(2)(B), 86(b)(2)(A), 137(b)(3)(A),
219(g)(3)(A)(ii), and 246(b)(1) are each amended by striking
``199,''.
(2) Section 170(b)(2)(D), as amended by the preceding
provisions of this Act, is amended by striking clause (iv), by
redesignating clause (v) as clause (iv), and by inserting
``and'' at the end of clause (iii).
(3) Section 172(d) is amended by striking paragraph (7).
(4) Section 613(a) is amended by striking ``and without the
deduction under section 199''.
(5) Section 613A(d)(1) is amended by striking subparagraph
(B) and by redesignating subparagraphs (C), (D), and (E) as
subparagraphs (B), (C), and (D), respectively.
(6) Section 1402(a) is amended by adding ``and'' at the end
of paragraph (15) and by striking paragraph (16).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3307. ENTERTAINMENT, ETC. EXPENSES.
(a) Denial of Deduction.--Subsection (a) of section 274 is amended to
read as follows:
``(a) Entertainment, Amusement, Recreation, and Other Fringe Benefits
.--
``(1) In general.--No deduction otherwise allowable under
this chapter shall be allowed for amounts paid or incurred for
any of the following items:
``(A) Activity.--With respect to an activity which is
of a type generally considered to constitute
entertainment, amusement, or recreation.
``(B) Membership dues.--With respect to membership in
any club organized for business, pleasure, recreation
or other social purposes.
``(C) Amenity.--With respect to a de minimis fringe
(as defined in section 132(e)(1)) that is primarily
personal in nature and involving property or services
that are not directly related to the taxpayer's trade
or business.
``(D) Facility.--With respect to a facility or
portion thereof used in connection with an activity
referred to in subparagraph (A), membership dues or
similar amounts referred to in subparagraph (B), or an
amenity referred to in subparagraph (C).
``(E) Qualified transportation fringe and parking
facility.--Which is a qualified transportation fringe
(as defined in section 132(f)) or which is a parking
facility used in connection with qualified parking (as
defined in section 132(f)(5)(C)).
``(F) On-premises athletic facility.--Which is an on-
premises athletic facility as defined in section
132(j)(4)(B).
``(2) Special rules.--For purposes of applying paragraph (1),
an activity described in section 212 shall be treated as a
trade or business.
``(3) Regulations.--Under the regulations prescribed to carry
out this section, the Secretary shall include regulations--
``(A) defining entertainment, amenities, recreation,
amusement, and facilities for purposes of this
subsection,
``(B) providing for the appropriate allocation of
depreciation and other costs with respect to facilities
used for parking or for on-premises athletic
facilities, and
``(C) specifying arrangements a primary purpose of
which is the avoidance of this subsection.''.
(b) Exception for Certain Expenses Includible in Income of
Recipient.--
(1) Expenses treated as compensation.--Paragraph (2) of
section 274(e) is amended to read as follows:
``(2) Expenses treated as compensation.--Expenses for goods,
services, and facilities, to the extent that the expenses do
not exceed the amount of the expenses which are treated by the
taxpayer, with respect to the recipient of the entertainment,
amusement, or recreation, as compensation to an employee on the
taxpayer's return of tax under this chapter and as wages to
such employee for purposes of chapter 24 (relating to
withholding of income tax at source on wages).''.
(2) Expenses includible in income of persons who are not
employees.--Paragraph (9) of section 274(e) is amended by
striking ``to the extent that the expenses'' and inserting ``to
the extent that the expenses do not exceed the amount of the
expenses that''.
(c) Exceptions for Reimbursed Expenses.--Paragraph (3) of section
274(e) is amended to read as follows:
``(3) Reimbursed expenses.--
``(A) In general.--Expenses paid or incurred by the
taxpayer, in connection with the performance by him of
services for another person (whether or not such other
person is the taxpayer's employer), under a
reimbursement or other expense allowance arrangement
with such other person, but this paragraph shall
apply--
``(i) where the services are performed for an
employer, only if the employer has not treated
such expenses in the manner provided in
paragraph (2), or
``(ii) where the services are performed for a
person other than an employer, only if the
taxpayer accounts (to the extent provided by
subsection (d)) to such person.
``(B) Exception.--Except as provided by the
Secretary, subparagraph (A) shall not apply--
``(i) in the case of an arrangement in which
the person other than the employer is an entity
described in section 168(h)(2)(A), or
``(ii) to any other arrangement designated by
the Secretary as having the effect of avoiding
the limitation under subparagraph (A).''.
(d) 50 Percent Limitation on Meals and Entertainment Expenses.--
Subsection (n) of section 274 is amended to read as follows:
``(n) Limitation on Certain Expenses.--
``(1) In general.--The amount allowable as a deduction under
this chapter for any expense for food or beverages (pursuant to
subsection (e)(1)) or business meals (pursuant to subsection
(k)(1)) shall not exceed 50 percent of the amount of such
expense or item which would (but for this paragraph) be
allowable as a deduction under this chapter.
``(2) Exceptions.--Paragraph (1) shall not apply to any
expense if--
``(A) such expense is described in paragraph (2),
(3), (6), (7), or (8) of subsection (e),
``(B) in the case of an expense for food or
beverages, such expense is excludable from the gross
income of the recipient under section 132 by reason of
subsection (e) thereof (relating to de minimis fringes)
or under section 119 (relating to meals and lodging
furnished for convenience of employer), or
``(C) in the case of an employer who pays or
reimburses moving expenses of an employee, such
expenses are includible in the income of the employee
under section 82.
``(3) Special rule for individuals subject to federal hours
of service.--In the case of any expenses for food or beverages
consumed while away from home (within the meaning of section
162(a)(2)) by an individual during, or incident to, the period
of duty subject to the hours of service limitations of the
Department of Transportation, paragraph (1) shall be applied by
substituting `80 percent' for `50 percent'.''.
(e) Conforming Amendments.--
(1) Section 274(d) is amended--
(A) by striking paragraph (2) and redesignating
paragraphs (3) and (4) as paragraphs (2) and (3),
respectively, and
(B) in the flush material following paragraph (3) (as
so redesignated)--
(i) by striking ``, entertainment, amusement,
recreation, or'' in item (B), and
(ii) by striking ``(D) the business
relationship to the taxpayer of persons
entertained, using the facility or property, or
receiving the gift'' and inserting ``(D) the
business relationship to the taxpayer of the
person receiving the benefit''.
(2) Section 274(e) is amended by striking paragraph (4) and
redesignating paragraphs (5), (6), (7), (8), and (9) as
paragraphs (4), (5), (6), (7), and (8), respectively.
(3) Section 274(k)(2)(A) is amended by striking ``(4), (7),
(8), or (9)'' and inserting ``(6), (7), or (8)''.
(4) Section 274 is amended by striking subsection (l).
(5) Section 274(m)(1)(B)(ii) is amended by striking ``(4),
(7), (8), or (9)'' and inserting ``(6), (7), or (8)''.
(f) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred after December 31, 2017.
SEC. 3308. UNRELATED BUSINESS TAXABLE INCOME INCREASED BY AMOUNT OF
CERTAIN FRINGE BENEFIT EXPENSES FOR WHICH DEDUCTION
IS DISALLOWED.
(a) In General.--Section 512(a) is amended by adding at the end the
following new paragraph:
``(6) Increase in unrelated business taxable income by
disallowed fringe.--Unrelated business taxable income of an
organization shall be increased by any amount for which a
deduction is not allowable under this chapter by reason of
section 274 and which is paid or incurred by such organization
for any qualified transportation fringe (as defined in section
132(f)), any parking facility used in connection with qualified
parking (as defined in section 132(f)(5)(C)), or any on-
premises athletic facility (as defined in section
132(j)(4)(B)). The preceding sentence shall not apply to the
extent the amount paid or incurred is directly connected with
an unrelated trade or business which is regularly carried on by
the organization. The Secretary may issue such regulations or
other guidance as may be necessary or appropriate to carry out
the purposes of this paragraph, including regulations or other
guidance providing for the appropriate allocation of
depreciation and other costs with respect to facilities used
for parking or for on-premises athletic facilities.
''.
(b) Effective Date.--The amendment made by this section shall apply
to amounts paid or incurred after December 31, 2017.
SEC. 3309. LIMITATION ON DEDUCTION FOR FDIC PREMIUMS.
(a) In General.--Section 162 is amended by redesignating subsection
(q) as subsection (r) and by inserting after subsection (p) the
following new subsection:
``(q) Disallowance of FDIC Premiums Paid by Certain Large Financial
Institutions.--
``(1) In general.--No deduction shall be allowed for the
applicable percentage of any FDIC premium paid or incurred by
the taxpayer.
``(2) Exception for small institutions.--Paragraph (1) shall
not apply to any taxpayer for any taxable year if the total
consolidated assets of such taxpayer (determined as of the
close of such taxable year) do not exceed $10,000,000,000.
``(3) Applicable percentage.--For purposes of this
subsection, the term `applicable percentage' means, with
respect to any taxpayer for any taxable year, the ratio
(expressed as a percentage but not greater than 100 percent)
which--
``(A) the excess of--
``(i) the total consolidated assets of such
taxpayer (determined as of the close of such
taxable year), over
``(ii) $10,000,000,000, bears to
``(B) $40,000,000,000.
``(4) FDIC premiums.--For purposes of this subsection, the
term `FDIC premium' means any assessment imposed under section
7(b) of the Federal Deposit Insurance Act (12 U.S.C. 1817(b)).
``(5) Total consolidated assets.--For purposes of this
subsection, the term `total consolidated assets' has the
meaning given such term under section 165 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C.
5365).
``(6) Aggregation rule.--
``(A) In general.--Members of an expanded affiliated
group shall be treated as a single taxpayer for
purposes of applying this subsection.
``(B) Expanded affiliated group.--For purposes of
this paragraph, the term `expanded affiliated group'
means an affiliated group as defined in section
1504(a), determined--
``(i) by substituting `more than 50 percent'
for `at least 80 percent' each place it
appears, and
``(ii) without regard to paragraphs (2) and
(3) of section 1504(b).
A partnership or any other entity (other than a
corporation) shall be treated as a member of an
expanded affiliated group if such entity is controlled
(within the meaning of section 954(d)(3)) by members of
such group (including any entity treated as a member of
such group by reason of this sentence).''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3310. REPEAL OF ROLLOVER OF PUBLICLY TRADED SECURITIES GAIN INTO
SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES.
(a) In General.--Part III of subchapter O of chapter 1 is amended by
striking section 1044 (and by striking the item relating to such
section in the table of sections of such part).
(b) Conforming Amendments.--Section 1016(a)(23) is amended--
(1) by striking ``1044,'', and
(2) by striking ``1044(d),''.
(c) Effective Date.--The amendments made by this section shall apply
to sales after December 31, 2017.
SEC. 3311. CERTAIN SELF-CREATED PROPERTY NOT TREATED AS A CAPITAL
ASSET.
(a) Patents, etc.--Section 1221(a)(3) is amended by inserting ``a
patent, invention, model or design (whether or not patented), a secret
formula or process,'' before ``a copyright''.
(b) Conforming Amendment.--Section 1231(b)(1)(C) is amended by
inserting ``a patent, invention, model or design (whether or not
patented), a secret formula or process,'' before ``a copyright''.
(c) Effective Date.--The amendments made by this section shall apply
to dispositions after December 31, 2017.
SEC. 3312. REPEAL OF SPECIAL RULE FOR SALE OR EXCHANGE OF PATENTS.
(a) In General.--Part IV of subchapter P of chapter 1 is amended by
striking section 1235 (and by striking the item relating to such
section in the table of sections of such part).
(b) Conforming Amendments.--
(1) Section 483(d) is amended by striking paragraph (4).
(2) Section 901(l)(5) is amended by striking ``without regard
to section 1235 or any similar rule'' and inserting ``without
regard to any provision which treats a disposition as a sale or
exchange of a capital asset held for more than 1 year or any
similar provision''.
(3) Section 1274(c)(3) is amended by striking subparagraph
(E) and redesignating subparagraph (F) as subparagraph (E).
(c) Effective Date.--The amendments made by this section shall apply
to dispositions after December 31, 2017.
SEC. 3313. REPEAL OF TECHNICAL TERMINATION OF PARTNERSHIPS.
(a) In General.--Paragraph (1) of section 708(b) is amended--
(1) by striking ``, or'' at the end of subparagraph (A) and
all that follows and inserting a period, and
(2) by striking ``only if--'' and all that follows through
``no part of any business'' and inserting the following: ``only
if no part of any business''.
(b) Effective Date.--The amendments made by this section shall apply
to partnership taxable years beginning after December 31, 2017.
SEC. 3314. RECHARACTERIZATION OF CERTAIN GAINS IN THE CASE OF
PARTNERSHIP PROFITS INTERESTS HELD IN CONNECTION
WITH PERFORMANCE OF INVESTMENT SERVICES.
(a) In General.--Part IV of subchapter O of chapter 1 is amended--
(1) by redesignating section 1061 as section 1062, and
(2) by inserting after section 1060 the following new
section:
``SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNECTION WITH PERFORMANCE
OF SERVICES.
``(a) In General.--If one or more applicable partnership interests
are held by a taxpayer at any time during the taxable year, the excess
(if any) of--
``(1) the taxpayer's net long-term capital gain with respect
to such interests for such taxable year, over
``(2) the taxpayer's net long-term capital gain with respect
to such interests for such taxable year computed by applying
paragraphs (3) and (4) of sections 1222 by substituting `3
years' for `1 year',
shall be treated as short-term capital gain.
``(b) Special Rule.--To the extent provided by the Secretary,
subsection (a) shall not apply to income or gain attributable to any
asset not held for portfolio investment on behalf of third party
investors.
``(c) Applicable Partnership Interest.--For purposes of this
section--
``(1) In general.--Except as provided in this paragraph or
paragraph (4), the term `applicable partnership interest' means
any interest in a partnership which, directly or indirectly, is
transferred to (or is held by) the taxpayer in connection with
the performance of substantial services by the taxpayer, or any
other related person, in any applicable trade or business. The
previous sentence shall not apply to an interest held by a
person who is employed by another entity that is conducting a
trade or business (other than an applicable trade or business)
and only provides services to such other entity.
``(2) Applicable trade or business.--The term `applicable
trade or business' means any activity conducted on a regular,
continuous, and substantial basis which, regardless of whether
the activity is conducted in one or more entities, consists, in
whole or in part, of--
``(A) raising or returning capital, and
``(B) either--
``(i) investing in (or disposing of)
specified assets (or identifying specified
assets for such investing or disposition), or
``(ii) developing specified assets.
``(3) Specified asset.--The term `specified asset' means
securities (as defined in section 475(c)(2) without regard to
the last sentence thereof), commodities (as defined in section
475(e)(2)), real estate held for rental or investment, cash or
cash equivalents, options or derivative contracts with respect
to any of the foregoing, and an interest in a partnership to
the extent of the partnership's proportionate interest in any
of the foregoing.
``(4) Exceptions.--The term `applicable partnership interest'
shall not include--
``(A) any interest in a partnership directly or
indirectly held by a corporation, or
``(B) any capital interest in the partnership which
provides the taxpayer with a right to share in
partnership capital commensurate with--
``(i) the amount of capital contributed
(determined at the time of receipt of such
partnership interest), or
``(ii) the value of such interest subject to
tax under section 83 upon the receipt or
vesting of such interest.
``(5) Third party investor.--The term `third party investor'
means a person who--
``(A) holds an interest in the partnership which does
not constitute property held in connection with an
applicable trade or business; and
``(B) is not (and has not been) actively engaged, and
is (and was) not related to a person so engaged, in
(directly or indirectly) providing substantial services
described in paragraph (1) for such partnership or any
applicable trade or business.
``(d) Transfer of Applicable Partnership Interest to Related
Person.--
``(1) In general.--If a taxpayer transfers any applicable
partnership interest, directly or indirectly, to a person
related to the taxpayer, the taxpayer shall include in gross
income (as short term capital gain) the excess (if any) of--
``(A) so much of the taxpayer's long-term capital
gains with respect to such interest for such taxable
year attributable to the sale or exchange of any asset
held for not more than 3 years as is allocable to such
interest, over
``(B) any amount treated as short term capital gain
under subsection (a) with respect to the transfer of
such interest.
``(2) Related person.--For purposes of this paragraph, a
person is related to the taxpayer if--
``(A) the person is a member of the taxpayer's family
within the meaning of section 318(a)(1), or
``(B) the person performed a service within the
current calendar year or the preceding three calendar
years in any applicable trade or business in which or
for which the taxpayer performed a service.
``(e) Reporting.--The Secretary shall require such reporting (at the
time and in the manner prescribed by the Secretary) as is necessary to
carry out the purposes of this section.
``(f) Regulations.--The Secretary shall issue such regulations or
other guidance as is necessary or appropriate to carry out the purposes
of this section''.
(b) Coordination With Section 83.--Subsection (e) of section 83 is
amended by striking ``or'' at the end of paragraph (4), by striking the
period at the end of paragraph (5) and inserting ``, or'', and by
adding at the end the following new paragraph:
``(6) a transfer of an applicable partnership interest to
which section 1061 applies.''.
(c) Clerical Amendment.--The table of sections for part IV of
subchapter O of chapter 1 is amended by striking the item relating to
1061 and inserting the following new items:
``Sec. 1061. Partnership interests held in connection with performance
of services.
``Sec. 1062. Cross references.''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3315. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.
(a) In General.--Section 174 is amended to read as follows:
``SEC. 174. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.
``(a) In General.--In the case of a taxpayer's specified research or
experimental expenditures for any taxable year--
``(1) except as provided in paragraph (2), no deduction shall
be allowed for such expenditures, and
``(2) the taxpayer shall--
``(A) charge such expenditures to capital account,
and
``(B) be allowed an amortization deduction of such
expenditures ratably over the 5-year period (15-year
period in the case of any specified research or
experimental expenditures which are attributable to
foreign research (within the meaning of section
41(d)(4)(F))) beginning with the midpoint of the
taxable year in which such expenditures are paid or
incurred.
``(b) Specified Research or Experimental Expenditures.--For purposes
of this section, the term `specified research or experimental
expenditures' means, with respect to any taxable year, research or
experimental expenditures which are paid or incurred by the taxpayer
during such taxable year in connection with the taxpayer's trade or
business.
``(c) Special Rules.--
``(1) Land and other property.--This section shall not apply
to any expenditure for the acquisition or improvement of land,
or for the acquisition or improvement of property to be used in
connection with the research or experimentation and of a
character which is subject to the allowance under section 167
(relating to allowance for depreciation, etc.) or section 611
(relating to allowance for depletion); but for purposes of this
section allowances under section 167, and allowances under
section 611, shall be considered as expenditures.
``(2) Exploration expenditures.--This section shall not apply
to any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of any
deposit of ore or other mineral (including oil and gas).
``(3) Software development.--For purposes of this section,
any amount paid or incurred in connection with the development
of any software shall be treated as a research or experimental
expenditure.
``(d) Treatment Upon Disposition, Retirement, or Abandonment.--If any
property with respect to which specified research or experimental
expenditures are paid or incurred is disposed, retired, or abandoned
during the period during which such expenditures are allowed as an
amortization deduction under this section, no deduction shall be
allowed with respect to such expenditures on account of such
disposition, retirement, or abandonment and such amortization deduction
shall continue with respect to such expenditures.''.
(b) Clerical Amendment.--The table of sections for part VI of
subchapter B of chapter 1 is amended by striking the item relating to
section 174 and inserting the following new item:
``Sec. 174. Amortization of research and experimental expenditures.''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred in taxable years beginning after December
31, 2022.
SEC. 3316. UNIFORM TREATMENT OF EXPENSES IN CONTINGENCY FEE CASES.
(a) In General.--Section 162, as amended by the preceding provisions
of this Act, is amended by redesignating subsection (r) as subsection
(s) and by inserting after subsection (q) the following new subsection:
``(r) Expenses in Contingency Fee Cases.--No deduction shall be
allowed under subsection (a) to a taxpayer for any expense--
``(1) paid or incurred in the course of the trade or business
of practicing law, and
``(2) resulting from a case for which the taxpayer is
compensated primarily on a contingent basis,
until such time as such contingency is resolved.''.
(b) Effective Date.--The amendment made by this section shall apply
to expenses and costs paid or incurred in taxable years beginning after
the date of the enactment of this Act.
Subtitle E--Reform of Business Credits
SEC. 3401. REPEAL OF CREDIT FOR CLINICAL TESTING EXPENSES FOR CERTAIN
DRUGS FOR RARE DISEASES OR CONDITIONS.
(a) In General.--Subpart D of part IV of subchapter A of chapter 1 is
amended by striking section 45C (and by striking the item relating to
such section in the table of sections for such subpart).
(b) Conforming Amendments.--
(1) Section 38(b) is amended by striking paragraph (12).
(2) Section 280C is amended by striking subsection (b).
(3) Section 6501(m) is amended by striking ``45C(d)(4),''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred in taxable years beginning after December
31, 2017.
SEC. 3402. REPEAL OF EMPLOYER-PROVIDED CHILD CARE CREDIT.
(a) In General.--Subpart D of part IV of subchapter A of chapter 1 is
amended by striking section 45F (and by striking the item relating to
such section in the table of sections for such subpart).
(b) Conforming Amendments.--
(1) Section 38(b) is amended by striking paragraph (15).
(2) Section 1016(a) is amended by striking paragraph (28).
(c) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
taxable years beginning after December 31, 2017.
(2) Basis adjustments.--The amendment made by subsection
(b)(2) shall apply to credits determined for taxable years
beginning after December 31, 2017.
SEC. 3403. REPEAL OF REHABILITATION CREDIT.
(a) In General.--Subpart E of part IV of subchapter A of chapter 1 is
amended by striking section 47 (and by striking the item relating to
such section in the table of sections for such subpart).
(b) Conforming Amendments.--
(1) Section 170(f)(14)(A) is amended by inserting ``(as in
effect before its repeal by the Tax Cuts and Jobs Act)'' after
``section 47''.
(2) Section 170(h)(4) is amended--
(A) by striking ``(as defined in section
47(c)(3)(B))'' in subparagraph (C)(ii), and
(B) by adding at the end the following new
subparagraph:
``(D) Registered historic district.--The term
`registered historic district' means--
``(i) any district listed in the National
Register, and
``(ii) any district--
``(I) which is designated under a
statute of the appropriate State or
local government, if such statute is
certified by the Secretary of the
Interior to the Secretary as containing
criteria which will substantially
achieve the purpose of preserving and
rehabilitating buildings of historic
significance to the district, and
``(II) which is certified by the
Secretary of the Interior to the
Secretary as meeting substantially all
of the requirements for the listing of
districts in the National Register.''.
(3) Section 469(i)(3) is amended by striking subparagraph
(B).
(4) Section 469(i)(6)(B) is amended--
(A) by striking ``in the case of--'' and all that
follows and inserting ``in the case of any credit
determined under section 42 for any taxable year.'',
and
(B) by striking ``, rehabilitation credit,'' in the
heading thereof.
(5) Section 469(k)(1) is amended by striking ``, or any
rehabilitation credit determined under section 47,''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to amounts paid or
incurred after December 31, 2017.
(2) Transition rule.--In the case of qualified rehabilitation
expenditures (within the meaning of section 47 of the Internal
Revenue Code of 1986 as in effect before its repeal) with
respect to any building--
(A) owned or leased (as permitted by section 47 of
the Internal Revenue Code of 1986 as in effect before
its repeal) by the taxpayer at all times after December
31, 2017, and
(B) with respect to which the 24-month period
selected by the taxpayer under section 47(c)(1)(C) of
such Code begins not later than the end of the 180-day
period beginning on the date of the enactment of this
Act,
the amendments made by this section shall apply to such
expenditures paid or incurred after the end of the taxable year
in which the 24-month period referred to in subparagraph (B)
ends.
SEC. 3404. REPEAL OF WORK OPPORTUNITY TAX CREDIT.
(a) In General.--Subpart F of part IV of subchapter A of chapter 1 is
amended by striking section 51 (and by striking the item relating to
such section in the table of sections for such subpart).
(b) Clerical Amendment.--The heading of such subpart F (and the item
relating to such subpart in the table of subparts for part IV of
subchapter A of chapter 1) are each amended by striking ``Rules for
Computing Work Opportunity Credit'' and inserting ``Special Rules''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred to individuals who begin work for the
employer after December 31, 2017.
SEC. 3405. REPEAL OF DEDUCTION FOR CERTAIN UNUSED BUSINESS CREDITS.
(a) In General.--Part VI of subchapter B of chapter 1 is amended by
striking section 196 (and by striking the item relating to such section
in the table of sections for such part).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3406. TERMINATION OF NEW MARKETS TAX CREDIT.
(a) In General.--Section 45D(f) is amended--
(1) by striking ``2019'' in paragraph (1)(G) and inserting
``2017'', and
(2) by striking ``2024'' in paragraph (3) and inserting
``2022''.
(b) Effective Date.--The amendments made by this section shall apply
to calendar years beginning after December 31, 2017.
SEC. 3407. REPEAL OF CREDIT FOR EXPENDITURES TO PROVIDE ACCESS TO
DISABLED INDIVIDUALS.
(a) In General.--Subpart D of part IV of subchapter A of chapter 1 is
amended by striking section 44 (and by striking the item relating to
such section in the table of sections for such subpart).
(b) Conforming Amendment.--Section 38(b) is amended by striking
paragraph (7).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3408. MODIFICATION OF CREDIT FOR PORTION OF EMPLOYER SOCIAL
SECURITY TAXES PAID WITH RESPECT TO EMPLOYEE TIPS.
(a) Credit Determined With Respect to Minimum Wage as in Effect.--
Section 45B(b)(1)(B) is amended by striking ``as in effect on January
1, 2007, and''.
(b) Information Return Requirement.--Section 45B is amended by
redesignating subsections (c) and (d) as subsections (d) and (e),
respectively, and by inserting after subsection (b) the following new
subsection:
``(c) Information Return Requirement.--
``(1) In general.--No credit shall be determined under
subsection (a) with respect to any food or beverage
establishment of any taxpayer for any taxable year unless such
taxpayer has, with respect to the calendar year which ends in
or with such taxable year--
``(A) made a report to the Secretary showing the
information described in section 6053(c)(1) with
respect to such food or beverage establishment, and
``(B) furnished written statements to each employee
of such food or beverage establishment showing the
information described in section 6053(c)(2).
``(2) Allocation of 10 percent of gross receipts.--For
purposes of determining the information referred to in
subparagraphs (A) and (B), section 6053(c)(3)(A)(i) shall be
applied by substituting `10 percent' for `8 percent'. For
purposes of section 6053(c)(5), any reference to section
6053(c)(3)(B) contained therein shall be treated as including a
reference to this paragraph.
``(3) Food or beverage establishment.--For purposes of this
subsection, the term `food or beverage establishment' means any
trade or business (or portion thereof) which would be a large
food or beverage establishment (as defined in section
6053(c)(4)) if such section were applied without regard to
subparagraph (C) thereof.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle F--Energy Credits
SEC. 3501. MODIFICATIONS TO CREDIT FOR ELECTRICITY PRODUCED FROM
CERTAIN RENEWABLE RESOURCES.
(a) Termination of Inflation Adjustment.--Section 45(b)(2) is
amended--
(1) by striking ``The 1.5 cent amount'' and inserting the
following:
``(A) In general.--The 1.5 cent amount'', and
(2) by adding at the end the following new subparagraph:
``(B) Termination.--Subparagraph (A) shall not apply
with respect to any electricity or refined coal
produced at a facility the construction of which begins
after the date of the enactment of this
subparagraph.''.
(b) Special Rule for Determination of Beginning of Construction.--
Section 45(e) is amended by adding at the end the following new
paragraph:
``(12) Special rule for determining beginning of
construction.--For purposes of subsection (d), the construction
of any facility, modification, improvement, addition, or other
property shall not be treated as beginning before any date
unless there is a continuous program of construction which
begins before such date and ends on the date that such property
is placed in service.''.
(c) Effective Dates.--
(1) Termination of inflation adjustment.--The amendments made
by subsection (a) shall apply to taxable years ending after the
date of the enactment of this Act.
(2) Special rule for determination of beginning of
construction.--The amendment made by subsection (b) shall apply
to taxable years beginning before, on, or after the date of the
enactment of this Act.
SEC. 3502. MODIFICATION OF THE ENERGY INVESTMENT TAX CREDIT.
(a) Extension of Solar Energy Property.--Section 48(a)(3)(A)(ii) is
amended by striking ``periods ending before January 1, 2017'' and
inserting ``property the construction of which begins before January 1,
2022''.
(b) Extension of Qualified Fuel Cell Property.--Section 48(c)(1)(D)
is amended by striking ``for any period after December 31, 2016'' and
inserting ``the construction of which does not begin before January 1,
2022''.
(c) Extension of Qualified Microturbine Property.--Section
48(c)(2)(D) is amended by striking ``for any period after December 31,
2016'' and inserting ``the construction of which does not begin before
January 1, 2022''.
(d) Extension of Combined Heat and Power System Property.--Section
48(c)(3)(A)(iv) is amended by striking ``which is placed in service
before January 1, 2017'' and inserting ``the construction of which
begins before January 1, 2022''.
(e) Extension of Qualified Small Wind Energy Property.--Section
48(c)(4)(C) is amended by striking ``for any period after December 31,
2016'' and inserting ``the construction of which does not begin before
January 1, 2022''.
(f) Extension of Thermal Energy Property.--Section 48(a)(3)(A)(vii)
is amended by striking ``periods ending before January 1, 2017'' and
inserting ``property the construction of which begins before January 1,
2022''.
(g) Phaseout of 30 Percent Credit Rate for Fuel Cell and Small Wind
Energy Property.--Section 48(a) is amended by adding at the end the
following new paragraph:
``(7) Phaseout for qualified fuel cell property and qualified
small wind energy property.--
``(A) In general.--In the case of qualified fuel cell
property or qualified small wind energy property, the
construction of which begins before January 1, 2022,
the energy percentage determined under paragraph (2)
shall be equal to--
``(i) in the case of any property the
construction of which begins after December 31,
2019, and before January 1, 2021, 26 percent,
and
``(ii) in the case of any property the
construction of which begins after December 31,
2020, and before January 1, 2022, 22 percent.
``(B) Placed in service deadline.--In the case of any
qualified fuel cell property or qualified small wind
energy property, the construction of which begins
before January 1, 2022, and which is not placed in
service before January 1, 2024, the energy percentage
determined under paragraph (2) shall be equal to 10
percent.''.
(h) Phaseout for Fiber-optic Solar Energy Property.--Subparagraphs
(A) and (B) of section 48(a)(6) are each amended by inserting ``or
(3)(A)(ii)'' after ``paragraph (3)(A)(i)''.
(i) Termination of Solar Energy Property.--Section 48(a)(3)(A)(i) is
amended by inserting ``, the construction of which begins before
January 1, 2028, and'' after ``equipment''.
(j) Termination of Geothermal Energy Property.--Section
48(a)(3)(A)(iii) is amended by inserting ``, the construction of which
begins before January 1, 2028, and'' after ``equipment''.
(k) Special Rule for Determination of Beginning of Construction.--
Section 48(c) is amended by adding at the end the following new
paragraph:
``(5) Special rule for determining beginning of
construction.--The construction of any facility, modification,
improvement, addition, or other property shall not be treated
as beginning before any date unless there is a continuous
program of construction which begins before such date and ends
on the date that such property is placed in service.''.
(l) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
periods after December 31, 2016, under rules similar to the
rules of section 48(m) of the Internal Revenue Code of 1986 (as
in effect on the day before the date of the enactment of the
Revenue Reconciliation Act of 1990).
(2) Extension of combined heat and power system property.--
The amendment made by subsection (d) shall apply to property
placed in service after December 31, 2016.
(3) Phaseouts and terminations.--The amendments made by
subsections (g), (h), (i), and (j) shall take effect on the
date of the enactment of this Act.
(4) Special rule for determination of beginning of
construction.--The amendment made by subsection (k) shall apply
to taxable years beginning before, on, or after the date of the
enactment of this Act.
SEC. 3503. EXTENSION AND PHASEOUT OF RESIDENTIAL ENERGY EFFICIENT
PROPERTY.
(a) Extension.--Section 25D(h) is amended by striking ``December 31,
2016 (December 31, 2021, in the case of any qualified solar electric
property expenditures and qualified solar water heating property
expenditures)'' and inserting ``December 31, 2021''.
(b) Phaseout.--
(1) In general.--Paragraphs (3), (4), and (5) of section
25D(a) are amended by striking ``30 percent'' each place it
appears and inserting ``the applicable percentage''.
(2) Conforming amendment.--Section 25D(g) of such Code is
amended by striking ``paragraphs (1) and (2) of''.
(c) Effective Date.--The amendments made by this section shall apply
to property placed in service after December 31, 2016.
SEC. 3504. REPEAL OF ENHANCED OIL RECOVERY CREDIT.
(a) In General.--Subpart D of part IV of subchapter A of chapter 1 is
amended by striking section 43 (and by striking the item relating to
such section in the table of sections for such subpart).
(b) Conforming Amendments.--
(1) Section 38(b) is amended by striking paragraph (6).
(2) Section 6501(m) is amended by striking ``43,''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3505. REPEAL OF CREDIT FOR PRODUCING OIL AND GAS FROM MARGINAL
WELLS.
(a) In General.--Subpart D of part IV of subchapter A of chapter 1 is
amended by striking section 45I (and by striking the item relating to
such section in the table of sections for such subpart).
(b) Conforming Amendment.--Section 38(b) is amended by striking
paragraph (19).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3506. MODIFICATIONS OF CREDIT FOR PRODUCTION FROM ADVANCED NUCLEAR
POWER FACILITIES.
(a) Treatment of Unutilized Limitation Amounts.--Section 45J(b) is
amended--
(1) in paragraph (4), by inserting ``or any amendment to''
after ``enactment of''; and
(2) by adding at the end the following new paragraph:
``(5) Allocation of unutilized limitation.--
``(A) In general.--Any unutilized national megawatt
capacity limitation shall be allocated by the Secretary
under paragraph (3) as rapidly as is practicable after
December 31, 2020--
``(i) first to facilities placed in service
on or before such date to the extent that such
facilities did not receive an allocation equal
to their full nameplate capacity; and
``(ii) then to facilities placed in service
after such date in the order in which such
facilities are placed in service.
``(B) Unutilized national megawatt capacity
limitation.--The term `unutilized national megawatt
capacity limitation' means the excess (if any) of--
``(i) 6,000 megawatts, over
``(ii) the aggregate amount of national
megawatt capacity limitation allocated by the
Secretary before January 1, 2021, reduced by
any amount of such limitation which was
allocated to a facility which was not placed in
service before such date.
``(C) Coordination with other provisions.--In the
case of any unutilized national megawatt capacity
limitation allocated by the Secretary pursuant to this
paragraph--
``(i) such allocation shall be treated for
purposes of this section in the same manner as
an allocation of national megawatt capacity
limitation; and
``(ii) subsection (d)(1)(B) shall not apply
to any facility which receives such
allocation.''.
(b) Transfer of Credit by Certain Public Entities.--
(1) In general.--Section 45J is amended--
(A) by redesignating subsection (e) as subsection
(f); and
(B) by inserting after subsection (d) the following
new subsection:
``(e) Transfer of Credit by Certain Public Entities.--
``(1) In general.--If, with respect to a credit under
subsection (a) for any taxable year--
``(A) the taxpayer would be a qualified public
entity; and
``(B) such entity elects the application of this
paragraph for such taxable year with respect to all (or
any portion specified in such election) of such credit,
the eligible project partner specified in such election (and
not the qualified public entity) shall be treated as the
taxpayer for purposes of this title with respect to such credit
(or such portion thereof).
``(2) Definitions.--For purposes of this subsection--
``(A) Qualified public entity.--The term `qualified
public entity' means--
``(i) a Federal, State, or local government
entity, or any political subdivision, agency,
or instrumentality thereof;
``(ii) a mutual or cooperative electric
company described in section 501(c)(12) or
section 1381(a)(2); or
``(iii) a not-for-profit electric utility
which has or had received a loan or loan
guarantee under the Rural Electrification Act
of 1936.
``(B) Eligible project partner.--The term `eligible
project partner' means--
``(i) any person responsible for, or
participating in, the design or construction of
the advanced nuclear power facility to which
the credit under subsection (a) relates;
``(ii) any person who participates in the
provision of the nuclear steam supply system to
the advanced nuclear power facility to which
the credit under subsection (a) relates;
``(iii) any person who participates in the
provision of nuclear fuel to the advanced
nuclear power facility to which the credit
under subsection (a) relates; or
``(iv) any person who has an ownership
interest in such facility.
``(3) Special rules.--
``(A) Application to partnerships.--In the case of a
credit under subsection (a) which is determined at the
partnership level--
``(i) for purposes of paragraph (1)(A), a
qualified public entity shall be treated as the
taxpayer with respect to such entity's
distributive share of such credit; and
``(ii) the term `eligible project partner'
shall include any partner of the partnership.
``(B) Taxable year in which credit taken into
account.--In the case of any credit (or portion
thereof) with respect to which an election is made
under paragraph (1), such credit shall be taken into
account in the first taxable year of the eligible
project partner ending with, or after, the qualified
public entity's taxable year with respect to which the
credit was determined.
``(C) Treatment of transfer under private use
rules.--For purposes of section 141(b)(1), any benefit
derived by an eligible project partner in connection
with an election under this subsection shall not be
taken into account as a private business use.''.
(2) Special rule for proceeds of transfers for mutual or
cooperative electric companies.--Section 501(c)(12) of such
Code is amended by adding at the end the following new
subparagraph:
``(I) In the case of a mutual or cooperative electric
company described in this paragraph or an organization
described in section 1381(a)(2), income received or
accrued in connection with an election under section
45J(e)(1) shall be treated as an amount collected from
members for the sole purpose of meeting losses and
expenses.''.
(c) Effective Dates.--
(1) Treatment of unutilized limitation amounts.--The
amendment made by subsection (a) shall take effect on the date
of the enactment of this Act.
(2) Transfer of credit by certain public entities.--The
amendments made by subsection (b) shall apply to taxable years
beginning after the date of the enactment of this Act.
Subtitle G--Bond Reforms
SEC. 3601. TERMINATION OF PRIVATE ACTIVITY BONDS.
(a) In General.--Paragraph (1) of section 103(b) is amended--
(1) by striking ``which is not a qualified bond (within the
meaning of section 141)'', and
(2) by striking ``which is not a qualified bond'' in the
heading thereof.
(b) Conforming Amendments.--
(1) Subpart A of part IV of subchapter B of chapter 1 is
amended by striking sections 142, 143, 144, 145, 146, and 147
(and by striking each of the items relating to such sections in
the table of sections for such subpart).
(2) Section 25 is amended by adding at the end the following
new subsection:
``(j) Coordination With Repeal of Private Activity Bonds.--Any
reference to section 143, 144, or 146 shall be treated as a reference
to such section as in effect before its repeal by the Tax Cuts and Jobs
Act.''.
(3) Section 26(b)(2) is amended by striking subparagraph (D).
(4) Section 141(b) is amended by striking paragraphs (5) and
(9).
(5) Section 141(d) is amended by striking paragraph (5).
(6) Section 141 is amended by striking subsection (e).
(7) Section 148(f)(4) is amended--
(A) by striking ``(determined in accordance with
section 147(b)(2)(A))'' in the flush matter following
subparagraph (A)(ii) and inserting ``(determined by
taking into account the respective issue prices of the
bonds issued as part of the issue)'', and
(B) by striking the last sentence of subparagraph
(D)(v).
(8) Clause (iv) of section 148(f)(4)(C) is amended to read as
follows:
``(iv) Construction issue.--For purposes of
this subparagraph--
``(I) In general.--The term
`construction issue' means any issue if
at least 75 percent of the available
construction proceeds of such issue are
to be used for construction
expenditures.
``(II) Construction.--The term
`construction' includes reconstruction
and rehabilitation.''.
(9) Section 149(b)(3) is amended by striking subparagraph
(C).
(10) Section 149(e)(2) is amended--
(A) by striking subparagraphs (C), (D), and (F) and
by redesignating subparagraphs (E) and (G) as
subparagraphs (C) and (D), respectively, and
(B) by striking the second sentence.
(11) Section 149(f)(6) is amended--
(A) by striking subparagraph (B), and
(B) by striking ``For purposes of this subsection''
and all that follows through ``The term'' and inserting
the following: ``For purposes of this subsection, the
term''.
(12) Section 150(e)(3) is amended to read as follows:
``(3) Public approval requirement.--A bond shall not be
treated as part of an issue which meets the requirements of
paragraph (1) unless such bond satisfies the requirements of
section 147(f)(2) (as in effect before its repeal by the Tax
Cuts and Jobs Act).''.
(13) Section 269A(b)(3) is amended by striking ``144(a)(3)''
and inserting ``414(n)(6)(A)''.
(14) Section 414(m)(5) is amended by striking ``section
144(a)(3)'' and inserting ``subsection (n)(6)(A)''.
(15) Section 414(n)(6)(A) is amended to read as follows:
``(A) Related persons.--A person is a related person
to another person if--
``(i) the relationship between such persons
would result in a disallowance of losses under
section 267 or 707(b), or
``(ii) such persons are members of the same
controlled group of corporations (as defined in
section 1563(a), except that `more than 50
percent' shall be substituted for `at least 80
percent' each place it appears therein).''.
(16) Section 6045(e)(4)(B) is amended by inserting ``(as in
effect before its repeal by the Tax Cuts and Jobs Act)'' after
``section 143(m)(3)''.
(17) Section 6654(f)(1) is amended by inserting ``(as in
effect before its repeal by the Tax Cuts and Jobs Act)'' after
``section 143(m)''.
(18) Section 7871(c) is amended--
(A) by striking paragraphs (2) and (3), and
(B) by striking ``Tax-exempt Bonds.--'' and all that
follows through ``Subsection (a) of section 103'' and
inserting the following: ``Tax-exempt Bonds.--
Subsection (a) of section 103''.
(c) Effective Date.--The amendments made by this section shall apply
to bonds issued after December 31, 2017.
SEC. 3602. REPEAL OF ADVANCE REFUNDING BONDS.
(a) In General.--Paragraph (1) of section 149(d) is amended by
striking ``as part of an issue described in paragraph (2), (3), or
(4).'' and inserting ``to advance refund another bond.''.
(b) Conforming Amendments.--
(1) Section 149(d) is amended by striking paragraphs (2),
(3), (4), and (6) and by redesignating paragraphs (5) and (7)
as paragraphs (2) and (3).
(2) Section 148(f)(4)(C) is amended by striking clause (xiv)
and by redesignating clauses (xv) to (xvii) as clauses (xiv) to
(xvi).
(c) Effective Date.--The amendments made by this section shall apply
to advance refunding bonds issued after December 31, 2017.
SEC. 3603. REPEAL OF TAX CREDIT BONDS.
(a) In General.--Part IV of subchapter A of chapter 1 is amended by
striking subparts H, I, and J (and by striking the items relating to
such subparts in the table of subparts for such part).
(b) Payments to Issuers.--Subchapter B of chapter 65 is amended by
striking section 6431 (and by striking the item relating to such
section in the table of sections for such subchapter).
(c) Conforming Amendments.--
(1) Part IV of subchapter U of chapter 1 is amended by
striking section 1397E (and by striking the item relating to
such section in the table of sections for such part).
(2) Section 54(l)(3)(B) is amended by inserting ``(as in
effect before its repeal by the Tax Cuts and Jobs Act)'' after
``section 1397E(I)''.
(3) Section 6211(b)(4)(A) is amended by striking ``, and
6431'' and inserting ``and'' before ``36B''.
(4) Section 6401(b)(1) is amended by striking ``G, H, I, and
J'' and inserting ``and G''.
(d) Effective Date.--The amendments made by this section shall apply
to bonds issued after December 31, 2017.
SEC. 3604. NO TAX EXEMPT BONDS FOR PROFESSIONAL STADIUMS.
(a) In General.--Section 103(b), as amended by this Act, is further
amended by adding at the end the following new paragraph:
``(4) Professional stadium bond.--Any professional stadium
bond.''.
(b) Professional Stadium Bond Defined.--Subsection (c) of section 103
is amended by adding at the end the following new paragraph:
``(3) Professional stadium bond.--The term `professional
stadium bond' means any bond issued as part of an issue any
proceeds of which are used to finance or refinance capital
expenditures allocable to a facility (or appurtenant real
property) which, during at least 5 days during any calendar
year, is used as a stadium or arena for professional sports
exhibitions, games, or training.''.
(c) Effective Date.--The amendments made by this section shall apply
to bonds issued after November 2, 2017.
Subtitle H--Insurance
SEC. 3701. NET OPERATING LOSSES OF LIFE INSURANCE COMPANIES.
(a) In General.--Section 805(b) is amended by striking paragraph (4)
and by redesignating paragraph (5) as paragraph (4).
(b) Conforming Amendments.--
(1) Part I of subchapter L of chapter 1 is amended by
striking section 810 (and by striking the item relating to such
section in the table of sections for such part).
(2) Part III of subchapter L of chapter 1 is amended by
striking section 844 (and by striking the item relating to such
section in the table of sections for such part).
(3) Section 381 is amended by striking subsection (d).
(4) Section 805(a)(4)(B)(ii) is amended to read as follows:
``(ii) the deduction allowed under section
172,''.
(5) Section 805(a) is amended by striking paragraph (5).
(6) Section 953(b)(1)(B) is amended to read as follows:
``(B) So much of section 805(a)(8) as relates to the
deduction allowed under section 172.''.
(c) Effective Date.--The amendments made by this section shall apply
to losses arising in taxable years beginning after December 31, 2017.
SEC. 3702. REPEAL OF SMALL LIFE INSURANCE COMPANY DEDUCTION.
(a) In General.--Part I of subchapter L of chapter 1 is amended by
striking section 806 (and by striking the item relating to such section
in the table of sections for such part).
(b) Conforming Amendments.--
(1) Section 453B(e) is amended--
(A) by striking ``(as defined in section 806(b)(3))''
in paragraph (2)(B), and
(B) by adding at the end the following new paragraph:
``(3) Noninsurance business.--
``(A) In general.--For purposes of this subsection,
the term `noninsurance business' means any activity
which is not an insurance business.
``(B) Certain activities treated as insurance
businesses.--For purposes of subparagraph (A), any
activity which is not an insurance business shall be
treated as an insurance business if--
``(i) it is of a type traditionally carried
on by life insurance companies for investment
purposes, but only if the carrying on of such
activity (other than in the case of real
estate) does not constitute the active conduct
of a trade or business, or
``(ii) it involves the performance of
administrative services in connection with
plans providing life insurance, pension, or
accident and health benefits.''.
(2) Section 465(c)(7)(D)(v)(II) is amended by striking
``section 806(b)(3)'' and inserting ``section 453B(e)(3)''.
(3) Section 801(a)(2) is amended by striking subparagraph
(C).
(4) Section 804 is amended by striking ``means--'' and all
that follows and inserting ``means the general deductions
provided in section 805.''.
(5) Section 805(a)(4)(B), as amended by section 3701, is
amended by striking clause (i) and by redesignating clauses
(ii), (iii), and (iv) as clauses (i), (ii), and (iii),
respectively.
(6) Section 805(b)(2)(A) is amended by striking clause (iii)
and by redesignating clauses (iv) and (v) as clauses (iii) and
(iv), respectively.
(7) Section 842(c) is amended by striking paragraph (1) and
by redesignating paragraphs (2) and (3) as paragraphs (1) and
(2), respectively.
(8) Section 953(b)(1), as amended by section 3701, is amended
by striking subparagraph (A) and by redesignating subparagraphs
(B) and (C) as subparagraphs (A) and (B), respectively.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3703. SURTAX ON LIFE INSURANCE COMPANY TAXABLE INCOME.
(a) In General.--Section 801(a)(1) is amended--
(1) by striking ``consist of a tax'' and insert ``consist of
the sum of--
``(A) a tax'', and
(2) by striking the period at the end and inserting ``,
and'', and
(3) by adding at the end the following new subparagraph:
``(B) a tax equal to 8 percent of the life insurance
company taxable income.''.
SEC. 3704. ADJUSTMENT FOR CHANGE IN COMPUTING RESERVES.
(a) In General.--Paragraph (1) of section 807(f) is amended to read
as follows:
``(1) Treatment as change in method of accounting.--If the
basis for determining any item referred to in subsection (c) as
of the close of any taxable year differs from the basis for
such determination as of the close of the preceding taxable
year, then so much of the difference between--
``(A) the amount of the item at the close of the
taxable year, computed on the new basis, and
``(B) the amount of the item at the close of the
taxable year, computed on the old basis,
as is attributable to contracts issued before the taxable year
shall be taken into account under section 481 as adjustments
attributable to a change in method of accounting initiated by
the taxpayer and made with the consent of the Secretary.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3705. REPEAL OF SPECIAL RULE FOR DISTRIBUTIONS TO SHAREHOLDERS
FROM PRE-1984 POLICYHOLDERS SURPLUS ACCOUNT.
(a) In General.--Subpart D of part I of subchapter L is amended by
striking section 815 (and by striking the item relating to such section
in the table of sections for such subpart).
(b) Conforming Amendment.--Section 801 is amended by striking
subsection (c).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
(d) Phased Inclusion of Remaining Balance of Policyholders Surplus
Accounts.--In the case of any stock life insurance company which has a
balance (determined as of the close of such company's last taxable year
beginning before January 1, 2018) in an existing policyholders surplus
account (as defined in section 815 of the Internal Revenue Code of
1986, as in effect before its repeal), the tax imposed by section 801
of such Code for the first 8 taxable years beginning after December 31,
2017, shall be the amount which would be imposed by such section for
such year on the sum of--
(1) life insurance company taxable income for such year
(within the meaning of such section 801 but not less than
zero), plus
(2) \1/8\ of such balance.
SEC. 3706. MODIFICATION OF PRORATION RULES FOR PROPERTY AND CASUALTY
INSURANCE COMPANIES.
(a) In General.--Section 832(b)(5)(B) is amended by striking ``15
percent'' and inserting ``26.25 percent''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3707. MODIFICATION OF DISCOUNTING RULES FOR PROPERTY AND CASUALTY
INSURANCE COMPANIES.
(a) Modification of Rate of Interest Used to Discount Unpaid
Losses.--Paragraph (2) of section 846(c) is amended to read as follows:
``(2) Determination of annual rate.--The annual rate
determined by the Secretary under this paragraph for any
calendar year shall be a rate determined on the basis of the
corporate bond yield curve (as defined in section
430(h)(2)(D)(i)).''.
(b) Modification of Computational Rules for Loss Payment Patterns.--
Section 846(d)(3) is amended by striking subparagraphs (B) through (G)
and inserting the following new subparagraphs:
``(B) Treatment of certain losses.--Losses which
would have been treated as paid in the last year of the
period applicable under subparagraph (A)(i) or (A)(ii)
shall be treated as paid in the following manner:
``(i) 3-year loss payment pattern.--
``(I) In general.--The period taken
into account under subparagraph (A)(i)
shall be extended to the extent
required under subclause (II).
``(II) Computation of extension.--The
amount of losses which would have been
treated as paid in the 3d year after
the accident year shall be treated as
paid in such 3d year and each
subsequent year in an amount equal to
the average of the losses treated as
paid in the 1st and 2d years after the
accident year (or, if lesser, the
portion of the unpaid losses not
theretofore taken into account). To the
extent such unpaid losses have not been
treated as paid before the 18th year
after the accident year, they shall be
treated as paid in such 18th year.
``(ii) 10-year loss payment pattern.--
``(I) In general.--The period taken
into account under subparagraph (A)(ii)
shall be extended to the extent
required under subclause (II).
``(II) Computation of extension.--The
amount of losses which would have been
treated as paid in the 10th year after
the accident year shall be treated as
paid in such 10th year and each
subsequent year in an amount equal to
the amount of the average of the losses
treated as paid in the 7th, 8th, and
9th years after the accident year (or,
if lesser, the portion of the unpaid
losses not theretofore taken into
account). To the extent such unpaid
losses have not been treated as paid
before the 25th year after the accident
year, they shall be treated as paid in
such 25th year.''.
(c) Repeal of Historical Payment Pattern Election.--Section 846 is
amended by striking subsection (e) and by redesignating subsections (f)
and (g) as subsections (e) and (f), respectively.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
(e) Transitional Rule.--For the first taxable year beginning after
December 31, 2017--
(1) the unpaid losses and the expenses unpaid (as defined in
paragraphs (5)(B) and (6) of section 832(b) of the Internal
Revenue Code of 1986) at the end of the preceding taxable year,
and
(2) the unpaid losses as defined in sections 807(c)(2) and
805(a)(1) of such Code at the end of the preceding taxable
year,
shall be determined as if the amendments made by this section had
applied to such unpaid losses and expenses unpaid in the preceding
taxable year and by using the interest rate and loss payment patterns
applicable to accident years ending with calendar year 2018, and any
adjustment shall be taken into account ratably in such first taxable
year and the 7 succeeding taxable years. For subsequent taxable years,
such amendments shall be applied with respect to such unpaid losses and
expenses unpaid by using the interest rate and loss payment patterns
applicable to accident years ending with calendar year 2018.
SEC. 3708. REPEAL OF SPECIAL ESTIMATED TAX PAYMENTS.
(a) In General.--Part III of subchapter L of chapter 1 is amended by
striking section 847 (and by striking the item relating to such section
in the table of sections for such part).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle I--Compensation
SEC. 3801. MODIFICATION OF LIMITATION ON EXCESSIVE EMPLOYEE
REMUNERATION.
(a) Repeal of Performance-based Compensation and Commission
Exceptions for Limitation on Excessive Employee Remuneration.--
(1) In general.--Section 162(m)(4) is amended by striking
subparagraphs (B) and (C) and by redesignating subparagraphs
(D), (E), (F), and (G) as subparagraphs (B), (C), (D), and (E),
respectively.
(2) Conforming amendments.--
(A) Paragraphs (5)(E) and (6)(D) of section 162(m)
are each amended by striking ``subparagraphs (B), (C),
and (D)'' and inserting ``subparagraph (B)''.
(B) Paragraphs (5)(G) and (6)(G) of section 162(m)
are each amended by striking ``(F) and (G)'' and
inserting ``(D) and (E)''.
(b) Expansion of Applicable Employer.--Section 162(m)(2) is amended
to read as follows:
``(2) Publicly held corporation.--For purposes of this
subsection, the term `publicly held corporation' means any
corporation which is an issuer (as defined in section 3 of the
Securities Exchange Act of 1934 (15 U.S.C. 78c))--
``(A) the securities of which are required to be
registered under section 12 of such Act (15 U.S.C.
78l), or
``(B) that is required to file reports under section
15(d) of such Act (15 U.S.C. 78o(d)).''.
(c) Modification of Definition of Covered Employees.--Section
162(m)(3) is amended--
(1) in subparagraph (A), by striking ``as of the close of the
taxable year, such employee is the chief executive officer of
the taxpayer or is'' and inserting ``such employee is the
principal executive officer or principal financial officer of
the taxpayer at any time during the taxable year, or was'',
(2) in subparagraph (B)--
(A) by striking ``4'' and inserting ``3'', and
(B) by striking ``(other than the chief executive
officer)'' and inserting ``(other than the principal
executive officer or principal financial officer)'',
and
(3) by striking ``or'' at the end of subparagraph (A), by
striking the period at the end of subparagraph (B) and
inserting ``, or'', and by adding at the end the following:
``(C) was a covered employee of the taxpayer (or any
predecessor) for any preceding taxable year beginning
after December 31, 2016.
Such term shall include any employee who would be described in
subparagraph (B) if the reporting described in such
subparagraph were required as so described.''.
(d) Special Rule for Remuneration Paid to Beneficiaries, etc.--
Section 162(m)(4), as amended by subsection (a), is amended by adding
at the end the following new subparagraph:
``(F) Special rule for remuneration paid to
beneficiaries, etc.--Remuneration shall not fail to be
applicable employee remuneration merely because it is
includible in the income of, or paid to, a person other
than the covered employee, including after the death of
the covered employee.''.
(e) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3802. EXCISE TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE
COMPENSATION.
(a) In General.--Subchapter D of chapter 42 is amended by adding at
the end the following new section:
``SEC. 4960. TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE
COMPENSATION.
``(a) Tax Imposed.--There is hereby imposed a tax equal to 20 percent
of the sum of--
``(1) so much of the remuneration paid (other than any excess
parachute payment) by an applicable tax-exempt organization for
the taxable year with respect to employment of any covered
employee in excess of $1,000,000, plus
``(2) any excess parachute payment paid by such an
organization to any covered employee.
``(b) Liability for Tax.--The employer shall be liable for the tax
imposed under subsection (a).
``(c) Definitions and Special Rules.--For purposes of this section--
``(1) Applicable tax-exempt organization.--The term
`applicable tax-exempt organization' means any organization
that for the taxable year--
``(A) is exempt from taxation under section 501(a),
``(B) is a farmers' cooperative organization
described in section 521(b)(1),
``(C) has income excluded from taxation under section
115(1), or
``(D) is a political organization described in
section 527(e)(1).
``(2) Covered employee.--For purposes of this section, the
term `covered employee' means any employee (including any
former employee) of an applicable tax-exempt organization if
the employee--
``(A) is one of the 5 highest compensated employees
of the organization for the taxable year, or
``(B) was a covered employee of the organization (or
any predecessor) for any preceding taxable year
beginning after December 31, 2016.
``(3) Remuneration.--For purposes of this section, the term
`remuneration' means wages (as defined in section 3401(a)),
except that such term shall not include any designated Roth
contribution (as defined in section 402A(c)).
``(4) Remuneration from related organizations.--
``(A) In general.--Remuneration of a covered employee
paid by an applicable tax-exempt organization shall
include any remuneration paid with respect to
employment of such employee by any related person or
governmental entity.
``(B) Related organizations.--A person or
governmental entity shall be treated as related to an
applicable tax-exempt organization if such person or
governmental entity--
``(i) controls, or is controlled by, the
organization,
``(ii) is controlled by one or more persons
that control the organization,
``(iii) is a supported organization (as
defined in section 509(f)(2)) during the
taxable year with respect to the organization,
``(iv) is a supporting organization described
in section 509(a)(3) during the taxable year
with respect to the organization, or
``(v) in the case of an organization that is
a voluntary employees' beneficiary association
described in section 501(a)(9), establishes,
maintains, or makes contributions to such
voluntary employees' beneficiary association.
``(C) Liability for tax.--In any case in which
remuneration from more than one employer is taken into
account under this paragraph in determining the tax
imposed by subsection (a), each such employer shall be
liable for such tax in an amount which bears the same
ratio to the total tax determined under subsection (a)
with respect to such remuneration as--
``(i) the amount of remuneration paid by such
employer with respect to such employee, bears
to
``(ii) the amount of remuneration paid by all
such employers to such employee.
``(5) Excess parachute payment.--For purposes determining the
tax imposed by subsection (a)(2)--
``(A) In general.--The term `excess parachute
payment' means an amount equal to the excess of any
parachute payment over the portion of the base amount
allocated to such payment.
``(B) Parachute payment.--The term `parachute
payment' means any payment in the nature of
compensation to (or for the benefit of) a covered
employee if--
``(i) such payment is contingent on such
employee's separation from employment with the
employer, and
``(ii) the aggregate present value of the
payments in the nature of compensation to (or
for the benefit of) such individual which are
contingent on such separation equals or exceeds
an amount equal to 3 times the base amount.
Such term does not include any payment described in
section 280G(b)(6) (relating to exemption for payments
under qualified plans) or any payment made under or to
an annuity contract described in section 403(b) or a
plan described in section 457(b).
``(C) Base amount.--Rules similar to the rules of
280G(b)(3) shall apply for purposes of determining the
base amount.
``(D) Property transfers; present value.--Rules
similar to the rules of paragraphs (3) and (4) of
section 280G(d) shall apply.
``(6) Coordination with deduction limitation.--Remuneration
the deduction for which is not allowed by reason of section
162(m) shall not be taken into account for purposes of this
section.
``(d) Regulations.--The Secretary shall prescribe such regulations as
may be necessary to prevent avoidance of the purposes of this section
through the performance of services other than as an employee.''.
(b) Clerical Amendment.--The table of sections for subchapter D of
chapter 42 is amended by adding at the end the following new item:
``Sec. 4960. Tax on excess exempt organization executive
compensation.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 3803. TREATMENT OF QUALIFIED EQUITY GRANTS.
(a) In General.--
(1) Election to defer income.--Section 83 is amended by
adding at the end the following new subsection:
``(i) Qualified Equity Grants.--
``(1) In general.--For purposes of this subtitle, if
qualified stock is transferred to a qualified employee who
makes an election with respect to such stock under this
subsection--
``(A) except as provided in subparagraph (B), no
amount shall be included in income under subsection (a)
for the first taxable year in which the rights of the
employee in such stock are transferable or are not
subject to a substantial risk of forfeiture, whichever
is applicable, and
``(B) an amount equal to the amount which would be
included in income of the employee under subsection (a)
(determined without regard to this subsection) shall be
included in income for the taxable year of the employee
which includes the earliest of--
``(i) the first date such qualified stock
becomes transferable (including transferable to
the employer),
``(ii) the date the employee first becomes an
excluded employee,
``(iii) the first date on which any stock of
the corporation which issued the qualified
stock becomes readily tradable on an
established securities market (as determined by
the Secretary, but not including any market
unless such market is recognized as an
established securities market by the Secretary
for purposes of a provision of this title other
than this subsection),
``(iv) the date that is 5 years after the
first date the rights of the employee in such
stock are transferable or are not subject to a
substantial risk of forfeiture, whichever
occurs earlier, or
``(v) the date on which the employee revokes
(at such time and in such manner as the
Secretary may provide) the election under this
subsection with respect to such stock.
``(2) Qualified stock.--
``(A) In general.--For purposes of this subsection,
the term `qualified stock' means, with respect to any
qualified employee, any stock in a corporation which is
the employer of such employee, if--
``(i) such stock is received--
``(I) in connection with the exercise
of an option, or
``(II) in settlement of a restricted
stock unit, and
``(ii) such option or restricted stock unit
was provided by the corporation--
``(I) in connection with the
performance of services as an employee,
and
``(II) during a calendar year in
which such corporation was an eligible
corporation.
``(B) Limitation.--The term `qualified stock' shall
not include any stock if the employee may sell such
stock to, or otherwise receive cash in lieu of stock
from, the corporation at the time that the rights of
the employee in such stock first become transferable or
not subject to a substantial risk of forfeiture.
``(C) Eligible corporation.--For purposes of
subparagraph (A)(ii)(II)--
``(i) In general.--The term `eligible
corporation' means, with respect to any
calendar year, any corporation if--
``(I) no stock of such corporation
(or any predecessor of such
corporation) is readily tradable on an
established securities market (as
determined under paragraph (1)(B)(iii))
during any preceding calendar year, and
``(II) such corporation has a written
plan under which, in such calendar
year, not less than 80 percent of all
employees who provide services to such
corporation in the United States (or
any possession of the United States)
are granted stock options, or
restricted stock units, with the same
rights and privileges to receive
qualified stock.
``(ii) Same rights and privileges.--For
purposes of clause (i)(II)--
``(I) except as provided in
subclauses (II) and (III), the
determination of rights and privileges
with respect to stock shall be
determined in a similar manner as
provided under section 423(b)(5),
``(II) employees shall not fail to be
treated as having the same rights and
privileges to receive qualified stock
solely because the number of shares
available to all employees is not equal
in amount, so long as the number of
shares available to each employee is
more than a de minimis amount, and
``(III) rights and privileges with
respect to the exercise of an option
shall not be treated as the same as
rights and privileges with respect to
the settlement of a restricted stock
unit.
``(iii) Employee.--For purposes of clause
(i)(II), the term `employee' shall not include
any employee described in section 4980E(d)(4)
or any excluded employee.
``(iv) Special rule for calendar years before
2018.--In the case of any calendar year
beginning before January 1, 2018, clause
(i)(II) shall be applied without regard to
whether the rights and privileges with respect
to the qualified stock are the same.
``(3) Qualified employee; excluded employee.--For purposes of
this subsection--
``(A) In general.--The term `qualified employee'
means any individual who--
``(i) is not an excluded employee, and
``(ii) agrees in the election made under this
subsection to meet such requirements as
determined by the Secretary to be necessary to
ensure that the withholding requirements of the
corporation under chapter 24 with respect to
the qualified stock are met.
``(B) Excluded employee.--The term `excluded
employee' means, with respect to any corporation, any
individual--
``(i) who was a 1-percent owner (within the
meaning of section 416(i)(1)(B)(ii)) at any
time during the 10 preceding calendar years,
``(ii) who is or has been at any prior time--
``(I) the chief executive officer of
such corporation or an individual
acting in such a capacity, or
``(II) the chief financial officer of
such corporation or an individual
acting in such a capacity,
``(iii) who bears a relationship described in
section 318(a)(1) to any individual described
in subclause (I) or (II) of clause (ii), or
``(iv) who has been for any of the 10
preceding taxable years one of the 4 highest
compensated officers of such corporation
determined with respect to each such taxable
year on the basis of the shareholder disclosure
rules for compensation under the Securities
Exchange Act of 1934 (as if such rules applied
to such corporation).
``(4) Election.--
``(A) Time for making election.--An election with
respect to qualified stock shall be made under this
subsection no later than 30 days after the first time
the rights of the employee in such stock are
transferable or are not subject to a substantial risk
of forfeiture, whichever occurs earlier, and shall be
made in a manner similar to the manner in which an
election is made under subsection (b).
``(B) Limitations.--No election may be made under
this section with respect to any qualified stock if--
``(i) the qualified employee has made an
election under subsection (b) with respect to
such qualified stock,
``(ii) any stock of the corporation which
issued the qualified stock is readily tradable
on an established securities market (as
determined under paragraph (1)(B)(iii)) at any
time before the election is made, or
``(iii) such corporation purchased any of its
outstanding stock in the calendar year
preceding the calendar year which includes the
first time the rights of the employee in such
stock are transferable or are not subject to a
substantial risk of forfeiture, unless--
``(I) not less than 25 percent of the
total dollar amount of the stock so
purchased is deferral stock, and
``(II) the determination of which
individuals from whom deferral stock is
purchased is made on a reasonable
basis.
``(C) Definitions and special rules related to
limitation on stock redemptions.--
``(i) Deferral stock.--For purposes of this
paragraph, the term `deferral stock' means
stock with respect to which an election is in
effect under this subsection.
``(ii) Deferral stock with respect to any
individual not taken into account if individual
holds deferral stock with longer deferral
period.--Stock purchased by a corporation from
any individual shall not be treated as deferral
stock for purposes of clause (iii) if such
individual (immediately after such purchase)
holds any deferral stock with respect to which
an election has been in effect under this
subsection for a longer period than the
election with respect to the stock so
purchased.
``(iii) Purchase of all outstanding deferral
stock.--The requirements of subclauses (I) and
(II) of subparagraph (B)(iii) shall be treated
as met if the stock so purchased includes all
of the corporation's outstanding deferral
stock.
``(iv) Reporting.--Any corporation which has
outstanding deferral stock as of the beginning
of any calendar year and which purchases any of
its outstanding stock during such calendar year
shall include on its return of tax for the
taxable year in which, or with which, such
calendar year ends the total dollar amount of
its outstanding stock so purchased during such
calendar year and such other information as the
Secretary may require for purposes of
administering this paragraph.
``(5) Controlled groups.--For purposes of this subsection,
all corporations which are members of the same controlled group
of corporations (as defined in section 1563(a)) shall be
treated as one corporation.
``(6) Notice requirement.--Any corporation that transfers
qualified stock to a qualified employee shall, at the time that
(or a reasonable period before) an amount attributable to such
stock would (but for this subsection) first be includible in
the gross income of such employee--
``(A) certify to such employee that such stock is
qualified stock, and
``(B) notify such employee--
``(i) that the employee may elect to defer
income on such stock under this subsection, and
``(ii) that, if the employee makes such an
election--
``(I) the amount of income recognized
at the end of the deferral period will
be based on the value of the stock at
the time at which the rights of the
employee in such stock first become
transferable or not subject to
substantial risk of forfeiture,
notwithstanding whether the value of
the stock has declined during the
deferral period,
``(II) the amount of such income
recognized at the end of the deferral
period will be subject to withholding
under section 3401(i) at the rate
determined under section 3402(t), and
``(III) the responsibilities of the
employee (as determined by the
Secretary under paragraph (3)(A)(ii))
with respect to such withholding.
``(7) Restricted stock units.--This section (other than this
subsection), including any election under subsection (b), shall
not apply to restricted stock units.''.
(2) Deduction by employer.--Subsection (h) of section 83 is
amended by striking ``or (d)(2)'' and inserting ``(d)(2), or
(i)''.
(b) Withholding.--
(1) Time of withholding.--Section 3401 is amended by adding
at the end the following new subsection:
``(i) Qualified Stock for Which an Election Is in Effect Under
Section 83(i).--For purposes of subsection (a), qualified stock (as
defined in section 83(i)) with respect to which an election is made
under section 83(i) shall be treated as wages--
``(1) received on the earliest date described in section
83(i)(1)(B), and
``(2) in an amount equal to the amount included in income
under section 83 for the taxable year which includes such
date.''.
(2) Amount of withholding.--Section 3402 is amended by adding
at the end the following new subsection:
``(t) Rate of Withholding for Certain Stock.--In the case of any
qualified stock (as defined in section 83(i)) with respect to which an
election is made under section 83(i)--
``(1) the rate of tax under subsection (a) shall not be less
than the maximum rate of tax in effect under section 1, and
``(2) such stock shall be treated for purposes of section
3501(b) in the same manner as a non-cash fringe benefit.''.
(c) Coordination With Other Deferred Compensation Rules.--
(1) Election to apply deferral to statutory options.--
(A) Incentive stock options.--Section 422(b) is
amended by adding at the end the following: ``Such term
shall not include any option if an election is made
under section 83(i) with respect to the stock received
in connection with the exercise of such option.''.
(B) Employee stock purchase plans.--Section 423(a) is
amended by adding at the end the following flush
sentence:
``The preceding sentence shall not apply to any share of stock with
respect to which an election is made under section 83(i).''.
(2) Exclusion from definition of nonqualified deferred
compensation plan.--Subsection (d) of section 409A is amended
by adding at the end the following new paragraph:
``(7) Treatment of qualified stock.--An arrangement under
which an employee may receive qualified stock (as defined in
section 83(i)(2)) shall not be treated as a nonqualified
deferred compensation plan solely because of an employee's
election, or ability to make an election, to defer recognition
of income under section 83(i).''.
(d) Information Reporting.--Section 6051(a) is amended by striking
``and'' at the end of paragraph (13), by striking the period at the end
of paragraph (14) and inserting a comma, and by inserting after
paragraph (14) the following new paragraphs:
``(15) the amount excludable from gross income under
subparagraph (A) of section 83(i)(1),
``(16) the amount includible in gross income under
subparagraph (B) of section 83(i)(1) with respect to an event
described in such subparagraph which occurs in such calendar
year, and
``(17) the aggregate amount of income which is being deferred
pursuant to elections under section 83(i), determined as of the
close of the calendar year.''.
(e) Penalty for Failure of Employer To Provide Notice of Tax
Consequences.--Section 6652 is amended by adding at the end the
following new subsection:
``(o) Failure to Provide Notice Under Section 83(i).--In the case of
each failure to provide a notice as required by section 83(i)(6), at
the time prescribed therefor, unless it is shown that such failure is
due to reasonable cause and not to willful neglect, there shall be
paid, on notice and demand of the Secretary and in the same manner as
tax, by the person failing to provide such notice, an amount equal to
$100 for each such failure, but the total amount imposed on such person
for all such failures during any calendar year shall not exceed
$50,000.''.
(f) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to stock
attributable to options exercised, or restricted stock units
settled, after December 31, 2017.
(2) Requirement to provide notice.--The amendments made by
subsection (e) shall apply to failures after December 31, 2017.
(g) Transition Rule.--Until such time as the Secretary (or the
Secretary's delegate) issue regulations or other guidance for purposes
of implementing the requirements of paragraph (2)(C)(i)(II) of section
83(i) of the Internal Revenue Code of 1986 (as added by this section),
or the requirements of paragraph (6) of such section, a corporation
shall be treated as being in compliance with such requirements
(respectively) if such corporation complies with a reasonable good
faith interpretation of such requirements.
TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS
Subtitle A--Establishment of Participation Exemption System for
Taxation of Foreign Income
SEC. 4001. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED
BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT
OWNED FOREIGN CORPORATIONS.
(a) In General.--Part VIII of subchapter B of chapter 1 is amended by
inserting after section 245 the following new section:
``SEC. 245A. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED
BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT
OWNED FOREIGN CORPORATIONS.
``(a) In General.--In the case of any dividend received from a
specified 10-percent owned foreign corporation by a domestic
corporation which is a United States shareholder with respect to such
foreign corporation, there shall be allowed as a deduction an amount
equal to the foreign-source portion of such dividend.
``(b) Specified 10-percent Owned Foreign Corporation.--For purposes
of this section, the term `specified 10-percent owned foreign
corporation' means any foreign corporation with respect to which any
domestic corporation is a United States shareholder. Such term shall
not include any passive foreign investment company (within the meaning
of subpart D of part VI of subchapter P) that is not a controlled
foreign corporation.
``(c) Foreign-source Portion.--For purposes of this section--
``(1) In general.--The foreign-source portion of any dividend
is an amount which bears the same ratio to such dividend as--
``(A) the post-1986 undistributed foreign earnings of
the specified 10-percent owned foreign corporation,
bears to
``(B) the total post-1986 undistributed earnings of
such foreign corporation.
``(2) Post-1986 undistributed earnings.--The term `post-1986
undistributed earnings' means the amount of the earnings and
profits of the specified 10-percent owned foreign corporation
(computed in accordance with sections 964(a) and 986)
accumulated in taxable years beginning after December 31,
1986--
``(A) as of the close of the taxable year of the
specified 10-percent owned foreign corporation in which
the dividend is distributed, and
``(B) without diminution by reason of dividends
distributed during such taxable year.
``(3) Post-1986 undistributed foreign earnings.--The term
`post-1986 undistributed foreign earnings' means the portion of
the post-1986 undistributed earnings which is attributable to
neither--
``(A) income described in subparagraph (A) of section
245(a)(5), nor
``(B) dividends described in subparagraph (B) of such
section (determined without regard to section
245(a)(12)).
``(4) Treatment of distributions from earnings before 1987.--
``(A) In general.--In the case of any dividend paid
out of earnings and profits of the specified 10-percent
owned foreign corporation (computed in accordance with
sections 964(a) and 986) accumulated in taxable years
beginning before January 1, 1987--
``(i) paragraphs (1), (2), and (3) shall be
applied without regard to the phrase `post-
1986' each place it appears, and
``(ii) paragraph (2) shall be applied by
substituting `after the date specified in
section 316(a)(1)' for `in taxable years
beginning after December 31, 1986'.
``(B) Dividends paid first out of post-1986
earnings.--Dividends shall be treated as paid out of
post-1986 undistributed earnings to the extent thereof.
``(5) Treatment of certain dividends in excess of
undistributed earnings.--In the case of any dividend from the
specified 10-percent owned foreign corporation which is in
excess of undistributed earnings (as determined under paragraph
(2) after taking into account the modifications described in
clauses (i) and (ii) of paragraph (4)(A)), the foreign-source
portion of such dividend is an amount which bears the same
ratio to such dividend as--
``(A) the portion of the earnings and profits
described in subparagraph (B) which is attributable to
neither income described in paragraph (3)(A) nor
dividends described in paragraph (3)(B), bears to
``(B) the earnings and profits of such corporation
for the taxable year in which such distribution is made
(computed as of the close of the taxable year without
diminution by reason of any distributions made during
the taxable year).
``(d) Disallowance of Foreign Tax Credit, etc.--
``(1) In general.--No credit shall be allowed under section
901 for any taxes paid or accrued (or treated as paid or
accrued) with respect to any dividend for which a deduction is
allowed under this section.
``(2) Denial of deduction.--No deduction shall be allowed
under this chapter for any tax for which credit is not
allowable under section 901 by reason of paragraph (1)
(determined by treating the taxpayer as having elected the
benefits of subpart A of part III of subchapter N).
``(e) Regulations.--The Secretary may prescribe such regulations or
other guidance as may be necessary or appropriate to carry out the
provisions of this section.''.
(b) Application of Holding Period Requirement.--Section 246(c) is
amended--
(1) by striking ``or 245'' in paragraph (1) and inserting
``245, or 245A'', and
(2) by adding at the end the following new paragraph:
``(5) Special rules for foreign source portion of dividends
received from specified 10-percent owned foreign
corporations.--
``(A) 6-month holding period requirement.--For
purposes of section 245A--
``(i) paragraph (1)(A) shall be applied--
``(I) by substituting `180 days' for
`45 days'each place it appears, and
``(II) by substituting `361-day
period' for `91-day period', and
``(ii) paragraph (2) shall not apply.
``(B) Status must be maintained during holding
period.--For purposes of applying paragraph (1) with
respect to section 245A, the taxpayer shall be treated
as holding the stock referred to in paragraph (1) for
any period only if--
``(i) the specified 10-percent owned foreign
corporation referred to in section 245A(a) is a
specified 10-percent owned foreign corporation
for such period, and
``(ii) the taxpayer is a United States
shareholder with respect to such specified 10-
percent owned foreign corporation for such
period.''.
(c) Application of Rules Generally Applicable to Deductions for
Dividends Received.--
(1) Treatment of dividends from certain corporations.--
Section 246(a)(1) is amended by striking ``and 245'' and
inserting ``245, and 245A''.
(2) Coordination with section 1059.--Section 1059(b)(2)(B) is
amended by striking ``or 245'' and inserting ``245, or 245A''.
(d) Coordination With Foreign Tax Credit Limitation.--Section 904(b)
is amended by adding at the end the following new paragraph:
``(5) Treatment of dividends for which deduction is allowed
under section 245a.--For purposes of subsection (a), in the
case of a United States shareholder with respect to a specified
10-percent owned foreign corporation, such shareholder's
taxable income from sources without the United States (and
entire taxable income) shall be determined without regard to--
``(A) the foreign-source portion of any dividend
received from such foreign corporation, and
``(B) any deductions properly allocable or
apportioned to--
``(i) income (other than subpart F income (as
defined in section 952) and foreign high return
amounts (as defined in section 951A(b)) with
respect to stock of such specified 10-percent
owned foreign corporation, or
``(ii) such stock (to the extent income with
respect to such stock is other than subpart F
income (as so defined) or foreign high return
amounts (as so defined)).
Any term which is used in section 245A and in this paragraph
shall have the same meaning for purposes of this paragraph as
when used in such section.''.
(e) Conforming Amendments.--
(1) Section 245(a)(4) is amended by striking ``section
902(c)(1)'' and inserting ``section 245A(c)(2) applied by
substituting `qualified 10-percent owned foreign corporation'
for `specified 10-percent owned foreign corporation' each place
it appears''.
(2) Section 951(b) is amended by striking ``subpart'' and
inserting ``title''.
(3) Section 957(a) is amended by striking ``subpart'' in the
matter preceding paragraph (1) and inserting ``title''.
(4) The table of sections for part VIII of subchapter B of
chapter 1 is amended by inserting after section 245 the
following new item:
``Sec. 245A. Deduction for foreign-source portion of dividends received
by domestic corporations from specified 10-percent owned foreign
corporations.''.
(f) Effective Date.--The amendments made by this section shall apply
to distributions made after (and, in the case of the amendments made by
subsection (d), deductions with respect to taxable years ending after)
December 31, 2017.
SEC. 4002. APPLICATION OF PARTICIPATION EXEMPTION TO INVESTMENTS IN
UNITED STATES PROPERTY.
(a) In General.--Section 956(a) is amended in the matter preceding
paragraph (1) by inserting ``(other than a corporation)'' after
``United States shareholder''.
(b) Regulatory Authority to Prevent Abuse.--Section 956(e) is amended
by striking ``including regulations to prevent'' and inserting
``including regulations--
``(1) to address United States shareholders that are
partnerships with corporate partners, and
``(2) to prevent''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2017.
SEC. 4003. LIMITATION ON LOSSES WITH RESPECT TO SPECIFIED 10-PERCENT
OWNED FOREIGN CORPORATIONS.
(a) Basis in Specified 10-percent Owned Foreign Corporation Reduced
by Nontaxed Portion of Dividend for Purposes of Determining Loss.--
(1) In general.--Section 961 is amended by adding at the end
the following new subsection:
``(d) Basis in Specified 10-percent Owned Foreign Corporation Reduced
by Nontaxed Portion of Dividend for Purposes of Determining Loss.--If a
domestic corporation received a dividend from a specified 10-percent
owned foreign corporation (as defined in section 245A) in any taxable
year, solely for purposes of determining loss on any disposition of
stock of such foreign corporation in such taxable year or any
subsequent taxable year, the basis of such domestic corporation in such
stock shall be reduced (but not below zero) by the amount of any
deduction allowable to such domestic corporation under section 245A
with respect to such stock except to the extent such basis was reduced
under section 1059 by reason of a dividend for which such a deduction
was allowable.''.
(2) Effective date.--The amendments made by this subsection
shall apply to distributions made after December 31, 2017.
(b) Treatment of Foreign Branch Losses Transferred to Specified 10-
percent Owned Foreign Corporations.--
(1) In general.--Part II of subchapter B of chapter 1 is
amended by adding at the end the following new section:
``SEC. 91. CERTAIN FOREIGN BRANCH LOSSES TRANSFERRED TO SPECIFIED 10-
PERCENT OWNED FOREIGN CORPORATIONS.
``(a) In General.--If a domestic corporation transfers substantially
all of the assets of a foreign branch (within the meaning of section
367(a)(3)(C)) to a specified 10-percent owned foreign corporation (as
defined in section 245A) with respect to which it is a United States
shareholder after such transfer, such domestic corporation shall
include in gross income for the taxable year which includes such
transfer an amount equal to the transferred loss amount with respect to
such transfer.
``(b) Transferred Loss Amount.--For purposes of this section, the
term `transferred loss amount' means, with respect to any transfer of
substantially all of the assets of a foreign branch, the excess (if
any) of--
``(1) the sum of losses--
``(A) which were incurred by the foreign branch after
December 31, 2017, and before the transfer, and
``(B) with respect to which a deduction was allowed
to the taxpayer, over
``(2) the sum of--
``(A) any taxable income of such branch for a taxable
year after the taxable year in which the loss was
incurred and through the close of the taxable year of
the transfer, and
``(B) any amount which is recognized under section
904(f)(3) on account of the transfer.
``(c) Reduction for Recognized Gains.--
``(1) In general.--In the case of a transfer not described in
section 367(a)(3)(C), the transferred loss amount shall be
reduced (but not below zero) by the amount of gain recognized
by the taxpayer on account of the transfer (other than amounts
taken into account under subsection (c)(2)(B)).
``(2) Coordination with recognition under section 367.--In
the case of a transfer described in section 367(a)(3)(C), the
transferred loss amount shall not exceed the excess (if any)
of--
``(A) the excess of the amount described in section
367(a)(3)(C)(i) over the amount described in section
367(a)(3)(C)(ii) with respect to such transfer, over
``(B) the amount of gain recognized under section
367(a)(3)(C) with respect to such transfer.
``(d) Source of Income.--Amounts included in gross income under this
section shall be treated as derived from sources within the United
States.
``(e) Basis Adjustments.--Consistent with such regulations or other
guidance as the Secretary may prescribe, proper adjustments shall be
made in the adjusted basis of the taxpayer's stock in the specified 10-
percent owned foreign corporation to which the transfer is made, and in
the transferee's adjusted basis in the property transferred, to reflect
amounts included in gross income under this section.''.
(2) Amounts recognized under section 367 on transfer of
foreign branch with previously deducted losses treated as
united states source.--Section 367(a)(3)(C) is amended by
striking ``outside'' in the last sentence and inserting
``within''.
(3) Clerical amendment.--The table of sections for part II of
subchapter B of chapter 1 is amended by adding at the end the
following new item:
``Sec. 91. Certain foreign branch losses transferred to specified 10-
percent owned foreign corporations.''.
(4) Effective date.--The amendments made by this subsection
shall apply to transfers after December 31, 2017.
SEC. 4004. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO
PARTICIPATION EXEMPTION SYSTEM OF TAXATION.
(a) In General.--Section 965 is amended to read as follows:
``SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO
PARTICIPATION EXEMPTION SYSTEM OF TAXATION.
``(a) Treatment of Deferred Foreign Income as Subpart F Income.--In
the case of the last taxable year of a deferred foreign income
corporation which begins before January 1, 2018, the subpart F income
of such foreign corporation (as otherwise determined for such taxable
year under section 952) shall be increased by the greater of--
``(1) the accumulated post-1986 deferred foreign income of
such corporation determined as of November 2, 2017, or
``(2) the accumulated post-1986 deferred foreign income of
such corporation determined as of December 31, 2017.
``(b) Reduction in Amounts Included in Gross Income of United States
Shareholders of Specified Foreign Corporations With Deficits in
Earnings and Profits.--
``(1) In general.--In the case of a taxpayer which is a
United States shareholder with respect to at least one deferred
foreign income corporation and at least one E&P; deficit foreign
corporation, the amount which would (but for this subsection)
be taken into account under section 951(a)(1) by reason of
subsection (a) as such United States shareholder's pro rata
share of the subpart F income of each deferred foreign income
corporation shall be reduced (but not below zero) by the amount
of such United States shareholder's aggregate foreign E&P;
deficit which is allocated under paragraph (2) to such deferred
foreign income corporation.
``(2) Allocation of aggregate foreign e&p; deficit.--The
aggregate foreign E&P; deficit of any United States shareholder
shall be allocated among the deferred foreign income
corporations of such United States shareholder in an amount
which bears the same proportion to such aggregate as--
``(A) such United States shareholder's pro rata share
of the accumulated post-1986 deferred foreign income of
each such deferred foreign income corporation, bears to
``(B) the aggregate of such United States
shareholder's pro rata share of the accumulated post-
1986 deferred foreign income of all deferred foreign
income corporations of such United States shareholder.
``(3) Definitions related to e&p; deficits.--For purposes of
this subsection--
``(A) Aggregate foreign e&p; deficit.--The term
`aggregate foreign E&P; deficit' means, with respect to
any United States shareholder, the aggregate of such
shareholder's pro rata shares of the specified E&P;
deficits of the E&P; deficit foreign corporations of
such shareholder.
``(B) E&P; deficit foreign corporation.--The term `E&P;
deficit foreign corporation' means, with respect to any
taxpayer, any specified foreign corporation with
respect to which such taxpayer is a United States
shareholder, if--
``(i) such specified foreign corporation has
a deficit in post-1986 earnings and profits,
and
``(ii) as of November 2, 2017--
``(I) such corporation was a
specified foreign corporation, and
``(II) such taxpayer was a United
States shareholder of such corporation.
``(C) Specified e&p; deficit.--The term `specified E&P;
deficit' means, with respect to any E&P; deficit foreign
corporation, the amount of the deficit referred to in
subparagraph (B).
``(4) Netting among united states shareholders in same
affiliated group.--
``(A) In general.--In the case of any affiliated
group which includes at least one E&P; net surplus
shareholder and one E&P; net deficit shareholder, the
amount which would (but for this paragraph) be taken
into account under section 951(a)(1) by reason of
subsection (a) by each such E&P; net surplus shareholder
shall be reduced (but not below zero) by such
shareholder's applicable share of the affiliated
group's aggregate unused E&P; deficit.
``(B) E&P; net surplus shareholder.--For purposes of
this paragraph, the term `E&P; net surplus shareholder'
means any United States shareholder which would
(determined without regard to this paragraph) take into
account an amount greater than zero under section
951(a)(1) by reason of subsection (a).
``(C) E&P; net deficit shareholder.--For purposes of
this paragraph, the term `E&P; net deficit shareholder'
means any United States shareholder if--
``(i) the aggregate foreign E&P; deficit with
respect to such shareholder (as defined in
paragraph (3)(A)), exceeds
``(ii) the amount which would (but for this
subsection) be taken into account by such
shareholder under section 951(a)(1) by reason
of subsection (a).
``(D) Aggregate unused e&p; deficit.--For purposes of
this paragraph--
``(i) In general.--The term `aggregate unused
E&P; deficit' means, with respect to any
affiliated group, the lesser of--
``(I) the sum of the excesses
described in subparagraph (C),
determined with respect to each E&P; net
deficit shareholder in such group, or
``(II) the amount determined under
subparagraph (E)(ii).
``(ii) Reduction with respect to e&p; net
deficit shareholders which are not wholly owned
by the affiliated group.--If the group
ownership percentage of any E&P; net deficit
shareholder is less than 100 percent, the
amount of the excess described in subparagraph
(C) which is taken into account under clause
(i)(I) with respect to such E&P; net deficit
shareholder shall be such group ownership
percentage of such amount.
``(E) Applicable share.--For purposes of this
paragraph, the term `applicable share' means, with
respect to any E&P; net surplus shareholder in any
affiliated group, the amount which bears the same
proportion to such group's aggregate unused E&P; deficit
as--
``(i) the product of--
``(I) such shareholder's group
ownership percentage, multiplied by
``(II) the amount which would (but
for this paragraph) be taken into
account under section 951(a)(1) by
reason of subsection (a) by such
shareholder, bears to
``(ii) the aggregate amount determined under
clause (i) with respect to all E&P; net surplus
shareholders in such group.
``(F) Group ownership percentage.--For purposes of
this paragraph, the term `group ownership percentage'
means, with respect to any United States shareholder in
any affiliated group, the percentage of the value of
the stock of such United States shareholder which is
held by other includible corporations in such
affiliated group. Notwithstanding the preceding
sentence, the group ownership percentage of the common
parent of the affiliated group is 100 percent. Any term
used in this subparagraph which is also used in section
1504 shall have the same meaning as when used in such
section.
``(c) Application of Participation Exemption to Included Income.--
``(1) In general.--In the case of a United States shareholder
of a deferred foreign income corporation, there shall be
allowed as a deduction for the taxable year in which an amount
is included in the gross income of such United States
shareholder under section 951(a)(1) by reason of this section
an amount equal to the sum of--
``(A) the United States shareholder's 7 percent rate
equivalent percentage of the excess (if any) of--
``(i) the amount so included as gross income,
over
``(ii) the amount of such United States
shareholder's aggregate foreign cash position,
plus
``(B) the United States shareholder's 14 percent rate
equivalent percentage of so much of the amount
described in subparagraph (A)(ii) as does not exceed
the amount described in subparagraph (A)(i).
``(2) 7 and 14 percent rate equivalent percentages.--For
purposes of this subsection--
``(A) 7 percent rate equivalent percentage.--The term
`7 percent rate equivalent percentage' means, with
respect to any United States shareholder for any
taxable year, the percentage which would result in the
amount to which such percentage applies being subject
to a 7 percent rate of tax determined by only taking
into account a deduction equal to such percentage of
such amount and the highest rate of tax specified in
section 11 for such taxable year. In the case of any
taxable year of a United States shareholder to which
section 15 applies, the highest rate of tax under
section 11 before the effective date of the change in
rates and the highest rate of tax under section 11
after the effective date of such change shall each be
taken into account under the preceding sentence in the
same proportions as the portion of such taxable year
which is before and after such effective date,
respectively.
``(B) 14 percent rate equivalent percentage.--The
term `14 percent rate equivalent percentage' means,
with respect to any United States shareholder for any
taxable year, the percentage determined under
subparagraph (A) applied by substituting `14 percent
rate of tax' for `7 percent rate of tax'.
``(3) Aggregate foreign cash position.--For purposes of this
subsection--
``(A) In general.--The term `aggregate foreign cash
position' means, with respect to any United States
shareholder, one-third of the sum of--
``(i) the aggregate of such United States
shareholder's pro rata share of the cash
position of each specified foreign corporation
of such United States shareholder determined as
of November 2, 2017,
``(ii) the aggregate described in clause (i)
determined as of the close of the last taxable
year of each such specified foreign corporation
which ends before November 2, 2017, and
``(iii) the aggregate described in clause (i)
determined as of the close of the taxable year
of each such specified foreign corporation
which precedes the taxable year referred to in
clause (ii).
In the case of any foreign corporation which did not
exist as of the determination date described in clause
(ii) or (iii), this subparagraph shall be applied
separately to such foreign corporation by not taking
into account such clause and by substituting `one-half
(100 percent in the case that both clauses (ii) and
(iii) are disregarded)' for `one-third'.
``(B) Cash position.--For purposes of this paragraph,
the cash position of any specified foreign corporation
is the sum of--
``(i) cash held by such foreign corporation,
``(ii) the net accounts receivable of such
foreign corporation, plus
``(iii) the fair market value of the
following assets held by such corporation:
``(I) Actively traded personal
property for which there is an
established financial market.
``(II) Commercial paper, certificates
of deposit, the securities of the
Federal government and of any State or
foreign government.
``(III) Any foreign currency.
``(IV) Any obligation with a term of
less than one year.
``(V) Any asset which the Secretary
identifies as being economically
equivalent to any asset described in
this subparagraph.
``(C) Net accounts receivable.--For purposes of this
paragraph, the term `net accounts receivable' means,
with respect to any specified foreign corporation, the
excess (if any) of--
``(i) such corporation's accounts receivable,
over
``(ii) such corporation's accounts payable
(determined consistent with the rules of
section 461).
``(D) Prevention of double counting.--
``(i) In general.--The applicable percentage
of each specified cash position of a specified
foreign corporation shall not be taken into
account by--
``(I) the United States shareholder
referred to in clause (ii) with respect
to such position, or
``(II) any United States shareholder
which is an includible corporation in
the same affiliated group as such
United States shareholder referred to
in clause (ii).
``(ii) Specified cash position.--For purposes
of this subparagraph, the term `specified cash
position' means--
``(I) amounts described in
subparagraph (B)(ii) to the extent such
amounts are receivable from another
specified foreign corporation with
respect to any United States
shareholder,
``(II) amounts described in
subparagraph (B)(iii)(I) to the extent
such amounts consist of an equity
interest in another specified foreign
corporation with respect to any United
States shareholder, and
``(III) amounts described in
subparagraph (B)(iii)(IV) to the extent
that another specified foreign
corporation with respect to any United
States shareholder is obligated to
repay such amount.
``(iii) Applicable percentage.--For purposes
of this subparagraph, the term `applicable
percentage' means--
``(I) with respect to each specified
cash position described in subclause
(I) or (III) of clause (ii), the pro
rata share of the United States
shareholder referred to in clause (ii)
with respect to the specified foreign
corporation referred to in such clause,
and
``(II) with respect to each specified
cash position described in clause
(ii)(II), the ratio (expressed as a
percentage and not in excess of 100
percent) of the United States
shareholder's pro rata share of the
cash position of the specified foreign
corporation referred to in such clause
divided by the amount of such specified
cash position.
For purposes of this subparagraph, a separate
applicable percentage shall be determined under
each of subclauses (I) and (II) with respect to
each specified foreign corporation referred to
in clause (ii) with respect to which a
specified cash position is determined for the
specified foreign corporation referred to in
clause (i).
``(iv) Reduction with respect to affiliated
group members not wholly owned by the
affiliated group.--For purposes of clause
(i)(II), in the case of an includible
corporation the group ownership percentage of
which is less than 100 percent (as determined
under subsection (b)(4)(F)), the amount not
take into account by reason of such clause
shall be the group ownership percentage of such
amount (determined without regard to this
clause).
``(E) Certain blocked assets not taken into
account.--A cash position of a specified foreign
corporation shall not be taken into account under
subparagraph (A) if such position could not (as of the
date that it would otherwise have been taken into
account under clause (i), (ii), or (iii) of
subparagraph (A)) have been distributed by such
specified foreign corporation to United States
shareholders of such specified foreign corporation
because of currency or other restrictions or
limitations imposed under the laws of any foreign
country (within the meaning of section 964(b)).
``(F) Cash positions of certain non-corporate
entities taken into account.--An entity (other than a
domestic corporation) shall be treated as a specified
foreign corporation of a United States shareholder for
purposes of determining such United States
shareholder's aggregate foreign cash position if any
interest in such entity is held by a specified foreign
corporation of such United States shareholder
(determined after application of this subparagraph) and
such entity would be a specified foreign corporation of
such United States shareholder if such entity were a
foreign corporation.
``(G) Time of certain determinations.--For purposes
of this paragraph, the determination of whether a
person is a United States shareholder, whether a person
is a specified foreign corporation, and the pro rata
share of a United States shareholder with respect to a
specified foreign corporation, shall be determined as
of the end of the taxable year described in subsection
(a).
``(H) Anti-abuse.--If the Secretary determines that
the principal purpose of any transaction was to reduce
the aggregate foreign cash position taken into account
under this subsection, such transaction shall be
disregarded for purposes of this subsection.
``(d) Deferred Foreign Income Corporation; Accumulated Post-1986
Deferred Foreign Income.--For purposes of this section--
``(1) Deferred foreign income corporation.--The term
`deferred foreign income corporation' means, with respect to
any United States shareholder, any specified foreign
corporation of such United States shareholder which has
accumulated post-1986 deferred foreign income (as of the date
referred to in paragraph (1) or (2) of subsection (a),
whichever is applicable with respect to such foreign
corporation) greater than zero.
``(2) Accumulated post-1986 deferred foreign income.--The
term `accumulated post-1986 deferred foreign income' means the
post-1986 earnings and profits except to the extent such
earnings--
``(A) are attributable to income of the specified
foreign corporation which is effectively connected with
the conduct of a trade or business within the United
States and subject to tax under this chapter, or
``(B) if distributed, would be excluded from the
gross income of a United States shareholder under
section 959.
To the extent provided in regulations or other guidance
prescribed by the Secretary, in the case of any controlled
foreign corporation which has shareholders which are not United
States shareholders, accumulated post-1986 deferred foreign
income shall be appropriately reduced by amounts which would be
described in subparagraph (B) if such shareholders were United
States shareholders.
``(3) Post-1986 earnings and profits.--The term `post-1986
earnings and profits' means the earnings and profits of the
foreign corporation (computed in accordance with sections
964(a) and 986) accumulated in taxable years beginning after
December 31, 1986, and determined--
``(A) as of the date referred to in paragraph (1) or
(2) of subsection (a), whichever is applicable with
respect to such foreign corporation,
``(B) without diminution by reason of dividends
distributed during the taxable year ending with or
including such date, and
``(C) increased by the amount of any qualified
deficit (within the meaning of section
952(c)(1)(B)(ii)) arising before January 1, 2018, which
is treated as a qualified deficit (within the meaning
of such section as amended by the Tax Cuts and Jobs
Act) for purposes of such foreign corporation's first
taxable year beginning after December 31, 2017.
``(e) Specified Foreign Corporation.--
``(1) In general.--For purposes of this section, the term
`specified foreign corporation' means--
``(A) any controlled foreign corporation, and
``(B) any foreign corporation with respect to which
one or more domestic corporations is a United States
shareholder (determined without regard to section
958(b)(4)).
``(2) Application to certain foreign corporations.--For
purposes of sections 951 and 961, a foreign corporation
described in paragraph (1)(B) shall be treated as a controlled
foreign corporation solely for purposes of taking into account
the subpart F income of such corporation under subsection (a)
(and for purposes of applying subsection (f)).
``(3) Exception for passive foreign investment companies.--
The term `specified foreign corporation' shall not include any
passive foreign investment company (within the meaning of
subpart D of part VI of subchapter P) that is not a controlled
foreign corporation.
``(f) Determinations of Pro Rata Share.--For purposes of this
section, the determination of any United States shareholder's pro rata
share of any amount with respect to any specified foreign corporation
shall be determined under rules similar to the rules of section
951(a)(2) by treating such amount in the same manner as subpart F
income (and by treating such specified foreign corporation as a
controlled foreign corporation).
``(g) Disallowance of Foreign Tax Credit, etc.--
``(1) In general.--No credit shall be allowed under section
901 for the applicable percentage of any taxes paid or accrued
(or treated as paid or accrued) with respect to any amount for
which a deduction is allowed under this section.
``(2) Applicable percentage.--For purposes of this
subsection, the term `applicable percentage' means the amount
(expressed as a percentage) equal to the sum of--
``(A) 80 percent of the ratio of--
``(i) the excess to which subsection
(c)(1)(A) applies, divided by
``(ii) the sum of such excess plus the amount
to which subsection (c)(1)(B) applies, plus
``(B) 60 percent of the ratio of--
``(i) the amount to which subsection
(c)(1)(B) applies, divided by
``(ii) the sum described in subparagraph
(A)(ii).
``(3) Denial of deduction.--No deduction shall be allowed
under this chapter for any tax for which credit is not
allowable under section 901 by reason of paragraph (1)
(determined by treating the taxpayer as having elected the
benefits of subpart A of part III of subchapter N).
``(4) Coordination with section 78.--With respect to the
taxes treated as paid or accrued by a domestic corporation with
respect to amounts which are includible in gross income of such
domestic corporation by reason of this section, section 78
shall apply only to so much of such taxes as bears the same
proportion to the amount of such taxes as--
``(A) the excess of--
``(i) the amounts which are includible in
gross income of such domestic corporation by
reason of this section, over
``(ii) the deduction allowable under
subsection (c) with respect to such amounts,
bears to
``(B) such amounts.
``(5) Extension of foreign tax credit carryover period.--With
respect to any taxes paid or accrued (or treated as paid or
accrued) with respect to any amount for which a deduction is
allowed under this section, section 904(c) shall be applied by
substituting `first 20 succeeding taxable years' for `first 10
succeeding taxable years'.
``(h) Election to Pay Liability in Installments.--
``(1) In general.--In the case of a United States shareholder
of a deferred foreign income corporation, such United States
shareholder may elect to pay the net tax liability under this
section in 8 equal installments.
``(2) Date for payment of installments.--If an election is
made under paragraph (1), the first installment shall be paid
on the due date (determined without regard to any extension of
time for filing the return) for the return of tax for the
taxable year described in subsection (a) and each succeeding
installment shall be paid on the due date (as so determined)
for the return of tax for the taxable year following the
taxable year with respect to which the preceding installment
was made.
``(3) Acceleration of payment.--If there is an addition to
tax for failure to timely pay any installment required under
this subsection, a liquidation or sale of substantially all the
assets of the taxpayer (including in a title 11 or similar
case), a cessation of business by the taxpayer, or any similar
circumstance, then the unpaid portion of all remaining
installments shall be due on the date of such event (or in the
case of a title 11 or similar case, the day before the petition
is filed). The preceding sentence shall not apply to the sale
of substantially all the assets of a taxpayer to a buyer if
such buyer enters into an agreement with the Secretary under
which such buyer is liable for the remaining installments due
under this subsection in the same manner as if such buyer were
the taxpayer.
``(4) Proration of deficiency to installments.--If an
election is made under paragraph (1) to pay the net tax
liability under this section in installments and a deficiency
has been assessed with respect to such net tax liability, the
deficiency shall be prorated to the installments payable under
paragraph (1). The part of the deficiency so prorated to any
installment the date for payment of which has not arrived shall
be collected at the same time as, and as a part of, such
installment. The part of the deficiency so prorated to any
installment the date for payment of which has arrived shall be
paid upon notice and demand from the Secretary. This subsection
shall not apply if the deficiency is due to negligence, to
intentional disregard of rules and regulations, or to fraud
with intent to evade tax.
``(5) Election.--Any election under paragraph (1) shall be
made not later than the due date for the return of tax for the
taxable year described in subsection (a) and shall be made in
such manner as the Secretary may provide.
``(6) Net tax liability under this section.--For purposes of
this subsection--
``(A) In general.--The net tax liability under this
section with respect to any United States shareholder
is the excess (if any) of--
``(i) such taxpayer's net income tax for the
taxable year in which an amount is included in
the gross income of such United States
shareholder under section 951(a)(1) by reason
of this section, over
``(ii) such taxpayer's net income tax for
such taxable year determined--
``(I) without regard to this section,
and
``(II) without regard to any income,
deduction, or credit, properly
attributable to a dividend received by
such United States shareholder from any
deferred foreign income corporation.
``(B) Net income tax.--The term `net income tax'
means the regular tax liability reduced by the credits
allowed under subparts A, B, and D of part IV of
subchapter A.
``(i) Special Rules for S Corporation Shareholders.--
``(1) In general.--In the case of any S corporation which is
a United States shareholder of a deferred foreign income
corporation, each shareholder of such S corporation may elect
to defer payment of such shareholder's net tax liability under
this section with respect to such S corporation until the
shareholder's taxable year which includes the triggering event
with respect to such liability. Any net tax liability payment
of which is deferred under the preceding sentence shall be
assessed on the return as an addition to tax in the
shareholder's taxable year which includes such triggering
event.
``(2) Triggering event.--
``(A) In general.--In the case of any shareholder's
net tax liability under this section with respect to
any S corporation, the triggering event with respect to
such liability is whichever of the following occurs
first:
``(i) Such corporation ceases to be an S
corporation (determined as of the first day of
the first taxable year that such corporation is
not an S corporation).
``(ii) A liquidation or sale of substantially
all the assets of such S corporation (including
in a title 11 or similar case), a cessation of
business by such S corporation, such S
corporation ceases to exist, or any similar
circumstance.
``(iii) A transfer of any share of stock in
such S corporation by the taxpayer (including
by reason of death, or otherwise).
``(B) Partial transfers of stock.--In the case of a
transfer of less than all of the taxpayer's shares of
stock in the S corporation, such transfer shall only be
a triggering event with respect to so much of the
taxpayer's net tax liability under this section with
respect to such S corporation as is properly allocable
to such stock.
``(C) Transfer of liability.--A transfer described in
clause (iii) shall not be treated as a triggering event
if the transferee enters into an agreement with the
Secretary under which such transferee is liable for net
tax liability with respect to such stock in the same
manner as if such transferee were the taxpayer.
``(3) Net tax liability.--A shareholder's net tax liability
under this section with respect to any S corporation is the net
tax liability under this section which would be determined
under subsection (h)(6) if the only subpart F income taken into
account by such shareholder by reason of this section were
allocations from such S corporation.
``(4) Election to pay deferred liability in installments.--In
the case of a taxpayer which elects to defer payment under
paragraph (1)--
``(A) subsection (h) shall be applied separately with
respect to the liability to which such election
applies,
``(B) an election under subsection (h) with respect
to such liability shall be treated as timely made if
made not later than the due date for the return of tax
for the taxable year in which the triggering event with
respect to such liability occurs,
``(C) the first installment under subsection (h) with
respect to such liability shall be paid not later than
such due date (but determined without regard to any
extension of time for filing the return), and
``(D) if the triggering event with respect to any net
tax liability is described in paragraph (2)(A)(ii), an
election under subsection (h) with respect to such
liability may be made only with the consent of the
Secretary.
``(5) Joint and several liability of s corporation.--If any
shareholder of an S corporation elects to defer payment under
paragraph (1), such S corporation shall be jointly and
severally liable for such payment and any penalty, addition to
tax, or additional amount attributable thereto.
``(6) Extension of limitation on collection.--Notwithstanding
any other provision of law, any limitation on the time period
for the collection of a liability deferred under this
subsection shall not be treated as beginning before the date of
the triggering event with respect to such liability.
``(7) Annual reporting of net tax liability.--
``(A) In general.--Any shareholder of an S
corporation which makes an election under paragraph (1)
shall report the amount of such shareholder's deferred
net tax liability on such shareholder's return of tax
for the taxable year for which such election is made
and on the return of tax for each taxable year
thereafter until such amount has been fully assessed on
such returns.
``(B) Deferred net tax liability.--For purposes of
this paragraph, the term `deferred net tax liability'
means, with respect to any taxable year, the amount of
net tax liability payment of which has been deferred
under paragraph (1) and which has not been assessed on
a return of tax for any prior taxable year.
``(C) Failure to report.--In the case of any failure
to report any amount required to be reported under
subparagraph (A) with respect to any taxable year
before the due date for the return of tax for such
taxable year, there shall be assessed on such return as
an addition to tax 5 percent of such amount.
``(8) Election.--Any election under paragraph (1)--
``(A) shall be made by the shareholder of the S
corporation not later than the due date for such
shareholder's return of tax for the taxable year which
includes the close of the taxable year of such S
corporation in which the amount described in subsection
(a) is taken into account, and
``(B) shall be made in such manner as the Secretary
may provide.
``(j) Reporting by S Corporation.--Each S corporation which is a
United States shareholder of a deferred foreign income corporation
shall report in its return of tax under section 6037(a) the amount
includible in its gross income for such taxable year by reason of this
section and the amount of the deduction allowable by subsection (c).
Any copy provided to a shareholder under section 6037(b) shall include
a statement of such shareholder's pro rata share of such amounts.
``(k) Inclusion of Deferred Foreign Income Under This Section Not to
Trigger Recapture of Overall Foreign Loss, etc.--For purposes of
sections 904(f)(1) and 907(c)(4), in the case of a United States
shareholder of a deferred foreign income corporation, such United
States shareholder's taxable income from sources without the United
States and combined foreign oil and gas income shall be determined
without regard to this section.
``(l) Regulations.--The Secretary may prescribe such regulations or
other guidance as may be necessary or appropriate to carry out the
provisions of this section.''.
(b) Clerical Amendment.--The table of sections for subpart F of part
III of subchapter N of chapter 1 is amended by striking the item
relating to section 965 and inserting the following:
``Sec. 965. Treatment of deferred foreign income upon transition to
participation exemption system of taxation.''.
Subtitle B--Modifications Related to Foreign Tax Credit System
SEC. 4101. REPEAL OF SECTION 902 INDIRECT FOREIGN TAX CREDITS;
DETERMINATION OF SECTION 960 CREDIT ON CURRENT YEAR
BASIS.
(a) Repeal of Section 902 Indirect Foreign Tax Credits.--Subpart A of
part III of subchapter N of chapter 1 is amended by striking section
902.
(b) Determination of Section 960 Credit on Current Year Basis.--
Section 960 is amended--
(1) by striking subsection (c), by redesignating subsection
(b) as subsection (c), by striking all that precedes subsection
(c) (as so redesignated) and inserting the following:
``SEC. 960. DEEMED PAID CREDIT FOR SUBPART F INCLUSIONS.
``(a) In General.--For purposes of this subpart, if there is included
in the gross income of a domestic corporation any item of income under
section 951(a)(1) with respect to any controlled foreign corporation
with respect to which such domestic corporation is a United States
shareholder, such domestic corporation shall be deemed to have paid so
much of such foreign corporation's foreign income taxes as are properly
attributable to such item of income.
``(b) Special Rules for Distributions From Previously Taxed Earnings
and Profits.--For purposes of this subpart--
``(1) In general.--If any portion of a distribution from a
controlled foreign corporation to a domestic corporation which
is a United States shareholder with respect to such controlled
foreign corporation is excluded from gross income under section
959(a), such domestic corporation shall be deemed to have paid
so much of such foreign corporation's foreign income taxes as--
``(A) are properly attributable to such portion, and
``(B) have not been deemed to have to been paid by
such domestic corporation under this section for the
taxable year or any prior taxable year.
``(2) Tiered controlled foreign corporations.--If section
959(b) applies to any portion of a distribution from a
controlled foreign corporation to another controlled foreign
corporation, such controlled foreign corporation shall be
deemed to have paid so much of such other controlled foreign
corporation's foreign income taxes as--
``(A) are properly attributable to such portion, and
``(B) have not been deemed to have been paid by a
domestic corporation under this section for the taxable
year or any prior taxable year.'',
(2) and by adding after subsection (c) (as so redesignated)
the following new subsections:
``(d) Foreign Income Taxes.--The term `foreign income taxes' means
any income, war profits, or excess profits taxes paid or accrued to any
foreign country or possession of the United States.
``(e) Regulations.--The Secretary may prescribe such regulations or
other guidance as may be necessary or appropriate to carry out the
provisions of this section.''.
(c) Conforming Amendments.--
(1) Section 78 is amended to read as follows:
``SEC. 78. GROSS UP FOR DEEMED PAID FOREIGN TAX CREDIT.
``If a domestic corporation chooses to have the benefits of subpart A
of part III of subchapter N (relating to foreign tax credit) for any
taxable year, an amount equal to the taxes deemed to be paid by such
corporation under subsections (a) and (b) of section 960 for such
taxable year shall be treated for purposes of this title (other than
sections 959, 960, and 961) as an item of income required to be
included in the gross income of such domestic corporation under section
951(a) for such taxable year.''.
(2) Section 245(a)(10)(C) is amended by striking ``sections
902, 907, and 960'' and inserting ``sections 907 and 960''.
(3) Sections 535(b)(1) and 545(b)(1) are each amended by
striking ``section 902(a) or 960(a)(1)'' and inserting
``section 960''.
(4) Section 814(f)(1) is amended--
(A) by striking subparagraph (B), and
(B) by striking all that precedes ``No income'' and
inserting the following:
``(1) Treatment of foreign taxes.--''.
(5) Section 865(h)(1)(B) is amended by striking ``sections
902, 907, and 960'' and inserting ``sections 907 and 960''.
(6) Section 901(a) is amended by striking ``sections 902 and
960'' and inserting ``section 960''.
(7) Section 901(e)(2) is amended by striking ``but is not
limited to--'' and all that follows through ``that portion''
and inserting ``but is not limited to, that portion''.
(8) Section 901(f) is amended by striking ``sections 902 and
960'' and inserting ``section 960''.
(9) Section 901(j)(1)(A) is amended by striking ``902 or''.
(10) Section 901(j)(1)(B) is amended by striking ``sections
902 and 960'' and inserting ``section 960''.
(11) Section 901(k)(2) is amended by striking ``section 853,
902, or 960'' and inserting ``section 853 or 960''.
(12) Section 901(k)(6) is amended by striking ``902 or''.
(13) Section 901(m)(1) is amended by striking ``relevant
foreign assets--'' and all that follows and inserting
``relevant foreign assets shall not be taken into account in
determining the credit allowed under subsection (a).''.
(14) Section 904(d)(1) is amended by striking ``sections 902,
907, and 960'' and inserting ``sections 907 and 960''.
(15) Section 904(d)(6)(A) is amended by striking ``sections
902, 907, and 960'' and inserting ``sections 907 and 960''.
(16) Section 904(h)(10)(A) is amended by striking ``sections
902, 907, and 960'' and inserting ``sections 907 and 960''.
(17) Section 904 is amended by striking subsection (k).
(18) Section 905(c)(1) is amended by striking the last
sentence.
(19) Section 905(c)(2)(B)(i) is amended to read as follows:
``(i) shall be taken into account for the
taxable year to which such taxes relate, and''.
(20) Section 906(a) is amended by striking ``(or deemed,
under section 902, paid or accrued during the taxable year)''.
(21) Section 906(b) is amended by striking paragraphs (4) and
(5).
(22) Section 907(b)(2)(B) is amended by striking ``902 or''.
(23) Section 907(c)(3) is amended--
(A) by striking subparagraph (A) and redesignating
subparagraphs (B) and (C) as subparagraphs (A) and (B),
respectively, and
(B) by striking ``section 960(a)'' in subparagraph
(A) (as so redesignated) and inserting ``section 960''.
(24) Section 907(c)(5) is amended by striking ``902 or''.
(25) Section 907(f)(2)(B)(i) is amended by striking ``902
or''.
(26) Section 908(a) is amended by striking ``902 or''.
(27) Section 909(b) is amended--
(A) by striking ``section 902 corporation'' in the
matter preceding paragraph (1) and inserting ``10/50
corporation'',
(B) by striking ``902 or'' in paragraph (1),
(C) by striking ``by such section 902 corporation''
and all that follows in the matter following paragraph
(2) and inserting ``by such 10/50 corporation or a
domestic corporation which is a United States
shareholder with respect to such 10/50 corporation.'',
and
(D) by striking ``Section 902 Corporations'' in the
heading thereof and inserting ``10/50 Corporations''.
(28) Section 909(d)(5) is amended to read as follows:
``(5) 10/50 corporation.--The term `10/50 corporation' means
any foreign corporation with respect to which one or more
domestic corporations is a United States shareholder.''.
(29) Section 958(a)(1) is amended by striking ``960(a)(1)''
and inserting ``960''.
(30) Section 959(d) is amended by striking ``Except as
provided in section 960(a)(3), any'' and inserting ``Any''.
(31) Section 959(e) is amended by striking ``section 960(b)''
and inserting ``section 960(c)''.
(32) Section 1291(g)(2)(A) is amended by striking ``any
distribution--'' and all that follows through ``but only if''
and inserting ``any distribution, any withholding tax imposed
with respect to such distribution, but only if''.
(33) Section 6038(c)(1)(B) is amended by striking ``sections
902 (relating to foreign tax credit for corporate stockholder
in foreign corporation) and 960 (relating to special rules for
foreign tax credit)'' and inserting ``section 960''.
(34) Section 6038(c)(4) is amended by striking subparagraph
(C).
(35) The table of sections for subpart A of part III of
subchapter N of chapter 1 is amended by striking the item
relating to section 902.
(36) The table of sections for subpart F of part III of
subchapter N of chapter 1 is amended by striking the item
relating to section 960 and inserting the following:
``Sec. 960. Deemed paid credit for subpart F inclusions.''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 4102. SOURCE OF INCOME FROM SALES OF INVENTORY DETERMINED SOLELY
ON BASIS OF PRODUCTION ACTIVITIES.
(a) In General.--Section 863(b) is amended by adding at the end the
following: ``Gains, profits, and income from the sale or exchange of
inventory property described in paragraph (2) shall be allocated and
apportioned between sources within and without the United States solely
on the basis of the production activities with respect to the
property.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle C--Modification of Subpart F Provisions
SEC. 4201. REPEAL OF INCLUSION BASED ON WITHDRAWAL OF PREVIOUSLY
EXCLUDED SUBPART F INCOME FROM QUALIFIED
INVESTMENT.
(a) In General.--Subpart F of part III of subchapter N of chapter 1
is amended by striking section 955.
(b) Conforming Amendments.--
(1)(A) Section 951(a)(1)(A) is amended to read as follows:
``(A) his pro rata share (determined under paragraph
(2)) of the corporation's subpart F income for such
year, and''.
(B) Section 851(b)(3) is amended by striking ``section
951(a)(1)(A)(i)'' in the flush language at the end and
inserting ``section 951(a)(1)(A)''.
(C) Section 952(c)(1)(B)(i) is amended by striking ``section
951(a)(1)(A)(i)'' and inserting ``section 951(a)(1)(A)''.
(D) Section 953(c)(1)(C) is amended by striking ``section
951(a)(1)(A)(i)'' and inserting ``section 951(a)(1)(A)''.
(2) Section 951(a) is amended by striking paragraph (3).
(3) Section 953(d)(4)(B)(iv)(II) is amended by striking ``or
amounts referred to in clause (ii) or (iii) of section
951(a)(1)(A)''.
(4) Section 964(b) is amended by striking ``, 955,''.
(5) Section 970 is amended by striking subsection (b).
(6) The table of sections for subpart F of part III of
subchapter N of chapter 1 is amended by striking the item
relating to section 955.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of United States shareholders in which or
with which such taxable years of foreign corporations end.
SEC. 4202. REPEAL OF TREATMENT OF FOREIGN BASE COMPANY OIL RELATED
INCOME AS SUBPART F INCOME.
(a) In General.--Section 954(a) is amended by striking paragraph (5),
by striking the comma at the end of paragraph (3) and inserting a
period, and by inserting ``and'' at the end of paragraph (2).
(b) Conforming Amendments.--
(1) Section 952(c)(1)(B)(iii) is amended by striking
subclause (I) and by redesignating subclauses (II) through (V)
as subclauses (I) through (IV), respectively.
(2) Section 954(b)(4) is amended by striking the last
sentence.
(3) Section 954(b)(5) is amended by striking ``the foreign
base company services income, and the foreign base company oil
related income'' and inserting ``and the foreign base company
services income''.
(4) Section 954(b) is amended by striking paragraph (6).
(5) Section 954 is amended by striking subsection (g).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of United States shareholders in which or
with which such taxable years of foreign corporations end.
SEC. 4203. INFLATION ADJUSTMENT OF DE MINIMIS EXCEPTION FOR FOREIGN
BASE COMPANY INCOME.
(a) In General.--Section 954(b)(3) is amended by adding at the end
the following new subparagraph:
``(D) Inflation adjustment.--In the case of any
taxable year beginning after 2017, the dollar amount in
subparagraph (A)(ii) shall be increased by an amount
equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(c)(2)(A) for the
calendar year in which the taxable year begins.
Any increase determined under the preceding sentence
shall be rounded to the nearest multiple of $50,000.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of United States shareholders in which or
with which such taxable years of foreign corporations end.
SEC. 4204. LOOK-THRU RULE FOR RELATED CONTROLLED FOREIGN CORPORATIONS
MADE PERMANENT.
(a) In General.--Paragraph (6) of section 954(c) is amended by
striking subparagraph (C).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2019, and to taxable years of United States shareholders in which or
with which such taxable years of foreign corporations end.
SEC. 4205. MODIFICATION OF STOCK ATTRIBUTION RULES FOR DETERMINING
STATUS AS A CONTROLLED FOREIGN CORPORATION.
(a) In General.--Section 958(b) is amended--
(1) by striking paragraph (4), and
(2) by striking ``Paragraphs (1) and (4)'' in the last
sentence and inserting ``Paragraph (1)''.
(b) Application of Certain Reporting Requirements.--Section
6038(e)(2) is amended by striking ``except that--'' and all that
follows through ``in applying subparagraph (C)'' and inserting ``except
that in applying subparagraph (C)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of United States shareholders in which or
with which such taxable years of foreign corporations end.
SEC. 4206. ELIMINATION OF REQUIREMENT THAT CORPORATION MUST BE
CONTROLLED FOR 30 DAYS BEFORE SUBPART F INCLUSIONS
APPLY.
(a) In General.--Section 951(a)(1) is amended by striking ``for an
uninterrupted period of 30 days or more'' and inserting ``at any
time''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
Subtitle D--Prevention of Base Erosion
SEC. 4301. CURRENT YEAR INCLUSION BY UNITED STATES SHAREHOLDERS WITH
FOREIGN HIGH RETURNS.
(a) In General.--Subpart F of part III of subchapter N of chapter 1
is amended by inserting after section 951 the following new section:
``SEC. 951A. FOREIGN HIGH RETURN AMOUNT INCLUDED IN GROSS INCOME OF
UNITED STATES SHAREHOLDERS.
``(a) In General.--Each person who is a United States shareholder of
any controlled foreign corporation for any taxable year of such United
States shareholder shall include in gross income for such taxable year
50 percent of such shareholder's foreign high return amount for such
taxable year.
``(b) Foreign High Return Amount.--For purposes of this section--
``(1) In general.--The term `foreign high return amount'
means, with respect to any United States shareholder for any
taxable year of such United States shareholder, the excess (if
any) of--
``(A) such shareholder's net CFC tested income for
such taxable year, over
``(B) the excess (if any) of--
``(i) the applicable percentage of the
aggregate of such shareholder's pro rata share
of the qualified business asset investment of
each controlled foreign corporation with
respect to which such shareholder is a United
States shareholder for such taxable year
(determined for each taxable year of each such
controlled foreign corporation which ends in or
with such taxable year of such United States
shareholder), over
``(ii) the amount of interest expense taken
into account under subsection (c)(2)(A)(ii) in
determining the shareholder's net CFC tested
income for the taxable year.
``(2) Applicable percentage.--The term `applicable
percentage' means, with respect to any taxable year, the
Federal short-term rate (determined under section 1274(d) for
the month in which or with which such taxable year ends) plus 7
percentage points.
``(c) Net CFC Tested Income.--For purposes of this section--
``(1) In general.--The term `net CFC tested income' means,
with respect to any United States shareholder for any taxable
year of such United States shareholder, the excess (if any)
of--
``(A) the aggregate of such shareholder's pro rata
share of the tested income of each controlled foreign
corporation with respect to which such shareholder is a
United States shareholder for such taxable year of such
United States shareholder (determined for each taxable
year of such controlled foreign corporation which ends
in or with such taxable year of such United States
shareholder), over
``(B) the aggregate of such shareholder's pro rata
share of the tested loss of each controlled foreign
corporation with respect to which such shareholder is a
United States shareholder for such taxable year of such
United States shareholder (determined for each taxable
year of such controlled foreign corporation which ends
in or with such taxable year of such United States
shareholder).
``(2) Tested income; tested loss.--For purposes of this
section--
``(A) Tested income.--The term `tested income' means,
with respect to any controlled foreign corporation for
any taxable year of such controlled foreign
corporation, the excess (if any) of--
``(i) the gross income of such corporation
determined without regard to--
``(I) any item of income which is
effectively connected with the conduct
by such corporation of a trade or
business within the United States if
subject to tax under this chapter,
``(II) any gross income taken into
account in determining the subpart F
income of such corporation,
``(III) except as otherwise provided
by the Secretary, any amount excluded
from the foreign personal holding
company income (as defined in section
954) of such corporation by reason of
section 954(c)(6) but only to the
extent that any deduction allowable for
the payment or accrual of such amount
does not result in a reduction in the
foreign high return amount of any
United States shareholder (determined
without regard to this subclause),
``(IV) any gross income excluded from
the foreign personal holding company
income (as defined in section 954) of
such corporation by reason of
subsection (c)(2)(C), (h), or (i) of
section 954,
``(V) any gross income excluded from
the insurance income (as defined in
section 953) of such corporation by
reason of section 953(a)(2),
``(VI) any gross income excluded from
foreign base company income (as defined
in section 954) or insurance income (as
defined in section 953) of such
corporation by reason of section
954(b)(4),
``(VII) any dividend received from a
related person (as defined in section
954(d)(3)), and
``(VIII) any commodities gross income
of such corporation, over
``(ii) the deductions (including taxes)
properly allocable to such gross income under
rules similar to the rules of section 954(b)(5)
(or which would be so properly allocable if
such corporation had such gross income).
``(B) Tested loss.--The term `tested loss' means,
with respect to any controlled foreign corporation for
any taxable year of such controlled foreign
corporation, the excess (if any) of the amount
described in subparagraph (A)(ii) over the amount
described in subparagraph (A)(i).
``(d) Qualified Business Asset Investment.--For purposes of this
section--
``(1) In general.--The term `qualified business asset
investment' means, with respect to any controlled foreign
corporation for any taxable year of such controlled foreign
corporation, the aggregate of the corporation's adjusted bases
(determined as of the close of such taxable year and after any
adjustments with respect to such taxable year) in specified
tangible property--
``(A) used in a trade or business of the corporation,
and
``(B) of a type with respect to which a deduction is
allowable under section 168.
``(2) Specified tangible property.--The term `specified
tangible property' means any tangible property to the extent
such property is used in the production of tested income or
tested loss.
``(3) Partnership property.--For purposes of this subsection,
if a controlled foreign corporation holds an interest in a
partnership at the close of such taxable year of the controlled
foreign corporation, such controlled foreign corporation shall
take into account under paragraph (1) the controlled foreign
corporation's distributive share of the aggregate of the
partnership's adjusted bases (determined as of such date in the
hands of the partnership) in tangible property held by such
partnership to the extent such property--
``(A) is used in the trade or business of the
partnership,
``(B) is of a type with respect to which a deduction
is allowable under section 168, and
``(C) is used in the production of tested income or
tested loss (determined with respect to such controlled
foreign corporation's distributive share of income or
loss with respect to such property).
For purposes of this paragraph, the controlled foreign
corporation's distributive share of the adjusted basis of any
property shall be the controlled foreign corporation's
distributive share of income and loss with respect to such
property.
``(4) Determination of adjusted basis.--For purposes of this
subsection, the adjusted basis in any property shall be
determined without regard to any provision of this title (or
any other provision of law) which is enacted after the date of
the enactment of this section.
``(5) Regulations.--The Secretary shall issue such
regulations or other guidance as the Secretary determines
appropriate to prevent the avoidance of the purposes of this
subsection, including regulations or other guidance which
provide for the treatment of property if--
``(A) such property is transferred, or held,
temporarily, or
``(B) the avoidance of the purposes of this paragraph
is a factor in the transfer or holding of such
property.
``(e) Commodities Gross Income.--For purposes of this section--
``(1) Commodities gross income.--The term `commodities gross
income' means, with respect to any corporation--
``(A) gross income of such corporation from the
disposition of commodities which are produced or
extracted by such corporation (or a partnership in
which such corporation is a partner), and
``(B) gross income of such corporation from the
disposition of property which gives rise to income
described in subparagraph (A).
``(2) Commodity.--The term `commodity' means any commodity
described in section 475(e)(2)(A) or section 475(e)(2)(D)
(determined without regard to clause (i) thereof and by
substituting `a commodity described in subparagraph (A)' for
`such a commodity' in clause (ii) thereof).
``(f) Taxable Years for Which Persons Are Treated as United States
Shareholders of Controlled Foreign Corporations.--For purposes of this
section--
``(1) In general.--A United States shareholder of a
controlled foreign corporation shall be treated as a United
States shareholder of such controlled foreign corporation for
any taxable year of such United States shareholder if--
``(A) a taxable year of such controlled foreign
corporation ends in or with such taxable year of such
person, and
``(B) such person owns (within the meaning of section
958(a)) stock in such controlled foreign corporation on
the last day, in such taxable year of such foreign
corporation, on which the foreign corporation is a
controlled foreign corporation.
``(2) Treatment as a controlled foreign corporation.--Except
for purposes of paragraph (1)(B) and the application of section
951(a)(2) to this section pursuant to subsection (g), a foreign
corporation shall be treated as a controlled foreign
corporation for any taxable year of such foreign corporation if
such foreign corporation is a controlled foreign corporation at
any time during such taxable year.
``(g) Determination of Pro Rata Share.--For purposes of this section,
pro rata shares shall be determined under the rules of section
951(a)(2) in the same manner as such section applies to subpart F
income.
``(h) Coordination With Subpart F.--
``(1) Treatment as subpart f income for certain purposes.--
Except as otherwise provided by the Secretary any foreign high
return amount included in gross income under subsection (a)
shall be treated in the same manner as an amount included under
section 951(a)(1)(A) for purposes of applying sections
168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962,
993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C),
6654(d)(2)(D), and 6655(e)(4).
``(2) Entire foreign high return amount taken into account
for purposes of certain sections.--For purposes of applying
paragraph (1) with respect to sections 168(h)(2)(B), 851(b),
959, 961, 962, 1248(b)(1), and 1248(d)(1), the foreign high
return amount included in gross income under subsection (a)
shall be determined by substituting `100 percent' for `50
percent' in such subsection.
``(3) Allocation of foreign high return amount to controlled
foreign corporations.--For purposes of the sections referred to
in paragraph (1), with respect to any controlled foreign
corporation any pro rata amount from which is taken into
account in determining the foreign high return amount included
in gross income of a United States shareholder under subsection
(a), the portion of such foreign high return amount which is
treated as being with respect to such controlled foreign
corporation is--
``(A) in the case of a controlled foreign corporation
with tested loss, zero, and
``(B) in the case of a controlled foreign corporation
with tested income, the portion of such foreign high
return amount which bears the same ratio to such
foreign high return amount as--
``(i) such United States shareholder's pro
rata amount of the tested income of such
controlled foreign corporation, bears to
``(ii) the aggregate amount determined under
subsection (c)(1)(A) with respect to such
United States shareholder.
``(4) Coordination with subpart f to deny double benefit of
losses.--In the case of any United States shareholder of any
controlled foreign corporation, the amount included in gross
income under section 951(a)(1)(A) shall be determined by
increasing the earnings and profits of such controlled foreign
corporation (solely for purposes of determining such amount) by
an amount that bears the same ratio (not greater than 1) to
such shareholder's pro rata share of the tested loss of such
controlled foreign corporation as--
``(A) the aggregate amount determined under
subsection (c)(1)(A) with respect to such shareholder,
bears to
``(B) the aggregate amount determined under
subsection (c)(1)(B) with respect to such
shareholder.''.
(b) Foreign Tax Credit.--
(1) Application of deemed paid foreign tax credit.--Section
960, as amended by the preceding provisions of this Act, is
amended by redesignating subsections (d) and (e) as subsections
(e) and (f), respectively, and by inserting after subsection
(c) the following new subsection:
``(d) Deemed Paid Credit for Taxes Properly Attributable to Tested
Income.--
``(1) In general.--For purposes of this subpart, if any
amount is includible in the gross income of a domestic
corporation under section 951A, such domestic corporation shall
be deemed to have paid foreign income taxes equal to 80 percent
of--
``(A) such domestic corporation's foreign high return
percentage, multiplied by
``(B) the aggregate tested foreign income taxes paid
or accrued by controlled foreign corporations with
respect to which such domestic corporation is a United
States shareholder.
``(2) Foreign high return percentage.--For purposes of
paragraph (1), the term `foreign high return percentage' means,
with respect to any domestic corporation, the ratio (expressed
as a percentage) of--
``(A) such corporation's foreign high return amount
(as defined in section 951A(b)), divided by
``(B) the aggregate amount determined under section
951A(c)(1)(A) with respect to such corporation.
``(3) Tested foreign income taxes.--For purposes of paragraph
(1), the term `tested foreign income taxes' means, with respect
to any domestic corporation which is a United States
shareholder of a controlled foreign corporation, the foreign
income taxes paid or accrued by such foreign corporation which
are properly attributable to gross income described in section
951A(c)(2)(A)(i).''.
(2) Application of foreign tax credit limitation.--
(A) Separate basket for foreign high return amount.--
Section 904(d)(1) is amended by redesignating
subparagraphs (A) and (B) as subparagraphs (B) and (C),
respectively, and by inserting before subparagraph (B)
(as so redesignated) the following new subparagraph:
``(A) any amount includible in gross income under
section 951A,''.
(B) No carryover of excess taxes.--Section 904(c) is
amended by adding at the end the following: ``This
subsection shall not apply to taxes paid or accrued
with respect to amounts described in subsection
(d)(1)(A).''
(3) Gross up for deemed paid foreign tax credit.--Section 78,
as amended by the preceding provisions of this Act, is
amended--
(A) by striking ``any taxable year, an amount'' and
inserting ``any taxable year--
``(1) an amount'', and
(B) by striking the period at the end and inserting
``, and
``(2) an amount equal to the taxes deemed to be paid by such
corporation under section 960(d) for such taxable year
(determined by substituting `100 percent' for `80 percent' in
such section) shall be treated for purposes of this title
(other than sections 959, 960, and 961) as an increase in the
foreign high return amount of such domestic corporation under
section 951A for such taxable year.''.
(c) Conforming Amendments.--
(1) Section 170(b)(2)(D) is amended by striking ``computed
without regard to'' and all that follows and inserting
``computed--
``(i) without regard to--
``(I) this section,
``(II) part VIII (except section
248),
``(III) any net operating loss
carryback to the taxable year under
section 172,
``(IV) any capital loss carryback to
the taxable year under section
1212(a)(1), and
``(ii) by substituting `100 percent' for `50
percent' in section 951A(a).''.
(2) Section 246(b)(1) is amended by--
(A) striking ``and without regard to'' and inserting
``without regard to'', and
(B) by striking the period at the end and inserting
``, and by substituting `100 percent' for `50 percent'
in section 951A(a).''.
(3) Section 469(i)(3)(F) is amended by striking ``determined
without regard to'' and all that follows and inserting
``determined--
``(i) without regard to--
``(I) any amount includible in gross
income under section 86,
``(II) the amounts allowable as a
deduction under section 219, and
``(III) any passive activity loss or
any loss allowable by reason of
subsection (c)(7), and
``(ii) by substituting `100 percent' for `50
percent' in section 951A(a).''.
(4) Section 856(c)(2) is amended by striking ``and'' at the
end of subparagraph (H), by adding ``and'' at the end of
subparagraph (I), and by inserting after subparagraph (I) the
following new subparagraph:
``(J) amounts includible in gross income under
section 951A(a);''.
(5) Section 856(c)(3)(D) is amended by striking ``dividends
or other distributions on, and gain'' and inserting
``dividends, other distributions on, amounts includible in
gross income under section 951A(a) with respect to, and gain''.
(6) The table of sections for subpart F of part III of
subchapter N of chapter 1 is amended by inserting after the
item relating to section 951 the following new item:
``Sec. 951A. Foreign high return amount included in gross income of
United States shareholders.''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2017, and to taxable years of United States shareholders in which or
with which such taxable years of foreign corporations end.
SEC. 4302. LIMITATION ON DEDUCTION OF INTEREST BY DOMESTIC CORPORATIONS
WHICH ARE MEMBERS OF AN INTERNATIONAL FINANCIAL
REPORTING GROUP.
(a) In General.--Section 163 is amended by redesignating subsection
(n) as subsection (p) and by inserting after subsection (m) the
following new subsection:
``(n) Limitation on Deduction of Interest by Domestic Corporations in
International Financial Reporting Groups.--
``(1) In general.--In the case of any domestic corporation
which is a member of any international financial reporting
group, the deduction under this chapter for interest paid or
accrued during the taxable year shall not exceed the sum of--
``(A) the allowable percentage of 110 percent of the
excess (if any) of --
``(i) the amount of such interest so paid or
accrued, over
``(ii) the amount described in subparagraph
(B), plus
``(B) the amount of interest includible in gross
income of such corporation for such taxable year.
``(2) International financial reporting group.--
``(A) For purposes of this subsection, the term
`international financial reporting group' means, with
respect to any reporting year, any group of entities
which--
``(i) includes--
``(I) at least one foreign
corporation engaged in a trade or
business within the United States, or
``(II) at least one domestic
corporation and one foreign
corporation,
``(ii) prepares consolidated financial
statements with respect to such year, and
``(iii) reports in such statements average
annual gross receipts (determined in the
aggregate with respect to all entities which
are part of such group) for the 3-reporting-
year period ending with such reporting year in
excess of $100,000,000.
``(B) Rules relating to determination of average
gross receipts.--For purposes of subparagraph (A)(iii),
rules similar to the rules of section 448(c)(3) shall
apply.
``(3) Allowable percentage.--For purposes of this
subsection--
``(A) In general.--The term `allowable percentage'
means, with respect to any domestic corporation for any
taxable year, the ratio (expressed as a percentage and
not greater than 100 percent) of--
``(i) such corporation's allocable share of
the international financial reporting group's
reported net interest expense for the reporting
year of such group which ends in or with such
taxable year of such corporation, over
``(ii) such corporation's reported net
interest expense for such reporting year of
such group.
``(B) Reported net interest expense.--The term
`reported net interest expense' means--
``(i) with respect to any international
financial reporting group for any reporting
year, the excess of--
``(I) the aggregate amount of
interest expense reported in such
group's consolidated financial
statements for such taxable year, over
``(II) the aggregate amount of
interest income reported in such
group's consolidated financial
statements for such taxable year, and
``(ii) with respect to any domestic
corporation for any reporting year, the excess
of--
``(I) the amount of interest expense
of such corporation reported in the
books and records of the international
financial reporting group which are
used in preparing such group's
consolidated financial statements for
such taxable year, over
``(II) the amount of interest income
of such corporation reported in such
books and records.
``(C) Allocable share of reported net interest
expense.--With respect to any domestic corporation
which is a member of any international financial
reporting group, such corporation's allocable share of
such group's reported net interest expense for any
reporting year is the portion of such expense which
bears the same ratio to such expense as--
``(i) the EBITDA of such corporation for such
reporting year, bears to
``(ii) the EBITDA of such group for such
reporting year.
``(D) EBITDA.--
``(i) In general.--The term `EBITDA' means,
with respect to any reporting year, earnings
before interest, taxes, depreciation, and
amortization--
``(I) as determined in the
international financial reporting
group's consolidated financial
statements for such year, or
``(II) for purposes of subparagraph
(A)(i), as determined in the books and
records of the international financial
reporting group which are used in
preparing such statements if not
determined in such statements.
``(ii) Treatment of disregarded entities.--
The EBITDA of any domestic corporation shall
not fail to include the EBITDA of any entity
which is disregarded for purposes of this
chapter.
``(iii) Treatment of intra-group
distributions.--The EBITDA of any domestic
corporation shall be determined without regard
to any distribution received by such
corporation from any other member of the
international financial reporting group.
``(E) Special rules for non-positive ebitda.--
``(i) Non-positive group ebitda.--In the case
of any international financial reporting group
the EBITDA of which is zero or less, paragraph
(1) shall not apply to any member of such group
the EBITDA of which is above zero.
``(ii) Non-positive entity ebitda.--In the
case of any group member the EBITDA of which is
zero or less, paragraph (1) shall be applied
without regard to subparagraph (A) thereof.
``(4) Consolidated financial statement.--For purposes of this
subsection, the term `consolidated financial statement' means
any consolidated financial statement described in paragraph
(2)(A)(ii) if such statement is--
``(A) a financial statement which is certified as
being prepared in accordance with generally accepted
accounting principles, international financial
reporting standards, or any other comparable method of
accounting identified by the Secretary, and which is--
``(i) a 10-K (or successor form), or annual
statement to shareholders, required to be filed
with the United States Securities and Exchange
Commission,
``(ii) an audited financial statement which
is used for--
``(I) credit purposes,
``(II) reporting to shareholders,
partners, or other proprietors, or to
beneficiaries, or
``(III) any other substantial nontax
purpose,
but only if there is no statement described in
clause (i), or
``(iii) filed with any other Federal or State
agency for nontax purposes, but only if there
is no statement described in clause (i) or
(ii), or
``(B) a financial statement which--
``(i) is used for a purpose described in
subclause (I), (II), or (III) of subparagraph
(A)(ii), or
``(ii) filed with any regulatory or
governmental body (whether domestic or foreign)
specified by the Secretary,
but only if there is no statement described in
subparagraph (A).
``(5) Reporting year.--For purposes of this subsection, the
term `reporting year' means, with respect to any international
financial reporting group, the year with respect to which the
consolidated financial statements are prepared.
``(6) Application to certain entities.--
``(A) Partnerships.--Except as otherwise provided by
the Secretary in paragraph (7), this subsection shall
apply to any partnership which is a member of any
international financial reporting group under rules
similar to the rules of section 163(j)(3).
``(B) Foreign corporations engaged in trade or
business within the united states.--Except as otherwise
provided by the Secretary in paragraph (8), any
deduction for interest paid or accrued by a foreign
corporation engaged in a trade or business within the
United States shall be limited in a manner consistent
with the principles of this subsection.
``(C) Consolidated groups.--For purposes of this
subsection, the members of any group that file (or are
required to file) a consolidated return with respect to
the tax imposed by chapter 1 for a taxable year shall
be treated as a single corporation.
``(7) Regulations.--The Secretary may issue such regulations
or other guidance as are necessary or appropriate to carry out
the purposes of this subsection.''.
(b) Carryforward of Disallowed Interest.--
(1) In general.--Section 163(o) is amended to read as
follows:
``(o) Carryforward of Certain Disallowed Interest.--The amount of any
interest not allowed as a deduction for any taxable year by reason of
subsection (j)(1) or (n)(1) (whichever imposes the lower limitation
with respect to such taxable year) shall be treated as interest (and as
business interest for purposes of subsection (j)(1)) paid or accrued in
the succeeding taxable year. Interest paid or accrued in any taxable
year (determined without regard to the preceding sentence) shall not be
carried past the 5th taxable year following such taxable year,
determined by treating interest as allowed as a deduction on a first-
in, first-out basis.''.
(2) Treatment of carryforward of disallowed interest in
certain corporate acquisitions.--For rules related to the
carryforward of disallowed interest in certain corporate
acquisitions, see the amendments made by section 3301(c).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 4303. EXCISE TAX ON CERTAIN PAYMENTS FROM DOMESTIC CORPORATIONS TO
RELATED FOREIGN CORPORATIONS; ELECTION TO TREAT
SUCH PAYMENTS AS EFFECTIVELY CONNECTED INCOME.
(a) Excise Tax on Certain Amounts From Domestic Corporations to
Foreign Affiliates.--
(1) In general.--Chapter 36 is amended by adding at the end
the following new subchapter:
``Subchapter E--Tax on Certain Amounts to Foreign Affiliates
``Sec. 4491. Imposition of tax on certain amounts from domestic
corporations to foreign affiliates.
``SEC. 4491. IMPOSITION OF TAX ON CERTAIN AMOUNTS FROM DOMESTIC
CORPORATIONS TO FOREIGN AFFILIATES.
``(a) In General.--There is hereby imposed on each specified amount
paid or incurred by a domestic corporation to a foreign corporation
which is a member of the same international financial reporting group
as such domestic corporation a tax equal to the highest rate of tax in
effect under section 11 multiplied by such amount.
``(b) By Whom Paid.--The tax imposed by subsection (a) shall be paid
by the domestic corporation described in such subsection.
``(c) Exception for Effectively Connected Income.--Subsection (a)
shall not apply to so much of any specified amount as is effectively
connected with the conduct of a trade or business within the United
States if such amount is subject to tax under chapter 1. In the case of
any amount which is treated as effectively connected with the conduct
of a trade or business within the United States by reason of section
882(g), the preceding sentence shall apply to such amount only if the
domestic corporation provides to the Secretary (at such time and in
such form and manner as the Secretary may provide) a copy of the
election made under section 882(g) by the foreign corporation referred
to in subsection (a).
``(d) Definitions and Special Rules.--Terms used in this section that
are also used in section 882(g) shall have the same meaning as when
used in such section and rules similar to the rules of paragraphs (5)
and (6) of such section shall apply for purposes of this section.''.
(2) Denial of deduction for tax imposed.--Section 275(a) is
amended by inserting after paragraph (6) the following new
paragraph:
``(7) Taxes imposed by section 4491.''.
(3) Clerical amendment.--The table of subchapters for chapter
36 is amended by adding at the end the following new item:
``subchapter e. tax on certain amounts to foreign affiliates.''.
(b) Election to Treat Certain Payments From Domestic Corporations to
Related Foreign Corporations as Effectively Connected Income.--Section
882 is amended by adding at the end the following new subsection:
``(g) Election to Treat Certain Payments From Domestic Corporations
to Related Foreign Corporations as Effectively Connected Income.--
``(1) In general.--In the case of any specified amount paid
or incurred by a domestic corporation to a foreign corporation
which is a member of the same international financial reporting
group as such domestic corporation and which has elected to be
subject to the provisions of this subsection--
``(A) such amount shall be taken into account (other
than for purposes of sections 245, 245A, and 881) in
the taxable year of such foreign corporation during
which such amount is paid or incurred as if--
``(i) such foreign corporation were engaged
in a trade or business within the United
States,
``(ii) such foreign corporation had a
permanent establishment in the United States
during the taxable year, and
``(iii) such payment were effectively
connected with the conduct of a trade or
business within the United States and were
attributable to such permanent establishment,
``(B) for purposes of subsection (c)(1)(A), no
deduction shall be allowed with respect to such amount
and such subsection shall be applied without regard to
such amount, and
``(C) the foreign corporation shall be allowed a
deduction (for the taxable year referred to in
subparagraph (A)) equal to the deemed expenses with
respect to such amount.
``(2) Specified amount.--For purposes of this subsection--
``(A) In general.--The term `specified amount' means
any amount which is, with respect to the payor,
allowable as a deduction or includible in costs of
goods sold, inventory, or the basis of a depreciable or
amortizable asset.
``(B) Exceptions.--The term `specified amount' shall
not include--
``(i) interest,
``(ii) any amount paid or incurred for the
acquisition of any security described in
section 475(c)(2) (determined without regard to
the last sentence thereof) or any commodity
described in section 475(e)(2),
``(iii) except as provided in subparagraph
(C), any amount with respect to which tax is
imposed under section 881(a), and
``(iv) in the case of a payor which has
elected to use a services cost method for
purposes of section 482, any amount paid or
incurred for services if such amount is the
total services cost with no markup.
``(C) Amounts not treated as effectively connected to
extent of gross-basis tax.--Subparagraph (B)(iii) shall
only apply to so much of any specified amount as bears
the proportion to such amount as--
``(i) the rate of tax imposed under section
881(a) with respect to such amount, bears to
``(ii) 30 percent.
``(3) Deemed expenses.--
``(A) In general.--The deemed expenses with respect
to any specified amount received by a foreign
corporation during any reporting year is the amount of
expenses such that the net income ratio of such foreign
corporation with respect to such amount (taking into
account only such specified amount and such deemed
expenses) is equal to the net income ratio of the
international financial reporting group determined for
such reporting year with respect to the product line to
which the specified amount relates.
``(B) Net income ratio.--For purposes of this
paragraph, the term `net income ratio' means the ratio
of--
``(i) net income determined without regard to
interest income, interest expense, and income
taxes, divided by
``(ii) revenues.
``(C) Method of determination.--Amounts described in
subparagraph (B) shall be determined with respect to
the international financial reporting group on the
basis of the consolidated financial statements referred
to in paragraph (4)(A)(i) and the books and records of
the members of the international financial reporting
group which are used in preparing such statements,
taking into account only revenues and expenses of the
members of such group (other than the members of such
group which are (or are treated as) a domestic
corporation for purposes of this subsection) derived
from, or incurred with respect to--
``(i) persons who are not members of such
group, and
``(ii) members of such group which are (or
are treated as) a domestic corporation for
purposes of this subsection.
``(4) International financial reporting group.--For purposes
of this subsection--
``(A) In general.--The term `international financial
reporting group' means any group of entities, with
respect to any specified amount, if such amount is paid
or incurred during a reporting year of such group with
respect to which--
``(i) such group prepares consolidated
financial statements (within the meaning of
section 163(n)(4)) with respect to such year,
and
``(ii) the average annual aggregate payment
amount of such group for the 3-reporting-year
period ending with such reporting year exceeds
$100,000,000.
``(B) Annual aggregate payment amount.--The term
`annual aggregate payment amount' means, with respect
to any reporting year of the group referred to in
subparagraph (A)(i), the aggregate specified amounts to
which paragraph (1) applies (or would apply if such
group were an international financial reporting group).
``(C) Application of certain rules.--Rules similar to
the rules of subparagraphs (A), (B), and (D) of section
448(c)(3) shall apply for purposes of this paragraph.
``(5) Treatment of partnerships.--Any specified amount paid,
incurred, or received by a partnership which is a member of any
international financial reporting group (and any amount treated
as paid, incurred, or received by a partnership under this
paragraph) shall be treated for purposes of this subsection as
amounts paid, incurred, or received, respectively, by each
partner of such partnership in an amount equal to such
partner's distributive share of the items of income, gain,
deduction, or loss to which such amounts relate.
``(6) Treatment of amounts in connection with united states
trade or business.--Any specified amount paid, incurred, or
received by a foreign corporation in connection with the
conduct of a trade or business within the United States (other
than a trade or business it is deemed to conduct pursuant to
this subsection) shall be treated for purposes of this
subsection as an amount paid, incurred, or received,
respectively, by a domestic corporation. For purposes of the
preceding sentence, a foreign corporation shall be deemed to
pay, incur, and receive amounts with respect to a trade or
business it conducts within the United States (other than a
trade or business it is deemed to conduct pursuant to this
subsection) to the extent such foreign corporation would be
treated as paying, incurring, or receiving such amounts from
such trade or business if such trade or business were a
domestic corporation.
``(7) Joint and several liability of members of internal
financial reporting group.--In the case of any underpayment
with respect to any taxable year of a foreign corporation which
is a member of an international financial accounting group,
each domestic corporation which is a member of such group at
any time during such taxable year shall be jointly and
severally liable for--
``(A) so much of such underpayment as does not exceed
the excess (if any) of such underpayment over the
amount of such underpayment determined without regard
to this subsection, and
``(B) any penalty, addition to tax, or additional
amount attributable to the amount described in
subparagraph (A).
``(8) Foreign tax credit allowed.--The credit allowed under
section 906(a) with respect to amounts taken into account in
income under paragraph (1)(A) shall be limited to 80 percent of
the amount of taxes paid or accrued and determined without
regard to section 906(b)(1).
``(9) Election.--Any election under paragraph (1)--
``(A) shall be made at such time and in such form and
manner as the Secretary may provide, and
``(B) shall apply for the taxable year for which made
and all subsequent taxable years unless revoked with
the consent of the Secretary.
``(10) Regulations.--The Secretary may issue such regulations
or other guidance as are necessary or appropriate to carry out
the purposes of this subsection, including regulations or other
guidance--
``(A) to provide for the proper determination of
product lines, and
``(B) to prevent the avoidance of the purposes of
this subsection through the use of conduit transactions
or by other means.''.
(c) Reporting Requirements.--
(1) Reporting by foreign corporation.--Section 6038C(b) is
amended to read as follows:
``(b) Required Information.--
``(1) In general.--The information described in this
subsection is--
``(A) the information described in section 6038A(b),
and
``(B) such other information as the Secretary may
prescribe by regulations relating to any item not
directly connected with a transaction for which
information is required under subparagraph (A).
``(2) Certain payments from related domestic corporations.--
``(A) In general.--In the case of any reporting
corporation that receives during the taxable year any
amount to which section 882(g)(1) applies, the
information described in this subsection shall include,
with respect to each member of the international
financial reporting group from which any such amount is
received--
``(i) the name and taxpayer identification
number of such member,
``(ii) the aggregate amounts received from
such member,
``(iii) the product lines to which such
amounts relate, the aggregate amounts relating
to each such product line, and the net income
ratio for each such product line (determined
under section 882(g)(3)(B) with respect to the
international financial reporting group), and
``(iv) a summary of any changes in financial
accounting methods that affect the computation
of any net income ratio described in clause
(iii).
``(B) Definitions and special rules.--Terms used in
this paragraph that are also used in section 882(g)
shall have the same meaning as when used in such
section and rules similar to the rules of paragraphs
(5) and (6) of such section shall apply for purposes of
this paragraph.''.
(2) Reporting by domestic group members.--
(A) In general .--Subpart A of part III of subchapter
A of chapter 61 is amended by inserting after section
6038D the following new section:
``SEC. 6038E. INFORMATION WITH RESPECT TO CERTAIN PAYMENTS FROM
DOMESTIC CORPORATIONS TO RELATED FOREIGN
CORPORATIONS.
``(a) In General.--In the case of any domestic corporation which pays
or incurs any amount to which section 882(g)(1) applies, such person
shall--
``(1) make a return according to the forms and regulations
prescribed the Secretary, setting forth the information
described in subsection (b), and
``(2) maintain (at the location, in the manner, and to the
extent prescribed in regulations) such records as may be
appropriate to determine liability for tax pursuant to
paragraphs (1) and (7) of section 882(g).
``(b) Required Information.--The information described in this
subsection is--
``(1) the name and taxpayer identification number of the
common parent of the international financial reporting group in
which such domestic corporation is a member, and
``(2) with respect to any person who receives an amount
described in subsection (a) from such domestic corporation--
``(A) the name and taxpayer identification number of
such person,
``(B) the aggregate amounts received by such person,
``(C) the product lines to which such amounts relate,
the aggregate amounts relating to each such product
line, and the net income ratio for each such product
line (determined under section 882(g)(3)(B) with
respect to the international financial reporting
group), and
``(D) a summary of any changes in financial
accounting methods that affect the computation of any
net income ratios described in subparagraph (C).
``(c) Definitions and Special Rules.--Terms used in this paragraph
that are also used in section 882(g) shall have the same meaning as
when used in such section and rules similar to the rules of paragraphs
(5) and (6) of such section shall apply for purposes of this
paragraph.''.
(B) Clerical amendment.--The table of sections for
subpart A of part III of subchapter A of chapter 61 is
amended by inserting after the item relating to section
6038D the following new item:
``Sec. 6038E. Information with respect to certain payments from
domestic corporations to related foreign corporations.''.
(d) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred after December 31, 2018.
Subtitle E--Provisions Related to Possessions of the United States
SEC. 4401. EXTENSION OF DEDUCTION ALLOWABLE WITH RESPECT TO INCOME
ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES IN
PUERTO RICO.
(a) In General.--Section 199(d)(8)(C), prior to its repeal by this
Act, is amended--
(1) by striking ``first 11 taxable years'' and inserting
``first 12 taxable years'', and
(2) by striking ``January 1, 2017'' and inserting ``January
1, 2018''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2016.
SEC. 4402. EXTENSION OF TEMPORARY INCREASE IN LIMIT ON COVER OVER OF
RUM EXCISE TAXES TO PUERTO RICO AND THE VIRGIN
ISLANDS.
(a) In General.--Section 7652(f)(1) is amended by striking ``January
1, 2017'' and inserting ``January 1, 2023''.
(b) Effective Date.--The amendment made by this section shall apply
to distilled spirits brought into the United States after December 31,
2016.
SEC. 4403. EXTENSION OF AMERICAN SAMOA ECONOMIC DEVELOPMENT CREDIT.
(a) In General.--Section 119(d) of division A of the Tax Relief and
Health Care Act of 2006 is amended--
(1) by striking ``January 1, 2017'' each place it appears and
inserting ``January 1, 2023'',
(2) by striking ``first 11 taxable years'' in paragraph (1)
and inserting ``first 17 taxable years'', and
(3) by striking ``first 5 taxable years'' in paragraph (2)
and inserting ``first 11 taxable years''.
(b) Treatment of Certain References.--Section 119(e) of division A of
the Tax Relief and Health Care Act of 2006 is amended by adding at the
end the following: ``References in this subsection to section 199 of
the Internal Revenue Code of 1986 shall be treated as references to
such section as in effect before its repeal by the Tax Cuts and Jobs
Act.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2016.
Subtitle F--Other International Reforms
SEC. 4501. RESTRICTION ON INSURANCE BUSINESS EXCEPTION TO PASSIVE
FOREIGN INVESTMENT COMPANY RULES.
(a) In General.--Section 1297(b)(2)(B) is amended to read as follows:
``(B) derived in the active conduct of an insurance
business by a qualifying insurance corporation (as
defined in subsection (f)),''.
(b) Qualifying Insurance Corporation Defined.--Section 1297 is
amended by adding at the end the following new subsection:
``(f) Qualifying Insurance Corporation.--For purposes of subsection
(b)(2)(B)--
``(1) In general.--The term `qualifying insurance
corporation' means, with respect to any taxable year, a foreign
corporation--
``(A) which would be subject to tax under subchapter
L if such corporation were a domestic corporation, and
``(B) the applicable insurance liabilities of which
constitute more than 25 percent of its total assets,
determined on the basis of such liabilities and assets
as reported on the corporation's applicable financial
statement for the last year ending with or within the
taxable year.
``(2) Alternative facts and circumstances test for certain
corporations.--If a corporation fails to qualify as a qualified
insurance corporation under paragraph (1) solely because the
percentage determined under paragraph (1)(B) is 25 percent or
less, a United States person that owns stock in such
corporation may elect to treat such stock as stock of a
qualifying insurance corporation if--
``(A) the percentage so determined for the
corporation is at least 10 percent, and
``(B) under regulations provided by the Secretary,
based on the applicable facts and circumstances--
``(i) the corporation is predominantly
engaged in an insurance business, and
``(ii) such failure is due solely to runoff-
related or rating-related circumstances
involving such insurance business.
``(3) Applicable insurance liabilities.--For purposes of this
subsection--
``(A) In general.--The term `applicable insurance
liabilities' means, with respect to any life or
property and casualty insurance business--
``(i) loss and loss adjustment expenses, and
``(ii) reserves (other than deficiency,
contingency, or unearned premium reserves) for
life and health insurance risks and life and
health insurance claims with respect to
contracts providing coverage for mortality or
morbidity risks.
``(B) Limitations on amount of liabilities.--Any
amount determined under clause (i) or (ii) of
subparagraph (A) shall not exceed the lesser of such
amount--
``(i) as reported to the applicable insurance
regulatory body in the applicable financial
statement described in paragraph (4)(A) (or, if
less, the amount required by applicable law or
regulation), or
``(ii) as determined under regulations
prescribed by the Secretary.
``(4) Other definitions and rules.--For purposes of this
subsection--
``(A) Applicable financial statement.--The term
`applicable financial statement' means a statement for
financial reporting purposes which--
``(i) is made on the basis of generally
accepted accounting principles,
``(ii) is made on the basis of international
financial reporting standards, but only if
there is no statement that meets the
requirement of clause (i), or
``(iii) except as otherwise provided by the
Secretary in regulations, is the annual
statement which is required to be filed with
the applicable insurance regulatory body, but
only if there is no statement which meets the
requirements of clause (i) or (ii).
``(B) Applicable insurance regulatory body.--The term
`applicable insurance regulatory body' means, with
respect to any insurance business, the entity
established by law to license, authorize, or regulate
such business and to which the statement described in
subparagraph (A) is provided.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
TITLE V--EXEMPT ORGANIZATIONS
Subtitle A--Unrelated Business Income Tax
SEC. 5001. CLARIFICATION OF UNRELATED BUSINESS INCOME TAX TREATMENT OF
ENTITIES TREATED AS EXEMPT FROM TAXATION UNDER
SECTION 501(A).
(a) In General.--Section 511 is amended by adding at the end the
following new subsection:
``(d) Organizations and Trusts Exempt From Taxation Not Solely by
Reason of Section 501(a).--For purposes of subsections (a)(2) and
(b)(2), an organization or trust shall not fail to be treated as exempt
from taxation under this subtitle by reason of section 501(a) solely
because such organization is also so exempt, or excludes amounts from
gross income, by reason of any other provision of this title.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 5002. EXCLUSION OF RESEARCH INCOME LIMITED TO PUBLICLY AVAILABLE
RESEARCH.
(a) In General.--Section 512(b)(9) is amended by striking ``from
research'' and inserting ``from such research''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle B--Excise Taxes
SEC. 5101. SIMPLIFICATION OF EXCISE TAX ON PRIVATE FOUNDATION
INVESTMENT INCOME.
(a) Rate Reduction.--Section 4940(a) is amended by striking ``2
percent'' and inserting ``1.4 percent''.
(b) Repeal of Special Rules for Certain Private Foundations.--Section
4940 is amended by striking subsection (e).
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 5102. PRIVATE OPERATING FOUNDATION REQUIREMENTS RELATING TO
OPERATION OF ART MUSEUM.
(a) In General.--Section 4942(j) is amended by adding at the end the
following new paragraph:
``(6) Organization operating art museum.--For purposes of
this section, the term `operating foundation' shall not include
an organization which operates an art museum as a substantial
activity unless such museum is open during normal business
hours to the public for at least 1,000 hours during the taxable
year.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 5103. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES
AND UNIVERSITIES.
(a) In General.--Chapter 42 is amended by adding at the end the
following new subchapter:
``Subchapter H--Excise Tax Based on Investment Income of Private
Colleges and Universities
``Sec. 4969. Excise tax based on investment income of private colleges
and universities.
``SEC. 4969. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES
AND UNIVERSITIES.
``(a) Tax Imposed.--There is hereby imposed on each applicable
educational institution for the taxable year a tax equal to 1.4 percent
of the net investment income of such institution for the taxable year.
``(b) Applicable Educational Institution.--For purposes of this
subchapter--
``(1) In general.--The term `applicable educational
institution' means an eligible educational institution (as
defined in section 25A(e)(3))--
``(A) which has at least 500 students during the
preceding taxable year,
``(B) which is not described in the first sentence of
section 511(a)(2)(B), and
``(C) the aggregate fair market value of the assets
of which at the end of the preceding taxable year
(other than those assets which are used directly in
carrying out the institution's exempt purpose) is at
least $250,000 per student of the institution.
``(2) Students.--For purposes of paragraph (1), the number of
students of an institution shall be based on the daily average
number of full-time students attending such institution (with
part-time students taken into account on a full-time student
equivalent basis).
``(c) Net Investment Income.--For purposes of this section, net
investment income shall be determined under rules similar to the rules
of section 4940(c).
``(d) Assets and Net Investment Income of Related Organizations.--
``(1) In general.--For purposes of subsections (b)(1)(C) and
(c), the assets and net investment income of any related
organization shall be treated as the assets and net investment
income of the eligible educational institution.
``(2) Related organization.--For purposes of this subsection,
the term `related organization' means, with respect to an
eligible educational institution, any organization which--
``(A) controls, or is controlled by, such
institution,
``(B) is controlled by one or more persons that
control such institution, or
``(C) is a supported organization (as defined in
section 509(f)(3)), or an organization described in
section 509(a)(3), during the taxable year with respect
to such institution.''.
(b) Clerical Amendment.--The table of subchapters for chapter 42 is
amended by adding at the end the following new item:
``subchapter h--excise tax based on investment income of private
colleges and universities''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
SEC. 5104. EXCEPTION FROM PRIVATE FOUNDATION EXCESS BUSINESS HOLDING
TAX FOR INDEPENDENTLY-OPERATED PHILANTHROPIC
BUSINESS HOLDINGS.
(a) In General.--Section 4943 is amended by adding at the end the
following new subsection:
``(g) Exception for Certain Holdings Limited to Independently-
operated Philanthropic Business.--
``(1) In general.--Subsection (a) shall not apply with
respect to the holdings of a private foundation in any business
enterprise which for the taxable year meets--
``(A) the ownership requirements of paragraph (2),
``(B) the all profits to charity distribution
requirement of paragraph (3), and
``(C) the independent operation requirements of
paragraph (4).
``(2) Ownership.--The ownership requirements of this
paragraph are met if--
``(A) 100 percent of the voting stock in the business
enterprise is held by the private foundation at all
times during the taxable year, and
``(B) all the private foundation's ownership
interests in the business enterprise were acquired not
by purchase.
``(3) All profits to charity.--
``(A) In general.--The all profits to charity
distribution requirement of this paragraph is met if
the business enterprise, not later than 120 days after
the close of the taxable year, distributes an amount
equal to its net operating income for such taxable year
to the private foundation.
``(B) Net operating income.--For purposes of this
paragraph, the net operating income of any business
enterprise for any taxable year is an amount equal to
the gross income of the business enterprise for the
taxable year, reduced by the sum of--
``(i) the deductions allowed by chapter 1 for
the taxable year which are directly connected
with the production of such income,
``(ii) the tax imposed by chapter 1 on the
business enterprise for the taxable year, and
``(iii) an amount for a reasonable reserve
for working capital and other business needs of
the business enterprise.
``(4) Independent operation.--The independent operation
requirements of this paragraph are met if, at all times during
the taxable year--
``(A) no substantial contributor (as defined in
section 4958(c)(3)(C)) to the private foundation, or
family member of such a contributor (determined under
section 4958(f)(4)) is a director, officer, trustee,
manager, employee, or contractor of the business
enterprise (or an individual having powers or
responsibilities similar to any of the foregoing),
``(B) at least a majority of the board of directors
of the private foundation are not--
``(i) also directors or officers of the
business enterprise, or
``(ii) members of the family (determined
under section 4958(f)(4)) of a substantial
contributor (as defined in section
4958(c)(3)(C)) to the private foundation, and
``(C) there is no loan outstanding from the business
enterprise to a substantial contributor (as so defined)
to the private foundation or a family member of such
contributor (as so determined).
``(5) Certain deemed private foundations excluded.--This
subsection shall not apply to--
``(A) any fund or organization treated as a private
foundation for purposes of this section by reason of
subsection (e) or (f),
``(B) any trust described in section 4947(a)(1)
(relating to charitable trusts), and
``(C) any trust described in section 4947(a)(2)
(relating to split-interest trusts).''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2017.
Subtitle C--Requirements for Organizations Exempt From Tax
SEC. 5201. 501(C)(3) ORGANIZATIONS PERMITTED TO MAKE STATEMENTS
RELATING TO POLITICAL CAMPAIGN IN ORDINARY COURSE
OF ACTIVITIES.
(a) In General.--Section 501 is amended by adding at the end the
following new subsection:
``(s) Special Rule Relating to Political Campaign Statements of
Organizations Described in Subsection (c)(3).--
``(1) In general.--For purposes of subsection (c)(3) and
sections 170(c)(2), 2055, 2106, 2522, and 4955, an organization
shall not fail to be treated as organized and operated
exclusively for a purpose described in subsection (c)(3), nor
shall it be deemed to have participated in, or intervened in
any political campaign on behalf of (or in opposition to) any
candidate for public office, solely because of the content of
any statement which--
``(A) is made in the ordinary course of the
organization's regular and customary activities in
carrying out its exempt purpose, and
``(B) results in the organization incurring not more
than de minimis incremental expenses.
``(2) Termination.--Paragraph (1) shall not apply to taxable
years beginning after December 31, 2023.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2018.
SEC. 5202. ADDITIONAL REPORTING REQUIREMENTS FOR DONOR ADVISED FUND
SPONSORING ORGANIZATIONS.
(a) In General.--Section 6033(k) is amended by striking ``and'' at
the end of paragraph (2), by striking the period at the end of
paragraph (3), and by adding at the end the following new paragraphs:
``(4) indicate the average amount of grants made from such
funds during such taxable year (expressed as a percentage of
the value of assets held in such funds at the beginning of such
taxable year), and
``(5) indicate whether the organization has a policy with
respect to donor advised funds (as so defined) for frequency
and minimum level of distributions.
Such organization shall include with such return a copy of any policy
described in paragraph (5).''.
(b) Effective Date.--The amendment made by this section shall apply
for returns filed for taxable years beginning after December 31, 2017.
Amend the title so as to read:
A bill to provide for reconciliation pursuant to titles II
and V of the concurrent resolution on the budget for fiscal
year 2018.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
H.R. 1, as reported by the Committee on Ways and Means,
makes comprehensive reforms to the Internal Revenue Code of
1986 to provide tax relief and simplification to American
families and individuals so that they can keep more of what
they earn and devote less time and resources to filing their
tax returns; to provide tax relief to businesses of all sizes
so that they can create jobs, increase paychecks, and invest in
the American economy; and to modernize the U.S. international
tax system to unleash the global competitiveness of America and
American businesses. H.R. 1 fulfills the reconciliation
instructions included in Titles II and V of the Concurrent
Resolution on the Budget for Fiscal Year 2018.
B. Background and Need for Legislation
H.R. 1 reflects the Committee's long-standing focus on
achieving comprehensive tax reform in order to promote economic
growth and job creation, to support global competiveness, and
to reduce tax burdens on families and individuals. Lowering tax
burdens on the middle class and creating a healthier economy
will help American families, as will reforms that make the
system simpler and fairer for taxpayers. Lowering the tax
burden on businesses small and large and modernizing the U.S.
international tax rules will promote investment and job
creation and put America back in the lead pack. The Committee
believes that H.R. 1 delivers a 21st century tax code that is
built for growth.
C. Legislative History
Budget resolution
On October 26, 2017, the House of Representatives approved
H. Con. Res. 71, the budget resolution for fiscal year 2018.
Pursuant to section 5113(b) of H. Con. Res. 71, the Committee
on Ways and Means was directed to submit to the Committee on
the Budget recommendations for changes in law within the
jurisdiction of the Committee on Ways and Means that increase
the deficit by not more than $1,500,000,000,000 for the period
of fiscal years 2018 through 2027.
Committee action
Beginning November 6, 2017, the Committee on Ways and Means
marked up H.R. 1, a bill to provide for reconciliation pursuant
to the concurrent resolution on the budget for fiscal year
2018, and ordered the bill, as amended, favorably reported
(with a quorum being present) on November 9, 2017.
Committee hearings
The Ways and Means Committee has held extensive hearings
over many years focused on tax reform overall and on particular
aspects of tax reform.
During the 115th Congress, the Committee held the following
hearings that addressed aspects of tax reform:
How Tax Reform Will Grow our Economy and
Create Jobs (May 18, 2017)
Increasing U.S. Competitiveness and
Preventing American Jobs from Moving Overseas (May 23,
2017)
The President's Fiscal Year 2018 Budget
Proposals (May 24, 2017).
Also during the 115th Congress, the Subcommittee on Tax
Policy held hearings on the following tax reform topics:
How Tax Reform Will Help America's Small
Businesses Grow and Create New Jobs (July 13, 2017)
How Tax Reform Will Simplify Our Broken Tax
Code and Help Individuals and Families (July 19, 2017).
In addition, the Committee and its Subcommittees held many
hearings over the past several years on a wide variety of
subjects relevant to comprehensive tax reform, including the
following hearings:
Committee on Ways and Means
The Global Tax Environment in 2016 and
Implications for International Tax Reform (February 24,
2016)
Reaching America's Potential: Delivering
Growth and Opportunity for All Americans (February 2,
2016)
Benefits of Permanent Tax Policy for
America's Job Creators (April 8, 2014).
Tax Reform: Tax Havens, Base Erosion, and
Profit-Shifting (June 13, 2013)
Tax Reform and Residential Real Estate
(April 25, 2013)
Tax Reform and Tax Provisions Affecting
State and Local Governments (March 19, 2013)
Tax Reform and Charitable Contributions
(February 14, 2013)
Tax Reform and the Tax Treatment of Capital
Gains (September 20, 2012)
Tax Reform and the U.S. Manufacturing Sector
(July 19, 2012)
Tax Reform and Tax-Favored Retirement
Accounts (April 17, 2012)
Treatment of Closely-Held Businesses in the
Context of Tax Reform (March 7, 2012)
Interaction of Tax and Financial Accounting
on Tax Reform (February 8, 2012)
Economic Models Available to the Joint
Committee on Taxation for Analyzing Tax Reform
Proposals (September 21, 2011)
Tax Reform and Consumption-Based Tax Systems
(July 26, 2011)
Tax Reform and the Tax Treatment of Debt and
Equity (July 13, 2011)
How Business Tax Reform Can Encourage Job
Creation (June 2, 2011)
How Other Countries Have Used Tax Reform to
Help Their Companies Compete in the Global Market and
Create Jobs (May 24, 2011)
The Need for Comprehensive Tax Reform to
Help American Companies Compete in the Global Market
and Create Jobs for American Workers (May 12, 2011)
How the Tax Code's Burdens on Individuals
and Families Demonstrate the Need for Comprehensive Tax
Reform (April 13, 2011)
Fundamental Tax Reform (January 20, 2011)
Subcommittee on Tax Policy (formerly Subcommittee on Select
Revenue Measures)
Perspectives on Need for Tax Reform (May 25,
2016)
Member Proposals for Improvements to the
U.S. Tax System (May 12, 2016)
Fundamental Tax Reform Proposals, Part II
(April 13, 2016)
Fundamental Tax Reform Proposals, Part I
(March 22, 2016)
OECD Base Erosion and Profit Shifting (BEPS)
Project (December 1, 2015)
Burden of the Estate Tax on Family
Businesses and Farms (March 18, 2015)
Dynamic Analysis of the Tax Reform Act of
2014 (July 30, 2014)
Small Business Pass-Through Entity Tax
Reform Discussion Draft (May 15, 2013)
Financial Products Tax Reform Discussion
Draft (March 20, 2013)
How Welfare and Tax Benefits Can Discourage
Work (June 27, 2012)
Framework for Evaluating Certain Expiring
Tax Provisions (June 8, 2012)
Certain Expiring Tax Provisions (April 26,
2012)
International Tax Reform Discussion Draft
(November 17, 2011)
Energy Tax Policy and Tax Reform (September
22, 2011)
Tax Reform and Foreign Investment in the
United States (June 23, 2011)
Small Business and Tax Reform (March 3,
2011)
Subcommittee on Oversight
Back to School: A Review of Tax-Exempt
College and University Endowments (September 13, 2016)
Tax-Exempt Colleges and Universities:
Encouraging the Free Exchange of Ideas (March 2, 2016)
The Rising Costs of Higher Education and Tax
Policy (October 7, 2015)
The Department of Labor's Proposed Fiduciary
Rule (September 30, 2015)
Protecting Small Businesses from IRS Abuse
(February 11, 2015)
Internal Revenue Service's Colleges and
Universities Compliance Project (May 8, 2013)
Public Charity Organizational Issues,
Unrelated Business Income Tax, and the Revised Form 990
(July 25, 2012)
Tax Exempt Organizations (May 16, 2012)
II. EXPLANATION OF THE BILL
TITLE I--TAX REFORM FOR INDIVIDUALS
A. Simplification and Reform of Rates, Standard Deductions, and
Exemptions
1. Reduction and simplification of individual income tax rates (secs.
1001 and 1005 of the bill and sec. 1 of the Code)
PRESENT LAW
In general
To determine regular tax liability, an individual taxpayer
generally must apply the tax rate schedules (or the tax tables)
to his or her regular taxable income. The rate schedules are
broken into several ranges of income, known as income brackets,
and the marginal tax rate increases as a taxpayer's income
increases.
Tax rate schedules
Separate rate schedules apply based on an individual's
filing status. For 2017, the regular individual income tax rate
schedules are as follows:
TABLE 1.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2017\1\
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals
------------------------------------------------------------------------
Not over $9,325........................ 10% of the taxable income.
Over $9,325 but not over $37,950....... $932.50 plus 15% of the excess
over $9,325.
Over $37,950 but not over $91,900...... $5,226.25 plus 25% of the
excess over $37,950.
Over $91,900 but not over $191,650..... $18,713.75 plus 28% of the
excess over $91,900.
Over $191,650 but not over $416,700.... $46,643.75 plus 33% of the
excess over $191,650.
Over $416,700 but not over $418,400.... $120,910.25 plus 35% of the
excess over $416,700.
Over $418,400.......................... $121,505.25 plus 39.6% of the
excess over $418,400.
------------------------------------------------------------------------
Heads of Households
------------------------------------------------------------------------
Not over $13,350....................... 10% of the taxable income.
Over $13,350 but not over $50,800...... $1,335 plus 15% of the excess
over $13,350.
Over $50,800 but not over $131,200..... $6,952.50 plus 25% of the
excess over $50,800.
Over $131,200 but not over $212,500.... $27,052.50 plus 28% of the
excess over $131,200.
Over $212,500 but not over $416,700.... $49,816.50 plus 33% of the
excess over $212,500.
Over $416,700 but not over $444,550.... $117,202.50 plus 35% of the
excess over $416,700.
Over $444,550.......................... $126,950 plus 39.6% of the
excess over $444,550.
------------------------------------------------------------------------
Married Individuals Filing Joint Returns and Surviving Spouses
------------------------------------------------------------------------
Not over $18,650....................... 10% of the taxable income.
Over $18,650 but not over $75,900...... $1,865 plus 15% of the excess
over $18,650.
Over $75,900 but not over $153,100..... $10,452.50 plus 25% of the
excess over $75,900.
Over $153,100 but not over $233,350.... $29,752.50 plus 28% of the
excess over $153,100.
Over $233,350 but not over $416,700.... $52,222.50 plus 33% of the
excess over $233,350.
Over $416,700 but not over $470,700.... $112,728 plus 35% of the excess
over $416,700.
Over $470,700.......................... $131,628 plus 39.6% of the
excess over $470,700.
------------------------------------------------------------------------
Married Individuals Filing Separate Returns
------------------------------------------------------------------------
Not over $9,325........................ 10% of the taxable income.
Over $9,325 but not over $37,950....... $932.50 plus 15% of the excess
over $9,325.
Over $37,950 but not over $76,550...... $5,226.25 plus 25% of the
excess over $37,950.
Over $76,550 but not over $116,675..... $14,876.25 plus 28% of the
excess over $76,550.
Over $116,675 but not over $208,350.... $26,111.25 plus 33% of the
excess over $116,675.
Over $208,350 but not over $235,350.... $56,364 plus 35% of the excess
over $208,350.
Over $235,350.......................... $65,814 plus 39.6% of the
excess over $235,350.
------------------------------------------------------------------------
Estates and Trusts
------------------------------------------------------------------------
Not over $2,550........................ 15% of the taxable income.
Over $2,550 but not over $6,000........ $382.50 plus 25% of the excess
over $2,550.
Over $6,000 but not over $9,150........ $1,245 plus 28% of the excess
over $6,000.
Over $9,150 but not over $12,500....... $2,127 plus 33% of the excess
over $9,150.
Over $12,500........................... $3,232.50 plus 39.6% of the
excess over $12,500.
------------------------------------------------------------------------
\1\Rev. Proc. 2016-55, 2016-45 I.R.B. 707, sec. 3.01.
Unearned income of children
Special rules (generally referred to as the ``kiddie tax'')
apply to the net unearned income of certain children.\1\
Generally, the kiddie tax applies to a child if: (1) the child
has not reached the age of 19 by the close of the taxable year,
or the child is a full-time student under the age of 24, and
either of the child's parents is alive at such time; (2) the
child's unearned income exceeds $2,100 (for 2017); and (3) the
child does not file a joint return.\2\ The kiddie tax applies
regardless of whether the child may be claimed as a dependent
by either or both parents. For children above age 17, the
kiddie tax applies only to children whose earned income does
not exceed one-half of the amount of their support.
---------------------------------------------------------------------------
\1\Sec. 1(g). Unless otherwise stated, all section references are
to the Internal Revenue Code of 1986, as amended (the ``Code'').
\2\Sec. 1(g)(2).
---------------------------------------------------------------------------
Under these rules, the net unearned income of a child (for
2017, unearned income over $2,100) is taxed at the parents' tax
rates if the parents' tax rates are higher than the tax rates
of the child.\3\ The remainder of a child's taxable income
(i.e., earned income, plus unearned income up to $2,100 (for
2017), less the child's standard deduction) is taxed at the
child's rates, regardless of whether the kiddie tax applies to
the child. For these purposes, unearned income is income other
than wages, salaries, professional fees, other amounts received
as compensation for personal services actually rendered, and
distributions from qualified disability trusts.\4\ In general,
a child is eligible to use the preferential tax rates for
qualified dividends and capital gains.\5\
---------------------------------------------------------------------------
\3\Special rules apply for determining which parent's rate applies
where a joint return is not filed.
\4\Sec. 1(g)(4) and sec. 911(d)(2).
\5\Sec. 1(h).
---------------------------------------------------------------------------
The kiddie tax is calculated by computing the ``allocable
parental tax.'' This involves adding the net unearned income of
the child to the parent's income and then applying the parent's
tax rate. A child's ``net unearned income'' is the child's
unearned income less the sum of (1) the minimum standard
deduction allowed to dependents ($1,050 for 2017\6\), and (2)
the greater of (a) such minimum standard deduction amount or
(b) the amount of allowable itemized deductions that are
directly connected with the production of the unearned
income.\7\
---------------------------------------------------------------------------
\6\Sec. 3.02 of Rev. Proc. 2016-55, supra.
\7\Sec. 1(g)(4).
---------------------------------------------------------------------------
The allocable parental tax equals the hypothetical increase
in tax to the parent that results from adding the child's net
unearned income to the parent's taxable income.\8\ If the child
has net capital gains or qualified dividends, these items are
allocated to the parent's hypothetical taxable income according
to the ratio of net unearned income to the child's total
unearned income. If a parent has more than one child subject to
the kiddie tax, the net unearned income of all children is
combined, and a single kiddie tax is calculated. Each child is
then allocated a proportionate share of the hypothetical
increase, based upon the child's net unearned income relative
to the aggregate net unearned income of all of the parent's
children subject to the tax.
---------------------------------------------------------------------------
\8\Sec. 1(g)(3).
---------------------------------------------------------------------------
Generally, a child must file a separate return to report
his or her income.\9\ In such case, items on the parents'
return are not affected by the child's income, and the total
tax due from the child is the greater of:
---------------------------------------------------------------------------
\9\Sec. 1(g)(6). See Form 8615, Tax for Certain Children Who Have
Unearned Income.
---------------------------------------------------------------------------
1. The sum of (a) the tax payable by the child on the
child's earned income and unearned income up to $2,100
(for 2017), plus (b) the allocable parental tax on the
child's unearned income, or
2. The tax on the child's income without regard to
the kiddie tax provisions.\10\
---------------------------------------------------------------------------
\10\Sec. 1(g)(1).
---------------------------------------------------------------------------
Under certain circumstances, a parent may elect to report a
child's unearned income on the parent's return.\11\
---------------------------------------------------------------------------
\11\Sec. 1(g)(7).
---------------------------------------------------------------------------
Indexing tax provisions for inflation
Under present law, many parameters of the tax system are
adjusted for inflation to protect taxpayers from the effects of
rising prices. Most of the adjustments are based on annual
changes in the level of the Consumer Price Index for all Urban
Consumers (``CPI-U'').\12\ The CPI-U is an index that measures
prices paid by typical urban consumers on a broad range of
products, and is developed and published by the Department of
Labor.
---------------------------------------------------------------------------
\12\Sec. 1(f)(5).
---------------------------------------------------------------------------
Among the inflation-indexed tax parameters are the
following individual income tax amounts: (1) the regular income
tax brackets; (2) the basic standard deduction; (3) the
additional standard deduction for aged and blind; (4) the
personal exemption amount; (5) the thresholds for the overall
limitation on itemized deductions and the personal exemption
phase-out; (6) the phase-in and phase-out thresholds of the
earned income credit; (7) IRA contribution limits and
deductible amounts; and (8) the saver's credit.
Capital gains rates
In general
In the case of an individual, estate, or trust, any
adjusted net capital gain which otherwise would be taxed at the
10- or 15-percent rate is not taxed. Any adjusted net capital
gain which otherwise would be taxed at rates over 15-percent
and below 39.6 percent is taxed at a 15-percent rate. Any
adjusted net capital gain which otherwise would be taxed at a
39.6-percent rate is taxed at a 20-percent rate.
The unrecaptured section 1250 gain is taxed at a maximum
rate of 25 percent, and 28-percent rate gain is taxed at a
maximum rate of 28 percent. Any amount of unrecaptured section
1250 gain or 28-percent rate gain otherwise taxed at a 10- or
15-percent rate is taxed at the otherwise applicable rate.
In addition, a tax is imposed on net investment income in
the case of an individual, estate, or trust. In the case of an
individual, the tax is 3.8 percent of the lesser of net
investment income, which includes gains and dividends, or the
excess of modified adjusted gross income over the threshold
amount. The threshold amount is $250,000 in the case of a joint
return or surviving spouse, $125,000 in the case of a married
individual filing a separate return, and $200,000 in the case
of any other individual.
Definitions
Net capital gain
In general, gain or loss reflected in the value of an asset
is not recognized for income tax purposes until a taxpayer
disposes of the asset. On the sale or exchange of a capital
asset, any gain generally is included in income. Net capital
gain is the excess of the net long-term capital gain for the
taxable year over the net short-term capital loss for the year.
Gain or loss is treated as long-term if the asset is held for
more than one year.
A capital asset generally means any property except (1)
inventory, stock in trade, or property held primarily for sale
to customers in the ordinary course of the taxpayer's trade or
business, (2) depreciable or real property used in the
taxpayer's trade or business, (3) specified literary or
artistic property, (4) business accounts or notes receivable,
(5) certain U.S. publications, (6) certain commodity derivative
financial instruments, (7) hedging transactions, and (8)
business supplies. In addition, the net gain from the
disposition of certain property used in the taxpayer's trade or
business is treated as long-term capital gain. Gain from the
disposition of depreciable personal property is not treated as
capital gain to the extent of all previous depreciation
allowances. Gain from the disposition of depreciable real
property is generally not treated as capital gain to the extent
of the depreciation allowances in excess of the allowances
available under the straight-line method of depreciation.
Adjusted net capital gain
The ``adjusted net capital gain'' of an individual is the
net capital gain reduced (but not below zero) by the sum of the
28-percent rate gain and the unrecaptured section 1250 gain.
The net capital gain is reduced by the amount of gain that the
individual treats as investment income for purposes of
determining the investment interest limitation under section
163(d).
Qualified dividend income
Adjusted net capital gain is increased by the amount of
qualified dividend income.
A dividend is the distribution of property made by a
corporation to its shareholders out of its after-tax earnings
and profits. Qualified dividends generally includes dividends
received from domestic corporations and qualified foreign
corporations. The term ``qualified foreign corporation''
includes a foreign corporation that is eligible for the
benefits of a comprehensive income tax treaty with the United
States which the Treasury Department determines to be
satisfactory and which includes an exchange of information
program. In addition, a foreign corporation is treated as a
qualified foreign corporation for any dividend paid by the
corporation with respect to stock that is readily tradable on
an established securities market in the United States.
If a shareholder does not hold a share of stock for more
than 60 days during the 121-day period beginning 60 days before
the ex-dividend date (as measured under section 246(c)),
dividends received on the stock are not eligible for the
reduced rates. Also, the reduced rates are not available for
dividends to the extent that the taxpayer is obligated to make
related payments with respect to positions in substantially
similar or related property.
Dividends received from a corporation that is a passive
foreign investment company (as defined in section 1297) in
either the taxable year of the distribution, or the preceding
taxable year, are not qualified dividends.
A dividend is treated as investment income for purposes of
determining the amount of deductible investment interest only
if the taxpayer elects to treat the dividend as not eligible
for the reduced rates.
The amount of dividends qualifying for reduced rates that
may be paid by a regulated investment company (``RIC'') for any
taxable year in which the qualified dividend income received by
the RIC is less than 95 percent of its gross income (as
specially computed) may not exceed the sum of (1) the qualified
dividend income of the RIC for the taxable year and (2) the
amount of earnings and profits accumulated in a non-RIC taxable
year that were distributed by the RIC during the taxable year.
The amount of qualified dividend income that may be paid by
a real estate investment trust (``REIT'') for any taxable year
may not exceed the sum of (1) the qualified dividend income of
the REIT for the taxable year, (2) an amount equal to the
excess of the income subject to the taxes imposed by section
857(b)(1) and the regulations prescribed under section 337(d)
for the preceding taxable year over the amount of these taxes
for the preceding taxable year, and (3) the amount of earnings
and profits accumulated in a non-REIT taxable year that were
distributed by the REIT during the taxable year.
Dividends received from an organization that was exempt
from tax under section 501 or was a tax-exempt farmers'
cooperative in either the taxable year of the distribution or
the preceding taxable year; dividends received from a mutual
savings bank that received a deduction under section 591; or
deductible dividends paid on employer securities are not
qualified dividend income.
28-percent rate gain
The term ``28-percent rate gain'' means the excess of the
sum of the amount of net gain attributable to long-term capital
gains and losses from the sale or exchange of collectibles (as
defined in section 408(m) without regard to paragraph (3)
thereof) and the amount of gain equal to the additional amount
of gain that would be excluded from gross income under section
1202 (relating to certain small business stock) if the
percentage limitations of section 1202(a) did not apply, over
the sum of the net short-term capital loss for the taxable year
and any long-term capital loss carryover to the taxable year.
Unrecaptured section 1250 gain
``Unrecaptured section 1250 gain'' means any long-term
capital gain from the sale or exchange of section 1250 property
(i.e., depreciable real estate) held more than one year to the
extent of the gain that would have been treated as ordinary
income if section 1250 applied to all depreciation, reduced by
the net loss (if any) attributable to the items taken into
account in computing 28-percent rate gain. The amount of
unrecaptured section 1250 gain (before the reduction for the
net loss) attributable to the disposition of property to which
section 1231 (relating to certain property used in a trade or
business) applies may not exceed the net section 1231 gain for
the year.
REASONS FOR CHANGE
The Committee believes that changing the individual rate
structure by reducing the total number of rate brackets and the
size of some rate brackets creates a simpler and fairer Federal
income tax. The committee further believes that a tax system
with lower rates will allow taxpayers to keep more of their
earnings to spend on family needs and will contribute to
economic growth.
Under present law, the tax on the unearned income of
children depends on the income of the child, parents, and when
applicable, siblings. The Committee intends to simplify the
taxation of unearned income of children, while continuing to
minimize the benefit of tax-motivated income shifting, by
subjecting this unearned income to the rates applicable to
trusts.
The Committee believes that the cost-of-living adjustments
provided throughout the code can be improved by indexing with
the chained Consumer Price Index (``C-CPI-U''), which is
designed by the Bureau of Labor Statistics to be a closer
approximation of a cost-of-living index than other CPI
measures.
EXPLANATION OF PROVISION
Modification of rates
The provision replaces the individual income tax rate
structure with a new rate structure.
TABLE 2.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE
PROVISION
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals
------------------------------------------------------------------------
Not over $45,000....................... 12% of the taxable income.
Over $45,000 but not over $200,000..... $5,400 plus 25% of the excess
over $45,000.
Over $200,000 but not over $500,000.... $44,150 plus 35% of the excess
over $200,000.
Over $500,000.......................... $149,150 plus 39.6% of the
excess over $500,000.
------------------------------------------------------------------------
Heads of Households
------------------------------------------------------------------------
Not over $67,500....................... 12% of the taxable income.
Over $67,500 but not over $200,000..... $8,100 plus 25% of the excess
over $67,500.
Over $200,000 but not over $500,000.... $41,225 plus 35% of the excess
over $200,000.
Over $500,000.......................... $146,225 plus 39.6% of the
excess over $500,000.
------------------------------------------------------------------------
Married Individuals Filing Joint Returns and Surviving Spouses
------------------------------------------------------------------------
Not over $90,000....................... 12% of the taxable income.
Over $90,000 but not over $260,000..... $10,800 plus 25% of the excess
over $90,000.
Over $260,000 but not over $1,000,000.. $53,300 plus 35% of the excess
over $260,000.
Over $1,000,000........................ $312,300 plus 39.6% of the
excess over $1,000,000.
------------------------------------------------------------------------
Married Individuals Filing Separate Returns
------------------------------------------------------------------------
Not over $45,000....................... 12% of the taxable income.
Over $45,000 but not over $130,000..... $5,400 plus 25% of the excess
over $45,000.
Over $130,000 but not over $500,000.... $26,650 plus 35% of the excess
over $130,000.
Over $500,000.......................... $156,150 plus 39.6% of the
excess over $500,000.
------------------------------------------------------------------------
Estates and Trusts
------------------------------------------------------------------------
Not over $2,550........................ 12% of the taxable income.
Over $2,550 but not over $9,150........ $306 plus 25% of the excess
over $2,550.
Over $9,150 but not over $12,500....... $1,956 plus 35% of the excess
over $9,150.
Over $12,500........................... $3,128.50 plus 39.6% of the
excess over $12,500.
------------------------------------------------------------------------
The bracket thresholds are all adjusted for inflation and
then rounded to the next lowest multiple of $100 in future
years. Unlike present law (which uses a measure of the consumer
price index for all-urban consumers), the new inflation
adjustment uses the chained consumer price index for all-urban
consumers.
Phaseout of benefit of the 12-percent bracket
For taxpayers with adjusted gross income in excess of
$1,000,000 ($1,200,000 in the case of married taxpayers filing
jointly), the benefit of the 12-percent bracket, as measured
against the 39.6-percent bracket, is phased out at a rate of 6-
percent for taxpayers whose AGI is in excess of these amounts.
Thus, in the case of a married taxpayer filing a joint return,
if AGI is in excess of $1,200,000, the benefit of $24,840
(27.6-percent of $90,000) phases out over an income range of
$414,000. The phaseout thresholds are indexed for inflation.
Simplification of tax on unearned income of children
The provision simplifies the ``kiddie tax'' by effectively
applying the rates applicable to trusts, without the 12-percent
rate applicable to estates and trusts, to the net unearned
income of a child to whom the provision applies. Specifically,
the amount of taxable income taxed at a 12 percent rate may not
exceed the amount of taxable income in excess of the net
unearned income of the child. The amount of taxable income
taxed at rates below 35 percent may not exceed sum of (1) the
taxable income in excess of the net unearned income of the
child plus (2) the amount of taxable income not in excess of
the 35-percent bracket threshold applicable to a trust. The
amount of taxable income taxed at rates below 39.6 percent may
not exceed sum of (1) the taxable income in excess of the net
unearned income of the child plus (2) the amount of taxable
income not in excess of the 39.6-percent bracket threshold
applicable to a trust.
The following examples illustrate the application of the
provision:
Example 1.--Assume a child to whom the ``kiddie tax''
applies has $60,000 taxable income of which $50,000 is net
unearned income, which would otherwise be treated as ordinary
income, such as interest. Assume the 25-percent bracket
threshold amount for the taxable year is $45,000 for an
unmarried taxpayer, and the 35-percent and 39.6-percent bracket
thresholds for a trust are $9,150 and $12,500 respectively.
The child's 25-percent bracket threshold is $10,000
($60,000 less $50,000), 35-percent bracket threshold is $19,150
($10,000 plus $9,150), and 39.6-percent bracket threshold is
$22,500 ($10,000 plus $12,500). Thus, $10,000 is taxed at a 12-
percent rate, $9,150 at a 25 percent rate, $3,350 at a 35-
percent rate, and $37,500 at a 39.6-percent rate.
Example 2.--Assume the same facts as Example 1 except that
the amount of the child's net unearned income is $20,000
(rather than $50,000).
The child's 25-percent bracket threshold is $40,000
($60,000 less $50,000), 35-percent bracket threshold is $49,150
($40,000 plus $9,150), and the 39.6-percent bracket threshold
is $52,500 ($40,000 plus $12,500). Thus, $40,000 is taxed at a
10-percent rate, $9,150 at a 25-percent rate, $3,350 at a 35-
percent rate, and $7,500 at a 39.6-percent rate.
Replacing CPI-U with chained CPI-U
The provision requires the use of the chained CPI-U (``C-
CPI-U'') to index tax parameters currently indexed by the CPI-
U. The C-CPI-U, like the CPI-U, is a measure of the average
change over time in prices paid by urban consumers. It is
developed and published by the Department of Labor, but differs
from the CPI-U in accounting for the ability of individuals to
alter their consumption patterns in response to relative price
changes. The C-CPI-U accomplishes this by allowing for consumer
substitution between item categories in the market basket of
consumer goods and services that make up the index, while the
CPI-U only allows for modest substitution within item
categories. Values that are reset for 2018, such as the bracket
thresholds and standard deduction, are indexed by the C-CPI-U
in taxable years beginning after December 31, 2018. Other
indexed values in the code switch from CPI indexing to C-CPI-U
indexing going forward in taxable years beginning after
December 31, 2017.
Maximum rates on capital gains and qualified dividends
The provision generally retains the present-law maximum
rates on net capital gain and qualified dividends. The
breakpoints between the zero-and 15-percent rates (``15-percent
breakpoint'') and the 15-and 20-percent rates (``20-percent
breakpoint'') are the same amounts as the breakpoints under
present law, except the breakpoints are indexed using the C-
CPI-U in taxable years beginning after 2017. Thus, for 2018,
the 15-percent breakpoint is $77,200 for joint returns and
surviving spouses (one-half of this amount for married
taxpayers filing separately), $51,700 for heads of household,
$2,600 for estates and trusts, and $38,600 for other unmarried
individuals. The 20-percent breakpoint is $479,000 for joint
returns and surviving spouses (one-half of this amount for
married taxpayers filing separately), $452,400 for heads of
household, $12,700 for estates and trusts, and $425,800 for
other unmarried individuals.
Therefore, in the case of an individual (including an
estate or trust) with adjusted net capital gain, to the extent
the gain would not result in taxable income exceeding the 15-
percent breakpoint is not taxed. Any adjusted net capital gain
which would result in taxable income exceeding the 15-percent
breakpoint but not exceeding the 20-percent breakpoint is taxed
at 15 percent. The remaining adjusted net capital gain is taxed
at 20 percent.
As under present law, unrecaptured section 1250 gain
generally is taxed at a maximum rate of 25 percent, and 28-
percent rate gain is taxed at a maximum rate of 28 percent.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
2. Enhancement of standard deduction (sec. 1002 of the bill and sec. 63
of the Code)
PRESENT LAW
Under present law, an individual who does not elect to
itemize deductions may reduce his adjusted gross income
(``AGI'') by the amount of the applicable standard deduction in
arriving at his taxable income. The standard deduction is the
sum of the basic standard deduction and, if applicable, the
additional standard deduction. The basic standard deduction
varies depending upon a taxpayer's filing status. For 2017, the
amount of the basic standard deduction is $6,350 for single
individuals and married individuals filing separate returns,
$9,350 for heads of households, and $12,700 for married
individuals filing a joint return and surviving spouses. An
additional standard deduction is allowed with respect to any
individual who is elderly or blind.\13\ The amount of the
standard deduction is indexed annually for inflation.
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\13\For 2017, the additional amount is $1,250 for married taxpayers
(for each spouse meeting the applicable criterion) and surviving
spouses. The additional amount for single individuals and heads of
households is $1,550. An individual who qualifies as both blind and
elderly is entitled to two additional standard educations, for a total
additional amount (for 2017) of $2,500 or $3,100, as applicable.
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In the case of a dependent for whom a deduction for a
personal exemption is allowed to another taxpayer, the standard
deduction may not exceed the greater of (i) $1,050 (in 2017) or
(ii) the sum of $350 (in 2017) plus the individual's earned
income.
REASONS FOR CHANGE
The Committee believes that consolidating the basic
standard deduction, additional standard deduction, personal
exemption, and other tax benefits for taxpayer and spouse into
a larger standard deduction simplifies the tax code while
allowing a minimum level of income to be exempt from Federal
income taxation.
EXPLANATION OF PROVISION
The provision increases the standard deduction for
individuals across all filing statuses. Under the provision,
the amount of the standard deduction is $24,400 for married
individuals filing a joint return, $18,300 for head-of-
household filers, and $12,200 for all other taxpayers. The
amount of the standard deduction is indexed for inflation using
the chained consumer price index for all-urban consumers for
taxable years beginning after December 31, 2019.\14\
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\14\Thus, the standard deduction is the same for 2018 and 2019.
---------------------------------------------------------------------------
The provision eliminates the additional standard deduction
for the aged and the blind.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
3. Repeal of deduction for personal exemptions (sec. 1003 of the bill
and secs. 151-153 of the Code)
PRESENT LAW
Under present law, in determining taxable income, an
individual reduces AGI by any personal exemption deductions and
either the applicable standard deduction or his or her itemized
deductions. Personal exemptions generally are allowed for the
taxpayer, his or her spouse, and any dependents. For 2017, the
amount deductible for each personal exemption is $4,050. This
amount is indexed annually for inflation. The personal
exemption amount is phased out in the case of an individual
with AGI in excess of $313,800 for taxpayers filing jointly,
$287,650 for heads of household and $261,500 for all other
filers. In addition, no personal exemption is allowed in the
case of a dependent if a deduction is allowed to another
taxpayer.
Withholding rules
Under present law, the amount of tax required to be
withheld by employers from a taxpayer's wages is based in part
on the number of withholding exemptions a taxpayer claims on
his Form W-4. An employee is entitled to the following
exemptions: (1) an exemption for himself, unless he allowed to
be claimed as a dependent of another person; (2) an exemption
to which the employee's spouse would be entitled, if that
spouse does not file a Form W-4 for that taxable year claiming
an exemption described in (1); (3) an exemption for each
individual who is a dependent (but only if the employee's
spouse has not also claimed such a withholding exemption on a
Form W-4); (4) additional withholding allowances (taking into
account estimated itemized deductions, estimated tax credits,
and additional deductions as provided by the Secretary of the
Treasury); and (5) a standard deduction allowance.
Filing requirements
Under present law, an unmarried individual is required to
file a tax return for the taxable year if in that year the
individual had income which equals or exceeds the exemption
amount plus the standard deduction applicable to such
individual (i.e., single, head of household, or surviving
spouse). An individual entitled to file a joint return is
required to do so unless that individual's gross income, when
combined with the individual's spouse's gross income for the
taxable year, is less than the sum of twice the exemption
amount plus the basic standard deduction applicable to a joint
return, provided that such individual and his spouse, at the
close of the taxable year, had the same household as their
home.
TRUSTS AND ESTATES
In lieu of the deduction for personal exemptions, an estate
is allowed a deduction of $600. A trust is allowed a deduction
of $100; $300 if required to distribute all its income
currently; and an amount equal to the personal exemption of an
individual in the case of a qualified disability trust.
REASONS FOR CHANGE
The Committee believes that consolidating the basic
standard deduction, additional standard deduction, personal
exemption, and other tax benefits for taxpayer and spouse into
a larger standard deduction simplifies the tax code while
allowing a minimum level of income to be exempt from Federal
income taxation.
EXPLANATION OF PROVISION
The provision repeals the deduction for personal
exemptions.
The provision modifies the requirements for those who are
required to file a tax return. In the case of an individual who
is not married, such individual is required to file a tax
return if the taxpayer's gross income for the taxable year
exceeds the applicable standard deduction. Married individuals
are required to file a return if that individual's gross
income, when combined with the individual's spouse's gross
income, for the taxable year is more than the standard
deduction applicable to a joint return, provided that: (i) such
individual and his spouse, at the close of the taxable year,
had the same household as their home; (ii) the individual's
spouse does not make a separate return; and (iii) neither the
individual nor his spouse is a dependent of another taxpayer
who has income (other than earned income) in excess of $500
(indexed for inflation).
The provision repeals the enhanced deduction for qualified
disability trusts.
Under the provision, the Secretary of the Treasury is to
develop rules to determine the amount of tax required to be
withheld by employers from a taxpayer's wages.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
4. Maximum rate on business income of individuals (sec. 1004 of the
bill and new sec. 4 of the Code)
PRESENT LAW
Individual income tax rates
To determine regular tax liability, an individual taxpayer
generally must apply the tax rate schedules (or the tax tables)
to his or her regular taxable income. The rate schedules are
broken into several ranges of income, known as income brackets,
and the marginal tax rate increases as a taxpayer's income
increases. Separate rate schedules apply based on an
individual's filing status (i.e, single, head of household,
married filing jointly, or married filing separately). For
2017, the regular individual income tax rate schedule provides
rates of 10, 15, 25, 28, 33, 35, and 39.6 percent.
Under present law, no separate or different tax rate
schedule applies to business income of individuals from
partnerships, S corporations, or sole proprietorships.
Partnerships
In general
Partnerships generally are treated for Federal income tax
purposes as pass-through entities not subject to tax at the
entity level.\15\ Items of income (including tax-exempt
income), gain, loss, deduction, and credit of the partnership
are taken into account by the partners in computing their
income tax liability (based on the partnership's method of
accounting and regardless of whether the income is distributed
to the partners).\16\ A partner's deduction for partnership
losses is limited to the partner's adjusted basis in its
partnership interest.\17\ Losses not allowed as a result of
that limitation generally are carried forward to the next year.
A partner's adjusted basis in the partnership interest
generally equals the sum of (1) the partner's capital
contributions to the partnership, (2) the partner's
distributive share of partnership income, and (3) the partner's
share of partnership liabilities, less (1) the partner's
distributive share of losses allowed as a deduction and certain
nondeductible expenditures, and (2) any partnership
distributions to the partner.\18\ Partners generally may
receive distributions of partnership property without
recognition of gain or loss, subject to some exceptions.\19\
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\15\Sec. 701.
\16\Sec. 702(a).
\17\Sec. 704(d). In addition, passive loss and at-risk limitations
limit the extent to which certain types of income can be offset by
partnership deductions (sections 469 and 465). These limitations do not
apply to corporate partners (except certain closely-held corporations)
and may not be important to individual partners who have partner-level
passive income from other investments.
\18\Sec. 705.
\19\Sec. 731. Gain or loss may nevertheless be recognized, for
example, on the distribution of money or marketable securities,
distributions with respect to contributed property, or in the case of
disproportionate distributions (which can result in ordinary income).
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Partnerships may allocate items of income, gain, loss,
deduction, and credit among the partners, provided the
allocations have substantial economic effect.\20\ In general,
an allocation has substantial economic effect to the extent the
partner to which the allocation is made receives the economic
benefit or bears the economic burden of such allocation and the
allocation substantially affects the dollar amounts to be
received by the partners from the partnership independent of
tax consequences.\21\
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\20\Sec. 704(b)(2).
\21\Treas. Reg. sec. 1.704-1(b)(2).
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Limited liability companies
State laws of every State provide for limited liability
companies\22\ (``LLCs''), which are neither partnerships nor
corporations under applicable State law, but which are
generally treated as partnerships for Federal tax purposes.\23\
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\22\The first LLC statute was enacted in Wyoming in 1977. All
States (and the District of Columbia) now have an LLC statute, though
the tax treatment of LLCs for State tax purposes may differ.
\23\Under Treasury regulations promulgated in 1996, any domestic
nonpublicly traded unincorporated entity with two or more members
generally is treated as a partnership for federal income tax purposes,
while any single-member domestic unincorporated entity generally is
treated as disregarded for Federal income tax purposes (i.e., treated
as not separate from its owner). Instead of the applicable default
treatment, however, an LLC may elect to betreate as a corporation for
Federal income tax purposes. Treas. Reg. sec. 301.7701-3. These are
known as the ``check-the-box'' regulations.
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Publicly traded partnerships
Under present law, a publicly traded partnership generally
is treated as a corporation for Federal tax purposes.\24\ For
this purpose, a publicly traded partnership means any
partnership if interests in the partnership are traded on an
established securities market or interests in the partnership
are readily tradable on a secondary market (or the substantial
equivalent thereof).\25\
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\24\Sec. 7704(a). The reasons for change stated by the Ways and
Means Committee when the provision was enacted provide in part: ``[t]he
recent proliferation of publicly traded partnerships has come to the
committee's attention. The growth in such partnerships has caused
concern about long-term erosion of the corporate tax base.'' H.R. Rep.
100-391, Omnibus Reconciliation Act of 1987, October 26, 1987, p. 1065.
\25\Sec. 7704(b).
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An exception from corporate treatment is provided for
certain publicly traded partnerships, 90 percent or more of
whose gross income is qualifying income.\26\
---------------------------------------------------------------------------
\26\Sec. 7704(c)(2). Qualifying income is defined to include
interest, dividends, and gains from the disposition of a capital asset
(or of property described in section 1231(b)) that is held for the
production of income that is qualifying income. Sec. 7704(d).
Qualifying income also includes rents from real property, gains from
the sale or other disposition of real property, and income and gains
from the exploration, development, mining or production, processing,
refining, transportation (including pipelines transporting gas, oil, or
products thereof), or the marketing of any mineral or natural resource
(including fertilizer, geothermal energy, and timber), industrial
source carbon dioxide, or the transportation or storage of certain fuel
mixtures, alternative fuel, alcohol fuel, or biodiesel fuel. It also
includes income and gains from commodities (not described in section
1221(a)(1)) or futures, options, or forward contracts with respect to
such commodities (including foreign currency transactions of a
commodity pool) where a principal activity of the partnership is the
buying and selling of such commodities, futures, options, or forward
contracts. However, the exception for partnerships with qualifying
income does not apply to any partnership resembling a mutual fund
(i.e., that would be described in section 851(a) if it were a domestic
corporation), which includes a corporation registered under the
Investment Company Act of 1940 (Pub. L. No. 76-768 (1940)) as a
management company or unit investment trust (sec. 7704(c)(3)).
---------------------------------------------------------------------------
S corporations
Generally
For Federal income tax purposes, an S corporation\27\
generally is not subject to tax at the corporate level.\28\
Items of income (including tax-exempt income), gain, loss,
deduction, and credit of the S corporation are taken into
account by the S corporation shareholders in computing their
income tax liabilities (based on the S corporation's method of
accounting and regardless of whether the income is distributed
to the shareholders). A shareholder's deduction for corporate
losses is limited to the sum of the shareholder's adjusted
basis in its S corporation stock and the indebtedness of the S
corporation to such shareholder. Losses not allowed as a result
of that limitation generally are carried forward to the next
year. A shareholder's adjusted basis in the S corporation stock
generally equals the sum of (1) the shareholder's capital
contributions to the S corporation and (2) the shareholder's
pro rata share of S corporation income, less (1) the
shareholder's pro rata share of losses allowed as a deduction
and certain nondeductible expenditures, and (2) any S
corporation distributions to the shareholder.\29\
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\27\An S corporation is so named because its Federal tax treatment
is governed by subchapter S of the Code.
\28\Secs. 1363 and 1366.
\29\Sec. 1367. If any amount that would reduce the adjusted basis
of a shareholder's S corporation stock exceeds the amount that would
reduce that basis to zero, the excess is applied to reduce (but not
below zero) the shareholder's basis in any indebtedness of the S
corporation to the shareholder. If, after a reduction in the basis of
such indebtedness, there is an event that would increase the adjusted
basis of the shareholder's S corporation stock, such increase is
instead first applied to restore the reduction in the basis of the
shareholder's indebtedness. Sec. 1367(b)(2).
---------------------------------------------------------------------------
To be eligible to elect S corporation status, a corporation
may not have more than 100 shareholders and may not have more
than one class of stock.\30\ Only individuals (other than
nonresident aliens), certain tax-exempt organizations, and
certain trusts and estates are permitted shareholders of an S
corporation. A corporation may elect S corporation status only
with the consent of all of its shareholders, and may terminate
its election with the consent of shareholders holding more than
50 percent of the stock.\31\ Although there are limitations on
the types of shareholders and stock structure an S corporation
may have, businesses organized as S corporations may be as
large as those organized as C corporations or partnerships.
Certain corporations may not elect S corporation status,
including financial institutions using the reserve method of
accounting for bad debts and insurance companies subject to tax
under subchapter L.\32\
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\30\Sec. 1361. For this purpose, a husband and wife and all members
of a family are treated as one shareholder. Sec. 1361(c)(1).
\31\Sec. 1362.
\32\Sec. 1361(b)(2).
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In general, an S corporation shareholder is not subject to
tax on corporate distributions unless the distributions exceed
the shareholder's basis in the stock of the corporation.
S corporations that were previously C corporations
There are two principal exceptions to the general pass-
through treatment of S corporations. Both are applicable only
if the S corporation was previously a C corporation. The first
applies when the C corporation had appreciated assets,\33\ and
the second applies when the C corporation had accumulated
earnings and profits.\34\
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\33\Sec. 1374. The period was seven years for taxable years
beginning in 2009 and 2010, and five years for taxable years beginning
in 2011, 2012, 2013, and 2014. If a C corporation elects to be an S
corporation (or transfers assets to an S corporation in a carryover
basis transaction), certain net built-in gains that are attributable to
the period in which it was a C corporation, and that are recognized
during the first five years in which the former C corporation is an S
corporation, are subject to corporate-level tax.
\34\Sec. 1375. An S corporation with accumulated earnings and
profits is subject to corporate tax on excess net passive investment
income (but not in excess of its taxable income, subject to certain
adjustments), if more than 25 percent of its gross receipts for the
year are passive investment income. Subchapter C earnings and profits
generally refers to the earnings of the corporation prior to its
subchapter S election which would have been taxable as dividends if
distributed to shareholders by the corporation prior to its subchapter
S election. If the S corporation continues to have C corporation
earnings and profits and has gross receipts more than 25 percent of
which are passive investment income in each year for three consecutive
years, the S corporation election is automatically terminated. Sec.
1362(d)(3). Further, while an S corporation shareholder generally is
not subject to tax on corporate distributions unless the distributions
exceed the shareholder's basis in the stock of the corporation,
distributions from an S corporation that was formerly a C corporation
generally are taxed to shareholders as dividends to the extent of the S
corporation's accumulated earnings and profits. Sec. 1368.
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Sole proprietorships
Unlike a C corporation, partnership, or S corporation, a
business conducted as a sole proprietorship is not treated as
an entity distinct from its owner for Federal income tax
purposes.\35\ Rather, the business owner is taxed directly on
business income, and files Schedule C (sole proprietorships
generally), Schedule E (rental real estate and royalties), or
Schedule F (farms) with his or her individual tax return.
Furthermore, transfer of a sole proprietorship is treated as a
transfer of each individual asset of the business. Nonetheless,
a sole proprietorship is treated as an entity separate from its
owner for employment tax purposes,\36\ for certain excise
taxes,\37\ and certain information reporting requirements.\38\
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\35\A single-member unincorporated entity is disregarded for
Federal income tax purposes, unless its owner elects to be treated as a
C corporation. Treas. Reg. sec. 301.7701-3(b)(1)(ii). Sole
proprietorships often are conducted through legal entities for nontax
reasons. While sole proprietorships generally may have no more than one
owner, a married couple that files a joint return and jointly owns and
operates a business may elect to have that business treated as a sole
proprietorship under section 761(f).
\36\Treas. Reg. sec. 301.7701-2(c)(2)(iv).
\37\Treas. Reg. sec. 301.7701-2(c)(2)(v).
\38\Treas. Reg. sec. 301.7701-2(c)(2)(vi).
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REASONS FOR CHANGE
The Committee believes that a reduction in the corporate
income tax rate to 20 percent provided by the bill does not
completely address the income tax rate on business income. Many
businesses are conducted in the form of passthrough entities,
namely partnerships and S corporations. Further, businesses are
frequently conducted as sole proprietorships, rather than
through a legal entity that is treated for tax purposes as
separate from the individual who owns the business. The income
of businesses conducted in passthrough form or in sole
proprietorship form is subject to tax in the hands of their
individual owners at the income tax rates of individuals. To
treat corporate and noncorporate business income more similarly
under the income tax, the bill provides a maximum rate of 25
percent on qualified business income of individuals.
EXPLANATION OF PROVISION
Qualified business income of an individual from a
partnership, S corporation, or sole proprietorship is subject
to Federal income tax at a rate no higher than 25 percent.
Qualified business income means, generally, all net business
income from a passive business activity plus the capital
percentage of net business income from an active business
activity, reduced by carryover business losses and by certain
net business losses from the current year, as determined under
the provision.
Determination of rate
25-percent rate
The provision provides that an individual's tax is reduced
to reflect a maximum rate of 25 percent on qualified business
income. Qualified business income includes the capital
percentage, generally 30 percent, of net business income. The
percentage differs in the case of specified service activities
or in the case of a taxpayer election to prove out a different
percentage.
Taxable income (reduced by net capital gain) that exceeds
the maximum dollar amount for the 25-percent rate bracket
applicable to the taxpayer, and that exceeds qualified business
income, is subject to tax in the next higher brackets.
The provision provides that a 25-percent tax rate applies
generally to dividends received from a real estate investment
trust (other than any portion that is a capital gain dividend
or a qualified dividend), and applies generally to dividends
that are includable in gross income from certain cooperatives.
Nine-percent rate
A special rule provides a reduced tax rate of 11, 10, or
nine percent in the case of an individual's qualified active
business income below an indexed threshold of $75,000 (in the
case of a joint return or a surviving spouse) (the ``nine-
percent bracket threshold amount''). The indexed $75,000
threshold is three quarters of that amount for individuals
filing as head of household and half that amount for other
individuals. The reduced rate is not available to estates and
trusts.
The reduced rate is phased in. The reduced rate is 11
percent (that is, one percentage point below the 12 percent
rate) for taxable years beginning in 2018 and 2019, and is 10
percent (that is, two percentage points below the 12 percent
rate) for taxable years beginning in 2020 and 2021. For taxable
years beginning in 2022 and thereafter the reduced rate is nine
percent (that is, three percentage points below the 12 percent
rate).
The reduced tax rate applies to the least of three amounts,
the taxpayer's: (1) qualified active business income, (2)
taxable income reduced by net capital gain, or (3) nine-percent
bracket threshold amount (described above). Qualified active
business income for a taxable year means the excess of the
taxpayer's net business income from any active business
activity over his or her net business loss from any active
business activity. An active business activity is an activity
that involves the conduct of any trade or business and that is
not a passive activity for purposes of the passive loss rules
of section 469 determined without regard to paragraphs (2) and
(6)(B) of section 469(c) (that is, generally, the taxpayer
materially participates in the trade or business activity).
Qualified active business income includes income from any trade
or business activity, including service businesses. No capital
percentage limitation applies in determining qualified active
business income.
A phaseout applies to the amount subject to the 11-, 10-,
or nine-percent rate. The amount taxed at one of these rates is
reduced by the excess of taxable income over an indexed
applicable threshold amount, $150,000 in the case of married
individuals filing jointly. The applicable threshold amount is
three quarters of that amount for individuals filing as head of
household and half that amount for other individuals.
For example, assume that in 2022, an individual (married
filing jointly) has $70,000 of qualified active business income
and $40,000 of other income, resulting in taxable income of
$110,000. The $70,000 of qualified active business income is
subject to tax at nine percent. Alternatively, assume that in
2022, another individual has $160,000 of qualified active
business income and $10,000 of other income resulting in
taxable income of $170,000. The excess of the taxpayer's
$170,000 taxable income over the $150,000 applicable threshold
amount is $20,000. Taking into account the phaseout, this
$20,000 amount reduces the $75,000 amount that, absent the
phaseout, would be subject to the nine-percent rate, reversing
the benefit of the nine-percent rate for $20,000 of the
taxpayer's qualified active business income. The effect is that
$55,000 is subject to the nine percent rate.
Qualified business income
Qualified business income is defined as the sum of 100
percent of any net business income derived from any passive
business activity plus the capital percentage of net business
income derived from any active business activity, reduced by
the sum of 100 percent of any net business loss derived from
any passive business activity, 30 percent (except as otherwise
provided under rules for determining the capital percentage,
below) of any net business loss derived from any active
business activity, and any carryover business loss determined
for the preceding taxable year. Qualified business income does
not include income from a business activity that exceeds these
percentages.
Net business income or loss
To determine qualified business income requires a
calculation of net business income or loss from each of an
individual's passive business activities and active business
activities. Net business income or loss is determined at the
activity level, that is, separately for each business activity.
Net business income is determined by appropriately netting
items of income, gain, deduction and loss with respect to the
business activity. The determination takes into account these
amounts only to the extent the amount affects the determination
of taxable income for the year. For example, if in a taxable
year, a business activity has 100 of ordinary income from
inventory sales, and makes an expenditure of 25 that is
required to be capitalized and amortized over 5 years under
applicable tax rules, the net business income is 100 minus 5
(current-year ordinary amortization deduction), or 95. The net
business income is not reduced by the entire amount of the
capital expenditure, only by the amount deductible in
determining taxable income for the year.
Net business income or loss includes the amounts received
by the individual taxpayer as wages, director's fees,
guaranteed payments and amounts received from a partnership
other than in the individual's capacity as a partner, that are
properly attributable to a business activity. These amounts are
taken into account as an item of income with respect to the
business activity. For example, if an individual shareholder of
an S corporation engaged in a business activity is paid wages
or director's fees by the S corporation, the amount of wages or
director's fees is added in determining net business or loss
with respect to the business activity. This rule is intended to
ensure that the amount eligible for the 25-percent tax rate is
not erroneously reduced because of compensation for services or
other specified amounts that are paid separately (or treated as
separate) from the individual's distributive share of
passthrough income.
Net business income or loss does not include specified
investment-related income, deductions, or loss. Specifically,
net business income does not include (1) any item taken into
account in determining net long-term capital gain or net long-
term capital loss, (2) dividends, income equivalent to a
dividend, or payments in lieu of dividends, (3) interest income
and income equivalent to interest, other than that which is
properly allocable to a trade or business, (4) the excess of
gain over loss from commodities transactions, other than those
entered into in the normal course of the trade or business or
with respect to stock in trade or property held primarily for
sale to customers in the ordinary course of the trade or
business, property used in the trade or business, or supplies
regularly used or consumed in the trade or business, (5) the
excess of foreign currency gains over foreign currency losses
from section 988 transactions, other than transactions directly
related to the business needs of the business activity, (6) net
income from notional principal contracts, other than clearly
identified hedging transactions that are treated as ordinary
(i.e., not treated as capital assets), and (7) any amount
received from an annuity that is not used in the trade or
business of the business activity. Net business income does not
include any item of deduction or loss properly allocable to
such income.
Carryover business loss
The carryover business loss from the preceding taxable year
reduces qualified business income in the taxable year. The
carryover business loss is the excess of (1) the sum of 100
percent of any net business loss derived from any passive
business activity, 30 percent (except as otherwise provided
under rules for determining the capital percentage, below) of
any net business loss derived from any active business
activity, and any carryover business loss determined for the
preceding taxable year, over (2) the sum of 100 percent of any
net business income derived from any passive business activity
plus the capital percentage of net business income derived from
any active business activity. There is no time limit on
carryover business losses. For example, an individual has two
business activities that give rise to a net business loss of 3
and 4, respectively, in year one, giving rise to a carryover
business loss of 7 in year two. If in year two the two business
activities each give rise to net business income of 2, a
carryover business loss of 3 is carried to year three (that is,
- (2 + 2) = ).
Passive business activity and active business activity
A business activity means an activity that involves the
conduct of any trade or business. A taxpayer's activities
include those conducted through partnerships, S corporations,
and sole proprietorships. An activity has the same meaning as
under the present-law passive loss rules (section 469). As
provided in regulations under those rules, a taxpayer may use
any reasonable method of applying the relevant facts and
circumstances in grouping activities together or as separate
activities (through rental activities generally may not be
grouped with other activities unless together they constitute
an appropriate economic unit, and grouping real property
rentals with personal property rentals is not permitted). It is
intended that the activity grouping the taxpayer has selected
under the passive loss rules is required to be used for
purposes of the passthrough rate rules. For example, an
individual taxpayer has an interest in a bakery and a movie
theater in Baltimore, and a bakery and a movie theatre in
Philadelphia. For purposes of the passive loss rules, the
taxpayer has grouped them as two activities, a bakery activity
and a movie theatre activity. The taxpayer must group them the
same way, that is as two activities, a bakery activity and a
movie theatre activity, for purposes of rules of this
provision.
Regulatory authority is provided to require or permit
grouping as one or as multiple activities in particular
circumstances, in the case of specified services activities
that would be treated as a single employer under broad related
party rules of present law.
A passive business activity generally has the same meaning
as a passive activity under the present-law passive loss rules.
However, for this purpose, a passive business activity is not
defined to exclude a working interest in any oil or gas
property that the taxpayer holds directly or through an entity
that does not limit the taxpayer's liability. Rather, whether
the taxpayer materially participates in the activity is
relevant. Further, for this purpose, a passive business
activity does not include an activity in connection with a
trade or business or in connection with the production of
income.
An active business activity is an activity that involves
the conduct of any trade or business and that is not a passive
activity. For example, if an individual has a partnership
interest in a manufacturing business and materially
participates in the manufacturing business, it is considered an
active business activity of the individual.
Capital percentage
The capital percentage is the percentage of net business
income from an active business activity that is included in
qualified business income subject to Federal income tax at a
rate no higher than 25 percent.
In general, the capital percentage is 30 percent, except as
provided in the case of application of an increased percentage
for capital-intensive business activities, in the case of
specified service activities, and in the case of application of
the rule for capital-intensive specified service activities.
The capital percentage is reduced if the portion of net
business income represented by the sum of wages, director's
fees, guaranteed payments and amounts received from a
partnership other than in the individual's capacity as a
partner, that are properly attributable to a business activity
exceeds the difference between 100 percent and the capital
percentage. For example, if net business income from an
individual's active business activity conducted through an S
corporation is 100, including 75 of wages that the S
corporation pays the individual, the otherwise applicable
capital percentage is reduced from 30 percent to 25 percent.
Increased percentage for capital-intensive business
activities.--A taxpayer may elect the application of an
increased percentage with respect to any active business
activity other than a specified service activity (described
below). The election applies for the taxable year it is made
and each of the next four taxable years. The election is to be
made no later than the due date (including extensions) of the
return for the taxable year made, and is irrevocable. The
percentage under the election is the applicable percentage
(described below) for the five taxable years of the election.
Specified service activities.--In the case of an active
business activity that is a specified service activity,
generally the capital percentage is 0 and the percentage of any
net business loss from the specified service activity that is
taken into account as qualified business income is 0 percent.
A specified service activity means any trade or business
activity involving the performance of services in the fields of
health, law, engineering, architecture, accounting, actuarial
science, performing arts, consulting, athletics, financial
services, brokerage services, any trade or business where the
principal asset of such trade or business is the reputation or
skill of one or more of its employees, or investing, trading,
or dealing in securities, partnership interests, or
commodities. For this purpose a security and a commodity have
the meanings provided in the rules for the mark-to-market
accounting method for dealers in securities (sections 475(c)(2)
and 475(e)(2), respectively).
Capital-intensive specified service activities.--A taxpayer
may elect the application of an exception with respect to any
active business activity that is specified service activity,
provided the applicable percentage (described below) for the
taxable year is at least 10 percent. If the election is validly
made, the capital percentage and the percentage of net business
loss with respect to the activity are not 0 percent, but
rather, the applicable percentage for the taxable year.
Calculation of applicable percentage.--The applicable
percentage is the percentage applied in lieu of the capital
percentage in the case of either of the foregoing elections.
The applicable percentage (not the capital percentage) then
determines the portion of the net business income or loss from
the activity for the taxable year that is taken into account in
determining qualified business income subject to Federal income
tax at a rate no higher than 25 percent.
The applicable percentage is determined by dividing (1) the
specified return on capital for the activity for the taxable
year, by (2) the taxpayer's net business income derived from
that activity for that taxable year. The specified return on
capital for any active business activity is determined by
multiplying a deemed rate of return, the short-term AFR plus 7
percentage points, times the asset balance for the activity for
the taxable year, and reducing the product by interest expense
deducted with respect to the activity for the taxable year. The
asset balance for this purpose is the adjusted basis of
property used in connection with the activity as of the end of
the taxable year, but without taking account of basis
adjustments for bonus depreciation under section 168(k) or
expensing under section 179. In the case of an active business
activity conducted through a partnership or S corporation, the
taxpayer takes into account his distributive share of the asset
balance of the partnership's or S corporation's property used
in connection with the activity. Regulatory authority is
provided to ensure that in determining asset balance, no amount
is taken into account for more than one activity.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017. A transition rule provides that for
fiscal year taxpayers whose taxable year includes December 31,
2017, a proportional benefit of the reduced rate under the
provision is allowed for the period beginning January 1, 2018,
and ending on the day before the beginning of the taxable year
beginning after December 31, 2017.
B. Simplification and Reform of Family and Individual Tax Credits
1. Enhancement of child tax credit and new family tax credit (sec. 1101
of the bill and sec. 24 of the Code)
PRESENT LAW
An individual may claim a tax credit for each qualifying
child under the age of 17. The amount of the credit per child
is $1,000. A child who is not a citizen, national, or resident
of the United States cannot be a qualifying child.
The aggregate amount of child credits that may be claimed
is phased out for individuals with income over certain
threshold amounts. Specifically, the otherwise allowable child
tax credit is reduced by $50 for each $1,000 (or fraction
thereof) of modified adjusted gross income (``AGI'') over
$75,000 for single individuals or heads of households, $110,000
for married individuals filing joint returns, and $55,000 for
married individuals filing separate returns. For purposes of
this limitation, modified AGI includes certain otherwise
excludable income earned by U.S. citizens or residents living
abroad or in certain U.S. territories.
The credit is allowable against both the regular tax and
the alternative minimum tax (``AMT''). To the extent the child
credit exceeds the taxpayer's tax liability, the taxpayer is
eligible for a refundable credit\39\ (the ``additional child
tax credit'') equal to 15 percent of earned income in excess of
$3,000 (the ``earned income'' formula).
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\39\The refundable credit may not exceed the maximum credit per
child of $1,000.
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Families with three or more children may determine the
additional child tax credit using the ``alternative formula,''
if this results in a larger credit than determined under the
earned income formula. Under the alternative formula, the
additional child tax credit equals the amount by which the
taxpayer's Social Security taxes exceed the taxpayer's earned
income credit (``EIC'').
Earned income is defined as the sum of wages, salaries,
tips, and other taxable employee compensation plus net self-
employment earnings. At the taxpayer's election, combat pay may
be treated as earned income for these purposes. Unlike the EIC,
which also includes the preceding items in its definition of
earned income, the additional child tax credit is based only on
earned income to the extent it is included in computing taxable
income. For example, some ministers' parsonage allowances are
considered self-employment income, and thus are considered
earned income for purposes of computing the EIC, but the
allowances are excluded from gross income for individual income
tax purposes, and thus are not considered earned income for
purposes of the additional child tax credit since the income is
not included in taxable income.
Any credit or refund allowed or made to an individual under
this provision (including to any resident of a U.S. possession)
is not taken into account as income and is not be taken into
account as resources for the month of receipt and the following
two months for purposes of determining eligibility of such
individual or any other individual for benefits or assistance,
or the amount or extent of benefits or assistance, under any
Federal program or under any State or local program financed in
whole or in part with Federal funds.
REASONS FOR CHANGE
The Committee believes that it is important to provide an
increased tax benefit for families raising children, as well as
to ensure that all members of a household are accounted for in
determining families' ability to pay income tax. The Committee
believes that an expanded child tax credit and a new family tax
credit are an equitable means of achieving this goal.
EXPLANATION OF PROVISION
The provision expands the child tax credit into a new
family tax credit. The family credit consists of a $1,600
credit per qualifying child under the age of 17, and a $300
credit for each of the taxpayer (both spouses in the case of
married taxpayers filing a joint return) and each dependent of
the taxpayer who is not a qualifying child under age 17.
The provision generally retains the present-law definition
of dependent. However, under the provision, a qualifying child
is eligible for the $1,600 credit only if such child is a
citizen or national of the United States.
The family credit phases out at AGI of $230,000 for married
taxpayers filing joint returns and $115,000 for other
individuals. The credit is refundable under rules similar to
the present law additional child tax credit. That is, to the
extent the credit exceeds the taxpayer's tax liability, the
taxpayer is eligible for a refundable credit equal to 15
percent of earned income in excess of $3,000.\40\ The
refundable credit is limited to $1,000 times the number of
qualifying children under the age of 17 claimed on the return.
This $1,000 per child dollar limitation is indexed for
inflation, with a base year of 2017, rounding up to the nearest
$100. Accordingly, in 2018 the limitation will be $1,100.
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\40\The alternate formula described in the present law section
applies to the refundable portion of the family credit as well.
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The provision requires that the taxpayer include the name
and taxpayer identification number of each qualifying child and
dependent on the tax return for each taxable year.
The $300 credit for the taxpayer, spouse, and non-child
dependents of the taxpayer expires for taxable years beginning
after December 31, 2022.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
2. Repeal of credit for the elderly and permanently disabled (sec.
1102(a) of the bill and sec. 22 of the Code)
PRESENT LAW
Certain taxpayers who are over the age of 65 or retired on
account of permanent and total disability may claim a
nonrefundable credit. The maximum credit is 15 percent of
$5,000 for a return where one individual qualifies and $7,500
on a joint return where both spouses qualify.\41\ Thus, the
maximum credit amounts are $750 and $1,125, respectively.
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\41\Sec. 22(a).
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The credit base is reduced by one half of the amount by
which the taxpayer's adjusted gross income exceeds $7,500 if
the taxpayer is unmarried, $10,000 if the taxpayer is married
and files a joint return, or $5,000 if the taxpayer is married
and files a separate return.\42\ Thus, the credit base is
phased down to zero when adjusted gross income exceeds $17,500
for an unmarried person, $20,000 for a married couple filing a
joint return where only one spouse qualifies for the credit,
$25,000 for a joint return where both spouses qualify, and
$12,500 for a married person filing a separate return.
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\42\Sec. 22(d).
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Additionally, the credit base is reduced by certain items
of income otherwise exempt from tax: (1) benefits under Title
II of the Social Security Act; (2) retirement benefits under
the Railroad Retirement Act of 1974; (3) disability benefits
paid by the Veterans Administration, except for benefits
payable on account of personal injuries or sickness resulting
from active service in the Armed Forces; and (4) pensions,
annuities, and disability benefits exempted from tax by any
provision not in the Code.\43\
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\43\Sec. 22(c)(3).
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To qualify for the credit, a taxpayer must, at the end of
the taxable year, be at least 65 years old or retired on
account of permanent and total disability.\44\ Permanent and
total disability exists if, at the time of retirement, the
taxpayer was ``unable to engage in any substantial gainful
activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than 12 months.\45\
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\44\Sec. 22(b).
\45\Sec. 22(e)(3).
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REASONS FOR CHANGE
The Committee recognizes that, because the parameters of
the credit for the elderly and permanently disabled are not
indexed for inflation, under present law virtually no taxpayers
benefit from the credit. Accordingly, repealing the credit
makes the system simpler by reducing outdated and unnecessary
provisions in the Code and in IRS forms and publications.
EXPLANATION OF PROVISION
The provision repeals the credit for the elderly and
permanently disabled.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
3. Termination of credit for interest on certain home mortgages (sec.
1102(b) of the bill and sec. 25 of the Code)
PRESENT LAW
Qualified governmental units can elect to exchange all or a
portion of their qualified mortgage bond authority for
authority to issue mortgage credit certificates (``MCCs'').\46\
MCCs entitle homebuyers to a nonrefundable income tax credit
for a specified percentage of interest paid on mortgage loans
on their principal residences. The tax credit provided by the
MCC may be carried forward three years. Once issued, an MCC
generally remains in effect as long as the residence being
financed is the certificate-recipient's principal residence.
MCCs generally are subject to the same eligibility and targeted
area requirements as qualified mortgage bonds.\47\
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\46\Sec. 25.
\47\Sec. 143.
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REASONS FOR CHANGE
As the bill repeals the authority to issue qualified
private activity bonds,\48\ including qualified mortgage bonds,
the Committee believes it is an appropriate conforming change
to also terminate the related mortgage credit certificate
program.
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\48\Sec. 3601 of the bill, infra.
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EXPLANATION OF PROVISION
No credit is allowed with respect to any MCC issued after
December 31, 2017.
EFFECTIVE DATE
The provision applies to taxable years ending after
December 31, 2017. Credits continue for interest paid on
mortgage loans on principal residences for which MCCs have been
issued on or before December 31, 2017.
4. Repeal of credit for plug-in electric drive motor vehicles (sec.
1102(c) of the bill and sec. 30d of the Code)
PRESENT LAW
A credit is available for new four-wheeled vehicles
(excluding low speed vehicles and vehicles weighing 14,000
pounds or more) propelled by a battery with at least 4
kilowatt-hours of electricity that can be charged from an
external source.\49\ The base credit is $2,500 plus $417 for
each kilowatt-hour of additional battery capacity in excess of
4 kilowatt-hours (for a maximum credit of $7,500). Qualified
vehicles are subject to a 200,000 vehicle-permanufacturer
limitation. Once the limitation has been reached the credit is
phased down over four calendar quarters.
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\49\Sec. 30D.
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the credit for plug-in electric drive
motor vehicles, makes the system simpler and fairer for all
families and individuals, and allows for lower tax rates. The
Committee further believes that repeal of this provision is
consistent with streamlining the tax code, broadening the tax
base, lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision repeals the credit for plug-in electric drive
motor vehicles.
EFFECTIVE DATE
The provision is effective for vehicles placed in service
in taxable years beginning after December 31, 2017.
5. Modification of taxpayer identification number requirements for the
child tax credit, earned income credit, and american opportunity credit
(sec. 1103 of the bill and secs. 24, 25A and 32 of the Code)
PRESENT LAW
Earned income credit
Low and moderate-income taxpayers may be eligible for the
refundable earned income credit (``EIC''). Eligibility for the
EIC is based on the taxpayer's earned income, adjusted gross
income, investment income, filing status, and work status in
the United States. The amount of the EIC is based on the
presence and number of qualifying children in the worker's
family, as well as on adjusted gross income and earned income.
The earned income credit generally equals a specified
percentage of earned income\50\ up to a maximum dollar amount.
The maximum amount applies over a certain income range and then
diminishes to zero over a specified phase-out range. For
taxpayers with earned income (or adjusted gross income
(``AGI''), if greater) in excess of the beginning of the phase-
out range, the maximum EIC amount is reduced by the phase-out
rate multiplied by the amount of earned income (or AGI, if
greater) in excess of the beginning of the phase-out range. For
taxpayers with earned income (or AGI, if greater) in excess of
the end of the phase-out range, no credit is allowed.
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\50\Earned income is defined as (1) wages, salaries, tips, and
other employee compensation, but only if such amounts are includible in
gross income, plus (2) the amount of the individual's net self-
employment earnings.
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An individual is not eligible for the EIC if the aggregate
amount of disqualified income of the taxpayer for the taxable
year exceeds $3,450 (for 2017). This threshold is indexed for
inflation. Disqualified income is the sum of: (1) interest
(taxable and tax-exempt); (2) dividends; (3) net rent and
royalty income (if greater than zero); (4) capital gains net
income; and (5) net passive income (if greater than zero) that
is not self-employment income.
The EIC is a refundable credit, meaning that if the amount
of the credit exceeds the taxpayer's Federal income tax
liability, the excess is payable to the taxpayer as a direct
transfer payment.
Child tax credit\51\
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\51\See description of sec. 1101 of the bill for the provision's
modifications to the child tax
credit.
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An individual may claim a tax credit of $1,000 for each
qualifying child under the age of 17. A child who is not a
citizen, national, or resident of the United States cannot be a
qualifying child.
The aggregate amount of allowable child credits is phased
out for individuals with income over certain threshold amounts.
Specifically, the otherwise allowable aggregate child tax
credit (``CTC'') amount is reduced by $50 for each $1,000 (or
fraction thereof) of modified adjusted gross income (``modified
AGI'') over $75,000 for single individuals or heads of
households, $110,000 for married individuals filing joint
returns, and $55,000 for married individuals filing separate
returns. For purposes of this limitation, modified AGI includes
certain otherwise excludable income\52\ earned by U.S. citizens
or residents living abroad or in certain U.S. territories.
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\52\Sec. 911.
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The child tax credit is allowable against both the regular
tax and the alternative minimum tax (``AMT''). To the extent
the credit exceeds the taxpayer's tax liability, the taxpayer
is eligible for a refundable credit (the ``additional child tax
credit'') equal to 15 percent of earned income in excess of a
threshold dollar amount of $3,000 (the ``earned income''
formula).
Families with three or more qualifying children may
determine the additional child tax credit using the
``alternative formula'' if this results in a larger credit than
determined under the earned income formula. Under the
alternative formula, the additional child tax credit equals the
amount by which the taxpayer's Social Security taxes exceed the
taxpayer's EIC.
As with the EIC, earned income is defined as the sum of
wages, salaries, tips, and other taxable employee compensation
plus net self-employment earnings. Unlike the EIC, the
additional child tax credit is based on earned income only to
the extent it is included in computing taxable income. For
example, some ministers' parsonage allowances are considered
self-employment income and thus are considered earned income
for purposes of computing the EIC, but the allowances are
excluded from gross income for individual income tax purposes
and thus are not considered earned income for purposes of the
additional child tax credit.
American Opportunity credit\53\
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\53\See description of sec. 1201 of the bill for the provision's
modifications to the American Opportunity credit.
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The American Opportunity credit provides individuals with a
tax credit of up to $2,500 per eligible student per year for
qualified tuition and related expenses (including course
materials) paid for each of the first four years of the
student's post-secondary education in a degree or certificate
program. The credit rate is 100 percent on the first $2,000 of
qualified tuition and related expenses, and 25 percent on the
next $2,000 of qualified tuition and related expenses.
The American Opportunity credit is phased out ratably for
taxpayers with modified AGI between $80,000 and $90,000
($160,000 and $180,000 for married taxpayers filing a joint
return). The credit may be claimed against a taxpayer's AMT
liability.
Forty percent of a taxpayer's otherwise allowable modified
credit is refundable. A refundable credit is a credit which, if
the amount of the credit exceeds the taxpayer's Federal income
tax liability, the excess is payable to the taxpayer as a
direct transfer payment.
No credit is allowed to a taxpayer who fails to include the
taxpayer identification number of the student to whom the
qualified tuition and related expenses relate.
Taxpayer identification number requirements
Any individual filing a U.S. tax return is required to
state his or her taxpayer identification number on such return.
Generally, a taxpayer identification number is the individual's
Social Security number (``SSN'').\54\ However, in the case of
an individual who is not eligible to be issued an SSN, but who
has a tax filing obligation, the Internal Revenue Service
(``IRS'') issues an individual taxpayer identification number
(``ITIN'') for use in connection with the individual's tax
filing requirements.\55\ An individual who is eligible to
receive an SSN may not obtain an ITIN for purposes of his or
her tax filing obligations.\56\ An ITIN does not provide
eligibility to work in the United States or claim Social
Security benefits.
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\54\Sec. 6109(a).
\55\Treas. Reg. Sec. 301.6109-1(d)(3)(i).
\56\Treas. Reg. Sec. 301.6109-1(d)(3)(ii).
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Examples of individuals who are not eligible for SSNs, but
potentially need ITINs in order to file U.S. returns include a
nonresident alien filing a claim for a reduced withholding rate
under a U.S. income tax treaty, a nonresident alien required to
file a U.S. tax return,\57\ an individual who is a U.S.
resident alien under the substantial presence test and who
therefore must file a U.S. tax return,\58\ a dependent or
spouse of the prior two categories of individuals, or a
dependent or spouse of a nonresident alien visa holder.
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\57\For instance, in the case of an individual that has income
which is effectively connected with a United States trade or business,
such as the performance of personal services in the United States.
\58\Such an individual would have a filing requirement without
regard to whether the individual is lawfully present or has work
authorization.
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An individual is ineligible for the EIC (but not the child
tax credit) if he or she does not include a valid SSN and the
qualifying child's valid SSN (and, if married, the spouse's
SSN) on his or her tax return. For these purposes, the Code
defines an SSN as a Social Security number issued to an
individual, other than an SSN issued to an individual solely
for the purpose of applying for or receiving federally funded
benefits.\59\ If an individual fails to provide a correct
taxpayer identification number, such omission will be treated
as a mathematical or clerical error by the IRS.
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\59\Sec. 205(c)(2)(B)(i)(II) (and that portion of sec.
205(c)(2)(B)(i)(III) relating to it) of the Social Security Act.
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A taxpayer who resides with a qualifying child may not
claim the EIC with respect to the qualifying child if such
child does not have a valid SSN. The taxpayer also is
ineligible for the EIC for workers without children because he
or she resides with a qualifying child. However, if a taxpayer
has two or more qualifying children, some of whom do not have a
valid SSN, the taxpayer may claim the EIC based on the number
of qualifying children for whom there are valid SSNs.
REASONS FOR CHANGE
The Committee believes that it is important to ensure that
refundable and other credits are not being claimed
fraudulently. The Committee believes that requiring Social
Security numbers as the identifying number for taxpayers and
children will substantially lower the overpayment rate on these
credits.
EXPLANATION OF PROVISION
Under the provision, any qualifying child claimed by the
taxpayer on the tax return must use, as that child's
identifying number, a Social Security number that is valid for
employment in the United States in order to be eligible for the
CTC. Under the provision, if a child's identifying number was
other than a Social Security number (such as an ITIN), the
taxpayer would be eligible to receive the $300 credit for
dependents other than qualifying children, assuming such child
otherwise qualified as a dependent of the taxpayer.\60\
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\60\See description of sec. 1101 of the bill.
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Additionally, under the provision, taxpayers who use as
their taxpayer identification number a Social Security number
issued for non-work reasons, such as for purposes of receiving
Federal benefits or for any other reason, are not eligible for
the EIC.
Lastly, under the provision, in order to claim the American
Opportunity credit, the identification number provided with
respect to the student to whom the tuition and related expenses
relate must be a Social Security number.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
6. Procedures to reduce improper claims of earned income credit (sec.
1104 of the bill and new secs. 32(c)(2)(B)(vii) and 6011(i) of the
Code)
PRESENT LAW
Earned income credit
Low-and moderate-income workers may be eligible for the
refundable earned income credit (``EIC''). Eligibility for the
EIC is based on earned income, adjusted gross income (``AGI''),
investment income, filing status, number of children, and
immigration and work status in the United States. The maximum
amount of the EIC applies over a certain income range and then
diminishes to zero over a specified phaseout range. The EIC is
a refundable credit, meaning that if the amount of the credit
exceeds the taxpayer's Federal income tax liability, the excess
is payable to the taxpayer as a direct transfer payment.
The EIC generally equals a specified percentage of earned
income up to a maximum dollar amount. Earned income is the sum
of employee compensation includible in gross income (generally
the amount reported in Box 1 of Form W-2, Wage and Tax
Statement, discussed below) plus net earnings from self-
employment determined with regard to the deduction for one-half
of self-employment taxes.\61\ Special rules apply in computing
earned income for purposes of the EIC.\62\ Net earnings from
self-employment generally includes the gross income derived by
an individual from any trade or business carried on by the
individual, less the deductions attributable to the trade or
business that are allowed under the self-employment tax rules,
plus the individual's distributive share of income or loss from
any trade or business of a partnership in which the individual
is a partner.\63\
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\61\Sec. 32(c)(2)(A).
\62\Sec. 32(c)(2)(B).
\63\Sec. 1402(a); Chief Counsel Advice 200022051.
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Employment taxes and quarterly reporting by employers
Employment taxes include employer and employee taxes on
employee wages under the Federal Insurance Contributions Act
(``FICA'') and income taxes required to be withheld by
employers from employee wages (``income tax withholding'').\64\
Income tax withholding rates vary depending on the amount of
wages paid, the length of the payroll period, and the number of
withholding allowances claimed by the employee. Employers are
required also to withhold the employee share of FICA tax from
employee wages. For these purposes, wages is defined broadly to
include all remuneration, subject to exceptions specifically
provided in the relevant statutory provisions.
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\64\Secs. 3101-3128 (FICA) and 3401-3404 (income tax withholding).
Employment taxes also include taxes under the Railroad Retirement Act
(``RRTA''), sections 3201-3241, and tax under the Federal Unemployment
Taxes Act (``FUTA''), sections 3301-3311. Sections 3501-3510 provide
additional employment tax rules.
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Employers generally submit quarterly reports to IRS on Form
941, Employer's Quarterly Federal Tax Return, showing the
number of employees to whom wages were paid during the quarter,
the total wages paid to employees, total FICA taxes (employer
and employee) on the wages, and total income tax withheld from
the wages.\65\ In addition, by January 31 after the end of a
calendar year, an employer must provide each employee with Form
W-2, Wage and Tax Statement, showing the total wages paid to
the employee during the calendar year and certain other
information.\66\ The information contained on each employee's
W-2 is also provided to the IRS, accompanied by Form W-3,
Transmittal of Wage and Tax Statements, showing the total
number of Forms W-2 and aggregate information for all
employees, such as aggregate wages reported on Forms W-2. IRS
then compares the W-3 wage totals to the Form 941 (or Form 944)
wage totals.
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\65\Treas. Secs. 31.6011(a)-1(a)(1), 31.6011(a)-4(a)(1),
31.6011(a)-1(a)(5). If the total amount of FICA taxes and withheld
income tax for a year is $1,000 or less, instead of filing Form 941 for
each quarter, the employer is permitted file annually on Form 944,
Employer's Annual Federal Tax Return. Separate forms and filing
requirement apply with respect to RRTA and FUTA taxes.
\66\Sec. 6051(a). Employees are required to include a copy of Form
W-2 when filing their income tax returns.
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REASONS FOR CHANGE
The Committee recognizes that overclaims and overpayments
are prevalent in the EIC program. The Committee further
recognizes that the overwhelming majority of individuals making
overclaims were not eligible for the credit. The Committee
believes that these overclaims and overpayments can be
significantly reduced by making it clear that taxpayers are
required to claim all allowable deductions in determining
earned income and by providing the IRS additional quarterly
wage information on every taxpayer-employee such that the IRS
will be able to verify reported income before any refundable
EIC payment is made.
EXPLANATION OF PROVISION
Modification of the definition of ``earned income''
The provision clarifies that a taxpayer is required to
claim all allowable deductions in computing net earnings from
self-employment for EIC purposes.
Quarterly reporting of wages by employers
The provision modifies employer reporting requirements
associated with the deduction and withholding of certain
employment taxes on wages. Under the provision, employers must
report, along with the aggregate wages paid and employment
taxes collected on Form 941 or Form 944, the name and address
of each employee and the amount of reportable wages received by
each of those employees.
EFFECTIVE DATE
Modification of the definition of ``earned income''
The provision applies to taxable years ending after the
date of enactment.
Quarterly reporting of wages by employers
The provision applies to taxable years ending after the
date of enactment, subject to the authority of the Secretary to
delay for such period as the Secretary determines to be
reasonable to allow adequate time to modify systems to permit
compliance with the additional reporting requirements.
7. Certain income disallowed for purposes of the earned income tax
credit (sec. 1105 of the bill, new secs. 32(n) and 32(c)(2)(C) of the
Code, and secs. 6051, 6052, 6041(a), and 6050(w) of the Code)
PRESENT LAW
Earned income credit
Low-and moderate-income workers may be eligible for the
refundable earned income credit (``EIC''). Eligibility for the
EIC is based on earned income, adjusted gross income (``AGI''),
investment income, filing status, number of children, and
immigration and work status in the United States. The maximum
amount of the EIC applies over a certain income range and then
diminishes to zero over a specified phaseout range. The EIC is
a refundable credit, meaning that if the amount of the credit
exceeds the taxpayer's Federal income tax liability, the excess
is payable to the taxpayer as a direct transfer payment.
The EIC generally equals a specified percentage of earned
income up to a maximum dollar amount. Earned income is the sum
of employee compensation includible in gross income plus net
earnings from self-employment determined with regard to the
deduction for one-half of self-employment taxes.\67\ Special
rules apply in computing earned income for purposes of the
EIC.\68\
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\67\Sec. 32(c)(2)(A).
\68\Sec. 32(c)(2)(B).
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Information reporting
Present law imposes a variety of information reporting
requirements on participants in certain transactions.\69\ These
requirements are intended to assist taxpayers in preparing
their income tax returns and to help the Internal Revenue
Service (``IRS'') determine whether such returns are correct
and complete.
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\69\Sec. 6031 through 6060.
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The primary provision governing information reporting by
payors requires an information return by every person engaged
in a trade or business who makes payments aggregating $600 or
more in any taxable year to a single payee in the course of the
payor's trade or business.\70\ Payments to corporations
generally are excepted from this requirement. Payments subject
to reporting include fixed or determinable income or
compensation, but do not include payments for goods or certain
enumerated types of payments that are subject to other specific
reporting requirements.\71\ Detailed rules are provided for the
reporting of various types of investment income, including
interest, dividends, and gross proceeds from brokered
transactions (such as a sale of stock) paid to U.S.
persons.\72\
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\70\The information return generally is submitted electronically as
a Form-1099 or Form-1096, although certain payments to beneficiaries or
employees may require use of Forms W-3 or W-2, respectively. Treas.
Reg. sec. 1.6041-1(a)(2).
\71\Sec. 6041(a) requires reporting as to fixed or determinable
gains, profits, and income (other than payments to which section
6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 6050N(a) applies and other
than payments with respect to which a statement is required under
authority of section 6042(a), 6044(a)(2) or 6045). These payments
excepted from section 6041(a) include most interest, royalties, and
dividends.
\72\Secs. 6042 (dividends), 6045 (broker reporting) and 6049
(interest) and the Treasury regulations thereunder.
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Special information reporting requirements exist for
employers required to deduct and withhold tax from employees'
income.\73\ In addition, any service recipient engaged in a
trade or business and paying for services is required to make a
return according to regulations when the aggregate of payments
is $600 or more.\74\
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\73\Sec. 6051(a).
\74\Sec. 6041A.
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There are also information reporting requirements for
merchant acquiring entities and third party settlement
organizations with respect to payments made in settlement of
payment card transactions and third party payment network
transactions occurring in that calendar year.\75\
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\75\Sec. 6050W.
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The payor of amounts described above is required to provide
the recipient of the payment with an annual statement showing
the aggregate payments made and contact information for the
payor.\76\ The statement must be supplied to taxpayers by the
payors by January 31 of the following calendar year.\7\ Payors
generally must file the information return with the IRS on or
before January 31 of the year following the calendar year to
which such returns relate.\77\
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\76\Sec. 6041(d).
\77\Sec. 6071(d).
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Failure to comply with the information reporting
requirements results in penalties, which may include a penalty
for failure to file the information return,\78\ to furnish
payee statements,\79\ or to comply with other various reporting
requirements.\80\ No penalty is imposed if the failure is due
to reasonable cause.\81\ Any person who is required to file an
information return, but who fails to do so on or before the
prescribed filing date is subject to a penalty that varies
based on when, if at all, the correct information return is
filed and the correct payee statement is furnished.
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\78\Sec. 6721.
\79\Sec. 6722.
\80\Sec. 6723.
\81\Sec. 6724.
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Books or records
Every person liable for any tax imposed by the Code, or for
the collection thereof, must keep such records, render such
statements, make such returns, and comply with such rules and
regulations as the Secretary may from time to time
prescribe.\82\ Whenever necessary, the Secretary may require
any person, by notice served upon that person or by
regulations, to make such returns, render such statements, or
keep such records, as the Secretary deems sufficient to show
whether or not that person is liable for tax. Persons subject
to income tax are required to keep books or records sufficient
to establish the amount of gross income, deductions, credits,
or other matters required to be shown by that person in any
return of such tax or information.\83\ The books or records are
required to be kept available at all times for inspection by
the IRS, and must be retained so long as the contents thereof
may become material in the administration of any internal
revenue law.\84\
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\82\Sec. 6001.
\83\Treas. sec. 1.6001-1(a).
\84\Treas. sec. 1.6001-1(e).
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REASONS FOR CHANGE
The Committee recognizes that overclaims and overpayments
are prevalent in the EIC program. The Committee further
recognizes that the overwhelming majority of individuals making
overclaims were not eligible for the credit. The Committee
believes that these overclaims and overpayments can be
significantly reduced by limiting earned income for purposes of
the EIC to amounts that can be verified by third party
reporting or the taxpayer.
EXPLANATION OF PROVISION
The provision limits earned income for purposes of the
earned income credit to amounts substantiated by the taxpayer
on statements furnished or returns filed under third party
information reporting requirements, or amounts substantiated by
the taxpayer's books and records. The authority of the IRS to
make returns, render statements, or keep records and, pursuant
to the Code, to make corresponding adjustments to income to
reflect substantiated amounts for purposes other than the EIC
remains unaffected by this provision.
EFFECTIVE DATE
The provision is effective for taxable years ending after
the date of enactment.
C. Simplification and Reform of Education Incentives
1. Reform of American Opportunity tax credit and repeal of Lifetime
Learning credit (sec. 1201 of the bill and sec. 25A of the Code)
PRESENT LAW
American Opportunity credit
The American Opportunity credit provides individuals with a
tax credit of up to $2,500 per eligible student per year for
qualified tuition and related expenses (including course
materials) paid for each of the first four years of the
student's post-secondary education in a degree or certificate
program. The credit rate is 100 percent on the first $2,000 of
qualified tuition and related expenses, and 25 percent on the
next $2,000 of qualified tuition and related expenses. The
credit may not be claimed for more than four taxable years with
respect to any student.
The American Opportunity credit is phased out ratably for
taxpayers with modified AGI between $80,000 and $90,000
($160,000 and $180,000 for married taxpayers filing a joint
return). The credit may be claimed against a taxpayer's AMT
liability.
Forty percent of a taxpayer's otherwise allowable modified
credit is refundable. A refundable credit is a credit which, if
the amount of the credit exceeds the taxpayer's Federal income
tax liability, the excess is payable to the taxpayer as a
direct transfer payment.
A taxpayer may not claim the American Opportunity credit if
the qualified tuition and related expenses for the enrollment
or attendance of a student, if such student has been convicted
of a Federal or State felony offense consisting of the
possession or distribution of a controlled substance before the
end of the taxable year.\85\
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\85\Sec. 25A(b)(2)(D).
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Lifetime learning credit
Individual taxpayers may be eligible to claim a
nonrefundable credit, the Lifetime Learning credit, against
Federal income taxes equal to 20 percent of qualified tuition
and related expenses incurred during the taxable year on behalf
of the taxpayer, the taxpayer's spouse, or any dependents. Up
to $10,000 of qualified tuition and related expenses per
taxpayer return are eligible for the Lifetime Learning credit
(i.e., the maximum credit per taxpayer return is $2,000).
In contrast to the American Opportunity credit, a taxpayer
may claim the Lifetime Learning credit for an unlimited number
of taxable years.\86\ Also in contrast to the American
Opportunity credit, the maximum amount of the Lifetime Learning
credit that may be claimed on a taxpayer's return does not vary
based on the number of students in the taxpayer's family--that
is, the American Opportunity credit is computed on a per-
student basis while the Lifetime Learning credit is computed on
a family-wide basis. The Lifetime Learning credit amount that a
taxpayer may otherwise claim is phased out ratably for
taxpayers with modified AGI between $56,000 and $66,000
($112,000 and $132,000 for married taxpayers filing a joint
return) in 2017.
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\86\Sec. 25A(a)(2).
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REASONS FOR CHANGE
The Committee believes that it is important to provide
access to affordable, high-quality higher education. Combining
the American Opportunity credit with elements of the Lifetime
Learning Credit will continue to serve to make college more
affordable, while also streamlining these tax provisions so
that they are easier for families to apply--an important step
towards consolidating duplicative Code provisions and
simplifying the Code. The Committee believes that these changes
will make the system simpler and fairer for all families and
individuals.
EXPLANATION OF PROVISION
The provision modifies the American Opportunity credit\87\
by providing that a credit may be claimed with respect to a
student for five taxable years (rather than four taxable years
under present law). For a credit claimed with respect to the
student's fifth taxable year, the credit is half the value of
the American Opportunity credit that is applicable to the first
four taxable years (the refundable portion of the credit is 40-
percent of the half-value credit). Additionally, the provision
allows a student to claim the American Opportunity credit for
any of the first five years of postsecondary education.
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\87\The provision also repeals the Hope credit, a precursor to the
American Opportunity credit which since 2009 has been largely
superseded in the Code by the American Opportunity credit.
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The operation of this provision is as follows. Assume that
a student enters college in the Fall of 2018, attending for
eight consecutive semesters, such that the student graduates in
the Spring of 2022. Assume that qualifying tuition and fees for
each semester is in excess of $5,000. For each of taxable years
2018, 2019, 2020 and 2021, an individual claiming the credit on
behalf of the student would be eligible for the maximum credit
of $2,500 (of which $1,000 is refundable). For taxable year
2022, a taxpayer claiming the credit on behalf of the student
may be eligible for a $1,250 credit (of which $500 is
refundable). Alternatively, if no credit were claimed with
respect to the student in 2022, and the student were to decide
to attend graduate school in the Fall of 2024, the student may
claim the half-value fifth year credit ($1,250 ($500
refundable)) for the 2024 taxable year.
The provision repeals the lifetime learning credit.
EFFECTIVE DATE
The proposal applies to taxable years beginning after
December 31, 2017.
2. Consolidation and modification of education savings rules (sec. 1202
of the bill and secs. 529 and 530 of the Code)
PRESENT LAW
Coverdell education savings accounts
A Coverdell education savings account is a trust or
custodial account created exclusively for the purpose of paying
qualified education expenses of a named beneficiary.\88\ Annual
contributions to Coverdell education savings accounts may not
exceed $2,000 per designated beneficiary and may not be made
after the designated beneficiary reaches age 18 (except in the
case of a special needs beneficiary). The contribution limit is
phased out for taxpayers with modified AGI between $95,000 and
$110,000 ($190,000 and $220,000 for married taxpayers filing a
joint return); the AGI of the contributor, and not that of the
beneficiary, controls whether a contribution is permitted by
the taxpayer.
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\88\Sec. 530.
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Earnings on contributions to a Coverdell education savings
account generally are subject to tax when withdrawn.\89\
However, distributions from a Coverdell education savings
account are excludable from the gross income of the distributee
(i.e., the student) to the extent that the distribution does
not exceed the qualified education expenses incurred by the
beneficiary during the year the distribution is made. The
earnings portion of a Coverdell education savings account
distribution not used to pay qualified education expenses is
includible in the gross income of the distributee and generally
is subject to an additional 10-percent tax.\90\
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\89\In addition, Coverdell education savings accounts are subject
to the unrelated business income tax imposed by section 511.
\90\This 10-percent additional tax does not apply if a distribution
from an education savings account is made on account of the death or
disability of the designated beneficiary, or if made on account of a
scholarship received by the designated beneficiary.
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Tax-free (and free of additional 10-percent tax) transfers
or rollovers of account balances from one Coverdell education
savings account benefiting one beneficiary to another Coverdell
education savings account benefiting another beneficiary (as
well as redesignations of the named beneficiary) are permitted,
provided that the new beneficiary is a member of the family of
the prior beneficiary and is under age 30 (except in the case
of a special needs beneficiary). In general, any balance
remaining in a Coverdell education savings account is deemed to
be distributed within 30 days after the date that the
beneficiary reaches age 30 (or, if the beneficiary dies before
attaining age 30, within 30 days of the date that the
beneficiary dies).
Qualified education expenses include qualified elementary
and secondary expenses and qualified higher education expenses.
Such qualified education expenses generally include only out-
of-pocket expenses. They do not include expenses covered by
employer-provided educational assistance or scholarships for
the benefit of the beneficiary that are excludable from gross
income.
The term qualified elementary and secondary school
expenses, means expenses for: (1) tuition, fees, academic
tutoring, special needs services, books, supplies, and other
equipment incurred in connection with the enrollment or
attendance of the beneficiary at a public, private, or
religious school providing elementary or secondary education
(kindergarten through grade 12) as determined under State law;
(2) room and board, uniforms, transportation, and supplementary
items or services (including extended day programs) required or
provided by such a school in connection with such enrollment or
attendance of the beneficiary; and (3) the purchase of any
computer technology or equipment (as defined in section
170(e)(6)(F)(i)) or internet access and related services, if
such technology, equipment, or services are to be used by the
beneficiary and the beneficiary's family during any of the
years the beneficiary is in elementary or secondary school.
Computer software primarily involving sports, games, or hobbies
is not considered a qualified elementary and secondary school
expense unless the software is predominantly educational in
nature.
The term qualified higher education expenses includes
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of the designated beneficiary at an
eligible education institution, regardless of whether the
beneficiary is enrolled at an eligible educational institution
on a full-time, half-time, or less than half-time basis.\91\
Moreover, qualified higher education expenses include certain
room and board expenses for any period during which the
beneficiary is at least a half-time student. Qualified higher
education expenses include expenses with respect to
undergraduate or graduate-level courses. In addition, qualified
higher education expenses include amounts paid or incurred to
purchase tuition credits (or to make contributions to an
account) under a qualified tuition program for the benefit of
the beneficiary of the Coverdell education savings account.\92\
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\91\Qualified higher education expenses are defined in the same
manner as for qualified tuition programs.
\92\Sec. 530(b)(2)(B).
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Section 529 qualified tuition programs
In general
A qualified tuition program is a program established and
maintained by a State or agency or instrumentality thereof, or
by one or more eligible educational institutions, which
satisfies certain requirements and under which a person may
purchase tuition credits or certificates on behalf of a
designated beneficiary that entitle the beneficiary to the
waiver or payment of qualified higher education expenses of the
beneficiary (a ``prepaid tuition program''). Section 529
provides specified income tax and transfer tax rules for the
treatment of accounts and contracts established under qualified
tuition programs.\93\ In the case of a program established and
maintained by a State or agency or instrumentality thereof, a
qualified tuition program also includes a program under which a
person may make contributions to an account that is established
for the purpose of satisfying the qualified higher education
expenses of the designated beneficiary of the account, provided
it satisfies certain specified requirements (a ``savings
account program''). Under both types of qualified tuition
programs, a contributor establishes an account for the benefit
of a particular designated beneficiary to provide for that
beneficiary's higher education expenses.
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\93\For purposes of this description, the term ``account'' is used
interchangeably to refer to a prepaid tuition benefit contract or a
tuition savings account established pursuant to a qualified tuition
program.
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In general, prepaid tuition contracts and tuition savings
accounts established under a qualified tuition program involve
prepayments or contributions made by one or more individuals
for the benefit of a designated beneficiary. Decisions with
respect to the contract or account are typically made by an
individual who is not the designated beneficiary. Qualified
tuition accounts or contracts generally require the designation
of a person (generally referred to as an ``account owner'')\94\
whom the program administrator (oftentimes a third party
administrator retained by the State or by the educational
institution that established the program) may look to for
decisions, recordkeeping, and reporting with respect to the
account established for a designated beneficiary. The person or
persons who make the contributions to the account need not be
the same person who is regarded as the account owner for
purposes of administering the account. Under many qualified
tuition programs, the account owner generally has control over
the account or contract, including the ability to change
designated beneficiaries and to withdraw funds at any time and
for any purpose. Thus, in practice, qualified tuition accounts
or contracts generally involve a contributor, a designated
beneficiary, an account owner (who oftentimes is not the
contributor or the designated beneficiary), and an
administrator of the account or contract.
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\94\Section 529 refers to contributors and designated
beneficiaries, but does not define or otherwise refer to the term
``account owner,'' which is a commonly used term among qualified
tuition programs.
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Qualified higher education expenses
For purposes of receiving a distribution from a qualified
tuition program that qualifies for favorable tax treatment
under the Code, qualified higher education expenses means
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an
eligible educational institution, and expenses for special
needs services in the case of a special needs beneficiary that
are incurred in connection with such enrollment or attendance.
Qualified higher education expenses generally also include room
and board for students who are enrolled at least half-time.
Qualified higher education expenses include the purchase of any
computer technology or equipment, or Internet access or related
services, if such technology or services were to be used
primarily by the beneficiary during any of the years a
beneficiary is enrolled at an eligible institution.
Contributions to qualified tuition programs
Contributions to a qualified tuition program must be made
in cash. Section 529 does not impose a specific dollar limit on
the amount of contributions, account balances, or prepaid
tuition benefits relating to a qualified tuition account;
however, the program is required to have adequate safeguards to
prevent contributions in excess of amounts necessary to provide
for the beneficiary's qualified higher education expenses.
Contributions generally are treated as a completed gift
eligible for the gift tax annual exclusion. Contributions are
not tax deductible for Federal income tax purposes, although
they may be deductible for State income tax purposes. Amounts
in the account accumulate on a tax-free basis (i.e., income on
accounts in the plan is not subject to current income tax).
A qualified tuition program may not permit any contributor
to, or designated beneficiary under, the program to direct
(directly or indirectly) the investment of any contributions
(or earnings thereon) more than two times in any calendar year,
and must provide separate accounting for each designated
beneficiary. A qualified tuition program may not allow any
interest in an account or contract (or any portion thereof) to
be used as security for a loan.
REASONS FOR CHANGE
The Committee believes that expanding and strengthening the
529 program will help families have the ability to save for
future college expenses. Additionally, the Committee believes
that replacing Coverdell savings accounts with an expanded 529
program that allows individuals to save for primary and
secondary school tuition is an important step towards
consolidating duplicative Code provisions and simplifying the
Code.
EXPLANATION OF PROVISION
Under the provision, no new contributions are permitted
into Coverdell savings accounts after December 31, 2017.
However, rollovers of account balances from one Coverdell
education savings account to another pre-existing Coverdell
education savings account benefiting another beneficiary remain
permitted after this date. Additionally, the provision allows
section 529 plans to receive rollover contributions from
Coverdell education savings accounts.
The provision modifies section 529 plans to allow such
plans to distribute not more than $10,000 in expenses for
tuition incurred during the taxable year in connection with the
enrollment or attendance of the designated beneficiary at a
public, private or religious elementary or secondary school.
This limitation applies on a per-student basis, rather than a
per-account basis. Thus, under the provision, although an
individual may be the designated beneficiary of multiple
accounts, that individual may receive a maximum of $10,000 in
distributions free of tax, regardless of whether the funds are
distributed from multiple accounts. Any excess distributions
received by the individual would be treated as a distribution
subject to tax under the general rules of section 529.
The provision also modifies section 529 plans to allow such
plan distributions to be used for certain expenses, including
books, supplies, and equipment, required for attendance in a
registered apprenticeship program. Registered apprenticeship
programs are apprenticeship programs registered and certified
with the Secretary of Labor.
Finally, the provision specifies that nothing in this
section shall prevent an unborn child from qualifying as a
designated beneficiary. For these purposes, an unborn child
means a child in utero, and the term child in utero means a
member of the species homo sapiens, at any stage of
development, who is carried in the womb.
EFFECTIVE DATE
The provision applies to contributions and distributions
made after December 31, 2017.
3. Reforms to discharge of certain student loan indebtedness (sec. 1203
of the bill and sec. 108(f) of the Code)
PRESENT LAW
Gross income generally includes the discharge of
indebtedness of the taxpayer. Under an exception to this
general rule, gross income does not include any amount from the
forgiveness (in whole or in part) of certain student loans,
provided that the forgiveness is contingent on the student's
working for a certain period of time in certain professions for
any of a broad class of employers.\95\
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\95\Sec. 108(f).
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Student loans eligible for this special rule must be made
to an individual to assist the individual in attending an
educational institution that normally maintains a regular
faculty and curriculum and normally has a regularly enrolled
body of students in attendance at the place where its education
activities are regularly carried on. Loan proceeds may be used
not only for tuition and required fees, but also to cover room
and board expenses. The loan must be made by (1) the United
States (or an instrumentality or agency thereof), (2) a State
(or any political subdivision thereof), (3) certain tax-exempt
public benefit corporations that control a State, county, or
municipal hospital and whose employees have been deemed to be
public employees under State law, or (4) an educational
organization that originally received the funds from which the
loan was made from the United States, a State, or a tax-exempt
public benefit corporation.
In addition, an individual's gross income does not include
amounts from the forgiveness of loans made by educational
organizations (and certain tax-exempt organizations in the case
of refinancing loans) out of private, nongovernmental funds if
the proceeds of such loans are used to pay costs of attendance
at an educational institution or to refinance any outstanding
student loans (not just loans made by educational
organizations) and the student is not employed by the lender
organization. In the case of such loans made or refinanced by
educational organizations (or refinancing loans made by certain
tax-exempt organizations), cancellation of the student loan
must be contingent on the student working in an occupation or
area with unmet needs and such work must be performed for, or
under the direction of, a tax-exempt charitable organization or
a governmental entity.
Finally, an individual's gross income does not include any
loan repayment amount received under the National Health
Service Corps loan repayment program, certain State loan
repayment programs, or any amount received by an individual
under any State loan repayment or loan forgiveness program that
is intended to provide for the increased availability of health
care services in underserved or health professional shortage
areas (as determined by the State).
REASONS FOR CHANGE
The Committee believes that the discharge of a student loan
in the case of an individual whose loan was discharged on
account of death or disability of the student borrower should
not be a taxable event.
EXPLANATION OF PROVISION
The provision modifies the exclusion of student loan
discharges from gross income, by including within the exclusion
certain discharges on account of death or disability. Loans
eligible for the exclusion under the provision are loans made
by (1) the United States (or an instrumentality or agency
thereof), (2) a State (or any political subdivision thereof),
(3) certain tax-exempt public benefit corporations that control
a State, county, or municipal hospital and whose employees have
been deemed to be public employees under State law, (4) an
educational organization that originally received the funds
from which the loan was made from the United States, a State,
or a tax-exempt public benefit corporation, or (5) private
education loans (for this purpose, private education loan is
defined in section 140(7) of the Consumer Protection Act).\96\
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\96\15 U.S.C. 1650(7).
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Under the provision, the discharge of a loan as described
above is excluded from gross income if the discharge was
pursuant to the death or total and permanent disability of the
student.\97\
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\97\Although the provision makes specific reference to those
provisions of the Higher Education Act of 1965 that discharge William
D. Ford Federal Direct Loan Program loans, Federal Family Education
Loan Program loans, and Federal Perkins Loan Program loans in the case
of death and total and permanent disability, the provision also
contains a catch-all exclusion in the case of a student loan discharged
on account of the death or total and permanent disability of the
student, in addition to those specific statutory references.
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Additionally, the provision modifies the gross income
exclusion for amounts received under the National Health
Service Corps loan repayment program or certain State loan
repayment programs to include any amount received by an
individual under the Indian Health Service loan repayment
program.\98\
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\98\Section 108 of the Indian Health Care Improvement Act
established the Indian Health Service loan repayment program to assure
a sufficient supply of trained health professionals needed to provide
health care services to Indians. Pub. L. No. 94-437, as amended by Pub.
L. No. 100-713, sec. 108, and Pub. L. No. 102-573, sec. 106, and as
amended, and permanently reauthorized by Pub. L. No. 111-148, sec.
10221.
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EFFECTIVE DATE
The provision applies to discharges of loans after, and
amounts received after, December 31, 2017.
4. Repeal of deduction for student loan interest (sec. 1204 of the bill
and sec. 221 of the Code)
PRESENT LAW
Certain individuals who have paid interest on qualified
education loans may claim an above-the-line deduction for such
interest expenses, subject to a maximum annual deduction
limit.\99\ Required payments of interest generally do not
include voluntary payments, such as interest payments made
during a period of loan forbearance. No deduction is allowed to
an individual if that individual is claimed as a dependent on
another taxpayer's return for the taxable year.\100\
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\99\Sec. 221.
\100\Sec. 221(c).
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A qualified education loan generally is defined as any
indebtedness incurred solely to pay for the costs of attendance
(including room and board) of the taxpayer, the taxpayer's
spouse, or any dependent of the taxpayer as of the time the
indebtedness was incurred in attending on at least a half-time
basis (1) eligible educational institutions, or (2)
institutions conducting internship or residency programs
leading to a degree or certificate from an institution of
higher education, a hospital, or a health care facility
conducting postgraduate training. The cost of attendance is
reduced by any amount excluded from gross income under the
exclusions for qualified scholarships and tuition reductions,
employer-provided educational assistance, interest earned on
education savings bonds, qualified tuition programs, and
Coverdell education savings accounts, as well as the amount of
certain other scholarships and similar payments.
The maximum allowable deduction per year is $2,500.\101\
For 2017, the deduction is phased out ratably for taxpayers
with AGI between $65,000 and $80,000 ($135,000 and $165,000 for
married taxpayers filing a joint return). The income phase-out
ranges are indexed for inflation and rounded to the next lowest
multiple of $5,000.
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\101\Sec. 221(b)(1).
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for student loan interest,
makes the system simpler and fairer for all families and
individuals, and allows for lower tax rates. The Committee
further believes that repeal of this provision is consistent
with streamlining the tax code, broadening the tax base,
lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision repeals the deduction for student loan
interest.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
5. Repeal of deduction for qualified tuition and related expenses (sec.
1204 of the bill and sec. 222 of the Code)
PRESENT LAW
For taxable years beginning before January 1, 2017, an
individual is allowed an above-the-line deduction for qualified
tuition and related expenses for higher education paid by the
individual during the taxable year.\102\ Qualified tuition
includes tuition and fees required for the enrollment or
attendance by the taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer with respect to whom the taxpayer may
claim a personal exemption, at an eligible institution of
higher education for courses of instruction of such individual
at such institution. The expenses must be in connection with
enrollment at an institution of higher education during the
taxable year, or with an academic term beginning during the
taxable year or during the first three months of the next
taxable year. The deduction is not available for tuition and
related expenses paid for elementary or secondary education.
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\102\Sec. 222(a).
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The maximum deduction is $4,000 for an individual whose AGI
for the taxable year does not exceed $65,000 ($130,000 in the
case of a joint return), or $2,000 for other individuals whose
AGI does not exceed $80,000 ($160,000 in the case of a joint
return).\103\ No deduction is allowed for an individual whose
AGI exceeds the relevant AGI limitations, for a married
individual who does not file a joint return, or for an
individual with respect to whom a personal exemption deduction
may be claimed by another taxpayer for the taxable year. The
deduction is not available for taxable years beginning after
December 31, 2016.
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\103\Sec. 222(b)(2)(B).
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for tuition, makes the
system simpler and fairer for all families and individuals, and
allows for lower tax rates. The Committee further believes that
repeal of this provision is consistent with streamlining the
tax code, broadening the tax base, lowering rates, and growing
the economy.
EXPLANATION OF PROVISION
The provision repeals the deduction for qualified tuition
and related expenses.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
6. Repeal of exclusion for educational assistance programs (sec. 1204
of the bill and sec. 127 of the Code)
PRESENT LAW
Up to $5,250 annually of educational assistance provided by
an employer to an employee is excludible from the employee's
gross income, provided that certain requirements are
satisfied.\104\ Nondiscrimination rules\105\ apply and the
educational assistance must be provided pursuant to a separate
written plan of the employer. The exclusion applies to both
graduate and undergraduate courses, and applies only with
respect to education provided to the employee (i.e., it does
not apply to education provided to the spouse or a child of the
employee). Amounts that are excludible from gross income for
income tax purposes are also excluded from wages for employment
tax purposes.
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\104\Sec. 127(a).
\105\The employer's educational assistance program must not
discriminate in favor of highly compensated employees, within the
meaning of Sec. 414(q). In addition, no more than five percent of the
amounts paid or incurred by the employer during the year for
educational assistance under a qualified educational assistance program
can be provided for the class of individuals consisting of more-than-
five-percent owners of the employer and the spouses or dependents of
such more-than-five-percent owners.
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For purposes of the exclusion, educational assistance means
the payment by an employer of expenses incurred by or on behalf
of the employee for education of the employee including, but
not limited to, tuition, fees and similar payments, books,
supplies, and equipment. Educational assistance also includes
the provision by the employer of courses of instruction for the
employee (including books, supplies, and equipment).
Educational assistance does not include (1) tools or supplies
that may be retained by the employee after completion of a
course, (2) meals, lodging, or transportation, and (3) any
education involving sports, games, or hobbies.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the exclusion for educational assistance
programs, makes the system simpler and fairer for all families
and individuals, and allows for lower tax rates. The Committee
further believes that repeal of this provision is consistent
with streamlining the tax code, broadening the tax base,
lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision repeals the exclusions from gross income and
wages for educational assistance programs.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
7. Repeal of exclusion for interest on United States savings bonds used
for higher education expenses (sec. 1204 of the bill and sec. 135 of
the Code)
PRESENT LAW
Interest earned on a qualified United States Series EE
savings bond issued after 1989 is excludable from gross income
if the proceeds of the bond upon redemption do not exceed
qualified higher education expenses paid by the taxpayer during
the taxable year.\106\ Qualified higher education expenses
include tuition and fees (but not room and board expenses)
required for the enrollment or attendance of the taxpayer, the
taxpayer's spouse, or a dependent of the taxpayer at certain
eligible higher educational institutions. The amount of
qualified higher education expenses taken into account for
purposes of the exclusion is reduced by the amount of such
expenses taken into account in determining the Hope, American
Opportunity, or Lifetime Learning credits claimed by any
taxpayer, or taken into account in determining an exclusion
from gross income for a distribution from a qualified tuition
program or a Coverdell education savings account, with respect
to a particular student for the taxable year.
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\106\Sec. 135.
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The exclusion is phased out for certain higher-income
taxpayers, determined by the taxpayer's modified AGI during the
year the bond is redeemed. For 2017, the exclusion is phased
out for taxpayers with modified AGI between $78,150 and $93,150
($117,250 and $147,250 for married taxpayers filing a joint
return). To prevent taxpayers from effectively avoiding the
income phaseout limitation through the purchase of bonds
directly in the child's name, the interest exclusion is
available only with respect to U.S. Series EE savings bonds
issued to taxpayers who are at least 24 years old.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the exclusion for interest on United
States savings bonds used for higher education expenses, makes
the system simpler and fairer for all families and individuals,
and allows for lower tax rates. The Committee further believes
that repeal of this provision is consistent with streamlining
the tax code, broadening the tax base, lowering rates, and
growing the economy.
EXPLANATION OF PROVISION
The provision repeals exclusion for interest on Series EE
savings bonds used for qualified higher education expenses.
EFFECTIVE DATE
The provision generally applies to taxable years beginning
after December 31, 2017.
8. Repeal of exclusion for qualified tuition reductions (sec. 1204 of
the bill and sec. 117(d) of the Code)
PRESENT LAW
Qualified tuition reductions for certain education provided
to employees (and their spouses and dependents\107\) of certain
educational organizations are excludible from gross
income.\108\ The tuition reduction is subject to
nondiscrimination rules.\109\ The exclusion generally applies
below the graduate level, and to teaching and research
assistants who are students at the graduate level, but does not
apply to any amount received by a student that represents
payment for teaching, research or other services by the student
required as a condition for receiving the tuition reduction.
Amounts that are excludible from gross income for income tax
purposes are also excluded from wages for employment tax
purposes.
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\107\Individuals described under the rules of Sec. 132(h).
\108\Educational organization described in section
170(b)(1)(A)(ii). Sec. 117(d)(2).
\109\The exclusion applies with respect to highly compensated
employees, within the meaning of Sec. 414(q), only if such tuition
reductions are available on substantially the same terms to each member
of a group of employees which is defined under a reasonable
classification established by the employer, such that the benefit does
not discriminate in favor of highly compensated employees.
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the exclusion for qualified tuition
reductions, makes the system simpler and fairer for all
families and individuals, and allows for lower tax rates. The
Committee further believes that repeal of this provision is
consistent with streamlining the tax code, broadening the tax
base, lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision repeals the exclusions from gross income and
wages for qualified tuition reductions.
EFFECTIVE DATE
The provision applies to amounts paid or incurred after
December 31, 2017.
9. Rollovers between qualified tuition programs and qualified ABLE
programs (sec. 1205 of the bill and secs. 529 and 529A of the Code)
PRESENT LAW\110\
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\110\For a description of qualified tuition programs (also known as
529 plans), see the description of sec. 1203 of the bill.
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Qualified ABLE programs
The Code provides for a tax-favored savings program
intended to benefit disabled individuals, known as qualified
ABLE programs.\111\ A qualified ABLE program is a program
established and maintained by a State or agency or
instrumentality thereof. A qualified ABLE program must meet the
following conditions: (1) under the provisions of the program,
contributions may be made to an account (an ``ABLE account''),
established for the purpose of meeting the qualified disability
expenses of the designated beneficiary of the account; (2) the
program must limit a designated beneficiary to one ABLE
account; and (3) the program must meet certain other
requirements discussed below. A qualified ABLE program is
generally exempt from income tax, but is otherwise subject to
the taxes imposed on the unrelated business income of tax-
exempt organizations.
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\111\Sec. 529A.
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A designated beneficiary of an ABLE account is the owner of
the ABLE account. A designated beneficiary must be an eligible
individual (defined below) who established the ABLE account and
who is designated at the commencement of participation in the
qualified ABLE program as the beneficiary of amounts paid (or
to be paid) into and from the program.
Contributions to an ABLE account must be made in cash and
are not deductible for Federal income tax purposes. Except in
the case of a rollover contribution from another ABLE account,
an ABLE account must provide that it may not receive aggregate
contributions during a taxable year in excess of the amount
under section 2503(b) of the Code (the annual gift tax
exemption). For 2017, this is $14,000.\112\ Additionally, a
qualified ABLE program must provide adequate safeguards to
ensure that ABLE account contributions do not exceed the limit
imposed on accounts under the qualified tuition program of the
State maintaining the qualified ABLE program. Amounts in the
account accumulate on a tax-deferred basis (i.e., income on
accounts under the program is not subject to current income
tax).
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\112\This amount is indexed for inflation. In the case that
contributions to an ABLE account exceed the annual limit, an excise tax
in the amount of six percent of the excess contribution to such account
is imposed on the designated beneficiary. Such tax does not apply in
the event that the trustee of such account makes a corrective
distribution of such excess amounts by the due date (including
extensions) of the individual's tax return for the year within the
taxable year.
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A qualified ABLE program may permit a designated
beneficiary to direct (directly or indirectly) the investment
of any contributions (or earnings thereon) no more than two
times in any calendar year and must provide separate accounting
for each designated beneficiary. A qualified ABLE program may
not allow any interest in the program (or any portion thereof)
to be used as security for a loan.
Distributions from an ABLE account are generally includible
in the distributee's income to the extent consisting of
earnings on the account.\113\ Distributions from an ABLE
account are excludable from income to the extent that the total
distribution does not exceed the qualified disability expenses
of the designated beneficiary during the taxable year. If a
distribution from an ABLE account exceeds the qualified
disability expenses of the designated beneficiary, a pro rata
portion of the distribution is excludable from income. The
portion of any distribution that is includible in income is
subject to an additional 10-percent tax unless the distribution
is made after the death of the beneficiary. Amounts in an ABLE
account may be rolled over without income tax liability to
another ABLE account for the same beneficiary\114\ or another
ABLE account for the designated beneficiary's brother, sister,
stepbrother or stepsister who is also an eligible individual.
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\113\The rules of section 72 apply in determining the portion of a
distribution that consists of earnings.
\114\For instance, if a designated beneficiary were to relocate to
a different State.
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Except in the case of an ABLE account established in a
different ABLE program for purposes of transferring ABLE
accounts,\115\ no more than one ABLE account may be established
by a designated beneficiary. Thus, once an ABLE account has
been established by a designated beneficiary, no account
subsequently established by such beneficiary shall be treated
as an ABLE account.
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\115\In which case the contributor ABLE account must be closed 60
days after the transfer to the new ABLE account is made.
---------------------------------------------------------------------------
A contribution to an ABLE account is treated as a completed
gift of a present interest to the designated beneficiary of the
account. Such contributions qualify for the per-donee annual
gift tax exclusion ($14,000 for 2017) and, to the extent of
such exclusion, are exempt from the generation skipping
transfer (``GST'') tax. A distribution from an ABLE account
generally is not subject to gift tax or GST tax.
Eligible individuals
As described above, a qualified ABLE program may provide
for the establishment of ABLE accounts only if those accounts
are established and owned by an eligible individual, such owner
referred to as a designated beneficiary. For these purposes, an
eligible individual is an individual either (1) for whom a
disability certification has been filed with the Secretary for
the taxable year, or (2) who is entitled to Social Security
Disability Insurance benefits or SSI benefits\116\ based on
blindness or disability, and such blindness or disability
occurred before the individual attained age 26.
---------------------------------------------------------------------------
\116\These are benefits, respectively, under Title II or Title XVI
of the Social Security Act.
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A disability certification means a certification to the
satisfaction of the Secretary, made by the eligible individual
or the parent or guardian of the eligible individual, that the
individual has a medically determinable physical or mental
impairment, which results in marked and severe functional
limitations, and which can be expected to result in death or
which has lasted or can be expected to last for a continuous
period of not less than 12 months, or is blind (within the
meaning of section 1614(a)(2) of the Social Security Act). Such
blindness or disability must have occurred before the date the
individual attained age 26. Such certification must include a
copy of the diagnosis of the individual's impairment and be
signed by a licensed physician.\117\
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\117\No inference may be drawn from a disability certification for
purposes of eligibility for Social Security, SSI or Medicaid benefits.
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Qualified disability expenses
As described above, the earnings on distributions from an
ABLE account are excluded from income only to the extent total
distributions do not exceed the qualified disability expenses
of the designated beneficiary. For this purpose, qualified
disability expenses are any expenses related to the eligible
individual's blindness or disability which are made for the
benefit of the designated beneficiary. Such expenses include
the following expenses: education, housing, transportation,
employment training and support, assistive technology and
personal support services, health, prevention and wellness,
financial management and administrative services, legal fees,
expenses for oversight and monitoring, funeral and burial
expenses, and other expenses, which are approved by the
Secretary under regulations and consistent with the purposes of
section 529A.
Transfer to State
In the event that the designated beneficiary dies, subject
to any outstanding payments due for qualified disability
expenses incurred by the designated beneficiary, all amounts
remaining in the deceased designated beneficiary's ABLE account
not in excess of the amount equal to the total medical
assistance paid such individual under any State Medicaid plan
established under title XIX of the Social Security Act shall be
distributed to such State upon filing of a claim for payment by
such State. Such repaid amounts shall be net of any premiums
paid from the account or by or on behalf of the beneficiary to
the State's Medicaid Buy-In program.
Treatment of ABLE accounts under Federal programs
Any amounts in an ABLE account, and any distribution for
qualified disability expenses, shall be disregarded for
purposes of determining eligibility to receive, or the amount
of, any assistance or benefit authorized by any Federal means-
tested program. However, in the case of the SSI program, a
distribution for housing expenses is not disregarded, nor are
amounts in an ABLE account in excess of $100,000. In the case
that an individual's ABLE account balance exceeds $100,000,
such individual's SSI benefits shall not be terminated, but
instead shall be suspended until such time as the individual's
resources fall below $100,000. However, such suspension shall
not apply for purposes of Medicaid eligibility.
REASONS FOR CHANGE
ABLE programs can be viewed as an alternative to college
savings, allowing a parent to save for a child with a
disability in the same way a parent might save for a child to
go to college. The Committee believes that families should have
the flexibility to transition between these savings vehicles by
allowing amounts saved in a section 529 account to be
transferred to an ABLE account tax-free.''
EXPLANATION OF PROVISION
The provision allows for amounts from qualified tuition
programs (also known as 529 accounts) to be rolled over to an
ABLE account without penalty, provided that the ABLE account is
owned by the designated beneficiary of that 529 account, or a
member of such designated beneficiary's family.\118\ Such
rolled-over amounts count towards the overall limitation on
amounts that can be contributed to an ABLE account within a
taxable year.\119\ Any amount rolled over that is in excess of
this limitation shall be includible in the gross income of the
distributee in a manner provided by section 72.\120\
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\118\For these purposes, a member of the family means, with respect
to any designated beneficiary, the taxpayer's: (1) spouse; (2) child or
descendant of a child; (3) brother, sister, stepbrother or stepsister;
(4) father, mother or ancestor of either; (5) stepfather or stepmother;
(6) niece or nephew; (7) aunt or uncle; (8) in-law; (9) the spouse of
any individual described in (2)-(8); and (10) any first cousin of the
designated beneficiary.
\119\529A(b)(2)(B).
\120\529(c)(3)(A).
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EFFECTIVE DATE
The provision applies to distributions after December 31,
2017.
D. Simplification and Reform of Deductions
1. Repeal of overall limitation on itemized deductions (sec. 1301 of
the bill and sec. 68 of the Code)
PRESENT LAW
The total amount of most otherwise allowable itemized
deductions (other than the deductions for medical expenses,
investment interest and casualty, theft or gambling losses) is
limited for certain upper-income taxpayers.\121\ All other
limitations applicable to such deductions (such as the separate
floors) are first applied and, then, the otherwise allowable
total amount of itemized deductions is reduced by three percent
of the amount by which the taxpayer's adjusted gross income
exceeds a threshold amount.
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\121\Sec. 68.
---------------------------------------------------------------------------
For 2017, the threshold amounts are $261,500 for single
taxpayers, $287,650 for heads of household, $313,800 for
married couples filing jointly, and $156,900 for married
taxpayers filing separately. These threshold amounts are
indexed for inflation. The otherwise allowable itemized
deductions may not be reduced by more than 80 percent by reason
of the overall limit on itemized deductions.
REASONS FOR CHANGE
The Committee believes that the overall limitation on
itemized deductions has functioned as a hidden marginal tax
rate. In its mission to make the Code simpler, fairer, and more
transparent, the Committee believes that the provision should
be repealed.
EXPLANATION OF PROVISION
The provision repeals the overall limitation on itemized
deductions.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
2. Modification of deduction for home mortgage interest (sec. 1302 of
the bill and sec. 163(h) of the Code)
PRESENT LAW
As a general matter, personal interest is not
deductible.\122\ Qualified residence interest is not treated as
personal interest and is allowed as an itemized deduction,
subject to limitations.\123\ Qualified residence interest means
interest paid or accrued during the taxable year on either
acquisition indebtedness or home equity indebtedness. A
qualified residence means the taxpayer's principal residence
and one other residence of the taxpayer selected to be a
qualified residence. A qualified residence can be a house,
condominium, cooperative, mobile home, house trailer, or boat.
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\122\Sec. 163(h)(1).
\123\Sec. 163(h)(2)(D) and (h)(3).
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Acquisition indebtedness
Acquisition indebtedness is indebtedness that is incurred
in acquiring, constructing, or substantially improving a
qualified residence of the taxpayer and which secures the
residence. The maximum amount treated as acquisition
indebtedness is $1 million ($500,000 in the case of a married
person filing a separate return).
Acquisition indebtedness also includes indebtedness from
the refinancing of other acquisition indebtedness but only to
the extent of the amount (and term) of the refinanced
indebtedness. Thus, for example, if the taxpayer incurs
$200,000 of acquisition indebtedness to acquire a principal
residence and pays down the debt to $150,000, the taxpayer's
acquisition indebtedness with respect to the residence cannot
thereafter be increased above $150,000 (except by indebtedness
incurred to substantially improve the residence).
Interest on acquisition indebtedness is allowable in
computing alternative minimum taxable income. However, in the
case of a second residence, the acquisition indebtedness may
only be incurred with respect to a house, apartment,
condominium, or a mobile home that is not used on a transient
basis.
Home equity indebtedness
Home equity indebtedness is indebtedness (other than
acquisition indebtedness) secured by a qualified residence.
The amount of home equity indebtedness may not exceed
$100,000 ($50,000 in the case of a married individual filing a
separate return) and may not exceed the fair market value of
the residence reduced by the acquisition indebtedness.
Interest on home equity indebtedness is not deductible in
computing alternative minimum taxable income.
Interest on qualifying home equity indebtedness is
deductible, regardless of how the proceeds of the indebtedness
are used. For example, personal expenditures may include health
costs and education expenses for the taxpayer's family members
or any other personal expenses such as vacations, furniture, or
automobiles. A taxpayer and a mortgage company can contract for
the home equity indebtedness loan proceeds to be transferred to
the taxpayer in a lump sum payment (e.g., a traditional
mortgage), a series of payments (e.g., a reverse mortgage), or
the lender may extend the borrower a line of credit up to a
fixed limit over the term of the loan (e.g., a home equity line
of credit).
Thus, the aggregate limitation on the total amount of a
taxpayer's acquisition indebtedness and home equity
indebtedness with respect to a taxpayer's principal residence
and a second residence that may give rise to deductible
interest is $1,100,000 ($550,000, for married persons filing a
separate return).
REASONS FOR CHANGE
The Committee believes that scaling back existing tax
incentives, including the home mortgage interest deduction,
makes the system simpler and fairer for all families and
individuals, and allows for lower tax rates. The Committee
further believes that modification of this provision is
consistent with streamlining the tax code, broadening the tax
base, lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision modifies the home mortgage interest deduction
in the following ways.
First, under the provision, only interest paid on
indebtedness used to acquire, construct or substantially
improve the taxpayer's principal residence may be included in
the calculation of the deduction. Thus, under the provision, a
taxpayer receives no deduction for interest paid on
indebtedness used to acquire a second home.
Second, under the provision, a taxpayer may treat no more
than $500,000 as principal residence acquisition indebtedness
($250,000 in the case of married taxpayers filing separately).
In the case of principal residence acquisition indebtedness
incurred before the date of introduction (November 2, 2017),
this limitation is $1,000,000 ($500,000 in the case of married
taxpayers filing separately).\124\ Although the term principal
residence acquisition indebtedness is not defined in the
statute, it is intended that this ``grandfathering'' provision
apply only with respect to indebtedness incurred with respect
to a taxpayer's principal residence.
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\124\Special rules apply in the case of indebtedness from
refinancing existing principal residence acquisition indebtedness.
Specifically, the $1,000,000 ($500,000 in the case of married taxpayers
filing separately) limitation continues to apply to any indebtedness
incurred on or after November 2, 2017, to refinance qualified residence
indebtedness incurred before that date to the extent the amount of the
indebtedness resulting from the refinancing does not exceed the amount
of the refinanced indebtedness. Thus, the maximum dollar amount that
may be treated as principal residence acquisition indebtedness will not
decrease by reason of a refinancing.
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Last, under the provision, interest paid on home equity
indebtedness is not treated as qualified residence interest,
and thus is not deductible. This is the case regardless of when
the home equity indebtedness was incurred.
EFFECTIVE DATE
The provision is effective for interest paid or accrued in
taxable years beginning after December 31, 2017.
3. Modification of deduction for taxes not paid or accrued in a trade
or business (sec. 1303 of the bill and sec. 164(b) of the Code)
PRESENT LAW
Individuals are permitted a deduction for certain taxes
paid or accrued, whether or not incurred in a taxpayer's trade
or business. These taxes are: (i) State and local real and
foreign property taxes;\125\ (ii) State and local personal
property taxes;\126\ (iii) State, local, and foreign income,
war profits, and excess profits taxes.\127\ At the election of
the taxpayer, an itemized deduction may be taken for State and
local general sales taxes in lieu of the itemized deduction for
State and local income taxes.\128\
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\125\Sec. 164(a)(1).
\126\Sec. 164(a)(2).
\127\Sec. 164(a)(3). A foreign tax credit, in lieu of a deduction,
is allowable for foreign taxes if the taxpayer so elects.
\128\Sec. 164(b)(5).
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Property taxes may be allowed as a deduction in computing
adjusted gross income if incurred in connection with property
used in a trade or business; otherwise they are an itemized
deduction. In the case of State and local income taxes, the
deduction is an itemized deduction notwithstanding that the tax
may be imposed on profits from a trade or business.\129\
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\129\See H. Rep. No. 1365 to accompany Individual Income Tax Bill
of 1944 (78th Cong., 2d. Sess.), reprinted at 19 C.B. 839 (1944).
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Individuals also are permitted a deduction for Federal and
State generation skipping transfer tax (``GST tax'') imposed on
certain income distributions that are included in the gross
income of the distributee.\130\
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\130\Sec. 164(a)(4).
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In determining a taxpayer's alternative minimum taxable
income, no itemized deduction for property, income, or sales
tax is allowed.
REASONS FOR CHANGE
The Committee believe that scaling back existing tax
incentives, including the deduction for State and local taxes,
makes the system simpler and fairer for all families and
individuals, and allows for lower tax rates. The Committee
further believes that modification of this provision to apply
only to real property taxes is consistent with streamlining the
tax code, broadening the tax base, lowering rates, and growing
the economy.
EXPLANATION OF PROVISION
Under the provision, in the case of an individual, as a
general matter, State, local, and foreign property taxes and
State and local sales taxes are allowed as a deduction only
when paid or accrued in carrying on a trade or business, or an
activity described in section 212 (relating to expenses for the
production of income).\131\ Thus, the provision allows only
those deductions for State, local, and foreign property taxes,
and sales taxes, that are presently deductible in computing
income on an individual's Schedule C, Schedule E, or Schedule F
on such individual's tax return. Thus, for instance, in the
case of property taxes, an individual may deduct such items
only if these taxes were imposed on business assets (such as
residential rental property).
---------------------------------------------------------------------------
\131\The proposal does not modify the deductibility of GST tax
imposed on certain income distributions.
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The provision contains an exception to the above-stated
rule in the case of real property taxes. Under this exception,
an individual may claim an itemized deduction of up to $10,000
($5,000 for married taxpayer filing a separate return) for
property taxes paid or accrued in the taxable year, in addition
to any property taxes deducted in carrying on a trade or
business or an activity described in section 212. Foreign real
property taxes may not be deducted under this exception.
Under the provision, in the case of an individual, State
and local income, war profits, and excess profits taxes are not
allowable as a deduction.
It is intended that persons required to report refunds of
State and local income taxes under section 6050E should no
longer be required to report such refunds of tax relating to
taxable years beginning after December 31, 2017. A technical
amendment may be needed to reflect this intent.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
4. Repeal of deduction for personal casualty and theft losses (sec.
1304 of the bill and sec. 165 of the Code)
PRESENT LAW
A taxpayer may generally claim a deduction for any loss
sustained during the taxable year, not compensated by insurance
or otherwise. For individual taxpayers, deductible losses must
be incurred in a trade or business or other profit-seeking
activity or consist of property losses arising from fire,
storm, shipwreck, or other casualty, or from theft.\132\
Personal casualty or theft losses are deductible only if they
exceed $100 per casualty or theft. In addition, aggregate net
casualty and theft losses are deductible only to the extent
they exceed 10 percent of an individual taxpayer's adjusted
gross income.
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\132\Sec. 165(c).
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for personal casualty and
theft losses, makes the system simpler and fairer for all
families and individuals, and allows for lower tax rates. The
Committee further believes that repeal of this provision is
consistent with streamlining the tax code, broadening the tax
base, lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision repeals the deduction for personal casualty
and theft losses. However, notwithstanding the repeal of the
deduction, the provision retains the benefit of the deduction,
as modified by the Disaster Tax Relief and Airport and Airway
Extension Act of 2017,\133\ for those individuals who sustained
a personal casualty loss arising from hurricanes Harvey, Irma,
or Maria.
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\133\Pub. L. No. 115-63.
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
5. Limitation on wagering losses (sec. 1305 of the bill and sec. 165 of
the Code)
PRESENT LAW
Losses sustained during the taxable year on wagering
transactions are allowed as a deduction only to the extent of
the gains during the taxable year from such transactions.\134\
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\134\Sec. 165(d).
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REASONS FOR CHANGE
The Committee believes that the scope of the limitation on
wagering losses should be broadened to cover expenses incurred
in the conduct of the individual's gambling activity.
EXPLANATION OF PROVISION
The provision clarifies the scope of ``losses from wagering
transactions'' as that term is used in section 165(d). Under
the provision, this term includes any deduction otherwise
allowable under chapter 1 of the Code incurred in carrying on
any wagering transaction.
The provision is intended to clarify that the limitation on
losses from wagering transactions applies not only to the
actual costs of wagers incurred by an individual, but to other
expenses incurred by the individual in connection with the
conduct of that individual's gambling activity.\135\ The
provision clarifies, for instance, an individual's otherwise
deductible expenses in traveling to or from a casino are
subject to the limitation under section 165(d).
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\135\The provision thus reverses the result reached by the Tax
Court in Ronald A. Mayo v. Commissioner, 136 T.C. 81 (2011). In that
case, the Court held that a taxpayer's expenses incurred in the conduct
of the trade or business of gambling, other than the cost of wagers,
were not limited by sec. 165(d), and were thus deductible under sec.
162(a).
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
6. Modifications to the deduction for charitable contributions (sec.
1306 of the bill and sec. 170 of the Code)
PRESENT LAW
In general
The Internal Revenue Code allows taxpayers to reduce their
income tax liability by taking deductions for contributions to
certain organizations, including charities, Federal, State,
local, and Indian tribal governments, and certain other
organizations.
To be deductible, a charitable contribution generally must
meet several threshold requirements. First, the recipient of
the transfer must be eligible to receive charitable
contributions (i.e., an organization or entity described in
section 170(c)). Second, the transfer must be made with
gratuitous intent and without the expectation of a benefit of
substantial economic value in return. Third, the transfer must
be complete and generally must be a transfer of a donor's
entire interest in the contributed property (i.e., not a
contingent or partial interest contribution). To qualify for a
current year charitable deduction, payment of the contribution
must be made within the taxable year.\136\ Fourth, the transfer
must be of money or property--contributions of services are not
deductible.\137\ Finally, the transfer must be substantiated
and in the proper form.
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\136\Sec. 170(a)(1).
\137\For example, as discussed in greater detail below, the value
of time spent volunteering for a charitable organization is not
deductible. Incidental expenses such as mileage, supplies, or other
expenses incurred while volunteering for a charitable organization,
however, may be deductible.
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As discussed below, special rules limit the deductibility
of a taxpayer's charitable contributions in a given year to a
percentage of income, and those rules, in part, turn on whether
the organization receiving the contributions is a public
charity or a private foundation. Other special rules determine
the deductible value of contributed property for each type of
property.
Contributions of partial interests in property
In general
In general, a charitable deduction is not allowed for
income, estate, or gift tax purposes if the donor transfers an
interest in property to a charity while retaining an interest
in that property or transferring an interest in that property
to a noncharity for less than full and adequate
consideration.\138\ This rule of nondeductibility, often
referred to as the partial interest rule, generally prohibits a
charitable deduction for contributions of income interests,
remainder interests, or rights to use property.
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\138\Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and
2522(c)(2) (gift tax).
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A charitable contribution deduction generally is not
allowable for a contribution of a future interest in tangible
personal property.\139\ For this purpose, a future interest is
one ``in which a donor purports to give tangible personal
property to a charitable organization, but has an
understanding, arrangement, agreement, etc., whether written or
oral, with the charitable organization that has the effect of
reserving to, or retaining in, such donor a right to the use,
possession, or enjoyment of the property.''\140\
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\139\Sec. 170(a)(3).
\140\Treas. Reg. sec. 1.170A-5(a)(4). Treasury regulations provide
that section 170(a)(3), which generally denies a deduction for a
contribution of a future interest in tangible personal property, has
``no application in respect of a transfer of an undivided present
interest in property. For example, a contribution of an undivided one-
quarter interest in a painting with respect to which the donee is
entitled to possession during three months of each year shall be
treated as made upon the receipt by the donee of a formally executed
and acknowledged deed of gift. However, the period of initial
possession by the donee may not be deferred in time for more than one
year.'' Treas. Reg. sec. 1.170A-5(a)(2).
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A gift of an undivided portion of a donor's entire interest
in property generally is not treated as a nondeductible gift of
a partial interest in property.\141\ For this purpose, an
undivided portion of a donor's entire interest in property must
consist of a fraction or percentage of each and every
substantial interest or right owned by the donor in such
property and must extend over the entire term of the donor's
interest in such property.\142\ A gift generally is treated as
a gift of an undivided portion of a donor's entire interest in
property if the donee is given the right, as a tenant in common
with the donor, to possession, dominion, and control of the
property for a portion of each year appropriate to its interest
in such property.\143\
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\141\Sec. 170(f)(3)(B)(ii).
\142\Treas. Reg. sec. 1.170A-7(b)(1).
\143\Treas. Reg. sec. 1.170A-7(b)(1).
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Other exceptions to the partial interest rule are provided
for, among other interests: (1) remainder interests in
charitable remainder annuity trusts, charitable remainder
unitrusts, and pooled income funds; (2) present interests in
the form of a guaranteed annuity or a fixed percentage of the
annual value of the property; (3) a remainder interest in a
personal residence or farm; and (4) qualified conservation
contributions.
Qualified conservation contributions
Qualified conservation contributions are not subject to the
partial interest rule, which generally bars deductions for
charitable contributions of partial interests in property.\144\
A qualified conservation contribution is a contribution of a
qualified real property interest to a qualified organization
exclusively for conservation purposes. A qualified real
property interest is defined as: (1) the entire interest of the
donor other than a qualified mineral interest; (2) a remainder
interest; or (3) a restriction (granted in perpetuity) on the
use that may be made of the real property (generally, a
conservation easement). Qualified organizations include certain
governmental units, public charities that meet certain public
support tests, and certain supporting organizations.
Conservation purposes include: (1) the preservation of land
areas for outdoor recreation by, or for the education of, the
general public; (2) the protection of a relatively natural
habitat of fish, wildlife, or plants, or similar ecosystem; (3)
the preservation of open space (including farmland and forest
land) where such preservation will yield a significant public
benefit and is either for the scenic enjoyment of the general
public or pursuant to a clearly delineated Federal, State, or
local governmental conservation policy; and (4) the
preservation of an historically important land area or a
certified historic structure.
---------------------------------------------------------------------------
\144\Secs. 170(f)(3)(B)(iii) and 170(h).
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Percentage limits on charitable contributions
Individual taxpayers
Charitable contributions by individual taxpayers are
limited to a specified percentage of the individual's
contribution base. The contribution base is the taxpayer's
adjusted gross income (``AGI'') for a taxable year,
disregarding any net operating loss carryback to the year under
section 172.\145\ In general, more favorable (higher)
percentage limits apply to contributions of cash and ordinary
income property than to contributions of capital gain property.
More favorable limits also generally apply to contributions to
public charities (and certain operating foundations) than to
contributions to nonoperating private foundations.
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\145\Sec. 170(b)(1)(G).
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More specifically, the deduction for charitable
contributions by an individual taxpayer of cash and property
that is not appreciated to a charitable organization described
in section 170(b)(1)(A) (public charities, private foundations
other than nonoperating private foundations, and certain
governmental units) may not exceed 50 percent of the taxpayer's
contribution base. Contributions of this type of property to
nonoperating private foundations generally may be deducted up
to the lesser of 30 percent of the taxpayer's contribution base
or the excess of (i) 50 percent of the contribution base over
(ii) the amount of contributions subject to the 50 percent
limitation.
Contributions of appreciated capital gain property to
public charities and other organizations described in section
170(b)(1)(A) generally are deductible up to 30 percent of the
taxpayer's contribution base (after taking into account
contributions other than contributions of capital gain
property). An individual may elect, however, to bring all these
contributions of appreciated capital gain property for a
taxable year within the 50-percent limitation category by
reducing the amount of the contribution deduction by the amount
of the appreciation in the capital gain property. Contributions
of appreciated capital gain property to nonoperating private
foundations are deductible up to the lesser of 20 percent of
the taxpayer's contribution base or the excess of (i) 30
percent of the contribution base over (ii) the amount of
contributions subject to the 30 percent limitation.
Finally, contributions that are for the use of (not to) the
donee charity get less favorable percentage limits.
Contributions of capital gain property for the use of public
charities and other organizations described in section
170(b)(1)(A) also are limited to 20 percent of the taxpayer's
contribution base. Property contributed for the use of an
organization generally has been interpreted to mean property
contributed in trust for the organization.\146\ Charitable
contributions of income interests (where deductible) also
generally are treated as contributions for the use of the donee
organization.
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\146\Rockefeller v. Commissioner, 676 F.2d 35, 39 (2d Cir. 1982).
Table 3--CHARITABLE CONTRIBUTION PERCENTAGE LIMITS FOR INDIVIDUAL TAXPAYERS\147\
----------------------------------------------------------------------------------------------------------------
Ordinary Capital Gain
Income Capital Gain Property for
Property and Property to the the use of the
Cash Recipient\148\ Recipient
----------------------------------------------------------------------------------------------------------------
Public Charities, Private Operating Foundations, and Private 50% 30%\149\ 20%
Distributing Foundations......................................
Nonoperating Private Foundations............................... 30% 20% 20%
----------------------------------------------------------------------------------------------------------------
\147\Percentages shown are the percentage of an individual's contribution base.
\148\Capital gain property contributed to public charities, private operating foundations, or private
distributing foundations will be subject to the 50-percent limitation if the donor elects to reduce the fair
market value of the property by the amount that would have been long-term capital gain if the property had
been sold.
\149\Certain qualified conservation contributions to public charities (generally, conservation easements),
qualify for more generous contribution limits. In general, the 30-percent limit applicable to contributions of
capital gain property is increased to 100 percent if the individual making the qualified conservation
contribution is a qualified farmer or rancher or to 50 percent if the individual is not a qualified farmer or
rancher.
Corporate taxpayers
A corporation generally may deduct charitable contributions
up to 10 percent of the corporation's taxable income for the
year.\150\ For this purpose, taxable income is determined
without regard to: (1) the charitable contributions deduction;
(2) any net operating loss carryback to the taxable year; (3)
deductions for dividends received; (4) deductions for dividends
paid on certain preferred stock of public utilities; and (5)
any capital loss carryback to the taxable year.\151\
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\150\Sec. 170(b)(2)(A).
\151\Sec. 170(b)(2)(C).
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Carryforwards of excess contributions
Charitable contributions that exceed the applicable
percentage limit generally may be carried forward for up to
five years.\152\ In general, contributions carried over from a
prior year are taken into account after contributions for the
current year that are subject to the same percentage limit.
Excess contributions made for the use of (rather than to) an
organization generally may not be carried forward.
---------------------------------------------------------------------------
\152\Sec. 170(d).
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Qualified conservation contributions
Preferential percentage limits and carryforward rules apply
for qualified conservation contributions.\153\ In general, the
30-percent contribution base limitation on contributions of
capital gain property by individuals does not apply to
qualified conservation contributions. Instead, individuals may
deduct the fair market value of any qualified conservation
contribution to an organization described in section
170(b)(1)(A) (generally, public charities) to the extent of the
excess of 50 percent of the contribution base over the amount
of all other allowable charitable contributions. These
contributions are not taken into account in determining the
amount of other allowable charitable contributions. Individuals
are allowed to carry forward any qualified conservation
contributions that exceed the 50-percent limitation for up to
15 years. In the case of an individual who is a qualified
farmer or rancher for the taxable year in which the
contribution is made, a qualified conservation contribution is
allowable up to 100 percent of the excess of the taxpayer's
contribution base over the amount of all other allowable
charitable contributions.
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\153\Sec. 170(b)(1)(E).
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In the case of a corporation (other than a publicly traded
corporation) that is a qualified farmer or rancher for the
taxable year in which the contribution is made, any qualified
conservation contribution is allowable up to 100 percent of the
excess of the corporation's taxable income (as computed under
section 170(b)(2)) over the amount of all other allowable
charitable contributions. Any excess may be carried forward for
up to 15 years as a contribution subject to the 100-percent
limitation.\154\
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\154\Sec. 170(b)(2)(B).
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A qualified farmer or rancher means a taxpayer whose gross
income from the trade or business of farming (within the
meaning of section 2032A(e)(5)) is greater than 50 percent of
the taxpayer's gross income for the taxable year.
Valuation of charitable contributions
In general
For purposes of the income tax charitable deduction, the
value of property contributed to charity may be limited to the
fair market value of the property, the donor's tax basis in the
property, or in some cases a different amount.
Charitable contributions of cash are deductible in the
amount contributed, subject to the percentage limits discussed
above. In addition, a taxpayer generally may deduct the full
fair market value of long-term capital gain property
contributed to charity.\155\ Contributions of tangible personal
property also generally are deductible at fair market value if
the use by the recipient charitable organization is related to
its tax-exempt purpose.
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\155\Capital gain property means any capital asset or property used
in the taxpayer's trade or business, the sale of which at its fair
market value, at the time of contribution, would have resulted in gain
that would have been long-term capital gain. Sec. 170(e)(1)(A).
---------------------------------------------------------------------------
In certain other cases, however, section 170(e) limits the
deductible value of the contribution of appreciated property to
the donor's tax basis in the property. This limitation of the
property's deductible value to basis generally applies, for
example, for: (1) contributions of inventory or other ordinary
income or short-term capital gain property;\156\ (2)
contributions of tangible personal property if the use by the
recipient charitable organization is unrelated to the
organization's tax-exempt purpose;\157\ and (3) contributions
to or for the use of a private foundation (other than certain
private operating foundations).\158\
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\156\Sec. 170(e). Special rules, discussed below, apply for certain
contributions of inventory and other property.
\157\Sec. 170(e)(1)(B)(i)(I).
\158\Sec. 170(e)(1)(B)(ii). Certain contributions of patents or
other intellectual property also generally are limited to the donor's
basis in the property. Sec. 170(e)(1)(B)(iii). However, a special rule
permits additional charitable deductions beyond the donor's tax basis
in certain situations.
---------------------------------------------------------------------------
For contributions of qualified appreciated stock, the
above-described rule that limits the value of property
contributed to or for the use of a private nonoperating
foundation to the taxpayer's basis in the property does not
apply; therefore, subject to certain limits, contributions of
qualified appreciated stock to a nonoperating private
foundation may be deducted at fair market value.\159\ Qualified
appreciated stock is stock that is capital gain property and
for which (as of the date of the contribution) market
quotations are readily available on an established securities
market.\160\ A contribution of qualified appreciated stock
(when increased by the aggregate amount of all prior such
contributions by the donor of stock in the corporation)
generally does not include a contribution of stock to the
extent the amount of the stock contributed exceeds 10 percent
(in value) of all of the outstanding stock of the
corporation.\161\
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\159\Sec. 170(e)(5).
\160\Sec. 170(e)(5)(B).
\161\Sec. 170(e)(5)(C).
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Contributions of property with a fair market value that is
less than the donor's tax basis generally are deductible at the
fair market value of the property.
Enhanced deduction rules for certain contributions of
inventory and other property
Although most charitable contributions of property are
valued at fair market value or the donor's tax basis in the
property, certain statutorily described contributions of
appreciated inventory and other property qualify for an
enhanced deduction valuation that exceeds the donor's tax basis
in the property, but which is less than the fair market value
of the property.
As discussed above, a taxpayer's deduction for charitable
contributions of inventory property generally is limited to the
taxpayer's basis (typically, cost) in the inventory, or if
less, the fair market value of the property. For certain
contributions of inventory, however, C corporations (but not
other taxpayers) may claim an enhanced deduction equal to the
lesser of (1) basis plus one-half of the item's appreciation
(i.e., basis plus one-half of fair market value in excess of
basis) or (2) two times basis.\162\ To be eligible for the
enhanced deduction value, the contributed property generally
must be inventory of the taxpayer, contributed to a charitable
organization described in section 501(c)(3) (except for private
nonoperating foundations), and the donee must (1) use the
property consistent with the donee's exempt purpose solely for
the care of the ill, the needy, or infants, (2) not transfer
the property in exchange for money, other property, or
services, and (3) provide the taxpayer a written statement that
the donee's use of the property will be consistent with such
requirements.\163\ Contributions to organizations that are not
described in section 501(c)(3), such as governmental entities,
do not qualify for this enhanced deduction.
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\162\Sec. 170(e)(3).
\163\Sec. 170(e)(3)(A)(i)-(iii).
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To use the enhanced deduction provision, the taxpayer must
establish that the fair market value of the donated item
exceeds basis.
A taxpayer engaged in a trade or business, whether or not a
C corporation, is eligible to claim the enhanced deduction for
certain donations of food inventory.\164\
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\164\Sec. 170(e)(3)(C).
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Selected statutory rules for specific types of
contributions
Special statutory rules limit the deductible value (and
impose enhanced reporting obligations on donors) of charitable
contributions of certain types of property, including vehicles,
intellectual property, and clothing and household items. Each
of these rules was enacted in response to concerns that some
taxpayers did not accurately report--and in many instances
overstated--the value of the property for purposes of claiming
a charitable deduction.
Vehicle donations.--Under present law, the amount of
deduction for charitable contributions of vehicles (generally
including automobiles, boats, and airplanes for which the
claimed value exceeds $500 and excluding inventory property)
depends upon the use of the vehicle by the donee organization.
If the donee organization sells the vehicle without any
significant intervening use or material improvement of such
vehicle by the organization, the amount of the deduction may
not exceed the gross proceeds received from the sale. In other
situations, a fair market value deduction may be allowed.
Patents and other intellectual property.--If a taxpayer
contributes a patent or other intellectual property (other than
certain copyrights or inventory)\165\ to a charitable
organization, the taxpayer's initial charitable deduction is
limited to the lesser of the taxpayer's basis in the
contributed property or the fair market value of the
property.\166\ In addition, the taxpayer generally is permitted
to deduct, as a charitable contribution, certain additional
amounts in the year of contribution or in subsequent taxable
years based on a specified percentage of the qualified donee
income received or accrued by the charitable donee with respect
to the contributed intellectual property. For this purpose,
qualified donee income includes net income received or accrued
by the donee that properly is allocable to the intellectual
property itself (as opposed to the activity in which the
intellectual property is used).\167\
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\165\Under present and prior law, certain copyrights are not
considered capital assets, such that the charitable deduction for such
copyrights generally is limited to the taxpayer's basis. See sec.
1221(a)(3), 1231(b)(1)(C).
\166\Sec. 170(e)(1)(B)(iii).
\167\The present-law rules allowing additional charitable
deductions for qualified donee income were enacted as part of the
American Jobs Creation Act of 2004, and are effective for contributions
made after June 3, 2004. For a more detailed description of these
rules, see Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in the 108th Congress (JCS-5-05), May 2005, pp.
457-461.
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Clothing and household items.--Charitable contributions of
clothing and household items generally are subject to the
charitable deduction rules applicable to tangible personal
property. If such contributed property is appreciated property
in the hands of the taxpayer, and is not used to further the
donee's exempt purpose, the deduction is limited to basis. In
most situations, however, clothing and household items have a
fair market value that is less than the taxpayer's basis in the
property. Because property with a fair market value less than
basis generally is deductible at the property's fair market
value, taxpayers generally may deduct only the fair market
value of most contributions of clothing or household items,
regardless of whether the property is used for exempt or
unrelated purposes by the donee organization. Furthermore, a
special rule generally provides that no deduction is allowed
for a charitable contribution of clothing or a household item
unless the item is in good used or better condition. The
Secretary is authorized to deny by regulation a deduction for
any contribution of clothing or a household item that has
minimal monetary value, such as used socks and used
undergarments. Notwithstanding the general rule, a charitable
contribution of clothing or household items not in good used or
better condition with a claimed value of more than $500 may be
deducted if the taxpayer includes with the taxpayer's return a
qualified appraisal with respect to the property.\168\
Household items include furniture, furnishings, electronics,
appliances, linens, and other similar items. Food, paintings,
antiques, and other objects of art, jewelry and gems, and
certain collections are excluded from the special rules
described in the preceding paragraph.\169\
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\168\As is discussed above, the charitable contribution
substantiation rules generally require a qualified appraisal where the
claimed value of a contribution is more than $5,000.
\169\The special rules concerning the deductibility of clothing and
household items were enacted as part of the Pension Protection Act of
2006, P.L. 109-280 (August 17, 2006), and are effective for
contributions made after August 17, 2006. For a more detailed
description of these rules, see Joint Committee on Taxation, General
Explanation of Tax Legislation Enacted in the 109th Congress (JCS-1-
07), January 17, 2007, pp. 597-600.
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College athletic seating rights.--In general, where a
taxpayer receives or expects to receive a substantial return
benefit for a payment to charity, the payment is not deductible
as a charitable contribution. However, special rules apply to
certain payments to institutions of higher education in
exchange for which the payor receives the right to purchase
tickets or seating at an athletic event. Specifically, the
payor may treat 80 percent of a payment as a charitable
contribution where: (1) the amount is paid to or for the
benefit of an institution of higher education (as defined in
section 3304(f)) described in section (b)(1)(A)(ii) (generally,
a school with a regular faculty and curriculum and meeting
certain other requirements), and (2) such amount would be
allowable as a charitable deduction but for the fact that the
taxpayer receives (directly or indirectly) as a result of the
payment the right to purchase tickets for seating at an
athletic event in an athletic stadium of such institution.\170\
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\170\Sec. 170(l).
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Use of a vehicle when volunteering for a charity
Unreimbursed out-of-pocket expenditures made incident to
providing donated services to a qualified charitable
organization--such as out-of-pocket transportation expenses
necessarily incurred in performing donated services--may
qualify as a charitable contribution.\171\ No charitable
contribution deduction is allowed for traveling expenses
(including expenses for meals and lodging) while away from
home, whether paid directly or by reimbursement, unless there
is no significant element of personal pleasure, recreation, or
vacation in such travel.\172\
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\171\Treas. Reg. sec. 1.170A-1(g).
\172\Sec. 170(j).
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In determining the amount treated as a charitable
contribution where a taxpayer operates a vehicle in providing
donated services to a charity, the taxpayer either may track
and deduct actual out-of-pocket expenditures or, in the case of
a passenger automobile, may use the charitable standard mileage
rate. The charitable standard mileage rate is set by statute at
14 cents per mile.\173\ The taxpayer may also deduct (under
either computation method), any parking fees and tolls incurred
in rendering the services, but may not deduct any amount
(regardless of the computation method used) for general repair
or maintenance expenses, depreciation, insurance, registration
fees, etc. Regardless of the computation method used, the
taxpayer must keep reliable written records of expenses
incurred. For example, where a taxpayer uses the charitable
standard mileage rate to determine a deduction, the IRS has
stated that the taxpayer generally must maintain records of
miles driven, time, place (or use), and purpose of the mileage.
If the charitable standard mileage rate is not used to
determine the deduction, the taxpayer generally must maintain
reliable written records of actual expenses incurred.\174\
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\173\Sec. 170(i).
\174\In lieu of actual operating expenses, an optional standard
mileage rate may be used in computing deductible transportation
expenses for medical purposes (section 213) or for work-related moving
(section 217). The standard mileage rates for medical and moving
purposes generally cover only out-of-pocket operating expenses
(including gasoline and oil) directly related to the use of the
automobile. Such rates do not include costs that are not deductible for
medical or moving purposes, such as general maintenance expenses,
depreciation, insurance, and registration fees. The medical and moving
standard mileage rates are determined by the IRS and updated
periodically. For expenses paid or incurred on or after January 1,
2017, the rate for both such purposes is 17 cents per mile. IRS Notice
2016-79.
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Substantiation and other formal requirements
In general
A donor who claims a deduction for a charitable
contribution must maintain reliable written records regarding
the contribution, regardless of the value or amount of such
contribution.\175\ In the case of a charitable contribution of
money, regardless of the amount, applicable recordkeeping
requirements are satisfied only if the donor maintains as a
record of the contribution a bank record or a written
communication from the donee showing the name of the donee
organization, the date of the contribution, and the amount of
the contribution. In such cases, the recordkeeping requirements
may not be satisfied by maintaining other written records.
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\175\Sec. 170(f)(17).
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No charitable contribution deduction is allowed for a
separate contribution of $250 or more unless the donor obtains
a contemporaneous written acknowledgement of the contribution
from the charity indicating whether the charity provided any
good or service (and an estimate of the value of any such good
or service) to the taxpayer in consideration for the
contribution.\176\
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\176\Such acknowledgement must include the amount of cash and a
description (but not value) of any property other than cash
contributed, whether the donee provided any goods or services in
consideration for the contribution, and a good faith estimate of the
value of any such goods or services. Sec. 170(f)(8).
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In addition, any charity receiving a contribution exceeding
$75 made partly as a gift and partly as consideration for goods
or services furnished by the charity (a ``quid pro quo''
contribution) is required to inform the contributor in writing
of an estimate of the value of the goods or services furnished
by the charity and that only the portion exceeding the value of
the goods or services is deductible as a charitable
contribution.\177\
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\177\Sec. 6115.
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If the total charitable deduction claimed for noncash
property is more than $500, the taxpayer must attach a
completed Form 8283 (Noncash Charitable Contributions) to the
taxpayer's return or the deduction is not allowed.\178\ In
general, taxpayers are required to obtain a qualified appraisal
for donated property with a value of more than $5,000, and to
attach an appraisal summary to the tax return.
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\178\Sec. 170(f)(11).
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Exception for certain contributions reported by the donee
organization
Subsection 170(f)(8)(D) provides an exception to the
contemporaneous written acknowledgment requirement described
above. Under the exception, a contemporaneous written
acknowledgment is not required if the donee organization files
a return, on such form and in accordance with such regulations
as the Secretary may prescribe, that includes the same content.
``[T]he section 170(f)(8)(D) exception is not available unless
and until the Treasury Department and the IRS issue final
regulations prescribing the method by which donee reporting may
be accomplished.''\179\ No such final regulations have been
issued.\180\
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\179\See IRS, Notice of Proposed Rulemaking, Substantiation
Requirement for Certain Contributions, REG-138344-13 (October 13,
2015), I.R.B. 2015-41 (preamble).
\180\In October 2015, the IRS issued proposed regulations that, if
finalized, would have implemented the section 170(f)(8)(D) exception to
the contemporaneous written acknowledgment requirement. The proposed
regulations provided that a return filed by a donee organization under
section 170(f)(8)(D) must include, in addition to the information
generally required on a contemporaneous written acknowledgment: (1) the
name and address of the donee organization; (2) the name and address of
the donor; and (3) the taxpayer identification number of the donor. In
addition, the return must be filed with the IRS (with a copy provided
to the donor) on or before February 28 of the year following the
calendar year in which the contribution was made. Under the proposed
regulations, donee reporting would have been optional and would have
been available solely at the discretion of the donee organization. The
proposed regulations were withdrawn in January 2016. See Prop. Treas.
Reg. sec 1.170A-13(f)(18).
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REASONS FOR CHANGE
The Committee believes that a robust charitable sector is
vital to our economy, and that charitable giving is critical to
ensuring that the sector thrives. For this reason, the
Committee believes that it is desirable to provide additional
incentives for taxpayers to provide monetary and volunteer
support to charities. Increasing the charitable percentage
limit for cash contributions to public charities will encourage
taxpayers to provide essential monetary support to front-line
charities. Allowing the charitable standard mileage rate to be
adjusted for inflation will encourage the volunteer support
that charities need to carry out their missions. At the same
time, the Committee believes that taxpayers should only be
permitted a charitable deduction commensurate with the value of
assets given to charity. For this reason, the provision
eliminates the special rule under present law that allows
taxpayers to take a charitable deduction for 80 percent of an
amount contributed to a college or university in exchange for
the right to purchase stadium seating and denies a deduction
for such contribution.
EXPLANATION OF PROVISION
The provision makes the following modifications to the
present law charitable deduction rules.
Increased percentage limits for contributions of cash to public
charities
The provision increases the income-based percentage limit
described in section 170(b)(1)(A) for certain charitable
contributions by an individual taxpayer of cash to public
charities and certain other organizations from 50 percent to 60
percent.
Charitable mileage rate adjusted for inflation
The provision repeals the statutory charitable mileage rate
and provides instead that the standard mileage rate used for
determining the charitable contribution deduction shall be a
rate which takes into account the variable costs of operating
an automobile. The intent of the provision is to allow the IRS
to determine, and make periodic adjustments to, the charitable
standard mileage rate, taking into account the types of costs
that are deductible under section 170 of the Code when
operating a vehicle in connection with providing volunteer
services (i.e., generally, the out-of-pocket operating expenses
(including gasoline and oil) directly related to the use of the
automobile for such purposes).
Denial of deduction for college athletic event seating rights
The provision amends section 170(l) to provide that no
charitable deduction shall be allowed for any amount described
in paragraph 170(l)(2), generally, a payment to an institution
of higher education in exchange for which the payor receives
the right to purchase tickets or seating at an athletic event,
as described in greater detail above.
Repeal of substantiation exception for certain contributions reported
by the donee organization
The provision repeals the section 170(f)(8)(D) exception to
the contemporaneous written acknowledgment requirement.
EFFECTIVE DATE
The provision is effective for contributions made in
taxable years beginning after December 31, 2017.
7. Repeal of deduction for tax preparation expenses (sec. 1307 of the
bill and sec. 212 of the Code)
PRESENT LAW
For regular income tax purposes, individuals are allowed an
itemized deduction for expenses for the production of income.
These expenses are defined as ordinary and necessary expenses
paid or incurred in a taxable year: (1) for the production or
collection of income; (2) for the management, conservation, or
maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund
of any tax.\181\
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\181\Sec. 212.
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for tax preparation
expenses, makes the system simpler and fairer for all families
and individuals, and allows for lower tax rates. The Committee
further believes that repeal of this provision is consistent
with streamlining the tax code, broadening the tax base,
lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision repeals the deduction for expenses in
connection with the determination, collection, or refund of any
tax.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
8. Repeal of deduction for medical expenses (sec. 1308 of the bill and
sec. 213 of the Code)
PRESENT LAW
Individuals may claim an itemized deduction for
unreimbursed medical expenses, but only to the extent that such
expenses exceed 10 percent of adjusted gross income.\182\ For
taxable years beginning before January 1, 2017, the 10-percent
threshold is reduced to 7.5 percent in the case of taxpayers
who have attained the age of 65 before the close of the taxable
year. In the case of married taxpayers, the 7.5 percent
threshold applies if either spouse has obtained the age of 65
before the close of the taxable year. For these taxpayers,
during these years, the threshold is 10 percent for AMT
purposes.
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\182\Sec. 213. The threshold was amended by the Patient Protection
and Affordable Care Act (Pub. L. No. 111-118). For taxable years
beginning before January 1, 2013, the threshold was 7.5 percent and 10
percent for alternative minimum tax (``AMT'') purposes.
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for unreimbursed medical
expenses, makes the system simpler and fairer for all families
and individuals, and allows for lower tax rates. The Committee
further believes that repeal of this provision is consistent
with streamlining the tax code, broadening the tax base,
lowering rates, and growing the economy.
EXPLANATION OF PROVISION
The provision repeals the deduction for unreimbursed
medical expenses.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
9. Repeal of deduction for alimony payments and corresponding inclusion
in gross income (sec. 1309 of the bill and secs. 61, 71, and 215 of the
Code)
PRESENT LAW
Alimony and separate maintenance payments are deductible by
the payor spouse and includible in income by the recipient
spouse.\183\ Child support payments are not treated as
alimony.\184\
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\183\Secs. 215(a), 61(a)(8) and 71(a).
\184\Sec. 71(c).
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REASONS FOR CHANGE
The Committee believes that the repeal of the deduction for
alimony payments from the payor spouse and repeal of the
corresponding inclusion in gross income by the recipient spouse
simplifies the tax code and prevents divorced couples from
reducing income tax through a specific form of payments
unavailable to married couples.
EXPLANATION OF PROVISION
Under the provision, alimony and separate maintenance
payments are not deductible by the payor spouse. The provision
repeals the Code provisions that specify that alimony and
separate maintenance payments are included in income. Thus, the
intent of the provision is to follow the rule of the United
States Supreme Court's holding in Gould v. Gould,\185\ in which
the Court held that such payments are not income to the
recipient. Income used for alimony payments is taxed at the
rates applicable to the payor spouse rather than the recipient
spouse. The treatment of child support is not changed.
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\185\245 U.S. 151 (1917).
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EFFECTIVE DATE
The provision is effective for any divorce or separation
instrument executed after December 31, 2017, or for any divorce
or separation instrument executed on or before December 31,
2017, and modified after that date, if the modification
expressly provides that the amendments made by this section
apply to such modification.
10. Repeal of deduction for moving expenses (sec. 1310 of the bill and
secs. 134 and 217 of the Code)
PRESENT LAW
Individuals are permitted an above-the-line deduction for
moving expenses paid or incurred during the taxable year in
connection with the commencement of work by the taxpayer as an
employee or as a self-employed individual at a new principal
place of work.\186\ Such expenses are deductible only if the
move meets certain conditions related to distance from the
taxpayer's previous residence and the taxpayer's status as a
full-time employee in the new location.
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\186\Sec. 217(a).
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Special rules apply in the case of a member of the Armed
Forces of the United States. In the case of any such individual
who is on active duty, who moves pursuant to a military order
and incident to a permanent change of station, the limitations
related to distance from the taxpayer's previous residence and
status as a full-time employee in the new location do not
apply.\187\ Additionally, any moving and storage expenses which
are furnished in kind to such an individual, spouse, or
dependents, or if such expenses are reimbursed or an allowance
for such expenses is provided, such amounts are excluded from
gross income.\188\ Rules also apply to exclude amounts
furnished to the spouse and dependents of such an individual in
the event that such individuals move to a location other than
to where the member of the Armed Forces is moving.
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\187\Sec. 217(g).
\188\Sec. 217(g)(2).
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Present law provides income exclusions for various benefits
provided to members of the Armed Forces.\189\
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\189\Sec. 134.
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for moving expenses, makes
the system simpler and fairer for all families and individuals,
and allows for lower tax rates. The Committee further believes
that repeal of this provision is consistent with streamlining
the tax code, broadening the tax base, lowering rates, and
growing the economy.
However, the Committee recognizes that special
circumstances apply to members of the Armed Forces, and thus
the provision retains the present law benefits relating to the
moving expenses of these taxpayers.
EXPLANATION OF PROVISION
The provision generally repeals the deduction for moving
expenses. The provision intends to retain tax benefits for the
moving expenses of members of the Armed Forces of the United
States.\190\ Thus, the provision retains the special rules
under present law that provide a exclusions for amounts
attributable to in-kind moving and storage expenses (and
reimbursements or allowances for these expenses) for members of
the Armed Forces (or their spouse or dependents) on active duty
that move pursuant to a military order and incident to a
permanent change of station.\191\
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\190\A technical amendment may be needed to reflect this intent for
the deduction for moving expenses for members of the Armed Forces.
\191\Under the provision, these exclusions are added to section
134.
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
11. Termination of deduction and exclusions for contributions to
medical savings accounts (sec. 1311 of the bill and secs. 106(b) and
220 of the Code)
PRESENT LAW
Archer MSAs
As of 1997, certain individuals are permitted to contribute
to an Archer MSA, which is a tax-exempt trust or custodial
account.\192\ Within limits, contributions to an Archer MSA are
deductible in determining adjusted gross income if made by an
individual and are excludible from gross income for income tax
purposes and wages for employment tax\193\ purposes if made by
the employer of an individual.\194\
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\192\Archer MSAs were originally called medical savings accounts or
MSAs.
\193\The FICA exclusion is provided under IRS Notice 96-53.
\194\Secs. 106(b) and 220.
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An individual is generally eligible for an Archer MSA if
the individual is covered by a high deductible health plan and
no other health plan other than a plan that provides certain
permitted insurance or permitted coverage. In addition, the
individual either must be an employee of a small employer
(generally an employer with 50 or fewer employees on average)
that provides the high deductible health plan or must be self-
employed or the spouse of a self-employed individual and the
high deductible health plan is not provided by the employer of
the individual or spouse.
For 2017, a high deductible health plan for purposes of
Archer MSA eligibility is a health plan with an annual
deductible of at least $2,250 and not more than $3,350 in the
case of self-only coverage and at least $4,500 and not more
than $6,750 in the case of family coverage. In addition, for
2017, the maximum out-of-pocket expenses with respect to
allowed costs must be no more than $4,500 in the case of self-
only coverage and no more than $8,250 in the case of family
coverage. Out-of-pocket expenses include deductibles, co-
payments, and other amounts (other than premiums) that the
individual must pay for covered benefits under the plan. A plan
does not fail to qualify as a high deductible health plan if
substantially all of the coverage under the plan is certain
permitted insurance or is coverage (whether provided through
insurance or otherwise) for accidents, disability, dental care,
vision care, or long-term care.
The maximum annual contribution that can be made to an
Archer MSA for a year is 65 percent of the annual deductible
under the individual's high deductible health plan in the case
of self-only coverage (65 percent of $3,350 for 2017) and 75
percent of the annual deductible in the case of family coverage
(75 percent of $6,750 for 2017), but in no case more than the
individual's compensation income. In addition, the maximum
contribution can be made only if the individual is covered by
the high deductible health plan for the full year.
Distributions from an Archer MSA for qualified medical
expenses are not includible in gross income. Distributions not
used for qualified medical expenses are includible in gross
income and subject to an additional 20-percent tax unless an
exception applies. A distribution from an Archer MSA may be
rolled over on a nontaxable basis to another Archer MSA or to a
health savings account and does not count against the
contribution limits.
After 2007, no new contributions can be made to Archer MSAs
except by or on behalf of individuals who previously had made
Archer MSA contributions and employees of small employers that
previously contributed to Archer MSAs (or at least 20 percent
of whose employees who were previously eligible to contribute
to Archer MSAs did so).
Health savings accounts
As of 2004, an individual with a high deductible health
plan (and no other health plan other than a plan that provides
certain permitted insurance or permitted coverage) generally
may contribute to a health savings account (``HSA''), which is
a tax-exempt trust or custodial account. HSAs provide similar
tax-favored savings treatment as Archer MSAs. That is, within
limits, contributions to an HSA are deductible in determining
adjusted gross income if made by an individual and are
excludable from gross income for income tax purposes and wages
for employment tax\195\ purposes if made by the employer of an
individual, and distributions for qualified medical expenses
are not includible in gross income.\196\ However, the rules for
HSAs are in various aspects more favorable than the rules for
Archer MSAs.\197\ For example, the availability of HSAs is not
limited to employees of small employers or self-employed
individuals and their spouses.
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\195\The FICA exclusion is provided under IRS Notice 2004-2.
\196\Secs. 106(d) and 223.
\197\Sections 4980E and 4980G respectively require an employer
making MSA or HSA contributions to make comparable contributions for
comparable participating employees. However, under section 4980G(d), an
employer may make larger HSA contributions for nonhighly compensated
employees.
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For 2017, a high deductible health plan for purposes of HSA
eligibility is a health plan with an annual deductible of at
least $1,300 in the case of self-only coverage and at least
$2,600 in the case of family coverage. In addition, for 2017,
the sum of the deductible and the maximum out-of-pocket
expenses with respect to allowed costs must be no more than
$6,550 in the case of self-only coverage and no more than
$13,100 in the case of family coverage. A plan does not fail to
qualify as a high deductible health plan for HSA purposes
merely because it does not have a deductible for preventive
care.
For 2017, the maximum aggregate annual contribution that
can be made to an HSA is $3,400 in the case of self-only
coverage and $6,750 in the case of family coverage. The annual
contribution limits are increased by $1,000 for individuals who
have attained age 55 by the end of the taxable year (referred
to as ``catch-up contributions''). The maximum amount that an
individual make contribute is reduced by the amount of any
contributions to the individual's Archer MSA and any excludable
HSA contributions made by the individual's employer. In some
cases, an individual may make the maximum HSA contribution,
even if the individual is covered by the high deductible health
plan for only part of the year. A distribution from an HSA may
be rolled over on a nontaxable basis to another HSA and does
not count against the contribution limits.
REASONS FOR CHANGE
The Committee recognizes that Archer MSAs provide fewer
benefits than HSAs. The termination of the deduction and
exclusions for contributions to Archer MSAs therefore
simplifies the Code by consolidating two similar tax-favored
accounts into a single account with more favorable benefits for
the taxpayer (i.e., HSAs).
EXPLANATION OF PROVISION
Under the provision, contributions to Archer MSAs for
taxable years beginning after December 31, 2017, are not
deductible or excludible from gross income and wages.\198\
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\198\The provision retains the requirement that an employer making
HSA contributions must make comparable contributions for comparable
participating employees, including the rule under which an employer may
make larger HSA contributions for nonhighly compensated employees. As
under present law, with respect to highly compensated employees, both
highly compensated employees and nonhighly compensated employees are to
be treated as comparable participating employees. (A technical
amendment is needed to the reference within new section 4980G(d)(3)(B)
to subparagraph (B), which should be a reference to subparagraph
(A)(ii).)
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
12. Denial of deduction for expenses attributable to the trade or
business of being an employee, expenses of teachers, performing artists
and certain officials (sec. 1312 of the bill and secs. 62, 67, and new
sec. 262A of the Code)
PRESENT LAW
In general, business expenses incurred by an employee are
deductible, but only as an itemized deduction and only to the
extent the expenses exceed two percent of adjusted gross
income.\199\ However, in the case of certain employees and
certain expenses, a deduction may be taken in determining
adjusted gross income (referred to as an ``above-the-line''
deduction), including expenses of qualified performing artists,
expenses of State or local government officials performing
services on a fee basis, and expenses of eligible
educators.\200\
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\199\Secs. 62(a)(1) and 67.
\200\Sec. 62(a)(2)(B), (C), and (D). Under section 62(a)(2)(A) and
(c), certain reimbursements of employee business expenses are excluded
from income. Under section 62(a)(2)(E), an above-the-line deduction
applies to expenses of members of a reserve component of the Armed
Forces.
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Present law and IRS guidance provide for numerous items
that may be deducted under this provision (subject to the two-
percent adjusted gross income floor). This non-exhaustive list
includes):\201\
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\201\See IRS Publication 529, ``Miscellaneous Deductions'' (2016),
p. 3.
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Business bad debt of an employee;
Business liability insurance premiums;
Damages paid to a former employer for
breach of an employment contract;
Depreciation on a computer a taxpayer's
employer requires him to use in his work;
Dues to a chamber of commerce if membership
helps the taxpayer do his job;
Dues to professional societies;
Educator expenses;\202\
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\202\Under a special provision, these expenses are deductible
``above the line'' up to $250.
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Home office or part of a taxpayer's home
used regularly and exclusively in the taxpayer's work;
Job search expenses in the taxpayer's
present occupation;
Laboratory breakage fees;
Legal fees related to the taxpayer's job;
Licenses and regulatory fees;
Malpractice insurance premiums;
Medical examinations required by an
employer;
Occupational taxes;
Passport for a business trip;
Repayment of an income aid payment received
under an employer's plan;
Research expenses of a college professor;
Rural mail carriers' vehicle expenses;
Subscriptions to professional journals and
trade magazines related to the taxpayer's work;
Tools and supplies used in the taxpayer's
work;
Travel, transportation, meals,
entertainment, gifts, and local lodging related to the
taxpayer's work;
Union dues and expenses;
Work clothes and uniforms if required and
not suitable for everyday use; and
Work-related education.
A working condition fringe provided to an employee is
excluded from the employee's income and wages.\203\ For this
purpose, a working condition fringe means property or services
provided to an employee to the extent that, if the employee
paid for the property or service, the payment would be
deductible as a business expense or depreciation.
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\203\Sec. 132(a)(3) and (d).
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for expenses attributable
to the trade or business of being an employee, and expenses of
teachers, performing artists, and certain officials, makes the
system simpler and fairer for all families and individuals, and
allows for lower tax rates. The Committee further believes that
repeal of this provision is consistent with streamlining the
tax code, broadening the tax base, lowering rates, and growing
the economy.
EXPLANATION OF PROVISION
Under the provision, business expenses incurred by an
employee are not deductible, other than expenses that are
deductible in determining adjusted gross income (that is,
above-the-line deductions).
In addition, the present-law provisions allowing above-the-
line deductions for expenses of qualified performing artists
and expenses of State or local government officials performing
services on a fee basis are repealed. The present-law provision
allowing an above-the-line deduction for expenses of eligible
educators is also repealed.\204\
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\204\The provision retains the present-law provisions under which
certain reimbursements of employee business expenses are excluded from
income and under which an above-the-line deduction applies to expenses
of members of a reserve component of the Armed Forces.
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In addition, whether property or services provided by an
employer are excluded as a working condition fringe is
determined without regard to the provision. That is, the same
standard as under present law applies for this purpose.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
E. Simplification and Reform of Exclusions and Taxable Compensation
1. Limitation on exclusion for employer-provided housing (sec. 1401 of
the bill and sec. 119 of the Code)
PRESENT LAW
The value of lodging furnished to an employee, spouse, or
dependents by or on behalf of an employer for the convenience
of the employer (referred to as ``employer-provided lodging'')
is excludible from the employee's gross income, but only if the
employee is required to accept the lodging on the business
premises of the employer as a condition of employment.\205\
Special rules apply with respect to employees living in foreign
camps\206\ and lodging furnished by certain educational
institutions to employees.\207\ Amounts attributable to
employer-provided lodging that are excludible from gross income
for income tax purposes are also excluded from wages for
employment tax purposes.
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\205\Sec. 119(a).
\206\Sec. 119(c).
\207\Sec. 119(d).
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REASONS FOR CHANGE
The Committee believes that limiting the exclusion for
employer-provided housing broadens the tax base, closes
loopholes, and allows for lower tax rates. The Committee
further believes that limiting the exclusion accomplishes these
goals without placing undue burden on lower income taxpayers,
achieving simplicity and fairness for all individuals and
families.
EXPLANATION OF PROVISION
The provision limits the amount that may be excluded from
gross income for employer-provided lodging to $50,000 ($25,000
in the case of a married individual filing a separate return),
subject to a phase-out based on the employee's level of
compensation. The exclusion is phased out by $1 for every $2
earned above the indexed compensation threshold. For 2017, this
compensation threshold is $120,000.\208\ The provision also
denies any exclusion for employer-provided housing provided to
5% owners,\209\ regardless of their compensation level.
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\208\The compensation threshold is that amount in effect under
section 414(q)(1)(B)(i).
\209\As defined in section 416(i)(1)(B)(i).
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In addition, the exclusion does not apply to more than one
residence at any given time. In the case of spouses filing a
joint return, the one residence limit may be applied separately
to each spouse for a period during which the spouses reside in
separate residences provided in connection with their
respective employments.
Those amounts that are not excludible from gross income for
income tax purposes will also not be excluded from wages for
employment tax purposes.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
2. Modification of exclusion of gain on sale of a principal residence
(sec. 1402 of the bill and sec. 121 of the Code)
PRESENT LAW
A taxpayer who is an individual may exclude up to $250,000
($500,000 if married filing a joint return) of gain realized on
the sale or exchange of a principal residence. To be eligible
for the exclusion, the taxpayer must have owned and used the
residence as a principal residence for at least two of the five
years ending on the date of the sale or exchange. A taxpayer
who fails to meet these requirements by reason of a change of
place of employment, health, or, to the extent provided under
regulations, unforeseen circumstances, is able to exclude an
amount equal to the fraction of the $250,000 ($500,000 if
married filing a joint return) that is equal to the fraction of
the two years that the ownership and use requirements are met.
The exclusion under this provision may not be claimed for
more than one sale or exchange during any two-year period.
REASONS FOR CHANGE
The Committee believes that the exclusion on proceeds from
the sale of a principal residence is intended to prevent
longtime homeowners from recognizing a gain upon an infrequent
and important transaction, and to allow those individuals to
use the full proceeds of the home sale to purchase another
home. The Committee believes that present-law the rule allowing
individuals to live in their home for only two out of the prior
five years to qualify for the exclusion has allowed individuals
to cycle between building homes and living in those homes while
they build the next, selling the lived-in home and qualifying
for the exclusion on the proceeds. Such use takes advantage of
the exclusion in a manner that was not intended.
The Committee further believes that high income taxpayers
should not be eligible for the exclusion.
EXPLANATION OF PROVISION
The provision extends the length of time a taxpayer must
own and use a residence to qualify for this exclusion.
Specifically, the exclusion is available only if the taxpayer
has owned and used the residence as a principal residence for
at least five of the eight years ending on the date of the sale
or exchange. A taxpayer who fails to meet these requirements by
reason of a change of place of employment, health, or, to the
extent provided under regulations, unforeseen circumstances is
able to exclude an amount equal to the fraction of the $250,000
($500,000 if married filing a joint return) that is equal to
the fraction of the five years that the ownership and use
requirements are met.
The provision limits the exclusion so that the exclusion
may not apply to more than one sale or exchange during any
five-year period.
The provision phases-out the exclusion by one dollar for
every dollar a taxpayer's AGI exceeds $250,000 ($500,000 if
married filing a joint return). For purposes of this provision,
AGI is measured using the average of the taxpayer's AGI in the
year of sale (excluding any income from the sale of the home)
and the prior two taxable years before the sale.
EFFECTIVE DATE
The provision is effective for sales and exchanges after
December 31, 2017.
3. Repeal of exclusion, etc., for employee achievement awards (sec.
1403 of the bill and secs. 74(c) and 274(j) of the Code)
PRESENT LAW
An employer's deduction for the cost of an employee
achievement award is limited to a certain amount.\210\ Employee
achievement awards that are deductible by an employer (or would
be deductible but for the fact that the employer is a tax-
exempt organization) are excludible from an employee's gross
income.\211\ Amounts that are excludible from gross income
under section 74(c) for income tax purposes are also excluded
from wages for employment tax purposes.
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\210\Sec. 274(j).
\211\Sec. 74(c).
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An employee achievement award is an item of tangible
personal property given to an employee in recognition of either
length of service or safety achievement and presented as part
of a meaningful presentation.
REASONS FOR CHANGE
The Committee believes that the repeal of the deduction
limitation and exclusions for employee achievement awards makes
the system simpler and fairer for all families and individuals,
and allows for lower tax rates. The Committee further believes
that the repeal of this provision is part of its larger effort
toward tax reform which broadens the tax base, closes
loopholes, and grows the economy.
EXPLANATION OF PROVISION
The provision repeals the deduction limitation for employee
achievement awards. It also repeals the exclusions from gross
income and wages.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
4. Sunset of exclusion for dependent care assistance programs (sec.
1404 of the bill and sec. 129 of the Code)
PRESENT LAW
An exclusion from the gross income of an employee of up to
$5,000 annually for employer-provided dependent care
assistance\212\ is allowed if the assistance is provided
pursuant to a separate written plan of an employer that does
not discriminate in favor of highly compensated employees\213\
and meets certain other requirements. The amount excludible
cannot exceed the earned income of the employee or, if the
employee is married, the lesser of the earned income of the
employee or the earned income of the employee's spouse. Amounts
attributable to dependent care assistance that are excludible
from gross income for income tax purposes are also excludible
from wages for employment tax purposes.
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\212\Sec. 129(a).
\213\Section 129(d). The exclusion applies if the contributions or
benefits under the program do not discriminate in favor of highly
compensated employees, within the meaning of Sec. 414(q), or their
dependents, and the program benefits employees under a classification
established by the employer found not to be discriminatory in favor or
such highly compensated employees or their dependents.
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REASONS FOR CHANGE
The Committee believes that the sunset of the exclusion for
dependent care assistance programs makes the system simpler and
fairer for all families and individuals, and allows for lower
tax rates. The Committee further believes that repeal of this
provision is consistent with streamlining the tax code,
broadening the tax base, lowering rates, and growing the
economy.
EXPLANATION OF PROVISION
The provision terminates the exclusions from gross income
and wages for dependent care assistance programs for taxable
years beginning after December 31, 2022.
EFFECTIVE DATE
The provision is effective on the date of enactment.
5. Repeal of exclusion for qualified moving expense reimbursement (sec.
1405 of the bill and sec. 132(g) of the Code)
PRESENT LAW
Qualified moving expense reimbursements are excludible from
an employee's gross income\214\, and are defined as any amount
received (directly or indirectly) from an employer as payment
for (or reimbursement of) expenses which would be deductible as
moving expenses under section 217\215\ if directly paid or
incurred by the employee. However, any such amount actually
deducted by the individual is not eligible for this exclusion.
Amounts excludible from gross income for income tax purposes as
qualified moving expense reimbursements are also excluded from
wages for employment tax purposes.
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\214\Section 132(a)(6) and 132(g).
\215\Individuals are allowed an itemized deduction for moving
expenses paid or incurred during the taxable year in connection with
the commencement of work by the taxpayer as an employee or as a self-
employed individual at a new principal place of work. Such expenses are
deductible only if the move meets certain conditions related to
distance from the taxpayer's previous residence and the taxpayer's
status as a full-time employee in the new location.
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REASONS FOR CHANGE
The Committee believes that the repeal of the exclusion for
qualified moving expense reimbursement makes the system simpler
and fairer for all families and individuals, and allows for
lower tax rates. The Committee further believes that the repeal
of this provision is part of its larger effort toward tax
reform which broadens the tax base, closes loopholes and grows
the economy.
EXPLANATION OF PROVISION
The provision repeals the exclusion from gross income and
wages for qualified moving expense reimbursements.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
6. Repeal of exclusion for adoption assistance programs (sec. 1406 of
the bill and sec. 137 of the Code)
PRESENT LAW
An exclusion from an employee's gross income is allowed for
qualified adoption expenses paid or reimbursed by an employer,
if such amounts are furnished pursuant to an adoption
assistance program.\216\ For 2017, the maximum exclusion amount
is $13,570, and is phased out ratably for taxpayers with
modified adjusted gross income (``AGI'') above a certain
amount. In 2017, the phase out range begins at modified AGI of
$203,540, with no exclusion when modified AGI equals or exceeds
$243,540. Modified AGI is the sum of the taxpayer's AGI plus
amounts excluded from income under sections 911, 931, and 933
(relating to the exclusion of income of U.S. citizens or
residents living abroad; residents of Guam, American Samoa, and
the Northern Mariana Islands and residents of Puerto Rico,
respectively).
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\216\Section 137(a).
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In the case of adoption of a child with special needs that
is finalized during a taxable year, the taxpayer may claim as
an exclusion the amount of the maximum exclusion minus the
aggregate qualified adoption expenses with respect to that
adoption for all prior taxable years.
Qualified adoption expenses are reasonable and necessary
adoption fees, court costs, attorney fees, and other expenses
that are: (1) directly related to, and the principal purpose of
which is for, the legal adoption of an eligible child by the
taxpayer; (2) not incurred in violation of State or Federal
law, or in carrying out any surrogate parenting arrangement;
(3) not for the adoption of the child of the taxpayer's spouse;
and (4) not reimbursed (e.g., by an employer).\217\
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\217\Section 23(d)(1).
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For the exclusion to apply, certain requirements must be
satisfied, including satisfaction of nondiscrimination rules
and providing employees with reasonable notification of the
availability and terms of the program.\218\
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\218\The employer's adoption assistance program must not
discriminate in favor of highly compensated employees, within the
meaning of Sec. 414(q). In addition, no more than five percent of the
amounts paid or incurred by the employer during the year for qualified
adoption expenses under an adoption assistance program can be provided
for the class of individuals consisting of more-than-five-percent
owners of the employer and the spouses or dependents of such more-than-
five-percent owners.
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Adoption expenses paid or reimbursed by the employer under
an adoption assistance program are not eligible for the
adoption credit under section 23. A taxpayer may be eligible
for the adoption credit (with respect to qualified adoption
expenses he or she incurs) and also for the exclusion (with
respect to different qualified adoption expenses paid or
reimbursed by his or her employer).
REASONS FOR CHANGE
The Committee believes that the repeal of the exclusion for
adoption assistance programs makes the system simpler and
fairer for all families and individuals, and allows for lower
tax rates. The Committee further believes that the repeal of
this provision is part of its larger effort toward tax reform
which broadens the tax base, closes loopholes and grows the
economy.
EXPLANATION OF PROVISION
The provision repeals the exclusion from gross income for
adoption assistance programs.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
F. Simplification and Reform of Savings, Pensions, Retirement
1. Repeal of special rule permitting recharacterization of IRA
contributions (sec. 1501 of the bill and sec. 408A of the Code)
PRESENT LAW
Individual retirement arrangements
There are two basic types of individual retirement
arrangements (``IRAs'') under present law: traditional
IRAs,\219\ to which both deductible and nondeductible
contributions may be made,\220\ and Roth IRAs, to which only
nondeductible contributions may be made.\221\ The principal
difference between these two types of IRAs is the timing of
income tax inclusion.
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\219\Sec. 408.
\220\Secs. 219(a) and 408(o).
\221\Sec. 408A.
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An annual limit applies to contributions to IRAs. The
contribution limit is coordinated so that the aggregate maximum
amount that can be contributed to all of an individual's IRAs
(both traditional and Roth) for a taxable year is the lesser of
a certain dollar amount ($5,500 for 2017) or the individual's
compensation. In the case of a married couple, contributions
can be made up to the dollar limit for each spouse if the
combined compensation of the spouses is at least equal to the
contributed amount. The dollar limit is increased annually
(``indexed'') as needed to reflect increases in the cost-of
living. An individual who has attained age 50 before the end of
the taxable year may also make catch-up contributions up to
$1,000 to an IRA. The IRA catch-up contribution limit is not
indexed.
Traditional IRAs
An individual may make deductible contributions to a
traditional IRA up to the IRA contribution limit (reduced by
any contributions to Roth IRAs) if neither the individual nor
the individual's spouse is an active participant in an
employer-sponsored retirement plan. If an individual (or the
individual's spouse) is an active participant in an employer-
sponsored retirement plan, the deduction is phased out for
taxpayers with adjusted gross income (``AGI'') for the taxable
year over certain indexed levels.\222\ To the extent an
individual cannot or does not make deductible contributions to
a traditional IRA or contributions to a Roth IRA for the
taxable year, the individual may make nondeductible after-tax
contributions to a traditional IRA (that is, no AGI limits
apply), subject to the same contribution limits as the limits
on deductible contributions, including catch-up contributions.
An individual who has attained age 70\1/2\ before to the close
of a year is not permitted to make contributions to a
traditional IRA for that year.
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\222\Sec. 219(g).
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Amounts held in a traditional IRA are includible in income
when withdrawn, except to the extent the withdrawal is a return
of the individual's basis.\223\ All traditional IRAs of an
individual are treated as a single contract for purposes of
recovering basis in the IRAs.
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\223\Basis results from after-tax contributions to traditional IRAs
or a rollovers to traditional IRAs of after-tax amounts from another
eligible retirement plan.
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Roth IRAs
Individuals with AGI below certain levels may make
nondeductible contributions to a Roth IRA. The maximum annual
contribution that can be made to a Roth IRA is phased out for
taxpayers with AGI for the taxable year over certain indexed
levels.\224\
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\224\Although an individual with AGI exceeding certain limits is
not permitted to make a contribution directly to a Roth IRA, the
individual can make a contribution to a traditional IRA and convert the
traditional IRA to a Roth IRA, as discussed below.
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Amounts held in a Roth IRA that are withdrawn as a
qualified distribution are not includible in income. A
qualified distribution is a distribution that (1) is made after
the five-taxable-year period beginning with the first taxable
year for which the individual first made a contribution to a
Roth IRA, and (2) is made after attainment of age 59\1/2\, on
account of death or disability, or is made for first-time
homebuyer expenses of up to $10,000.
Distributions from a Roth IRA that are not qualified
distributions are includible in income to the extent
attributable to earnings; amounts that are attributable to a
return of contributions to the Roth IRA are not includible in
income. All Roth IRAs are treated as a single contract for
purposes of determining the amount that is a return of
contributions.
Separation of traditional and Roth IRA accounts
Contributions to traditional IRAs and to Roth IRAs must be
segregated into separate IRAs, meaning arrangements with
separate trusts, accounts, or contracts, and separate IRA
documents. Except in the case of a conversion or
recharacterization, amounts cannot be transferred or rolled
over between the two types of IRAs.
Taxpayers generally may convert an amount in a traditional
IRA to a Roth IRA.\225\ The amount converted is includible in
the taxpayer's income as if a withdrawal had been made.\226\
The conversion is accomplished by a trustee-to-trustee transfer
of the amount from the traditional IRA to the Roth IRA, or by a
distribution from the traditional IRA and contribution to the
Roth IRA within 60 days.
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\225\Although an individual with AGI exceeding certain limits is
not permitted to make a contribution directly to a Roth IRA, the
individual can make a contribution to a traditional IRA and convert the
traditional IRA to a Roth IRA.
\226\Subject to various exceptions, distributions from an IRA
before age 59\1/2\ that are includible in income are subject to a 10-
percent early distribution tax under section 72(t). An exception
applies to an amount includible in income as a result of the conversion
from a traditional IRA into a Roth IRA. However, the early distribution
tax applies if the taxpayer withdraws the amount within five years of
the conversion.
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Rollovers to IRAs of distributions from tax-favored
employer-sponsored retirement plans (that is, qualified
retirement plans, tax-deferred annuity plans, and governmental
eligible deferred compensation plans\227\) are also permitted.
For tax-free rollovers, distributions from pretax accounts
under an employer-sponsored plan generally must are contributed
to a traditional IRA, and distributions from a designated Roth
account under an employer-sponsored plan must be contributed
only to a Roth IRA. However, a distribution from an employer-
sponsored plan that is not from a designated Roth account is
also permitted to be rolled over into a Roth IRA, subject to
the rules that apply to conversions from a traditional IRA into
a Roth IRA. Thus, a rollover from a tax-favored employer-
sponsored plan to a Roth IRA is includible in gross income
(except to the extent it represents a return of after-tax
contributions).\228\
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\227\Secs. 401(a), 403(a), 403(b) and 457(b).
\228\As in the case of a conversion of an amount from a traditional
IRA to a Roth IRA, the special recapture rule relating to the 10-
percent additional tax on early distributions applies for distributions
made from the Roth IRA within a specified five-year period after the
rollover.
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Recharacterization of IRA contributions
If an individual makes a contribution to an IRA
(traditional or Roth) for a taxable year, the individual is
permitted to recharacterize the contribution as a contribution
to the other type of IRA (traditional or Roth) by making a
trustee-to-trustee transfer to the other type of IRA before the
due date for the individual's income tax return for that
year.\229\ In the case of a recharacterization, the
contribution will be treated as having been made to the
transferee IRA (and not the original, transferor IRA) as of the
date of the original contribution. Both regular contributions
and conversion contributions to a Roth IRA can be
recharacterized as having been made to a traditional IRA.
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\229\Sec. 408A(d)(6).
---------------------------------------------------------------------------
The amount transferred in a recharacterization must be
accompanied by any net income allocable to the contribution. In
general, even if a recharacterization is accomplished by
transferring a specific asset, net income is calculated as a
pro rata portion of income on the entire account rather than
income allocable to the specific asset transferred. However,
when doing a Roth conversion of an amount for a year, an
individual may establish multiple Roth IRAs, for example, Roth
IRAs with different investment strategies, and divide the
amount being converted among the IRAs. The individual can then
choose whether to recharacterize any of the Roth IRAs as a
traditional IRA by transferring the entire amount in the
particular Roth IRA to a traditional IRA.\230\ For example, if
the value of the assets in a particular Roth IRA declines after
the conversion, the conversion can be reversed by
recharacterizing that IRA as a traditional IRA. The individual
may then later convert that traditional IRA to a Roth IRA
(referred to as a reconversion), including only the lower value
in income. Treasury regulations prevent the reconversion from
taking place immediately after the recharcterization, by
requiring a minimum period to elapse before the reconversion.
Generally the reconversion cannot occur sooner than the later
of 30 days after the recharacterization or a date during the
taxable year following the taxable year of the original
conversion.\231\
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\230\Treas. Reg. sec. 1.408A-5, Q&A-2;(b).
\231\Treas. Reg. sec. 1.408A-5, Q&A-9.;
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REASONS FOR CHANGE
Recharacterization of IRA contributions may enable an
individual to avoid tax by retroactively manipulating the
amount of income that must be recognized for tax purposes. The
Committee intends to repeal the recharacterization rule in
order to prevent such manipulation.
EXPLANATION OF PROVISION
The provision repeals the special rule that allows IRA
contributions to one type of IRA (either traditional or Roth)
to be recharacterized as a contribution to the other type of
IRA. Thus, for example, under the provision, a conversion
contribution establishing a Roth IRA during a taxable year can
no longer be recharacterized as a contribution to a traditional
IRA (thereby unwinding the conversion).\232\
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\232\The provision does not preclude an individual from making a
contribution to a traditional IRA and converting the traditional IRA to
a Roth IRA. Rather, the provision would preclude the individual from
later unwinding the conversion through a recharacterization.
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
2. Reduction in minimum age for allowable in-service distributions
(sec. 1502 of the bill and secs. 401 and 457 of the Code)
PRESENT LAW
Tax-favored employer-sponsored retirement plans consist of
qualified retirement plans, including certain defined
contribution plans that allow employees to make elective
deferrals (a ``section 401(k) plan''), tax-deferred annuity
plans (a ``section 403(b) plan''), which may also allow
employees to make elective deferrals, and eligible deferred
compensation plans of State and local government employers (a
``governmental section 457(b) plan'').\233\ The terms of an
employer-sponsored retirement plan generally determine when
distributions are permitted. However, in some cases,
restrictions may apply to distribution before an employee's
severance from employment, referred to as ``in-service''
distributions.
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\233\Secs. 401(a), 401(k), 403(a), 403(b), and 457(b).
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In-service distributions of elective deferrals (and related
earnings) under a section 401(k) plan generally are permitted
only after attainment of age 59\1/2\ or termination of the
plan.\234\ In-service distributions of elective deferrals (but
not related earnings) are also permitted in the case of
hardship. Elective deferrals under a section 403(b) plan are
subject to in-service distribution restrictions similar to
those applicable to elective deferrals under a section 401(k)
plan, and, in some cases, other contributions to a section
403(b) plan are subject to similar restrictions.\235\
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\234\Sec. 401(k)(2)(B). Similar restrictions apply to certain other
contributions, such as employer matching or nonelective contributions
required under the nondiscrimination safe harbors under section 401(k).
\235\Secs. 403(b)(7)(A)(ii) and 403(b)(11).
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Pension plans, that is, qualified defined benefit plans and
money purchase pension plans, a type of qualified defined
contribution plan, generally may not permit in-service
distributions before attainment of age 62 (or attainment of
normal retirement age under the plan if earlier) or termination
of the plan.\236\
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\236\Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) and
1.401(a)-1(b).
---------------------------------------------------------------------------
Deferrals under a governmental section 457(b) plan are
subject to in-service distribution restrictions similar to
those applicable to elective deferrals under a section 401(k)
plan, except that in-service distributions under a governmental
section 457(b) plan are permitted only after attainment of age
70\1/2\ (rather than age 59\1/2\).\237\
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\237\Sec. 457(d)(1)(A).
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REASONS FOR CHANGE
Present law offers various types of tax-favored employer-
sponsored retirement plans that are very similar, but with
minor variations such as the age at which in-service
distributions are permitted. These variations create complexity
for employers and plan administrators and may cause confusion
for employees. These variations also impose different rules on
generally similarly situated taxpayers instead of providing the
same rules for all taxpayers. Providing a uniform age for
allowable in-service distributions will help simplify the rules
for various types of plans. In addition, lowering the age to
59\1/2\ for all plans will remove a tax barrier to phased
retirement as an alternative to early retirement.
EXPLANATION OF PROVISION
Under the provision, in-service distributions are permitted
under a pension plan or a governmental section 457(b) plan at
age 59\1/2\, thus making the rules for those plans consistent
with the rules for section 401(k) plans and section 403(b)
plans.
EFFECTIVE DATE
The provision is effective for plan years beginning after
December 31, 2017.
3. Modification of rules governing hardship distributions (sec. 1503 of
the bill and secs. 401 and 403 of the Code)
PRESENT LAW
Elective deferrals under a section 401(k) plan or a section
403(b) plan may not be distributed before the occurrence of one
or more specified events, including financial hardship of the
employee.\238\
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\238\Secs. 401(k)(2)(B)(i)(IV) and 403(b)(7)(A)(ii) and (b)(11)(B).
Other types of contributions may also be subject to this restriction.
---------------------------------------------------------------------------
Applicable Treasury regulations provide that a distribution
is made on account of hardship only if the distribution is made
on account of an immediate and heavy financial need of the
employee and is necessary to satisfy the heavy need.\239\ The
Treasury regulations provide a safe harbor under which a
distribution may be deemed necessary to satisfy an immediate
and heavy financial need. One requirement of this safe harbor
is that the employee be prohibited from making elective
deferrals and employee contributions to the plan and all other
plans maintained by the employer for at least six months after
receipt of the hardship distribution.
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\239\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The rules relating to hardship distributions contain minor
distinctions that create complexity for employers and plan
administrators. These distinctions may lead to inadvertent
errors, correction of which increases plan costs, and may also
cause confusion for employees. In addition, the rule
prohibiting employees from making contributions for six months
after receiving a hardship distribution impedes employees'
ability to save for retirement. The Committee believes that the
rules relating to hardship withdrawals should be more
consistent and should not impede retirement savings.
EXPLANATION OF PROVISION
The Secretary of the Treasury is directed to modify the
applicable regulations within one year of the date of enactment
to (1) delete the requirement that an employee be prohibited
from making elective deferrals and employee contributions for
six months after the receipt of a hardship distribution in
order for the distribution to be deemed necessary to satisfy an
immediate and heavy financial need, and (2) make any other
modifications necessary to carry out the purposes of the rule
allowing elective deferrals to be distributed in the case of
hardship. Thus, under the modified regulations, an employee
would not be prevented for any period after the receipt of a
hardship distribution from continuing to make elective
deferrals and employee contributions.
EFFECTIVE DATE
The regulations as revised by the provision shall apply to
plan years beginning after December 31, 2017.
4. Modification of rules relating to hardship withdrawals from cash or
deferred arrangements (sec. 1504 of the bill and sec. 401 of the Code)
PRESENT LAW
Amounts attributable to elective deferrals (including
earnings thereon) under a section 401(k) plan generally may not
be distributed before the earliest of the employee's severance
from employment, death, disability or attainment of age 59\1/
2\, or termination of the plan, or as a qualified reservist
distribution.\240\ Elective deferrals, but not associated
earnings, may be distributed on account of hardship.
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\240\Sec. 401(k)(2)(B)(i).
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An employer may make nonelective and matching contributions
for employees under a section 401(k) plan. Elective deferrals,
and matching contributions and after-tax employee
contributions, are subject to special tests
(``nondiscrimination tests'') to prevent discrimination in
favor of highly compensated employees. Nonelective
contributions and matching contributions that satisfy certain
requirements (``qualified nonelective contributions and
qualified matching contributions'') may be used to enable the
plan to satisfy these nondiscrimination tests. One of the
requirements is that these contributions be subject to the same
distribution restrictions as elective deferrals, except that
these contributions (and associated earnings) are not permitted
to be distributed on account of hardship.
Applicable Treasury regulations provide that a distribution
is made on account of hardship only if the distribution is made
on account of an immediate and heavy financial need of the
employee and is necessary to satisfy the heavy need.\241\ The
Treasury regulations provide a safe harbor under which a
distribution may be deemed necessary to satisfy an immediate
and heavy financial need. One requirement of the safe harbor is
that the employee represent that the need cannot be satisfied
through currently available plan loans. This in effect requires
an employee to take any available plan loan before receiving a
hardship distribution.
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\241\Treas. Reg. sec. 1.401(k)-1(d)(3).
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REASONS FOR CHANGE
The rules for determining which amounts may be distributed
as hardship distributions are overly complex. This complexity
may lead to inadvertent errors, correction of which increases
plan costs, and may also cause confusion for employees. The
Committee wishes to provide more consistency in these rules,
thereby reducing complexity.
Plan loans serve a valid purpose in providing employees
with temporary use of retirement funds without depleting
retirement savings. However, in some cases, a loan may not be
suitable to cover an employee's financial need. In that case, a
requirement to document the need for a distribution, rather
than a loan, creates an unnecessary burden for the employee and
plan administrator and may cause a delay that aggravates the
employee's financial hardship. The Committee wishes to reduce
administrative complexity by removing the requirement to obtain
a loan before a hardship distribution. In addition the
Committee believes that hardship distributions should not be
limited to amounts contributed by the employee.
EXPLANATION OF PROVISION
The provision allows earnings on elective deferrals under a
section 401(k) plan, as well as qualified nonelective
contributions and qualified matching contributions (and
associated earnings), to be distributed on account of hardship.
Further, a distribution is not treated as failing to be on
account of hardship solely because the employee does not take
any available plan loan.
EFFECTIVE DATE
The provision applies to plan years beginning after
December 31, 2017.
5. Extended rollover period for the rollover of plan loan offset
amounts in certain cases (sec. 1505 of the bill and sec. 402 of the
Code)
PRESENT LAW
Taxation of retirement plan distributions
A distribution from a tax-favored employer-sponsored
retirement plan (that is, a qualified retirement plan, section
403(b) plan, or a governmental section 457(b) plan) is
generally includible in gross income, except in the case of a
qualified distribution from a designated Roth account or to the
extent the distribution is a recovery of basis under the plan
or the distribution is contributed to another such plan or an
IRA (referred to as eligible retirement plans) in a tax-free
rollover.\242\ In the case of a distribution from a retirement
plan to an employee under age 59\1/2\, the distribution (other
than a distribution from a governmental section 457(b) plan) is
also subject to a 10-percent early distribution tax unless an
exception applies.\243\
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\242\Secs. 402(a) and (c), 402A(d), 403(a) and (b), 457(a) and
(e)(16).
\243\Sec. 72(t).
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A distribution from a tax-favored employer-sponsored
retirement plan that is an eligible rollover distribution may
be rolled over to an eligible retirement plan.\244\ The
rollover generally can be achieved by direct rollover (direct
payment from the distributing plan to the recipient plan) or by
contributing the distribution to the eligible retirement plan
within 60 days of receiving the distribution (``60-day
rollover'').
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\244\Certain distributions are not eligible rollover distributions,
such as annuity payments, required minimum distributions, hardship
distributions, and loans that are treated as deemed distributions under
section 72(p).
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Employer-sponsored retirement plans are required to offer
an employee a direct rollover with respect to any eligible
rollover distribution before paying the amount to the employee.
If an eligible rollover distribution is not directly rolled
over to an eligible retirement plan, the taxable portion of the
distribution generally is subject to mandatory 20-percent
income tax withholding.\245\ Employees who do not elect a
direct rollover but who roll over eligible distributions within
60 days of receipt also defer tax on the rollover amounts;
however, the 20 percent withheld will remain taxable unless the
employee substitutes funds within the 60-day period.
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\245\Treas. Reg. sec. 1.402(c)-2, Q&A-1;(b)(3).
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Plan loans
Employer-sponsored retirement plans may provide loans to
employees. Unless the loan satisfies certain requirements in
both form and operation, the amount of a retirement plan loan
is a deemed distribution from the retirement plan, including
that the terms of the loan provide for a repayment period of
not more than five years (except for a loan specifically to
purchase a home) and for level amortization of loan payments
with payments not less frequently than quarterly.\246\ Thus, if
an employee stops making payments on a loan before the loan is
repaid, a deemed distribution of the outstanding loan balance
generally occurs. A deemed distribution of an unpaid loan
balance is generally taxed as though an actual distribution
occurred, including being subject to a 10-percent early
distribution tax, if applicable. A deemed distribution is not
eligible for rollover to another eligible retirement plan.
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\246\Sec. 72(p).
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A plan may also provide that, in certain circumstances (for
example, if an employee terminates employment), an employee's
obligation to repay a loan is accelerated and, if the loan is
not repaid, the loan is cancelled and the amount in employee's
account balance is offset by the amount of the unpaid loan
balance, referred to as a loan offset. A loan offset is treated
as an actual distribution from the plan equal to the unpaid
loan balance (rather than a deemed distribution), and (unlike a
deemed distribution) the amount of the distribution is eligible
for tax-free rollover to another eligible retirement plan
within 60 days. However, the plan is not required to offer a
direct rollover with respect to a plan loan offset amount that
is an eligible rollover distribution, and the plan loan offset
amount is generally not subject to 20-percent income tax
withholding.
REASONS FOR CHANGE
The Committee believes that providing a longer rollover
period with respect to plan loan offsets may result in more
rollovers, thus increasing retirement savings.
EXPLANATION OF PROVISION
Under the provision, the period during which a qualified
plan loan offset amount may be contributed to an eligible
retirement plan as a rollover contribution is extended from 60
days after the date of the offset to the due date (including
extensions) for filing the Federal income tax return for the
taxable year in which the plan loan offset occurs, that is, the
taxable year in which the amount is treated as distributed from
the plan. Under the provision, a qualified plan loan offset
amount is a plan loan offset amount that is treated as
distributed from a qualified retirement plan, a section 403(b)
plan or a governmental section 457(b) plan solely by reason of
the termination of the plan or the failure to meet the
repayment terms of the loan because of the employee's
separation from service, whether due to layoff, cessation of
business, termination of employment, or otherwise. As under
present law, a loan offset amount under the provision is the
amount by which an employee's account balance under the plan is
reduced to repay a loan from the plan.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
6. Modification of nondiscrimination rules for certain plans providing
benefits or contributions to older, longer service participants (sec.
1506 of the bill and sec. 401 of the Code)
PRESENT LAW
In general
Qualified retirement plans are subject to nondiscrimination
requirements, under which the group of employees covered by a
plan (``plan coverage'') and the contributions or benefits
provided to employees, including benefits, rights, and features
under the plan, must not discriminate in favor of highly
compensated employees.\247\ The timing of plan amendments must
also not have the effect of discriminating significantly in
favor of highly compensated employees. In addition, in the case
of a defined benefit plan, the plan must benefit at least the
lesser of (1) 50 employees and (2) the greater of 40 percent of
all employees and two employees (or one employee if the
employer has only one employee), referred to as the ``minimum
participation'' requirements.\248\ These nondiscrimination
requirements are designed to help ensure that qualified
retirement plans achieve the goal of retirement security for
both lower and higher paid employees.
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\247\Secs. 401(a)(3)-(5) and 410(b). Detailed rules are provided in
Treas. Reg. secs. 1.401(a)(4)-1 through-13 and secs. 1.410(b)-2 through
-10. In applying the nondiscrimination requirements, certain employees,
such as those under age 21 or with less than a year of service,
generally may be disregarded. In addition, employees of controlled
groups and affiliated service groups under the aggregation rules of
section 414(b), (c), (m) and (o) are treated as employed by a single
employer.
\248\Sec. 401(a)(26).
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For nondiscrimination purposes, an employee generally is
treated as highly compensated if the employee (1) was a five-
percent owner of the employer at any time during the year or
the preceding year, or (2) had compensation for the preceding
year in excess of $120,000 (for 2017).\249\ Employees who are
not highly compensated are referred to as nonhighly compensated
employees.
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\249\Sec. 414(q). At the election of the employer, employees who
are highly compensated based on the amount of their compensation may be
limited to employees who were among the top 20 percent of employees
based on compensation.
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Nondiscriminatory plan coverage
Whether plan coverage of employees is nondiscriminatory is
determined by calculating a plan's ratio percentage, that is,
the ratio of the percentage of nonhighly compensated employees
covered under the plan to the percentage of highly compensated
employees covered. For this purpose, certain portions of a
defined contribution plan are treated as separate plans to
which the plan coverage requirements are applied separately,
referred to as mandatory disaggregation. Specifically, the
following, if provided under a plan, are treated as separate
plans: the portion of a plan consisting of employee elective
deferrals, the portion consisting of employer matching
contributions, the portion consisting of employer nonelective
contributions, and the portion consisting of an employee stock
ownership plan (``ESOP'').\250\ Subject to mandatory
disaggregation, different qualified retirement plans may
otherwise be aggregated and tested together as a single plan,
provided that they use the same plan year. The plan determined
under these rules for plan coverage purposes generally is also
treated as the plan for purposes of applying the other
nondiscrimination requirements.
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\250\Elective deferrals are contributions that an employee elects
to have made to a defined contribution plan that includes a qualified
cash or deferred arrangement (referred to as ``section 401(k) plan'')
rather than receive the same amount as current compensation. Employer
matching contributions are contributions made by an employer only if an
employee makes elective deferrals or after-tax employee contributions.
Employer nonelective contributions are contributions made by an
employer regardless of whether an employee makes elective deferrals or
after-tax employee contributions. Under section 4975(e)(7), an ESOP is
a defined contribution plan, or portion of a defined contribution plan,
that is designated as an ESOP and is designed to invest primarily in
employer stock.
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A plan's coverage is nondiscriminatory if the ratio
percentage, as determined above, is 70 percent or greater. If a
plan's ratio percentage is less than 70 percent, a multi-part
test applies, referred to as the average benefit test. First,
the plan must meet a ``nondiscriminatory classification
requirement,'' that is, it must cover a group of employees that
is reasonable and established under objective business criteria
and the plan's ratio percentage must be at or above a level
specified in the regulations, which varies depending on the
percentage of nonhighly compensated employees in the employer's
workforce. In addition, the average benefit percentage test
must be satisfied.
Under the average benefit percentage test, in general, the
average rate of employer-provided contributions or benefit
accruals for all nonhighly compensated employees under all
plans of the employer must be at least 70 percent of the
average contribution or accrual rate of all highly compensated
employees.\251\ In applying the average benefit percentage
test, elective deferrals made by employees, as well as employer
matching and nonelective contributions, are taken into account.
Generally, all plans maintained by the employer are taken into
account, including ESOPs, regardless of whether plans use the
same plan year.
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\251\Contribution and benefit rates are generally determined under
the rules for nondiscriminatory contributions or benefit accruals,
described below. These rules are generally based on benefit accruals
under a defined benefit plan, other than accruals attributable to
after-tax employee contributions, and contributions allocated to
participants' accounts under a defined contribution plan, other than
allocations attributable to after-tax employee (Under these rules,
contributions allocated to a participants accounts are referred to as
``allocations,'' with the related rates referred to as ``allocation
rates,'' but ``contribution rates'' is used herein for convenience.)
However, as discussed below, benefit accruals can be converted to
actuarially equivalent contributions, and contributions can be
converted to actuarially equivalent benefit accruals.
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Under a transition rule applicable in the case of the
acquisition or disposition of a business, or portion of a
business, or a similar transaction, a plan that satisfied the
plan coverage requirements before the transaction is deemed to
continue to satisfy them for a period after the transaction,
provided coverage under the plan is not significantly changed
during that period.\252\
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\252\Sec. 410(b)(6)(C).
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Nondiscriminatory contributions or benefit accruals
In general
There are three general approaches to testing the amount of
benefits under qualified retirement plans: (1) design-based
safe harbors under which the plan's contribution or benefit
accrual formula satisfies certain uniformity standards, (2) a
general test, described below, and (3) cross-testing of
equivalent contributions or benefit accruals. Employee elective
deferrals and employer matching contributions under defined
contribution plans are subject to special testing rules and
generally are not permitted to be taken into account in
determining whether other contributions or benefits are
nondiscriminatory.\253\
---------------------------------------------------------------------------
\253\Secs. 401(k) and (m), the latter of which applies also to
after-tax employee contributions under a defined contribution plan.
---------------------------------------------------------------------------
The nondiscrimination rules allow contributions and benefit
accruals to be provided to highly compensated and nonhighly
compensated employees at the same percentage of
compensation.\254\ Thus, the various testing approaches
described below are generally applied to the amount of
contributions or accruals provided as a percentage of
compensation, referred to as a contribution rate or accrual
rate. In addition, under the ``permitted disparity'' rules, in
calculating an employee's contribution or accrual rate, credit
may be given for the employer paid portion of Social Security
taxes or benefits.\255\ The permitted disparity rules do not
apply in testing whether elective deferrals, matching
contributions, or ESOP contributions are nondiscriminatory.
---------------------------------------------------------------------------
\254\For this purpose, under section 401(a)(17), compensation
generally is limited to $265,000 per year (for 2016).
\255\See sections 401(a)(5)(C) and (D) and 401(l) and Treas. Reg.
section 1. 401(a)(4)-7 and 1.401(l)-1 through -6 for rules for
determining the amount of contributions or benefits that can be
attributed to the employer-paid portion of Social Security taxes or
benefits.
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The general test is generally satisfied by measuring the
rate of contribution or benefit accrual for each highly
compensated employee to determine if the group of employees
with the same or higher rate (a ``rate'' group) is a
nondiscriminatory group, using the nondiscriminatory plan
coverage standards described above. For this purpose, if the
ratio percentage of a rate group is less than 70 percent, a
simplified standard applies, which includes disregarding the
reasonable classification requirement, but requires
satisfaction of the average benefit percentage test.
Cross-testing
Cross-testing involves the conversion of contributions
under a defined contribution plan or benefit accruals under a
defined benefit plan to actuarially equivalent accruals or
contributions, with the resulting equivalencies tested under
the general test. However, employee elective deferrals and
employer matching contributions under defined contribution
plans are not permitted to be taken into account for this
purpose, and cross-testing of contributions under a defined
contribution plan, or cross-testing of a defined contribution
plan aggregated with a defined benefit plan, is permitted only
if certain threshold requirements are satisfied.
In order for a defined contribution plan to be tested on an
equivalent benefit accrual basis, one of the following three
threshold conditions must be met:
The plan has broadly available allocation
rates, that is, each allocation rate under the plan is
available to a nondiscriminatory group of employees
(disregarding certain permitted additional
contributions provided to employees as a replacement
for benefits under a frozen defined benefit plan, as
discussed below);
The plan provides allocations that meet
prescribed designs under which allocations gradually
increase with age or service or are expected to provide
a target level of annuity benefit; or
The plan satisfies a minimum allocation
gateway, under which each nonhighly compensated
employee has an allocation rate of (a) at least one-
third of the highest rate for any highly compensated
employee, or (b) if less, at least five percent.
In order for an aggregated defined contribution and defined
benefit plan to be tested on an aggregate equivalent benefit
accrual basis, one of the following three threshold conditions
must be met:
The plan must be primarily defined benefit in
character, that is, for more than fifty percent of the
nonhighly compensated employees under the plan, their
accrual rate under the defined benefit plan exceeds
their equivalent accrual rate under the defined
contribution plan;
The plan consists of broadly available
separate defined benefit and defined contribution
plans, that is, the defined benefit plan and the
defined contribution plan would separately satisfy
simplified versions of the minimum coverage and
nondiscriminatory amount requirements; or
The plan satisfies a minimum aggregate
allocation gateway, under which each nonhighly
compensated employee has an aggregate allocation rate
(consisting of allocations under the defined
contribution plan and equivalent allocations under the
defined benefit plan) of (a) at least one-third of the
highest aggregate allocation rate for any nonhighly
compensated employee, or (b) if less, at least five
percent in the case of a highest nonhighly compensated
employee's rate up to 25 percent, increased by one
percentage point for each five-percentage-point
increment (or portion thereof) above 25 percent,
subject to a maximum of 7.5 percent.
Benefits, rights, and features
Each benefit, right, or feature offered under the plan
generally must be available to a group of employees that has a
ratio percentage that satisfies the minimum coverage
requirements, including the reasonable classification
requirement if applicable, except that the average benefit
percentage test does not have to be met, even if the ratio
percentage is less than 70 percent.
Multiple-employer and section 403(b) plans
A multiple-employer plan generally is a single plan
maintained by two or more unrelated employers, that is,
employers that are not treated as a single employer under the
aggregation rules for related entities.\256\ The plan coverage
and other nondiscrimination requirements are applied separately
to the portions of a multiple-employer plan covering employees
of different employers.\257\
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\256\Sec. 413(c). Multiple-employer status does not apply if the
plan is a multiemployer plan, defined under sec. 414(f) as a plan
maintained pursuant to one or more collective bargaining agreements
with two or more unrelated employers and to which the employers are
required to contribute under the collective bargaining agreement(s).
Multiemployer plans are also known as Taft-Hartley plans.
\257\Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).
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Certain tax-exempt charitable organizations may offer their
employees a tax-deferred annuity plan (``section 403(b)
plan).\258\ The nondiscrimination requirements, other than the
requirements applicable to elective deferrals, generally apply
to section 403(b) plans of private tax-exempt organizations.
For purposes of applying the nondiscrimination requirements to
a section 403(b) plan, subject to mandatory disaggregation, a
qualified retirement plan may be combined with the section
403(b) plan and treated as a single plan.\259\ However, a
section 403(b) plan and qualified retirement plan may not be
treated as a single plan for purposes of applying the
nondiscrimination requirements to the qualified retirement
plan.
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\258\Sec. 403(b). These plans are available to employers that are
tax-exempt under section 501(c)(3), as well as to educational
institutions of State or local governments.
\259\Treas. Reg. sec. 1.410(b)-7(f).
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Closed and frozen defined benefit plans
A defined benefit plan may be amended to limit
participation in the plan to individuals who are employees as
of a certain date. That is, employees hired after that date are
not eligible to participate in the plan. Such a plan is
sometimes referred to as a ``closed'' defined benefit plan
(that is, closed to new entrants). In such a case, it is common
for the employer also to maintain a defined contribution plan
and to provide employer matching or nonelective contributions
only to employees not covered by the defined benefit plan or at
a higher rate to such employees.
Over time, the group of employees continuing to accrue
benefits under the defined benefit plan may come to consist
more heavily of highly compensated employees, for example,
because of greater turnover among nonhighly compensated
employees or because increasing compensation causes nonhighly
compensated employees to become highly compensated. In that
case, the defined benefit plan may have to be combined with the
defined contribution plan and tested on a benefit accrual
basis. However, under the regulations, if none of the threshold
conditions is met, testing on a benefits basis may not be
available. Notwithstanding the regulations, recent IRS guidance
provides relief for a limited period, allowing certain closed
defined benefit plans to be aggregated with a defined
contribution plan and tested on an aggregate equivalent
benefits basis without meeting any of the threshold
conditions.\260\ When the group of employees continuing to
accrue benefits under a closed defined benefit plan consists
more heavily of highly compensated employees, the benefits,
rights, and features provided under the plan may also fail the
tests under the existing nondiscrimination rules.
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\260\Notice 2014-5, 2014-2 I.R.B. 276, extended by Notice 2015-28,
2015-14 14 I.R.B. 848, Notice 2016-57, 2016-40 I.R.B. 432, and Notice
2017-45, 2017-38 I.R.B. 232. Proposed regulations revising the
nondiscrimination requirements for closed plans were also issued
earlier this year, subject to various conditions. 81 Fed. Reg. 4976
(January 29, 2016).
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In some cases, if a defined benefit plan is amended to
cease future accruals for all participants, referred to as a
``frozen'' defined benefit plan, additional contributions to a
defined contribution plan may be provided for participants, in
particular for older participants, in order to make up in part
for the loss of the benefits they expected to earn under the
defined benefit plan (``make-whole'' contributions). As a
practical matter, testing on a benefit accrual basis may be
required in that case, but may not be available because the
defined contribution plan does not meet any of the threshold
conditions.
REASONS FOR CHANGE
Some employers sponsoring defined benefit plans have
determined that new employees prefer other types of
compensation to defined benefit plans and have therefore closed
their plans to new entrants. Existing employees continue to
earn benefits under the plan, consistent with their
expectations as to their compensation and retirement income,
which is particularly important for employees close to
retirement. However, without greater flexibility in the
nondiscrimination rules, employers may be forced to freeze
their defined benefit plans, thus preventing employees from
earning their expected benefits. When a defined benefit plan is
frozen, make-whole contributions can offset some of the
resulting benefit loss for employees. In that case, too,
greater flexibility in the nondiscrimination rules is needed.
The Committee wishes to provide such flexibility in order to
protect benefits for older, longer-service employees.
EXPLANATION OF PROVISION
Closed or frozen defined benefit plans
In general
Under the provision, nondiscrimination relief applies with
respect to benefits, rights, and features for a closed class of
participants (``closed class''),\261\ and with respect to
benefit accruals for a closed class, under a defined benefit
plan that meets the requirements described below (referred to
herein as an ``applicable'' defined benefit plan). In addition,
the provision treats a closed or frozen applicable defined
benefit plan as meeting the minimum participation requirements
if the plan met the requirements as of the effective date of
the plan amendment by which the plan was closed or frozen.
---------------------------------------------------------------------------
\261\References under the provision to a closed class of
participants and similar references to a closed class include
arrangements under which one or more classes of participants are
closed, except that one or more classes of participants closed on
different dates are not aggregated for purposes of determining the date
any such class was closed.
---------------------------------------------------------------------------
If a portion of an applicable defined benefit plan eligible
for relief under the provision is spun off to another employer,
and if the spun-off plan continues to satisfy any ongoing
requirements applicable for the relevant relief as described
below, the relevant relief for the spun-off plan will continue
with respect to the other employer.
Benefits, rights, or features for a closed class
Under the provision, an applicable defined benefit plan
that provides benefits, rights, or features to a closed class
does not fail the nondiscrimination requirements by reason of
the composition of the closed class, or the benefits, rights,
or features provided to the closed class, if (1) for the plan
year as of which the class closes and the two succeeding plan
years, the benefits, rights, and features satisfy the
nondiscrimination requirements without regard to the relief
under the provision, but taking into account the special
testing rules described below,\262\ and (2) after the date as
of which the class was closed, any plan amendment modifying the
closed class or the benefits, rights, and features provided to
the closed class does not discriminate significantly in favor
of highly compensated employees.
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\262\Other testing options available under present law are also
available for this purpose.
---------------------------------------------------------------------------
For purposes of requirement (1) above, the following
special testing rules apply:
In applying the plan coverage transition
rule for business acquisitions, dispositions, and
similar transactions, the closing of the class of
participants is not treated as a significant change in
coverage;
Two or more plans do not fail to be eligible
to be a treated as a single plan solely by reason of
having different plan years;\263\ and
---------------------------------------------------------------------------
\263\This rule applies also for purposes applying the plan coverage
and other nondiscrimination requirements to an applicable defined
benefit plan and one or more defined contributions that, under the
provision, may be treated as a single plan as described below.
---------------------------------------------------------------------------
Changes in employee population are
disregarded to the extent attributable to individuals
who become employees or cease to be employees, after
the date the class is closed, by reason of a merger,
acquisition, divestiture, or similar event.
Benefit accruals for a closed class
Under the provision, an applicable defined benefit plan
that provides benefits to a closed class may be aggregated,
that is, treated as a single plan, and tested on a benefit
accrual basis with one or more defined contribution plans
(without having to satisfy the threshold conditions under
present law) if (1) for the plan year as of which the class
closes and the two succeeding plan years, the plan satisfies
the plan coverage and nondiscrimination requirements without
regard to the relief under the provision, but taking into
account the special testing rules described above,\264\ and (2)
after the date as of which the class was closed, any plan
amendment modifying the closed class or the benefits provided
to the closed class does not discriminate significantly in
favor of highly compensated employees.
---------------------------------------------------------------------------
\264\Other testing options available under present law are also
available for this purpose.
---------------------------------------------------------------------------
Under the provision, defined contribution plans that may be
aggregated with an applicable defined benefit plan and treated
as a single plan include the portion of one or more defined
contribution plans consisting of matching contributions, an
ESOP, or matching or nonelective contributions under a section
403(b) plan. If an applicable defined benefit plan is
aggregated with the portion of a defined contribution plan
consisting of matching contributions, any portion of the
defined contribution plan consisting of elective deferrals must
also be aggregated. In addition, the matching contributions are
treated in the same manner as nonelective contributions,
including for purposes of permitted disparity.
Applicable defined benefit plan
An applicable defined benefit plan to which relief under
the provision applies is a defined benefit plan under which the
class was closed (or the plan frozen) before April 5, 2017, or
that meets the following alternative conditions: (1) taking
into account any predecessor plan, the plan has been in effect
for at least five years as of the date the class is closed (or
the plan is frozen) and (2) under the plan, during the five-
year period preceding that date, (a) for purposes of the relief
provided with respect to benefits, rights, and features for a
closed class, there has not been a substantial increase in the
coverage or value of the benefits, rights, or features, or (b)
for purposes of the relief provided with respect to benefit
accruals for a closed class or the minimum participation
requirements, there has not been a substantial increase in the
coverage or benefits under the plan.
For purposes of (2)(a) above, a plan is treated as having a
substantial increase in coverage or value of benefits, rights,
or features only if, during the applicable five-year period,
either the number of participants covered by the benefits,
rights, or features on the date the period ends is more than 50
percent greater than the number on the first day of the plan
year in which the period began, or the benefits, rights, and
features have been modified by one or more plan amendments in
such a way that, as of the date the class is closed, the value
of the benefits, rights, and features to the closed class as a
whole is substantially greater than the value as of the first
day of the five-year period, solely as a result of the
amendments.
For purposes of (2)(b) above, a plan is treated as having
had a substantial increase in coverage or benefits only if,
during the applicable five-year period, either the number of
participants benefiting under the plan on the date the period
ends is more than 50 percent greater than the number of
participants on the first day of the plan year in which the
period began, or the average benefit provided to participants
on the date the period ends is more than 50 percent greater
than the average benefit provided on the first day of the plan
year in which the period began. In applying this requirement,
the average benefit provided to participants under the plan is
treated as having remained the same between the two relevant
dates if the benefit formula applicable to the participants has
not changed between the dates and, if the benefit formula has
changed, the average benefit under the plan is considered to
have increased by more than 50 percent only if the target
normal cost for all participants benefiting under the plan for
the plan year in which the five-year period ends exceeds the
target normal cost for all such participants for that plan year
if determined using the benefit formula in effect for the
participants for the first plan year in the five-year period by
more than 50 percent.\265\ In applying these rules, a multiple-
employer plan is treated as a single plan, rather than as
separate plans separately covering the employees of each
participating employer.
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\265\Under the funding requirements applicable to defined benefit
plans, target normal cost for a plan year (defined in section
430(b)(1)(A)(i)) is generally the sum of the present value of the
benefits expected to be earned under the plan during the plan year plus
the amount of plan-related expenses to be paid from plan assets during
the plan year. Under the provision, in applying this average benefit
rule to certain defined benefit plans maintained by cooperative
organizations and charities, referred to as CSEC plans (defined in
section 414(y)), which are subject to different funding requirements,
the CSEC plan's normal cost under section 433(j)(1)(B) is used instead
of target normal cost.
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In applying these standards, any increase in coverage or
value, or in coverage or benefits, whichever is applicable, is
generally disregarded if it is attributable to coverage and
value, or coverage and benefits, provided to employees who (1)
became participants as a result of a merger, acquisition, or
similar event that occurred during the 7-year period preceding
the date the class was closed, or (2) became participants by
reason of a merger of the plan with another plan that had been
in effect for at least five years as of the date of the merger
and, in the case of benefits, rights, or features for a closed
class, under the merger, the benefits, rights, or features
under one plan were conformed to the benefits, rights, or
features under the other plan prospectively.
Make-whole contributions under a defined contribution plan
Under the provision, a defined contribution plan is
permitted to be tested on an equivalent benefit accrual basis
(without having to satisfy the threshold conditions under
present law) if the following requirements are met:
The plan provides make-whole contributions
to a closed class of participants whose accruals under
a defined benefit plan have been reduced or ended
(``make-whole class'');
For the plan year of the defined
contribution plan as of which the make-whole class
closes and the two succeeding plan years, the make-
whole class satisfies the nondiscriminatory
classification requirement under the plan coverage
rules, taking into account the special testing rules
described above;
After the date as of which the class was
closed, any amendment to the defined contribution plan
modifying the make-whole class or the allocations,
benefits, rights, and features provided to the make-
whole class does not discriminate significantly in
favor of highly compensated employees; and
Either the class was closed before April 5,
2017, or the defined benefit plan is an applicable
defined benefit plan under the alternative conditions
applicable for purposes of the relief provided with
respect to benefit accruals for a closed class.
With respect to one or more defined contribution plans
meeting the requirements above, in applying the plan coverage
and nondiscrimination requirements, the portion of the plan
providing make-whole or other nonelective contributions may
also be aggregated and tested on an equivalent benefit accrual
basis with the portion of one or more other defined
contribution plans consisting of matching contributions, an
ESOP, or matching or nonelective contributions under a section
403(b) plan. If the plan is aggregated with the portion of a
defined contribution plan consisting of matching contributions,
any portion of the defined contribution plan consisting of
elective deferrals must also be aggregated. In addition, the
matching contributions are treated in the same manner as
nonelective contributions, including for purposes of permitted
disparity.
Under the provision, ``make-whole contributions'' generally
means nonelective contributions for each employee in the make-
whole class that are reasonably calculated, in a consistent
manner, to replace some or all of the retirement benefits that
the employee would have received under the defined benefit plan
and any other plan or qualified cash or deferred arrangement
under a section 401(k) plan if no change had been made to the
defined benefit plan and other plan or arrangement.\266\
However, under a special rule, in the case of a defined
contribution plan that provides benefits, rights, or features
to a closed class of participants whose accruals under a
defined benefit plan have been reduced or eliminated, the plan
will not fail to satisfy the nondiscrimination requirements
solely by reason of the composition of the closed class, or the
benefits, rights, or features provided to the closed class, if
the defined contribution plan and defined benefit plan
otherwise meet the requirements described above but for the
fact that the make-whole contributions under the defined
contribution plan are made in whole or in part through matching
contributions.
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\266\For this purpose, consistency is not required with respect to
employees who were subject to different benefit formulas under the
defined benefit plan.
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If a portion of a defined contribution plan eligible for
relief under the provision is spun off to another employer, and
if the spun-off plan continues to satisfy any ongoing
requirements applicable for the relevant relief as described
above, the relevant relief for the spun-off plan will continue
with respect to the other employer.
EFFECTIVE DATE
The provision is generally effective on the date of
enactment without regard to whether any plan modifications
referred to in the provision are adopted or effective before,
on, or after the date of enactment. However, at the election of
a plan sponsor, the provision will apply to plan years
beginning after December 31, 2013. For purposes of the
provision, a closed class of participants under a defined
benefit plan is treated as being closed before April 5, 2017,
if the plan sponsor's intention to create the closed class is
reflected in formal written documents and communicated to
participants before that date. In addition, a plan does not
fail to be eligible for the relief under the provision solely
because (1) in the case of benefits, rights, or features for a
closed class under a defined benefit plan, the plan was amended
before the date of enactment to eliminate one or more benefits,
rights, or features and is further amended after the date of
enactment to provide the previously eliminated benefits,
rights, or features to a closed class of participants, or (2)
in the case of benefit accruals for a closed class under a
defined benefit plan or application of the minimum benefit
requirements to a closed or frozen defined benefit plan, the
plan was amended before the date of the enactment to cease all
benefit accruals and is further amended after the date of
enactment to provide benefit accruals to a closed class of
participants. In either case, the relevant relief applies only
if the plan otherwise meets the requirements for the relief,
and, in applying the relevant relief, the date the class of
participants is closed is the effective date of the later
amendment.
G. Estate, Gift, and Generation-Skipping Transfer Taxes
1. Increase in estate and gift tax exemption, followed by repeal of
estate and generation-skipping transfer taxes and reduction in gift tax
rate (secs. 1601 and 1602 of the bill, secs. 2010, 2056A, 2502, and
2505 of the Code, and new secs. 2210 and 2664 of the Code)
PRESENT LAW
In general
A gift tax is imposed on certain lifetime transfers, and an
estate tax is imposed on certain transfers at death. A
generation-skipping transfer tax generally is imposed on
transfers, either directly or in trust or similar arrangement,
to a ``skip person'' (i.e., a beneficiary in a generation more
than one generation younger than that of the transferor).
Transfers subject to the generation-skipping transfer tax
include direct skips, taxable terminations, and taxable
distributions.
Income tax rules determine the recipient's tax basis in
property acquired from a decedent or by gift. Gifts and
bequests generally are excluded from the recipient's gross
income.\267\
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\267\Sec. 102.
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Common features of the estate, gift, and generation-skipping transfer
taxes
Unified credit (exemption) and tax rates
Unified credit.--A unified credit is available with respect
to taxable transfers by gift and at death.\268\ The unified
credit offsets tax, computed using the applicable estate and
gift tax rates, on a specified amount of transfers, referred to
as the applicable exclusion amount, or exemption amount. The
exemption amount was set at $5 million for 2011 and is indexed
for inflation for later years.\269\ For 2017, the inflation-
indexed exemption amount is $5.49 million.\270\ Exemption used
during life to offset taxable gifts reduces the amount of
exemption that remains at death to offset the value of a
decedent's estate. An election is available under which
exemption that is not used by a decedent may be used by the
decedent's surviving spouse (exemption portability).
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\268\Sec. 2010.
\269\For 2011 and later years, the gift and estate taxes were
reunified, meaning that the gift tax exemption amount was increased to
equal the estate tax exemption amount.
\270\For 2017, the $5.49 exemption amount results in a unified
credit of $2,141,800, after applying the applicable rates set forth in
section 2001(c).
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Common tax rate table.--A common tax-rate table with a top
marginal tax rate of 40 percent is used to compute gift tax and
estate tax. The 40-percent rate applies to transfers in excess
of $1 million (to the extent not exempt). Because the exemption
amount currently shields the first $5.49 million in gifts and
bequests from tax, transfers in excess of the exemption amount
generally are subject to tax at the highest marginal rate (40
percent).
Generation-skipping transfer tax exemption and rate.--The
generation-skipping transfer tax is a separate tax that can
apply in addition to either the gift tax or the estate tax. The
tax rate and exemption amount for generation-skipping transfer
tax purposes, however, are set by reference to the estate tax
rules. Generation-skipping transfer tax is imposed using a flat
rate equal to the highest estate tax rate (40 percent). Tax is
imposed on cumulative generation-skipping transfers in excess
of the generation-skipping transfer tax exemption amount in
effect for the year of the transfer. The generation-skipping
transfer tax exemption for a given year is equal to the estate
tax exemption amount in effect for that year (currently $5.49
million).
Transfers between spouses.--A 100-percent marital deduction
generally is permitted for the value of property transferred
between spouses.\271\ In addition, transfers of ``qualified
terminable interest property'' also are eligible for the
marital deduction. Qualified terminable interest property is
property: (1) that passes from the decedent, (2) in which the
surviving spouse has a ``qualifying income interest for life,''
and (3) to which an election under these rules applies. A
qualifying income interest for life exists if: (1) the
surviving spouse is entitled to all the income from the
property (payable annually or at more frequent intervals) or
has the right to use the property during the spouse's life, and
(2) no person has the power to appoint any part of the property
to any person other than the surviving spouse.
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\271\Secs. 2056 and 2523.
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A marital deduction generally is denied for property
passing to a surviving spouse who is not a citizen of the
United States. A marital deduction is permitted, however, for
property passing to a qualified domestic trust of which the
noncitizen surviving spouse is a beneficiary. A qualified
domestic trust is a trust that has as its trustee at least one
U.S. citizen or U.S. corporation. No corpus may be distributed
from a qualified domestic trust unless the U.S. trustee has the
right to withhold any estate tax imposed on the distribution.
Tax is imposed on (1) any distribution from a qualified
domestic trust before the date of the death of the noncitizen
surviving spouse and (2) the value of the property remaining in
a qualified domestic trust on the date of death of the
noncitizen surviving spouse. The tax is computed as an
additional estate tax on the estate of the first spouse to die.
Transfers to charity.--Contributions to section 501(c)(3)
charitable organizations and certain other organizations may be
deducted from the value of a gift or from the value of the
assets in an estate for Federal gift or estate tax
purposes.\272\ The effect of the deduction generally is to
remove the full fair market value of assets transferred to
charity from the gift or estate tax base; unlike the income tax
charitable deduction, there are no percentage limits on the
deductible amount. For estate tax purposes, the charitable
deduction is limited to the value of the transferred property
that is required to be included in the gross estate.\273\ A
charitable contribution of a partial interest in property, such
as a remainder or future interest, generally is not deductible
for gift or estate tax purposes.\274\
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\272\Secs. 2055 and 2522.
\273\Sec. 2055(d).
\274\Secs. 2055(e)(2) and 2522(c)(2).
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The estate tax
Overview
The Code imposes a tax on the transfer of the taxable
estate of a decedent who is a citizen or resident of the United
States.\275\ The taxable estate is determined by deducting from
the value of the decedent's gross estate any deductions
provided for in the Code. After applying tax rates to determine
a tentative amount of estate tax, certain credits are
subtracted to determine estate tax liability.\276\
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\275\Sec. 2001(a).
\276\More mechanically, the taxable estate is combined with the
value of adjusted taxable gifts made during the decedent's life
(generally, post-1976 gifts), before applying tax rates to determine a
tentative total amount of tax. The portion of the tentative tax
attributable to lifetime gifts is then subtracted from the total
tentative tax to determine the gross estate tax, i.e., the amount of
estate tax before considering available credits. Credits are then
subtracted to determine the estate tax liability.
This method of computation was designed to ensure that a taxpayer
only gets one run up through the rate brackets for all lifetime gifts
and transfers at death, at a time when the thresholds for applying the
higher marginal rates exceeded the exemption amount. However, the
higher ($5.49 million) present-law exemption amount effectively renders
the lower rate brackets irrelevant, because the top marginal rate
bracket applies to all transfers in excess of $1 million. In other
words, all transfers that are not exempt by reason of the $5.49 million
exemption amount are taxed at the highest marginal rate of 40 percent.
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Because the estate tax shares a common unified credit
(exemption) and tax rate table with the gift tax, the exemption
amounts and tax rates are described together above, along with
certain other common features of these taxes.
Gross estate
A decedent's gross estate includes, to the extent provided
for in other sections of the Code, the date-of-death value of
all of a decedent's property, real or personal, tangible or
intangible, wherever situated.\277\ In general, the value of
property for this purpose is the fair market value of the
property as of the date of the decedent's death, although an
executor may elect to value certain property as of the date
that is six months after the decedent's death (the alternate
valuation date).\278\
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\277\Sec. 2031(a).
\278\Sec. 2032.
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The gross estate includes not only property directly owned
by the decedent, but also other property in which the decedent
had a beneficial interest at the time of his or her death.\279\
The gross estate also includes certain transfers made by the
decedent prior to his or her death, including: (1) certain
gifts made within three years prior to the decedent's
death;\280\ (2) certain transfers of property in which the
decedent retained a life estate;\281\ (3) certain transfers
taking effect at death;\282\ and (4) revocable transfers.\283\
In addition, the gross estate also includes property with
respect to which the decedent had, at the time of death, a
general power of appointment (generally, the right to determine
who will have beneficial ownership).\284\ The value of a life
insurance policy on the decedent's life is included in the
gross estate if the proceeds are payable to the decedent's
estate or the decedent had incidents of ownership with respect
to the policy at the time of his or her death.\285\
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\279\Sec. 2033.
\280\Sec. 2035.
\281\Sec. 2036.
\282\Sec. 2037.
\283\Sec. 2038.
\284\Sec. 2041.
\285\Sec. 2042.
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Deductions from the gross estate
A decedent's taxable estate is determined by subtracting
from the value of the gross estate any deductions provided for
in the Code.
Marital and charitable transfers.--As described above,
transfers to a surviving spouse or to charity generally are
deductible for estate tax purposes. The effect of the marital
and charitable deductions generally is to remove assets
transferred to a surviving spouse or to charity from the estate
tax base.
State death taxes.--An estate tax deduction is permitted
for death taxes (e.g., any estate, inheritance, legacy, or
succession taxes) actually paid to any State or the District of
Columbia, in respect of property included in the gross estate
of the decedent.\286\ Such State taxes must have been paid and
claimed before the later of: (1) four years after the filing of
the estate tax return; or (2) (a) 60 days after a decision of
the U.S. Tax Court determining the estate tax liability becomes
final, (b) the expiration of the period of extension to pay
estate taxes over time under section 6166, or (c) the
expiration of the period of limitations in which to file a
claim for refund or 60 days after a decision of a court in
which such refund suit has become final.
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\286\Sec. 2058.
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Other deductions.--A deduction is available for funeral
expenses, estate administration expenses, and claims against
the estate, including certain taxes.\287\ A deduction also is
available for uninsured casualty and theft losses incurred
during the settlement of the estate.\288\
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\287\Sec. 2053.
\288\Sec. 2054.
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Credits against tax
After accounting for allowable deductions, a gross amount
of estate tax is computed. Estate tax liability is then
determined by subtracting allowable credits from the gross
estate tax.
Unified credit.--The most significant credit allowed for
estate tax purposes is the unified credit, which is discussed
in greater detail above.\289\ For 2017, the value of the
unified credit is $2,141,800, which has the effect of exempting
$5.49 million in transfers from tax. The unified credit
available at death is reduced by the amount of unified credit
used to offset gift tax on gifts made during the decedent's
life.
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\289\Sec. 2010.
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Other credits.--Estate tax credits also are allowed for:
(1) gift tax paid on certain pre-1977 gifts (before the estate
and gift tax computations were integrated);\290\ (2) estate tax
paid on certain prior transfers (to limit the estate tax burden
when estate tax is imposed on transfers of the same property in
two estates by reason of deaths in rapid succession);\291\ and
(3) certain foreign death taxes paid (generally, where the
property is situated in a foreign country but included in the
decedent's U.S. gross estate).\292\
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\290\Sec. 2012.
\291\Sec. 2013.
\292\Sec. 2014. In certain cases, an election may be made to deduct
foreign death taxes. See section 2053(d).
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Provisions affecting small and family-owned businesses and
farms
Special-use valuation.--An executor can elect to value for
estate tax purposes certain ``qualified real property'' used in
farming or another qualifying closely-held trade or business at
its current-use value, rather than its fair market value.\293\
The maximum reduction in value for such real property is
$750,000 (adjusted for inflation occurring after 1997; the
inflation-adjusted amount for 2017 is $1,120,000). In general,
real property generally qualifies for special-use valuation
only if (1) at least 50 percent of the adjusted value of the
decedent's gross estate (including both real and personal
property) consists of a farm or closely-held business property
in the decedent's estate and (2) at least 25 percent of the
adjusted value of the gross estate consists of farm or closely
held business real property. In addition, the property must be
used in a qualified use (e.g., farming) by the decedent or a
member of the decedent's family for five of the eight years
before the decedent's death.
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\293\Sec. 2032A.
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If, after a special-use valuation election is made, the
heir who acquired the real property ceases to use it in its
qualified use within 10 years of the decedent's death, an
additional estate tax is imposed to recapture the entire
estate-tax benefit of the special-use valuation.\294\
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\294\Prior to 2004, an estate also was permitted to deduct the
adjusted value of a qualified family-owned business interest of the
decedent, up to $675,000. Sec. 2057. A qualified family-owned business
interest generally was defined as any interest in a trade or business
(regardless of the form in which it is held) with a principal place of
business in the United States if the decedent's family owns at least 50
percent of the trade or business, two families own 70 percent, or three
families own 90 percent, as long as the decedent's family owns at least
30 percent of the trade or business. To qualify for the exclusion, the
decedent (or a member of the decedent's family) must have owned and
materially participated in the trade or business for at least five of
the eight years preceding the decedent's date of death. In addition, at
least one qualified heir (or member of the qualified heir's family) was
required to have materially participated in the trade or business for
at least 10 years following the decedent's death. The qualified family-
owned business rules provided a graduated recapture based on the number
of years after the decedent's death within which a disqualifying event
occurred.
The qualified family-owned business deduction and the unified
credit effective exemption amount were coordinated. If the maximum
deduction amount of $675,000 is elected, then the unified credit
effective exemption amount is $625,000, for a total of $1.3 million. If
the qualified family-owned business deduction is less than $675,000,
then the unified credit effective exemption amount is equal to
$625,000, increased by the difference between $675,000 and the amount
of the qualified family-owned business deduction. However, the unified
credit effective exemption amount cannot be increased above such amount
in effect for the taxable year. Because of the coordination between the
qualified family-owned business deduction and the unified credit
effective exemption amount, the qualified family-owned business
deduction did not provide a benefit in any year in which the applicable
exclusion amount exceeded $1.3 million.
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Installment payment of estate tax for closely held
businesses.--Under present law, the estate tax generally is due
within nine months of a decedent's death. However, an executor
generally may elect to pay estate tax attributable to an
interest in a closely held business in two or more installments
(but no more than 10).\295\ An estate is eligible for payment
of estate tax in installments if the value of the decedent's
interest in a closely held business exceeds 35 percent of the
decedent's adjusted gross estate (i.e., the gross estate less
certain deductions). If the election is made, the estate may
defer payment of principal and pay only interest for the first
five years, followed by up to 10 annual installments of
principal and interest. This provision effectively extends the
time for paying estate tax by 14 years from the original due
date of the estate tax. A special two-percent interest rate
applies to the amount of deferred estate tax attributable to
the first $1 million (adjusted annually for inflation occurring
after 1998; the inflation-adjusted amount for 2017 is
$1,490,000) in taxable value of a closely held business. The
interest rate applicable to the amount of estate tax
attributable to the taxable value of the closely held business
in excess of $1 million (adjusted for inflation) is equal to 45
percent of the rate applicable to underpayments of tax under
section 6621 of the Code (i.e., 45 percent of the Federal
short-term rate plus three percentage points).\296\ Interest
paid on deferred estate taxes is not deductible for estate or
income tax purposes.
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\295\Sec. 6166.
\296\The interest rate on this portion adjusts with the Federal
short-term rate.
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The Gift Tax
Overview
The Code imposes a tax for each calendar year on the
transfer of property by gift during such year by any
individual, whether a resident or nonresident of the United
States.\297\ The amount of taxable gifts for a calendar year is
determined by subtracting from the total amount of gifts made
during the year: (1) the gift tax annual exclusion (described
below); and (2) allowable deductions.
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\297\Sec. 2501(a).
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Gift tax for the current taxable year is determined by: (1)
computing a tentative tax on the combined amount of all taxable
gifts for the current and all prior calendar years using the
common gift tax and estate tax rate table; (2) computing a
tentative tax only on all prior-year gifts; (3) subtracting the
tentative tax on prior-year gifts from the tentative tax
computed for all years to arrive at the portion of the total
tentative tax attributable to current-year gifts; and, finally,
(4) subtracting the amount of unified credit not consumed by
prior-year gifts.
Because the gift tax shares a common unified credit
(exemption) and tax rate table with the estate tax, the
exemption amounts and tax rates are described together above,
along with certain other common features of these taxes.
Transfers by gift
The gift tax applies to a transfer by gift regardless of
whether: (1) the transfer is made outright or in trust; (2) the
gift is direct or indirect; or (3) the property is real or
personal, tangible or intangible.\298\ For gift tax purposes,
the value of a gift of property is the fair market value of the
property at the time of the gift.\299\ Where property is
transferred for less than full consideration, the amount by
which the value of the property exceeds the value of the
consideration is considered a gift and is included in computing
the total amount of a taxpayer's gifts for a calendar
year.\300\
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\298\Sec. 2511(a).
\299\Sec. 2512(a).
\300\Sec. 2512(b).
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For a gift to occur, a donor generally must relinquish
dominion and control over donated property. For example, if a
taxpayer transfers assets to a trust established for the
benefit of his or her children, but retains the right to revoke
the trust, the taxpayer may not have made a completed gift,
because the taxpayer has retained dominion and control over the
transferred assets. A completed gift made in trust, on the
other hand, often is treated as a gift to the trust
beneficiaries.
By reason of statute, certain transfers are not treated as
transfers by gift for gift tax purposes. These include, for
example, certain transfers for educational and medical
purposes,\301\ transfers to section 527 political
organizations,\302\ and transfers to tax-exempt organizations
described in sections 501(c)(4), (5), or (6).\303\
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\301\Sec. 2503(e).
\302\Sec. 2501(a)(4).
\303\Sec. 2501(a)(6).
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Taxable gifts
As stated above, the amount of a taxpayer's taxable gifts
for the year is determined by subtracting from the total amount
of the taxpayer's gifts for the year the gift tax annual
exclusion and any available deductions.
Gift tax annual exclusion.--Under present law, donors of
lifetime gifts are provided an annual exclusion of $14,000 per
donee in 2017 (indexed for inflation from the 1997 annual
exclusion amount of $10,000) for gifts of present interests in
property during the taxable year.\304\ If the non-donor spouse
consents to split the gift with the donor spouse, then the
annual exclusion is $28,000 per donee in 2017. In general,
unlimited transfers between spouses are permitted without
imposition of a gift tax. Special rules apply to the
contributions to a qualified tuition program (``529 Plan'')
including an election to treat a contribution that exceeds the
annual exclusion as a contribution made ratably over a five-
year period beginning with the year of the contribution.\305\
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\304\Sec. 2503(b).
\305\Sec. 529(c)(2).
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Marital and charitable deductions.--As described above,
transfers to a surviving spouse or to charity generally are
deductible for gift tax purposes. The effect of the marital and
charitable deductions generally is to remove assets transferred
to a surviving spouse or to charity from the gift tax base.
The generation-skipping transfer tax
A generation-skipping transfer tax generally is imposed (in
addition to the gift tax or the estate tax) on transfers,
either directly or in trust or similar arrangement, to a ``skip
person'' (i.e., a beneficiary in a generation more than one
generation below that of the transferor). Transfers subject to
the generation-skipping transfer tax include direct skips,
taxable terminations, and taxable distributions.
Exemption and tax rate
An exemption generally equal to the estate tax exemption
amount ($5.49 million for 2017) is provided for each person
making generation-skipping transfers. The exemption may be
allocated by a transferor (or his or her executor) to
transferred property, and in some cases is automatically
allocated. The allocation of generation-skipping transfer tax
exemption effectively reduces the tax rate on a generation-
skipping transfer.
The tax rate on generation-skipping transfers is a flat
rate of tax equal to the maximum estate and gift tax rate (40
percent) multiplied by the ``inclusion ratio.'' The inclusion
ratio with respect to any property transferred indicates the
amount of ``generation-skipping transfer tax exemption''
allocated to a trust (or to property transferred in a direct
skip) relative to the total value of property transferred.\306\
If, for example, a taxpayer transfers $5 million in property to
a trust and allocates $5 million of exemption to the transfer,
the inclusion ratio is zero, and the applicable tax rate on any
subsequent generation-skipping transfers from the trust is zero
percent (40 percent multiplied by the inclusion ratio of zero).
If, however, the taxpayer allocated only $2.5 million of
exemption to the transfer, the inclusion ratio is 0.5, and the
applicable tax rate on any subsequent generation-skipping
transfers from the trust is 20 percent (40 percent multiplied
by the inclusion ratio of 0.5). If the taxpayer allocates no
exemption to the transfer, the inclusion ratio is one, and the
applicable tax rate on any subsequent generation-skipping
transfers from the trust is 40 percent (40 percent multiplied
by the inclusion ratio of one).
---------------------------------------------------------------------------
\306\The inclusion ratio is one minus the applicable fraction. The
applicable fraction is the amount of exemption allocated to a trust (or
to a direct skip) divided by the value of assets transferred.
---------------------------------------------------------------------------
Generation-skipping transfers
Generation-skipping transfer tax generally is imposed at
the time of a generation-skipping transfer--a direct skip, a
taxable termination, or a taxable distribution.
A direct skip is any transfer subject to estate or gift tax
of an interest in property to a skip person. A skip person may
be a natural person or certain trusts. All persons assigned to
the second or more remote generation below the transferor are
skip persons (e.g., grandchildren and great-grandchildren).
Trusts are skip persons if (1) all interests in the trust are
held by skip persons, or (2) no person holds an interest in the
trust and at no time after the transfer may a distribution
(including distributions and terminations) be made to a non-
skip person.
A taxable termination is a termination (by death, lapse of
time, release of power, or otherwise) of an interest in
property held in trust unless, immediately after such
termination, a non-skip person has an interest in the property,
or unless at no time after the termination may a distribution
(including a distribution upon termination) be made from the
trust to a skip person.
A taxable distribution is a distribution from a trust to a
skip person (other than a taxable termination or direct skip).
If a transferor allocates generation-skipping transfer tax
exemption to a trust prior to the taxable distribution,
generation-skipping transfer tax may be avoided.
Income tax basis in property received
In general
Gain or loss, if any, on the disposition of property is
measured by the taxpayer's amount realized (i.e., gross
proceeds received) on the disposition, less the taxpayer's
basis in such property. Basis generally represents a taxpayer's
investment in property with certain adjustments required after
acquisition. For example, basis is increased by the cost of
capital improvements made to the property and decreased by
depreciation deductions taken with respect to the property.
A gift or bequest of appreciated (or loss) property is not
an income tax realization event for the transferor. The Code
provides special rules for determining a recipient's basis in
assets received by lifetime gift or from a decedent.
Basis in property received by lifetime gift
Under present law, property received from a donor of a
lifetime gift generally takes a carryover basis. ``Carryover
basis'' means that the basis in the hands of the donee is the
same as it was in the hands of the donor. The basis of property
transferred by lifetime gift also is increased, but not above
fair market value, by any gift tax paid by the donor. The basis
of a lifetime gift, however, generally cannot exceed the
property's fair market value on the date of the gift. If a
donor's basis in property is greater than the fair market value
of the property on the date of the gift, then, for purposes of
determining loss on a subsequent sale of the property, the
donee's basis is the property's fair market value on the date
of the gift.
Basis in property acquired from a decedent
Property acquired from a decedent's estate generally takes
a stepped-up basis. ``Stepped-up basis'' means that the basis
of property acquired from a decedent's estate generally is the
fair market value on the date of the decedent's death (or, if
the alternate valuation date is elected, the earlier of six
months after the decedent's death or the date the property is
sold or distributed by the estate). Providing a fair market
value basis eliminates the recognition of income on any
appreciation of the property that occurred prior to the
decedent's death and eliminates the tax benefit from any
unrealized loss.
In community property states, a surviving spouse's one-half
share of community property held by the decedent and the
surviving spouse (under the community property laws of any
State, U.S. possession, or foreign country) generally is
treated as having passed from the decedent and, thus, is
eligible for stepped-up basis. Thus, both the decedent's one-
half share and the surviving spouse's one-half share are
stepped up to fair market value. This rule applies if at least
one-half of the whole of the community interest is includible
in the decedent's gross estate.
Stepped-up basis treatment generally is denied to certain
interests in foreign entities. Stock in a passive foreign
investment company (including those for which a mark-to-market
election has been made) generally takes a carryover basis,
except that stock of a passive foreign investment company for
which a decedent shareholder had made a qualified electing fund
election is allowed a stepped-up basis. Stock owned by a
decedent in a domestic international sales corporation (or
former domestic international sales corporation) takes a
stepped-up basis reduced by the amount (if any) which would
have been included in gross income under section 995(c) as a
dividend if the decedent had lived and sold the stock at its
fair market value on the estate tax valuation date (i.e.,
generally the date of the decedent's death unless an alternate
valuation date is elected).
REASONS FOR CHANGE
The Committee believes the Federal estate and generation-
skipping transfer taxes harm taxpayers and the economy and
therefore should be repealed. A tax on capital, such as the
estate tax, motivates wealth holders to reduce savings and
increase spending during life, rather than passing it to the
next generation, ultimately increasing the consumption gap
between the wealthy and poor. A tax on capital also causes
investors to provide less capital to workers, thereby reducing
wages in the long run.
The Committee is particularly concerned about the effect of
the estate tax on the owners of farms and family businesses,
which create jobs and support our economy. The estate tax hits
such entrepreneurs especially hard, forcing families of
deceased owners to make the difficult decision to sell all or
part of the farm or business or take out costly loans to
satisfy the estate tax liability.
EXPLANATION OF PROVISION
The provision doubles the estate and gift tax exemption
amount for decedents dying and gifts made after December 31,
2017. This is accomplished by increasing the basic exclusion
amount provided in section 2010(c)(3) of the Code from $5
million to $10 million. The $10 million amount is indexed for
inflation occurring after 2011.
For estates of decedents dying and generation-skipping
transfers made after December 31, 2024, the provision repeals
the estate tax and the generation-skipping transfer tax. The
provision includes a transition rule for assets placed in a
qualified domestic trust by a decedent who died before the
effective date of the provision. Specifically, estate tax will
not be imposed on: (1) distributions before the death of a
surviving spouse from the trust more than 10 years after the
date of enactment; or (2) assets remaining in the qualified
domestic trust upon the death of the surviving spouse. The top
marginal gift tax rate is reduced to 35 percent for gifts made
after December 31, 2024.
The provision generally retains the present law rules for
determining the income tax basis of assets acquired by gift and
assets acquired from a decedent. As a result, property received
from a donor of a lifetime gift generally will continue to take
a carryover basis, and property acquired from a decedent's
estate generally will continue to take a stepped-up basis.
EFFECTIVE DATE
The doubling of the estate and gift tax exemption is
effective for estates of decedents dying, generation-skipping
transfers, and gifts made after December 31, 2017. The repeal
of the estate and generation-skipping transfer taxes, and the
reduction in the gift tax rate to 35 percent, are effective for
estates of decedents dying, generation-skipping transfers, and
gifts made after December 31, 2024.
TITLE II--ALTERNATIVE MINIMUM TAX REPEAL
1. Repeal of alternative minimum tax (sec. 2001 of the bill and sec. 55
of the Code)
PRESENT LAW
Individual alternative minimum tax
In general
An alternative minimum tax (``AMT'') is imposed on an
individual, estate, or trust in an amount by which the
tentative minimum tax exceeds the regular income tax for the
taxable year. For taxable years beginning in 2017, the
tentative minimum tax is the sum of (1) 26 percent of so much
of the taxable excess as does not exceed $187,800 ($93,900 in
the case of a married individual filing a separate return) and
(2) 28 percent of the remaining taxable excess. The breakpoints
are indexed for inflation. The taxable excess is so much of the
alternative minimum taxable income (``AMTI'') as exceeds the
exemption amount. The maximum tax rates on net capital gain and
dividends used in computing the regular tax are used in
computing the tentative minimum tax. AMTI is the taxable income
adjusted to take account of specified tax preferences and
adjustments.
The exemption amounts for taxable years beginning in 2017
are: (1) $84,500 in the case of married individuals filing a
joint return and surviving spouses; (2) $54,300 in the case of
other unmarried individuals; (3) $42,250 in the case of married
individuals filing separate returns; and (4) $24,100 in the
case of an estate or trust. For taxable years beginning in
2017, the exemption amounts are phased out by an amount equal
to 25 percent of the amount by which the individual's AMTI
exceeds (1) $160,900 in the case of married individuals filing
a joint return and surviving spouses, (2) $120,700 in the case
of other unmarried individuals, and (3) $80,450 in the case of
married individuals filing separate returns or an estate or a
trust. The amounts are indexed for inflation.
AMTI is the taxpayer's taxable income increased by certain
preference items and adjusted by determining the tax treatment
of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items.
Preference items in computing AMTI
The minimum tax preference items are:
1. The excess of the deduction for percentage depletion
over the adjusted basis of each mineral property (other than
oil and gas properties) at the end of the taxable year.
2. The amount by which excess intangible drilling costs
(i.e., expenses in excess the amount that would have been
allowable if amortized over a 10-year period) exceed 65 percent
of the net income from oil, gas, and geothermal properties.
This preference applies to independent producers only to the
extent it reduces the producer's AMTI (determined without
regard to this preference and the net operating loss deduction)
by more than 40 percent.
3. Tax-exempt interest income on private activity bonds
(other than qualified 501(c)(3) bonds, certain housing bonds,
and bonds issued in 2009 and 2010) issued after August 7, 1986.
4. Accelerated depreciation or amortization on certain
property placed in service before January 1, 1987.
5. Seven percent of the amount excluded from income under
section 1202 (relating to gains on the sale of certain small
business stock).
In addition, losses from any tax shelter farm activity or
passive activities are not taken into account in computing
AMTI.
Adjustments in computing AMTI
The adjustments that individuals must make to compute AMTI
are:
1. Depreciation on property placed in service after 1986
and before January 1, 1999, is computed by using the generally
longer class lives prescribed by the alternative depreciation
system of section 168(g) and either (a) the straight-line
method in the case of property subject to the straight-line
method under the regular tax or (b) the 150-percent declining
balance method in the case of other property. Depreciation on
property placed in service after December 31, 1998, is computed
by using the regular tax recovery periods and the AMT methods
described in the previous sentence. Depreciation on property
acquired after September 10, 2001, which is allowed an
additional allowance under section 168(k) for the regular tax
is computed without regard to any AMT adjustments.
2. Mining exploration and development costs are capitalized
and amortized over a 10-year period.
3. Taxable income from a long-term contract (other than a
home construction contract) is computed using the percentage of
completion method of accounting.
4. Depreciation on property placed in service after 1986
and before January 1, 1999, is computed by using the generally
longer class lives prescribed by the alternative depreciation
system of section 168(g) and either (a) the straight-line
method in the case of property subject to the straight-line
method under the regular tax or (b) the 150-percent declining
balance method in the case of other property. Depreciation on
property placed in service after December 31, 1998, is computed
by using the regular tax recovery periods and the AMT methods
described in the previous sentence. Depreciation on property
acquired after September 10, 2001, which is allowed an
additional allowance under section 168(k) for the regular tax
is computed without regard to any AMT adjustments.
5. Mining exploration and development costs are capitalized
and amortized over a 10-year period.
6. Taxable income from a long-term contract (other than a
home construction contract) is computed using the percentage of
completion method of accounting.
7. The amortization deduction allowed for pollution control
facilities placed in service before January 1, 1999 (generally
determined using 60-month amortization for a portion of the
cost of the facility under the regular tax), is calculated
under the alternative depreciation system (generally, using
longer class lives and the straight-line method). The
amortization deduction allowed for pollution control facilities
placed in service after December 31, 1998, is calculated using
the regular tax recovery periods and the straight-line method.
8. Miscellaneous itemized deductions are not allowed.
9. Itemized deductions for State, local, and foreign real
property taxes; State and local personal property taxes; State,
local, and foreign income, war profits, and excess profits
taxes; and State and local sales taxes are not allowed.
10. Medical expenses are allowed only to the extent they
exceed ten percent of the taxpayer's adjusted gross income.
11. Deductions for interest on home equity loans are not
allowed.
12. The standard deduction and the deduction for personal
exemptions are not allowed.
13. The amount allowable as a deduction for circulation
expenditures is capitalized and amortized over a three-year
period.
14. The amount allowable as a deduction for research and
experimentation expenditures from passive activities is
capitalized and amortized over a 10-year period.
15. The regular tax rules relating to incentive stock
options do not apply.
Other rules
The taxpayer's net operating loss deduction generally
cannot reduce the taxpayer's AMTI by more than 90 percent of
the AMTI (determined without the net operating loss deduction).
The alternative minimum tax foreign tax credit reduces the
tentative minimum tax.
The various nonrefundable business credits allowed under
the regular tax generally are not allowed against the AMT.
Certain exceptions apply.
If an individual is subject to AMT in any year, the amount
of tax exceeding the taxpayer's regular tax liability is
allowed as a credit (the ``AMT credit'') in any subsequent
taxable year to the extent the taxpayer's regular tax liability
exceeds his or her tentative minimum tax liability in such
subsequent year. The AMT credit is allowed only to the extent
that the taxpayer's AMT liability is the result of adjustments
that are timing in nature. The individual AMT adjustments
relating to itemized deductions and personal exemptions are not
timing in nature, and no minimum tax credit is allowed with
respect to these items.
An individual may elect to write off certain expenditures
paid or incurred with respect of circulation expenses, research
and experimental expenses, intangible drilling and development
expenditures, development expenditures, and mining exploration
expenditures over a specified period (three years in the case
of circulation expenses, 60 months in the case of intangible
drilling and development expenditures, and 10 years in case of
other expenditures). The election applies for purposes of both
the regular tax and the alternative minimum tax.
Corporate alternative minimum tax
In general
An AMT is also imposed on a corporation to the extent the
corporation's tentative minimum tax exceeds its regular tax.
This tentative minimum tax is computed at the rate of 20
percent on the AMTI in excess of a $40,000 exemption amount
that phases out. The exemption amount is phased out by an
amount equal to 25 percent of the amount that the corporation's
AMTI exceeds $150,000.
AMTI is the taxpayer's taxable income increased by certain
preference items and adjusted by determining the tax treatment
of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items.
A corporation with average gross receipts of less than $7.5
million for the prior three taxable years is exempt from the
corporate minimum tax. The $7.5 million threshold is reduced to
$5 million for the corporation's first three-taxable year
period.
Preference items in computing AMTI
The corporate minimum tax preference items are:
1. The excess of the deduction for percentage depletion
over the adjusted basis of the property at the end of the
taxable year. This preference does not apply to percentage
depletion allowed with respect to oil and gas properties.
2. The amount by which excess intangible drilling costs
arising in the taxable year exceed 65 percent of the net income
from oil, gas, and geothermal properties. This preference does
not apply to an independent producer to the extent the
preference would not reduce the producer's AMTI by more than 40
percent.
3. Tax-exempt interest income on private activity bonds
(other than qualified 501(c)(3) bonds, certain housing bonds,
and bonds issued in 2009 and 2010) issued after August 7, 1986.
4. Accelerated depreciation or amortization on certain
property placed in service before January 1, 1987.
Adjustments in computing AMTI
The adjustments that corporations must make in computing
AMTI are:
1. Depreciation on property placed in service after 1986
and before January 1, 1999, must be computed by using the
generally longer class lives prescribed by the alternative
depreciation system of section 168(g) and either (a) the
straight-line method in the case of property subject to the
straight-line method under the regular tax or (b) the 150-
percent declining balance method in the case of other property.
Depreciation on property placed in service after December 31,
1998, is computed by using the regular tax recovery periods and
the AMT methods described in the previous sentence.
Depreciation on property which is allowed ``bonus
depreciation'' for the regular tax is computed without regard
to any AMT adjustments.
2. Mining exploration and development costs must be
capitalized and amortized over a 10-year period.
3. Taxable income from a long-term contract (other than a
home construction contract) must be computed using the
percentage of completion method of accounting.
4. The amortization deduction allowed for pollution control
facilities placed in service before January 1, 1999 (generally
determined using 60-month amortization for a portion of the
cost of the facility under the regular tax), must be calculated
under the alternative depreciation system (generally, using
longer class lives and the straight-line method). The
amortization deduction allowed for pollution control facilities
placed in service after December 31, 1998, is calculated using
the regular tax recovery periods and the straight-line method.
5. The special rules applicable to Merchant Marine
construction funds are not applicable.
6. The special deduction allowable under section 833(b) for
Blue Cross and Blue Shield organizations is not allowed.
7. The adjusted current earnings adjustment applies, as
described below.
Adjusted current earning (``ACE'') adjustment
The adjusted current earnings adjustment is the amount
equal to 75 percent of the amount by which the adjusted current
earnings of a corporation exceed its AMTI (determined without
the ACE adjustment and the alternative tax net operating loss
deduction). In determining ACE the following rules apply:
1. For property placed in service before 1994, depreciation
generally is determined using the straight-line method and the
class life determined under the alternative depreciation
system.
2. Amounts excluded from gross income under the regular tax
but included for purposes of determining earnings and profits
are generally included in determining ACE.
3. The inside build-up of a life insurance contract is
included in ACE (and the related premiums are deductible).
4. Intangible drilling costs of integrated oil companies
must be capitalized and amortized over a 60-month period.
5. The regular tax rules of section 173 (allowing
circulation expenses to be amortized) and section 248 (allowing
organizational expenses to be amortized) do not apply.
6. Inventory must be calculated using the FIFO, rather than
LIFO, method.
7. The installment sales method generally may not be used.
8. No loss may be recognized on the exchange of any pool of
debt obligations for another pool of debt obligations having
substantially the same effective interest rates and maturities.
9. Depletion (other than for oil and gas properties) must
be calculated using the cost, rather than the percentage,
method.
10. In certain cases, the assets of a corporation that has
undergone an ownership change must be stepped down to their
fair market values.
Other rules
The taxpayer's net operating loss carryover generally
cannot reduce the taxpayer's AMT liability by more than 90
percent of AMTI determined without this deduction.
The various nonrefundable business credits allowed under
the regular tax generally are not allowed against the AMT.
Certain exceptions apply.
If a corporation is subject to AMT in any year, the amount
of AMT is allowed as an AMT credit in any subsequent taxable
year to the extent the taxpayer's regular tax liability exceeds
its tentative minimum tax in the subsequent year. Corporations
are allowed to claim a limited amount of AMT credits in lieu of
bonus depreciation.
A corporation may elect to write off certain expenditures
paid or incurred with respect of circulation expenses, research
and experimental expenses, intangible drilling and development
expenditures, development expenditures, and mining exploration
expenditures over a specified period (three years in the case
of circulation expenses, 60 months in the case of intangible
drilling and development expenditures, and 10 years in case of
other expenditures). The election applies for purposes of both
the regular tax and the alternative minimum tax.
REASONS FOR CHANGE
The requirement that taxpayers compute their income for
purposes of both the regular income tax and the AMT is one of
the most far-reaching complexities of the Code. The AMT is
particularly burdensome for individuals with small businesses,
because they often do not know whether they will be affected
until they file their taxes and therefore must maintain a
reserve that cannot be used to invest in their businesses.
EXPLANATION OF PROVISION
The provision repeals the individual and corporate
alternative minimum tax.
The provision allows the AMT credit to offset the
taxpayer's regular tax liability for any taxable year. In
addition, the AMT credit is refundable for any taxable year
beginning after 2018 and before 2023 in an amount equal to 50
percent (100 percent in the case of taxable years beginning in
2022) of the excess of the minimum tax credit for the taxable
year over the amount of the credit allowable for the year
against regular tax liability. Thus, the full amount of the
minimum tax credit will be allowed in taxable years beginning
before 2023.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
In determining the alternative minimum taxable income for
taxable years beginning before January 1, 2018, the net
operating loss deduction carryback from taxable years beginning
after December 31, 2017, are determined without regard to any
AMT adjustments or preferences.
The repeal of the election to write off certain
expenditures over a specified period applies to amounts paid or
incurred after December 31, 2017.
TITLE III--BUSINESS TAX REFORM
A. Tax Rates
1. Reduction in corporate tax rate (sec. 3001 of the bill and sec. 11
of the Code)
PRESENT LAW
In general
Corporate taxable income is subject to tax under a four-
step graduated rate structure.\307\ The top corporate tax rate
is 35 percent on taxable income in excess of $10 million. The
corporate taxable income brackets and tax rates are as set
forth in the table below.
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\307\Sec. 11(a) and (b)(1).
------------------------------------------------------------------------
Tax rate
Taxable Income (percent)
------------------------------------------------------------------------
Not over $50,000........................................ 15
Over $50,000 but not over $75,000....................... 25
Over $75,000 but not over $10,000,000................... 34
Over $10,000,000........................................ 35
------------------------------------------------------------------------
An additional five-percent tax is imposed on a
corporation's taxable income in excess of $100,000. The maximum
additional tax is $11,750. Also, a second additional three-
percent tax is imposed on a corporation's taxable income in
excess of $15 million. The maximum second additional tax is
$100,000.
Certain personal service corporations pay tax on their
entire taxable income at the rate of 35 percent.\308\
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\308\Sec. 11(b)(2).
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Present law provides that, if the maximum corporate tax
rate exceeds 35 percent, the maximum rate on a corporation's
net capital gain will be 35 percent.\309\
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\309\Sec. 1201(a).
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Dividends received deduction
Corporations are allowed a deduction with respect to
dividends received from other taxable domestic
corporations.\310\ The amount of the deduction is generally
equal to 70 percent of the dividend received.
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\310\Sec. 243(a). Such dividends are taxed at a maximum rate of
10.5 percent (30 percent of the top corporate tax rate of 35 percent).
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In the case of any dividend received from a 20-percent
owned corporation, the amount of the deduction is equal to 80
percent of the dividend received.\311\ The term ``20-percent
owned corporation'' means any corporation if 20 percent or more
of the stock of such corporation (by vote and value) is owned
by the taxpayer. For this purpose, certain preferred stock is
not taken into account.
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\311\Sec. 243(c). Such dividends are taxed at a maximum rate of 7
percent (20 percent of the top corporate tax rate of 35 percent).
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In the case of a dividend received from a corporation that
is a member of the same affiliated group, a corporation is
generally allowed a deduction equal to 100 percent of the
dividend received.\312\
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\312\Sec. 243(a)(3) and (b)(1). For this purpose, the term
``affiliated group'' generally has the meaning given such term by
section 1504(a). Sec. 243(b)(2).
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REASONS FOR CHANGE
The United States has one of the highest statutory
corporate tax rates among developed countries. The Committee
believes that lowering the corporate tax rate is necessary to
ensure domestic corporations remain globally competitive with
their counterparts domiciled in the United States' largest
international competitors. The average corporate income tax
rate among nations in the Organisation for Economic Co-
operation and Development is 22.5 percent. A low competitive
corporate tax rate also contributes to making the United States
an attractive location for foreign corporations to invest. In
addition, a lower corporate tax rate means corporations will
have more resources to invest in growing their businesses and
creating jobs.
EXPLANATION OF PROVISION
The provision eliminates the graduated corporate rate
structure and instead taxes corporate taxable income at 20
percent.
Personal service corporations are taxed at 25 percent.
The provision repeals the maximum corporate tax rate on net
capital gain as obsolete.
The provision reduces the 70 percent dividends received
deduction to 50 percent and the 80 percent dividends received
deduction to 65 percent.\313\
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\313\Such dividends would be taxed at a maximum rate of 10 percent
(50 percent of the top corporate tax rate of 20 percent) and 7 percent
(35 percent of the top corporate tax rate of 20 percent), respectively.
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For taxpayers subject to the normalization method of
accounting (e.g., regulated public utilities), the provision
provides for the normalization of excess deferred tax reserves
resulting from the reduction of corporate income tax rates
(with respect to prior depreciation or recovery allowances
taken on assets placed in service before the date of
enactment).
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
B. Cost Recovery
1. Increased expensing (sec. 3101 of the bill and sec. 168(k) of the
Code)
PRESENT LAW
A taxpayer generally must capitalize the cost of property
used in a trade or business or held for the production of
income and recover such cost over time through annual
deductions for depreciation or amortization.\314\ Tangible
property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation for different types of property based on an
assigned applicable depreciation method, recovery period,\315\
and convention.\316\
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\314\See secs. 263(a) and 167. However, where property is not used
exclusively in a taxpayer's business, the amount eligible for a
deduction must be reduced by the amount related to personal use. See,
e.g., section 280A.
\315\The applicable recovery period for an asset is determined in
part by statute and in part by historic Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Rev. Proc. 87-56,
1987-2 C.B. 674, laying out the framework of recovery periods for
enumerated classes of assets. The Secretary clarified and modified the
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November
1988, Congress revoked the Secretary's authority to modify the class
lives of depreciable property. Rev. Proc. 87-56, as modified, remains
in effect except to the extent that the Congress has, since 1988,
statutorily modified the recovery period for certain depreciable
assets, effectively superseding any administrative guidance with regard
to such property.
\316\Sec. 168.
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Bonus depreciation
An additional first-year depreciation deduction is allowed
equal to 50 percent of the adjusted basis of qualified property
acquired and placed in service before January 1, 2020 (January
1, 2021, for longer production period property\317\ and certain
aircraft).\318\\319\ The 50-percent allowance is phased down
for property placed in service after December 31, 2017 (after
December 31, 2018 for longer production period property and
certain aircraft). The bonus depreciation percentage rates are
as follows.
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\317\As defined in section 168(k)(2)(B).
\318\As defined in section 168(k)(2)(C).
\319\Sec. 168(k). The additional first-year depreciation deduction
is generally subject to the rules regarding whether a cost must be
capitalized under section 263A.
------------------------------------------------------------------------
Bonus Depreciation Percentage
---------------------------------------
Longer Production
Placed in Service Year Qualified Property Period Property
in General and Certain
Aircraft
------------------------------------------------------------------------
2017............................ 50 percent........ 50 percent
2018............................ 40 percent........ 50 percent\320\
2019............................ 30 percent........ 40 percent
2020............................ n/a............... 30 percent\321\
------------------------------------------------------------------------
The additional first-year depreciation deduction is allowed
for both the regular tax and the alternative minimum tax
(``AMT''),\322\ but is not allowed in computing earnings and
profits.\323\ The basis of the property and the depreciation
allowances in the year of purchase and later years are
appropriately adjusted to reflect the additional first-year
depreciation deduction.\324\ The amount of the additional
first-year depreciation deduction is not affected by a short
taxable year.\325\ The taxpayer may elect out of the additional
first-year depreciation for any class of property for any
taxable year.\326\
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\320\It is intended that for longer production period property
placed in service in 2018, 50 percent applies to the entire adjusted
basis. Similarly, for longer production period property placed in
service in 2019, 40 percent applies to the entire adjusted basis. A
technical correction may be necessary with respect to longer production
period property placed in service in 2018 and 2019 so that the statute
reflects this intent.
\321\In the case of longer production period property described in
section 168(k)(2)(B) and placed in service in 2020, 30 percent applies
to the adjusted basis attributable to manufacture, construction, or
production before January 1, 2020, and the remaining adjusted basis
does not qualify for bonus depreciation. Thirty percent applies to the
entire adjusted basis of certain aircraft described in section
168(k)(2)(C) and placed in service in 2020.
\322\Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
\323\Sec. 312(k)(3) and Treas. Reg. sec. 1.168(k)-1(f)(7).
\324\Sec. 168(k)(1)(B).
\325\Ibid.
\326\Sec. 168(k)(7). For the definition of a class of property, see
Treas. Reg. sec. 1.168(k)-1(e)(2).
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The interaction of the additional first-year depreciation
allowance with the otherwise applicable depreciation allowance
may be illustrated as follows. Assume that in 2017 a taxpayer
purchases new depreciable property and places it in
service.\327\ The property's cost is $10,000, and it is five-
year property subject to the 200 percent declining balance
method and half-year convention. The amount of additional
first-year depreciation allowed is $5,000. The remaining $5,000
of the cost of the property is depreciable under the rules
applicable to five-year property.
---------------------------------------------------------------------------
\327\Assume that the cost of the property is not eligible for
expensing under section 179 or Treas. Reg. sec. 1.263(a)-1(f).
---------------------------------------------------------------------------
Thus, $1,000 also is allowed as a depreciation deduction in
2017.\328\ The total depreciation deduction with respect to the
property for 2017 is $6,000. The remaining $4,000 adjusted
basis of the property generally is recovered through otherwise
applicable depreciation rules.
---------------------------------------------------------------------------
\328\$1,000 results from the application of the half-year
convention and the 200 percent declining balance method to the
remaining $5,000.
---------------------------------------------------------------------------
Qualified property
Property qualifying for the additional first-year
depreciation deduction must meet all of the following
requirements.\329\ First, the property must be: (1) property to
which MACRS applies with an applicable recovery period of 20
years or less; (2) water utility property;\330\ (3) computer
software other than computer software covered by section 197;
or (4) qualified improvement property.\331\ Second, the
original use\332\ of the property must commence with the
taxpayer.\333\ Third, the taxpayer must acquire the property
within the applicable time period (as described below).
Finally, the property must be placed in service before January
1, 2020. As noted above, an extension of the placed-in-service
date of one year (i.e., before January 1, 2021) is provided for
certain property with a recovery period of 10 years or longer,
certain transportation property, and certain aircraft.\334\
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\329\Requirements relating to actions taken before 2008 are not
described herein since they have little (if any) remaining effect.
\330\As defined in section 168(e)(5).
\331\The additional first-year depreciation deduction is not
available for any property that is required to be depreciated under the
alternative depreciation system of MACRS. Sec. 168(k)(2)(D)(i).
\332\The term ``original use'' means the first use to which the
property is put, whether or not such use corresponds to the use of such
property by the taxpayer. If in the normal course of its business a
taxpayer sells fractional interests in property to unrelated third
parties, then the original use of such property begins with the first
user of each fractional interest (i.e., each fractional owner is
considered the original user of its proportionate share of the
property). Treas. Reg. sec. 1.168(k)-1(b)(3).
\333\A special rule applies in the case of certain leased property.
In the case of any property that is originally placed in service by a
person and that is sold to the taxpayer and leased back to such person
by the taxpayer within three months after the date that the property
was placed in service, the property would be treated as originally
placed in service by the taxpayer not earlier than the date that the
property is used under the leaseback. If property is originally placed
in service by a lessor, such property is sold within three months after
the date that the property was placed in service, and the user of such
property does not change, then the property is treated as originally
placed in service by the taxpayer not earlier than the date of such
sale. Sec. 168(k)(2)(E)(ii) and (iii).
\334\Property qualifying for the extended placed-in-service date
must have an estimated production period exceeding one year and a cost
exceeding $1 million. Transportation property generally is defined as
tangible personal property used in the trade or business of
transporting persons or property. Certain aircraft which is not
transportation property, other than for agricultural or firefighting
uses, also qualifies for the extended placed-inservice date, if at the
time of the contract for purchase, the purchaser made a nonrefundable
deposit of the lesser of 10 percent of the cost or $100,000, and which
has an estimated production period exceeding four months and a cost
exceeding $200,000.
---------------------------------------------------------------------------
To qualify, property must be acquired (1) before January 1,
2020, or (2) pursuant to a binding written contract which was
entered into before January 1, 2020. With respect to property
that is manufactured, constructed, or produced by the taxpayer
for use by the taxpayer, the taxpayer must begin the
manufacture, construction, or production of the property before
January 1, 2020.\335\ Property that is manufactured,
constructed, or produced for the taxpayer by another person
under a contract that is entered into prior to the manufacture,
construction, or production of the property is considered to be
manufactured, constructed, or produced by the taxpayer.\336\
For property eligible for the extended placed-in-service date,
a special rule limits the amount of costs eligible for the
additional first-year depreciation. With respect to such
property, only the portion of the basis that is properly
attributable to the costs incurred before January 1, 2020
(``progress expenditures'') is eligible for the additional
first-year depreciation deduction.\337\
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\335\Sec. 168(k)(2)(E)(i).
\336\Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
\337\Sec. 168(k)(2)(B)(ii). For purposes of determining the amount
of eligible progress expenditures, rules similar to section 46(d)(3) as
in effect prior to the Tax Reform Act of 1986 apply.
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Qualified improvement property
Qualified improvement property is any improvement to an
interior portion of a building that is nonresidential real
property if such improvement is placed in service after the
date such building was first placed in service.\338\ Qualified
improvement property does not include any improvement for which
the expenditure is attributable to the enlargement of the
building, any elevator or escalator, or the internal structural
framework of the building.
---------------------------------------------------------------------------
\338\Sec. 168(k)(3).
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Election to accelerate AMT credits in lieu of bonus depreciation
A corporation otherwise eligible for additional first-year
depreciation may elect to claim additional AMT credits in lieu
of claiming additional depreciation with respect to qualified
property.\339\ In the case of a corporation making this
election, the straight line method is used for the regular tax
and the AMT with respect to qualified property.\340\
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\339\Sec. 168(k)(4).
\340\Sec. 168(k)(4)(A)(ii).
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A corporation making an election increases the tax
liability limitation under section 53(c) on the use of minimum
tax credits by the bonus depreciation amount. The aggregate
increase in credits allowable by reason of the increased
limitation is treated as refundable.
The bonus depreciation amount generally is equal to 20
percent of bonus depreciation for qualified property that could
be claimed as a deduction absent an election under this
provision.\341\ As originally enacted, the bonus depreciation
amount for all taxable years was limited to the lesser of (1)
$30 million or (2) six percent of the minimum tax credits
allocable to the adjusted net minimum tax imposed for taxable
years beginning before January 1, 2006. However, extensions of
this provision have provided that this limitation applies
separately to property subject to each extension.
---------------------------------------------------------------------------
\341\For this purpose, bonus depreciation is the difference between
(i) the aggregate amount of depreciation determined if section
168(k)(1) applied to all qualified property placed in service during
the taxable year and (ii) the amount of depreciation that would be so
determined if section 168(k)(1) did not so apply. This determination is
made using the most accelerated depreciation method and the shortest
life otherwise allowable for each property.
---------------------------------------------------------------------------
For taxable years ending after December 31, 2015, the bonus
depreciation amount for a taxable year (as defined under
present law with respect to all qualified property) is limited
to the lesser of (1) 50 percent of the minimum tax credit for
the first taxable year ending after December 31, 2015
(determined before the application of any tax liability
limitation) or (2) the minimum tax credit for the taxable year
allocable to the adjusted net minimum tax imposed for taxable
years ending before January 1, 2016 (determined before the
application of any tax liability limitation and determined on a
first-in, first-out basis).
All corporations treated as a single employer under section
52(a) are treated as one taxpayer for purposes of the
limitation, as well as for electing the application of this
provision.\342\
---------------------------------------------------------------------------
\342\Sec. 168(k)(4)(B)(iii).
---------------------------------------------------------------------------
In the case of a corporation making an election which is a
partner in a partnership, for purposes of determining the
electing partner's distributive share of partnership items,
bonus depreciation does not apply to any qualified property and
the straight line method is used with respect to that
property.\343\
---------------------------------------------------------------------------
\343\Sec. 168(k)(4)(D)(ii).
---------------------------------------------------------------------------
In the case of a partnership having a single corporate
partner owning (directly or indirectly) more than 50 percent of
the capital and profits interests in the partnership, each
partner takes into account its distributive share of
partnership depreciation in determining its bonus depreciation
amount.\344\
---------------------------------------------------------------------------
\344\Sec. 168(k)(4)(D)(iii).
---------------------------------------------------------------------------
Special rules
Passenger automobiles
The limitation under section 280F on the amount of
depreciation deductions allowed with respect to certain
passenger automobiles is increased in the first year by $8,000
for automobiles that qualify (and for which the taxpayer does
not elect out of the additional first-year deduction).\345\ The
$8,000 amount is phased down from $8,000 by $1,600 per calendar
year beginning in 2018. Thus, the section 280F increase amount
for property placed in service during 2018 is $6,400, and
during 2019 is $4,800. While the underlying section 280F
limitation is indexed for inflation,\346\ the section 280F
increase amount is not indexed for inflation. The increase does
not apply to a taxpayer who elects to accelerate AMT credits in
lieu of bonus depreciation for a taxable year.
---------------------------------------------------------------------------
\345\Sec. 168(k)(2)(F).
\346\Sec. 280F(d)(7).
---------------------------------------------------------------------------
Certain plants bearing fruits and nuts
A special election is provided for certain plants bearing
fruits and nuts.\347\ Under the election, the applicable
percentage of the adjusted basis of a specified plant which is
planted or grafted after December 31, 2015, and before January
1, 2020, is deductible for regular tax and AMT purposes in the
year planted or grafted by the taxpayer, and the adjusted basis
is reduced by the amount of the deduction.\348\ The percentage
is 50 percent for 2017, 40 percent for 2018, and 30 percent for
2019. A specified plant is any tree or vine that bears fruits
or nuts, and any other plant that will have more than one yield
of fruits or nuts and generally has a preproductive period of
more than two years from planting or grafting to the time it
begins bearing fruits or nuts.\349\ The election is revocable
only with the consent of the Secretary, and if the election is
made with respect to any specified plant, such plant is not
treated as qualified property eligible for bonus depreciation
in the subsequent taxable year in which it is placed in
service.
---------------------------------------------------------------------------
\347\See sec. 168(k)(5).
\348\Any amount deducted under this election is not subject to
capitalization under section 263A.
\349\A specified plant does not include any property that is
planted or grafted outside the United States.
---------------------------------------------------------------------------
Long-term contracts
In general, in the case of a long-term contract, the
taxable income from the contract is determined under the
percentage-of-completion method.\350\ Solely for purposes of
determining the percentage of completion under section
460(b)(1)(A), the cost of qualified property with a MACRS
recovery period of seven years or less is taken into account as
a cost allocated to the contract as if bonus depreciation had
not been enacted for property placed in service before January
1, 2020 (January 1, 2021, in the case of longer production
period property).\351\
---------------------------------------------------------------------------
\350\Sec. 460.
\351\Sec. 460(c)(6). Other dates involving prior years are not
described herein.
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that providing full expensing for
certain business assets lowers the cost of capital for tangible
property used in a trade or business. With lower costs of
capital, the Committee believes that businesses will be
encouraged to purchase equipment and other assets, which will
promote capital investment and provide economic growth. The
Committee also believes that full expensing for certain
business assets will eliminate depreciation recordkeeping
requirements for such assets.
EXPLANATION OF PROVISION
Full expensing for certain business assets
The provision extends and modifies the additional first-
year depreciation deduction through 2022 (through 2023 for
longer production period property and certain aircraft). The
50-percent allowance is increased to 100 percent for property
acquired and placed in service after September 27, 2017, and
before January 1, 2023 (January 1, 2024, for longer production
period property and certain aircraft), as well as for specified
plants planted or grafted after September 27, 2017, and before
January 1, 2023.
Special rules
The $8,000 increase amount in the limitation on the
depreciation deductions allowed with respect to certain
passenger automobiles is increased to $16,000 for passenger
automobiles acquired and placed in service after September 27,
2017, and before January 1, 2023.
The provision extends the special rule under the
percentage-of-completion method for the allocation of bonus
depreciation to a long-term contract for property placed in
service before January 1, 2023 (January 1, 2024, in the case of
longer production period property).
Application to used property
The provision removes the requirement that the original use
of qualified property must commence with the taxpayer. Thus,
the provision applies to purchases of used as well as new
items. To prevent abuses, the additional first-year
depreciation deduction applies only to property purchased in an
arm's-length transaction. It does not apply to property
received as a gift or from a decedent.\352\ In the case of
trade-ins, like-kind exchanges, or involuntary conversions, it
applies only to any money paid in addition to the traded-in
property or in excess of the adjusted basis of the replaced
property.\353\ It does not apply to property acquired in a
nontaxable exchange such as a reorganization, to property
acquired from a member of the taxpayer's family, including a
spouse, ancestors, and lineal descendants, or from another
related entity as defined in section 267, nor to property
acquired from a person who controls, is controlled by, or is
under common control with, the taxpayer.\354\ Thus it does not
apply, for example, if one member of an affiliated group of
corporations purchases property from another member, or if an
individual who controls a corporation purchases property from
that corporation.
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\352\By reference to section 179(d)(2)(C). See also Treas. Reg.
sec. 1.179-4(c)(1)(iv).
\353\By reference to section 179(d)(3). See also Treas. Reg. sec.
1.179-4(d).
\354\By reference to section 179(d)(2)(A) and (B). See also Treas.
Reg. sec. 1.179-4(c).
---------------------------------------------------------------------------
Exception for certain businesses not subject to limitation on interest
expense
The provision excludes from the definition of qualified
property any property used in a real property trade or
business, i.e., any real property development, redevelopment,
construction, reconstruction, acquisition, conversion, rental,
operation, management, leasing, or brokerage trade or
business.\355\
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\355\As defined in section 3301 of the bill (Interest), by cross
reference to section 469(c)(7)(C). Note that a mortgage broker who is a
broker of financial instruments is not in a real property trade or
business for this purpose. See, e.g., CCA 201504010 (December 17,
2014).
---------------------------------------------------------------------------
The provision also excludes from the definition of
qualified property any property used in the trade or business
of certain regulated public utilities, i.e., the trade or
business of the furnishing or sale of (1) electrical energy,
water, or sewage disposal services, (2) gas or steam through a
local distribution system, or (3) transportation of gas or
steam by pipeline, if the rates for such furnishing or sale, as
the case may be, have been established or approved by a State
or political subdivision thereof, by any agency or
instrumentality of the United States, or by a public service or
public utility commission or other similar body of any State or
political subdivision thereof.\356\
---------------------------------------------------------------------------
\356\As defined in section 3301 of the bill (Interest).
---------------------------------------------------------------------------
In addition, the provision excludes from the definition of
qualified property any property used in a trade or business
that has had floor plan financing indebtedness,\357\ unless the
taxpayer with such trade or business is not a tax shelter
prohibited from using the cash method and is exempt from the
interest limitation rules in section 3301 of the bill by
meeting the $25 million gross receipts test of section 448(c).
---------------------------------------------------------------------------
\357\As defined in section 3301 of the bill (Interest).
---------------------------------------------------------------------------
Election to accelerate AMT credits in lieu of bonus depreciation
As a conforming amendment to the repeal of AMT,\358\ the
provision repeals the election to accelerate AMT credits in
lieu of bonus depreciation.
---------------------------------------------------------------------------
\358\See section 2001 of the bill (Repeal of alternative minimum
tax).
---------------------------------------------------------------------------
Transition rule
The present-law phase-down of bonus depreciation is
maintained for property acquired before September 28, 2017, and
placed in service after September 27, 2017. Under the
provision, in the case of property acquired and adjusted basis
incurred before September 28, 2017, the bonus depreciation
rates are as follows.
PHASE-DOWN FOR PORTION OF BASIS OF QUALIFIED PROPERTY ACQUIRED BEFORE
SEPTEMBER 28, 2017
------------------------------------------------------------------------
Bonus Depreciation Percentage
-------------------------------------------
Placed in Service Year Longer Production
Qualified Property Period Property and
in General Certain Aircraft
------------------------------------------------------------------------
2017........................ 50 percent.......... 50 percent.
2018........................ 40 percent.......... 50 percent.
2019........................ 30 percent.......... 40 percent.
2020........................ n/a................. 30 percent.
------------------------------------------------------------------------
Similarly, the section 280F increase amount in the
limitation on the depreciation deductions allowed with respect
to certain passenger automobiles acquired before September 28,
2017, and placed in service after September 27, 2017, is $8,000
for 2017, $6,400 for 2018, and $4,800 for 2019.
EFFECTIVE DATE
The provision generally applies to property acquired\359\
and placed in service after September 27, 2017, and to
specified plants planted or grafted after such date.
---------------------------------------------------------------------------
\359\Property is not treated as acquired after the date on which a
written binding contract is entered into for such acquisition.
---------------------------------------------------------------------------
A transition rule provides that, for a taxpayer's first
taxable year ending after September 27, 2017, the taxpayer may
elect to apply section 168 without regard to the amendments
made by this provision.
In the case of any taxable year that includes any portion
of the period beginning on September 28, 2017, and ending on
December 31, 2017, the amount of any net operating loss for
such taxable year which may be treated as a net operating loss
carryback is determined without regard to the amendments made
by this provision.\360\
---------------------------------------------------------------------------
\360\See section 3302 of the bill (Modification of net operating
loss deduction).
---------------------------------------------------------------------------
C. Small Business Reforms
1. Expansion of section 179 expensing (sec. 3201 of the bill and sec.
179 of the code)
PRESENT LAW
A taxpayer generally must capitalize the cost of property
used in a trade or business or held for the production of
income and recover such cost over time through annual
deductions for depreciation or amortization.\361\ Tangible
property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation for different types of property based on an
assigned applicable depreciation method, recovery period,\362\
and convention.\363\
---------------------------------------------------------------------------
\361\See secs. 263(a) and 167. However, where property is not used
exclusively in a taxpayer's business, the amount eligible for a
deduction must be reduced by the amount related to personal use. See,
e.g., section 280A.
\362\The applicable recovery period for an asset is determined in
part by statute and in part by historic Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Rev. Proc. 87-56,
1987-2 C.B. 674, laying out the framework of recovery periods for
enumerated classes of assets. The Secretary clarified and modified the
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November
1988, Congress revoked the Secretary's authority to modify the class
lives of depreciable property. Rev. Proc. 87-56, as modified, remains
in effect except to the extent that the Congress has, since 1988,
statutorily modified the recovery period for certain depreciable
assets, effectively superseding any administrative guidance with regard
to such property.
\363\Sec. 168.
---------------------------------------------------------------------------
Election to expense certain depreciable business assets
A taxpayer may elect under section 179 to deduct (or
``expense'') the cost of qualifying property, rather than to
recover such costs through depreciation deductions, subject to
limitation. The maximum amount a taxpayer may expense is
$500,000 of the cost of qualifying property placed in service
for the taxable year.\364\ The $500,000 amount is reduced (but
not below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$2,000,000.\365\ The $500,000 and $2,000,000 amounts are
indexed for inflation for taxable years beginning after
2015.\366\
---------------------------------------------------------------------------
\364\Sec. 179(b)(1).
\365\Sec. 179(b)(2).
\366\Sec. 179(b)(6).
---------------------------------------------------------------------------
In general, qualifying property is defined as depreciable
tangible personal property that is purchased for use in the
active conduct of a trade or business.\367\ Qualifying property
also includes off-the-shelf computer software and qualified
real property (i.e., qualified leasehold improvement property,
qualified restaurant property, and qualified retail improvement
property).\368\ Qualifying property excludes any property
described in section 50(b) (i.e., certain property not eligible
for the investment tax credit).\369\
---------------------------------------------------------------------------
\367\Passenger automobiles subject to the section 280F limitation
are eligible for section 179 expensing only to the extent of the dollar
limitations in section 280F. For sport utility vehicles above the 6,000
pound weight rating, which are not subject to the limitation under
section 280F, the maximum cost that may be expensed for any taxable
year under section 179 is $25,000. Sec. 179(b)(5).
\368\Sec. 179(d)(1)(A)(ii) and (f).
\369\Sec. 179(d)(1) flush language.
---------------------------------------------------------------------------
The amount eligible to be expensed for a taxable year may
not exceed the taxable income for such taxable year that is
derived from the active conduct of a trade or business
(determined without regard to this provision).\370\ Any amount
that is not allowed as a deduction because of the taxable
income limitation may be carried forward to succeeding taxable
years (subject to limitations).
---------------------------------------------------------------------------
\370\Sec. 179(b)(3).
---------------------------------------------------------------------------
No general business credit under section 38 is allowed with
respect to any amount for which a deduction is allowed under
section 179.\371\ If a corporation makes an election under
section 179 to deduct expenditures, the full amount of the
deduction does not reduce earnings and profits. Rather, the
expenditures that are deducted reduce corporate earnings and
profits ratably over a five-year period.\372\
---------------------------------------------------------------------------
\371\Sec. 179(d)(9).
\372\Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
An expensing election is made under rules prescribed by the
Secretary.\373\ In general, any election or specification made
with respect to any property may not be revoked except with the
consent of the Commissioner. However, an election or
specification under section 179 may be revoked by the taxpayer
without consent of the Commissioner.
---------------------------------------------------------------------------
\373\Sec. 179(c)(1).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that section 179 expensing provides
two important benefits for small businesses. First, it lowers
the cost of capital for tangible property used in a trade or
business. With a lower cost of capital, the Committee believes
small businesses will invest in more equipment and employ more
workers. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. In order to
increase the value of these benefits and the number of eligible
taxpayers that may receive these benefits, the provision
increases both the amount allowed to be expensed under section
179 and the amount of the phase-out threshold. In addition, in
order to counteract the negative effect of inflation on the
limit and phase-out threshold of this provision for small
businesses, the provision indexes such amounts for inflation.
The Committee also believes that qualified energy efficient
heating and air-conditioning property should be included in the
section 179 expensing provision to facilitate investment by
small businesses in this type of real property.
EXPLANATION OF PROVISION
The provision increases the maximum amount a taxpayer may
expense under section 179 to $5,000,000, and increases the
phase-out threshold amount to $20,000,000 for five taxable
years, i.e., for taxable years beginning in 2018, 2019, 2020,
2021 and 2022. Thus, the provision provides that the maximum
amount a taxpayer may expense, for taxable years beginning
after 2017 and before 2023, is $5,000,000 of the cost of
qualifying property placed in service for the taxable year. The
$5,000,000 amount is reduced (but not below zero) by the amount
by which the cost of qualifying property placed in service
during the taxable year exceeds $20,000,000. The $5,000,000 and
$20,000,000 amounts are indexed for inflation for taxable years
beginning after 2018.
The provision also expands the definition of qualified real
property under section 179 to include qualified energy
efficient heating and air-conditioning property acquired and
placed in service by the taxpayer after November 2, 2017. For
purposes of the provision, qualified energy efficient heating
and air-conditioning property means any depreciable section
1250 property that is (i) installed as part of a building's
heating, cooling, ventilation, or hot water system, and (ii)
within the scope of Standard 90.1-2007 of the American Society
of Heating, Refrigerating, and Air-Conditioning Engineers and
the Illuminating Engineering Society of North America (as in
effect on the day before the date of the adoption of Standard
90.1-2010 of such Societies) or any successor standard.
EFFECTIVE DATE
The increased dollar limitations under section 179 apply to
taxable years beginning after December 31, 2017.
The expansion of qualified real property to include
qualified energy efficient heating and air-conditioning
property applies to property acquired\374\ and placed in
service after November 2, 2017.
---------------------------------------------------------------------------
\374\Property is not treated as acquired after the date on which a
written binding contract is entered into for such acquisition.
---------------------------------------------------------------------------
2. Small business accounting method reform and simplification (sec.
3202 of the bill and secs. 263A, 448, 460, and 471 of the Code)
PRESENT LAW
General rule for methods of accounting
Section 446 generally allows a taxpayer to select the
method of accounting to be used to compute taxable income,
provided that such method clearly reflects the income of the
taxpayer. The term ``method of accounting'' includes not only
the overall method of accounting used by the taxpayer, but also
the accounting treatment of any one item.\375\ Permissible
overall methods of accounting include the cash receipts and
disbursements method (``cash method''), an accrual method, or
any other method (including a hybrid method) permitted under
regulations prescribed by the Secretary.\376\ Examples of any
one item for which an accounting method may be adopted include
cost recovery,\377\ revenue recognition,\378\ and timing of
deductions.\379\ For each separate trade or business, a
taxpayer is entitled to adopt any permissible method, subject
to certain restrictions.\380\
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\375\Treas. Reg. sec. 1.446-1(a)(1).
\376\Sec. 446(c).
\377\See, e.g., secs. 167 and 168.
\378\See, e.g., secs. 451 and 460.
\379\See, e.g., secs. 461 and 467.
\380\Sec. 446(d); Treas. Reg. sec. 1.446-1(d).
---------------------------------------------------------------------------
A taxpayer filing its first return may adopt any
permissible method of accounting in computing taxable income
for such year.\381\ Except as otherwise provided, section
446(e) requires taxpayers to secure consent of the Secretary
before changing a method of accounting. The regulations under
this section provide rules for determining: (1) what a method
of accounting is, (2) how an adoption of a method of accounting
occurs, and (3) how a change in method of accounting is
effectuated.\382\
---------------------------------------------------------------------------
\381\Treas. Reg. sec. 1.446-1(e)(1).
\382\Treas. Reg. sec. 1.446-1(e).
---------------------------------------------------------------------------
Cash and accrual methods
Taxpayers using the cash method generally recognize items
of income when actually or constructively received and items of
expense when paid. The cash method is administratively easy and
provides the taxpayer flexibility in the timing of income
recognition. It is the method generally used by most individual
taxpayers, including farm and nonfarm sole proprietorships.
Taxpayers using an accrual method generally accrue items of
income when all the events have occurred that fix the right to
receive the income and the amount of the income can be
determined with reasonable accuracy.\383\ Taxpayers using an
accrual method of accounting generally may not deduct items of
expense prior to when all events have occurred that fix the
obligation to pay the liability, the amount of the liability
can be determined with reasonable accuracy, and economic
performance has occurred.\384\ Accrual methods of accounting
generally result in a more accurate measure of economic income
than does the cash method. The accrual method is often used by
businesses for financial accounting purposes.
---------------------------------------------------------------------------
\383\See, e.g., sec. 451.
\384\See, e.g., sec. 461.
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A C corporation, a partnership that has a C corporation as
a partner, or a tax-exempt trust or corporation with unrelated
business income generally may not use the cash method.
Exceptions are made for farming businesses, qualified personal
service corporations, and the aforementioned entities to the
extent their average annual gross receipts do not exceed $5
million for all prior years (including the prior taxable years
of any predecessor of the entity) (the ``gross receipts
test''). The cash method may not be used by any tax
shelter.\385\ In addition, the cash method generally may not be
used if the purchase, production, or sale of merchandise is an
income producing factor.\386\ Such taxpayers generally are
required to keep inventories and use an accrual method with
respect to inventory items.\387\
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\385\Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this
purpose, a tax shelter includes: (1) any enterprise (other than a C
corporation) if at any time interests in such enterprise have been
offered for sale in any offering required to be registered with any
Federal or State agency having the authority to regulate the offering
of securities for sale; (2) any syndicate (within the meaning of
section 1256(e)(3)(B)); or (3) any tax shelter as defined in section
6662(d)(2)(C)(ii). In the case of a farming trade or business, a tax
shelter includes any tax shelter as defined in section
6662(d)(2)(C)(ii) or any partnership or any other enterprise other than
a corporation which is not an S corporation engaged in the trade or
business of farming, (1) if at any time interests in such partnership
or enterprise have been offered for sale in any offering required to be
registered with any Federal or State agency having authority to
regulate the offering of securities for sale or (2) if more than 35
percent of the losses during any period are allocable to limited
partners or limited entrepreneurs.
\386\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
\387\Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
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A farming business is defined as a trade or business of
farming, including operating a nursery or sod farm, or the
raising or harvesting of trees bearing fruit, nuts, or other
crops, timber, or ornamental trees.\388\ Such farming
businesses are not precluded from using the cash method
regardless of whether they meet the gross receipts test.
However, section 447 generally requires a farming C corporation
(and any farming partnership if a corporation is a partner in
such partnership) to use an accrual method of accounting.
Section 447 does not apply to nursery or sod farms, to the
raising or harvesting of trees (other than fruit and nut
trees), nor to farming C corporations meeting a gross receipts
test with a $1 million threshold. For family farm C
corporations, the threshold under the gross receipts test is
$25 million.
---------------------------------------------------------------------------
\388\Sec. 448(d)(1).
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A qualified personal service corporation is a corporation:
(1) substantially all of whose activities involve the
performance of services in the fields of health, law,
engineering, architecture, accounting, actuarial science,
performing arts, or consulting, and (2) substantially all of
the stock of which is owned by current or former employees
performing such services, their estates, or heirs.\389\
Qualified personal service corporations are allowed to use the
cash method without regard to whether they meet the gross
receipts test.
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\389\Sec. 448(d)(2).
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Accounting for inventories
In general, for Federal income tax purposes, taxpayers must
account for inventories if the production, purchase, or sale of
merchandise is an income-producing factor to the taxpayer.\390\
Treasury regulations also provide that in any case in which the
use of inventories is necessary to clearly reflect income, the
accrual method must be used with regard to purchases and
sales.\391\ However, an exception is provided for taxpayers
whose average annual gross receipts do not exceed $1
million.\392\ A second exception is provided for taxpayers in
certain industries whose average annual gross receipts do not
exceed $10 million and that are not otherwise prohibited from
using the cash method under section 448.\393\ Such taxpayers
may account for inventory as materials and supplies that are
not incidental (i.e., ``non-incidental materials and
supplies'').\394\
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\390\Sec. 471(a) and Treas. Reg. sec. 1.471-1.
\391\Treas. Reg. sec. 1.446-1(c)(2).
\392\Rev. Proc. 2001-10, 2001-1 C.B. 272.
\393\Rev. Proc. 2002-28, 2002-1 C.B. 815.
\394\Treas. Reg. sec. 1.162-3(a)(1). A deduction is generally
permitted for the cost of non-incidental materials and supplies in the
taxable year in which they are first used or are consumed in the
taxpayer's operations.
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In those circumstances in which a taxpayer is required to
account for inventory, the taxpayer must maintain inventory
records to determine the cost of goods sold during the taxable
period. Cost of goods sold generally is determined by adding
the taxpayer's inventory at the beginning of the period to the
purchases made during the period and subtracting from that sum
the taxpayer's inventory at the end of the period.
Because of the difficulty of accounting for inventory on an
item-by-item basis, taxpayers often use conventions that assume
certain item or cost flows. Among these conventions are the
first-in, first-out (``FIFO'') method, which assumes that the
items in ending inventory are those most recently acquired by
the taxpayer, and the last-in, first-out (``LIFO'') method,
which assumes that the items in ending inventory are those
earliest acquired by the taxpayer.
Uniform capitalization
The uniform capitalization rules require certain direct and
indirect costs allocable to real or tangible personal property
produced by the taxpayer to be included in either inventory or
capitalized into the basis of such property, as
applicable.\395\ For real or personal property acquired by the
taxpayer for resale, section 263A generally requires certain
direct and indirect costs allocable to such property to be
included in inventory.
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\395\Sec. 263A.
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Section 263A provides a number of exceptions to the general
uniform capitalization requirements. One such exception exists
for certain small taxpayers who acquire property for resale and
have $10 million or less of average annual gross receipts;\396\
such taxpayers are not required to include additional section
263A costs in inventory. Another exception exists for taxpayers
who raise, harvest, or grow trees.\397\ Under this exception,
section 263A does not apply to trees raised, harvested, or
grown by the taxpayer (other than trees bearing fruit, nuts, or
other crops, or ornamental trees) and any real property
underlying such trees. Similarly, the uniform capitalization
rules do not apply to any plant having a preproductive period
of two years or less or to any animal, which is produced by a
taxpayer in a farming business (unless the taxpayer is required
to use an accrual method of accounting under section 447 or
448(a)(3)).\398\ Freelance authors, photographers, and artists
also are exempt from section 263A for any qualified creative
expenses.\399\
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\396\Sec. 263A(b)(2)(B). No exception is available for small
taxpayers who produce property subject to section 263A. However, a de
minimis rule under Treasury regulations treats producers with total
indirect costs of $200,000 or less as having no additional indirect
costs beyond those normally capitalized for financial accounting
purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv).
\397\Sec. 263A(c)(5).
\398\Sec. 263A(d).
\399\Sec. 263A(h). Qualified creative expenses are defined as
amounts paid or incurred by an individual in the trade or business of
being a writer, photographer, or artist. However, such term does not
include any expense related to printing, photographic plates, motion
picture files, video tapes, or similar items.
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Accounting for long-term contracts
In general, in the case of a long-term contract, the
taxable income from the contract is determined under the
percentage-of-completion method.\400\ Under this method, the
taxpayer must include in gross income for the taxable year an
amount equal to the product of (1) the gross contract price and
(2) the percentage of the contract completed during the taxable
year.\401\ The percentage of the contract completed during the
taxable year is determined by comparing costs allocated to the
contract and incurred before the end of the taxable year with
the estimated total contract costs.\402\ Costs allocated to the
contract typically include all costs (including depreciation)
that directly benefit or are incurred by reason of the
taxpayer's long-term contract activities.\403\ The allocation
of costs to a contract is made in accordance with
regulations.\404\ Costs incurred with respect to the long-term
contract are deductible in the year incurred, subject to
general accrual method of accounting principles and
limitations.\405\
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\400\Sec. 460(a).
\401\See Treas. Reg. sec. 1.460-4. This calculation is done on a
cumulative basis. Thus, the amount included in gross income in a
particular year is that proportion of the expected contract price that
the amount of costs incurred through the end of the taxable year bears
to the total expected costs, reduced by the amounts of gross contract
price included in gross income in previous taxable years.
\402\Sec. 460(b)(1).
\403\Sec. 460(c).
\404\Treas. Reg. sec. 1.460-5.
\405\Treas. Reg. secs. 1.460-4(b)(2)(iv) and 1.460-1(b)(8).
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An exception from the requirement to use the percentage-of-
completion method is provided for certain construction
contracts (``small construction contracts''). Contracts within
this exception are those contracts for the construction or
improvement of real property if the contract: (1) is expected
(at the time such contract is entered into) to be completed
within two years of commencement of the contract and (2) is
performed by a taxpayer whose average annual gross receipts for
the prior three taxable years do not exceed $10 million.\406\
Thus, long-term contract income from small construction
contracts must be reported consistently using the taxpayer's
exempt contract method.\407\ Permissible exempt contract
methods include the completed contract method, the exempt-
contract percentage-of-completion method, the percentage-of-
completion method, or any other permissible method.\408\
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\406\Secs. 460(e)(1)(B) and (4).
\407\Since such contracts involve the construction of real
property, they are subject to the interest capitalization rules without
regard to their duration. See Treas. Reg. sec. 1.263A-8.
\408\Treas. Reg. sec. 1.460-4(c)(1).
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REASONS FOR CHANGE
The Committee believes that the present law accounting
method rules impose overly complex recordkeeping requirements
that increase compliance costs for small businesses, as such
rules have non-uniform small business exception requirements,
rely on varying forms of gross receipts tests with widely
different exception thresholds, and vary depending on the
classification of a taxpayer's business activities. The
Committee believes that using an accrual method, along with
keeping inventory records, applying the uniform capitalization
rules, and using the percentage-of-completion method, is more
complicated than the cash method and any difference in income
for a small business may be relatively small, such that either
method may clearly reflect the income of a small business. In
addition, the Committee believes that the cash method may
address liquidity concerns of small businesses in that it
measures income when the taxpayer is most likely to have the
cash to pay any tax. The Committee also believes that the
ability of small businesses to use simplified methods of
accounting for inventory and certain construction contracts
generally will be practical and administratively convenient for
such taxpayers. In addition, the Committee believes that the
uniform capitalization rules are relatively complex and any
potential distortion to income caused by not applying such
rules is not material enough to warrant the application of
unduly burdensome rules to small businesses.
The Committee believes that a uniform definition of small
business for determining applicable accounting method rules and
consistent application of a gross receipts test will simplify
tax administration and taxpayer compliance. An increase in the
gross receipts test to $25 million will materially increase the
number of business entities that are able to obtain relief from
complex tax accounting rules. Many rules under present law
prohibit a taxpayer from taking advantage of a small business
accounting method exception if they ever fail to meet the
relevant gross receipts test. The Committee believes that such
taxpayers should be allowed to avail themselves of simplified
accounting methods if they subsequently are able to meet the
gross receipts test. Finally, the Committee believes that
indexing the threshold for inflation will ensure that the small
business definition remains an accurate reflection of the
appropriate level of gross receipts for exempting entities from
certain tax accounting rules.
EXPLANATION OF PROVISION
The provision expands the universe of taxpayers that may
use the cash method of accounting. Under the provision, the
cash method of accounting may be used by taxpayers, other than
tax shelters, that satisfy the gross receipts test, regardless
of whether the purchase, production, or sale of merchandise is
an income-producing factor. The gross receipts test allows
taxpayers with annual average gross receipts that do not exceed
$25 million for the three prior taxable-year period (the ``$25
million gross receipts test'') to use the cash method. The $25
million amount is indexed for inflation for taxable years
beginning after 2018.
The provision expands the universe of farming C
corporations (and farming partnerships with a C corporation
partner) that may use the cash method to include any farming C
corporation (or farming partnership with a C corporation
partner) that meets the $25 million gross receipts test.
The provision retains the exceptions from the required use
of the accrual method for qualified personal service
corporations and taxpayers other than C corporations. Thus,
qualified personal service corporations, partnerships without C
corporation partners, S corporations, and other passthrough
entities are allowed to use the cash method without regard to
whether they meet the $25 million gross receipts test, so long
as the use of such method clearly reflects income.\409\
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\409\Consistent with present law, the cash method generally may not
be used by taxpayers, other than those that meet the $25 million gross
receipts test, if the purchase, production, or sale of merchandise is
an income-producing factor. In addition, the cash method may not be
used by a tax shelter.
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In addition, the provision also exempts certain taxpayers
from the requirement to keep inventories. Specifically,
taxpayers that meet the $25 million gross receipts test are not
required to account for inventories under section 471,\410\ but
rather may use a method of accounting for inventories that
either (1) treats inventories as non-incidental materials and
supplies,\411\ or (2) conforms to the taxpayer's financial
accounting treatment of inventories.\412\
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\410\In the case of a sole proprietorship, the $25 million gross
receipts test is applied as if the sole proprietorship is a corporation
or partnership.
\411\Consistent with present law, a deduction is generally
permitted for the cost of non-incidental materials and supplies in the
taxable year in which they are first used or are consumed in the
taxpayer's operations. See Treas. Reg. sec. 1.162-3(a)(1).
\412\The taxpayer's financial accounting treatment of inventories
is determined by reference to the method of accounting used in the
taxpayer's applicable financial statement (as defined in section 3202
of the bill (Small business accounting method reform and
simplification)) or, if the taxpayer does not have an applicable
financial statement, the method of accounting used in the taxpayer's
book and records prepared in accordance with the taxpayer's accounting
procedures.
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The provision expands the exception for small taxpayers
from the uniform capitalization rules. Under the provision, any
producer or reseller that meets the $25 million gross receipts
test is exempted from the application of section 263A.\413\ The
provision retains the exemptions from the uniform
capitalization rules that are not based on a taxpayer's gross
receipts.
---------------------------------------------------------------------------
\413\In the case of a sole proprietorship, the $25 million gross
receipts test is applied as if the sole proprietorship is a corporation
or partnership.
---------------------------------------------------------------------------
Finally, the provision expands the exception for small
construction contracts from the requirement to use the
percentage-of-completion method. Under the provision, contracts
within this exception are those contracts for the construction
or improvement of real property if the contract: (1) is
expected (at the time such contract is entered into) to be
completed within two years of commencement of the contract and
(2) is performed by a taxpayer that (for the taxable year in
which the contract was entered into) meets the $25 million
gross receipts test.\414\
---------------------------------------------------------------------------
\414\In the case of a sole proprietorship, the $25 million gross
receipts test is applied as if the sole proprietorship is a corporation
or partnership.
---------------------------------------------------------------------------
Under the provision, a taxpayer who fails the $25 million
gross receipts test would not be eligible for any of the
aforementioned exceptions (i.e., from the accrual method, from
keeping inventories, from applying the uniform capitalization
rules, or from using the percentage-of-completion method) for
such taxable year.
EFFECTIVE DATE
The provisions to expand the universe of taxpayers,
including farming C corporations, eligible to use the cash
method, exempt certain taxpayers from the requirement to keep
inventories, and expand the exception from the uniform
capitalization rules apply to taxable years beginning after
December 31, 2017. Application of these rules is a change in
the taxpayer's method of accounting for purposes of section
481.
The provision to expand the exception for small
construction contracts from the requirement to use the
percentage-of-completion method applies to contracts entered
into after December 31, 2017, in taxable years ending after
such date. Application of this rule is a change in the
taxpayer's method of accounting for purposes of section 481.
Application of the exception for small construction contracts
from the requirement to use the percentage-of-completion method
is applied on a cutoff basis for all similarly classified
contracts (hence there is no adjustment under section 481(a)
for contracts entered into before January 1, 2018).
3. Small business exception from limitation on deduction of business
interest (sec. 3203 of the bill and sec. 163(j) of the Code)
For present law, reasons for change, explanation of
provision, and effective date for the small business exception
from the limitation on the deduction of business interest, see
section 3301 of the bill (Interest).
4. Modification of treatment of S corporation conversions to C
corporations (sec. 3204 of the bill and secs. 481 and 1371 of the Code)
PRESENT LAW
Changes in accounting method
Cash and accrual methods in general
Taxpayers using the cash method generally recognize items
of income when actually or constructively received and items of
expense when paid. The cash method is administratively easy and
provides the taxpayer flexibility in the timing of income
recognition. It is the method generally used by most individual
taxpayers, including farm and nonfarm sole proprietorships.
Taxpayers using an accrual method generally accrue items of
income when all the events have occurred that fix the right to
receive the income and the amount of the income can be
determined with reasonable accuracy.\415\ Taxpayers using an
accrual method of accounting generally may not deduct items of
expense prior to when all events have occurred that fix the
obligation to pay the liability, the amount of the liability
can be determined with reasonable accuracy, and economic
performance has occurred.\416\ Accrual methods of accounting
generally result in a more accurate measure of economic income
than does the cash method. The accrual method is often used by
businesses for financial accounting purposes.
---------------------------------------------------------------------------
\415\See, e.g., sec. 451.
\416\See, e.g., sec. 461.
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A C corporation, a partnership that has a C corporation as
a partner, or a tax-exempt trust or corporation with unrelated
business income generally may not use the cash method.
Exceptions are made for farming businesses,\417\ qualified
personal service corporations,\418\ and the aforementioned
entities to the extent their average annual gross receipts do
not exceed $5 million for all prior years (including the prior
taxable years of any predecessor of the entity) (the ``gross
receipts test'').\419\ The cash method may not be used by any
tax shelter.\420\ In addition, the cash method generally may
not be used if the purchase, production, or sale of merchandise
is an income producing factor.\421\ Such taxpayers generally
are required to keep inventories and use an accrual method with
respect to inventory items.\422\
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\417\A farming business is defined as a trade or business of
farming, including operating a nursery or sod farm, or the raising or
harvesting of trees bearing fruit, nuts, or other crops, timber, or
ornamental trees. Sec. 448(d)(1).
\418\A qualified personal service corporation is a corporation (1)
substantially all of whose activities involve the performance of
services in the fields of health, law, engineering, architecture,
accounting, actuarial science, performing arts, or consulting, and (2)
substantially all of the stock of which is owned by current or former
employees performing such services, their estates, or heirs. Sec.
448(d)(2).
\419\The gross receipts test is modified to apply to taxpayers with
annual average gross receipts that do not exceed $25 million for the
three prior taxable-year period as part of this bill. See section 3202
of the bill (Small business accounting method reform and
simplification).
\420\Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this
purpose, a tax shelter includes: (1) any enterprise (other than a C
corporation) if at any time interests in such enterprise have been
offered for sale in any offering required to be registered with any
Federal or State agency having the authority to regulate the offering
of securities for sale; (2) any syndicate (within the meaning of
section 1256(e)(3)(B)); or (3) any tax shelter as defined in section
6662(d)(2)(C)(ii). In the case of a farming trade or business, a tax
shelter includes any tax shelter as defined in section
6662(d)(2)(C)(ii) or any partnership or any other enterprise other than
a corporation which is not an S corporation engaged in the trade or
business of farming, (1) if at any time interests in such partnership
or enterprise have been offered for sale in any offering required to be
registered with any Federal or State agency having authority to
regulate the offering of securities for sale or (2) if more than 35
percent of the losses during any period are allocable to limited
partners or limited entrepreneurs.
\421\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
\422\Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
However, section 3202 of the bill (Small business accounting method
reform and simplification) provides an exemption from the requirement
to use inventories for taxpayers that meet the $25 million gross
receipts test provided in such section. Accordingly, under the bill,
such taxpayers are thus also eligible to use the cash method.
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Procedures for changing a method of accounting
A taxpayer filing its first return may adopt any
permissible method of accounting in computing taxable income
for such year.\423\ Except as otherwise provided, section
446(e) requires taxpayers to secure consent of the Secretary
before changing a method of accounting. The regulations under
this section provide rules for determining: (1) what a method
of accounting is, (2) how an adoption of a method of accounting
occurs, and (3) how a change in method of accounting is
effectuated.\424\
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\423\Treas. Reg. sec. 1.446-1(e)(1).
\424\Treas. Reg. sec. 1.446-1(e).
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Section 481 prescribes the rules to be followed in
computing taxable income in cases where the taxable income of
the taxpayer is computed under a different method than the
prior year (e.g., when changing from the cash method to an
accrual method). In computing taxable income for the year of
change, the taxpayer must take into account those adjustments
which are determined to be necessary solely by reason of such
change in order to prevent items of income or expense from
being duplicated or omitted.\425\ The year of change is the
taxable year for which the taxable income of the taxpayer is
computed under a different method than the prior year.\426\
Congress has provided the Secretary with the authority to
prescribe the timing and manner in which such adjustments are
taken into account in computing taxable income.\427\ Net
adjustments that decrease taxable income generally are taken
into account entirely in the year of change, and net
adjustments that increase taxable income generally are taken
into account ratably during the four-taxable-year period
beginning with the year of change.\428\
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\425\Sec. 481(a)(2) and Treas. Reg. sec. 1.481-1(a)(1).
\426\Treas. Reg. sec. 1.481-1(a)(1).
\427\Sec. 481(c). While Treasury regulations generally provide that
the entire adjustments required by section 481(a) are taken into
account entirely in the year of change, the Secretary has provided the
Commissioner with the authority to provide additional guidance
regarding the taxable year or years in which the adjustments are taken
into account. See Treas. Reg. sec. 1.481-1(c)(2).
\428\See Section 7.03 of Rev. Proc. 2015-13, 2015-5 I.R.B 419.
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Post-termination distributions
Under present law, in the case of an S corporation that
converts to a C corporation, distributions of cash by the C
corporation to its shareholders during the post-termination
transition period (to the extent of the amount in the
accumulated adjustment account) are tax-free to the
shareholders and reduce the adjusted basis of the stock.\429\
The post-termination transition period is generally the one-
year period after the S corporation election terminates.\430\
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\429\Sec. 1371(e)(1).
\430\Sec. 1377(b).
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REASONS FOR CHANGE
The Committee recognizes that, with the significant
modifications to the tax code with respect to both S
corporations and C corporations in this bill, taxpayers that
previously elected to be taxed as S corporations may prefer
instead to be taxed as C corporations. The Committee
acknowledges that the revocation of an S election may require
certain taxpayers to change from the cash method to an accrual
method, and may have other effects on the taxpayer.
Accordingly, the Committee believes that it is important to
provide rules to ease the transition from S corporation to C
corporation for the affected taxpayers.
EXPLANATION OF PROVISION
Under the provision, any section 481(a) adjustment of an
eligible terminated S corporation attributable to the
revocation of its S corporation election (i.e., a change from
the cash method to an accrual method) is taken into account
ratably during the six-taxable-year period beginning with the
year of change.\431\ An eligible terminated S corporation is
any C corporation which (1) is an S corporation the day before
the enactment of this bill, (2) during the two-year period
beginning on the date of such enactment revokes its S
corporation election under section 1362(a), and (3) all of the
owners of which on the date the S corporation election is
revoked are the same owners (and in identical proportions) as
the owners on the date of such enactment.
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\431\Section 3202 of the bill (Small business accounting method
reform and simplification) expand the universe of partnerships and C
corporations eligible to use the cash method to include partnerships or
C corporations with annual average gross receipts that do not exceed
$25 million for the three prior taxable-year period. Accordingly, an
eligible terminated S corporation with annual average gross receipts
that do not exceed $25 million that used the cash method prior to
revoking its S corporation election may be eligible to remain on the
cash method as a C corporation.
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Under the provision, in the case of a distribution of money
by an eligible terminated S corporation, the accumulated
adjustments account shall be allocated to such distribution,
and the distribution shall be chargeable to accumulated
earnings and profits, in the same ratio as the amount of the
accumulated adjustments account bears to the amount the
accumulated earnings and profits.
EFFECTIVE DATE
The provision is effective upon enactment.
D. Reform of Business-related Exclusions, Deductions, etc.
1. Interest (sec. 3301 of the bill and sec. 163(j) of the Code)
PRESENT LAW
Interest deduction
Interest paid or accrued by a business generally is
deductible in the computation of taxable income subject to a
number of limitations.\432\
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\432\Sec. 163(a). In addition to the limitations discussed herein,
other limitations include: denial of the deduction for the disqualified
portion of the original issue discount on an applicable high yield
discount obligation (sec. 163(e)(5)), denial of deduction for interest
on certain obligations not in registered form (sec. 163(f)), reduction
of the deduction for interest on indebtedness with respect to which a
mortgage credit certificate has been issued under section 25 (sec.
163(g)), disallowance of deduction for personal interest (sec. 163(h)),
disallowance of deduction for interest on debt with respect to certain
life insurance contracts (sec. 264), and disallowance of deduction for
interest relating to tax-exempt income (sec. 265). Interest may also be
subject to capitalization. See, e.g., sections 263A(f) and 461(g).
---------------------------------------------------------------------------
Interest is generally deducted by a taxpayer as it is paid
or accrued, depending on the taxpayer's method of accounting.
For all taxpayers, if an obligation is issued with original
issue discount (``OID''), a deduction for interest is allowable
over the life of the obligation on a yield to maturity
basis.\433\ Generally, OID arises where interest on a debt
instrument is not calculated based on a qualified rate and
required to be paid at least annually.
---------------------------------------------------------------------------
\433\Sec. 163(e). But see section 267 (dealing in part with
interest paid to a related or foreign party).
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Investment interest expense
In the case of a taxpayer other than a corporation, the
deduction for interest on indebtedness that is allocable to
property held for investment (``investment interest'') is
limited to the taxpayer's net investment income for the taxable
year.\434\ Disallowed investment interest is carried forward to
the next taxable year.
---------------------------------------------------------------------------
\434\Sec. 163(d).
---------------------------------------------------------------------------
Net investment income is investment income net of
investment expenses. Investment income generally consists of
gross income from property held for investment, and investment
expense includes all deductions directly connected with the
production of investment income (e.g., deductions for
investment management fees) other than deductions for interest.
Investment income includes only so much of the taxpayer's net
capital gain and qualified dividend income as the taxpayer
elects to take into account as investment income.
The two-percent floor on miscellaneous itemized deductions
allows taxpayers to deduct investment expenses connected with
investment income only to the extent such deductions exceed two
percent of the taxpayer's adjusted gross income (``AGI'').\435\
Miscellaneous itemized deductions\436\ that are not investment
expenses are disallowed first before any investment expenses
are disallowed.\437\
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\435\Sec. 67(a).
\436\Miscellaneous itemized deductions include itemized deductions
of individuals other than certain specific itemized deductions. Sec.
67(b). Miscellaneous itemized deductions generally include, for
example, investment management fees and certain employee business
expenses, but specifically do not include, for example, interest,
taxes, casualty and theft losses, charitable contributions, medical
expenses, or other listed itemized deductions.
\437\H.R. Rep. No. 841, 99th Cong., 2d Sess., p. II-154, Sept. 18,
1986 (Conf. Rep.) (``In computing the amount of expenses that exceed
the 2-percent floor, expenses that are not investment expenses are
intended to be disallowed before any investment expenses are
disallowed.'').
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For purposes of the investment interest limitation, debt is
allocated under a tracing approach to expenditures in
accordance with the use of the debt proceeds, and interest on
the debt is allocated in the same manner.\438\ Thus, generally,
the disallowance of a deduction for investment interest depends
on the individual's use of the proceeds of the debt. For
example, if an individual pledges corporate stock held for
investment as security for a loan and uses the debt proceeds to
purchase a car for personal use, interest expense on the debt
is allocated to the personal expenditure to purchase the car
and is treated as nondeductible personal interest rather than
investment interest.
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\438\Temp. Treas. Reg. sec. 1.163-8T(c).
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Earnings stripping
Section 163(j) may disallow a deduction for disqualified
interest paid or accrued by a corporation in a taxable year if
two threshold tests are satisfied: the payor's debt-to-equity
ratio exceeds 1.5 to 1.0 (the safe harbor ratio) and the
payor's net interest expense exceeds 50 percent of its adjusted
taxable income (generally, taxable income computed without
regard to deductions for net interest expense, net operating
losses, domestic production activities under section 199,
depreciation, amortization, and depletion). Disqualified
interest includes interest paid or accrued to: (1) related
parties when no Federal income tax is imposed with respect to
such interest;\439\ (2) unrelated parties in certain instances
in which a related party guarantees the debt; or (3) to a real
estate investment trust (``REIT'') by a taxable REIT subsidiary
of that trust.\440\ Interest amounts disallowed under these
rules can be carried forward indefinitely.\441\ In addition,
any excess limitation (i.e., the excess, if any, of 50 percent
of the adjusted taxable income of the payor over the payor's
net interest expense) can be carried forward three years.\442\
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\439\If a tax treaty reduces the rate of tax on interest paid or
accrued by the taxpayer, the interest is treated as interest on which
no Federal income tax is imposed to the extent of the same proportion
of such interest as the rate of tax imposed without regard to the
treaty, reduced by the rate of tax imposed by the treaty, bears to the
rate of tax imposed without regard to the treaty. Sec. 163(j)(5)(B).
\440\Sec. 163(j)(3).
\441\Sec. 163(j)(1)(B).
\442\Sec. 163(j)(2)(B)(ii).
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REASONS FOR CHANGE
The Committee believes that the general deductibility of
interest payments on debt may result in companies undertaking
more leverage than they would in the absence of the tax system.
The effective marginal tax rate on debt-financed investment is
lower than that on equity-financed investment.\443\ Limiting
the deductibility of interest along with reducing the corporate
tax rate narrows the disparity in the effective marginal tax
rates based on different sources of financing. This leads to a
more efficient capital structure for firms. The Committee
believes that it is necessary to apply the limitation on the
deductibility of interest to businesses regardless of the form
in which such businesses are organized so as not to create
distortions in the choice of entity.
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\443\For a discussion of effective marginal tax rates on
investment, see Joint Committee on Taxation, Economic Growth and Tax
Policy (JCX-19-17), May 16, 2017, p. 15ff.
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The Committee believes that limitations on the
deductibility of interest should be applied to those businesses
with the greatest levels of leverage. Such firms may pose the
greatest societal costs in times of financial distress. Smaller
firms are likely to impose smaller costs on the economy than
larger firms. Additionally, smaller firms have limited access
to public equity capital markets as compared to larger firms.
Thus, the Committee believes it is appropriate to limit the
interest deduction of only the largest taxpayers.
The Committee understands that some taxpayers who do not
consistently incur excessive amounts of leverage may
nonetheless at times incur an amount of interest expense that
is large in relation to its taxable income. For instance, a bad
year in a business cycle might reduce taxable income to the
point where a limitation based on taxable income takes effect.
Furthermore, earnings attributable to investments financed by
debt and interest payments associated with such debt may arise
in different periods. For that reason, the Committee believes
taxpayers should be able to average annual results, and so
believes the carryforward of denied interest deductions is
appropriate for a period of time.
The Committee recognizes that certain types of trades or
businesses have particular characteristics that warrant special
rules related to interest deductibility.
EXPLANATION OF PROVISION
In general
In the case of any taxpayer for any taxable year, the
deduction for business interest is limited to the sum of (1)
business interest income; (2) 30 percent of the adjusted
taxable income of the taxpayer for the taxable year; and (3)
the floor plan financing interest of the taxpayer for the
taxable year. The amount of any business interest not allowed
as a deduction for any taxable year may be carried forward for
up to five years beyond the year in which the business interest
was paid or accrued, treating business interest as allowed as a
deduction on a first-in, first-out basis. The limitation
applies at the taxpayer level. In the case of a group of
affiliated corporations that file a consolidated return, the
limitation applies at the consolidated tax return filing level.
Business interest means any interest paid or accrued on
indebtedness properly allocable to a trade or business. Any
amount treated as interest for purposes of the Internal Revenue
Code is interest for purposes of the provision. Business
interest income means the amount of interest includible in the
gross income of the taxpayer for the taxable year which is
properly allocable to a trade or business. Business interest
does not include investment interest, and business interest
income does not include investment income, within the meaning
of section 163(d).\444\
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\444\Section 163(d) applies in the case of a taxpayer other than a
corporation. Thus, a corporation has neither investment interest nor
investment income within the meaning of section 163(d). Thus, interest
income and interest expense of a corporation is properly allocable to a
trade or business, unless such trade or business is otherwise
explicitly excluded from the application of the provision.
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Adjusted taxable income means the taxable income of the
taxpayer computed without regard to (1) any item of income,
gain, deduction, or loss which is not properly allocable to a
trade or business; (2) any business interest or business
interest income; (3) the amount of any net operating loss
deduction; and (4) any deduction allowable for depreciation,
amortization, or depletion.\445\ The Secretary may provide
other adjustments to the computation of adjusted taxable
income.
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\445\Any deduction allowable for depreciation, amortization, or
depletion includes any deduction allowable for any amount treated as
depreciation, amortization, or depletion under present law.
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Floor plan financing interest means interest paid or
accrued on floor plan financing indebtedness. Floor plan
financing indebtedness means indebtedness used to finance the
acquisition of motor vehicles held for sale to retail customers
and secured by the inventory so acquired. A motor vehicle means
a motor vehicle that is an automobile, a truck, a recreational
vehicle, a motorcycle, a boat, farm machinery or equipment, or
construction machinery or equipment.
By including business interest income and floor plan
financing interest in the limitation, the rule operates to
allow floor plan financing interest to be fully deductible and
to limit the deduction for net interest expense (less floor
plan financing interest) to 30 percent of adjusted taxable
income. That is, a deduction for business interest is permitted
to the full extent of business interest income and any floor
plan financing interest. To the extent that business interest
exceeds business interest income and floor plan financing
interest, the deduction for the net interest expense is limited
to 30 percent of adjusted taxable income.
It is generally intended that, similar to present law,
section 163(j) apply after the application of provisions that
subject interest to deferral, capitalization, or other
limitation. Thus, section 163(j) applies to interest deductions
that are deferred, for example under section 163(e) or section
267(a)(3)(B), in the taxable year to which such deductions are
deferred. Section 163(j) applies after section 263A is applied
to capitalize interest and after, for example, section 265 or
section 279 is applied to disallow interest.
Application to passthrough entities
In general
In the case of any partnership, the limitation is applied
at the partnership level. Any deduction for business interest
is taken into account in determining the nonseparately stated
taxable income or loss of the partnership.\446\ To prevent
double counting, special rules are provided for the
determination of the adjusted taxable income of each partner of
the partnership. Similarly, to allow for additional interest
deduction by a partner in the case of an excess amount of
unused adjusted taxable income limitation of the partnership,
special rules apply. Similar rules apply with respect to any S
corporation and its shareholders.
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\446\This amount is the ``Ordinary business income or loss''
reflected on Form 1065 (U.S. Return of Partnership Income). The
partner's distributive share is reflected in Box 1 of Schedule K-1
(Form 1065).
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Double counting rule
The adjusted taxable income of each partner (or
shareholder, as the case may be) is determined without regard
to such partner's distributive share of the nonseparately
stated income or loss of such partnership. In the absence of
such a rule, the same dollars of adjusted taxable income of a
partnership could generate additional interest deductions as
the income is passed through to the partners.
Example 1.--ABC is a partnership owned 50-50 by XYZ
Corporation and an individual. ABC generates $200 of
noninterest income. Its only expense is $60 of business
interest. Under the provision the deduction for business
interest is limited to 30 percent of adjusted taxable income,
that is, 30 percent * $200 = $60. ABC deducts $60 of business
interest and reports ordinary business income of $140. XYZ's
distributive share of the ordinary business income of ABC is
$70. XYZ has net taxable income of zero from its other
operations, none of which is attributable to interest income
and without regard to its business interest expense. XYZ has
business interest expense of $25. In the absence of any special
rule, the $70 of taxable income from its interest in ABC would
permit the deduction of up to an additional $21 of interest (30
percent * $70 = $21), resulting in a deduction disallowance of
only $4. XYZ's $100 share of ABC's adjusted taxable income
would generate $51 of interest deductions. If XYZ were instead
a passthrough entity, additional deductions could be available
at each tier.
The double counting rule provides that XYZ has adjusted
taxable income computed without regard to the $70 distributive
share of the nonseparately stated income of ABC. As a result,
XYZ has adjusted taxable income of $0. XYZ's deduction for
business interest is limited to 30 percent * $0 = $0, resulting
in a deduction disallowance of $25.
Additional deduction limit
The limit on the amount allowed as a deduction for business
interest is increased by a partner's distributive share of the
partnership's excess amount of unused adjusted taxable income
limitation. The excess amount with respect to any partnership
is the excess (if any) of 30 percent of the adjusted taxable
income of the partnership over the amount (if any) by which the
business interest of the partnership (reduced by floor plan
financing interest) exceeds the business interest income of the
partnership. This allows a partner of a partnership to deduct
more interest expense the partner may have paid or incurred to
the extent the partnership could have deducted more business
interest.
Example 2.--The facts are the same as in Example 1 except
ABC has only $40 of business interest. As in Example 1, ABC has
a limit on its interest deduction of $60. The excess amount for
ABC is $60 -$40 = $20. XYZ's distributive share of the excess
amount from ABC partnership is $10. XYZ's deduction for
business interest is limited to 30 percent of its adjusted
taxable income plus its distributive share of the excess amount
from ABC partnership (30 percent * $0 + $10 = $10). As a result
of the rule, XYZ may deduct $10 of business interest and has an
interest deduction disallowance of $15.
Carryforward of disallowed business interest
The amount of any business interest not allowed as a
deduction for any taxable year is treated as business interest
paid or accrued in the succeeding taxable year. Business
interest may be carried forward for up to five years.
Carryforwards are determined on a first-in, first-out basis. It
is intended that the provision be administered in a way to
prevent trafficking in carryforwards.
A coordination rule is provided with the limitation on
deduction of interest by domestic corporations in international
financial reporting groups.\447\ Whichever rule imposes the
lower limitation on deduction of business interest with respect
to the taxable year (and therefore the greatest amount of
interest to be carried forward) governs.
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\447\See section 4302 of the bill (Limitation on deduction of
interest by domestic corporations which are members of an international
financial reporting group).
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Any carryforward of disallowed business interest is an item
taken into account in the case of certain corporate
acquisitions described in section 381 and is subject to
limitation under section 382.
Exceptions
The limitation does not apply to any taxpayer that meets
the $25 million gross receipts test of section 448(c), that is,
if the average annual gross receipts for the three-taxable-year
period ending with the prior taxable year does not exceed $25
million.\448\ Aggregation rules apply to determine the amount
of a taxpayer's gross receipts under the gross receipts test of
section 448(c).
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\448\In the case of a sole proprietorship, the $25 million gross
receipts test is applied as if the sole proprietorship were a
corporation or partnership.
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The trade or business of performing services as an employee
is not treated as a trade or business for purposes of the
limitation. As a result, for example, the wages of an employee
are not counted in the adjusted taxable income of the taxpayer
for purposes of determining the limitation.
The limitation does not apply to a real property trade or
business as defined in section 469(c)(7)(C). Any real property
development, redevelopment, construction, reconstruction,
acquisition, conversion, rental, operation, management,
leasing, or brokerage trade or business is not treated as a
trade or business for purposes of the limitation. As a result,
for example, interest expense paid or incurred in a real
property trade or business is not business interest subject to
limitation and is generally deductible in the computation of
taxable income.
The limitation does not apply to certain regulated public
utilities. Specifically, the trade or business of the
furnishing or sale of (1) electrical energy, water, or sewage
disposal services, (2) gas or steam through a local
distribution system, or (3) transportation of gas or steam by
pipeline, if the rates for such furnishing or sale, as the case
may be, have been established or approved by a State or
political subdivision thereof, by any agency or instrumentality
of the United States, or by a public service or public utility
commission or other similar body of any State or political
subdivision thereof is not treated as a trade or business for
purposes of the limitation.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
2. Modification of net operating loss deduction (sec. 3302 of the bill
and sec. 172 of the Code)
PRESENT LAW
A net operating loss (``NOL'') generally means the amount
by which a taxpayer's business deductions exceed its gross
income.\449\ In general, an NOL may be carried back two years
and carried over 20 years to offset taxable income in such
years.\450\ NOLs offset taxable income in the order of the
taxable years to which the NOL may be carried.\451\
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\449\Sec. 172(c).
\450\Sec. 172(b)(1)(A).
\451\Sec. 172(b)(2).
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Different carryback periods apply with respect to NOLs
arising in different circumstances. Extended carryback periods
are allowed for NOLs attributable to specified liability losses
and certain casualty and disaster losses.\452\ Limitations are
placed on the carryback of excess interest losses attributable
to corporate equity reduction transactions.\453\
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\452\Sec. 172(b)(1)(C) and (E).
\453\Sec. 172(b)(1)(D).
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REASONS FOR CHANGE
The Committee believes that, except in limited
circumstances of disaster losses for farms and small
businesses, NOLs should be carried forward, but not back.
Further, with the elimination of carrybacks, the Committee
believes that NOL carryovers should be adjusted to account for
time value of money to preserve its value. The Committee also
believes that taxpayers should pay some income tax in years in
which the taxpayer has taxable income (determined without
regard to the NOL deduction). Therefore, the Committee believes
that the NOL deduction should be limited to 90 percent of
taxable income (determined without regard to the deduction).
EXPLANATION OF PROVISION
The provision limits the NOL deduction to 90 percent of
taxable income (determined without regard to the deduction).
Carryovers to other years are adjusted to take account of this
limitation, and may be carried forward indefinitely. In
addition, NOL carryovers attributable to losses arising in
taxable years beginning after December 31, 2017, are increased
annually to take into account the time value of money.
The provision repeals the two-year carryback and the
special carryback provisions, but provides a one-year carryback
in the case of certain disaster losses incurred in the trade or
business of farming, or by certain small businesses.\454\ For
this purpose, small business means a corporation, partnership,
or sole proprietorship whose average annual gross receipts for
the three taxable-year period ending with such taxable year
does not exceed $5,000,000. Aggregation rules apply to
determine gross receipts.
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\454\Notwithstanding the amendments made by the provision and
section 1304 of the bill (Repeal of deduction for personal casualty
losses), the provision retains the present-law three-year carryback for
the portion of the NOL for any taxable year which is a net disaster
loss to which section 504(b) of the Disaster Tax Relief and Airport and
Airway Extension Act of 2017 (Pub. L. No. 115-63) applies (i.e., a net
disaster loss arising from hurricane Harvey, Irma, or Maria).
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EFFECTIVE DATE
The provision allowing indefinite carryovers and modifying
carrybacks generally applies to losses arising in taxable years
beginning after December 31, 2017.\455\
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\455\See section 3101 of the bill (Increased expensing) for a
limitation on the amount of any NOL which may be treated as an NOL
carryback in the case of any year which includes any portion of the
period beginning September 28, 2017 and ending December 31, 2017.
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The provision limiting the NOL deduction applies to taxable
years beginning after December 31, 2017.
The annual increase in carryover amounts applies to taxable
years beginning after December 31, 2017.
3. Like-kind exchanges of real property (sec. 3303 of the bill and sec.
1031 of the Code)
PRESENT LAW
An exchange of property, like a sale, generally is a
taxable event. However, no gain or loss is recognized if
property held for productive use in a trade or business or for
investment is exchanged for property of a ``like kind'' which
is to be held for productive use in a trade or business or for
investment.\456\ In general, section 1031 does not apply to any
exchange of stock in trade (i.e., inventory) or other property
held primarily for sale; stocks, bonds, or notes; other
securities or evidences of indebtedness or interest; interests
in a partnership; certificates of trust or beneficial
interests; or choses in action.\457\ Section 1031 also does not
apply to certain exchanges involving livestock\458\ or foreign
property.\459\
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\456\Sec. 1031(a)(1).
\457\Sec. 1031(a)(2). A chose in action is a right that can be
enforced by legal action.
\458\Sec. 1031(e).
\459\Sec. 1031(h).
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For purposes of section 1031, the determination of whether
property is of a ``like kind'' relates to the nature or
character of the property and not its grade or quality, i.e.,
the nonrecognition rules do not apply to an exchange of one
class or kind of property for property of a different class or
kind (e.g., section 1031 does not apply to an exchange of real
property for personal property).\460\ The different classes of
property are: (1) depreciable tangible personal property;\461\
(2) intangible or nondepreciable personal property;\462\ and
(3) real property.\463\ However, the rules with respect to
whether real estate is ``like kind'' are applied more liberally
than the rules governing like-kind exchanges of depreciable,
intangible, or nondepreciable personal property. For example,
improved real estate and unimproved real estate generally are
considered to be property of a ``like kind'' as this
distinction relates to the grade or quality of the real
estate,\464\ while depreciable tangible personal properties
must be either within the same General Asset Class\465\ or
within the same Product Class.\466\
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\460\Treas. Reg. sec. 1.1031(a)-1(b).
\461\For example, an exchange of a personal computer classified
under asset class 00.12 of Rev. Proc. 87-56, 1987-2 C.B. 674, for a
printer classified under the same asset class of Rev. Proc. 87-56 would
be treated as property of a like kind. However, an exchange of an
airplane classified under asset class 00.21 of Rev. Proc. 87-56 for a
heavy general purpose truck classified under asset class 00.242 of Rev.
Proc. 87-56 would not be treated as property of a like kind. See Treas.
Reg. sec. 1.1031(a)-2(b)(7).
\462\For example, an exchange of a copyright on a novel for a
copyright on a different novel would be treated as property of a like
kind. See Treas. Reg. sec. 1.1031(a)-2(c)(3). However, the goodwill or
going concern value of one business is not of a like kind to the
goodwill or going concern value of a different business. See Treas.
Reg. sec. 1.1031(a)-2(c)(2). The Internal Revenue Service (``IRS'') has
ruled that intangible assets such as trademarks, trade names,
mastheads, and customer-based intangibles that can be separately
described and valued apart from goodwill qualify as property of a like
kind under section 1031. See Chief Counsel Advice 200911006, February
12, 2009.
\463\Treas. Reg. sec. 1.1031(a)-1(b) and (c).
\464\Treas. Reg. sec. 1.1031(a)-1(b).
\465\Treasury Regulation section 1.1031(a)-2(b)(2) provides the
following list of General Asset Classes, based on asset classes 00.11
through 00.28 and 00.4 of Rev. Proc. 87-56, 1987-2 C.B. 674: (i) Office
furniture, fixtures, and equipment (asset class 00.11), (ii)
Information systems (computers and peripheral equipment) (asset class
00.12), (iii) Data handling equipment, except computers (asset class
00.13), (iv) Airplanes (airframes and engines), except those used in
commercial or contract carrying of passengers or freight, and all
helicopters (airframes and engines) (asset class 00.21), (v)
Automobiles, taxis (asset class 00.22), (vi) Buses (asset class 00.23),
(vii) Light general purpose trucks (asset class 00.241), (viii) Heavy
general purpose trucks (asset class 00.242), (ix) Railroad cars and
locomotives, except those owned by railroad transportation companies
(asset class 00.25), (x) Tractor units for use over-the-road (asset
class 00.26), (xi) Trailers and trailer-mounted containers (asset class
00.27), (xii) Vessels, barges, tugs, and similar water-transportation
equipment, except those used in marine construction (asset class
00.28), and (xiii) Industrial steam and electric generation and/or
distribution systems (asset class 00.4).
\466\Property within a product class consists of depreciable
tangible personal property that is described in a 6-digit product class
within Sectors 31, 32, and 33 (pertaining to manufacturing industries)
of the North American Industry Classification System (``NAICS''), set
forth in Executive Office of the President, Office of Management and
Budget, North American Industry Classification System, United States,
2002 (NAICS Manual), as periodically updated. Treas. Reg. sec.
1.1031(a)-2(b)(3).
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The nonrecognition of gain in a like-kind exchange applies
only to the extent that like-kind property is received in the
exchange. Thus, if an exchange of property would meet the
requirements of section 1031, but for the fact that the
property received in the transaction consists not only of the
property that would be permitted to be exchanged on a tax-free
basis, but also other non-qualifying property or money
(``additional consideration''), then the gain to the recipient
of the other property or money is required to be recognized,
but not in an amount exceeding the fair market value of such
other property or money.\467\ Additionally, any such gain
realized on a section 1031 exchange as a result of additional
consideration being involved constitutes ordinary income to the
extent that the gain is subject to the recapture provisions of
sections 1245 and 1250.\468\ No losses may be recognized from a
like-kind exchange.\469\
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\467\Sec. 1031(b). For example, if a taxpayer holding land A having
a basis of $40,000 and a fair market value of $100,000 exchanges the
property for land B worth $90,000 plus $10,000 in cash, the taxpayer
would recognize $10,000 of gain on the transaction, which would be
includable in income. The remaining $50,000 of gain would be deferred
until the taxpayer disposes of land B in a taxable sale or exchange.
\468\Secs. 1245(b)(4) and 1250(d)(4). For example, if a taxpayer
holding section 1245 property A with an original cost basis of $11,000,
an adjusted basis of $10,000, and a fair market value of $15,000
exchanges the property for section 1245 property B with a fair market
value of $14,000 plus $1,000 in cash, the taxpayer would recognize
$1,000 of ordinary income on the transaction. The remaining $4,000 of
gain would be deferred until the taxpayer disposes of section 1245
property B in a taxable sale or exchange.
\469\Sec. 1031(c).
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If section 1031 applies to an exchange of properties, the
basis of the property received in the exchange is equal to the
basis of the property transferred. This basis is increased to
the extent of any gain recognized as a result of the receipt of
other property or money in the like-kind exchange, and
decreased to the extent of any money received by the
taxpayer.\470\ The holding period of qualifying property
received includes the holding period of the qualifying property
transferred, but the nonqualifying property received is
required to begin a new holding period.\471\
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\470\Sec. 1031(d). Thus, in the example noted above, the taxpayer's
basis in B would be $40,000 (the taxpayer's transferred basis of
$40,000, increased by $10,000 in gain recognized, and decreased by
$10,000 in money received).
\471\Sec. 1223(1).
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A like-kind exchange also does not require that the
properties be exchanged simultaneously. Rather, the property to
be received in the exchange must be received not more than 180
days after the date on which the taxpayer relinquishes the
original property (but in no event later than the due date
(including extensions) of the taxpayer's income tax return for
the taxable year in which the transfer of the relinquished
property occurs). In addition, the taxpayer must identify the
property to be received within 45 days after the date on which
the taxpayer transfers the property relinquished in the
exchange.\472\
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\472\Sec. 1031(a)(3).
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The Treasury Department has issued regulations\473\ and
revenue procedures\474\ providing guidance and safe harbors for
taxpayers engaging in deferred like-kind exchanges.
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\473\Treas. Reg. sec. 1.1031(k)-1(a) through (o).
\474\See Rev. Proc. 2000-37, 2000-40 I.R.B. 308, as modified by
Rev. Proc. 2004-51, 2004-33 I.R.B. 294.
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REASONS FOR CHANGE
The definition of like-kind property has been modified
legislatively over the years to address issues relating to
targeted types of property. With the provisions in the bill of
increased and expanded expensing under sections 168(k) and 179
for tangible personal property and certain building
improvements,\475\ the Committee believes that section 1031
should be limited to exchanges of real property not held
primarily for sale.
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\475\See sections 3101 (Increased expensing) and 3201 (Expansion of
section 179 expensing) of the bill.
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EXPLANATION OF PROVISION
The provision modifies the provision providing for
nonrecognition of gain in the case of like-kind exchanges by
limiting its application to real property that is not held
primarily for sale.\476\
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\476\It is intended that real property eligible for like-kind
exchange treatment under present law will continue to be eligible for
like-kind exchange treatment under the provision. For example, a like-
kind exchange of real property includes an exchange of shares in a
mutual ditch, reservoir, or irrigation company described in section
501(c)(12)(A) if at the time of the exchange such shares have been
recognized by the highest court or statute of the State in which the
company is organized as constituting or representing real property or
an interest in real property. Similarly, improved real estate and
unimproved real estate are generally considered to be property of a
like kind (see Treas. Reg. sec. 1.1031(a)-1(b)).
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EFFECTIVE DATE
The provision generally applies to exchanges completed
after December 31, 2017. However, an exception is provided for
any exchange if the property disposed of by the taxpayer in the
exchange is disposed of on or before December 31, 2017, or the
property received by the taxpayer in the exchange is received
on or before such date.
4. Revision of treatment of contributions to capital (sec. 3304 of the
bill and sec. 118 of the Code)
PRESENT LAW
The gross income of a corporation does not include any
contribution to its capital.\477\ For purposes of this rule, a
contribution to the capital of a corporation does not include
any contribution in aid of construction or any other
contribution from a customer or potential customer.\478\ A
special rule allows certain contributions in aid of
construction received by a regulated public utility that
provides water or sewerage disposal services to be treated as a
tax-free contribution to the capital of the utility.\479\ No
deduction or credit is allowed for, or by reason of, any
expenditure that constitutes a contribution that is treated as
a tax-free contribution to the capital of the utility.\480\
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\477\Sec. 118(a).
\478\Sec. 118(b).
\479\Sec. 118(c)(1).
\480\Sec. 118(c)(4).
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If property is acquired by a corporation as a contribution
to capital and is not contributed by a shareholder as such, the
adjusted basis of the property is zero.\481\ If the
contribution consists of money, the corporation must first
reduce the basis of any property acquired with the contributed
money within the following 12-month period, and then reduce the
basis of other property held by the corporation.\482\
Similarly, the adjusted basis of any property acquired by a
utility with a contribution in aid of construction is
zero.\483\
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\481\Sec. 362(c)(1).
\482\Sec. 362(c)(2). See also Treas. Reg. sec. 1.362-2.
\483\Sec. 118(c)(4).
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REASONS FOR CHANGE
The Committee believes that a contribution to corporation's
capital is properly treated as income to the recipient unless
the contributor receives in exchange an ownership interest of
commensurate value to the contribution. The Committee also
believes that removing a special rule that applies only to
certain contributions to a corporation by nonshareholders helps
achieve the goal of similar treatment of similarly situated
taxpayers. The Committee further believes that treating
contributions to capital by nonshareholders as income to the
corporation will remove a Federal tax subsidy for State and
local governments to offer incentives to businesses as a way of
encouraging them to locate operations in a particular
jurisdiction. If taxpayers in a particular State or locality
wish to provide such financial inducements to businesses, they
should be able to do so, but they should bear the cost of such
financial inducements without passing on a portion of those
costs to all Federal taxpayers.
EXPLANATION OF PROVISION
The provision repeals the provision of the Internal Revenue
Code under which, generally, a corporation's gross income does
not include contributions of capital to the corporation.
The provision provides that a contribution to capital,
other than a contribution of money or property made in exchange
for stock of a corporation or any interest in an entity, is
included in gross income of the corporation. For example, a
contribution of municipal land by a municipality that is not in
exchange for stock (or for a partnership interest or other
interest) of equivalent value is considered a contribution to
capital that is includable in gross income. By contrast, a
municipal tax abatement for locating a business in a particular
municipality is not considered a contribution to capital.
The provision further provides that a contribution of
capital in exchange for stock is not includible in the gross
income of the corporation to the extent that the fair market
value of any money or other property contributed does not
exceed the fair market value of stock received. It is intended
that, for this purpose, the fair market value of any property
contributed is calculated net of any liabilities to which the
property is subject and net of any liabilities or obligations
of the transferor assumed or taken subject to by the entity in
connection with the transaction. When valuing stock or equity
received, taxpayers may disregard discounts for lack of control
and the effect of limited liquidity on valuation.
The provision does not change the application of the
meaningless gesture doctrine, described in Lessinger v.
Commissioner, 872 F.2d 519 (2d. Cir. 1989) and related cases,
as well as in administrative guidance.\484\ Thus, under the
provision, whether incremental shares of stock are issued when
the existing shareholder or shareholders of a corporation make
a pro-rata contribution to the capital of the corporation is
not determinative of whether the contribution is included in
income of the corporation.
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\484\Rev. Rul. 64-155, 1964-1 CB 138.
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The fair market value requirement generally will be
satisfied in any arm's length transaction in which stock is
issued in consideration for cash. Thus, for example, in a
public offering, if the price of the stock was determined on an
arm's length basis, the fact the stock trades immediately after
its issuance at a price below the issue price will not result
in contribution to capital treatment.
Finally, the provision provides rules clarifying the
contributee's basis in the property contributed.
EFFECTIVE DATE
The provision applies to contributions made, and
transactions entered into, after the date of enactment.
5. Repeal of deduction for local lobbying expenses (sec. 3305 of the
bill and sec. 162(e) of the Code)
PRESENT LAW
In general
A taxpayer generally is allowed a deduction for ordinary
and necessary expenses paid or incurred in carrying on any
trade or business.\485\ However, section 162(e) denies a
deduction for amounts paid or incurred in connection with (1)
influencing legislation,\486\ (2) participation in, or
intervention in, any political campaign on behalf of (or in
opposition to) any candidate for public office, (3) any attempt
to influence the general public, or segments thereof, with
respect to elections, legislative matters, or referendums, or
(4) any direct communication with a covered executive branch
official\487\ in an attempt to influence the official actions
or positions of such official. Expenses paid or incurred in
connection with lobbying and political activities (such as
research for, or preparation, planning, or coordination of, any
previously described activity) also are not deductible.\488\
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\485\Sec. 162(a).
\486\The term ``influencing legislation'' means any attempt to
influence any legislation through communication with any member or
employee of a legislative body, or with any government official or
employee who may participate in the formulation of legislation. The
term ``legislation'' includes actions with respect to Acts, bills,
resolutions, or similar items by the Congress, any State legislature,
any local council, or similar governing body, or by the public in a
referendum, initiative, constitutional amendment, or similar procedure.
Secs. 162(e)(4) and 4911(e)(2).
\487\The term ``covered executive branch official'' means (1) the
President, (2) the Vice President, (3) any officer or employee of the
White House Office of the Executive Office of the President, and the
two most senior level officers of each of the other agencies in such
Executive Office, (4) any individual servicing in a position in level I
of the Executive Schedule under section 5312 of title 5, United States
Code, (5) any other individual designated by the President as having
Cabinet-level status, and (6) any immediate deputy of an individual
described in (4) or (5). Sec. 162(e)(6).
\488\Sec. 162(e)(5)(C).
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Exceptions
Local legislation
Notwithstanding the above, a deduction is allowed for
ordinary and necessary expenses incurred in connection with any
legislation of any local council or similar governing body
(``local legislation'').\489\ With respect to local
legislation, the exception permits a deduction for amounts paid
or incurred in carrying on any trade or business (1) in direct
connection with appearances before, submission of statements
to, or sending communications to the committees or individual
members of such council or body with respect to legislation or
proposed legislation of direct interest to the taxpayer, or (2)
in direct connection with communication of information between
the taxpayer and an organization of which the taxpayer is a
member with respect to any such legislation or proposed
legislation which is of direct interest to the taxpayer and
such organization, and (3) that portion of the dues paid or
incurred with respect to any organization of which the taxpayer
is a member which is attributable to the expenses of the
activities described in (1) or (2) carried on by such
organization.\490\
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\489\Sec. 162(e)(2)(A).
\490\Sec. 162(e)(2)(B).
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For purposes of this exception, legislation of an Indian
tribal government is treated in the same manner as local
legislation.\491\
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\491\Sec. 162(e)(7).
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De minimis
For taxpayers with $2,000 or less of in-house expenditures
related to lobbying and political activities, a de minimis
exception is provided that permits a deduction.\492\
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\492\Sec. 162(e)(5)(B).
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REASONS FOR CHANGE
The Committee believes that Federal tax law should not draw
a distinction between the deductibility of local and non-local
lobbying expenses. The Committee further believes that ending
the deductibility of local lobbying expenses eliminates a
Federal tax subsidy for efforts to influence local legislation.
Finally, the Committee believes that elimination of this
distinction furthers its general goal of simplification of
Federal tax law.
EXPLANATION OF PROVISION
The provision repeals the exception for amounts paid or
incurred related to lobbying local councils or similar
governing bodies, including Indian tribal governments. Thus,
the general disallowance rules applicable to lobbying and
political expenditures will apply to costs incurred related to
such local legislation.
EFFECTIVE DATE
The provision applies to amounts paid or incurred after
December 31, 2017.
6. Repeal of deduction for income attributable to domestic production
activities (sec. 3306 of the bill and sec. 199 of the Code)
PRESENT LAW
Section 199 provides a deduction from taxable income (or,
in the case of an individual, adjusted gross income\493\) that
is equal to nine percent of the lesser of the taxpayer's
qualified production activities income or taxable income
(determined without regard to the section 199 deduction) for
the taxable year.\494\ For corporations subject to the 35-
percent corporate income tax rate, the nine-percent deduction
effectively reduces the corporate income tax rate to slightly
less than 32 percent on qualified production activities
income.\495\ A similar reduction applies to the graduated rates
applicable to individuals with qualifying domestic production
activities income.
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\493\For this purpose, adjusted gross income is determined after
application of sections 86, 135, 137, 219, 221, 222, and 469, without
regard to the section 199 deduction. Sec. 199(d)(2).
\494\Sec. 199(a). In the case of oil related qualified production
activities income, the deduction from taxable income is equal to six
percent of the lesser of the taxpayer's oil related qualified
production activities income, qualified production activities income,
or taxable income. Sec. 199(d)(9).
\495\This example assumes the deduction does not exceed the wage
limitation discussed below.
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In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the costs of goods sold that are allocable to those
receipts; and (2) other expenses, losses, or deductions which
are properly allocable to those receipts.\496\
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\496\Sec. 199(c)(1). In computing qualified production activities
income, the domestic production activities deduction itself is not an
allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs.
1.199-1 through 1.199-9 where the Secretary has prescribed rules for
the proper allocation of items of income, deduction, expense, and loss
for purposes of determining qualified production activities income.
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Domestic production gross receipts generally are gross
receipts of a taxpayer that are derived from: (1) any sale,
exchange, or other disposition, or any lease, rental, or
license, of qualifying production property\497\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States;\498\ (2)
any sale, exchange, or other disposition, or any lease, rental,
or license, of qualified film\499\ produced by the taxpayer;
(3) any sale, exchange, or other disposition, or any lease,
rental, or license, of electricity, natural gas, or potable
water produced by the taxpayer in the United States; (4)
construction of real property performed in the United States by
a taxpayer in the ordinary course of a construction trade or
business; or (5) engineering or architectural services
performed in the United States for the construction of real
property located in the United States.\500\
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\497\Qualifying production property generally includes any tangible
personal property, computer software, and sound recordings. Sec.
199(c)(5).
\498\When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the District
of Columbia. Sec. 7701(a)(9). A special rule for determining domestic
production gross receipts, however, provides that for taxable years
beginning after December 31, 2005, and before January 1, 2018, in the
case of any taxpayer with gross receipts from sources within the
Commonwealth of Puerto Rico, the term ``United States'' includes the
Commonwealth of Puerto Rico, but only if all of the taxpayer's Puerto
Rico-sourced gross receipts are taxable under the Federal income tax
for individuals or corporations for such taxable year. Secs.
199(d)(8)(A) and (C), as extended by section 4401 of the bill
(Extension of deduction allowable with respect to income attributable
to domestic production activities in Puerto Rico). In computing the 50-
percent wage limitation, the taxpayer is permitted to take into account
wages paid to bona fide residents of Puerto Rico for services performed
in Puerto Rico. Sec. 199(d)(8)(B).
\499\Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers. Sec. 199(c)(6).
\500\Sec. 199(c)(4)(A).
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The amount of the deduction for a taxable year is limited
to 50 percent of the W-2 wages paid by the taxpayer, and
properly allocable to domestic production gross receipts,
during the calendar year that ends in such taxable year.\501\
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\501\Sec. 199(b)(1). For purposes of the provision, ``W-2 wages''
include the sum of the amounts of wages as defined in section 3401(a)
and elective deferrals that the taxpayer properly reports to the Social
Security Administration with respect to the employment of employees of
the taxpayer during the calendar year ending during the taxpayer's
taxable year. Elective deferrals include elective deferrals as defined
in section 402(g)(3), amounts deferred under section 457, and
designated Roth contributions as defined in section 402A. See sec.
199(b)(2)(A). The wage limitation for qualified films includes any
compensation for services performed in the United States by actors,
production personnel, directors, and producers and is not restricted to
W-2 wages. Sec. 199(b)(2)(D).
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REASONS FOR CHANGE
The Committee believes the reduction in corporate rate and
creation of a maximum rate on business income of individuals
will enhance the ability of all domestic businesses to compete
in the global marketplace and enable small businesses to
maintain their position as the primary source of new jobs in
this country. Therefore, while the Committee believes that the
deduction for income attributable to domestic production
activities has generally helped domestic manufacturing firms by
improving the cash flow of domestic manufacturers and making
investments in domestic manufacturing facilities more
attractive, there is no longer a need for such deduction.
Finally, the Committee believes that elimination of deduction
for income attributable to domestic production activities
furthers the Committee's general goal of simplification of the
tax code.
EXPLANATION OF PROVISION
The provision repeals section 199 for taxable years
beginning after December 31, 2017.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
7. Entertainment, etc. expenses (sec. 3307 of the bill and sec. 274 of
the Code)
PRESENT LAW
In general
No deduction is allowed with respect to (1) an activity
generally considered to be entertainment, amusement, or
recreation (``entertainment''), unless the taxpayer establishes
that the item was directly related to (or, in certain cases,
associated with) the active conduct of the taxpayer's trade or
business, or (2) a facility (e.g., an airplane) used in
connection with such activity.\502\ If the taxpayer establishes
that entertainment expenses are directly related to (or
associated with) the active conduct of its trade or business,
the deduction generally is limited to 50 percent of the amount
otherwise deductible.\503\ Similarly, a deduction for any
expense for food or beverages generally is limited to 50
percent of the amount otherwise deductible.\504\ In addition,
no deduction is allowed for membership dues with respect to any
club organized for business, pleasure, recreation, or other
social purpose.\505\
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\502\Sec. 274(a)(1).
\503\Sec. 274(n)(1)(B).
\504\Sec. 274(n)(1)(A).
\505\Sec. 274(a)(3).
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There are a number of exceptions to the general rule
disallowing deduction of entertainment expenses and the rules
limiting deductions to 50 percent of the otherwise deductible
amount. Under one such exception, those rules do not apply to
expenses for goods, services, and facilities to the extent that
the expenses are reported by the taxpayer as compensation and
as wages to an employee.\506\ Those rules also do not apply to
expenses for goods, services, and facilities to the extent that
the expenses are includible in the gross income of a recipient
who is not an employee (e.g., a nonemployee director) as
compensation for services rendered or as a prize or award.\507\
The exceptions apply only to the extent that amounts are
properly reported by the company as compensation and wages or
otherwise includible in income. In no event can the amount of
the deduction exceed the amount of the taxpayer's actual cost,
even if a greater amount (i.e., fair market value) is
includible in income.\508\
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\506\Sec. 274(e)(2)(A). See below for a discussion of the recent
modification of this rule for certain individuals.
\507\Sec. 274(e)(9).
\508\Treas. Reg. sec. 1.162-25T(a).
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Those deduction disallowance rules also do not apply to
expenses paid or incurred by the taxpayer, in connection with
the performance of services for another person (other than an
employer), under a reimbursement or other expense allowance
arrangement if the taxpayer accounts for the expenses to such
person.\509\ Another exception applies for expenses for
recreational, social, or similar activities primarily for the
benefit of employees other than certain owners and highly
compensated employees.\510\ An exception applies also to the 50
percent deduction limit for food and beverages provided to crew
members of certain commercial vessels and certain oil or gas
platform or drilling rig workers.\511\
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\509\Sec. 274(e)(3).
\510\Sec. 274(e)(4).
\511\Sec. 274(n)(2)(E).
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Expenses treated as compensation
Except as otherwise provided, gross income includes
compensation for services, including fees, commissions, fringe
benefits, and similar items.\512\ In general, an employee (or
other service provider) must include in gross income the amount
by which the fair market value of a fringe benefit exceeds the
sum of the amount (if any) paid by the individual and the
amount (if any) specifically excluded from gross income.\513\
Treasury regulations provide detailed rules regarding the
valuation of certain fringe benefits, including flights on an
employer-provided aircraft. In general, the value of a non-
commercial flight generally is determined under the base
aircraft valuation formula, also known as the Standard Industry
Fare Level formula or ``SIFL.''\514\ If the SIFL valuation
rules do not apply, the value of a flight on an employer-
provided aircraft generally is equal to the amount that an
individual would have to pay in an arm's-length transaction to
charter the same or a comparable aircraft for that period for
the same or a comparable flight.\515\
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\512\Sec. 61(a)(1).
\513\Treas. Reg. sec. 1.61-21(b)(1).
\514\Treas. Reg. sec. 1.61-21(g)(5).
\515\Treas. Reg. sec. 1.61-21(b)(6).
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In the context of an employer providing an aircraft to
employees for nonbusiness (e.g., vacation) flights, the
exception for expenses treated as compensation has been
interpreted as not limiting the company's deduction for
expenses attributable to the operation of the aircraft to the
amount of compensation reportable to its employees.\516\ The
result of that interpretation is often a deduction several
times larger than the amount required to be included in income.
Further, in many cases, the individual including amounts
attributable to personal travel in income directly benefits
from the enhanced deduction, resulting in a net deduction for
the personal use of the company aircraft.
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\516\Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C.
197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001).
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The exceptions for expenses treated as compensation or
otherwise includible income were subsequently modified in the
case of specified individuals such that the exceptions apply
only to the extent of the amount of expenses treated as
compensation or includible in income of the specified
individual.\517\ Specified individuals are individuals who,
with respect to an employer or other service recipient (or a
related party), are subject to the requirements of section
16(a) of the Securities Exchange Act of 1934, or would be
subject to such requirements if the employer or service
recipient (or related party) were an issuer of equity
securities referred to in section 16(a).\518\
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\517\Sec. 274(e)(2)(B)(i). See also Treas. Reg. sec. 1.274-9(a).
\518\Sec. 274(e)(2)(B)(ii). See also Treas. Reg. sec. 1.274-9(b).
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As a result, in the case of specified individuals, no
deduction is allowed with respect to expenses for (1) a
nonbusiness activity generally considered to be entertainment,
amusement or recreation, or (2) a facility (e.g., an airplane)
used in connection with such activity to the extent that such
expenses exceed the amount treated as compensation or
includible in income to the specified individual. For example,
a company's deduction attributable to aircraft operating costs
and other expenses for a specified individual's vacation use of
a company aircraft is limited to the amount reported as
compensation to the specified individual. However, in the case
of other employees or service providers, the company's
deduction is not limited to the amount treated as compensation
or includible in income.\519\
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\519\See Treas. Reg. sec. 1.274-10(a)(2).
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Excludable fringe benefits
Certain employer-provided fringe benefits are excluded from
an employee's gross income and wages for employment tax
purposes, including de minimis fringes and qualified
transportation fringes.\520\ A de minimis fringe generally
means any property or service the value of which is (taking
into account the frequency with which similar fringes are
provided by the employer) so small as to make accounting for it
unreasonable or administratively impracticable.\521\ Qualified
transportation fringes include qualified parking (i.e., on or
near the employer's business premises or on or near a location
from which the employee commutes to work by public transit),
transit passes, vanpool benefits, and qualified bicycle
commuting reimbursements.\522\ On-premises athletic facilities
are gyms or other athletic facilities located on the employer's
premises, operated by the employer, and substantially all the
use of which is by employees of the employer, their spouses,
and their dependent children.\523\
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\520\Secs. 132(a), 3121(a)(20), 3231(e)(5), 3306(b)(16), and
3401(a)(19).
\521\Sec. 132(e)(1). Examples include occasional personal use of an
employer's copying machine, occasional parties or meals for employees
and their guests, local telephone calls, and coffee, doughnuts and soft
drinks. Treas. Reg. sec. 1.132-6(e)(1).
\522\Sec. 132(f)(1), (5). The qualified transportation fringe
exclusions are subject to monthly limits. Sec. 132(f)(2).
\523\Section 132(j)(4).
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REASONS FOR CHANGE
The Committee believes that the difficulty in determining
whether entertainment expenses are directly related to, or
associated with, a trade or business creates uncertainty for
taxpayers and the potential for significant abuse. The
Committee therefore believes that a tax deduction for
entertainment-related expenses should be permitted only to the
extent such items are reported as employee compensation. The
Committee also aligns the treatment of the employer's deduction
for transportation and gym benefits, and amenities provided to
an employee that are primarily personal in nature and not
directly related to a trade or business, with other similar
taxable items.
EXPLANATION OF PROVISION
The provision provides that no deduction is allowed with
respect to (1) an activity generally considered to be
entertainment, amusement or recreation, (2) membership dues
with respect to any club organized for business, pleasure,
recreation or other social purposes, (3) a de minimis fringe
that is primarily personal in nature and involving property or
services that are not directly related to the taxpayer's trade
or business, (4) a facility or portion thereof used in
connection with any of the above items, (5) a qualified
transportation fringe, including costs of operating a facility
used for qualified parking, and (6) an on-premises athletic
facility provided by an employer to its employees, including
costs of operating such a facility. Thus, the provision repeals
the present-law exception to the deduction disallowance for
entertainment, amusement, or recreation that is directly
related to (or, in certain cases, associated with) the active
conduct of the taxpayer's trade or business (and the related
rule applying a 50 percent limit to such deductions). The
provision also repeals the present-law exception for
recreational, social, or similar activities primarily for the
benefit of employees. However, taxpayers may still, generally,
deduct 50 percent of the food and beverage expenses associated
with operating their trade or business (e.g., meals consumed by
employees on work travel).
Under the provision, in the case of all individuals (not
just specified individuals), the exceptions to the general
entertainment expense disallowance rule for expenses treated as
compensation or includible in income apply only to the extent
of the amount of expenses treated as compensation or includible
in income. Thus, under those exceptions, no deduction is
allowed with respect to expenses for (1) a nonbusiness activity
generally considered to be entertainment, amusement or
recreation, or (2) a facility (e.g., an airplane) used in
connection with such activity to the extent that such expenses
exceed the amount treated as compensation or includible in
income. As under present law, the exceptions apply only if
amounts are properly reported by the company as compensation
and wages or otherwise includible in income.
The provision amends the present-law exception for
reimbursed expenses. The provision disallows a deduction for
amounts paid or incurred by a taxpayer in connection with the
performance of services for another person (other than an
employee) under a reimbursement or other expense allowance
arrangement if the person for whom the services are performed
is a tax-exempt entity\524\ or the arrangement is designated by
the Secretary as having the effect of avoiding the 50 percent
deduction disallowance.
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\524\As defined in section 168(h)(2)(A), i.e., Federal, State and
local government entities, organizations (other than certain
cooperatives) exempt from income tax, any foreign person or entity, and
any Indian tribal government.
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The provision clarifies that the exception to the 50
percent deduction limit for food or beverages applies to any
expense excludible from the gross income of the recipient
related to meals furnished for the convenience of the employer.
The provision thereby repeals as deadwood the special
exceptions for food or beverages provided to crew members of
certain commercial vessels and certain oil or gas platform or
drilling rig workers.
EFFECTIVE DATE
The provision applies to amounts paid or incurred after
December 31, 2017.
8. Unrelated business taxable income increased by amount of certain
fringe benefit expenses for which deduction is disallowed (sec. 3308 of
the bill and sec. 512 of the Code)
PRESENT LAW
Tax exemption for certain organizations
Section 501(a) exempts certain organizations from Federal
income tax. Such organizations include: (1) tax-exempt
organizations described in section 501(c) (including among
others section 501(c)(3) charitable organizations and section
501(c)(4) social welfare organizations); (2) religious and
apostolic organizations described in section 501(d); and (3)
trusts forming part of a pension, profit-sharing, or stock
bonus plan of an employer described in section 401(a).
Unrelated business income tax, in general
The unrelated business income tax (``UBIT'') generally
applies to income derived from a trade or business regularly
carried on by the organization that is not substantially
related to the performance of the organization's tax-exempt
functions.\525\ An organization that is subject to UBIT and
that has $1,000 or more of gross unrelated business taxable
income must report that income on Form 990-T (Exempt
Organization Business Income Tax Return).
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\525\Secs. 511-514.
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Most exempt organizations may operate an unrelated trade or
business so long as the organization remains primarily engaged
in activities that further its exempt purposes. Therefore, an
organization may engage in a substantial amount of unrelated
business activity without jeopardizing its exempt status. A
section 501(c)(3) (charitable) organization, however, may not
operate an unrelated trade or business as a substantial part of
its activities.\526\ Therefore, the unrelated trade or business
activity of a section 501(c)(3) organization must be
insubstantial.
---------------------------------------------------------------------------
\526\Treas. Reg. sec. 1.501(c)(3)-1(e).
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An organization determines its unrelated business taxable
income by subtracting from its gross unrelated business income
deductions directly connected with the unrelated trade or
business.\527\ Under regulations, in determining unrelated
business taxable income, an organization that operates multiple
unrelated trades or businesses aggregates income from all such
activities and subtracts from the aggregate gross income the
aggregate of deductions.\528\ As a result, an organization may
use a loss from one unrelated trade or business to offset gain
from another, thereby reducing total unrelated business taxable
income.
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\527\Sec. 512(a).
\528\Treas. Reg. sec. 1.512(a)-1(a).
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Organizations subject to tax on unrelated business income
Most exempt organizations are subject to the tax on
unrelated business income. Specifically, organizations subject
to the unrelated business income tax generally include: (1)
organizations exempt from tax under section 501(a), including
organizations described in section 501(c) (except for U.S.
instrumentalities and certain charitable trusts); (2) qualified
pension, profit-sharing, and stock bonus plans described in
section 401(a); and (3) certain State colleges and
universities.\529\
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\529\Sec. 511(a)(2).
---------------------------------------------------------------------------
Exclusions from Unrelated Business Taxable Income
Certain types of income are specifically exempt from
unrelated business taxable income, such as dividends, interest,
royalties, and certain rents,\530\ unless derived from debt-
financed property or from certain 50-percent controlled
subsidiaries.\531\ Other exemptions from UBIT are provided for
activities in which substantially all the work is performed by
volunteers, for income from the sale of donated goods, and for
certain activities carried on for the convenience of members,
students, patients, officers, or employees of a charitable
organization. In addition, special UBIT provisions exempt from
tax activities of trade shows and State fairs, income from
bingo games, and income from the distribution of low-cost items
incidental to the solicitation of charitable contributions.
Organizations liable for tax on unrelated business taxable
income may be liable for alternative minimum tax determined
after taking into account adjustments and tax preference items.
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\530\Secs. 511-514.
\531\Sec. 512(b)(13).
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REASONS FOR CHANGE
As part of its broader tax reform effort, the Committee
believes that certain nontaxable fringe benefits should not be
deductible by employers if not includible in income of
employees. The Committee believes that aligning the tax
treatment between for-profit and tax-exempt employers with
respect to nontaxable transportation and gym benefits provided
to employees will make the tax system simpler and fairer for
all businesses. In addition, broadening the tax base will allow
for lower tax rates that will benefit all taxpayers.
EXPLANATION OF PROVISION
Under the provision, unrelated business taxable income
includes any expenses paid or incurred by a tax exempt
organization for qualified transportation fringe benefits (as
defined in section 132(f)), a parking facility used in
connection with qualified parking (as defined in section
132(f)(5)(C)), or any on-premises athletic facility (as defined
in section 132(j)(4)(B)), provided such amounts are not
deductible under section 274.
EFFECTIVE DATE
The provision is effective for amounts paid or incurred
after December 31, 2017.
9. limitation on deduction for FDIC premiums (sec. 3309 of the bill and
sec. 162 of the Code)
PRESENT LAW
Corporations organized under the laws of any of the 50
States (and the District of Columbia) generally are subject to
the U.S. corporate income tax on their worldwide taxable
income. The taxable income of a C corporation\532\ generally
comprises gross income less allowable deductions. A taxpayer
generally is allowed a deduction for ordinary and necessary
expenses paid or incurred in carrying on any trade or
business.\533\
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\532\Corporations subject to tax are commonly referred to as C
corporations after subchapter C of the Code, which sets forth corporate
tax rules. Certain specialized entities that invest primarily in real
estate related assets (real estate investment trusts) or in stock and
securities (regulated investment companies) and that meet other
requirements, generally including annual distribution of 90 percent of
their income, are allowed to deduct their distributions to
shareholders, thus generally paying little or no corporate-level tax
despite otherwise being subject to subchapter C.
\533\Sec. 162(a). However, certain exceptions apply. No deduction
is allowed for (1) any charitable contribution or gift that would be
allowable as a deduction under section 170 were it not for the
percentage limitations, the dollar limitations, or the requirements as
to the time of payment, set forth in such section; (2) any illegal
bribe, illegal kickback, or other illegal payment; (3) certain lobbying
and political expenditures; (4) any fine or similar penalty paid to a
government for the violation of any law; (5) two-thirds of treble
damage payments under the antitrust laws; (6) certain foreign
advertising expenses; (7) certain amounts paid or incurred by a
corporation in connection with the reacquisition of its stock or of the
stock of any related person; or (8) certain applicable employee
remuneration.
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Corporations that make a valid election pursuant to section
1362 of subchapter S of the Code, referred to as S
corporations, generally are not subject to corporate-level
income tax on its items of income and loss. Instead, an S
corporation passes through to shareholders its items of income
and loss. The shareholders separately take into account their
shares of these items on their individual income tax returns.
Banks, thrifts, and credit unions
In general
Financial institutions are subject to the same Federal
income tax rules and rates as are applied to other corporations
or entities, with specified exceptions.
C corporation banks and thrifts
A bank is generally taxed for Federal income tax purposes
as a C corporation. For this purpose a bank generally means a
corporation, a substantial portion of whose business is
receiving deposits and making loans and discounts, or
exercising certain fiduciary powers.\534\ A bank for this
purpose generally includes domestic building and loan
associations, mutual stock or savings banks, and certain
cooperative banks that are commonly referred to as
thrifts.\535\
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\534\Sec. 581. See also Treas. Reg. sec. 1.581-1(a).
\535\While the general principles for determining the taxable
income of a corporation are applicable to a mutual savings bank, a
building and loan association, and a cooperative bank, there are
certain exceptions and special rules for such institutions. Treas. Reg.
sec. 1.581-2(a).
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S corporation banks
A bank is generally eligible to elect S corporation status
under section 1362, provided it meets the other requirements
for making this election and it does not use the reserve method
of accounting for bad debts as described in section 585.\536\
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\536\Sec. 1361(b)(2)(A).
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Special bad debt loss rules for small banks
Section 166 provides a deduction for any debt that becomes
worthless (wholly or partially) within a taxable year. The
reserve method of accounting for bad debts, repealed in
1986\537\ for most taxpayers, is allowed under section 585 for
any bank (as defined in section 581) other than a large bank.
For this purpose, a bank is a large bank if, for the taxable
year (or for any preceding taxable year after 1986), the
average adjusted basis of all its assets (or the assets of the
controlled group of which it is a member) exceeds $500 million.
Deductions for reserves are taken in lieu of a worthless debt
deduction under section 166. Accordingly, a small bank is able
to take deductions for additions to a bad debt reserve.
Additions to the reserve are determined under an experience
method that generally looks to the ratio of (1) the total bad
debts sustained during the taxable year and the five preceding
taxable years to (2) the sum of the loans outstanding at the
close of such taxable years.\538\
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\537\Tax Reform Act of 1986, Pub. L. No. 99-514.
\538\Sec. 585(b)(2).
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Credit unions
Credit unions are exempt from Federal income taxation.\539\
The exemption is based on their status as not-for-profit mutual
or cooperative organizations (without capital stock) operated
for the benefit of their members, who generally must share a
common bond. The definition of common bond has been expanded to
permit greater use of credit unions.\540\ While significant
differences between the rules under which credit unions and
banks operate have existed in the past, most of those
differences have disappeared over time.\541\
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\539\Sec. 501(c)(14)(A). For a discussion of the history of and
reasons for Federal tax exemption, see United States Department of the
Treasury, Comparing Credit Unions with Other Depository Institutions,
Report 3070, January 15, 2001, available at https://www.treasury.gov/
press-center/press-releases/Documents/report30702.doc.
\540\The Credit Union Membership Access Act, Pub. L. No. 105-219,
allows multiple common bond credit unions. The legislation in part
responds to National Credit Union Administration v. First National Bank
& Trust Co., 522 U.S. 479 (1998), which interpreted the permissible
membership of tax-exempt credit unions narrowly.
\541\The Treasury Department has concluded that any remaining
regulatory differences do not raise competitive equity concerns between
credit unions and banks. United States Department of the Treasury,
Comparing Credit Unions with Other Depository Institutions, Report
3070, January 15, 2001, p. 2, available at https://www.treasury.gov/
press-center/press-releases/Documents/report30702.doc.
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FDIC premiums
The Federal Deposit Insurance Corporation (``FDIC'')
provides deposit insurance for banks and savings institutions.
To maintain its status as an insured depository institution, a
bank must pay semiannual assessments into the deposit insurance
fund (``DIF''). Assessments for deposit insurance are treated
as ordinary and necessary business expenses. These assessments,
also known as premiums, are deductible once the all events test
for the premium is satisfied.\542\
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\542\Technical Advice Memorandum 199924060, March 5, 1999, and Rev.
Rul. 80-230, 1980-2 C.B. 169, 1980.
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REASONS FOR CHANGE
The Committee believes that this provision is necessary to
correct for the fact that, when the FDIC determines the
assessments necessary to maintain an adequate balance in the
DIF, it does so on a pretax basis and does not take into
account the deductibility of the premium payments. These
deductions diminish the General Fund and effectively result in
a General Fund transfer to the DIF.
EXPLANATION OF PROVISION
No deduction is allowed for the applicable percentage of
any FDIC premium paid or incurred by the taxpayer. For
taxpayers with total consolidated assets of $50 billion or
more, the applicable percentage is 100 percent. Otherwise, the
applicable percentage is the ratio of the excess of total
consolidated assets over $10 billion to $40 billion. For
example, for a taxpayer with total consolidated assets of $20
billion, no deduction is allowed for 25 percent of FDIC
premiums. The provision does not apply to taxpayers with total
consolidated assets (as of the close of the taxable year) that
do not exceed $10 billion.
FDIC premium means any assessment imposed under section
7(b) of the Federal Deposit Insurance Act.\543\ The term total
consolidated assets has the meaning given such term under
section 165 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act.\544\
---------------------------------------------------------------------------
\543\12 U.S.C. sec. 1817(b).
\544\Pub. L. No. 111-203.
---------------------------------------------------------------------------
For purposes of determining a taxpayer's total consolidated
assets, members of an expanded affiliated group are treated as
a single taxpayer. An expanded affiliated group means an
affiliated group as defined in section 1504(a), determined by
substituting ``more than 50 percent'' for ``at least 80
percent'' each place it appears and without regard to the
exceptions from the definition of includible corporation for
insurance companies and foreign corporations. A partnership or
any other entity other than a corporation is treated as a
member of an expanded affiliated group if such entity is
controlled by members of such group.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
10. Repeal of rollover of publicly traded securities gain into
specialized small business investment companies (sec. 3310 of the bill
and sec. 1044 of the Code)
PRESENT LAW
A corporation or individual may elect to roll over tax-free
any capital gain realized on the sale of publicly-traded
securities to the extent of the taxpayer's cost of purchasing
common stock or a partnership interest in a specialized small
business investment company within 60 days of the sale.\545\
The amount of gain that an individual may elect to roll over
under this provision for a taxable year is limited to (1)
$50,000 or (2) $500,000 reduced by the gain previously excluded
under this provision.\546\ For corporations, these limits are
$250,000 and $1 million, respectively.\547\
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\545\Sec. 1044(a).
\546\Sec. 1044(b)(1).
\547\Sec. 1044(b)(2).
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the election described above to roll over
tax-free capital gain realized on the sale of publicly-traded
securities, makes the system simpler and fairer for all
individuals, families, and businesses, and allows for lower tax
rates. The Committee further believes that the repeal of this
provision is a necessary part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the election described above to roll
over tax-free capital gain realized on the sale of publicly-
traded securities.
EFFECTIVE DATE
The provision applies to sales after December 31, 2017.
11. Certain self-created property not treated as a capital asset (sec.
3311 of the bill and sec. 1221 of the Code)
PRESENT LAW
In general, property held by a taxpayer (whether or not
connected with his trade or business) is considered a capital
asset.\548\ Certain assets, however, are specifically excluded
from the definition of capital asset. Such excluded assets are:
inventory property, property of a character subject to
depreciation (including real property),\549\ certain self-
created intangibles, accounts or notes receivable acquired in
the ordinary course of business (e.g., for providing services
or selling property), publications of the U.S. Government
received by a taxpayer other than by purchase at the price
offered to the public, commodities derivative financial
instruments held by a commodities derivatives dealer unless
established to the satisfaction of the Secretary that any such
instrument has no connection to the activities of such dealer
as a dealer and clearly identified as such before the close of
the day on which it was acquired, originated, or entered into,
hedging transactions clearly identified as such, and supplies
regularly used or consumed by the taxpayer in the ordinary
course of a trade or business of the taxpayer.\550\
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\548\Sec. 1221(a).
\549\The net gain from the sale, exchange, or involuntary
conversion of certain property used in the taxpayer's trade or business
(in excess of depreciation recapture) is treated as long-term capital
gain. Sec. 1231. However, net gain from such property is treated as
ordinary income to the extent that losses from such property in the
previous five years were treated as ordinary losses. Sec. 1231(c).
\550\Sec. 1221(a)(1)-(8).
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Self-created intangibles subject to the exception are
copyrights, literary, musical, or artistic compositions,
letters or memoranda, or similar property which is held either
by the taxpayer who created the property, or (in the case of a
letter, memorandum, or similar property) a taxpayer for whom
the property was produced.\551\ For the purpose of determining
gain, a taxpayer with a substituted or transferred basis from
the taxpayer who created the property, or for whom the property
was created, also is subject to the exception.\552\ However, a
taxpayer may elect to treat musical compositions and copyrights
in musical works as capital assets.\553\
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\551\Sec. 1221(a)(3)(A) and (B).
\552\Sec. 1221(a)(3)(C).
\553\Sec. 1221(b)(3). Thus, if a taxpayer who owns musical
compositions or copyrights in musical works that the taxpayer created
(or if a taxpayer to which the musical compositions or copyrights have
been transferred by the works' creator in a substituted basis
transaction) elects the application of this provision, gain from a sale
of the compositions or copyrights is treated as capital gain, not
ordinary income.
---------------------------------------------------------------------------
Since the intent of Congress is that profits and losses
arising from everyday business operations be characterized as
ordinary income and loss, the general definition of capital
asset is narrowly applied and the categories of exclusions are
broadly interpreted.\554\
---------------------------------------------------------------------------
\554\Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 52
(1955).
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REASONS FOR CHANGE
The rationale underlying the treatment of a copyright,
artistic work, and similar property in the hands of the person
who created it (or in the possession of a person who received
the property as a gift from the person who created it) is that
the holder of the property is, in effect, engaged in the
business of creating and selling the copyright or similar
property (or is selling the property created by the personal
efforts of another who gave the individual the property). Thus,
gain arising from the sale of such property is treated as
ordinary income derived as compensation for personal services
rendered by the person (or the contributor), rather than as
capital gain from the sale of property held as a capital asset.
The Committee believes that a patent, invention, model or
design, and a secret formula or process are essentially similar
to copyrights and similar property created by the personal
efforts of the taxpayer (or of the person who gave the property
to the taxpayer), and should, therefore, be classified in the
same manner for purposes of the tax law. The Committee believes
that one who sells a patent, invention, model or design, or
secret formula or process created by or for the person should
not be treated as receiving capital gain on the sale when the
product being sold is, in effect, the result of personal
efforts.
EXPLANATION OF PROVISION
This provision amends section 1221(a)(3), resulting in the
exclusion of a patent, invention, model or design (whether or
not patented), and a secret formula or process which is held
either by the taxpayer who created the property or a taxpayer
with a substituted or transferred basis from the taxpayer who
created the property (or for whom the property was created)
from the definition of a ``capital asset.'' Thus, gains or
losses from the sale or exchange of a patent, invention, model
or design (whether or not patented), or a secret formula or
process which is held either by the taxpayer who created the
property or a taxpayer with a substituted or transferred basis
from the taxpayer who created the property (or for whom the
property was created) will not receive capital gain treatment.
EFFECTIVE DATE
The provision applies to dispositions after December 31,
2017.
12. Repeal of special rule for sale or exchange of patents (sec. 3312
of the bill and sec. 1235 of the Code)
PRESENT LAW
Section 1235 provides that a transfer\555\ of all
substantial rights to a patent, or an undivided interest
therein which includes a part of all such rights, by any holder
shall be considered the sale or exchange of a capital asset
held for more than one year, regardless of whether or not
payments in consideration of such transfer are (1) payable
periodically over a period generally conterminous with the
transferee's use of the patent, or (2) contingent on the
productivity, use, or disposition of the property
transferred.\556\
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\555\A transfer by gift, inheritance, or devise is not included.
\556\Sec. 1235(a).
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A holder is defined as (1) any individual whose efforts
created such property, or (2) any other individual who has
acquired his interest in such property in exchange for
consideration in money or money's worth paid to such creator
prior to actual reduction to practice of the invention covered
by the patent, if such individual is neither the employer of
such creator nor related (as defined) to such creator.\557\
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\557\Sec. 1235(b).
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REASONS FOR CHANGE
The Committee believes that certain self-created
intangibles should not be treated as capital assets and that
income derived from such intangibles should be ordinary in
character. The special rule for the sale or exchange of
patents, which treats the gain as capital, is inconsistent with
that belief.
EXPLANATION OF PROVISION
The provision repeals section 1235. Thus, the holder of a
patented invention may not transfer his or her rights to the
patent and treat amounts received as proceeds from the sale of
a capital asset. It is intended that the determination of
whether a transfer is a sale or exchange of a capital asset
that produces capital gain, or a transaction that produces
ordinary income, will be determined under generally applicable
principles.\558\
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\558\See also section 3311 of the bill (Certain self-created
property not treated as a capital asset).
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EFFECTIVE DATE
The provision applies to dispositions after December 31,
2017.
13. Repeal of technical termination of partnerships (sec. 3313 of the
bill and sec. 708(b) of the Code)
PRESENT LAW
A partnership is considered as terminated under specified
circumstances.\559\ Special rules apply in the case of the
merger, consolidation, or division of a partnership.\560\
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\559\Sec. 708(b)(1).
\560\Sec. 708(b)(2). Mergers, consolidations, and divisions of
partnerships take either an assets-over form or an assets-up form
pursuant to Treas. Reg. sec. 1.708-1(c).
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A partnership is treated as terminated if no part of any
business, financial operation, or venture of the partnership
continues to be carried on by any of its partners in a
partnership.\561\
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\561\Sec. 708(b)(1)(A).
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A partnership is also treated as terminated if within any
12-month period, there is a sale or exchange of 50 percent or
more of the total interest in partnership capital and
profits.\562\ This is sometimes referred to as a technical
termination. Under regulations, the technical termination gives
rise to a deemed contribution of all the partnership's assets
and liabilities to a new partnership in exchange for an
interest in the new partnership, followed by a deemed
distribution of interests in the new partnership to the
purchasing partners and the other remaining partners.\563\
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\562\Sec. 708(b)(1)(B).
\563\Treas. Reg. sec. 1.708-1(b)(4).
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The effect of a technical termination is not necessarily
the end of the partnership's existence, but rather the
termination of some tax attributes. Upon a technical
termination, the partnership's taxable year closes, potentially
resulting in short taxable years.\564\ Partnership-level
elections generally cease to apply following a technical
termination.\565\ A technical termination generally results in
the restart of partnership depreciation recovery periods.
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\564\Sec. 706(c)(1); Treas. Reg. sec. 1.708-1(b)(3).
\565\Partnership level elections include, for example, the section
754 election to adjust basis on a transfer or distribution, as well as
other elections that determine the partnership's tax treatment of
partnership items. A list of elections can be found at William S.
McKee, William F. Nelson, and Robert L. Whitmire, Federal Taxation of
Partnerships and Partners, 4th edition, para. 9.01[7], pp. 9-42--9-44.
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REASONS FOR CHANGE
The Committee is concerned that partnership technical
terminations are being used electively to change partnership-
level elections and attributes in a way which otherwise would
not be permitted. Following these elective terminations, the
partnership remains in existence and can continue to do
business, but with refreshed tax attributes. Because of the
perceived abuse of the technical termination rule, the
Committee believes its repeal will improve tax administration
and increase taxpayer compliance.
EXPLANATION OF PROVISION
The provision repeals the section 708(b)(1)(B) rule
providing for technical terminations of partnerships. The
provision does not change the present-law rule of section
708(b)(1)(A) that a partnership is considered as terminated if
no part of any business, financial operation, or venture of the
partnership continues to be carried on by any of its partners
in a partnership.
EFFECTIVE DATE
The provision applies to partnership taxable years
beginning after December 31, 2017.
14. Recharacterization of certain gains in the case of partnership
profits interests held in connection with performance of investment
services (sec. 3314 of the bill and secs. 1 and 83 of the Code)
PRESENT LAW
Partnership profits interest for services
A profits interest in a partnership is the right to receive
future profits in the partnership but does not generally
include any right to receive money or other property upon the
immediate liquidation of the partnership. The treatment of the
receipt of a profits interest in a partnership (sometimes
referred to as a carried interest) in exchange for the
performance of services has been the subject of controversy.
Though courts have differed, in some instances, a taxpayer
receiving a profits interest for performing services has not
been taxed upon the receipt of the partnership interest.\566\
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\566\Only a handful of cases have addressed this issue. Though one
case required the value to be included currently, where value was
easily determined by a sale of the profits interest soon after receipt
(Diamond v. Commissioner, 56 T.C. 530 (1971), aff'd 492 F.2d 286 (7th
Cir. 1974)), a more recent case concluded that partnership profits
interests were not includable on receipt, because the profits interests
were speculative and without fair market value (Campbell v.
Commissioner, 943 F. 2d 815 (8th Cir. 1991)).
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In 1993, the Internal Revenue Service, referring to the
litigation of the tax treatment of receiving a partnership
profits interest and the results in the cases, issued
administrative guidance that the IRS generally would treat the
receipt of a partnership profits interest for services as not a
taxable event for the partnership or the partner.\567\ Under
this guidance, this treatment does not apply, however, if: (1)
the profits interest relates to a substantially certain and
predictable stream of income from partnership assets, such as
income from high-quality debt securities or a high-quality net
lease; (2) within two years of receipt, the partner disposes of
the profits interest; or (3) the profits interest is a limited
partnership interest in a publicly traded partnership. More
recent administrative guidance\568\ clarifies that this
treatment applies with respect to substantially unvested
profits interests provided the service partner takes into
income his distributive share of partnership income, and the
partnership does not deduct any amount either on grant or on
vesting of the profits interest.\569\
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\567\Rev. Proc. 93-27 (1993-2 C.B. 343), citing the Diamond and
Campbell cases, supra.
\568\Rev. Proc. 2001-43 (2001-2 C.B. 191). This result applies
under the guidance even if the interest is substantially nonvested on
the date of grant.
\569\A similar result would occur under the ``safe harbor''
election under proposed regulations regarding the application of
section 83 to the compensatory transfer of a partnership interest. REG-
105346-03, 70 Fed. Reg. 29675 (May 24, 2005).
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By contrast, a partnership capital interest received for
services is includable in the partner's income under generally
applicable rules relating to the receipt of property for the
performance of services.\570\ A partnership capital interest
for this purpose is an interest that would entitle the
receiving partner to a share of the proceeds if the
partnership's assets were sold at fair market value and the
proceeds were distributed in liquidation.\571\
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\570\Secs. 61 and 83; Treas. Reg. sec. 1.721-1(b)(1); see U.S. v.
Frazell, 335 F.2d 487 (5th Cir. 1964), cert. denied, 380 U.S. 961
(1965).
\571\Rev. Proc. 93-27, 1993-2 C.B. 343.
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Property received for services under section 83
In general
Section 83 governs the amount and timing of income and
deductions attributable to transfers of property in connection
with the performance of services. If property is transferred in
connection with the performance of services, the person
performing the services (the ``service provider'') generally
must recognize income for the taxable year in which the
property is first substantially vested (i.e., transferable or
not subject to a substantial risk of forfeiture).\572\ The
amount includible in the service provider's income is the
excess of the fair market value of the property over the amount
(if any) paid for the property. A deduction is allowed to the
person for whom such services are performed (the ``service
recipient'') equal to the amount included in gross income by
the service provider.\573\ The deduction is allowed for the
taxable year of the service recipient in which or with which
ends the taxable year in which the amount is included in the
service provider's income.
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\572\The Department of Treasury has issued proposed regulations
regarding the application of section 83 to the compensatory transfer of
a partnership interest. 70 Fed. Reg. 29675 (May 24, 2005). The proposed
regulations provide that a partnership interest is ``property'' for
purposes of section 83. Thus, a compensatory transfer of a partnership
interest is includible in the service provider's gross income at the
time that it first becomes substantially vested (or, in the case of a
substantially nonvested partnership interest, at the time of grant if a
section 83(b) election is made). However, because the fair market value
of a compensatory partnership interest is often difficult to determine,
the proposed regulations also permit a partnership and a partner to
elect a safe harbor under which the fair market value of a compensatory
partnership interest is treated as being equal to the liquidation value
of that interest. Therefore, in the case of a true profits interest in
a partnership (one under which the partner would be entitled to nothing
if the partnership were liquidated immediately following the grant),
under the proposed regulations, the grant of a substantially vested
profits interest (or, if a section 83(b) election is made, the grant of
a substantially nonvested profits interest) results in no income
inclusion under section 83 because the fair market value of the
property received by the service provider is zero. The proposed safe
harbor is subject to a number of conditions. For example, the election
cannot be made retroactively and must apply to all compensatory
partnership transfers that occur during the period that the election is
in effect.
\573\Sec. 83(h).
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Property that is subject to a substantial risk of
forfeiture and that is not transferable is generally referred
to as ``substantially nonvested.'' Property is subject to a
substantial risk of forfeiture if the individual's right to the
property is conditioned on the future performance (or
refraining from performance) of substantial services. In
addition, a substantial risk of forfeiture exists if the right
to the property is subject to a condition other than the
performance of services, provided that the condition relates to
a purpose of the transfer and there is a substantial
possibility that the property will be forfeited if the
condition does not occur.
Section 83(b) election
Under section 83(b), even if the property is substantially
nonvested at the time of transfer, the service provider may
nevertheless elect within 30 days of the transfer to recognize
income for the taxable year of the transfer. Such an election
is referred to as a ``section 83(b) election.'' The service
provider makes an election by filing with the IRS a written
statement that includes the fair market value of the property
at the time of transfer and the amount (if any) paid for the
property. The service provider must also provide a copy of the
statement to the service recipient.
Passthrough tax treatment of partnerships
The character of partnership items passes through to the
partners, as if the items were realized directly by the
partners.\574\ Thus, for example, long-term capital gain of the
partnership is treated as long-term capital gain in the hands
of the partners.
---------------------------------------------------------------------------
\574\Sec. 702.
---------------------------------------------------------------------------
A partner holding a partnership interest includes in income
its distributive share (whether or not actually distributed) of
partnership items of income and gain, including capital gain
eligible for the lower tax rates. A partner's basis in the
partnership interest is increased by any amount of gain thus
included and is decreased by losses. These basis adjustments
prevent double taxation of partnership income to the partner,
preserving the partnership's tax status as a passthrough
entity. Money distributed to the partner by the partnership is
taxed to the extent the amount exceeds the partner's basis in
the partnership interest.
Net long-term capital gain
In the case of an individual, estate, or trust, any
adjusted net capital gain which otherwise would be taxed at the
10- or 15-percent rate is not taxed. Any adjusted net capital
gain which otherwise would be taxed at rates over 15 percent
and below 39.6 percent is taxed at a 15-percent rate. Any
adjusted net capital gain which otherwise would be taxed at a
39.6-percent rate is taxed at a 20-percent rate.\575\
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\575\Sec. 1. Other rates apply to certain types of gain. The
unrecaptured section 1250 gain is taxed at a maximum rate of 25
percent, and 28-percent rate gain is taxed at a maximum rate of 28
percent. Any amount of unrecaptured section 1250 gain or 28-percent
rate gain otherwise taxed at a 10- or 15-percent rate is taxed at the
otherwise applicable rate. In addition, a tax is imposed on net
investment income in the case of an individual, estate, or trust. In
the case of an individual, the tax is 3.8 percent of the lesser of net
investment income, which includes gains and dividends, or the excess of
modified adjusted gross income over the threshold amount. The threshold
amount is $250,000 in the case of a joint return or surviving spouse,
$125,000 in the case of a married individual filing a separate return,
and $200,000 in the case of any other individual.
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In general, gain or loss reflected in the value of an asset
is not recognized for income tax purposes until a taxpayer
disposes of the asset. On the sale or exchange of a capital
asset,\576\ any gain generally is included in income.
---------------------------------------------------------------------------
\576\Sec. 1221. A capital asset generally means any property except
(1) inventory, stock in trade, or property held primarily for sale to
customers in the ordinary course of the taxpayer's trade or business,
(2) depreciable or real property used in the taxpayer's trade or
business, (3) specified literary or artistic property, (4) business
accounts or notes receivable, (5) certain U.S. publications, (6)
certain commodity derivative financial instruments, (7) hedging
transactions, and (8) business supplies. In addition, the net gain from
the disposition of certain property used in the taxpayer's trade or
business is treated as long-term capital gain. Gain from the
disposition of depreciable personal property is not treated as capital
gain to the extent of all previous depreciation allowances. Gain from
the disposition of depreciable real property is generally not treated
as capital gain to the extent of the depreciation allowances in excess
of the allowances available under the straight-line method of
depreciation.
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Short-term capital gain means gain from the sale or
exchange of a capital asset held for not more than one year, if
and to the extent such gain is taken into account in computing
gross income. Net short-term capital loss means the excess of
short term capital losses for the taxable year over the short-
term capital gains for the taxable year.
Net long-term capital gain means the excess of long-term
capital gains for the taxable year over the long-term capital
losses for the taxable year.
Net capital gain is the excess of the net long-term capital
gain for the taxable year over the net short-term capital loss
for the year. Gain or loss is treated as long-term if the asset
is held for more than one year.
The adjusted net capital gain of an individual is the net
capital gain reduced (but not below zero) by the sum of the 28-
percent rate gain and the unrecaptured section 1250 gain. The
net capital gain is reduced by the amount of gain that the
individual treats as investment income for purposes of
determining the investment interest limitation.\577\
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\577\Sec. 163(d).
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REASONS FOR CHANGE
The Committee is concerned about Federal tax issues arising
from the use of carried interests in asset management
businesses. In these arrangements, the investment fund
typically is a partnership. The investors are limited partners
that contribute capital to acquire fund assets, and the fund
manager is the general partner of the investment fund
partnership. The general partner is itself a partnership of
individuals with investment management expertise. The fund
manager receives management fees along with a carried interest.
The arrangement requires the performance of services by
individuals whose professional skill as fund managers generates
capital income for investors in the fund.
Because the character of a partnership's income passes
through to partners, income from a carried interest may take
the form of long-term or short-term capital gain realized by
the underlying investment fund as the fund sells off investment
assets. Long-term capital gain allocated to individual partners
may represent compensation for their services as fund managers.
The Committee believes that the lower rates that apply to
long-term capital gain from sales or exchanges of capital
assets of partnerships should not be available to holders of
applicable partnership interests unless an extended holding
period requirement has been met. Therefore, the Committee bill
imposes a three-year holding period (not the generally
applicable one-year holding period) in the case of long-term
capital gain from applicable partnership interests. If the
holder of an applicable partnership interest is allocated gain
from the sale of property held for less than three years, that
gain is treated as short-term capital gain and is subject to
tax at the rates applicable to ordinary income. The Committee
believes that providing a three-year holding period requirement
on certain capital gains for holders of applicable partnership
interests strikes the right balance for economic growth and
fairness without stifling investment.
EXPLANATION OF PROVISION
General rule
The provision provides for a three-year holding period in
the case of certain net long-term capital gain with respect to
any applicable partnership interest held by the taxpayer.
Section 83 (relating to property transferred in connection
with performance of services) does not apply to the transfer of
a partnership interest to which the provision applies.
Short-term capital gain
The provision treats as short-term capital gain taxed at
ordinary income rates the amount of the taxpayer's net long-
term capital gain with respect to an applicable partnership
interest for the taxable year that exceeds the amount of such
gain calculated as if a three-year (not one-year) holding
period applies. In making this calculation, the provision takes
account of long-term capital losses calculated as if a three-
year holding period applies.
A special rule provides that, as provided in regulations or
other guidance issued by the Secretary, this rule does not
apply to income or gain attributable to any asset that is not
held for portfolio investment on behalf of third party
investors. Third party investor means a person (1) who holds an
interest in the partnership that is not property held in
connection with an applicable trade or business (defined below)
with respect to that person, and (2) who is not and has not
been actively engaged in directly or indirectly providing
substantial services for the partnership or any applicable
trade or business (and is (or was) not related to a person so
engaged). A related person for this purpose is a family member
(within the meaning of attribution rules\578\) or colleague,
that is a person who performed a service within the current
calendar year or the preceding three calendar years in any
applicable trade or business in which or for which the taxpayer
performed a service.
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\578\Sec. 318(a)(1).
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Applicable partnership interest
An applicable partnership interest is any interest in a
partnership that, directly or indirectly, is transferred to (or
held by) the taxpayer in connection with performance of
services in any applicable trade or business. The services may
be performed by the taxpayer or by any other related person or
persons in any applicable trade or business. It is intended
that partnership interests shall not fail to be treated as
transferred or held in connection with the performance of
services merely because the taxpayer also made contributions to
the partnership, and the Treasury Department is directed to
provide guidance implementing this intent. An applicable
partnership interest does not include an interest held by a
person who is employed by another entity that is conducting a
trade or business (which is not an applicable trade or
business) and who provides services only to the other entity.
An applicable partnership interest does not include an
interest in a partnership directly or indirectly held by a
corporation. For example, if two corporations form a
partnership to conduct a joint venture for developing and
marketing a pharmaceutical product, the partnership interests
held by the two corporations are not applicable partnership
interests.
An applicable partnership interest does not include any
capital interest in a partnership giving the taxpayer a right
to share in partnership capital commensurate with the amount of
capital contributed (as of the time the partnership interest
was received), or commensurate with the value of the
partnership interest that is taxed under section 83 on receipt
or vesting of the partnership interest. For example, in the
case of a partner who holds a capital interest in the
partnership with respect to capital he or she contributed to
the partnership, if the partnership agreement provides that the
partner's share of partnership capital is commensurate with the
amount of capital he or she contributed (as of the time the
partnership interest was received) compared to total
partnership capital, the partnership interest is not an
applicable partnership interest to that extent.
Applicable trade or business
An applicable trade or business means any activity
(regardless of whether the activity are conducted in one or
more entities) that consists in whole or in part of the
following: (1) raising or returning capital, and either (2)
investing in (or disposing of) specified assets (or identifying
specified assets for investing or disposition), or (3)
developing specified assets.
Developing specified assets takes place, for example, if it
is represented to investors, lenders, regulators, or others
that the value, price, or yield of a portfolio business may be
enhanced or increased in connection with choices or actions of
a service provider or of others acting in concert with or at
the direction of a service provider. Services performed as an
employee of an applicable trade or business are treated as
performed in an applicable trade or business for purposes of
this rule. Merely voting shares owned does not amount to
development; for example, a mutual fund that merely votes
proxies received with respect to shares of stock it holds is
not engaged in development.
Specified assets
Under the provision, specified assets means securities
(generally as defined under rules for mark-to-market accounting
for securities dealers), commodities (as defined under rules
for mark-to-market accounting for commodities dealers), real
estate held for rental or investment, cash or cash equivalents,
options or derivative contracts with respect to such
securities, commodities, real estate, cash or cash equivalents,
as well as an interest in a partnership to the extent of the
partnership's proportionate interest in the foregoing. A
security for this purpose means any (1) share of corporate
stock, (2) partnership interest or beneficial ownership
interest in a widely held or publicly traded partnership or
trust, (3) note, bond, debenture, or other evidence of
indebtedness, (4) interest rate, currency, or equity notional
principal contract, (5) interest in, or derivative financial
instrument in, any such security or any currency (regardless of
whether section 1256 applies to the contract), and (6) position
that is not such a security and is a hedge with respect to such
a security and is clearly identified. A commodity for this
purpose means any (1) commodity that is actively traded, (2)
notional principal contract with respect to such a commodity,
(3) interest in, or derivative financial instrument in, such a
commodity or notional principal contract, or (4) position that
is not such a commodity and is a hedge with respect to such a
commodity and is clearly identified. For purposes of the
provision, real estate held for rental or investment does not
include, for example, real estate on which the holder operates
an active farm.
A partnership interest, for purposes of determining the
proportionate interest of a partnership in any specified asset,
includes any partnership interest that is not otherwise treated
as a security for purposes of the provision (for example, an
interest in a partnership that is not widely held or publicly
traded). For example, assume that a hedge fund acquires an
interest in an operating business conducted in the form of a
non-publicly traded partnership that is not widely held; the
partnership interest is a specified asset for purposes of the
provision.
Transfer of applicable partnership interest to related person
If a taxpayer transfers any applicable partnership
interest, directly or indirectly, to a person related to the
taxpayer, then the taxpayer includes in gross income as short-
term capital gain so much of the taxpayer's net long-term
capital gain attributable to the sale or exchange of an asset
held for not more than three years as is allocable to the
interest. The amount included as short-term capital gain on the
transfer is reduced by the amount treated as short-term capital
gain on the transfer for the taxable year under the general
rule of the provision (that is, amounts are not double-
counted). A related person for this purpose is a family member
(within the meaning of attribution rules)\579\ or colleague,
that is a person who performed a service within the current
calendar year or the preceding three calendar years in any
applicable trade or business in which or for which the taxpayer
performed a service.
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\579\Sec. 318(a)(1).
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Reporting requirement
The Secretary is directed to require reporting (at the time
in the manner determined by the Secretary) necessary to carry
out the purposes of the provision. The penalties otherwise
applicable to a failure to report to partners under section
6031(b) apply to failure to report under this requirement.
Regulatory authority
The Treasury Department is directed to issue regulations or
other guidance necessary to carry out the provision. Such
guidance is to address prevention of the abuse of the purposes
of the provision, including through the allocation of income to
tax-indifferent parties. Guidance is also to provide for the
application of the provision in the case of tiered structures
of entities.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
15. Amortization of research and experimental expenditures (sec. 3315
of the bill and sec. 174 of the Code)
PRESENT LAW
Business expenses associated with the development or
creation of an asset having a useful life extending beyond the
current year generally must be capitalized and depreciated over
such useful life.\580\ Taxpayers, however, may elect to deduct
currently the amount of certain reasonable research or
experimentation expenditures paid or incurred in connection
with a trade or business.\581\ Taxpayers may choose to forgo a
current deduction, capitalize their research expenditures, and
recover them ratably over the useful life of the research, but
in no case over a period of less than 60 months.\582\
Taxpayers, alternatively, may elect to amortize their research
expenditures over a period of 10 years.\583\ Research and
experimental expenditures deductible under section 174 are not
subject to capitalization under either section 263(a)\584\ or
section 263A.\585\
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\580\Secs. 167 and 263(a).
\581\Secs. 174(a) and (e).
\582\Sec. 174(b). Taxpayers generating significant short-term
losses often choose to defer the deduction for their research and
experimentation expenditures under this section. Additionally, section
174 amounts are excluded from the definition of ``start-up
expenditures'' under section 195 (section 195 generally provides that
start-up expenditures in excess of $5,000 either are not deductible or
are amortizable over a period of not less than 180 months once an
active trade or business begins). So as not to generate significant
losses before beginning their trade or business, a taxpayer may choose
to defer the deduction and amortize its section 174 costs beginning
with the month in which the taxpayer first realizes benefits from the
expenditures.
\583\Secs. 174(f)(2) and 59(e). This special 10-year election is
available to mitigate the effect of the alternative minimum tax
adjustment for research expenditures set forth in section 56(b)(2).
Taxpayers with significant losses also may elect to amortize their
otherwise deductible research and experimentation expenditures to
reduce amounts that could be subject to expiration under the net
operating loss carryforward regime.
\584\Sec. 263(a)(1)(B).
\585\Sec. 263A(c)(2).
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Amounts defined as research or experimental expenditures
under section 174 generally include all costs incurred in the
experimental or laboratory sense related to the development or
improvement of a product.\586\ In particular, qualifying costs
are those incurred for activities intended to discover
information that would eliminate uncertainty concerning the
development or improvement of a product.\587\ Uncertainty
exists when information available to the taxpayer is not
sufficient to ascertain the capability or method for
developing, improving, and/or appropriately designing the
product.\588\ The determination of whether expenditures qualify
as deductible research expenses depends on the nature of the
activity to which the costs relate, not the nature of the
product or improvement being developed or the level of
technological advancement the product or improvement
represents. Examples of qualifying costs include salaries for
those engaged in research or experimentation efforts, amounts
incurred to operate and maintain research facilities (e.g.,
utilities, depreciation, rent), and expenditures for materials
and supplies used and consumed in the course of research or
experimentation (including amounts incurred in conducting
trials).\589\ In addition, under administrative guidance, the
costs of developing computer software have been accorded
treatment similar to research expenditures.\590\
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\586\Treas. Reg. sec. 1.174-2(a)(1) and (2). Product is defined to
include any pilot model, process, formula, invention, technique,
patent, or similar property, and includes products to be used by the
taxpayer in its trade or business as well as products to be held for
sale, lease, or license. Treas. Reg. sec. 1.174-2(a)(11), Example 10,
provides an example of new process development costs eligible for
section 174 treatment.
\587\Treas. Reg. sec. 1.174-2(a)(1).
\588\Ibid.
\589\ See Treas. Reg. sec. 1.174-4(c). The definition of research
and experimental expenditures also includes the costs of obtaining a
patent, such as attorneys' fees incurred in making and perfecting a
patent. Treas. Reg. sec. 1.174-2(a)(1).
\590\Rev. Proc. 2000-50, 2000-2 C.B. 601.
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Research or experimental expenditures under section 174 do
not include expenditures for quality control testing;
efficiency surveys; management studies; consumer surveys;
advertising or promotions; the acquisition of another's patent,
model, production or process; or research in connection with
literary, historical, or similar projects.\591\ For purposes of
section 174, quality control testing means testing to determine
whether particular units of materials or products conform to
specified parameters, but does not include testing to determine
if the design of the product is appropriate.\592\
---------------------------------------------------------------------------
\591\Treas. Reg. sec. 1.174-2(a)(6).
\592\Treas. Reg. sec. 1.174-2(a)(7).
---------------------------------------------------------------------------
Generally, no current deduction under section 174 is
allowable for expenditures for the acquisition or improvement
of land or of depreciable or depletable property used in
connection with any research or experimentation.\593\ In
addition, no current deduction is allowed for research expenses
incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other
mineral, including oil and gas.\594\
---------------------------------------------------------------------------
\593\Sec. 174(c).
\594\Sec. 174(d). Special rules apply with respect to geological
and geophysical costs (section 167(h)), qualified tertiary injectant
expenses (section 193), intangible drilling costs (sections 263(c) and
291(b)), and mining exploration and development costs (sections 616 and
617).
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REASONS FOR CHANGE
The Committee recognizes that research and experimentation
expenditures have a useful life beyond the tax year in which
the expenditures are incurred, and that the tangible and
intangible property created through research and
experimentation activities provide value to a business beyond a
single tax year. The Committee also acknowledges that the costs
of developing software closely resemble the types of research
and experimental expenditures that fall within the purview of
section 174, and therefore should be accorded similar
treatment. For these reasons, the Committee believes research
expenses, including software development costs, should be
amortized over a period beyond the current year. Further, the
Committee believes that research and experimentation
expenditures that are attributable to research conducted
outside of the United States should be amortized over a longer
period so as to encourage research and experimental activities
inside the United States.
EXPLANATION OF PROVISION
Under the provision, amounts defined as specified research
or experimental expenditures are required to be capitalized and
amortized ratably over a five-year period, beginning with the
midpoint of the taxable year in which the specified research or
experimental expenditures were paid or incurred. Specified
research or experimental expenditures which are attributable to
research that is conducted outside of the United States\595\
are required to be capitalized and amortized ratably over a
period of 15 years, beginning with the midpoint of the taxable
year in which such expenditures were paid or incurred.
Specified research or experimental expenditures subject to
capitalization include expenditures for software development.
---------------------------------------------------------------------------
\595\For this purpose, the term ``United States'' includes the
United States, the Commonwealth of Puerto Rico, and any possession of
the United States.
---------------------------------------------------------------------------
Specified research or experimental expenditures do not
include expenditures for land or for depreciable or depletable
property used in connection with the research or
experimentation, but do include the depreciation and depletion
allowances of such property. Also excluded are exploration
expenditures incurred for ore or other minerals (including oil
and gas).
In the case of retired, abandoned, or disposed property
with respect to which specified research or experimental
expenditures are paid or incurred, any remaining basis may not
be recovered in the year of retirement, abandonment, or
disposal, but instead must continue to be amortized over the
remaining amortization period.
As part of the repeal of the alternative minimum tax,
taxpayers may no longer elect to amortize their research or
experimental expenditures over a period of 10 years.\596\
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\596\See section 2001 of the bill (Repeal of alternative minimum
tax).
---------------------------------------------------------------------------
It is the intent of the Committee that application of this
rule shall be treated as a change in the taxpayer's method of
accounting for purposes of section 481, initiated by the
taxpayer, and made with the consent of the Secretary. It is the
intent of the Committee that this rule be applied on a cutoff
basis to research and experimental expenditures paid or
incurred in taxable years beginning after December 31, 2022
(hence there is no adjustment under section 481(a) for research
and experimental expenditures paid or incurred in taxable years
beginning before January 1, 2023).
EFFECTIVE DATE
The provision applies to amounts paid or incurred in
taxable years beginning after December 31, 2022.
16. Uniform treatment of expenses in contingency fee cases (sec. 3316
of the bill and new sec. 162(q) of the Code)
PRESENT LAW
The Code provides that a taxpayer may deduct all ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on a trade or business.\597\
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\597\Sec. 162(a); Treas. Reg. sec. 1.162-1(a).
---------------------------------------------------------------------------
A current deduction for an expense for which there is a
right or expectation of reimbursement may be disallowed because
these payments are not expenses of the taxpayer and are instead
in the nature of an advance or a loan. The extent to which the
right must be established has varied. Some cases have denied
the current deduction because the right of reimbursement was
fixed,\598\ others have allowed the current deduction because
the right of reimbursement was uncertain,\599\ and other cases
have denied the current deduction if the taxpayer's right to
reimbursement was subject to a contingency.
---------------------------------------------------------------------------
\598\Charles Baloian Company, Inc. v. Commissioner, 68 T.C. 620,
626, 628 (1977); Manocchio v. Commissioner, 710 F.2d 1400, 1402 (9th
Cir. 1983); Glendinning, McLeish & Co. v. Commissioner, 61 F.2d 950,
952 (2d Cir. 1932); Webbe v. Commissioner, T.C. Memo. 1987-426, aff'd,
902 F.2d 688 (8th Cir. 1990).
\599\ George K. Herman Chevrolet, Inc. v. Commissioner, 39 T.C.
846, 853 (1963); Allegheny Corporation v. Commissioner, 28 T.C. 298,
305 (1957), acq., 1957-2 C.B. 3; Electric Tachometer Corporation v.
Commissioner, 37 T.C. 158, 161-162 (1961), acq., 1962-2 C.B. 4.
---------------------------------------------------------------------------
Courts have held that an attorney representing clients on a
contingent fee basis may not currently deduct advances to or
expenses paid on behalf of the clients as ordinary and
necessary business expenses.\600\ The amounts in these cases
were to be repaid from any recovery. Courts have also held that
even if reimbursement is due only under certain circumstances,
generally no immediate deduction is allowable.\601\
---------------------------------------------------------------------------
\600\ Burnett v. Commissioner, 356 F.2d 755, 760 (5th Cir.), cert.
denied, 385 U.S. 832 (1966); Herrick v. Commissioner, 63 T.C. 562, 567,
568 (1975); Canelo v. Commissioner, 53 T.C. 217, 225 (1969), aff'd, 447
F.2d 484 (9th Cir. 1971), acq. 1971-2 C.B. 2, nonacq. in part, 1982-2
C.B. 2; Silverton v. Commissioner, T.C. Memo. 1977-198, aff'd, 647 F.2d
172 (9th Cir.), cert. denied, 454 U.S. 1033 (1981); Watts v.
Commissioner, T.C. Memo. 1968-183.
\601\ Boccardo v. Commissioner, 12 Cl Ct. 184 (1987); Boccardo v.
Commissioner, 65 T.C.M. 2739 (1993).
---------------------------------------------------------------------------
However, the Ninth Circuit reached the opposite conclusion
and held that attorneys who represent clients in ``gross fee''
contingency fee cases are not extending loans to clients and
therefore may treat litigation costs, such as court fees and
witness expenses, as deductible business expenses under the
Code.\602\ The IRS does not follow this decision, except in the
Ninth Circuit, based on the fact that amounts advanced by
attorneys will be reimbursed by the client and therefore are
not deductible business expenses.\603\
---------------------------------------------------------------------------
\602\Boccardo v. Commissioner, 56 F.3d 1016 (9th Cir. 1995), rev'g
65 T.C.M. 2739 (1993).
\603\1997 FSA LEXIS 442 (June 2, 1997).
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REASONS FOR CHANGE
The Committee believes that amounts advanced by attorneys
in ``gross fee'' cases are loans and therefore should not be
treated as deductible expenses. The Committee further believes
this change is necessary to provide uniform treatment of
expenses in contingency fee cases.
EXPLANATION OF PROVISION
The provision denies attorneys an otherwise-allowable
deduction for litigation costs paid under arrangements that are
primarily on a contingent fee basis until the contingency ends.
The provision effects a legislative override of the opinion
in the Ninth Circuit Court of Appeals in Boccardo v.
Commissioner, 56 F.3d 1016 (9th Cir. 1995). No inference
regarding the tax treatment of these costs under present law is
intended.
EFFECTIVE DATE
The provision applies to expenses and costs paid or
incurred in taxable years beginning after the date of
enactment.
E. Reform of Business Credits
1. Repeal of credit for clinical testing expenses for certain drugs for
rare diseases or conditions (sec. 3401 of the bill and sec. 45C of the
Code)
PRESENT LAW
Section 45C provides a 50-percent business tax credit for
qualified clinical testing expenses incurred in testing of
certain drugs for rare diseases or conditions, generally
referred to as ``orphan drugs.'' Qualified clinical testing
expenses are costs incurred to test an orphan drug after the
drug has been approved for human testing by the Food and Drug
Administration (``FDA'') but before the drug has been approved
for sale by the FDA.\604\ A rare disease or condition is
defined as one that (1) affects fewer than 200,000 persons in
the United States, or (2) affects more than 200,000 persons,
but for which there is no reasonable expectation that
businesses could recoup the costs of developing a drug for such
disease or condition from sales in the United States of the
drug.\605\
---------------------------------------------------------------------------
\604\Sec. 45C(b).
\605\Sec. 45C(d).
---------------------------------------------------------------------------
Amounts included in computing the credit under this section
are excluded from the computation of the research credit under
section 41.\606\
---------------------------------------------------------------------------
\606\Sec. 45C(c).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the orphan drug credit, makes the system
simpler and fairer for all individuals, families, and
businesses, and allows for lower tax rates. The Committee
further believes that the repeal of this provision is an
important part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the credit for qualified clinical
testing expenses.
EFFECTIVE DATE
The provision applies to amounts paid or incurred in
taxable years beginning after December 31, 2017. 604 Sec.
45C(b). 605 Sec. 45C(d). 606 Sec. 45C(c).
2. Repeal of employer-provided child care credit (sec. 3402 of the bill
and sec. 45F of the Code)
PRESENT LAW
Taxpayers are eligible for a tax credit equal to 25 percent
of qualified expenditures for employee child care and 10
percent of qualified expenditures for child care resource and
referral services. The maximum total credit that may be claimed
by a taxpayer may not exceed $150,000 per taxable year. The
credit is part of the general business credit.\607\
---------------------------------------------------------------------------
\607\Sec. 38(b)(15).
---------------------------------------------------------------------------
Qualified child care expenditures generally include costs
paid or incurred: (1) to acquire, construct, rehabilitate, or
expand property that is to be used as part of the taxpayer's
qualified child care facility;\608\ (2) for the operation of
the taxpayer's qualified child care facility, including the
costs of training and certain compensation for employees of the
child care facility, and scholarship programs; or (3) under a
contract with a qualified child care facility to provide child
care services to employees of the taxpayer. To be a qualified
child care facility, the principal use of the facility must be
for child care (unless it is the principal residence of the
taxpayer), and the facility must meet all applicable State and
local laws and regulations, including any licensing laws.
---------------------------------------------------------------------------
\608\In addition, a depreciation deduction (or amortization in lieu
of depreciation) must be allowable with respect to the property and the
property must not be part of the principal residence of the taxpayer or
any employee of the taxpayer.
---------------------------------------------------------------------------
Qualified child care expenditures for resource and referral
services include amounts paid under contract to provide child
care resource and referral services to a taxpayer's employees.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the employer-provided child care credit,
makes the system simpler and fairer for all individuals,
families, and businesses, and allows for lower tax rates. The
Committee further believes that the repeal of this provision is
an important part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the credit for qualified child care
expenditures and qualified child care expenditures for resource
and referral services.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
3. Repeal of rehabilitation credit (sec. 3403 of the bill and sec. 47
of the Code)
PRESENT LAW
Section 47 provides a two-tier tax credit for
rehabilitation expenditures.
A 20-percent credit is provided for qualified
rehabilitation expenditures with respect to a certified
historic structure. For this purpose, a certified historic
structure means any building that is listed in the National
Register, or that is located in a registered historic district
and is certified by the Secretary of the Interior to the
Secretary of the Treasury as being of historic significance to
the district.
A 10-percent credit is provided for qualified
rehabilitation expenditures with respect to a qualified
rehabilitated building, which generally means a building that
was first placed in service before 1936. A pre-1936 building
must meet requirements with respect to retention of existing
external walls and internal structural framework of the
building in order for expenditures with respect to it to
qualify for the 10-percent credit. A building is treated as
having met the substantial rehabilitation requirement under the
10-percent credit only if the rehabilitation expenditures
during the 24-month period selected by the taxpayer and ending
within the taxable year exceed the greater of (1) the adjusted
basis of the building (and its structural components), or (2)
$5,000.
The provision requires the use of straight-line
depreciation or the alternative depreciation system in order
for rehabilitation expenditures to be treated as qualified
under the provision.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the rehabilitation credit, makes the
system simpler and fairer for all individuals, families, and
businesses, and allows for lower tax rates. The Committee
further believes that the repeal of this provision is an
important part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the rehabilitation credit.
EFFECTIVE DATE
The provision applies to amounts paid or incurred after
December 31, 2017. A transition rule provides that in the case
of qualified rehabilitation expenditures (within the meaning of
present law), with respect to any building owned or leased by
the taxpayer at all times on and after January 1, 2018, the 24-
month period selected by the taxpayer (under section
47(c)(1)(C)) is to begin not later than the end of the 180-day
period beginning on the date of the enactment of the Act, and
the amendments made by the provision apply to such expenditures
paid or incurred after the end of the taxable year in which
such 24-month period ends.
4. Repeal of work opportunity tax credit (sec. 3404 of the bill and
sec. 51 of the Code)
PRESENT LAW
In general
The work opportunity tax credit is available on an
elective basis for employers hiring individuals from one or
more of ten targeted groups. The amount of the credit available
to an employer is determined by the amount of qualified wages
paid by the employer. Generally, qualified wages consist of
wages attributable to services rendered by a member of a
targeted group during the one-year period beginning with the
day the individual begins work for the employer (two years in
the case of an individual in the long-term family assistance
recipient category).
Targeted groups eligible for the credit
Generally, an employer is eligible for the credit only for
qualified wages paid to members of a targeted group. These
targeted groups are: (1) Families receiving TANF; (2) Qualified
veterans; (3) Qualified ex-felons; (4) Designated community
residents; (5) Vocational rehabilitation referrals; (6)
Qualified summer youth employees; (7) Qualified food and
nutrition recipients; (8) Qualified SSI recipients; (9) Long-
term family assistance recipients; and (10) Qualified long-term
unemployment recipients.
Qualified wages
Generally, qualified wages are defined as cash wages paid
by the employer to a member of a targeted group. The employer's
deduction for wages is reduced by the amount of the credit.
For purposes of the credit, generally, wages are defined by
reference to the FUTA definition of wages contained in section
3306(b) (without regard to the dollar limitation therein
contained). Special rules apply in the case of certain
agricultural labor and certain railroad labor.
Calculation of the credit
The credit available to an employer for qualified wages
paid to members of all targeted groups (except for long-term
family assistance recipients and qualified veterans) equals 40
percent (25 percent for employment of 400 hours or less) of
qualified first-year wages. Generally, qualified first-year
wages are qualified wages (not in excess of $6,000)
attributable to service rendered by a member of a targeted
group during the one-year period beginning with the day the
individual began work for the employer. Therefore, the maximum
credit per employee is $2,400 (40 percent of the first $6,000
of qualified first-year wages). With respect to qualified
summer youth employees, the maximum credit is $1,200 (40
percent of the first $3,000 of qualified first-year wages).
Except for long-term family assistance recipients, no credit is
allowed for second-year wages.
In the case of long-term family assistance recipients, the
credit equals 40 percent (25 percent for employment of 400
hours or less) of $10,000 for qualified first-year wages and 50
percent of the first $10,000 of qualified second-year wages.
Generally, qualified second-year wages are qualified wages (not
in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the
one-year period beginning on the day after the one-year period
beginning with the day the individual began work for the
employer. Therefore, the maximum credit per employee is $9,000
(40 percent of the first $10,000 of qualified first-year wages
plus 50 percent of the first $10,000 of qualified second-year
wages).
In the case of a qualified veterans, the credit is
calculated as follows: (1) in the case of a qualified veteran
who was eligible to receive assistance under a supplemental
nutritional assistance program (for at least a three-month
period during the year prior to the hiring date) the employer
is entitled to a maximum credit of 40 percent of $6,000 of
qualified first-year wages; (2) in the case of a qualified
veteran who is entitled to compensation for a service connected
disability, who is hired within one year of discharge, the
employer is entitled to a maximum credit of 40 percent of
$12,000 of qualified first-year wages; (3) in the case of a
qualified veteran who is entitled to compensation for a service
connected disability, and who has been unemployed for an
aggregate of at least six months during the one-year period
ending on the hiring date, the employer is entitled to a
maximum credit of 40 percent of $24,000 of qualified first-year
wages; (4) in the case of a qualified veteran unemployed for at
least four weeks but less than six months (whether or not
consecutive) during the one-year period ending on the date of
hiring, the maximum credit equals 40 percent of $6,000 of
qualified first-year wages; and (5) in the case of a qualified
veteran unemployed for at least six months (whether or not
consecutive) during the one-year period ending on the date of
hiring, the maximum credit equals 40 percent of $14,000 of
qualified first-year wages.
Expiration
The work opportunity tax credit is not available with
respect to wages paid to individuals who begin work for an
employer after December 31, 2019.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the work opportunity tax credit, makes
the system simpler and fairer for all individuals, families,
and businesses, and allows for lower tax rates. The Committee
further believes that the repeal of this provision is a
necessary part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the work opportunity tax credit.
EFFECTIVE DATE
The provision applies to amounts paid or incurred to
individuals who begin work for the employer after December 31,
2017.
5. Repeal of deduction for certain unused business credits (sec. 3405
of the bill and sec. 196 of the Code)
PRESENT LAW
The general business credit (``GBC'') consists of various
individual tax credits allowed with respect to certain
qualified expenditures and activities.\609\ In general, the
various individual tax credits contain provisions that prohibit
``double benefits,'' either by denying deductions in the case
of expenditure-related credits or by requiring income
inclusions in the case of activity-related credits. Unused
credits may be carried back one year and carried forward 20
years.\610\
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\609\Sec. 38.
\610\Sec. 39.
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Section 196 allows a deduction to the extent that certain
portions of the GBC expire unused after the end of the carry
forward period. In general, 100 percent of the unused credit is
allowed as a deduction in the taxable year after such credit
expired. However, with respect to the investment credit
determined under section 46 (other than the rehabilitation
credit) and the research credit determined under section 41(a)
(for a taxable year beginning before January 1, 1990), section
196 limits the deduction to 50 percent of such unused
credits.\611\
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\611\Sec. 196(d).
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the deduction for certain unused business
credits, makes the system simpler and fairer for all
individuals, families, and businesses, and allows for lower tax
rates. The Committee further believes that the repeal of this
provision is a necessary part of its larger tax reform effort.
EXPLANATION OF PROVISION
This provision repeals the deduction for certain unused
business credits.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
6. Termination of new markets tax credit (sec. 3406 of the bill and
sec. 45D of the Code)
PRESENT LAW
Section 45D provides a new markets tax credit for qualified
equity investments made to acquire stock in a corporation, or a
capital interest in a partnership, that is a qualified
community development entity (``CDE'').\612\ The amount of the
credit allowable to the investor (either the original purchaser
or a subsequent holder) is (1) a five-percent credit for the
year in which the equity interest is purchased from the CDE and
for each of the following two years, and (2) a six-percent
credit for each of the following four years.\613\ The credit is
determined by applying the applicable percentage (five or six
percent) to the amount paid to the CDE for the investment at
its original issue, and is available to the taxpayer who holds
the qualified equity investment on the date of the initial
investment or on the respective anniversary date that occurs
during the taxable year.\614\ The credit is recaptured if at
any time during the seven-year period that begins on the date
of the original issue of the investment the entity (1) ceases
to be a qualified CDE, (2) the proceeds of the investment cease
to be used as required, or (3) the equity investment is
redeemed.\615\
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\612\Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
\613\Sec. 45D(a)(2).
\614\Sec. 45D(a)(3).
\615\Sec. 45D(g).
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A qualified CDE is any domestic corporation or partnership:
(1) whose primary mission is serving or providing investment
capital for low-income communities or low-income persons; (2)
that maintains accountability to residents of low-income
communities by their representation on any governing board of
or any advisory board to the CDE; and (3) that is certified by
the Secretary as being a qualified CDE.\616\ A qualified equity
investment means stock (other than nonqualified preferred
stock) in a corporation or a capital interest in a partnership
that is acquired at its original issue directly (or through an
underwriter) from a CDE for cash, and includes an investment of
a subsequent purchaser if such investment was a qualified
equity investment in the hands of the prior holder.\617\
Substantially all of the investment proceeds must be used by
the CDE to make qualified low-income community investments and
the investment must be designated as a qualified equity
investment by the CDE. For this purpose, qualified low-income
community investments include: (1) capital or equity
investments in, or loans to, qualified active low-income
community businesses; (2) certain financial counseling and
other services to businesses and residents in low-income
communities; (3) the purchase from another CDE of any loan made
by such entity that is a qualified low-income community
investment; or (4) an equity investment in, or loan to, another
CDE.\618\
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\616\Sec. 45D(c).
\617\Sec. 45D(b).
\618\Sec. 45D(d).
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A ``low-income community'' is a population census tract
with either (1) a poverty rate of at least 20 percent or (2)
median family income which does not exceed 80 percent of the
greater of metropolitan area median family income or statewide
median family income (for a non-metropolitan census tract, does
not exceed 80 percent of statewide median family income). In
the case of a population census tract located within a high
migration rural county, low-income is defined by reference to
85 percent (as opposed to 80 percent) of statewide median
family income.\619\ For this purpose, a high migration rural
county is any county that, during the 20-year period ending
with the year in which the most recent census was conducted,
has a net out-migration of inhabitants from the county of at
least 10 percent of the population of the county at the
beginning of such period.
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\619\Sec. 45D(e).
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The Secretary is authorized to designate ``targeted
populations'' as low-income communities for purposes of the new
markets tax credit.\620\ For this purpose, a ``targeted
population'' is defined by reference to section 103(20) of the
Riegle Community Development and Regulatory Improvement Act of
1994\621\ (the ``Act'') to mean individuals, or an identifiable
group of individuals, including an Indian tribe, who are low-
income persons or otherwise lack adequate access to loans or
equity investments. Section 103(17) of the Act provides that
``low income'' means (1) for a targeted population within a
metropolitan area, less than 80 percent of the area median
family income; and (2) for a targeted population within a non-
metropolitan area, less than the greater of 80 percent of the
area median family income or 80 percent of the statewide non-
metropolitan area median family income. A targeted population
is not required to be within any census tract. In addition, a
population census tract with a population of less than 2,000 is
treated as a low-income community for purposes of the credit if
such tract is within an empowerment zone, the designation of
which is in effect under section 1391, and is contiguous to one
or more low-income communities.
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\620\Sec. 45D(e)(2).
\621\Pub. L. No. 103-325.
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A qualified active low-income community business is defined
as a business that satisfies, with respect to a taxable year,
the following requirements: (1) at least 50 percent of the
total gross income of the business is derived from the active
conduct of trade or business activities in any low-income
community; (2) a substantial portion of the tangible property
of the business is used in a low-income community; (3) a
substantial portion of the services performed for the business
by its employees is performed in a low-income community; and
(4) less than five percent of the average of the aggregate
unadjusted bases of the property of the business is
attributable to certain financial property or to certain
collectibles.\622\
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\622\Sec. 45D(d)(2).
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The maximum annual amount of qualified equity investments
is $3.5 billion for calendar years 2010 through 2019. No amount
of unused allocation limitation may be carried to any calendar
year after 2024.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the new markets tax credit, makes the
system simpler and fairer for all individuals, families, and
businesses, and allows for lower tax rates. The Committee
further believes that the repeal of this provision is an
important part of its larger tax reform effort.
EXPLANATION OF PROVISION
This provision provides that the new markets tax credit
limitation is zero for calendar year 2018 and thereafter and no
amount of unused allocation limitation may be carried to any
calendar year after 2022.
EFFECTIVE DATE
The provision applies to calendar years beginning after
December 31, 2017.
7. Repeal of credit for expenditures to provide access to disabled
individuals (sec. 3407 of the bill and sec. 44 of the Code)
PRESENT LAW
Section 44 provides a 50-percent credit for eligible access
expenditures paid or incurred by an eligible small business for
the taxable year. The credit is limited to eligible access
expenditures exceeding $250 but not exceeding 10,500. The
credit is part of the general business credit.\623\
---------------------------------------------------------------------------
\623\Sec. 38(b)(17).
---------------------------------------------------------------------------
Eligible access expenditures generally means amounts paid
or incurred by an eligible small business to comply with
requirements under the Americans with Disabilities Act of
1990.\624\ These expenditures\625\ include: (1) removal of
architectural, communication, physical or transportation
barriers which prevent a business from being usable or
accessible to individuals with disabilities;\626\ (2) provision
of qualified interpreters or other effective methods of making
aurally-delivered materials available to individuals with
hearing impairments; (3) provision of qualified readers, taped
texts, or other effective methods of making visually-delivered
materials available to individuals with visual impairments; (4)
acquisition or modification of equipment or devices for
individuals with disabilities; or (5) provision of other
similar services, modifications, materials, or equipment.
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\624\As in effect on November 5, 1990. Sec. 44(c)(1).
\625\These expenditures must be reasonable and necessary, excluding
those unnecessary to accomplish listed purposes, and meet standards set
forth by the Secretary and the Architectural and Transportation
Barriers Compliance Board. Sec. 44(c)(3) and (5).
\626\Expenses related to this removal are not eligible in
connection with facilities placed in service after November 5, 1990.
Sec. 44(c)(4).
---------------------------------------------------------------------------
An eligible small business means any person that elects
application of section 44 and, during the preceding taxable
year, (1) had gross receipts not exceeding $1,000,000 or (2)
employed not more than 30 full-time employees.\627\
---------------------------------------------------------------------------
\627\ For this definition, an employee is considered full-time if
employed at least 30 hours per week for 20 or more calendar weeks in
the taxable year.
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REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the credit for eligible access
expenditures, makes the system simpler and fairer for all
individuals, families, and businesses, and allows for lower tax
rates. The Committee further believes that the repeal of this
provision is an important part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the credit for eligible access
expenditures.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
8. Modification of credit for portion of employer social security taxes
paid with respect to employee tips (sec. 3408 of the bill and sec. 45B
of the Code)
PRESENT LAW
Credit
Certain food or beverage establishments may elect to claim
a business tax credit equal to an employer's taxes under the
Federal Insurance Contributions Act (``FICA'')\628\ paid on
tips in excess of those treated as wages for purposes of
meeting the minimum wage requirements of the Fair Labor
Standards Act (the ``FLSA'') as in effect on January 1,
2007.\629\ The credit applies only with respect to FICA taxes
paid on tips received from customers in connection with the
providing, delivering, or serving of food or beverages for
consumption if the tipping of employees delivering or serving
food or beverages by customers is customary. The credit is
available whether or not the tips are reported or a percentage
of gross receipts is allocated (described below). No deduction
is allowed for any amount taken into account in determining the
tip credit. A taxpayer may elect not to have the credit apply
for a taxable year.
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\628\FICA taxes consist of social security (OASDI, or old age,
survivor, and disability insurance) and hospital (Medicare) taxes
imposed on employers and employees with respect to wages paid to
employees under sections 3101-3128.
\629\Sec. 45B. As of January 1, 2007, the Federal minimum wage
under the FLSA was $5.15 per hour. In the case of tipped employees, the
FLSA provided that the minimum wage could be reduced to $2.13 per hour
(that is, the employer is only required to pay cash equal to $2.13 per
hour) if the combination of tips and cash income equaled the Federal
minimum wage.
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Reporting and allocation requirements
Employees are required to report monthly tips to their
employer.\630\ Certain large\631\ food or beverage
establishments are required to report to the IRS and employees
various information including gross receipts of the
establishment, and to allocate among employees who customarily
receive tip income an amount equal to eight percent of gross
receipts in excess of the amount of tips reported by such
employees.\632\ Employee tip income that is reported by
employees is treated as employer-provided wages subject to
FICA.
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\630\Sec. 6053(a).
\631\A large establishment for this purpose is one which normally
employed more than 10 employees on a typical business day during the
preceding calendar year.
\632\Sec. 6053(c).
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REASONS FOR CHANGE
The Committee believes that updating the minimum wage
threshold on which the FICA tip credit is determined, as well
as requiring consistent reporting and tip allocations by
businesses eligible for the credit, will encourage compliance
and consistency among those food or beverage establishments
that elect to claim the FICA tip credit.
EXPLANATION OF PROVISION
The provision revises the amount of the credit for FICA
taxes an employer pays on tips, as an amount equal to the
employer's FICA taxes paid on tips in excess of those treated
as minimum wages under the FLSA without regard to the January
1, 2007 date. For 2017, this amount is $7.25. In addition, the
credit is permitted only if the employer satisfies the
reporting requirements of section 6053(c) to the IRS and
employees, and allocates among employees who customarily
receive tip income an amount equal to 10 percent (rather than
eight percent) of gross receipts in excess of the amount of
tips reported by such employees. The claiming of the credit
remains elective. However, if any size eligible food or
beverage establishment elects to claim the FICA tip credit for
any taxable year after the provision takes effect, the
establishment must satisfy this reporting and 10-percent
allocation requirement for that taxable year. Reporting and
allocation requirements for food and beverage establishments
that elect not to claim the credit remain unchanged.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
F. Energy Credits
1. Modifications to credit for electricity produced from certain
renewable resources (sec. 3501 of the bill and sec. 45 of the Code)
PRESENT LAW
In general
An income tax credit is allowed for the production of
electricity from qualified energy resources at qualified
facilities (the ``renewable electricity production
credit'').\633\ Qualified energy resources comprise wind,
closed-loop biomass, open-loop biomass, geothermal energy,
municipal solid waste, qualified hydropower production, and
marine and hydrokinetic renewable energy. Qualified facilities
are, generally, facilities that generate electricity using
qualified energy resources. To be eligible for the credit,
electricity produced from qualified energy resources at
qualified facilities must be sold by the taxpayer to an
unrelated person.
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\633\Sec. 45. In addition to the renewable electricity production
credit, section 45 also provides income tax credits for the production
of Indian coal and refined coal at qualified facilities.
SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
RESOURCES
------------------------------------------------------------------------
Credit amount
Eligible electricity production for 2017
activity (sec. 45) (cents per Expiration1
kilowatt-hour)
------------------------------------------------------------------------
Wind.............................. 2.4 December 31, 2019.
Closed-loop biomass............... 2.4 December 31, 2016.
Open-loop biomass (including 1.2 December 31, 2016.
agricultural livestock waste
nutrient facilities).
Geothermal........................ 2.4 December 31, 2016.
Municipal solid waste (including 1.2 December 31, 2016.
landfill gas facilities and trash
combustion facilities).
Qualified hydropower.............. 1.2 December 31, 2016.
Marine and hydrokinetic........... 1.2 December 31, 2016.
------------------------------------------------------------------------
1Expires for property the construction of which begins after this date.
The credit rate, initially set at 1.5 cents per kilowatt-
hour (reduced by one-half for certain renewable resources) is
adjusted annually for inflation.\634\ In general, the credit is
available for electricity produced during the first 10 years
after a facility has been placed in service.
---------------------------------------------------------------------------
\634\The most recent inflation adjustment factors can be found in
IRS Notice 2017-33, I.R.B. 2017-22, May 30, 2017.
---------------------------------------------------------------------------
Taxpayers may also elect to get a 30-percent investment tax
credit in lieu of this production tax credit.\635\
---------------------------------------------------------------------------
\635\Sec. 48(a)(5).
---------------------------------------------------------------------------
Phase-down for wind facilities
In the case of wind facilities, the available production
tax credit or investment tax credit is reduced by 20 percent
for facilities the construction of which begins in 2017, by 40
percent for facilities the construction of which begins in
2018, and by 60 percent for facilities the construction of
which begins in 2019.
Special rules for determining when the construction of a facility
begins
In general, a taxpayer may establish the beginning of
construction of a facility by beginning physical work of a
significant nature (the ``physical work test'').\636\
Alternatively, a taxpayer may establish the beginning of
construction by meeting the safe harbor test which generally
requires that the taxpayer have paid or incurred five percent
of the total cost of constructing the facility (the ``five
percent safe harbor'').\637\ Both methods require that a
taxpayer make continuous progress towards completion once
construction has begun.\638\ To demonstrate that continuous
progress is being made, taxpayers relying on the physical work
test must show that the project is undergoing ``continuous
construction,'' and taxpayer relying on the five percent safe
harbor must show ``continuous effort'' to complete the
project.\639\ Collectively, these two tests are referred to as
the ``continuity requirement.''\640\
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\636\IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 2013.
\637\Ibid.
\638\Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, May 5,
2016.
\639\Ibid.
\640\Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
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REASONS FOR CHANGE
The Committee believes that many existing tax incentives
need to be repealed or otherwise limited as part of its larger
tax reform effort to broaden the tax base, close loopholes and
grow the economy. With this in mind, the Committee believes
that it is appropriate to impose additional limits on the
renewable power credit in order to make the tax system simpler
and fairer for all individuals, families, and businesses, and
to allow for lower tax rates. In addition, the Committee
believes that codifying existing guidance regarding when the
construction of a renewable power facility begins will provide
increased certainty to taxpayers engaging in renewable power
projects.
EXPLANATION OF PROVISION
The provision eliminates the inflation adjustment for wind
facilities the construction of which begins after the date of
enactment. Such facilities are entitled to a credit of 1.5
cents per kilowatt-hour (i.e., the statutory credit rate
unadjusted for inflation). Credits remain subject to the phase-
down based on the year construction begins.
The provision includes a special rule for determining the
beginning of construction, which is intended to codify Treasury
guidance for determining when construction of a facility has
begun, including the physical work test, the five percent safe
harbor, and the continuity requirement.
EFFECTIVE DATE
The provision terminating the inflation adjustment is
effective for taxable years ending after the date of enactment.
The provision codifying existing guidance for determining
when construction has begun is effective for taxable years
beginning before, on, or after the date of enactment.
2. Modification of the energy investment tax credit (sec. 3502 of the
bill and sec. 48 of the Code)
PRESENT LAW
In general
A permanent, nonrefundable, 10-percent business energy
credit\641\ is allowed for the cost of new property that is
equipment that either (1) uses solar energy to generate
electricity, to heat or cool a structure, or to provide solar
process heat or (2) is used to produce, distribute, or use
energy derived from a geothermal deposit, but only, in the case
of electricity generated by geothermal power, up to the
electric transmission stage. Property used to generate energy
for the purposes of heating a swimming pool is not eligible
solar energy property.
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\641\Sec. 48.
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In addition to the permanent credit, temporary investment
credits are available for a variety of renewable and
alternative energy property. The rules governing these
temporary credits are described below.
The energy credit is a component of the general business
credit.\642\ An unused general business credit generally may be
carried back one year and carried forward 20 years.\643\ The
taxpayer's basis in the property is reduced by one-half of the
amount of the credit claimed. For projects whose construction
time is expected to equal or exceed two years, the credit may
be claimed as progress expenditures are made on the project,
rather than during the year the property is placed in service.
The credit is allowed against the alternative minimum tax.
---------------------------------------------------------------------------
\642\Sec. 38(b)(1).
\643\Sec. 39.
---------------------------------------------------------------------------
Solar energy property
The credit rate for solar energy property is increased to
30 percent in the case of property the construction of which
begins before January 1, 2020. The rate is increased to 26
percent in the case of property the construction of which
begins in calendar year 2020. The rate is increased to 22
percent in the case of property the construction of which
begins in calendar year 2021. To qualify for the enhanced
credit rates, the property must be placed in service before
January 1, 2024.
Additionally, equipment that uses fiber-optic distributed
sunlight (``fiber optic solar'') to illuminate the inside of a
structure is solar energy property eligible for the 30-percent
credit, but only for property placed in service before January
1, 2017.
Fuel cell property and microturbine property
The energy credit applies to qualified fuel cell power
plant property, but only for periods prior to January 1, 2017.
The credit rate is 30 percent.
A qualified fuel cell power plant is an integrated system
composed of a fuel cell stack assembly and associated balance
of plant components that (1) converts a fuel into electricity
using electrochemical means, and (2) has an electricity-only
generation efficiency of greater than 30 percent and a capacity
of at least one-half kilowatt. The credit may not exceed $1,500
for each 0.5 kilowatt of capacity.
The energy credit applies to qualifying stationary
microturbine power plant property for periods prior to January
1, 2017. The credit is limited to the lesser of 10 percent of
the basis of the property or $200 for each kilowatt of
capacity.
A qualified stationary microturbine power plant is an
integrated system comprised of a gas turbine engine, a
combustor, a recuperator or regenerator, a generator or
alternator, and associated balance of plant components that
converts a fuel into electricity and thermal energy. Such
system also includes all secondary components located between
the existing infrastructure for fuel delivery and the existing
infrastructure for power distribution, including equipment and
controls for meeting relevant power standards, such as voltage,
frequency, and power factors. Such system must have an
electricity-only generation efficiency of not less than 26
percent at International Standard Organization conditions and a
capacity of less than 2,000 kilowatts.
Geothermal heat pump property
The energy credit applies to qualified geothermal heat pump
property placed in service prior to January 1, 2017. The credit
rate is 10 percent. Qualified geothermal heat pump property is
equipment that uses the ground or ground water as a thermal
energy source to heat a structure or as a thermal energy sink
to cool a structure.
Small wind property
The energy credit applies to qualified small wind energy
property placed in service prior to January 1, 2017. The credit
rate is 30 percent. Qualified small wind energy property is
property that uses a qualified wind turbine to generate
electricity. A qualifying wind turbine means a wind turbine of
100 kilowatts of rated capacity or less.
Combined heat and power property
The energy credit applies to combined heat and power
(``CHP'') property placed in service prior to January 1, 2017.
The credit rate is 10 percent.
CHP property is property: (1) that uses the same energy
source for the simultaneous or sequential generation of
electrical power, mechanical shaft power, or both, in
combination with the generation of steam or other forms of
useful thermal energy (including heating and cooling
applications); (2) that has an electrical capacity of not more
than 50 megawatts or a mechanical energy capacity of not more
than 67,000 horsepower or an equivalent combination of
electrical and mechanical energy capacities; (3) that produces
at least 20 percent of its total useful energy in the form of
thermal energy that is not used to produce electrical or
mechanical power, and produces at least 20 percent of its total
useful energy in the form of electrical or mechanical power (or
a combination thereof); and (4) the energy efficiency
percentage of which exceeds 60 percent. CHP property does not
include property used to transport the energy source to the
generating facility or to distribute energy produced by the
facility.
The otherwise allowable credit with respect to CHP property
is reduced to the extent the property has an electrical
capacity or mechanical capacity in excess of any applicable
limits. Property in excess of the applicable limit (15
megawatts or a mechanical energy capacity of more than 20,000
horsepower or an equivalent combination of electrical and
mechanical energy capacities) is permitted to claim a fraction
of the otherwise allowable credit. The fraction is equal to the
applicable limit divided by the capacity of the property. For
example, a 45 megawatt property would be eligible to claim 15/
45ths, or one third, of the otherwise allowable credit. Again,
no credit is allowed if the property exceeds the 50 megawatt or
67,000 horsepower limitations described above.
Additionally, systems whose fuel source is at least 90
percent open-loop biomass and that would qualify for the credit
but for the failure to meet the efficiency standard are
eligible for a credit that is reduced in proportion to the
degree to which the system fails to meet the efficiency
standard. For example, a system that would otherwise be
required to meet the 60-percent efficiency standard, but which
only achieves 30-percent efficiency, would be permitted a
credit equal to one-half of the otherwise allowable credit
(i.e., a 5-percent credit).
Election of energy credit in lieu of section 45 production
tax credit
A taxpayer may make an irrevocable election to have the
property used in certain qualified renewable power facilities
be treated as energy property eligible for a 30-percent
investment credit under section 48. For this purpose, qualified
facilities are facilities otherwise eligible for the renewable
electricity production tax credit with respect to which no
credit under section 45 has been allowed. A taxpayer electing
to treat a facility as energy property may not claim the
production credit under section 45. The 30-percent credit rate
phases down in calendar years 2017, 2018, and 2019.
REASONS FOR CHANGE
In an effort to harmonize existing energy credits as part
of tax reform, the Committee believes that the energy
investment tax credit should have the same phase-down period
and expiration date for otherwise credit-eligible property.
EXPLANATION OF PROVISION
The provision extends the energy credit for fiber optic
solar, fuel cell, microturbine, geothermal heat pump, small
wind, and combined heat and power property. In each case, the
credit is extended for property the construction of which
begins before January 1, 2022. In the case of fiber optic
solar, fuel cell, and small wind property, the credit rate is
reduced to 26 percent for property the construction of which
begins in calendar year 2020 and to 22 percent for property the
construction of which begins in calendar year 2021. Qualified
property must be placed in service before January 1, 2024.
The provision terminates the permanent credits for solar
and geothermal property the construction of which begins after
December 31, 2027.
The provision adds a special rule for determining the
beginning of construction of qualified property. Under the
provision, the construction of any facility, modification,
improvement, addition, or other property is not treated as
beginning before any date unless there is a continuous program
of construction which begins before such date and ends on the
date that such property is placed in service.
EFFECTIVE DATE
The provision generally applies to periods after December
31, 2016, under rules similar to the rules of section 48(m), as
in effect on the day before the date of enactment of the
Revenue Reconciliation Act of 1990. The extension of the credit
for combined heat and power system property applies to property
placed in service after December 31, 2016. The reduced credit
rates and the termination of the permanent credits are
effective on the date of the enactment of the provision. The
special rule for determining the beginning of construction of
qualified property applies to taxable years beginning before,
on, or after the date of enactment of the provision.
3. Extension and phaseout of residential energy efficient property
credit (sec. 3503 of the bill and sec. 25D of the Code)
PRESENT LAW
In general
Section 25D provides a personal tax credit for the purchase
of qualified solar electric property and qualified solar water
heating property that is used exclusively for purposes other
than heating swimming pools and hot tubs. The credit is equal
to 30 percent of qualifying expenditures.
Section 25D also provides a 30 percent credit for the
purchase of qualified geothermal heat pump property, qualified
small wind energy property, and qualified fuel cell power
plants. The credit for any fuel cell may not exceed $500 for
each 0.5 kilowatt of capacity.
The credit is nonrefundable. The credit with respect to all
qualifying property may be claimed against the alternative
minimum tax.
With the exception of solar property, the credit expires
for property placed in service after December 31, 2016. In the
case of qualified solar electric property and solar water
heating property, the credit expires for property placed in
service after December 31, 2021. In addition, the credit rate
for such solar property is reduced to 26 percent for property
placed in service in calendar year 2020 and to 22 percent for
property placed in service in calendar year 2021.
Qualified property
Qualified solar electric property is property that uses
solar energy to generate electricity for use in a dwelling
unit. Qualifying solar water heating property is property used
to heat water for use in a dwelling unit located in the United
States and used as a residence if at least half of the energy
used by such property for such purpose is derived from the sun.
A qualified fuel cell power plant is an integrated system
comprised of a fuel cell stack assembly and associated balance
of plant components that (1) converts a fuel into electricity
using electrochemical means, (2) has an electricity-only
generation efficiency of greater than 30 percent, and (3) has a
nameplate capacity of at least 0.5 kilowatt. The qualified fuel
cell power plant must be installed on or in connection with a
dwelling unit located in the United States and used by the
taxpayer as a principal residence.
Qualified small wind energy property is property that uses
a wind turbine to generate electricity for use in a dwelling
unit located in the United States and used as a residence by
the taxpayer.
Qualified geothermal heat pump property means any equipment
which (1) uses the ground or ground water as a thermal energy
source to heat the dwelling unit or as a thermal energy sink to
cool such dwelling unit, (2) meets the requirements of the
Energy Star program which are in effect at the time that the
expenditure for such equipment is made, and (3) is installed on
or in connection with a dwelling unit located in the United
States and used as a residence by the taxpayer.
Additional rules
The depreciable basis of the property is reduced by the
amount of the credit. Expenditures for labor costs allocable to
onsite preparation, assembly, or original installation of
property eligible for the credit are eligible expenditures.
Special proration rules apply in the case of jointly owned
property, condominiums, and tenant-stockholders in cooperative
housing corporations. If less than 80 percent of the property
is used for nonbusiness purposes, only that portion of
expenditures that is used for nonbusiness purposes is taken
into account.
REASONS FOR CHANGE
In an effort to harmonize existing energy credits as part
of tax reform, the Committee believes that the residential
energy efficient property credit should have the same phase-
down period and expiration date for all otherwise credit-
eligible property.
EXPLANATION OF PROVISION
The provision extends the residential energy efficient
property credit with respect to non-solar qualified property
through December 31, 2021. The credit rate for such property is
reduced to 26 percent for property placed in service in
calendar year 2020 and to 22 percent for property placed in
service in calendar year 2021.
EFFECTIVE DATE
The provision applies to property placed in service after
December 31, 2016.
4. Repeal of enhanced oil recovery credit (sec. 3504 of the bill and
sec. 43 of the Code)
PRESENT LAW
Section 43 provides a 15-percent credit for expenses
associated with an enhanced oil recovery (``EOR'') project.
Qualified EOR costs consist of the following designated
expenses associated with an EOR project: (1) amounts paid for
depreciable tangible property; (2) intangible drilling and
development expenses; (3) tertiary injectant expenses; and (4)
construction costs for certain Alaskan natural gas treatment
facilities. An EOR project is generally a project that involves
increasing the amount of recoverable domestic crude oil through
the use of one or more tertiary recovery methods (as defined in
section 193(b)(3)), such as injecting steam or carbon dioxide
into a well to effect oil displacement. The credit is reduced
as the price of oil exceeds a certain threshold.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the enhanced oil recovery credit, makes
the system simpler and fairer for all individuals, families,
and businesses, and allows for lower tax rates. The Committee
further believes that the repeal of this provision is an
important part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the enhanced oil recovery credit.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
5. Repeal of credit for producing oil and gas from marginal wells (sec.
3505 of the bill and sec. 45I of the Code)
PRESENT LAW
Section 45I provides a $3-per-barrel credit for the
production of crude oil and a $0.50 credit per 1,000 cubic feet
of qualified natural gas production. In both cases, the credit
is available only for production from a ``qualified marginal
well.''
A qualified marginal well is defined as a domestic well:
(1) production from which is treated as marginal production for
purposes of the Code's percentage depletion rules; or (2) that
during the taxable year had average daily production of not
more than 25 barrel equivalents and produces water at a rate of
not less than 95 percent of total well effluent. The maximum
amount of production on which credit could be claimed is 1,095
barrels or barrel equivalents.
The credit is not available to production occurring if the
reference price of oil exceeds $18 ($2.00 for natural gas). The
credit is reduced proportionately for reference prices between
$15 and $18 ($1.67 and $2.00 for natural gas).
The credit is treated as a general business credit. Unused
credits can be carried back for up to five years rather than
the generally applicable carryback period of one year. The
credit is indexed for inflation.
REASONS FOR CHANGE
The Committee believes that the repeal of many existing tax
incentives, including the credit for producing oil and gas from
marginal wells, makes the system simpler and fairer for all
individuals, families, and businesses, and allows for lower tax
rates. The Committee further believes that the repeal of this
provision is an important part of its larger tax reform effort.
EXPLANATION OF PROVISION
The provision repeals the credit for producing oil and gas
from marginal wells.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
6. Modification of credit for production from advanced nuclear power
facilities (sec. 3506 of the bill and sec. 45J of the Code)
PRESENT LAW
Taxpayers producing electricity at a qualifying advanced
nuclear power facility may claim a credit equal to 1.8 cents
per kilowatt-hour of electricity produced for the eight-year
period starting when the facility is placed in service.\644\
The aggregate amount of credit that a taxpayer may claim in any
year during the eight-year period is subject to limitation
based on allocated capacity and an annual limitation as
described below.
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\644\Sec. 45J. The 1.8-cents credit amount is reduced, but not
below zero, if the annual average contract price per kilowatt-hour of
electricity generated from advanced nuclear power facilities in the
preceding year exceeds eight cents per kilowatt-hour. The eight-cent
price comparison level is indexed for inflation after 1992 (12.6 cents
for 2017).
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An advanced nuclear facility is any nuclear facility for
the production of electricity, the reactor design for which was
approved after 1993 by the Nuclear Regulatory Commission. For
this purpose, a qualifying advanced nuclear facility does not
include any facility for which a substantially similar design
for a facility of comparable capacity was approved before 1994.
A qualifying advanced nuclear facility is an advanced
nuclear facility for which the taxpayer has received an
allocation of megawatt capacity from the Secretary of the
Treasury (``the Secretary'') and is placed in service before
January 1, 2021. The taxpayer may only claim credit for
production of electricity equal to the ratio of the allocated
capacity that the taxpayer receives from the Secretary to the
rated nameplate capacity of the taxpayer's facility. For
example, if the taxpayer receives an allocation of 750
megawatts of capacity from the Secretary and the taxpayer's
facility has a rated nameplate capacity of 1,000 megawatts,
then the taxpayer may claim three-quarters of the otherwise
allowable credit, or 1.35 cents per kilowatt-hour, for each
kilowatt-hour of electricity produced at the facility (subject
to the annual limitation described below). The credit is
restricted to 6,000 megawatts of national capacity. Once that
limitation has been reached, the Secretary may make no
additional allocations. Treasury guidance required allocation
applications to be filed before February 1, 2014.\645\
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\645\I.R.S. Notice 2013-68.
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A taxpayer operating a qualified facility may claim no more
than $125 million in tax credits per 1,000 megawatts of
allocated capacity in any one year of the eight-year credit
period. If the taxpayer operates a 1,350 megawatt rated
nameplate capacity system and has received an allocation from
the Secretary for 1,350 megawatts of capacity eligible for the
credit, the taxpayer's annual limitation on credits that may be
claimed is equal to 1.35 times $125 million, or $168.75
million. If the taxpayer operates a facility with a nameplate
rated capacity of 1,350 megawatts, but has received an
allocation from the Secretary for 750 megawatts of credit
eligible capacity, then the two limitations apply such that the
taxpayer may claim a credit effectively equal to one cent per
kilowatt-hour of electricity produced (calculated as described
above) subject to an annual credit limitation of $93.75 million
in credits (three-quarters of $125 million).
The credit is part of the general business credit.
REASONS FOR CHANGE
The Committee is concerned that some advanced nuclear power
credits that would otherwise be available to taxpayers may go
unused. Specifically, the Committee wants to ensure the full
utilization of all 6,000 megawatts of credit-eligible advanced
nuclear power national capacity by requiring unutilized
capacity to be reallocated. In addition, the Committee wants to
ensure that tax-exempt entities receiving credit allocations
may elect to transfer those credits to other participants in an
advanced nuclear power project. The Committee therefore
believes that some modifications to the advanced nuclear power
credit are necessary.
EXPLANATION OF PROVISION
The provision modifies the national megawatt capacity
limitation for the advanced nuclear power production credit. To
the extent any amount of the 6,000 megawatts of authorized
capacity remains unutilized, the provision requires the
Secretary to allocate such capacity first to facilities placed
in service before the year 2021, to the extent such facilities
did not receive an allocation equal to their full nameplate
capacity, and then to facilities placed in service after such
date in the order in which such facilities are placed in
service. The provision provides that the present-law placed-in-
service sunset date of January 1, 2021, does not apply with
respect to allocations of such unutilized national megawatt
capacity.
The provision also allows qualified public entities to
elect to forgo credits to which they otherwise would be
entitled in favor of an eligible project partner. Qualified
public entities are defined as (1) a Federal, State, or local
government of any political subdivision, agency, or
instrumentality thereof; (2) a mutual or cooperative electric
company; or (3) a not-for-profit electric utility which has or
had received a loan or loan guarantee under the Rural
Electrification Act of 1936.\646\ An eligible project partner
under the provision generally includes any person who designed
or constructed the nuclear power plant, participates in the
provision of nuclear steam or nuclear fuel to the power plant,
or has an ownership interest in the facility. In the case of a
facility owned by a partnership, where the credit is determined
at the partnership level, any electing qualified public entity
is treated as the taxpayer with respect to such entity's
distributive share of such credits, and any other partner is an
eligible project partner.
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\646\7 U.S.C. sec. 901 et seq.
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EFFECTIVE DATE
The provision requiring the allocation of unutilized
national megawatt capacity limitation is effective on the date
of enactment. The provision allowing an election by qualified
public entities to forgo credits in favor of an eligible
project partner is effective for taxable years beginning after
the date of enactment.
G. Bond Reforms
1. Termination of private activity bonds (sec. 3601 of the bill and
sec. 103 of the Code)
PRESENT LAW
In general
Under present law, gross income generally does not include
interest paid on State or local bonds.\647\ State and local
bonds are classified generally as either governmental bonds or
private activity bonds. Governmental bonds are bonds which are
primarily used to finance governmental functions or that are
repaid with governmental funds. Private activity bonds are
bonds with respect to which the State or local government
serves as a conduit providing financing to nongovernmental
persons (e.g., private businesses or individuals). The
exclusion from income for State and local bonds only applies to
private activity bonds if the bonds are issued for certain
permitted purposes (``qualified private activity bonds'').
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\647\Sec. 103.
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Private activity bonds
Present law provides three main tests for determining
whether a State or local bond is in substance a private
activity bond, the two-part private business test, the five-
percent unrelated or disproportionate use test, and the private
loan test.
Private business test
Private business use and private payments result in State
and local bonds being private activity bonds if both parts of
the two-part private business test are satisfied--
1. More than 10 percent of the bond proceeds is to be
used (directly or indirectly) by a private business
(the ``private business use test''); and
2. More than 10 percent of the debt service on the
bonds is secured by an interest in property to be used
in a private business use or to be derived from
payments in respect of such property (the ``private
payment test'').
Private business use generally includes any use by a
business entity (including the Federal government), which
occurs pursuant to terms not generally available to the general
public. For example, if bond-financed property is leased to a
private business (other than pursuant to certain short-term
leases for which safe harbors are provided under Treasury
regulations), bond proceeds used to finance the property are
treated as used in a private business use, and rental payments
are treated as securing the payment of the bonds. Private
business use also can arise when a governmental entity
contracts for the operation of a governmental facility by a
private business under a management contract that does not
satisfy Treasury regulatory safe harbors regarding the types of
payments made to the private operator and the length of the
contract.
Five-percent unrelated or disproportionate business use
test
A second standard to determine whether a bond is to be
treated as a private activity bond is the five percent
unrelated or disproportionate business use test. Under this
test the private business use and private payment test
(described above) are separately applied substituting five
percent for 10 percent and generally only taking into account
private business use and private payments that are not related
or not proportionate to the government use of the bond
proceeds. For example, while a bond issue that finances a new
State or local government office building may include a
cafeteria, the issue may become a private activity bond if the
size of the cafeteria is excessive (as determined under this
rule).
Private loan test
The third standard for determining whether a State or local
bond is a private activity bond is whether an amount exceeding
the lesser of (1) five percent of the bond proceeds or (2) $5
million is used (directly or indirectly) to finance loans to
private persons. Private loans include both business and other
(e.g., personal) uses and payments by private persons; however,
in the case of business uses and payments, all private loans
also constitute private business uses and payments subject to
the private business test. Present law provides that the
substance of a transaction governs in determining whether the
transaction gives rise to a private loan. In general, any
transaction which transfers tax ownership of property to a
private person is treated as a private loan.
Special limit on certain output facilities
A special rule for output facilities treats bonds as
private activity bonds if more than $15 million of the proceeds
of the bond issue are used to finance an output facility (an
output facility includes electric and gas generation,
transmission and related facilities but not a facility for the
furnishing of water).\648\
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\648\Sec. 141(b)(4).
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Special volume cap requirement for larger transactions
A special volume cap requirement for larger transactions
treats bonds as private activity bonds if the nonqualified
amount of private business use or private payments exceeds $15
million (even if that amount is within the general 10-percent
private business limitation for governmental bonds) unless the
issuer obtains a private activity bond volume allocation.\649\
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\649\Sec. 141(b)(5).
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Qualified private activity bonds
As stated, interest on private activity bonds is taxable
unless the bonds meet the requirements for qualified private
activity bonds. Qualified private activity bonds permit States
or local governments to act as conduits providing tax-exempt
financing for certain private activities. The definition of
qualified private activity bonds includes an exempt facility
bond, or qualified mortgage, veterans' mortgage, small issue,
redevelopment, 501(c)(3), or student loan bond.\650\ The
definition of exempt facility bond includes bonds issued to
finance certain transportation facilities (airports, ports,
mass commuting, and high-speed intercity rail facilities);
qualified residential rental projects; privately owned and/or
operated utility facilities (sewage, water, solid waste
disposal, and local district heating and cooling facilities,
certain private electric and gas facilities, and hydroelectric
dam enhancements); public/private educational facilities;
qualified green building and sustainable design projects; and
qualified highway or surface freight transfer facilities.\651\
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\650\Sec. 141(e).
\651\Sec. 142(a).
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In most cases, the aggregate volume of these tax-exempt
private activity bonds is restricted by annual aggregate volume
limits imposed on bonds issued by issuers within each State.
For 2017, the State volume limit is the greater of $100
multiplied by the State population, or $305.32 million.\652\
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\652\Sec. 3.20 of Rev. Proc. 2016-55, 2016-2 C.B. 707.
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REASONS FOR CHANGE
The Committee believes that the Federal government should
not subsidize the borrowing costs of private businesses,
allowing them to pay lower interest rates, while competitors
with similar creditworthiness that are unable to avail
themselves of qualified private activity bonds must pay a
higher interest rate on the debt they issue. The Committee
believes that if taxpayers in a State or locality decide to
subsidize private businesses those taxpayers should bear the
cost of those subsidies, instead of all Federal taxpayers
bearing a portion of the cost.
EXPLANATION OF PROVISION
The provision repeals the exception from the exclusion from
gross income for interest paid on qualified private activity
bonds issued after December 31, 2017. Thus, such interest on
private activity bond issued after such date is includible in
the gross income of the taxpayer.\653\
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\653\The provisions do not apply to any previously issued bond, nor
would the provisions prevent State and local governments from issuing
private activity bonds in the future; the provisions merely remove the
Federal tax subsidy for newly issued bonds. The bill also terminates
section 25 of the Code as it relates to credits associated with
mortgage credit certificates issued after December 31, 2017. See
section 1102 of the bill (Repeal of nonrefundable credits).
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EFFECTIVE DATE
The provision applies to bonds issued after December 31,
2017.
2. Repeal of advance refunding bonds (sec. 3602 of the bill and sec.
149(d) of the Code)
PRESENT LAW
Section 103 generally provides that gross income does not
include interest received on State or local bonds. State and
local bonds are classified generally as either governmental
bonds or private activity bonds. Governmental bonds are bonds
the proceeds of which are primarily used to finance
governmental facilities or the debt is repaid with governmental
funds. Private activity bonds are bonds in which the State or
local government serves as a conduit providing financing to
nongovernmental persons (e.g., private businesses or
individuals).\654\ Bonds issued to finance the activities of
charitable organizations described in section 501(c)(3)
(``qualified 501(c)(3) bonds'') are one type of private
activity bond. The exclusion from income for interest on State
and local bonds only applies if certain Code requirements are
met.
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\654\Sec. 141.
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The exclusion for income for interest on State and local
bonds applies to refunding bonds but there are limits on
advance refunding bonds. A refunding bond is defined as any
bond used to pay principal, interest, or redemption price on a
prior bond issue (the refunded bond). Different rules apply to
current as opposed to advance refunding bonds. A current
refunding occurs when the refunded bond is redeemed within 90
days of issuance of the refunding bonds. Conversely, a bond is
classified as an advance refunding if it is issued more than 90
days before the redemption of the refunded bond.\655\ Proceeds
of advance refunding bonds are generally invested in an escrow
account and held until a future date when the refunded bond may
be redeemed.
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\655\Sec. 149(d)(5).
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Although there is no statutory limitation on the number of
times that tax-exempt bonds may be currently refunded, the Code
limits advance refundings. Generally, governmental bonds and
qualified 501(c)(3) bonds may be advance refunded one
time.\656\ Private activity bonds, other than qualified
501(c)(3) bonds, may not be advance refunded at all.\657\
Furthermore, in the case of an advance refunding bond that
results in interest savings (e.g., a high interest rate to low
interest rate refunding), the refunded bond must be redeemed on
the first call date 90 days after the issuance of the refunding
bond that results in debt service savings.\658\
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\656\Sec. 149(d)(3). Bonds issued before 1986 and pursuant to
certain transition rules contained in the Tax Reform Act of 1986 may be
advance refunded more than one time in certain cases.
\657\Sec. 149(d)(2).
\658\Sec. 149(d)(3)(A)(iii) and (B); Treas. Reg. sec. 1.149(d)-
1(f)(3). A ``call'' provision provides the issuer of a bond with the
right to redeem the bond prior to the stated maturity.
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REASONS FOR CHANGE
The ability to issue advance refunding bonds allows State
and local governments to issue and have outstanding two sets of
Federally subsidized debt associated with the same activity.
The Committee believes that a single activity should have a
maximum of only one set of Federally subsidized debt, and so
believes removing the ability to issue tax-advantaged advance
refunding bonds is appropriate.
EXPLANATION OF PROVISION
The provision repeals the exclusion from gross income for
interest on a bond issued to advance refund another bond.
EFFECTIVE DATE
The provision applies to advance refunding bonds issued
after December 31, 2017.
3. Repeal of tax credit bonds (sec. 3603 of the bill and secs. 54A,
54B, 54C, 54D, 54E, 54F and 6431 of the Code)
PRESENT LAW
In general
Tax-credit bonds provide tax credits to investors to
replace a prescribed portion of the interest cost. The
borrowing subsidy generally is measured by reference to the
credit rate set by the Treasury Department. Current tax-credit
bonds include qualified tax credit bonds, which have certain
common general requirements, and include new clean renewable
energy bonds, qualified energy conservation bonds, qualified
zone academy bonds, and qualified school construction
bonds.\659\
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\659\The authority to issue two other types of tax-credit bonds,
recovery zone economic development bonds and Build America Bonds,
expired on January 1, 2011.
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Qualified tax-credit bonds
General rules applicable to qualified tax-credit bonds\660\
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\660\Certain other rules apply to qualified tax credit bonds, such
as maturity limitations, reporting requirements, spending rules, and
rules relating to arbitrage. Separate rules apply in the case of tax-
credit bonds which are not qualified tax-credit bonds (i.e., ``recovery
zone economic development bonds,'' and ``Build America Bonds'').
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Unlike tax-exempt bonds, qualified tax-credit bonds
generally are not interest-bearing obligations. Rather, the
taxpayer holding a qualified tax-credit bond on a credit
allowance date is entitled to a tax credit. The amount of the
credit is determined by multiplying the bond's credit rate by
the face amount on the holder's bond. The credit rate for an
issue of qualified tax credit bonds is determined by the
Secretary and is estimated to be a rate that permits issuance
of the qualified tax-credit bonds without discount and interest
cost to the qualified issuer.\661\ The credit accrues quarterly
and is includible in gross income (as if it were an interest
payment on the bond), and can be claimed against regular income
tax liability and alternative minimum tax liability. Unused
credits may be carried forward to succeeding taxable years. In
addition, credits may be separated from the ownership of the
underlying bond similar to how interest coupons can be stripped
for interest-bearing bonds.
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\661\However, for new clean renewable energy bonds and qualified
energy conservation bonds, the applicable credit rate is 70 percent of
the otherwise applicable rate.
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New clean renewable energy bonds
New clean renewable energy bonds (``New CREBs'') may be
issued by qualified issuers to finance qualified renewable
energy facilities.\662\ Qualified renewable energy facilities
are facilities that: (1) qualify for the tax credit under
section 45 (other than Indian coal and refined coal production
facilities), without regard to the placed-in-service date
requirements of that section; and (2) are owned by a public
power provider, governmental body, or cooperative electric
company.
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\662\Sec. 54C.
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The term ``qualified issuers'' includes: (1) public power
providers; (2) a governmental body; (3) cooperative electric
companies; (4) a not-for-profit electric utility that has
received a loan or guarantee under the Rural Electrification
Act; and (5) clean renewable energy bond lenders. There was
originally a national limitation for New CREBs of $800 million.
The national limitation was then increased by an additional
$1.6 billion in 2009. As with other tax credit bonds, a
taxpayer holding New CREBs on a credit allowance date is
entitled to a tax credit. However, the credit rate on New CREBs
is set by the Secretary at a rate that is 70 percent of the
rate that would permit issuance of such bonds without discount
and interest cost to the issuer.\663\
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\663\Given the differences in credit quality and other
characteristics of individual issuers, the Secretary cannot set credit
rates in a manner that will allow each issuer to issue tax credit bonds
at par.
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Qualified energy conservation bonds
Qualified energy conservation bonds may be used to finance
qualified conservation purposes.
The term ``qualified conservation purpose'' means:
1. Capital expenditures incurred for purposes of: (a)
reducing energy consumption in publicly owned buildings
by at least 20 percent; (b) implementing green
community programs;\664\ (c) rural development
involving the production of electricity from renewable
energy resources; or (d) any facility eligible for the
production tax credit under section 45 (other than
Indian coal and refined coal production facilities);
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\664\Capital expenditures to implement green community programs
include grants, loans, and other repayment mechanisms to implement such
programs. For example, States may issue these tax credit bonds to
finance retrofits of existing private buildings through loans and/or
grants to individual homeowners or businesses, or through other
repayment mechanisms. Other repayment mechanisms can include periodic
fees assessed on a government bill or utility bill that approximates
the energy savings of energy efficiency or conservation retrofits.
Retrofits can include heating, cooling, lighting, water-saving, storm
water-reducing, or other efficiency measures.
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2. Expenditures with respect to facilities or grants
that support research in: (a) development of cellulosic
ethanol or other nonfossil fuels; (b) technologies for
the capture and sequestration of carbon dioxide
produced through the use of fossil fuels; (c)
increasing the efficiency of existing technologies for
producing nonfossil fuels; (d) automobile battery
technologies and other technologies to reduce fossil
fuel consumption in transportation; and (e)
technologies to reduce energy use in buildings;
3. Mass commuting facilities and related facilities
that reduce the consumption of energy, including
expenditures to reduce pollution from vehicles used for
mass commuting;
4. Demonstration projects designed to promote the
commercialization of: (a) green building technology;
(b) conversion of agricultural waste for use in the
production of fuel or otherwise; (c) advanced battery
manufacturing technologies; (d) technologies to reduce
peak-use of electricity; and (e) technologies for the
capture and sequestration of carbon dioxide emitted
from combusting fossil fuels in order to produce
electricity; and
5. Public education campaigns to promote energy
efficiency (other than movies, concerts, and other
events held primarily for entertainment purposes).
There was originally a national limitation on qualified
energy conservation bonds of $800 million. The national
limitation was then increased by an additional $2.4 billion in
2009. As with other qualified tax credit bonds, the taxpayer
holding qualified energy conservation bonds on a credit
allowance date is entitled to a tax credit. The credit rate on
the bonds is set by the Secretary at a rate that is 70 percent
of the rate that would permit issuance of such bonds without
discount and interest cost to the issuer.\665\
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\665\Given the differences in credit quality and other
characteristics of individual issuers, the Secretary cannot set credit
rates in a manner that will allow each issuer to issue tax credit bonds
at par.
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Qualified zone academy bonds
Qualifies zone academy bonds (``QZABs'') are defined as any
bond issued by a State or local government, provided that (1)
at least 95 percent of the proceeds are used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers and other school personnel in
a ``qualified zone academy,'' and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A total of $400 million of QZABs has been authorized to be
issued annually in calendar years 1998 through 2008. The
authorization was increased to $1.4 billion for calendar year
2009, and also for calendar year 2010. For each of the calendar
years 2011 through 2016, the authorization was set at $400
million.
Qualified school construction bonds
Qualified school construction bonds must meet three
requirements: (1) 100 percent of the available project proceeds
of the bond issue is used for the construction, rehabilitation,
or repair of a public school facility or for the acquisition of
land on which such a bond-financed facility is to be
constructed; (2) the bonds are issued by a State or local
government within which such school is located; and (3) the
issuer designates such bonds as a qualified school construction
bond.
There is a national limitation on qualified school
construction bonds of $11 billion for calendar years 2009 and
2010, and zero after 2010. If an amount allocated is unused for
a calendar year, it may be carried forward to the following and
subsequent calendar years. Under a separate special rule, the
Secretary of the Interior may allocate $200 million of school
construction bond authority for Indian schools.
Direct-pay bonds and expired tax-credit bond provisions
The Code provides that an issuer may elect to issue certain
tax credit bonds as ``direct-pay bonds.'' Instead of a credit
to the holder, with a ``direct-pay bond'' the Federal
government pays the issuer a percentage of the interest on the
bonds. The following tax credit bonds may be issued as direct-
pay bonds: new clean renewable energy bonds, qualified energy
conservation bonds, and qualified school construction bonds.
Qualified zone academy bonds may not be issued as direct-pay
using any national zone academy bond allocation for calendar
years after 2011 or any carryforward of such allocations. The
ability to issue Build America Bonds and Recovery Zone bonds,
which have direct-pay features, has expired.
REASONS FOR CHANGE
The Committee believes that some tax credit bond programs
allow for financing of activities that may be of questionable
value to Federal taxpayers. In any case, the Committee believes
that sufficient time has passed to allow full use of the
allocations provided for under tax-credit bond programs and
that terminating the issuance of new tax credit bonds is
appropriate.
EXPLANATION OF PROVISION
The provision prospectively repeals authority to issue tax-
credit bonds and direct-pay bonds.
EFFECTIVE DATE
The provision applies to bonds issued after December 31,
2017.
4. No tax-exempt bonds for professional stadiums (sec. 3604 of the bill
and sec. 103 of the Code)
PRESENT LAW
In general
Section 103 generally provides gross income does not
include interest on State or local bonds. State and local bonds
are classified generally as either governmental bonds or
private activity bonds. Governmental bonds are bonds the
proceeds of which are primarily used to finance governmental
facilities or the debt is repaid with governmental funds.
Private activity bonds are bonds in which the State or local
government serves as a conduit providing financing to
nongovernmental persons (e.g., private businesses or
individuals). The exclusion from income for State and local
bonds does not apply to private activity bonds, unless the
bonds are issued for certain purposes (``qualified private
activity bonds'') permitted by the Code and other Code
requirements are met.
Private activity bond tests
In general
A private activity bond includes any bond that satisfies
(1) the ``private business test'' (consisting of two
components: a private business use test and a private security
or payment test); or (2) ``the private loan financing
test.''\666\
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\666\Sec. 141.
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Two-part private business test
Under the private business test, a bond is a private
activity bond if it is part of an issue in which:
(1) More than 10 percent of the proceeds of the issue
(including use of the bond-financed property) are to be
used in the trade or business of any person other than
a governmental unit (``private business use test'');
and
(2) More than 10 percent of the payment of principal
or interest on the issue is, directly or indirectly,
secured by (a) property used or to be used for a
private business use or (b) to be derived from payments
in respect of property, or borrowed money, used or to
be used for a private business use (``private payment
test'').\667\
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\667\The 10-percent private business test is reduced to five
percent in the case of private business uses (and payments with respect
to such uses) that are unrelated to any governmental use being financed
by the issue.
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A bond is not a private activity bond unless both parts of
the private business test (i.e., the private business use test
and the private payment test) are met. For purposes of the
private payment test, both direct and indirect payments made by
any private person treated as using the financed property are
taken into account. Payments by a person for the use of
proceeds generally do not include payments for ordinary and
necessary expenses (within the meaning of section 162)
attributable to the operation and maintenance of financed
property.\668\
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\668\Treas. Reg. sec. 1.141-4(c)(3).
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Private loan financing test
A bond issue satisfies the private loan financing test if
proceeds exceeding the lesser of $5 million or five percent of
such proceeds are used directly or indirectly to finance loans
to one or more nongovernmental persons.
Types of qualified private activity bonds
The interest of qualified private activity bonds is tax
exempt. A qualified private activity bond is a qualified
mortgage, veterans' mortgage, small issue, student loan,
redevelopment, 501(c)(3), or exempt facility bond.\669\ To
qualify as an exempt facility bond, 95 percent of the net
proceeds must be used to finance: (1) airports; (2) docks and
wharves; (3) mass commuting facilities; (4) high-speed
intercity rail facilities; (5) facilities for the furnishing of
water; (6) sewage facilities; (7) solid waste disposal
facilities; (8) hazardous waste disposal facilities; (9)
qualified residential rental projects; (10) facilities for the
local furnishing of electric energy or gas; (11) local district
heating or cooling facilities; (12) environmental enhancements
of hydroelectric generating facilities; (13) qualified public
educational facilities; or (14) qualified green building and
sustainable design projects.
---------------------------------------------------------------------------
\669\Sec. 141(e).
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Financing of sports facilities with governmental bonds
In 1986, Congress eliminated a provision expressly allowing
tax-exempt financing for sports facilities.\670\ Nevertheless,
professional sports facilities continue to be financed with
tax-exempt bonds despite the fact that privately owned sports
teams are the primary (if not exclusive) users of such
facilities. Present law permits the use of tax-exempt bond
proceeds for private activities if either part of the two-part
private business test is not met. Only if both parts of the
private business test (private use and private payment) are met
will the interest on such bonds be taxable. In the case of
bond-financed professional sports facilities, issuers have
intentionally structured the tax-exempt bond issuance and
related transactions to fail the private payment test. In most
of these transactions, the professional sports team is not
required to pay for more than a small portion of its use of the
sports facility. As a result, the private payment test is not
met and the bonds financing the facility are not treated as
private activity bonds, despite the existence of substantial
private business use.
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\670\Sec. 1301 of the Tax Reform Act of 1986 (Pub. L. 99-514, 1986)
(prior to amendment, sec. 103(b)(4)(B) of the Internal Revenue Code of
1954 permitted tax-exempt financing for sports facilities).
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REASONS FOR CHANGE
Congress attempted to eliminate tax-exempt financing for
sports facilities in the Tax Reform Act of 1986. Despite that
effort, however, such financings have continued, and the
Committee believes it is appropriate to close the loophole that
allows tax-exempt financing of stadiums for the benefit of
professional sports teams.
EXPLANATION OF PROVISION
The provision provides that the interest on bonds, the
proceeds of which are to be used to finance or refinance
capital expenditures allocable to a professional sports
stadium, is not tax-exempt. The term ``professional sports
stadium'' means any facility (or appurtenant real property)
which during at least five days during any calendar year is
used as a stadium or arena for professional sports,
exhibitions, games, or training.
EFFECTIVE DATE
The provision applies to bonds issued after November 2,
2017.
H. Insurance
1. Net operating losses of life insurance companies (sec. 3701 of the
bill and sec. 810 of the Code)
PRESENT LAW
A net operating loss (``NOL'') generally means the amount
by which a taxpayer's business deductions exceed its gross
income. In general, an NOL may be carried back two years and
carried over 20 years to offset taxable income in such years.
NOLs offset taxable income in the order of the taxable years to
which the NOL may be carried.\671\
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\671\Sec. 172(b)(2).
---------------------------------------------------------------------------
For purposes of computing the alternative minimum tax
(``AMT''), a taxpayer's NOL deduction cannot reduce the
taxpayer's alternative minimum taxable income (``AMTI'') by
more than 90 percent of the AMTI.\672\
---------------------------------------------------------------------------
\672\Sec. 56(d).
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In the case of a life insurance company, a deduction is
allowed in the taxable year for operations loss carryovers and
carrybacks, in lieu of the deduction for net operation losses
allowed to other corporations.\673\ A life insurance company is
permitted to treat a loss from operations (as defined under
section 810(c)) for any taxable year as an operations loss
carryback to each of the three taxable years preceding the loss
year and an operations loss carryover to each of the 15 taxable
years following the loss year.\674\
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\673\Secs. 810, 805(a)(5).
\674\Sec. 810(b)(1).
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REASONS FOR CHANGE
The Committee believes that the treatment of loss
carryovers of life insurance companies should not differ from
the treatment of NOL carryovers of other corporations.
Consequently, the Committee bill eliminates the separate life
insurer carryover rules and applies the generally applicable
NOL rules to life insurance companies.
EXPLANATION OF PROVISION
The provision repeals the operations loss deduction for
life insurance companies and allows the NOL deduction under
section 172. This provides the same treatment for losses of
life insurance companies as for losses of property and casualty
insurance companies and of other corporations. The provision
thus limits the companies' NOL deduction to 90 percent of
taxable income (determined without regard to the deduction),
provides that carryovers to other years are adjusted to take
account of this limitation and may be carried forward
indefinitely with interest, and repeals the present-law three-
year carryback. The NOL deduction of a life insurance company
is determined by treating the NOL for any taxable year
generally as the excess of the life insurance deductions for
such taxable year over the life insurance gross income for such
taxable year.
EFFECTIVE DATE
The provision applies to losses arising in taxable years
beginning after December 31, 2017.
2. Repeal of small life insurance company deduction (sec. 3702 of the
bill and sec. 806 of the Code)
PRESENT LAW
The small life insurance company deduction for any taxable
year is 60 percent of so much of the tentative life insurance
company taxable income (``LICTI'') for such taxable year as
does not exceed $3 million, reduced by 15 percent of the excess
of tentative LICTI over $3 million. The maximum deduction that
can be claimed by a small company is $1.8 million, and a
company with a tentative LICTI of $15 million or more is not
entitled to any small company deduction. A small life insurance
company for this purpose is one with less than $500 million of
assets.
REASONS FOR CHANGE
The Committee believes that the small life insurance
company deduction may have served as a transition rule
effectively providing a corporate tax rate reduction to small
life insurers in connection with 1984 changes to the rules
governing life insurance company taxation. However, that
purpose has been obviated by the passage of time. The Committee
believes that in light of the reduction in the corporate income
tax rate to 20 percent, it is appropriate to eliminate the
small life insurance company deduction.
EXPLANATION OF PROVISION
The provision repeals the small life insurance company
deduction.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
3. Surtax on life insurance company taxable income (sec. 3703 of the
bill and sec. 801 of the Code)
PRESENT LAW
Tax on life insurance company taxable income
In the case of a life insurance company, income tax is
imposed on life insurance company taxable income at the rate
applicable to taxable income of a corporation.
Reserves
In determining life insurance company taxable income, a
life insurance company includes in gross income any net
decrease in reserves, and deducts a net increase in
reserves.\675\ Methods for determining reserves for tax
purposes generally are based on reserves prescribed by the
National Association of Insurance Commissioners for purposes of
financial reporting under State regulatory rules.
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\675\Sec. 807.
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In computing the net increase or net decrease in reserves,
six items are taken into account. These are (1) life insurance
reserves; (2) unearned premiums and unpaid losses included in
total reserves; (3) amounts that are discounted at interest to
satisfy obligations under insurance and annuity contracts that
do not involve life, accident, or health contingencies when the
computation is made; (4) dividend accumulations and other
amounts held at interest in connection with insurance and
annuity contracts; (5) premiums received in advance and
liabilities for premium deposit funds; and (6) reasonable
special contingency reserves under contracts of group term life
insurance or group accident and health insurance that are held
for retired lives, premium stabilization, or a combination of
both.
Life insurance reserves for any contract are the greater of
the net surrender value of the contract or the reserves
determined under Federally prescribed rules, but may not exceed
the statutory reserve with respect to the contract (for
regulatory reporting). In computing the Federally prescribed
reserve for any type of contract, the taxpayer must use the tax
reserve method applicable to the contract, an interest rate for
discounting of reserves to take account of the time value of
money, and the prevailing commissioners' standard tables for
mortality or morbidity. The assumed interest rate to be used in
computing the Federally prescribed reserve is the greater of
the applicable Federal interest rate or the prevailing State
assumed interest rate.
Proration rules
A life insurance company is subject to proration rules in
calculating life insurance company taxable income.
The proration rules reduce the company's deductions,
including reserve deductions and dividends received deductions,
if the life insurance company has tax-exempt income, deductible
dividends received, or other similar untaxed income items,
because deductible reserve increases can be viewed as being
funded proportionately out of taxable and tax-exempt income.
Under the proration rules, the net increase and net
decrease in reserves are computed by reducing the ending
balance of the reserve items by the policyholders' share of
tax-exempt interest.\676\
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\676\Secs. 807(a)(2)(B) and (b)(1)(B).
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Similarly, under the proration rules, a life insurance
company is allowed a dividends-received deduction for
intercorporate dividends from nonaffiliates only in proportion
to the company's share of such dividends,\677\ but not for the
policyholders' share. Fully deductible dividends from
affiliates are excluded from the application of this proration
formula, if such dividends are not themselves distributions
from tax-exempt interest or from dividend income that would not
be fully deductible if received directly by the taxpayer. In
addition, the proration rule includes in prorated amounts the
increase for the taxable year in policy cash values of life
insurance policies and annuity and endowment contracts.
---------------------------------------------------------------------------
\677\Secs. 805(a)(4), 812.
---------------------------------------------------------------------------
Company's share and policyholder's share under proration
rules
The life insurance company proration rules provide that the
company's share, for this purpose, means the percentage
obtained by dividing the company's share of the net investment
income for the taxable year by the net investment income for
the taxable year.\678\ Net investment income means 95 percent
of gross investment income, in the case of assets held in
segregated asset accounts under variable contracts, and 90
percent of gross investment income in other cases.\679\
---------------------------------------------------------------------------
\678\Sec. 812(a).
\679\Sec. 812(c).
---------------------------------------------------------------------------
Gross investment income includes specified items.\680\ The
specified items include interest (including tax-exempt
interest), dividends, rents, royalties and other related
specified items, short-term capital gains, and trade or
business income. Gross investment income does not include gain
(other than short-term capital gain to the extent it exceeds
net long-term capital loss) that is, or is considered as, from
the sale or exchange of a capital asset. Gross investment
income also does not include the appreciation in the value of
assets that is taken into account in computing the company's
tax reserve deduction under section 817.
---------------------------------------------------------------------------
\680\Sec. 812(d).
---------------------------------------------------------------------------
The company's share of net investment income, for purposes
of this calculation, is the net investment income for the
taxable year, reduced by the sum of (a) the policy interest for
the taxable year and (b) a portion of policyholder
dividends.\681\ Policy interest is defined to include required
interest at the greater of the prevailing State assumed rate or
the applicable Federal rate (plus some other interest items).
Present law provides that in any case where neither the
prevailing State assumed interest rate nor the applicable
Federal rate is used, ``another appropriate rate'' is used for
this calculation. No statutory definition of ``another
appropriate rate'' is provided; the law is unclear as to what
rate or rates are appropriate for this purpose.\682\
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\681\Sec. 812(b)(1). This portion is defined as gross investment
income's share of policyholder dividends.
\682\Legislative history of section 812 mentions that the general
concept that items of investment yield should be allocated between
policyholders and the company was retained from prior law. H. Rep. 98-
861. Conference Report to accompany H.R. 4170, the Deficit Reduction
Act of 1984, 98th Cong., 2d Sess., 1065 (June 23, 1984). This concept
is referred to in Joint Committee on Taxation, General Explanation of
the Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-84,
p. 622, stating, ``[u]nder the Act, the formula used for purposes of
determining the policyholders' share in based generally on the
proration formula used under prior law in computing gain or loss from
operations (i.e., by reference to `required interest').'' This may
imply that a reference to pre-1984-law regulations may be appropriate.
See Rev. Rul 2003-120, 2003-2 C.B. 1154, and Technical Advice Memoranda
20038008 and 20339049.
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In 2007, the IRS issued Rev. Rul. 2007-54,\683\
interpreting required interest under section 812(b) to be
calculated by multiplying the mean of a contract's beginning-
of-year and end-of-year reserves by the greater of the
applicable Federal interest rate or the prevailing State
assumed interest rate, for purposes of determining separate
account reserves for variable contracts. However, Rev. Rul.
2007-54 was suspended by Rev. Rul. 2007-61, in which the IRS
and the Treasury Department stated that the issues would more
appropriately be addressed by regulation.\684\ No regulations
have been issued to date.
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\683\2007-38 I.R.B. 604.
\684\2007-42 I.R.B. 799.
---------------------------------------------------------------------------
Capitalization of policy acquisition expenses
In the case of an insurance company, specified policy
acquisition expenses for any taxable year are required to be
capitalized, and generally are amortized over the 120-month
period beginning with the first month in the second half of the
taxable year.\685\
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\685\Sec. 848.
---------------------------------------------------------------------------
Specified policy acquisition expenses are determined as
that portion of the insurance company's general deductions for
the taxable year that does not exceed a specific percentage of
the net premiums for the taxable year on each of three
categories of insurance contracts. For annuity contracts, the
percentage is 1.75; for group life insurance contracts, the
percentage is 2.05; and for all other specified insurance
contracts, the percentage is 7.7.
With certain exceptions, a specified insurance contract is
any life insurance, annuity, or noncancellable accident and
health insurance contract or combination thereof. A group life
insurance contract is any life insurance contract that covers a
group of individuals defined by reference to employment
relationship, membership in an organization, or similar factor,
the premiums for which are determined on a group basis, and the
proceeds of which are payable to (or for the benefit of)
persons other than the employer of the insured, an organization
to which the insured belongs, or other similar person.
REASONS FOR CHANGE
The Committee bill provides for a reduction to 20 percent
of the rate of tax applicable to corporations, including to
life insurance companies. In connection with the reduction in
the corporate tax rate, the Committee believes it is timely and
appropriate to update present-law tax provisions governing life
insurers, including those relating to computation of life
insurance tax reserves, life insurance proration for purposes
of determining the dividends received deduction, and
capitalization of policy acquisition expenses. The Committee is
concerned that these provisions are out of date and do not
reflect recent developments. The Committee is continuing to
develop reforms to these provisions. In the meantime, the bill
includes a surtax on life insurance company taxable income that
is intended to have the same overall revenue consequences as
reforms that were proposed in these three areas in the
introduced version of the bill. The surtax is intended only as
placeholder and the Committee intends to develop reforms in
these three areas as the bill moves through the legislative
process.
EXPLANATION OF PROVISION
The provision imposes an additional eight-percent income
tax on life insurance company taxable income.
EFFECTIVE DATE
The placeholder provision is intended to apply to taxable
years beginning after December 31, 2017.
4. Adjustment for change in computing reserves (sec. 3704 of the bill
and sec. 807 of the Code)
PRESENT LAW
Change in method of accounting
In general, a taxpayer may change its method of accounting
under section 446 with the consent of the Secretary (or may be
required to change its method of accounting by the Secretary).
In such instances, a taxpayer generally is required to make an
adjustment (a ``section 481(a) adjustment'') to prevent amounts
from being duplicated in, or omitted from, the calculation of
the taxpayer's income. Pursuant to IRS procedures, negative
section 481(a) adjustments generally are deducted from income
in the year of the change whereas positive section 481(a)
adjustments generally are required to be included in income
ratably over four taxable years.\686\
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\686\See, e.g., Rev. Proc. 2015-13, 2015-5 I.R.B. 419, and Rev.
Proc. 2017-30, 2017-18 I.R.B. 1131.
---------------------------------------------------------------------------
However, section 807(f) explicitly provides that changes in
the basis for determining life insurance company reserves are
to be taken into account ratably over 10 years.
10-year spread for change in computing life insurance company reserves
For Federal income tax purposes, a life insurance company
includes in gross income any net decrease in reserves, and
deducts a net increase in reserves.\687\ Methods for
determining reserves for tax purposes generally are based on
reserves prescribed by the National Association of Insurance
Commissioners for purposes of financial reporting under State
regulatory rules.
---------------------------------------------------------------------------
\687\Sec. 807.
---------------------------------------------------------------------------
Income or loss resulting from a change in the method of
computing reserves is taken into account ratably over a 10-year
period.\688\ The rule for a change in basis in computing
reserves applies only if there is a change in basis in
computing the Federally prescribed reserve (as distinguished
from the net surrender value). Although life insurance tax
reserves require the use of a Federally prescribed method,
interest rate, and mortality or morbidity table, changes in
other assumptions for computing statutory reserves (e.g., when
premiums are collected and claims are paid) may cause increases
or decreases in a company's life insurance reserves that must
be spread over a 10-year period. Changes in the net surrender
value of a contract are not subject to the 10-year spread
because, apart from its use as a minimum in determining the
amount of life insurance tax reserves, the net surrender value
is not a reserve but a current liability.
---------------------------------------------------------------------------
\688\Sec. 807(f).
---------------------------------------------------------------------------
If for any taxable year the taxpayer is not a life
insurance company, the balance of any adjustments to reserves
is taken into account for the preceding taxable year.
REASONS FOR CHANGE
The Committee believes that the treatment of changes to the
method of computing reserves of life insurance companies should
not differ from the treatment of changes to the method of
accounting in the case of other corporations. Consequently, the
Committee bill eliminates the separate rule providing a 10-year
period for taking into account a change in the method of
computing reserves of a life insurer.
EXPLANATION OF PROVISION
Income or loss resulting from a change in method of
computing life insurance company reserves is taken into account
consistent with IRS procedures, generally ratably over a four-
year period, instead of over a 10-year period.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
5. Repeal of special rule for distributions to shareholders from pre-
1984 policyholders surplus account (sec. 3705 of the bill and sec. 815
of the Code)
PRESENT AND PRIOR LAW
Under the law in effect from 1959 through 1983, a life
insurance company was subject to a three-phase taxable income
computation under Federal tax law. Under the three-phase
system, a company was taxed on the lesser of its gain from
operations or its taxable investment income (Phase I) and, if
its gain from operations exceeded its taxable investment
income, 50 percent of such excess (Phase II). Federal income
tax on the other 50 percent of the gain from operations was
deferred, and was accounted for as part of a policyholder's
surplus account and, subject to certain limitations, taxed only
when distributed to stockholders or upon corporate dissolution
(Phase III). To determine whether amounts had been distributed,
a company maintained a shareholders surplus account, which
generally included the company's previously taxed income that
would be available for distribution to shareholders.
Distributions to shareholders were treated as being first out
of the shareholders surplus account, then out of the
policyholders surplus account, and finally out of other
accounts.
The Deficit Reduction Act of 1984\689\ included provisions
that, for 1984 and later years, eliminated further deferral of
tax on amounts (described above) that previously would have
been deferred under the three-phase system. Although for
taxable years after 1983, life insurance companies may not
enlarge their policyholders surplus account, the companies are
not taxed on previously deferred amounts unless the amounts are
treated as distributed to shareholders or subtracted from the
policyholders surplus account.\690\
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\689\Pub. L. No. 98-369.
\690\Sec. 815.
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Any direct or indirect distribution to shareholders from an
existing policyholders surplus account of a stock life
insurance company is subject to tax at the corporate rate in
the taxable year of the distribution. Present law (like prior
law) provides that any distribution to shareholders is treated
as made (1) first out of the shareholders surplus account, to
the extent thereof, (2) then out of the policyholders surplus
account, to the extent thereof, and (3) finally, out of other
accounts.
For taxable years beginning after December 31, 2004, and
before January 1, 2007, the application of the rules imposing
income tax on distributions to shareholders from the
policyholders surplus account of a life insurance company were
suspended. Distributions in those years were treated as first
made out of the policyholders surplus account, to the extent
thereof, and then out of the shareholders surplus account, and
lastly out of other accounts.
REASONS FOR CHANGE
The Committee believes it is appropriate to require life
insurers with a policyholders surplus account to be subject to
current income taxation on any remaining amounts of income
deferred from periods before 1984.
EXPLANATION OF PROVISION
The provision repeals section 815, the rules imposing
income tax on distributions to shareholders from the
policyholders surplus account of a stock life insurance
company.
In the case of any stock life insurance company with an
existing policyholders surplus account (as defined in section
815 before its repeal), tax is imposed on the balance of the
account as of December 31, 2017. A life insurance company is
required to pay tax on the balance of the account ratably over
the first eight taxable years beginning after December 31,
2017.
Specifically, the tax imposed on a life insurance company
is the tax on the sum of life insurance company taxable income
for the taxable year (but not less than zero) plus 1/8 of the
balance of the existing policyholders surplus account as of
December 31, 2017. Thus, life insurance company losses are not
allowed to offset the amount of the policyholders surplus
account balance subject to tax.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
6. Modification of proration rules for property and casualty insurance
companies (sec. 3706 of the bill and sec. 832 of the Code)
Present Law The taxable income of a property and casualty
insurance company is determined as the sum of its gross income
from underwriting income and investment income (as well as
gains and other income items), reduced by allowable deductions.
A proration rule applies to property and casualty insurance
companies. In calculating the deductible amount of its reserve
for losses incurred, a property and casualty insurance company
must reduce the amount of losses incurred by 15 percent of (1)
the insurer's tax-exempt interest, (2) the deductible portion
of dividends received (with special rules for dividends from
affiliates), and (3) the increase for the taxable year in the
cash value of life insurance, endowment, or annuity contracts
the company owns.\691\ This proration rule reflects the fact
that reserves are generally funded in part from tax-exempt
interest, from deductible dividends, and from other untaxed
amounts.
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\691\Sec. 832(b)(5).
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REASONS FOR CHANGE
The Committee believes that the rate of proration
applicable to property and casualty insurers with respect to
untaxed income should be adjusted to take account of the tax
rate reduction to 20 percent that applies to income of
corporations, including property and casualty insurers. The
Committee bill therefore modifies the percentage applicable
under the proration rule.
EXPLANATION OF PROVISION
The provision replaces the 15-percent reduction under
present law with a 26.25-percent reduction under the proration
rule for property and casualty insurance companies. This change
in the percentage takes into account the reduction in the
corporate tax rate from 35 to 20 percent under section 3001 of
the bill (reduction in corporate tax rate).
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
7. Modification of discounting rules for property and casualty
insurance companies (sec. 3707 of the bill and sec. 832 of the Code)
PRESENT LAW
A property and casualty insurance company generally is
subject to tax on its taxable income.\692\ The taxable income
of a property and casualty insurance company is determined as
the sum of its underwriting income and investment income (as
well as gains and other income items), reduced by allowable
deductions.\693\ Among the items that are deductible in
calculating underwriting income are additions to reserves for
losses incurred and expenses incurred.
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\692\Sec. 831(a).
\693\Sec. 832.
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To take account of the time value of money, discounting of
unpaid losses is required. All property and casualty loss
reserves (unpaid losses and unpaid loss adjustment expenses)
for each line of business (as shown on the annual statement)
are required to be discounted for Federal income tax purposes.
The discounted reserves are calculated using a prescribed
interest rate which is based on the applicable Federal mid-term
rate (``mid-term AFR''). The discount rate is the average of
the mid-term AFRs effective at the beginning of each month over
the 60-month period preceding the calendar year for which the
determination is made.
To determine the period over which the reserves are
discounted, a prescribed loss payment pattern applies. The
prescribed length of time is either the accident year and the
following three calendar years, or the accident year and the
following 10 calendar years, depending on the line of business.
In the case of certain ``long-tail'' lines of business, the 10-
year period is extended, but not by more than five additional
years. Thus, present law limits the maximum duration of any
loss payment pattern to the accident year and the following 15
years. The Treasury Department is directed to determine a loss
payment pattern for each line of business by reference to the
historical loss payment pattern for that line of business using
aggregate experience reported on the annual statements of
insurance companies, and is required to make this determination
every five years, starting with 1987.
Under the discounting rules, an election is provided
permitting a taxpayer to use its own (rather than an industry-
wide) historical loss payment pattern with respect to all lines
of business, provided that applicable requirements are met.
Treasury publishes discount factors for each line of
business to be applied by taxpayers for discounting
reserves.\694\ The discount factors are published annually,
based on (1) the interest rate applicable to the calendar year,
and (2) the loss payment pattern for each line of business as
determined every five years.
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\694\The most recent property and casualty reserve discount factors
published by Treasury are in Rev. Proc. 2016-58, 2016-51 I.R.B. 839,
and see Rev. Proc. 2012-44, 2012-49 I.R.B. 645.
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REASONS FOR CHANGE
The Committee believes that the loss payment patterns
prescribed by present law for property and casualty insurers do
not accurately reflect the duration of these liabilities and
should be extended. To ensure that the length of the period is
reasonable from a record-keeping perspective, the period is not
indefinite, but rather, is limited to 18 years after the
accident year, or 25 years after the accident year for long-
tail lines of business. In the interests of neutrality of the
tax law across taxpayers, the Committee bill repeals the
election of a property and casualty insurer to use its own loss
payment pattern rather than an industry loss payment pattern
for purposes of the loss reserve discounting rules. The
Committee believes that the interest rate applicable today for
purposes of the loss reserve discounting rules does not
accurately take account of the time value of money. In order to
more accurately measure income, the rate should be based on a
rate more closely related to property and casualty companies'
yield on assets. Therefore, the Committee bill provides for an
interest rate based on the corporate bond yield curve.
EXPLANATION OF PROVISION
The provision modifies the reserve discounting rules
applicable to property and casualty insurance companies. In
general, the provision modifies the prescribed interest rate,
extends the periods applicable under the loss payment pattern,
and repeals the election to use a taxpayer's historical loss
payment pattern.
Interest rate
The provision provides that the interest rate is an annual
rate for any calendar year to be determined by Treasury based
on the corporate bond yield curve (rather than the mid-term AFR
as under present law). For this purpose, the corporate bond
yield curve means, with respect to any month, a yield curve
that reflects the average, for the preceding 24-month period,
of monthly yields on investment grade corporate bonds with
varying maturities and that are in the top three quality levels
available.\695\ Because the corporate bond yield curve provides
for 24-month averaging, the present-law rule providing for 60-
month averaging to determine the interest rate is repealed
under the provision. It is expected that Treasury will
determine a 24-month average for the 24 months preceding the
first month of the calendar year for which the determination is
made.
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\695\This rule adopts the definition found in section
430(h)(2)(D)(i) of the term ``corporate bond yield curve.'' Section
430, which relates to minimum funding standards for single-employer
defined benefit pension plans, includes other rules for determining an
``effective interest rate,'' such as segment rate rules. The term
``effective interest rate'' along with these other rules, including the
segment rate rules, do not apply for purposes of property and casualty
insurance reserve discounting.
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Loss payment patterns
The provision extends the periods applicable for
determining loss payment patterns. Under the provision, the
maximum duration of the loss payment pattern is determined by
the amount of losses remaining unpaid using aggregate industry
experience for each line of business, rather than by a set
number of years as under present law.
Like present law, the provision provides that Treasury
determines a loss payment pattern for each line of business by
reference to the historical loss payment pattern for that line
of business using aggregate experience reported on the annual
statements of insurance companies, and is required to make this
determination every five years.
Under the provision, the present-law three-year and 10-year
periods following the accident year are extended up to a
maximum of 15 more years for the lines of business to which
each period applies. For lines of business to which the three-
year period applies, the amount of losses that would have been
treated as paid in the third year after the accident year is
treated as paid in that year and each subsequent year in an
amount equal to the average of the amounts treated as paid in
the first and second years (or, if less, the remaining amount).
To the extent these unpaid losses have not been treated as paid
before the 18th year after the accident year, they are treated
as paid in that 18th year.
Similarly, for lines of business to which the 10-year
period applies, the amount of losses that would have been
treated as paid in the 10th year following the accident year is
treated as paid in that year and each subsequent year in an
amount equal to the average of the amounts treated as paid in
the seventh, eighth, and ninth years (or if less, the remaining
amount). To the extent these unpaid losses have not been
treated as paid before the 25th year after the accident year,
they are treated as paid in that 25th year.
The provision repeals the present-law rule providing that
in the case of certain ``long-tail'' lines of business, the 10-
year period is extended, but not by more than five additional
years. The provision does not change the lines of business to
which the three-year, and 10-year, periods, respectively,
apply.
Election to use own historical loss payment pattern
The provision repeals the present-law election permitting a
taxpayer to use its own (rather than an aggregate industry-
experience-based) historical loss payment pattern with respect
to all lines of business.
EFFECTIVE DATE
The provision generally applies to taxable years beginning
after December 31, 2017. Under a transitional rule for the
first taxable year beginning in 2018, the amount of unpaid
losses and expenses unpaid (under section 832(b)(5)(B) and (6))
and the unpaid losses (under sections 807(c)(2) and 805(a)(1))
at the end of the preceding taxable year are determined as if
the provision had applied to these items in such preceding
taxable year, using the interest rate and loss payment patterns
for accident years ending with calendar year 2018. Any
adjustment is spread over eight taxable years, i.e., is
included in the taxpayer's gross income ratably in the first
taxable year beginning in 2018 and the seven succeeding taxable
years. For taxable years subsequent to the first taxable year
beginning in 2018, the provision applies to such unpaid losses
and expenses unpaid (i.e., unpaid losses and expenses unpaid at
the end of the taxable year preceding the first taxable year
beginning in 2018) by using the interest rate and loss payment
patterns applicable to accident years ending with calendar year
2018.
8. Repeal of special estimated tax payments (sec. 3708 of the bill and
sec. 847 of the Code)
PRESENT LAW
Allowance of additional deduction and establishment of special loss
discount account
Present law allows an insurance company required to
discount its reserves an additional deduction that is not to
exceed the excess of (1) the amount of the undiscounted unpaid
losses over (2) the amount of the related discounted unpaid
losses, to the extent the amount was not deducted in a
preceding taxable year.\696\ The provision imposes the
requirement that a special loss discount account be established
and maintained, and that special estimated tax payments be
made. Unused amounts of special estimated tax payments are
treated as a section 6655 estimated tax payment for the 16th
year after the year for which the special estimated tax payment
was made.
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\696\Sec. 847.
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The total payments by a taxpayer, including section 6655
estimated tax payments and other tax payments, together with
special estimated tax payments made under this provision, are
generally the same as the total tax payments that the taxpayer
would make if the taxpayer did not elect to have this provision
apply, except to the extent amounts can be refunded under the
provision in the 16th year.
Calculation of special estimated tax payments based on tax benefit
attributable to deduction
More specifically, present law imposes a requirement that
the taxpayer make special estimated tax payments in an amount
equal to the tax benefit attributable to the additional
deduction allowed under the provision. If amounts are included
in gross income as a result of a reduction in the taxpayer's
special loss discount account or the liquidation or termination
of the taxpayer's insurance business, and an additional tax is
due for any year as a result of the inclusion, then an amount
of the special estimated tax payments equal to such additional
tax is applied against such additional tax. If there is an
adjustment reducing the amount of additional tax against which
the special estimated tax payment was applied, then in lieu of
any credit or refund for the reduction, a special estimated tax
payment is treated as made in an amount equal to the amount
that would otherwise be allowable as a credit or refund.
The amount of the tax benefit attributable to the deduction
is to be determined (under Treasury regulations (which have not
been promulgated)) by taking into account tax benefits that
would arise from the carryback of any net operating loss for
the year as well as current year benefits. In addition, tax
benefits for the current and carryback years are to take into
account the benefit of filing a consolidated return with
another insurance company without regard to the consolidation
limitations imposed by section 1503(c).
The taxpayer's estimated tax payments under section 6655
are to be determined without regard to the additional deduction
allowed under this provision and the special estimated tax
payments. Legislative history\697\ indicates that it is
intended that the taxpayer may apply the amount of an
overpayment of any section 6655 estimated tax payments for the
taxable year against the amount of the special estimated tax
payment required under this provision. The special estimated
tax payments under this provision are not treated as estimated
tax payments for purposes of section 6655 (e.g., for purposes
of calculating penalties or interest on underpayments of
estimated tax) when such special estimated tax payments are
made.
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\697\See H.R. Rep. No. 100-1104, Conference Report to accompany
H.R. 4333, the Technical and Miscellaneous Revenue Act of 1988, October
21, 1988, p. 174.
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Refundable amount
To the extent that a special estimated tax payment is not
used to offset additional tax due for any of the first 15
taxable years beginning after the year for which the payment
was made, such special estimated tax payment is treated as an
estimated tax payment made under section 6655 for the 16th year
after the year for which the special estimated tax payment was
made. If the amount of such deemed section 6655 payment,
together with the taxpayer's other payments credited against
tax liability for such 16th year, exceeds the tax liability for
such year, then the excess (up to the amount of the deemed
section 6655 payment) may be refunded to the taxpayer to the
same extent provided under present law with respect to
overpayments of tax.
Regulatory authority
In addition to the regulatory authority to adjust the
amount of special estimated tax payments in the event of a
change in the corporate tax rate, authority is provided to
Treasury to prescribe regulations necessary or appropriate to
carry out the purposes of the provision.
Such regulations include those providing for the separate
application of the provision with respect to each accident
year. Separate application of the provision with respect to
each accident year (i.e., applying a vintaging methodology) may
be appropriate under regulations to determine the amount of tax
liability for any taxable year against which special estimated
tax payments are applied, and to determine the amount (if any)
of special estimated tax payments remaining after the 15th year
which may be available to be refunded to the taxpayer.
Regulatory authority is also provided to make such
adjustments in the application of the provision as may be
necessary to take into account the corporate alternative
minimum tax. Under this regulatory authority, rules similar to
those applicable in the case of a change in the corporate tax
rate are intended to apply to determine the amount of special
estimated tax payments that may be applied against tax
calculated at the corporate alternative minimum tax rate. The
special estimated tax payments are not treated as payments of
regular tax for purposes of determining the taxpayer's
alternative minimum tax liability.
Regulations have not been promulgated under section 847.
REASONS FOR CHANGE
The Committee believes that the special estimated tax
payment rules add complexity to the tax law and do not improve
the accuracy of income measurement of property and casualty
insurers. The Committee bill therefore repeals these rules.
EXPLANATION OF PROVISION
The provision repeals section 847. Thus, the election to
apply section 847, the additional deduction, special loss
discount account, special estimated tax payment, and refundable
amount rules of present law are eliminated.
The entire balance of an existing account is included in
income of the taxpayer for the first taxable year beginning
after 2017, and the entire amount of existing special estimated
tax payments are applied against the amount of additional tax
attributable to this inclusion. Any special estimated tax
payments in excess of this amount are treated as estimated tax
payments under section 6655.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
I. Compensation
1. Modification of limitation on excessive employee remuneration (sec.
3801 of the bill and sec. 162(m) of the Code)
PRESENT LAW
In general
An employer generally may deduct reasonable compensation
for personal services as an ordinary and necessary business
expense. Section 162(m) provides an explicit limitation on the
deductibility of compensation expenses in the case of publicly
traded corporate employers. The otherwise allowable deduction
for compensation with respect to a covered employee of a
publicly held corporation\698\ is limited to no more than $1
million per year.\699\ The deduction limitation applies when
the deduction attributable to the compensation would otherwise
be taken.
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\698\A corporation is treated as publicly held if it has a class of
common equity securities that is required to be registered under
section 12 of the Securities Exchange Act of 1934. Section 162(m)(2).
\699\Sec. 162(m). This deduction limitation applies for purposes of
the regular income tax and the alternative minimum tax.
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Covered employees
Section 162(m) defines a covered employee as (1) the chief
executive officer of the corporation (or an individual acting
in such capacity) as of the close of the taxable year and (2)
any employee whose total compensation is required to be
reported to shareholders under the Securities Exchange Act of
1934 (``Exchange Act'') by reason of being among the
corporation's four most highly compensated officers for the
taxable year (other than the chief executive officer).\700\
Treasury regulations under section 162(m) provide that whether
an employee is the chief executive officer or among the four
most highly compensated officers should be determined pursuant
to the executive compensation disclosure rules promulgated
under the Exchange Act.
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\700\Sec. 162(m)(3).
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In 2006, the Securities and Exchange Commission amended
certain rules relating to executive compensation, including
which officers' compensation must be disclosed under the
Exchange Act. Under the new rules, such officers are (1) the
principal executive officer (or an individual acting in such
capacity), (2) the principal financial officer (or an
individual acting in such capacity), and (3) the three most
highly compensated officers, other than the principal executive
officer or principal financial officer.
In response to the Securities and Exchange Commission's new
disclosure rules, the Internal Revenue Service issued updated
guidance on identifying which employees are covered by section
162(m).\701\ The new guidance provides that ``covered
employee'' means any employee who is (1) as of the close of the
taxable year, the principal executive officer (or an individual
acting in such capacity) defined in reference to the Exchange
Act, or (2) among the three most highly compensated
officers\702\ for the taxable year (other than the principal
executive officer or principal financial officer), again
defined by reference to the Exchange Act. Thus, under current
guidance, only four employees are covered under section 162(m)
for any taxable year. Under Treasury regulations, the
requirement that the individual meet the criteria as of the
last day of the taxable year applies to both the principal
executive officer and the three highest compensated
officers.\703\
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\701\Notice 2007-49, 2007-25 I.R.B. 1429.
\702\By reason of being among the officers whose total compensation
is required to be reported to shareholders under the Securities
Exchange Act of 1934.
\703\Treas. Reg. sec. 1.162-27(c)(2).
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Definition of publicly held corporation
For purposes of the deduction disallowance of section
162(m), a publicly held corporation means any corporation
issuing any class of common equity securities required to be
registered under section 12 of the Securities Exchange Act of
1934.\704\ All U.S. publicly traded companies are subject to
this registration requirement, including their foreign
affiliates. A foreign company publicly traded through American
depository receipts (``ADRs'') is also subject to this
registration requirement if more than 50 percent of the
issuer's outstanding voting securities are held, directly or
indirectly, by residents of United States and either (i) the
majority of the executive officers or directors are United
States citizens or residents, (ii) more than 50 percent of the
assets of the issuer are located in the United States, or (iii)
the business of the issuer is administered principally in the
United States. Other foreign companies are not subject to the
registration requirement.
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\704\Sec. 162(m)(2).
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Remuneration subject to the deduction limitation
In general
Unless specifically excluded, the deduction limitation
applies to all remuneration for services, including cash and
the cash value of all remuneration (including benefits) paid in
a medium other than cash. If an individual is a covered
employee for a taxable year, the deduction limitation applies
to all compensation not explicitly excluded from the deduction
limitation, regardless of whether the compensation is for
services as a covered employee and regardless of when the
compensation was earned. The $1 million cap is reduced by
excess parachute payments (as defined in section 280G) that are
not deductible by the corporation.\705\
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\705\Sec. 162(m)(4)(F).
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Certain types of compensation are not subject to the
deduction limit and are not taken into account in determining
whether other compensation exceeds $1 million. The following
types of compensation are not taken into account: (1)
remuneration payable on a commission basis;\706\ (2)
remuneration payable solely on account of the attainment of one
or more performance goals if certain outside director and
shareholder approval requirements are met (``performance-based
compensation'');\707\ (3) payments to a tax-favored retirement
plan (including salary reduction contributions); (4) amounts
that are excludable from the executive's gross income (such as
employer-provided health benefits and miscellaneous fringe
benefits);\708\ and (5) any remuneration payable under a
written binding contract which was in effect on February 17,
1993. In addition, remuneration does not include compensation
for which a deduction is allowable after a covered employee
ceases to be a covered employee. Thus, the deduction limitation
often does not apply to deferred compensation that is otherwise
subject to the deduction limitation (e.g., is not performance-
based compensation) because the payment of compensation is
deferred until after termination of employment.
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\706\Sec. 162(m)(4)(B).
\707\Sec. 162(m)(4)(C).
\708\Secs. 105, 106, and 132.
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Performance-based compensation
Compensation qualifies for the exception for performance-
based compensation only if (1) it is paid solely on account of
the attainment of one or more performance goals, (2) the
performance goals are established by a compensation committee
consisting solely of two or more outside directors,\709\ (3)
the material terms under which the compensation is to be paid,
including the performance goals, are disclosed to and approved
by the shareholders in a separate majority-approved vote prior
to payment, and (4) prior to payment, the compensation
committee certifies that the performance goals and any other
material terms were in fact satisfied.
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\709\A director is considered an outside director if he or she is
not a current employee of the corporation (or related entities), is not
a former employee of the corporation (or related entities) who is
receiving compensation for prior services (other than benefits under a
qualified retirement plan), was not an officer of the corporation (or
related entities) at any time, and is not currently receiving
compensation for personal services in any capacity (e.g., for services
as a consultant) other than as a director.
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Compensation (other than stock options or other stock
appreciation rights (``SARs'')) is not treated as paid solely
on account of the attainment of one or more performance goals
unless the compensation is paid to the particular executive
pursuant to a pre-established objective performance formula or
standard that precludes discretion. A stock option or SAR with
an exercise price not less than the fair market value, on the
date the option or SAR is granted, of the stock subject to the
option or SAR, generally is treated as meeting the exception
for performance-based compensation, provided that the
requirements for outside director and shareholder approval are
met (without the need for certification that the performance
standards have been met). This is the case because the amount
of compensation attributable to the options or SARs received by
the executive is based solely on an increase in the
corporation's stock price. Stock-based compensation is not
treated as performance-based if it depends on factors other
than corporate performance.
REASONS FOR CHANGE
The Committee believes that the significant exceptions to
the limit on deductible executive compensation by publicly
traded corporations have resulted in a shift away from cash
compensation paid to senior executives in favor of stock
options and other forms of performance pay. The Committee
further believes this shift has led to perverse consequences
resulting from the focus of such executives and businesses on
quarterly results, rather than the long-term success of the
company and its rank-and-file workers. Additionally, the
Committee believes that aligning the deductibility limit
between domestically traded publicly traded corporations and
all foreign companies that trade ADRs in the United States, as
well as certain private C corporations and S corporations,
promotes fair tax treatment across similarly situated
businesses. The Committee believes the law should be clarified
to override administrative guidance, Notice 2007-49, 2007-25
I.R.B. 1429, which, contrary to the statute, limits the number
of covered employees to four.
EXPLANATION OF PROVISION
Definition of covered employee
The provision revises the definition of covered employee to
include both the principal executive officer and the principal
financial officer. Further, an individual is a covered employee
if the individual holds one of these positions at any time
during the taxable year. The provision also defines as a
covered employee the three (rather than four) most highly
compensated officers for the taxable year (other than the
principal executive officer or principal financial officer) who
are required to be reported on the company's proxy statement
(i.e., the statement required pursuant to executive
compensation disclosure rules promulgated under the Exchange
Act) for the taxable year (or who would be required to be
reported on such a statement for a company not required to make
such a report to shareholders). This includes such officers of
a corporation not required to file a proxy statement but which
otherwise falls within the revised definition of a publicly
held corporation, as well as such officers of a publicly traded
corporation that would otherwise have been required to file a
proxy statement for the year (for example, but for the fact
that the corporation delisted its securities or underwent a
transaction that resulted in the nonapplication of the proxy
statement requirement).
In addition, if an individual is a covered employee with
respect to a corporation for a taxable year beginning after
December 31, 2016, the individual remains a covered employee
for all future years. Thus, an individual remains a covered
employee with respect to compensation otherwise deductible for
subsequent years, including for years during which the
individual is no longer employed by the corporation and years
after the individual has died. Compensation does not fail to be
compensation with respect to a covered employee and thus
subject to the deduction limit for a taxable year merely
because the compensation is includible in the income of, or
paid to, another individual, such as compensation paid to a
beneficiary after the employee's death, or to a former spouse
pursuant to a domestic relations order.
Definition of publicly held corporation
The provision extends the applicability of section 162(m)
to include all domestic publicly traded corporations and all
foreign companies publicly traded through ADRs. The proposed
definition may include certain additional corporations that are
not publicly traded, such as large private C or S corporations.
Performance-based compensation and commissions exceptions
The provision eliminates the exceptions for commissions and
performance-based compensation from the definition of
compensation subject to the deduction limit. Thus, such
compensation is taken into account in determining the amount of
compensation with respect to a covered employee for a taxable
year that exceeds $1 million and is thus not deductible under
section 162.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
2. Excise tax on excess tax-exempt organization executive compensation
(sec. 3802 of the bill and sec. 4960 of the Code)
PRESENT LAW
Taxable employers and other service recipients generally
may deduct reasonable compensation expenses.\710\ However, in
some cases, compensation in excess of specific levels is not
deductible.
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\710\Sec. 162(a)(1).
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A publicly held corporation generally cannot deduct more
than $1 million of compensation (that is not compensation
otherwise excepted from this limit) in a taxable year for each
``covered employee.''\711\ For this purpose, a covered employee
is the corporation's principal executive officer (or an
individual acting in such capacity) defined in reference to the
Securities Exchange Act of 1934 (``Exchange Act'') as of the
close of the taxable year, or any employee whose total
compensation is required to be reported to shareholders under
the Exchange Act by reason of being among the corporation's
three most highly compensated officers for the taxable year
(other than the principal executive officer or principal
financial officer).\712\
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\711\Sec. 162(m)(1). Under section 162(m)(6), limits apply to
deductions for compensation of individuals performing services for
certain health insurance providers.
\712\Notice 2007-49, 2007-2 I.R.B. 1429.
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Unless an exception applies, generally a corporation cannot
deduct that portion of the aggregate present value of a
``parachute payment'' which equals or exceeds three times the
``base amount'' of certain service providers. The nondeductible
excess is an ``excess parachute payment.''\713\ A parachute
payment is generally a payment of compensation that is
contingent on a change in corporate ownership or control made
to certain officers, shareholders, and highly compensated
individuals.\714\ An individual's base amount is the average
annualized compensation includible in the individual's gross
income for the five taxable years ending before the date on
which the change in ownership or control occurs.\715\ Certain
amounts are not considered parachute payments, including
payments under a qualified retirement plan, a simplified
employee pension plan, or a simple retirement account.\716\
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\713\Sec. 280G(a) and (b)(1).
\714\Sec. 280G(b)(2) and (c).
\715\Sec. 280G(b)(3).
\716\Secs. 401(a), 403(a), 408(k), and 408(p).
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These deduction limits generally do not affect a tax-exempt
organization.
REASONS FOR CHANGE
The Committee believes that tax-exempt organizations enjoy
a tax subsidy from the Federal government because contributions
to such organizations are generally deductible and such
organizations are generally not subject to tax (except on
unrelated business income). As a result, such organizations are
subject to the requirement that they use their resources for
specific purposes, and the Committee believes that excessive
compensation (including excessive severance packages) paid to
senior executives of such organizations diverts resources from
those particular purposes. The Committee further believes that
alignment of the tax treatment of excessive executive
compensation (as top executives may inappropriately divert
organizational resources into excessive compensation) between
for-profit and tax-exempt employers furthers the Committee's
larger tax reform effort of making the system fairer for all
businesses.
EXPLANATION OF PROVISION
Under the provision, an employer is liable for an excise
tax equal to 20 percent of the sum of (1) any remuneration
(other than an excess parachute payment) in excess of $1
million paid to a covered employee by an applicable tax-exempt
organization for a taxable year, and (2) any excess parachute
payment (under a new definition for this purpose that relates
solely to separation pay) paid by the applicable tax-exempt
organization to a covered employee. Accordingly, the excise tax
applies as a result of an excess parachute payment, even if the
covered employee's remuneration does not exceed $1 million.
For purposes of the provision, a covered employee is an
employee (including any former employee) of an applicable tax-
exempt organization if the employee is one of the five highest
compensated employees of the organization for the taxable year
or was a covered employee of the organization (or a
predecessor) for any preceding taxable year beginning after
December 31, 2016. An ``applicable tax-exempt organization'' is
an organization exempt from tax under section 501(a), an exempt
farmers' cooperative,\717\ a Federal, State or local
governmental entity with excludable income,\718\ or a political
organization.\719\
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\717\Sec. 521(b).
\718\Sec. 115(1).
\719\Sec. 527(e)(1).
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Remuneration means wages as defined for income tax
withholding purposes,\720\ but does not include any designated
Roth contribution.\721\ Remuneration of a covered employee
includes any remuneration paid with respect to employment of
the covered employee by any person or governmental entity
related to the applicable tax-exempt organization. A person or
governmental entity is treated as related to an applicable tax-
exempt organization if the person or governmental entity (1)
controls, or is controlled by, the organization, (2) is
controlled by one or more persons that control the
organization, (3) is a supported organization\722\ during the
taxable year with respect to the organization, (4) is a
supporting organization\723\ during the taxable year with
respect to the organization, or (5) in the case of a voluntary
employees' beneficiary association (``VEBA''),\724\
establishes, maintains, or makes contributions to the VEBA.
However, remuneration of a covered employee that is not
deductible by reason of the $1 million limit on deductible
compensation is not taken into account for purposes of the
provision.
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\720\Sec. 3401(a).
\721\Under section 402A(c), a designated Roth contribution is an
elective deferral (that is, a contribution to a tax-favored employer-
sponsored retirement plan made at the election of an employee) that the
employee designates as not being excludable from income.
\722\Sec. 509(f)(3). A technical amendment to the provision is
needed to reflect the correct statutory citation.
\723\Sec. 509(a)(3).
\724\Sec. 501(c)(9). A technical amendment to the provision is
needed to reflect the correct statutory citation.
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Under the provision, an excess parachute payment is the
amount by which any parachute payment exceeds the portion of
the base amount allocated to the payment. A parachute payment
is a payment in the nature of compensation to (or for the
benefit of) a covered employee if the payment is contingent on
the employee's separation from employment and the aggregate
present value of all such payments equals or exceeds three
times the base amount. The base amount is the average
annualized compensation includible in the covered employee's
gross income for the five taxable years ending before the date
of the employee's separation from employment. Parachute
payments do not include payments under a qualified retirement
plan, a simplified employee pension plan, a simple retirement
account, a tax-deferred annuity,\725\ or an eligible deferred
compensation plan of a State or local government employer.\726\
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\725\Sec. 403(b).
\726\Sec. 457(b).
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The employer of a covered employee is liable for the excise
tax. If remuneration of a covered employee from more than one
employer is taken into account in determining the excise tax,
each employer is liable for the tax in an amount that bears the
same ratio to the total tax as the remuneration paid by that
employer bears to the remuneration paid by all employers to the
covered employee.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
3. Treatment of qualified equity grants (sec. 3803 of the bill and
secs. 83, 3401, and 6051 of the Code)
PRESENT LAW
Income tax treatment of employer stock transferred to an employee
Specific rules apply to property, including employer stock,
transferred to an employee in connection with the performance
of services.\727\ These rules govern the amount and timing of
income inclusion by the employee and the amount and timing of
the employer's compensation deduction.
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\727\Sec. 83. Section 83 applies generally to transfers of any
property, not just employer stock, in connection with the performance
of services by any service provider, not just an employee. However, the
provision described herein applies only with respect to certain
employer stock transferred to employees.
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Under these rules, an employee generally must recognize
income in the taxable year in which the employee's right to the
stock is transferable or is not subject to a substantial risk
of forfeiture, whichever occurs earlier (referred to herein as
``substantially vested''). Thus, if the employee's right to the
stock is substantially vested when the stock is transferred to
the employee, the employee recognizes income in the taxable
year of such transfer, in an amount equal to the fair market
value of the stock as of the date of transfer (less any amount
paid for the stock). If at the time the stock is transferred to
the employee, the employee's right to the stock is not
substantially vested (referred to herein as ``nonvested''), the
employee does not recognize income attributable to the stock
transfer until the taxable year in which the employee's right
becomes substantially vested. In this case, the amount
includible in the employee's income is the fair market value of
the stock as of the date that the employee's right to the stock
is substantially vested (less any amount paid for the stock).
However, if the employee's right to the stock is nonvested at
the time the stock is transferred to employee, under section
83(b), the employee may elect within 30 days of transfer to
recognize income in the taxable year of transfer, referred to
as a ``section 83(b)'' election.\728\ If a proper and timely
election under section 83(b) is made, the amount of
compensatory income is capped at the amount equal to the fair
market value of the stock as of the date of transfer (less any
amount paid for the stock). A section 83(b) election is
available with respect to grants of ``restricted stock''
(nonvested stock), and does not generally apply to the grant of
options.
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\728\Under Treas. Reg. sec. 1.83-2, the employee makes an election
by filing with the Internal Revenue Service a written statement that
includes the fair market value of the property at the time of transfer
and the amount (if any) paid for the property. The employee must also
provide a copy of the statement to the employer.
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In general, an employee's right to stock or other property
is subject to a substantial risk of forfeiture if the
employee's right to full enjoyment of the property is subject
to a condition, such as the future performance of substantial
services.\729\ An employee's right to stock or other property
is transferable if the employee can transfer an interest in the
property to any person other than the transferor of the
property.\730\ Thus, generally, employer stock transferred to
an employee by an employer is not transferable merely because
the employee can sell it back to the employer.
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\729\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the
definition of substantial risk of forfeiture.
\730\Treas. Reg. sec. 1.83-3(d). In addition, under section
83(c)(2), the right to stock is transferable only if any transferee's
right to the stock would not be subject to a substantial risk of
forfeiture.
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In the case of stock transferred to an employee, the
employer is allowed a deduction (to the extent a deduction for
a business expense is otherwise allowable) equal to the amount
included in the employee's income as a result of transfer of
the stock.\731\ The employer deduction generally is permitted
in the employer's taxable year in which or with which ends the
employee's taxable year when the amount is included and
properly reported in the employee's income.\732\
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\731\Sec. 83(h).
\732\Treas. Reg. sec. 1.83-6.
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These rules do not apply to the grant of a nonqualified
option on employer stock unless the option has a readily
ascertainable fair market value.\733\ Instead, these rules
apply to the transfer of employer stock by the employee on
exercise of the option. That is, if the right to the stock is
substantially vested on transfer (the time of exercise), income
recognition applies for the taxable year of transfer. If the
right to the stock is nonvested on transfer, the timing of
income inclusion is determined under the rules applicable to
the transfer of nonvested stock. In either case, the amount
includible in income by the employee is the fair market value
of the stock as of the required time of income inclusion, less
the exercise price paid by the employee. A section 83(b)
election generally does not apply to the grant of options. If
upon the exercise of an option, nonvested stock is transferred
to the employee, a section 83(b) election may apply. The
employer's deduction is generally determined under the rules
that apply to transfers of restricted stock, but a special
accrual rule may apply under Treasury regulations when the
transferred stock is substantially vested.\734\
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\733\See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A
nonqualified option is an option on employer stock that is not a
statutory option, discussed below.
\734\Treas. Reg. sec. 1.83-6(a)(3).
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Employment taxes and reporting
Employment taxes generally consist of taxes under the
Federal Insurance Contributions Act (``FICA''), tax under the
Federal Unemployment Tax Act (``FUTA''), and income taxes
required to be withheld by employers from wages paid to
employees (``income tax withholding'').\735\ Unless an
exception applies under the applicable rules, compensation
provided to an employee constitutes wages subject to these
taxes.
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\735\Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404
(income tax withholding). Instead of FICA taxes, railroad employers and
employees are subject, under the Railroad Retirement Tax Act
(``RRTA''), sections 3201-3241, to taxes equivalent to FICA taxes with
respect to compensation as defined for RRTA purposes. Sections 3501-
3510 provide additional rules relating to all these taxes.
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FICA imposes tax on employers and employees, generally
based on the amount of wages paid to an employee during the
year. Special rules as to the timing and amount of FICA taxes
apply in the case of nonqualified deferred compensation, as
defined for FICA purposes.\736\
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\736\Sec. 3121(v); Treas. Reg. sec. 31.3121(v)(2).
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The tax imposed on the employer and on the employee is each
composed of two parts: (1) the Social Security or old age,
survivors, and disability insurance (``OASDI'') tax equal to
6.2 percent of covered wages up to the OASDI wage base
($127,200 for 2017); and (2) the Medicare or hospital insurance
(``HI'') tax equal to 1.45 percent of all covered wages.\737\
The employee portion of FICA tax generally must be withheld
and, along with the employer portion, remitted to the Federal
government by the employer. FICA tax withholding applies
regardless of whether compensation is provided in the form of
cash or a noncash form, such as a transfer of property
(including employer stock) or in-kind benefits.\738\
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\737\The employee portion of the HI tax under FICA (not the
employer portion) is increased by an additional tax of 0.9 percent on
wages received in excess of a threshold amount. The threshold amount is
$250,000 in the case of a joint return, $125,000 in the case of a
married individual filing a separate return, and $200,000 in any other
case.
\738\Under section 3501(b), employment taxes with respect to
noncash fringe benefits are to be collected (or paid) by the employer
at the time and in the manner prescribed by the Secretary of the
Treasury (``Treasury''). Announcement 85-113, 1985-31 I.R.B. 31,
provides guidance on the application of employment taxes with respect
to noncash fringe benefits.
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FUTA imposes a tax on employers of six percent of wages up
to the FUTA wage base of $7,000.
Income tax withholding generally applies when wages are
paid by an employer to an employee, based on graduated
withholding rates set out in tables published by the Internal
Revenue Service (``IRS'').\739\ Like FICA tax withholding,
income tax withholding applies regardless of whether
compensation is provided in the form of cash or a noncash form,
such as a transfer of property (including employer stock) or
in-kind benefits.
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\739\Sec. 3402. Specific withholding rates apply in the case of
supplemental wages.
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An employer is required to furnish each employee with a
statement of compensation information for a calendar year,
including taxable compensation, FICA wages, and withheld income
and FICA taxes.\740\ In addition, information relating to
certain nontaxable items must be reported, such as certain
retirement and health plan contributions. The statement, made
on Form W-2, Wage and Tax Statement, must be provided to each
employee by January 31 of the succeeding year.\741\
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\740\Secs. 6041 and 6051.
\741\Employers send Form W-2 information to the Social Security
Administration, which records information relating to Social Security
and Medicare and forwards the Form W-2 information to the IRS.
Employees include a copy of Form W-2 with their income tax returns.
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Statutory options
Two types of statutory options apply with respect to
employer stock: incentive stock options (``ISOs'') and options
provided under an employee stock purchase plan (``ESPP'').\742\
Stock received pursuant to a statutory option is subject to
special rules, rather than the rules for nonqualified options,
discussed above. No amount is includible in an employee's
income on the grant, vesting, or exercise of a statutory
option.\743\ In addition, generally no deduction is allowed to
the employer with respect to the option or the stock
transferred to an employee.
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\742\Sections 421-424 govern statutory options. Section 423(b)(5)
requires that, under the terms of an ESPP, all employees granted
options generally must have the same rights and privileges.
\743\Under section 56(b)(3), this income tax treatment with respect
to stock received on exercise of an ISO does not apply for purposes of
the alternative minimum tax under section 55.
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If a holding requirement is met with respect to the stock
transferred on exercise of a statutory option and the employee
later disposes of the stock, the employee's gain generally is
treated as capital gain rather than ordinary income. Under the
holding requirement, the employee must not dispose of the stock
within two years after the date the option is granted and also
must not dispose of the stock within one year after the date
the option is exercised. If a disposition occurs before the end
of the required holding period (a ``disqualifying
disposition''), the employee recognizes ordinary income in the
taxable year in which the disqualifying disposition occurs and
the employer may be allowed a corresponding deduction in the
taxable year in which such disposition occurs. The amount of
ordinary income recognized when a disqualifying disposition
occurs generally equals the fair market value of the stock on
the date of exercise (that is, when the stock was transferred
to the employee) less the exercise price paid.
Employment taxes do not apply with respect to the grant or
vesting of a statutory option, transfer of stock pursuant to
the option, or a disposition (including a disqualifying
disposition) of the stock.\744\ However, certain special
reporting requirements apply.
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\744\Secs. 3121(a)(22), 3306(b)(19), and the last sentence of
section 421(b).
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Nonqualified deferred compensation
Compensation is generally includible in an employee's
income when paid to the employee. However, in the case of a
nonqualified deferred compensation plan,\745\ unless the
arrangement either is exempt from or meets the requirements of
section 409A, the amount of deferred compensation is first
includible in income for the taxable year when not subject to a
substantial risk of forfeiture (as defined),\746\ even if
payment will not occur until a later year.\747\ In general, to
meet the requirements of section 409A, the time when
nonqualified deferred compensation will be paid, as well as the
amount, must be specified at the time of deferral with limits
on further deferral after the time for payment. Various other
requirements apply, including that payment can only occur on
specific defined events.
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\745\Compensation earned by an employee is generally paid to the
employee shortly after being earned. However, in some cases, payment is
deferred to a later period, referred to as ``deferred compensation.''
Deferred compensation may be provided through a plan that receives tax-
favored treatment, such as a qualified retirement plan under section
401(a). Deferred compensation provided through a plan that is not
eligible for tax-favored treatment is referred to as ``nonqualified''
deferred compensation.
\746\Treas. Reg. sec. 1.409A-1(d).
\747\Section 409A and the regulations thereunder provide rules for
nonqualified deferred compensation. Compensation that fails to meet the
requirements of section 409A is also subject to an additional income
tax of 20% on amounts includible in income, and, along with a potential
interest factor tax, applies to increases in the value of the failed
compensation each year until it is paid.
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Various exemptions from section 409A apply, including
transfers of property subject to section 83.\748\ Nonqualified
options are not automatically exempt from section 409A, but may
be structured so as not to be considered nonqualified deferred
compensation.\749\ A restricted stock unit (``RSU'') is a term
used for an arrangement under which an employee has the right
to receive at a specified time in the future an amount
determined by reference to the value of one or more shares of
employer stock. An employee's right to receive the future
amount may be subject to a condition, such as continued
employment for a certain period or the attainment of certain
performance goals. The payment to the employee of the amount
due under the arrangement is referred to as settlement of the
RSU. The arrangement may provide for the settlement amount to
be paid in cash or as a transfer of employer stock (or either).
An arrangement providing RSUs is generally considered a
nonqualified deferred compensation plan and is subject to the
rules, including the limits, of section 409A. The employer
deduction generally is permitted in the employer's taxable year
in which or with which ends the employee's taxable year when
the amount is included and properly reported in the employee's
income.\750\
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\748\Treas. Reg. sec. 1.409A-1(b)(6).
\749\Treas. Reg. sec. 1.409A-1(b)(5). In addition, statutory option
arrangements are not nonqualified deferred compensation arrangements.
\750\Sec. 404(a)(5).
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REASONS FOR CHANGE
Employer stock may provide a valuable form of employee
compensation. In some cases, the transfer of employer stock
with a high fair market value may result in compensation
income, and a related tax liability, that is disproportionately
large in comparison to an employee's regular salary or wages.
In the case of publicly traded employer stock, an employee may
sell some of the stock to provide funds to cover that tax
liability. However, that approach often is not available in the
case of a closely held company that restricts the
transferability of its stock. This may make employer stock a
less attractive form of compensation. In the case of stock
options, the inability to pay the tax liability that would
result from the stock received on exercise of the option may
mean employees let options lapse, thus losing compensation they
have already earned. The Committee wishes to address these
situations by allowing employees to elect to defer recognition
of income attributable to stock received on exercise of an
option or settlement of an RSU until an opportunity to sell
some of the stock arises, but in no event longer than five
years from the date that the employee's right to the stock
becomes substantially vested.
EXPLANATION OF PROVISION
In general
The provision allows a qualified employee to elect to
defer, for income tax purposes, the inclusion in income of the
amount of income attributable to qualified stock transferred to
the employee by the employer. An election to defer income
inclusion (``inclusion deferral election'') with respect to
qualified stock must be made no later than 30 days after the
first time the employee's right to the stock is substantially
vested or is transferable, whichever occurs earlier.
If an employee elects to defer income inclusion under the
provision, the income must be included in the employee's income
for the taxable year that includes the earliest of (1) the
first date the qualified stock becomes transferable, including,
solely for this purpose, transferable to the employer;\751\ (2)
the date the employee first becomes an excluded employee (as
described below); (3) the first date on which any stock of the
employer becomes readily tradable on an established securities
market;\752\ (4) the date five years after the first date the
employee's right to the stock becomes substantially vested; or
(5) the date on which the employee revokes her inclusion
deferral election.\753\
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\751\Thus, for this purpose, the qualified stock is considered
transferable if the employee has the ability to sell the stock to the
employer (or any other person).
\752\An established securities market is determined for this
purpose by the Secretary, but does not include any market unless the
market is recognized as an established securities market for purposes
of another Code provision.
\753\An inclusion deferral election is revoked at the time and in
the manner as the Secretary provides.
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An inclusion deferral election is made in a manner similar
to the manner in which a section 83(b) election is made.\754\
The provision does not apply to income with respect to
nonvested stock that is includible as a result of a section
83(b) election. The provision clarifies that Section 83 (other
than the provision), including subsection (b), shall not apply
to RSUs. Therefore, RSUs are not eligible for a section 83(b)
election. This is the case because, absent this provision, RSUs
are nonqualified deferred compensation and therefore subject to
the rules that apply to nonqualified deferred compensation.
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\754\Thus, as in the case of a section 83(b) election under present
law, the employee must provide a copy of the inclusion deferral
election to the employer.
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An employee may not make an inclusion deferral election for
a year with respect to qualified stock if, in the preceding
calendar year, the corporation purchased any of its outstanding
stock unless at least 25 percent of the total dollar amount of
the stock so purchased is stock with respect to which an
inclusion deferral election is in effect (``deferral stock'')
and the determination of which individuals from whom deferral
stock is purchased is made on a reasonable basis.\755\ For
purposes of this requirement, stock purchased from an
individual is not treated as deferral stock (and the purchase
is not treated as a purchase of deferral stock) if, immediately
after the purchase, the individual holds any deferral stock
with respect to which an inclusion deferral election has been
in effect for a longer period than the election with respect to
the purchased stock. Thus, in general, in applying the purchase
requirement, an individual's deferral stock with respect to
which an inclusion deferral election has been in effect for the
longest periods must be purchased first. A corporation that has
deferral stock outstanding as of the beginning of any calendar
year and that purchases any of its outstanding stock during the
calendar year must report on its income tax return for the
taxable year in which, or with which, the calendar year ends
the total dollar amount of the outstanding stock purchased
during the calendar year and such other information as the
Secretary may require for purposes of administering this
requirement.
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\755\This requirement is met if the stock purchased by the
corporation includes all the corporation's outstanding deferral stock.
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A qualified employee may make an inclusion deferral
election with respect to qualified stock attributable to a
statutory option.\756\ In that case, the option is not treated
as a statutory option and the rules relating to statutory
options and related stock do not apply. In addition, an
arrangement under which an employee may receive qualified stock
is not treated as a nonqualified deferred compensation plan
solely because of an employee's inclusion deferral election or
ability to make an election.
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\756\For purposes of the requirement that an ESPP provide employees
with the same rights and privileges, the rules of the provision apply
in determining which employees have the right to make an inclusion
deferral election with respect to stock received under the ESPP.
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Deferred income inclusion applies also for purposes of the
employer's deduction of the amount of income attributable to
the qualified stock. That is, if an employee makes an inclusion
deferral election, the employer's deduction is deferred until
the employer's taxable year in which or with which ends the
taxable year of the employee for which the amount is included
in the employee's income as described in (1)-(5) above.
Qualified employee and qualified stock
Under the provision, a qualified employee means an
individual who is not an excluded employee and who agrees, in
the inclusion deferral election, to meet the requirements
necessary (as determined by the Secretary) to ensure the income
tax withholding requirements of the employer corporation with
respect to the qualified stock (as described below) are met.
For this purpose, an excluded employee with respect to a
corporation is any individual (1) who was a one-percent owner
of the corporation at any time during the 10 preceding calendar
years,\757\ (2) who is, or has been at any prior time, the
chief executive officer or chief financial officer of the
corporation or an individual acting in either capacity, (3) who
is a family member of an individual described in (1) or
(2),\758\ or (4) who has been one of the four highest
compensated officers of the corporation for any of the 10
preceding taxable years.\759\
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\757\One-percent owner status is determined under the top-heavy
rules for qualified retirement plans, that is, section
416(i)(1)(B)(ii).
\758\In the case of one-percent owners, this results from
application of the attribution rules of section 318 under section
416(i)(1)(B)(i)(II). Family members are determined under section
318(a)(1) and generally include an individual's spouse, children,
grandchildren and parents.
\759\These officers are determined on the basis of shareholder
disclosure rules for compensation under the Securities Exchange Act of
1934, as if such rules applied to the corporation.
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Qualified stock is any stock of a corporation if--
an employee receives the stock in connection
with the exercise of an option or in settlement of an
RSU, and
the option or RSU was granted by the
corporation to the employee in connection with the
performance of services and in a year in which the
corporation was an eligible corporation (as described
below).
However, qualified stock does not include any stock if, at
the time the employee's right to the stock becomes
substantially vested, the employee may sell the stock to, or
otherwise receive cash in lieu of stock from, the corporation.
Qualified stock can only be such if it relates to stock
received in connection with options or RSUs, and does not
include stock received in connection with other forms of equity
compensation, including stock appreciation rights or restricted
stock.
A corporation is an eligible corporation with respect to a
calendar year if (1) no stock of the employer corporation (or
any predecessor) is readily tradable on an established
securities market during any preceding calendar year,\760\ and
(2) the corporation has a written plan under which, in the
calendar year, not less than 80 percent of all employees who
provide services to the corporation in the United States (or
any U.S. possession) are granted stock options, or restricted
stock units (``RSUs''), with the same rights and privileges to
receive qualified stock (``80-percent requirement'').\761\ For
this purpose, in general, the determination of rights and
privileges with respect to stock is determined in a similar
manner as provided under the present-law ESPP rules.\762\
However, employees will not fail to be treated as having the
same rights and privileges to receive qualified stock solely
because the number of shares available to all employees is not
equal in amount, provided that the number of shares available
to each employee is more than a de minimis amount. In addition,
rights and privileges with respect to the exercise of a stock
option are not treated for this purpose as the same as rights
and privileges with respect to the settlement of an RSU.\763\
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\760\This requirement continues to apply up to the time an
inclusion deferral election is made. That is, under the provision, no
inclusion deferral election may be made with respect to qualified stock
if any stock of the corporation is readily tradable on an established
securities market at any time before the election is made.
\761\In applying the requirement that 80 percent of employees
receive stock options or RSUs, excluded employees and part-time
employees are not taken into account. For this purpose, part-time
employee is defined under section 4980G(d)(4), as an employee who is
customarily employed for fewer than 30 hours per week. (A technical
amendment to the provision is needed to reflect the correct statutory
citation defining part-time employees.)
\762\Sec. 423(b)(5).
\763\Under a transition rule, in the case of a calendar year
beginning before January 1, 2018, the 80-percent requirement is applied
without regard to whether the rights and privileges with respect to the
qualified stock are the same.
---------------------------------------------------------------------------
For purposes of the provision, corporations that are
members of the same controlled group\764\ are treated as one
corporation.
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\764\As defined in sec. 1563(a).
---------------------------------------------------------------------------
Notice, withholding and reporting requirements
Under the provision, a corporation that transfers qualified
stock to a qualified employee must provide a notice to the
qualified employee at the time (or a reasonable period before)
the employee's right to the qualified stock is substantially
vested (and income attributable to the stock would first be
includible absent an inclusion deferral election). The notice
must (1) certify to the employee that the stock is qualified
stock, and (2) notify the employee (a) that the employee may
(if eligible) elect to defer income inclusion with respect to
the stock and (b) that, if the employee makes an inclusion
deferral election, the amount of income required to be included
at the end of the deferral period will be based on the value of
the stock at the time the employee's right to the stock first
becomes substantially vested, notwithstanding whether the value
of the stock has declined during the deferral period (including
whether the value of the stock has declined below the
employee's tax liability with respect to such stock), and the
amount of income to be included at the end of the deferral
period will be subject to withholding as provided under the
provision, as well as of the employee's responsibilities with
respect to required withholding. Failure to provide the notice
may result in the imposition of a penalty of $100 for each
failure, subject to a maximum penalty of $50,000 for all
failures during any calendar year.
An inclusion deferral election applies only for income tax
purposes. The application of FICA and FUTA are not affected.
The provision includes specific income tax withholding and
reporting requirements with respect to income subject to an
inclusion deferral election.
For the taxable year for which income subject to an
inclusion deferral election is required to be included in
income by the employee (as described above), the amount
required to be included in income is treated as wages with
respect to which the employer is required to withhold income
tax at a rate not less than the highest income tax rate
applicable to individual taxpayers.\765\ The employer must
report on Form W-2 the amount of income covered by an inclusion
deferral election (1) for the year of deferral and (2) for the
year the income is required to be included in income by the
employee. In addition, for any calendar year, the employer must
report on Form W-2 the aggregate amount of income covered by
inclusion deferral elections, determined as of the close of the
calendar year.
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\765\That is, the maximum rate of tax in effect for the year under
section 1. The provision specifies that qualified stock is treated as a
noncash fringe benefit for income tax withholding purposes.
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EFFECTIVE DATE
The provision generally applies with respect to stock
attributable to options exercised or RSUs settled after
December 31, 2017. Under a transition rule, until the Secretary
(or the Secretary's delegate) issues regulations or other
guidance implementing the 80-percent and employer notice
requirements under the provision, a corporation will be treated
as complying with those requirements (respectively) if it
complies with a reasonable good faith interpretation of the
requirements. The penalty for a failure to provide the notice
required under the provision applies to failures after December
31, 2017.
TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS
PRESENT LAW
The following discussion of present law provides an
overview of general principles of taxation of cross-border
activity as well as a detailed explanation of provisions in
present law that are relevant to the provisions included in
Title IV of the bill as reported out of Committee.
Present law combines taxation of all U.S. persons on their
worldwide income, whether derived in the United States or
abroad, with limited deferral of taxation of income earned by
foreign subsidiaries of U.S. companies and source-based
taxation of the U.S.-source income of nonresident aliens and
foreign entities. Under this system (sometimes described as the
U.S. hybrid system), the application of the Code differs
depending on whether income arises from outbound investment or
inbound investment. Outbound investment refers to the foreign
activities of U.S. persons, while inbound investment is
investment by foreign persons in U.S. assets or activities,
although certain rules are common to both inbound and outbound
activities.
A. Principles Common to Inbound and Outbound Taxation
Although the U.S. tax rules differ depending on whether the
activity in question is inbound or outbound, there are certain
concepts that apply to both inbound and outbound investment.
Such areas include the transfer pricing rules, entity
classification, the rules for determination of source, and
whether a corporation is foreign or domestic.
1. Residence
U.S. persons are subject to tax on their worldwide income.
The Code defines U.S. person to include all U.S. citizens and
residents as well as domestic entities such as partnerships,
corporations, estates and certain trusts.\766\ The term
``resident'' is defined only with respect to natural persons.
Noncitizens who are lawfully admitted as permanent residents of
the United States in accordance with immigration laws
(colloquially referred to as green card holders) are treated as
residents for tax purposes. In addition, noncitizens who meet a
substantial presence test and are not otherwise exempt from
U.S. taxation are also taxable as U.S. residents.\767\
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\766\Sec. 7701(a)(30).
\767\Sec. 7701(b).
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For legal entities, the Code determines whether an entity
is subject to U.S. taxation on its worldwide income on the
basis of its place of organization. For purposes of U.S. tax
law, a corporation or partnership is treated as domestic if it
is organized or created under the laws of the United States or
of any State, unless, in the case of a partnership, the
Secretary prescribes otherwise by regulation.\768\ Other
partnerships and corporations (that is, those organized under
the laws of foreign countries) are generally treated as
foreign.\769\ In contrast, place of organization is not
determinative of residence under taxing jurisdictions that use
factors such as situs, management and control to determine
residence. As a result, legal entities may have more than one
tax residence, or, in some case, no residence.\770\ Only
domestic corporations are subject to U.S. tax on a worldwide
basis. Foreign corporations are taxed only on income that has a
sufficient connection with the United States.
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\768\Sec. 7701(a)(4).
\769\Secs. 7701(a)(5) and 7701(a)(9). Entities organized in a
possession or territory of the United States are not considered to have
been organized under the laws of the United States.
\770\``The notion of corporate residence is an important touchstone
of taxation, however, in many foreign income tax systems[,]'' with the
result that the bilateral treaties are often relied upon to resolve
conflicting claims of taxing jurisdiction. Joseph Isenbergh, Vol. 1
U.S. Taxation of Foreign Persons and Foreign Income, Para. 7.1 (Fourth
Ed. 2016).
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Tax benefits otherwise available to a domestic corporation
that migrates its tax home from the United States to foreign
jurisdiction may be denied to such corporation for ten years
following such migration.\771\ These sanctions generally apply
to a transaction in which, pursuant to a plan or a series of
related transactions: (1) a domestic corporation becomes a
subsidiary of a foreign-incorporated entity or otherwise
transfers substantially all of its properties to such an entity
in a transaction completed after March 4, 2003; (2) the former
shareholders of the domestic corporation hold (by reason of the
stock they had held in the domestic corporation) at least 60
percent but less than 80 percent (by vote or value) of the
stock of the foreign-incorporated entity after the transaction
(this stock often being referred to as ``stock held by reason
of''); and (3) the foreign-incorporated entity, considered
together with all companies connected to it by a chain of
greater than 50 percent ownership (that is, the ``expanded
affiliated group''), does not have substantial business
activities in the entity's country of incorporation, compared
to the total worldwide business activities of the expanded
affiliated group.\772\
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\771\Sec. 7874.
\772\Sec. 7874(a). In addition, an excise tax may be imposed on
certain stock compensation of executives of companies that undertake
inversion transactions. Sec. 4985.
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The Treasury Department and the IRS have promulgated
detailed guidance, through both regulations and several
notices, addressing these requirements under section 7874 since
the section was enacted in 2004,\773\ and have sought to expand
the reach of the section or reduce the tax benefits of
inversion transactions. For example, Notice 2014-52 announced
Treasury's and the IRS's intention to issue regulations and
took a two-pronged approached. First, it addressed the
treatment of cross-border combination transactions themselves.
Second, it addressed post-transaction steps that taxpayers may
undertake with respect to U.S.-owned foreign subsidiaries
making it more difficult to access foreign earnings without
incurring added U.S. tax. On November 19, 2015, Treasury and
the IRS issued Notice 2015-79, which announced their intent to
issue further regulations to limit cross-border merger
transactions, expanding on the guidance issued in Notice 2014-
52. In 2016, Treasury and the IRS issued proposed and temporary
regulations that incorporate the rules previously announced in
Notice 2014-52 and Notice 2015-79 and a new multiple domestic
entity acquisition rule.\774\
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\773\Notice 2015-79, 2015 I.R.B. LEXIS 583 (Nov. 19, 2015), which
announced their intent to issue further regulations to limit cross-
border merger transactions, expanding on the guidance issued in Notice
2014-52. On April 4, 2016, Treasury and the IRS issued proposed and
temporary regulations (T.D. 9761) that incorporate the rules previously
announced in Notice 2014-52 and Notice 2015-79 and a new multiple
domestic entity acquisition rule. On January 13, 2017, Treasury and the
IRS issued final and temporary regulations under section 7874 (T.D.
9812), which adopt, with few changes, prior temporary and proposed
regulations, which identify certain stock of an acquiring foreign
corporation that is disregarded in calculating the ownership of the
foreign corporation for purposes of section 7874.
\774\T.D. 9761, April 4, 2016. But see, Chamber of Commerce v
Internal Revenue Service, Cause No 1:16-CV-944-LY (W.D. Tex. Sept. 29,
2017), granting summary judgment to plaintiff in challenge to temporary
regulations based on lack of compliance with Administrative Procedure
Requirements.
---------------------------------------------------------------------------
In early 2017, Treasury issued final and temporary
regulations\775\ that adopt, with few changes, the prior
temporary and proposed regulations.
---------------------------------------------------------------------------
\775\T.D. 9812, January 13, 2017.
---------------------------------------------------------------------------
2. Entity classification
Certain entities are eligible to elect their classification
for Federal tax purposes under the ``check-the-box''
regulations adopted in 1997.\776\ Those regulations simplified
the entity classification process for both taxpayers and the
IRS by making the entity classification of unincorporated
entities explicitly elective in most instances.\777\ The
eligibility to elect and the breadth of an entity's choices
depend upon whether it is a ``per se corporation'' and its
number of beneficial owners. Foreign as well as domestic
entities may make the election. As a result, it is possible for
an entity that operates across countries to be treated as a
hybrid entity. A hybrid entity is one which is treated as a
flow-through or disregarded entity for U.S. tax purposes but as
a corporation for foreign tax purposes. For ``reverse hybrid
entities,'' the opposite is true. The election can affect the
determination of the source of the income, availability of tax
credits, and other tax attributes.
---------------------------------------------------------------------------
\776\Treas. Reg. sec. 301.7701-1, et seq.
\777\The check-the-box regulations replaced Treas. Reg. sec.
301.7701-2, as in effect prior to 1997, under which the classification
of unincorporated entities for Federal tax purposes was determined on
the basis of a four characteristics indicative of status as a
corporation: continuity of life, centralization of management, limited
liability, and free transferability of interests. An entity that
possessed three or more of these characteristics was treated as a
corporation; if it possessed two or fewer, then it was treated as a
partnership. Thus, to achieve characterization as a partnership under
this system, taxpayers needed to arrange the governing instruments of
an entity in such a way as to eliminate two of these corporate
characteristics. The advent and proliferation of limited liability
companies (``LLCs'') under State laws allowed business owners to create
customized entities that possessed a critical common feature--limited
liability for investors--as well as other corporate characteristics the
owners found desirable. As a consequence, classification was
effectively elective for well-advised taxpayers.
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3. Source of income rules
The rules for determining the source of certain types of
income are specified in the Code and described briefly below.
Various factors determine the source of income for U.S. tax
purposes, including the status or nationality of the payor, the
status or nationality of the recipient, the location of the
recipient's activities that generate the income, and the
location of the assets that generate the income. To the extent
that the source of income is not specified by statute, the
Treasury Secretary may promulgate regulations that explain the
appropriate treatment. However, many items of income are not
explicitly addressed by either the Code or Treasury
regulations, sometimes resulting in nontaxation of the income.
On several occasions, courts have determined the source of such
items by applying the rule for the type of income to which the
disputed income is most closely analogous, based on all facts
and circumstances.\778\
---------------------------------------------------------------------------
\778\See, e.g., Hunt v. Commissioner, 90 T.C. 1289 (1988).
---------------------------------------------------------------------------
Interest
Interest is derived from U.S. sources if it is paid by the
United States or any agency or instrumentality thereof, a State
or any political subdivision thereof, or the District of
Columbia. Interest is also from U.S. sources if it is paid by a
resident or a domestic corporation on a bond, note, or other
interest-bearing obligation.\779\ Special rules apply to treat
as foreign-source certain amounts paid on deposits with foreign
commercial banking branches of U.S. corporations or
partnerships and certain other amounts paid by foreign branches
of domestic financial institutions.\780\ Interest paid by the
U.S. branch of a foreign corporation is also treated as U.S.-
source income.\781\
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\779\Sec. 861(a)(1); Treas. Reg. sec. 1.861-2(a)(1).
\780\Secs. 861(a)(1) and 862(a)(1). For purposes of certain
reporting and withholding obligations the source rule in section
861(a)(1)(B) does not apply to interest paid by the foreign branch of a
domestic financial institution. This results in the payment being
treated as a withholdable payment. Sec. 1473(1)(C).
\781\Sec. 884(f)(1).
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Dividends
Dividend income is generally sourced by reference to the
payor's place of incorporation.\782\ Thus, dividends paid by a
domestic corporation are generally treated as entirely U.S.-
source income. Similarly, dividends paid by a foreign
corporation are generally treated as entirely foreign-source
income. Under a special rule, dividends from certain foreign
corporations that conduct U.S. businesses are treated in part
as U.S.-source income.\783\
---------------------------------------------------------------------------
\782\Secs. 861(a)(2), 862(a)(2).
\783\Sec. 861(a)(2)(B).
---------------------------------------------------------------------------
Rents and royalties
Rental income is sourced by reference to the location or
place of use of the leased property.\784\ The nationality or
the country of residence of the lessor or lessee does not
affect the source of rental income. Rental income from property
located or used in the United States (or from any interest in
such property) is U.S.-source income, regardless of whether the
property is real or personal, intangible or tangible.
---------------------------------------------------------------------------
\784\Sec. 861(a)(4).
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Royalties are sourced in the place of use of (or the place
of privilege to use) the property for which the royalties are
paid.\785\ This source rule applies to royalties for the use of
either tangible or intangible property, including patents,
copyrights, secret processes, formulas, goodwill, trademarks,
trade names, and franchises.
---------------------------------------------------------------------------
\785\Ibid.
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Income from sales of personal property
Subject to significant exceptions, income from the sale of
personal property is sourced on the basis of the residence of
the seller.\786\ For this purpose, special definitions of the
terms ``U.S. resident'' and ``nonresident'' are provided. A
nonresident is defined as any person who is not a U.S.
resident,\787\ while the term ``U.S. resident'' comprises any
juridical entity which is a U.S. person, all U.S. citizens, as
well as any individual who is a U.S. resident without a tax
home in a foreign country or a nonresident alien with a tax
home in the United States.\788\ As a result, nonresident
includes any foreign corporation.\789\
---------------------------------------------------------------------------
\786\Sec. 865(a).
\787\Sec. 865(g)(1)(B).
\788\Sec. 865(g)(1)(A).
\789\Sec. 865(g).
---------------------------------------------------------------------------
Several special rules apply. For example, income from the
sale of inventory property is generally sourced to the place of
sale, which is determined by where title to the property
passes.\790\ However, if the sale is by a nonresident and is
attributable to an office or other fixed place of business in
the United States, the sale is treated as income from U.S.
sources without regard to the place of sale, unless it is sold
for use, disposition, or consumption outside the United States
and a foreign office materially participates in the sale.\791\
Income from the sale of inventory property that a taxpayer
produces (in whole or in part) in the United States and sells
outside the United States, or that a taxpayer produces (in
whole or in part) outside the United States and sells in the
United States, is treated as partly U.S.-source and partly
foreign-source.\792\
---------------------------------------------------------------------------
\790\Secs. 865(b), 861(a)(6), 862(a)(6); Treas. Reg. sec. 1.861-
7(c).
\791\Sec. 865(e)(2).
\792\Sec. 863(b). A taxpayer may elect one of three methods for
allocating and apportioning income as U.S.-or foreign-source: (1) the
50-50 method under which 50 percent of the income from the sale of
inventory property in such a situation is attributable to the
production activities and 50 percent to the sales activities, with the
income sourced based on the location of those activities; (2)
independent factory price (``IFP'') method under which, in certain
circumstances, an IFP may be established by the taxpayer to determine
income from production activities; (3) the books and records method
under which, with advance permission, the taxpayer may use books of
account to detail the allocation of receipts and expenditures between
production and sales activities. Treas. Reg. sec. 1.863-3(b), (c). If
production activity occurs only within the United States, or only
within foreign countries, then all income is sourced to where the
production activity occurs; when production activities occur in both
the United States and one or more foreign countries, the income
attributable to production activities must be split between U.S. and
foreign sources. Treas. Reg. sec. 1.863-3(c)(1). The sales activity is
generally sourced based on where title to the property passes. Treas.
Reg. secs. 1.863-3(c)(2), 1.861-7(c).
---------------------------------------------------------------------------
In determining the source of gain or loss from the sale or
exchange of an interest in a foreign partnership, the IRS has
taken the position that to the extent that there is unrealized
gain attributable to partnership assets that are effectively
connected with the U.S. business, the foreign person's gain or
loss from the sale or exchange of a partnership interest is
effectively connected gain or loss to the extent of the
partner's distributive share of such unrealized gain or loss,
and not capital gain or loss. Similarly, to the extent that the
partner's distributive share of unrealized gain is attributable
to a permanent establishment of the partnership under an
applicable treaty provision, it may be subject to U.S. tax
under a treaty.\793\
---------------------------------------------------------------------------
\793\Rev. Rul. 91-32, 1991-1 C.B. 107. But see, Grecian Magnesite
Mining, Industrial & Shipping Co. SA v Commissioner, 149 T.C. No. 3
(2017).
---------------------------------------------------------------------------
Gain on the sale of depreciable property is divided between
U.S.-source and foreign-source in the same ratio that the
depreciation was previously deductible for U.S. tax
purposes.\794\ Payments received on sales of intangible
property are sourced in the same manner as royalties to the
extent the payments are contingent on the productivity, use, or
disposition of the intangible property.\795\
---------------------------------------------------------------------------
\794\Sec. 865(c).
\795\Sec. 865(d).
---------------------------------------------------------------------------
Personal services income
Compensation for labor or personal services is generally
sourced to the place-of-performance. Thus, compensation for
labor or personal services performed in the United States
generally is treated as U.S.-source income, subject to an
exception for amounts that meet certain de minimis
criteria.\796\ Compensation for services performed both within
and without the United States is allocated between U.S.- and
foreign-source.\797\
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\796\Sec. 861(a)(3). Gross income of a nonresident alien
individual, who is present in the United States as a member of the
regular crew of a foreign vessel, from the performance of personal
services in connection with the international operation of a ship is
generally treated as foreign-source income.
\797\Treas. Reg. sec. 1.861-4(b).
---------------------------------------------------------------------------
Insurance income
Underwriting income from issuing insurance or annuity
contracts generally is treated as U.S.-source income if the
contract involves property in, liability arising out of an
activity in, or the lives or health of residents of, the United
States.\798\
---------------------------------------------------------------------------
\798\Sec. 861(a)(7).
---------------------------------------------------------------------------
Transportation income
Sources rules generally provide that income from furnishing
transportation that both begins and ends in the United States
is U.S.-source income,\799\ and 50-percent of income
attributable to transportation that either begins or ends in
the United States is treated as U.S.-source income. However, to
the extent that the operator of a shipping or cruise line is
foreign, its ownership structure and the maritime law\800\
applicable for determining what constitutes international
shipping, as well as specific income tax provisions, combine to
create an industry-specific departure from the rules generally
applicable.\801\
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\799\Sec. 863(c).
\800\U.S. law on navigation is codified in U.S. Code at title 33,
and is consistent with the body of international maritime law. The
normative principles of international maritime law for determining the
maritime zones and territorial sovereignty over seas are embodied in
the United Nations Convention on the Law of the Sea, first opened for
signature in 1982. Since 1983, the Executive Branch has agreed that the
treaty is generally consistent with existing international norms of the
law of the sea and that the United States would act in conformity to
the principles of the treaty other than those portions regarding deep
seabed exploitation, even in the absence of ratification of the treaty.
\801\Due to the regulatory framework for aviation, an international
flight must either originate or conclude in the country of residence of
the airline's owner, where income tax for the international flight is
assessed. In contrast to international shipping, international aviation
cannot be carried out using flags-of-convenience. Thus, although tax
law treats shipping and aviation similarly, the differences between the
two industries and the applicable regulatory regimes produce different
tax outcomes. Full territorial sovereignty applies within 12 nautical
miles of one's coast; the contiguous waters beyond 12 nautical miles
but up to 24 nautical miles are subject to some regulation. Within 200
nautical miles, a country may assert an economic zone for exploitation
of living marine resources and some minerals. Beyond 200 nautical miles
are the ``high seas'' in which no sovereign state may assert exclusive
jurisdiction.
---------------------------------------------------------------------------
Income from space or ocean activities or international
communications
In the case of a foreign person, generally no income from a
space or ocean activity or from international communications is
treated as U.S.-source income.\802\ With respect to the latter,
an exception is provided if the foreign person maintains an
office or other fixed place of business in the United States,
in which case the international communications income
attributable to such fixed place of business is treated as
U.S.-source income.\803\ For U.S. persons, all income from
space or ocean activities and 50 percent of income from
international communications is treated as U.S.-source income.
---------------------------------------------------------------------------
\802\Sec. 863(d).
\803\Sec. 863(e).
---------------------------------------------------------------------------
Amounts received with respect to guarantees of indebtedness
Amounts received, directly or indirectly, from a
noncorporate resident or from a domestic corporation for the
provision of a guarantee of indebtedness of such person are
income from U.S. sources.\804\ This includes payments that are
made indirectly for the provision of a guarantee. For example,
U.S.-source income under this rule includes a guarantee fee
paid by a foreign bank to a foreign corporation for the foreign
corporation's guarantee of indebtedness owed to the bank by the
foreign corporation's domestic subsidiary, where the cost of
the guarantee fee is passed on to the domestic subsidiary
through, for instance, additional interest charged on the
indebtedness. In this situation, the domestic subsidiary has
paid the guarantee fee as an economic matter through higher
interest costs, and the additional interest payments made by
the subsidiary are treated as indirect payments of the
guarantee fee and, therefore, as income from U.S. sources.
---------------------------------------------------------------------------
\804\Sec. 861(a)(9). This provision effects a legislative override
of the opinion in Container Corp. v. Commissioner, 134 T.C. 122
(February 17, 2010), aff'd 2011 WL1664358, 107 A.F.T.R.2d 2011-1831
(5th Cir. May 2, 2011), in which the Tax Court held that fees paid by a
domestic corporation to its foreign parent with respect to guarantees
issued by the parent for the debts of the domestic corporation were
more closely analogous to compensation for services than to interest,
and determined that the source of the fees should be determined by
reference to the residence of the foreign parent-guarantor. As a
result, the income was treated as income from foreign sources.
---------------------------------------------------------------------------
Such U.S.-source income also includes amounts received from
a foreign person, whether directly or indirectly, for the
provision of a guarantee of indebtedness of that foreign person
if the payments received are connected with income of such
person that is effectively connected with the conduct of a U.S.
trade or business. Amounts received from a foreign person,
whether directly or indirectly, for the provision of a
guarantee of that person's debt, are treated as foreign-source
income if they are not from sources within the United States
under section 861(a)(9).
4. Intercompany transfers
Transfer pricing
A basic U.S. tax principle applicable in dividing profits
from transactions between related taxpayers is that the amount
of profit allocated to each related taxpayer must be measured
by reference to the amount of profit that a similarly situated
taxpayer would realize in similar transactions with unrelated
parties. The transfer pricing rules of section 482 and the
accompanying Treasury regulations are intended to preserve the
U.S. tax base by ensuring that taxpayers do not shift income
properly attributable to the United States to a related foreign
company through pricing that does not reflect an arm's-length
result.\805\ Similarly, the domestic laws of most U.S. trading
partners include rules to limit income shifting through
transfer pricing. The arm's-length standard is difficult to
administer in situations in which no unrelated party market
prices exist for transactions between related parties. When a
foreign person with U.S. activities has transactions with
related U.S. taxpayers, the amount of income attributable to
U.S. activities is determined in part by the same transfer
pricing rules of section 482 that apply when U.S. persons with
foreign activities transact with related foreign taxpayers.
---------------------------------------------------------------------------
\805\For a detailed description of the U.S. transfer pricing rules,
see Joint Committee on Taxation, Present Law and Background Related to
Possible Income Shifting and Transfer Pricing (JCX-37-10), July 20,
2010, pp. 18-50.
---------------------------------------------------------------------------
Section 482 authorizes the Secretary of the Treasury to
allocate income, deductions, credits, or allowances among
related business entities\806\ when necessary to clearly
reflect income or otherwise prevent tax avoidance, and
comprehensive Treasury regulations under that section adopt the
arm's-length standard as the method for determining whether
allocations are appropriate.\807\ The regulations generally
attempt to identify the respective amounts of taxable income of
the related parties that would have resulted if the parties had
been unrelated parties dealing at arm's length. For income from
intangible property, section 482 provides ``in the case of any
transfer (or license) of intangible property (within the
meaning of section 936(h)(3)(B)), the income with respect to
such transfer or license shall be commensurate with the income
attributable to the intangible.'' By requiring inclusion in
income of amounts commensurate with the income attributable to
the intangible, Congress was responding to concerns regarding
the effectiveness of the
arm's-length standard with respect to intangible property--
including, in particular, high-profit-potential
intangibles.\808\
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\806\The term ``related'' as used herein refers to relationships
described in section 482, which refers to ``two or more organizations,
trades or businesses (whether or not incorporated, whether or not
organized in the United States, and whether or not affiliated) owned or
controlled directly or indirectly by the same interests.''
\807\Section 1059A buttresses section 482 by limiting the extent to
which costs used to determine custom valuation can also be used to
determine basis in property imported from a related party. A taxpayer
that imports property from a related party may not assign a value to
the property for cost purposes that exceeds its customs value.
\808\H.R. Rep. No. 99-426, p. 423.
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Gain recognition on outbound transfers
If a transfer of intangible property to a foreign affiliate
occurs in connection with certain corporate transactions,
nonrecognition rules that may otherwise apply are suspended.
The transferor of intangible property must recognize gain from
the transfer as though he had sold the intangible (regardless
of the stage of development of the intangible property) in
exchange for payments contingent on the use, productivity or
disposition of the transferred property in amounts that would
have been received either annually over the useful life of the
property or upon disposition of the property after the
transfer.\809\ The appropriate amounts of those imputed
payments are determined using transfer-pricing principles.
Final regulations issued in 2016 eliminate an exception under
temporary regulations that permitted nonrecognition of gain
from outbound transfers of foreign goodwill and going concern
value. However, the Secretary announced that reinstatement of
an exception for active trades or businesses is under
consideration for cases with little potential for abuse and
administrative difficulties.\810\
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\809\Sec. 367(d).
\810\See, T.D. 9803, 81 F.R. 91012 (December 17, 2016). Treas. Reg.
sec. 1.367(d)-1(b) now provides that the rules of section 367(d) apply
to transfers of intangible property as defined under Treas. Sec.
1.367(a)-1(d)(5) after September 14, 2015, and to any transfers
occurring before that date resulting from entity classification
elections filed on or after September 15, 2015. Noting that commenters
on the regulations had cited legislative history that contemplated
active business exceptions, Treasury announced the reconsideration of
the rule. U.S. Treasury Department, Second Report to the President on
Identifying and Reducing Tax Regulatory Burdens, Executive Order 13789
October 2, 2017, TNT Doc 2017-72131. The relevant legislative history
is found at in H.R. Rep. No. 98-432, 98th Cong., 2d Sess. 1318-1320
(March 5, 1984) and Conference Report, H.R. Rep. No. 98-861, 98th Cong.
2d Sess. 951-957 (June 23, 1984).
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B. U.S. Tax Rules Applicable to Nonresident Aliens and Foreign
Corporations (Inbound)
Nonresident aliens and foreign corporations are generally
subject to U.S. tax only on their U.S.-source income. Thus, the
source and type of income received by a foreign person
generally determines whether there is any U.S. income tax
liability and the mechanism by which it is taxed. The U.S. tax
rules for U.S. activities of foreign taxpayers apply
differently to two broad types of income: U.S.-source income
that is ``fixed or determinable annual or periodical gains,
profits, and income'' (``FDAP income'') or income that is
``effectively connected with the conduct of a trade or business
within the United States'' (``ECI''). FDAP income generally is
subject to a 30-percent gross-basis tax withheld at its source,
while ECI is generally subject to the same U.S. tax rules that
apply to business income derived by U.S. persons. That is,
deductions are permitted in determining taxable ECI, which is
then taxed at the same rates applicable to U.S. persons. Much
FDAP income and similar income is, however, exempt from tax or
is subject to a reduced rate of tax under the Code\811\ or a
bilateral income tax treaty.\812\
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\811\E.g., the portfolio interest exception in section 871(h)
(discussed below).
\812\Because each treaty reflects considerations unique to the
relationship between the two treaty countries, treaty withholding tax
rates on each category of income are not uniform across treaties.
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1. Gross-basis taxation of U.S.-source income
Non-business income received by foreign persons from U.S.
sources is generally subject to tax on a gross basis at a rate
of 30 percent, which is collected by withholding at the source
of the payment. As explained below, the categories of income
subject to the 30-percent tax and the categories for which
withholding is required are generally coextensive, with the
result that determining the withholding tax liability
determines the substantive liability.
The income of non-resident aliens or foreign corporations
that is subject to tax at a rate of 30-percent includes FDAP
income that is not effectively connected with the conduct of a
U.S. trade or business.\813\ The items enumerated in defining
FDAP income are illustrative; the common characteristic of
types of FDAP income is that taxes with respect to the income
may be readily computed and collected at the source, in
contrast to the administrative difficulty involved in
determining the seller's basis and resulting gain from sales of
property.\814\ The words ``annual or periodical'' are ``merely
generally descriptive'' of the payments that could be within
the purview of the statute and do not preclude application of
the withholding tax to one-time, lump sum payments to
nonresident aliens.\815\
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\813\Secs. 871(a), 881. If the FDAP income is also ECI, it is taxed
on a net basis, at graduated rates.
\814\Commissioner v. Wodehouse, 337 U.S. 369, 388-89 (1949). After
reviewing legislative history of the Revenue Act of 1936, the Supreme
Court noted that Congress expressly intended to limit taxes on
nonresident aliens to taxes that could be readily collectible, i.e.,
subject to withholding, in response to ``a theoretical system
impractical of administration in a great number of cases. H.R. Rep. No.
2475, 74th Cong., 2d Sess. 9-10 (1936).'' In doing so, the Court
rejected P.G. Wodehouse's arguments that an advance royalty payment was
not within the purview of the statutory definition of FDAP income.
\815\815Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949).
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With respect to income from shipping, the gross basis tax
potentially applicable is four percent,\816\ unless the income
is effectively connected with a U.S. trade or business, and
thus subject to the graduated rates, as determined under rules
specific to U.S.-source gross transportation income rather than
the more broadly applicable rules defining effectively
connected income in section 864(c). Even if the income is
within the purview of those special rules, it may nevertheless
be exempt if the income is derived from the international
operation of a ship or aircraft by a foreign entity organized
in a jurisdiction which provides a reciprocal exemption to U.S.
entities.\817\
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\816\Sec. 887.
\817\Sec. 883(a)(1). In addition, to the extent provided in
regulations, income from shipping and aviation is not subject to the
four-percent gross basis tax if the income is of a type that is not
subject to the reciprocal exemption for net basis taxation. See sec.
887(b)(1). Comparable rules under section 872(b)(1) apply to income of
nonresident alien individuals from shipping operations.
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Types of FDAP income
FDAP income encompasses a broad range of types of gross
income, but has limited application to gains on sales of
property, including market discount on bonds and option
premiums.\818\ Capital gains received by nonresident aliens
present in the United States for fewer than 183 days are
generally treated as foreign source and are thus not subject to
U.S. tax, unless the gains are effectively connected with a
U.S. trade or business; capital gains received by nonresident
aliens present in the United States for 183 days or more\819\
that are treated as income from U.S. sources are subject to
gross-basis taxation.\820\ In contrast, U.S-source gains from
the sale or exchange of intangibles are subject to tax and
withholding if they are contingent upon the productivity of the
property sold and are not effectively connected with a U.S.
trade or business.\821\
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\818\Although technically insurance premiums paid to a foreign
insurer or reinsurer are FDAP income, they are exempt from withholding
under Treas. Reg. sec. 1.1441-2(a)(7) if the insurance contract is
subject to the excise tax under section 4371. Treas. Reg. secs. 1.1441-
2(b)(1)(i) and 1.1441-2(b)(2).
\819\For purposes of this rule, whether a person is considered a
resident in the United States is determined by application of the rules
under section 7701(b).
\820\Sec. 871(a)(2). In addition, certain capital gains from sales
of U.S. real property interests are subject to tax as effectively
connected income (or in some instances as dividend income) under the
Foreign Investment in Real Property Tax Act of 1980 (``FIRPTA'').
\821\Secs. 871(a)(1)(D), 881(a)(4).
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Interest on bank deposits may qualify for exemption on two
grounds, depending on where the underlying principal is held on
deposit. Interest paid with respect to deposits with domestic
banks and savings and loan associations, and certain amounts
held by insurance companies, are U.S.-source income but are not
subject to the U.S. tax when paid to a foreign person, unless
the interest is effectively connected with a U.S. trade or
business of the recipient.\822\ Interest on deposits with
foreign branches of domestic banks and domestic savings and
loan associations is not treated as U.S.-source income and is
thus exempt from U.S. tax (regardless of whether the recipient
is engaged in a U.S. trade or business).\823\ Similarly,
interest and original issue discount on certain short-term
obligations is also exempt from U.S. tax when paid to a foreign
person.\824\ Additionally, there is generally no information
reporting required with respect to payments of such
amounts.\825\
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\822\Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441-
1(b)(4)(ii).
\823\Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441-1(b)(4)(iii).
\824\Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 1.1441-
1(b)(4)(iv).
\825\Treas. Reg. sec. 1.1461-1(c)(2)(ii)(A), (B). Regulations
require a bank to report interest if the recipient is a nonresident
alien who resides in a country with which the United States has a
satisfactory exchange of information program under a bilateral
agreement and the deposit is maintained at an office in the United
States. Treas. Reg. secs. 1.6049-4(b)(5) and 1.6049-8. The IRS
publishes lists of the countries whose residents are subject to the
reporting requirements, and those countries with respect to which the
reported information will be automatically exchanged. Rev. Proc. 2017-
31, available at https://www.irs.gov/pub/irs-drop/rp-17-31.pdf,
supplementing Rev. Proc. 2014-64.
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Although FDAP income includes U.S.-source portfolio
interest, such interest is specifically exempt from the 30-
percent gross-basis tax. Portfolio interest is any interest
(including original issue discount) that is paid on an
obligation that is in registered form and for which the
beneficial owner has provided to the U.S. withholding agent a
statement certifying that the beneficial owner is not a U.S.
person.\826\ For obligations issued before March 19, 2012,
portfolio interest also includes interest paid on an obligation
that is not in registered form, provided that the obligation is
shown to be targeted to foreign investors under the conditions
sufficient to establish deductibility of the payment of such
interest.\827\ Portfolio interest, however, does not include
interest received by a 10-percent shareholder,\828\ certain
contingent interest,\829\ interest received by a controlled
foreign corporation from a related person,\830\ or interest
received by a bank on an extension of credit made pursuant to a
loan agreement entered into in the ordinary course of its trade
or business.\831\
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\826\Sec. 871(h)(2).
\827\Sec. 163(f)(2)(B). The exception to the registration
requirements for foreign targeted securities was repealed in 2010,
effective for obligations issued two years after enactment, thus
narrowing the portfolio interest exemption for obligations issued after
March 18, 2012. See Hiring Incentives to Restore Employment Law of
2010, Pub. L. No. 111-147, sec. 502(b).
\828\Sec. 871(h)(3).
\829\Sec. 871(h)(4).
\830\Sec. 881(c)(3)(C).
\831\Sec. 881(c)(3)(A).
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Imposition of gross-basis tax and reporting by U.S. withholding agents
The 30-percent tax on FDAP income is generally collected by
means of withholding.\832\ Withholding on FDAP payments to
foreign payees is required unless the withholding agent,\833\
i.e., the person making the payment to the foreign person
receiving the income, can establish that the beneficial owner
of the amount is eligible for an exemption from withholding or
a reduced rate of withholding under an income tax treaty.\834\
The principal statutory exemptions from the 30-percent tax
apply to interest on bank deposits, and portfolio interest,
described above.\835\
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\832\Secs. 1441, 1442.
\833\Withholding agent is defined broadly to include any U.S. or
foreign person that has the control, receipt, custody, disposal, or
payment of an item of income of a foreign person subject to
withholding. Treas. Reg. sec. 1.1441-7(a).
\834\Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b).
\835\A reduced rate of withholding of 14 percent applies to certain
scholarships and fellowships paid to individuals temporarily present in
the United States. Sec. 1441(b). In addition to statutory exemptions,
the 30percent tax with respect to interest, dividends and royalties may
be reduced or eliminated by a tax treaty between the United States and
the country in which the recipient of income otherwise subject to tax
is resident.
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In many instances, the income subject to withholding is the
only income of the foreign recipient that is subject to any
U.S. tax. No U.S. Federal income tax return from the foreign
recipient is generally required with respect to the income from
which tax was withheld, if the recipient has no ECI income and
the withholding is sufficient to satisfy the recipient's
liability. Accordingly, although the 30-percent gross-basis tax
is a withholding tax, it is also generally the final tax
liability of the foreign recipient (unless the foreign
recipients files for a refund).
A withholding agent that makes payments of U.S.-source
amounts to a foreign person is required to report and pay over
any amounts of U.S. tax withheld. The reports are due to be
filed with the IRS by March 15 of the calendar year following
the year in which the payment is made. Two types of reports are
required: (1) a summary of the total U.S.-source income paid
and withholding tax withheld on foreign persons for the year
and (2) a report to both the IRS and the foreign person of that
person's U.S.-source income that is subject to reporting.\836\
The nonresident withholding rules apply broadly to any
financial institution or other payor, including foreign
financial institutions.\837\
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\836\Treas. Reg. sec. 1.1461-1(b), (c).
\837\See Treas. Reg. sec. 1.1441-7(a) (definition of withholding
agent includes foreign persons).
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To the extent that the withholding agent deducts and
withholds an amount, the withheld tax is credited to the
recipient of the income.\838\ If the agent withholds more than
is required, and results in an overpayment of tax, the excess
may be refunded to the recipient of the income upon filing of a
timely claim for refund.
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\838\Sec. 1462.
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Excise tax on foreign reinsurance premiums
An excise tax applies to premiums paid to foreign insurers
and reinsurers covering U.S. risks.\839\ The excise tax is
imposed on a gross basis at the rate of one percent on
reinsurance and life insurance premiums, and at the rate of
four percent on property and casualty insurance premiums. The
excise tax does not apply to premiums that are effectively
connected with the conduct of a U.S. trade or business or that
are exempted from the excise tax under an applicable income tax
treaty. The excise tax paid by one party cannot be credited if,
for example, the risk is reinsured with a second party in a
transaction that is also subject to the excise tax.
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\839\Secs. 4371-4374.
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Many U.S. tax treaties provide an exemption from the excise
tax, including the treaties with Germany, Japan, Switzerland,
and the United Kingdom.\840\ To prevent persons from
inappropriately obtaining the benefits of exemption from the
excise tax, the treaties generally include an anti-conduit
rule. The most common anti-conduit rule provides that the
treaty exemption applies to the excise tax only to the extent
that the risks covered by the premiums are not reinsured with a
person not entitled to the benefits of the treaty (or any other
treaty that provides exemption from the excise tax).\841\
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\840\Generally, when a foreign person qualifies for benefits under
such a treaty, the United States is not permitted to collect the
insurance premiums excise tax from that person.
\841\In Rev. Rul. 2008-15, 2008-1 C.B. 633, the IRS provided
guidance to the effect that the excise tax is imposed separately on
each reinsurance policy covering a U.S. risk. Thus, if a U.S. insurer
or reinsurer reinsures a U.S. risk with a foreign reinsurer, and that
foreign reinsurer in turn reinsures the risk with a second foreign
reinsurer, the excise tax applies to both the premium to the first
foreign reinsurer and the premium to the second foreign reinsurer. In
addition, if the first foreign reinsurer is resident in a jurisdiction
with a tax treaty containing an excise tax exemption, the revenue
ruling provides that the excise tax still applies to both payments to
the extent that the transaction violates an anti-conduit rule in the
applicable tax treaty. Even if no violation of an anti-conduit rule
occurs, under the revenue ruling, the excise tax still applies to the
premiums paid to the second foreign reinsurer, unless the second
foreign reinsurer is itself entitled to an excise tax exemption.
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2. Net-basis taxation of U.S.-source income
The United States taxes on a net basis the income of
foreign persons that is ``effectively connected'' with the
conduct of a trade or business in the United States.\842\ Any
gross income derived by the foreign person that is not
effectively connected with the person's U.S. business is not
taken into account in determining the rates of U.S. tax
applicable to the person's income from the business.\843\
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\842\Secs. 871(b), 882.
\843\Secs. 871(b)(2), 882(a)(2).
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U.S. trade or business
A foreign person is subject to U.S. tax on a net basis if
the person is engaged in a U.S. trade or business. Partners in
a partnership and beneficiaries of an estate or trust are
treated as engaged in the conduct of a trade or business within
the United States if the partnership, estate, or trust is so
engaged.\844\
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\844\Sec. 875.
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The question whether a foreign person is engaged in a U.S.
trade or business is factual and has generated much case law.
Basic issues include whether the activity constitutes business
rather than investing, whether sufficient activities in
connection with the business are conducted in the United
States, and whether the relationship between the foreign person
and persons performing functions in the United States in
respect of the business is sufficient to attribute those
functions to the foreign person.
The trade or business rules differ from one activity to
another. The term ``trade or business within the United
States'' expressly includes the performance of personal
services within the United States.\845\ If, however, a
nonresident alien individual performs personal services for a
foreign employer, and the individual's total compensation for
the services and period in the United States are minimal
($3,000 or less in total compensation and 90 days or fewer of
physical presence in a year), the individual is not considered
to be engaged in a U.S. trade or business.\846\ Detailed rules
govern whether trading in stocks or securities or commodities
constitutes the conduct of a U.S. trade or business.\847\ A
foreign person who trades in stock or securities or commodities
in the United States through an independent agent generally is
not treated as engaged in a U.S. trade or business if the
foreign person does not have an office or other fixed place of
business in the United States through which trades are carried
out. A foreign person who trades stock or securities or
commodities for the person's own account also generally is not
considered to be engaged in a U.S. business so long as the
foreign person is not a dealer in stock or securities or
commodities.
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\845\Sec. 864(b).
\846\Sec. 864(b)(1).
\847\Sec. 864(b)(2).
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For eligible foreign persons, U.S. bilateral income tax
treaties restrict the application of net-basis U.S. taxation.
Under each treaty, the United States is permitted to tax
business profits only to the extent those profits are
attributable to a U.S. permanent establishment of the foreign
person. The threshold level of activities that constitute a
permanent establishment is generally higher than the threshold
level of activities that constitute a U.S. trade or business.
For example, a permanent establishment typically requires the
maintenance of a fixed place of business over a significant
period of time.
Effectively connected income
A foreign person that is engaged in the conduct of a trade
or business within the United States is subject to U.S. net-
basis taxation on the income that is ``effectively connected''
with the business. Specific statutory rules govern whether
income is ECI.\848\
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\848\Sec. 864(c).
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In the case of U.S.-source capital gain and U.S.-source
income of a type that would be subject to gross basis U.S.
taxation, the factors taken into account in determining whether
the income is ECI include whether the income is derived from
assets used in or held for use in the conduct of the U.S. trade
or business and whether the activities of the trade or business
were a material factor in the realization of the amount (the
``asset use'' and ``business activities'' tests).\849\ Under
the asset use and business activities tests, due regard is
given to whether the income, gain, or asset was accounted for
through the U.S. trade or business. All other U.S.-source
income is treated as ECI.\850\
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\849\Sec. 864(c)(2).
\850\Sec. 864(c)(3).
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A foreign person who is engaged in a U.S. trade or business
may have limited categories of foreign-source income that are
considered to be ECI.\851\ Foreign-source income not included
in one of these categories (described next) generally is exempt
from U.S. tax.
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\851\This income is subject to net-basis U.S. taxation after
allowance of a credit for any foreign income tax imposed on the income.
Sec. 906.
---------------------------------------------------------------------------
A foreign person's income from foreign sources generally is
considered to be ECI only if the person has an office or other
fixed place of business within the United States to which the
income is attributable and the income is in one of the
following categories: (1) rents or royalties for the use of
patents, copyrights, secret processes or formulas, good will,
trade-marks, trade brands, franchises, or other like intangible
properties derived in the active conduct of the trade or
business; (2) interest or dividends derived in the active
conduct of a banking, financing, or similar business within the
United States or received by a corporation the principal
business of which is trading in stocks or securities for its
own account; or (3) income derived from the sale or exchange
(outside the United States), through the U.S. office or fixed
place of business, of inventory or property held by the foreign
person primarily for sale to customers in the ordinary course
of the trade or business, unless the sale or exchange is for
use, consumption, or disposition outside the United States and
an office or other fixed place of business of the foreign
person in a foreign country participated materially in the sale
or exchange.\852\ Foreign-source dividends, interest, and
royalties are not treated as ECI if the items are paid by a
foreign corporation more than 50 percent (by vote) of which is
owned directly, indirectly, or constructively by the recipient
of the income.\853\
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\852\Sec. 864(c)(4)(B).
\853\Sec. 864(c)(4)(D)(i).
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In determining whether a foreign person has a U.S. office
or other fixed place of business, the office or other fixed
place of business of an agent generally is disregarded. The
place of business of an agent other than an independent agent
acting in the ordinary course of business is not disregarded,
however, if the agent either has the authority (regularly
exercised) to negotiate and conclude contracts in the name of
the foreign person or has a stock of merchandise from which he
regularly fills orders on behalf of the foreign person.\854\ If
a foreign person has a U.S. office or fixed place of business,
income, gain, deduction, or loss is not considered attributable
to the office unless the office was a material factor in the
production of the income, gain, deduction, or loss and the
office regularly carries on activities of the type from which
the income, gain, deduction, or loss was derived.\855\
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\854\Sec. 864(c)(5)(A).
\855\Sec. 864(c)(5)(B).
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Special rules apply in determining the ECI of an insurance
company. The foreign-source income of a foreign corporation
that is subject to tax under the insurance company provisions
of the Code is treated as ECI if the income is attributable to
its United States business.\856\
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\856\Sec. 864(c)(4)(C).
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Income, gain, deduction, or loss for a particular year
generally is not treated as ECI if the foreign person is not
engaged in a U.S. trade or business in that year.\857\ If,
however, income or gain taken into account for a taxable year
is attributable to the sale or exchange of property, the
performance of services, or any other transaction that occurred
in a prior taxable year, the determination whether the income
or gain is taxable on a net basis is made as if the income were
taken into account in the earlier year and without regard to
the requirement that the taxpayer be engaged in a trade or
business within the United States during the later taxable
year.\858\ If any property ceases to be used or held for use in
connection with the conduct of a U.S. trade or business and the
property is disposed of within 10 years after the cessation,
the determination whether any income or gain attributable to
the disposition of the property is taxable on a net basis is
made as if the disposition occurred immediately before the
property ceased to be used or held for use in connection with
the conduct of a U.S. trade or business and without regard to
the requirement that the taxpayer be engaged in a U.S. business
during the taxable year for which the income or gain is taken
into account.\859\
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\857\Sec. 864(c)(1)(B).
\858\Sec. 864(c)(6).
\859\Sec. 864(c)(7).
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Transportation income from U.S. sources is treated as
effectively connected with a foreign person's conduct of a U.S.
trade or business only if the foreign person has a fixed place
of business in the United States that is involved in the
earning of such income and substantially all of such income of
the foreign person is attributable to regularly scheduled
transportation.\860\ If the transportation income is
effectively connected with conduct of a U.S. trade or business,
the transportation income, along with transportation income
that is from U.S. sources because the transportation both
begins and ends in the United States, may be subject to net-
basis taxation. Income from the international operation of a
ship or aircraft may be eligible for an exemption under section
883, provided that the foreign jurisdiction has extended
reciprocity for U.S. businesses;\861\ whether the party
claiming an exemption is eligible for the tax relief;\862\ and
the activities that give rise to the income qualify under
relevant regulations.
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\860\Sec. 887(b)(4).
\861\The most recent compilation of countries that the United
States recognizes as providing exemptions lists countries in three
groups: Twenty-seven countries are eligible for exemption on the basis
of a review of the legislation in the foreign jurisdiction; 39 nations
exchanged diplomatic notes with the United States that grant exemption
to some extent; and more than 50 nations are parties with the United
States to bilateral income tax treaties that include a shipping
article. Rev. Rul. 2008-17, 2008-1 C.B. 626, modified by Ann. 2008-57,
2008-C.B. 1192, 2008.
\862\Sec. 883(c) and regulations thereunder.
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Allowance of deductions
Taxable ECI is computed by taking into account deductions
associated with gross ECI. For this purpose, the apportionment
and allocation of deductions is addressed in detailed
regulations. The regulations applicable to deductions other
than interest expense set forth general guidelines for
allocating deductions among classes of income and apportioning
deductions between ECI and non-ECI. In some circumstances,
deductions may be allocated on the basis of units sold, gross
sales or receipts, costs of goods sold, profits contributed,
expenses incurred, assets used, salaries paid, space used, time
spent, or gross income received. More specific guidelines are
provided for the allocation and apportionment of research and
experimental expenditures, legal and accounting fees, income
taxes, losses on dispositions of property, and net operating
losses. Detailed regulations under section 861 address the
allocation and apportionment of interest deductions. In
general, interest is allocated and apportioned based on assets
rather than income.
3. Special rules
FIRPTA
A foreign person's gain or loss from the disposition of a
U.S. real property interest (``USRPI'') is treated as ECI and,
therefore, as taxable at the income tax rates applicable to
U.S. persons, including the rates for net capital gain. A
foreign person subject to tax on this income is required to
file a U.S. tax return under the normal rules relating to
receipt of ECI.\863\ In the case of a foreign corporation, the
gain from the disposition of a USRPI may also be subject to the
branch profits tax at a 30-percent rate (or lower treaty rate).
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\863\Sec. 897(a).
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The payor of income that FIRPTA treats as ECI (``FIRPTA
income'') is generally required to withhold U.S. tax from the
payment.\864\ The foreign person can request a refund with its
U.S. tax return, if appropriate, based on that person's total
ECI and deductions (if any) for the taxable year.
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\864\Sec. 1445 and Treasury regulations thereunder.
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Branch profits taxes
A domestic corporation owned by foreign persons is subject
to U.S. income tax on its net income. The earnings of the
domestic corporation are subject to a second tax, this time at
the shareholder level, when dividends are paid. As described
previously, when the shareholders are foreign, the second-level
tax is imposed at a flat rate and collected by withholding.
Unless the portfolio interest exemption or another exemption
applies, interest payments made by a domestic corporation to
foreign creditors are likewise subject to U.S. tax. To
approximate these second-level withholding taxes imposed on
payments made by domestic subsidiaries to their foreign parent
corporations, the United States taxes a foreign corporation
that is engaged in a U.S. trade or business through a U.S.
branch on amounts of U.S. earnings and profits that are shifted
out of, or amounts of interest that are deducted by, the U.S.
branch of the foreign corporation. These branch taxes may be
reduced or eliminated under an applicable income tax
treaty.\865\
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\865\See Treas. Reg. sec. 1.884-1(g), -5.
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Under the branch profits tax, the United States imposes a
tax of 30 percent on a foreign corporation's ``dividend
equivalent amount.''\866\ The dividend equivalent amount
generally is the earnings and profits of a U.S. branch of a
foreign corporation attributable to its ECI.\867\ Limited
categories of earnings and profits attributable to a foreign
corporation's ECI are excluded in calculating the dividend
equivalent amount.\868\
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\866\Sec. 884(a).
\867\Sec. 884(b).
\868\See sec. 884(d)(2) (excluding, for example, earnings and
profits attributable to gain from the sale of domestic corporation
stock that constitutes a U.S. real property interest described in
section 897).
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In arriving at the dividend equivalent amount, a branch's
effectively connected earnings and profits are adjusted to
reflect changes in a branch's U.S. net equity (that is, the
excess of the branch's assets over its liabilities, taking into
account only amounts treated as connected with its U.S. trade
or business).\869\ The first adjustment reduces the dividend
equivalent amount to the extent the branch's earnings are
reinvested in trade or business assets in the United States (or
reduce U.S. trade or business liabilities). The second
adjustment increases the dividend equivalent amount to the
extent prior reinvested earnings are considered remitted to the
home office of the foreign corporation.
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\869\Sec. 884(b).
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Interest paid by a U.S. trade or business of a foreign
corporation generally is treated as if paid by a domestic
corporation and therefore is subject to U.S. 30-percent
withholding tax (if the interest is paid to a foreign person
and a Code or treaty exemption or reduction would not be
available if the interest were actually paid by a domestic
corporation).\870\ Certain ``excess interest'' of a U.S. trade
or business of a foreign corporation is treated as if paid by a
U.S. corporation to a foreign parent and, therefore, is subject
to U.S. 30-percent withholding tax.\871\ For this purpose,
excess interest is the excess of the interest expense of the
foreign corporation apportioned to the U.S. trade or business
over the amount of interest paid by the trade or business.
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\870\Sec. 884(f)(1)(A).
\871\Sec. 884(f)(1)(B).
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Earnings stripping
Taxpayers are limited in their ability to reduce the U.S.
tax on the income derived from their U.S. operations through
certain earnings stripping transactions involving interest
payments. If the payor's debt-to-equity ratio exceeds 1.5 to 1
(a debt-to-equity ratio of 1.5 to 1 or less is considered a
``safe harbor''), a deduction for disqualified interest paid or
accrued by the payor in a taxable year is generally disallowed
to the extent of the payor's excess interest expense.\872\
Disqualified interest includes interest paid or accrued to
related parties when no Federal income tax is imposed with
respect to such interest;\873\ to unrelated parties in certain
instances in which a related party guarantees the debt
(``guaranteed debt''); or to a REIT by a taxable REIT
subsidiary of that REIT. Excess interest expense is the amount
by which the payor's net interest expense (that is, the excess
of interest paid or accrued over interest income) exceeds 50
percent of its adjusted taxable income (generally taxable
income computed without regard to deductions for net interest
expense, net operating losses, domestic production activities
under section 199, depreciation, amortization, and depletion).
Interest amounts disallowed under these rules can be carried
forward indefinitely and are allowed as a deduction to the
extent of excess limitation in a subsequent tax year. In
addition, any excess limitation (that is, the excess, if any,
of 50 percent of the adjusted taxable income of the payor over
the payor's net interest expense) can be carried forward three
years.
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\872\Sec. 163(j).
\873\If a tax treaty reduces the rate of tax on interest paid or
accrued by the taxpayer, the interest is treated as interest on which
no Federal income tax is imposed to the extent of the same proportion
of such interest as the rate of tax imposed without regard to the
treaty, reduced by the rate of tax imposed under the treaty, bears to
the rate of tax imposed without regard to the treaty. Sec.
163(j)(5)(B).
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C. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons
(Outbound)
1. In general
In general, income earned directly by a U.S. person from
the conduct of a foreign business is taxed on a current
basis,\874\ but income earned indirectly from a separate legal
entity operating the foreign business is not. Instead, active
foreign business income earned by a U.S. person indirectly
through an interest in a foreign corporation generally is not
subject to U.S. tax until the income is distributed as a
dividend to the U.S. person. Certain anti-deferral regimes may
cause the U.S. owner to be taxed on a current basis in the
United States on certain categories of passive or highly mobile
income earned by the foreign corporation regardless of whether
the income has been distributed as a dividend to the U.S.
owner. The main anti-deferral regimes that provide such
exceptions are the controlled foreign corporation (``CFC'')
rules of subpart F\875\ and the passive foreign investment
company (``PFIC'') rules.\876\ A foreign tax credit generally
is available to offset, in whole or in part, the U.S. tax owed
on foreign-source income, whether the income is earned directly
by the domestic corporation, repatriated as an actual dividend,
or included in the domestic parent corporation's income under
one of the anti-deferral regimes.\877\
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\874\A U.S. citizen or resident living abroad may be eligible to
exclude from U.S. taxable income certain foreign earned income and
foreign housing costs under section 911. For a description of this
exclusion, see Present Law and Issues in U.S. Taxation of Cross-Border
Income (JCX-42-11), September 6, 2011, p. 52.
\875\Secs. 951-964.
\876\Secs. 1291-1298.
\877\Secs. 901, 902, 960, 1293(f).
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2. Anti-deferral regimes
Subpart F
Subpart F,\878\ applicable to CFCs and their shareholders,
is the main anti-deferral regime of relevance to a U.S.-based
multinational corporate group. A CFC generally is defined as
any foreign corporation if U.S. persons own (directly,
indirectly, or constructively) more than 50 percent of the
corporation's stock (measured by vote or value), taking into
account only those U.S. persons that are within the meaning of
the term ``United States shareholder,'' which refers only to
those U.S. persons who own at least 10 percent of the stock
(measured by vote only).\879\
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\878\Secs. 951-964.
\879\Secs. 951(b), 957, 958. The term ``United States shareholder''
is used interchangeably herein with ``U.S. shareholder.''
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Subpart F income
Under the subpart F rules, the United States generally
taxes the 10-percent U.S. shareholders of a CFC on their pro
rata shares of certain income of the CFC (referred to as
``subpart F income''), without regard to whether the income is
distributed to the shareholders.\880\ In effect, the United
States treats the 10-percent U.S. shareholders of a CFC as
having received a current distribution of the corporation's
subpart F income. With exceptions described below, subpart F
income generally includes passive income and other income that
is readily movable from one taxing jurisdiction to another.
Subpart F income consists of foreign base company income,\881\
insurance income,\882\ and certain income relating to
international boycotts and other violations of public
policy.\883\
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\880\Sec. 951(a).
\881\Sec. 954.
\882\Sec. 953.
\883\Sec. 952(a)(3)-(5).
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Foreign base company income consists of foreign personal
holding company income, which includes passive income such as
dividends, interest, rents, and royalties, and a number of
categories of income from business operations, including
foreign base company sales income, foreign base company
services income, and foreign base company oil-related
income.\884\
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\884\Sec. 954.
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Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Finally,
special rules apply under subpart F with respect to related
person insurance income\885\ in order to address captive
insurance companies.\886\ Under these rules, the threshold for
determining control is reduced to 25 percent, and any level of
stock ownership by a U.S. person in such corporation is
sufficient for the person to be treated as a U.S. shareholder.
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\885\Sec. 953(c). Related person insurance income is defined for
this purpose to mean any insurance income attributable to a policy of
insurance or reinsurance with respect to which the primary insured is
either a U.S. shareholder (within the meaning of the provision) in the
foreign corporation receiving the income or a person related to such a
shareholder.
\886\Joint Committee on Taxation, General Explanation of the Tax
Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 968.
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Investments in U.S. property
The 10-percent U.S. shareholders of a CFC also are required
to include currently in income for U.S. tax purposes their pro
rata shares of the corporation's untaxed earnings invested in
certain items of U.S. property.\887\ This U.S. property
generally includes tangible property located in the United
States, stock of a U.S. corporation, an obligation of a U.S.
person, and certain intangible assets, such as patents and
copyrights, acquired or developed by the CFC for use in the
United States.\888\ There are specific exceptions to the
general definition of U.S. property, including for bank
deposits, certain export property, and certain trade or
business obligations.\889\ The inclusion rule for investment of
earnings in U.S. property is intended to prevent taxpayers from
avoiding U.S. tax on dividend repatriations by repatriating CFC
earnings through non-dividend payments, such as loans to U.S.
persons.
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\887\Secs. 951(a)(1)(B), 956.
\888\Sec. 956(c)(1).
\889\Sec. 956(c)(2).
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Subpart F exceptions
Several exceptions to the broad definition of subpart F
income permit continued deferral for income from certain
transactions, dividends, interest and certain rents and
royalties received by a CFC from a related corporation
organized and operating in the same foreign country in which
the CFC is organized.\890\ The same-country exception is not
available to the extent that the payments reduce the subpart F
income of the payor. A second exception from foreign base
company income and insurance income is available for any item
of income received by a CFC if the taxpayer establishes that
the income was subject to an effective foreign income tax rate
greater than 90 percent of the maximum U.S. corporate income
tax rate (that is, more than 90 percent of 35 percent, or 31.5
percent).\891\
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\890\Sec. 954(c)(3).
\891\Sec. 954(b)(4).
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A provision colloquially referred to as the ``CFC look-
through'' rule excludes from foreign personal holding company
income dividends, interest, rents, and royalties received or
accrued by one CFC from a related CFC (with relation based on
control) to the extent attributable or properly allocable to
non-subpart-F income of the payor.\892\ The look-through rule
applies to taxable years of foreign corporations beginning
before January 1, 2020, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.\893\
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\892\Sec. 954(c)(6).
\893\See section 144 of the Protecting Americans from Tax Hikes Act
of 2015 (Division Q of Pub. L. No. 114-113), H.R. 2029 (``the PATH Act
of 2015''), which extended section 954(c)(6) for five years. Congress
has previously extended the application of section 954(c)(6) several
times, most recently in the Tax Increase Prevention Act of 2014, Pub.
L. No. 113-295; Pub. L. No. 107-147, sec. 614, 2002; Pub. L. No. 106-
170, sec. 503, 1999; Pub. L. No. 105-277, 1998.
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There is also an exclusion from subpart F income for
certain income of a CFC that is derived in the active conduct
of banking or financing business (``active financing income''),
which applies to all taxable years of the foreign corporation
beginning after December 31, 2014, and for taxable years of the
shareholders that end during or within such taxable years of
the corporation.\894\ With respect to income derived in the
active conduct of a banking, financing, or similar business, a
CFC is required to be predominantly engaged in such business
and to conduct substantial activity with respect to such
business in order to qualify for the active financing
exceptions. In addition, certain nexus requirements apply,
which provide that income derived by a CFC or a qualified
business unit (``QBU'') of a CFC from transactions with
customers is eligible for the exceptions if, among other
things, substantially all of the activities in connection with
such transactions are conducted directly by the CFC or QBU in
its home country, and such income is treated as earned by the
CFC or QBU in its home country for purposes of such country's
tax laws. Moreover, the exceptions apply to income derived from
certain cross border transactions, provided that certain
requirements are met.
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\894\Sec. 954(h). See section 128 of the PATH Act of 2015, which
made the active financing exception permanent.
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In the case of a securities dealer, an exception from
foreign personal holding company income applies to any interest
or dividend (or certain equivalent amounts) from any
transaction, including a hedging transaction or a transaction
consisting of a deposit of collateral or margin, entered into
in the ordinary course of the dealer's trade or business as a
dealer in securities within the meaning of section 475.\895\ In
the case of a QBU of the dealer, the income is required to be
attributable to activities of the QBU in the country of
incorporation, or to a QBU in the country in which the QBU both
maintains its principal office and conducts substantial
business activity. A coordination rule provides that, for
securities dealers, this exception generally takes precedence
over the exception for active financing income.
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\895\Sec. 954(c)(2)(C).
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Income is treated as active financing income only if, among
other requirements, it is derived by a CFC or by a QBU of that
CFC. Certain activities conducted by persons related to the CFC
or its QBU are treated as conducted directly by the CFC or
QBU.\896\ An activity qualifies under this rule if the activity
is performed by employees of the related person and if the
related person is an eligible CFC, the home country of which is
the same as the home country of the related CFC or QBU; the
activity is performed in the home country of the related
person; and the related person receives arm's-length
compensation that is treated as earned in the home country.
Income from an activity qualifying under this rule is excluded
from subpart F income so long as the other active financing
requirements are satisfied.
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\896\Sec. 954(h)(3)(E).
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Certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch or within the CFC's country of creation
or organization are also excepted from foreign personal holding
company income, provided that certain requirements are met.
Further, additional exceptions from insurance income and from
foreign personal holding company income apply for certain
income of certain CFCs or branches with respect to risks
located in a country other than the United States, provided
that the requirements for these exceptions, including reserve
requirements, are met.\897\
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\897\Subject to approval by the IRS, a taxpayer may establish that
the reserve of a life insurance company for life insurance and annuity
contracts is the amount taken into account in determining the foreign
statement reserve for the contract (reduced by catastrophe,
equalization, or deficiency reserve or any similar reserve). IRS
approval is to be based on whether the method, the interest rate, the
mortality and morbidity assumptions, and any other factors taken into
account in determining foreign statement reserves (taken together or
separately) provide an appropriate means of measuring income for
Federal income tax purposes.
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Exclusion of previously taxed earnings and profits
A 10-percent U.S. shareholder of a CFC may exclude from its
income actual distributions of earnings and profits from the
CFC that were previously included in the 10-percent U.S.
shareholder's income under subpart F.\898\ Any income inclusion
(under section 956) resulting from investments in U.S. property
may also be excluded from the 10-percent U.S. shareholder's
income when such earnings are ultimately distributed.\899\
Ordering rules provide that distributions from a CFC are
treated as coming first out of earnings and profits of the CFC
that have been previously taxed under subpart F, then out of
other earnings and profits.\900\
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\898\Sec. 959(a)(1).
\899\Sec. 959(a)(2).
\900\Sec. 959(c).
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Basis adjustments
In general, a 10-percent U.S. shareholder of a CFC receives
a basis increase with respect to its stock in the CFC equal to
the amount of the CFC's earnings that are included in the 10-
percent U.S. shareholder's income under subpart F.\901\
Similarly, a 10-percent U.S. shareholder of a CFC generally
reduces its basis in the CFC's stock in an amount equal to any
distributions that the 10-percent U.S. shareholder receives
from the CFC that are excluded from its income as previously
taxed under subpart F.\902\
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\901\Sec. 961(a).
\902\Sec. 961(b).
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Passive foreign investment companies
The Tax Reform Act of 1986\903\ established the PFIC anti-
deferral regime. A PFIC is generally defined as any foreign
corporation if 75 percent or more of its gross income for the
taxable year consists of passive income, or 50 percent or more
of its assets consists of assets that produce, or are held for
the production of, passive income.\904\ Alternative sets of
income inclusion rules apply to U.S. persons that are
shareholders in a PFIC, regardless of their percentage
ownership in the company. One set of rules applies to PFICs
that are qualified electing funds, under which electing U.S.
shareholders currently include in gross income their respective
shares of the company's earnings, with a separate election to
defer payment of tax, subject to an interest charge, on income
not currently received.\905\ A second set of rules applies to
PFICs that are not qualified electing funds, under which U.S.
shareholders pay tax on certain income or gain realized through
the company, plus an interest charge that is attributable to
the value of deferral.\906\ A third set of rules applies to
PFIC stock that is marketable, under which electing U.S.
shareholders currently take into account as income (or loss)
the difference between the fair market value of the stock as of
the close of the taxable year and their adjusted basis in such
stock (subject to certain limitations), often referred to as
``marking to market.''\907\ Under the PFIC regime, passive
income is any income which is of a kind that would be foreign
personal holding company income, including dividends, interest,
royalties, rents, and certain gains on the sale or exchange of
property, commodities, or foreign currency.
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\903\Pub. L. No. 99-514.
\904\Sec. 1297.
\905\Secs. 1293-1295.
\906\Sec. 1291.
\907\Sec. 1296.
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However, among other exceptions, passive income does not
include any income derived in the active conduct of an
insurance business by a corporation that is predominantly
engaged in an insurance business and that would be subject to
tax under subchapter L if it were a domestic corporation.\908\
In applying the insurance exception, the IRS analyzes whether
risks assumed under contracts issued by a foreign company
organized as an insurer are truly insurance risks, whether the
risks are limited under the terms of the contracts, and the
status of the company as an insurance company.\909\
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\908\Sec. 1297(b)(2)(B).
\909\Notice 2003-34, 2003-C.B. 1 990, June 9, 2003. See also, Prop.
Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 24,
2015.
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Other anti-deferral rules
The subpart F and PFIC rules are not the only anti-deferral
regimes. Other rules that impose current U.S. taxation on
income earned through corporations include the accumulated
earnings tax rules\910\ and the personal holding company rules.
---------------------------------------------------------------------------
\910\Secs. 531-537.
---------------------------------------------------------------------------
Rules for coordination among the anti-deferral regimes are
provided to prevent U.S. persons from being subject to U.S. tax
on the same item of income under multiple regimes. For example,
a corporation generally is not treated as a PFIC with respect
to a particular shareholder if the corporation is also a CFC
and the shareholder is a 10-percent U.S. shareholder. Thus,
subpart F is allowed to trump the PFIC rules.
3. Foreign tax credit
Subject to certain limitations, U.S. citizens, resident
individuals, and domestic corporations are allowed to claim
credit for foreign income taxes they pay. A domestic
corporation that owns at least 10 percent of the voting stock
of a foreign corporation is allowed a ``deemed-paid'' credit
for foreign income taxes paid by the foreign corporation that
the domestic corporation is deemed to have paid when the
related income is distributed as a dividend or is included in
the domestic corporation's income under the anti-deferral
rules.\911\
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\911\Secs. 901, 902, 960, 1291(g).
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The foreign tax credit generally is limited to a taxpayer's
U.S. tax liability on its foreign-source taxable income (as
determined under U.S. tax accounting principles). This limit is
intended to ensure that the credit serves its purpose of
mitigating double taxation of foreign-source income without
offsetting U.S. tax on U.S.-source income.\912\ The limit is
computed by multiplying a taxpayer's total U.S. tax liability
for the year by the ratio of the taxpayer's foreign-source
taxable income for the year to the taxpayer's total taxable
income for the year. If the total amount of foreign income
taxes paid and deemed paid for the year exceeds the taxpayer's
foreign tax credit limitation for the year, the taxpayer may
carry back the excess foreign taxes to the previous year or
carry forward the excess taxes to one of the succeeding 10
years.\913\
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\912\Secs. 901, 904.
\913\Sec. 904(c).
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The computation of the foreign tax credit limitation
requires a taxpayer to determine the amount of its taxable
income from foreign sources in each limitation category
(described below) by allocating and apportioning deductions
between U.S.-source gross income, on the one hand, and foreign-
source gross income in each limitation category, on the other.
In general, deductions are allocated and apportioned to the
gross income to which the deductions factually relate.\914\
However, subject to certain exceptions, deductions for interest
expense and research and experimental expenses are apportioned
based on taxpayer ratios.\915\ In the case of interest expense,
this ratio is the ratio of the corporation's foreign or
domestic (as applicable) assets to its worldwide assets. In the
case of research and experimental expenses, the apportionment
ratio is based on either sales or gross income. All members of
an affiliated group of corporations generally are treated as a
single corporation for purposes of determining the
apportionment ratios.\916\
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\914\Treas. Reg. sec. 1.861-8(b), Temp. Treas. Reg. sec. 1.861-
8T(c).
\915\Temp. Treas. Reg. sec. 1.861-9T, Treas. Reg. sec. 1.861-17.
\916\Sec. 864(e)(1), (6); Temp. Treas. Reg. sec. 1.861-14T(e)(2).
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The term ``affiliated group'' is determined generally by
reference to the rules for determining whether corporations are
eligible to file consolidated returns.\917\ These rules exclude
foreign corporations from an affiliated group.\918\ Interest
expense allocation rules permitting a U.S. affiliated group to
apportion the interest expense of the members of the U.S.
affiliated group on a worldwide-group basis were modified in
2004, and initially effective for taxable years beginning after
December 31, 2008.\919\ The effective date of the modified
rules has been delayed to January 1, 2021.\920\ A result of
this rule is that interest expense of foreign members of a U.S.
affiliated group is taken into account in determining whether a
portion of the interest expense of the domestic members of the
group must be allocated to foreign-source income. An allocation
to foreign-source income generally is required only if, in
broad terms, the domestic members of the group are more highly
leveraged than is the entire worldwide group. The new rules are
generally expected to reduce the amount of the U.S. group's
interest expense that is allocated to foreign-source income.
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\917\Secs. 864(e)(5), 1504.
\918\Sec. 1504(b)(3).
\919\Sec. 864(f); ``American Jobs Creation Act of 2004''
(``AJCA''), Pub. L. 108-357, sec. 401(a).
\920\Hiring Incentives to Restore Employment Act, Pub. L. No. 111-
147, sec. 551(a).
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The foreign tax credit limitation is applied separately to
passive category income and to general category income.\921\
Passive category income includes passive income, such as
portfolio interest and dividend income, and certain specified
types of income. All other income is in the general category.
Passive income is treated as general category income if it is
earned by a qualifying financial services entity. Passive
income is also treated as general category income if it is
highly taxed (that is, if the foreign tax rate is determined to
exceed the highest rate of tax specified in Code section 1 or
11, as applicable). Dividends (and subpart F inclusions),
interest, rents, and royalties received by a 10-percent U.S.
shareholder from a CFC are assigned to a separate limitation
category by reference to the category of income out of which
the dividends or other payments were made.\922\ Dividends
received by a 10-percent corporate shareholder of a foreign
corporation that is not a CFC are also categorized on a look-
through basis.\923\
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\921\Sec. 904(d). AJCA generally reduced the number of income
categories from nine to two, effective for tax years beginning in 2006.
Before AJCA, the foreign tax credit limitation was applied separately
to the following categories of income: (1) passive income, (2) high
withholding tax interest, (3) financial services income, (4) shipping
income, (5) certain dividends received from noncontrolled section 902
foreign corporations (also known as ``10/50 companies''), (6) certain
dividends from a domestic international sales corporation or former
domestic international sales corporation, (7) taxable income
attributable to certain foreign trade income, (8) certain distributions
from a foreign sales corporation or former foreign sales corporation,
and (9) any other income not described in items (1) through (8) (so-
called ``general basket'' income). A number of other provisions of the
Code, including several enacted in 2010 as part of Pub. L. No. 111-226,
create additional separate categories in specific circumstances or
limit the availability of the foreign tax credit in other ways. See,
e.g., secs. 865(h), 901(j), 904(d)(6), 904(h)(10).
\922\Sec. 904(d)(3). The subpart F rules applicable to CFCs and
their 10-percent U.S. shareholders are described below.
\923\Sec. 904(d)(4).
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Special rules apply to the allocation of income and losses
from foreign and U.S. sources within each category of
income.\924\ Foreign losses from one category will first be
used to offset income from foreign sources of other categories.
If there remains an overall foreign loss, it will be deducted
against income from U.S. sources. The same principle applies to
losses from U.S. sources. In subsequent years, the losses that
were deducted against another category or source of income will
be recaptured. That is, an equal amount of income from the same
category or source that generated a loss in the prior year will
be recharacterized as income from the other category or source
against which the loss was deducted. Up to 50 percent of income
from one source in any subsequent year will be recharacterized
as income from the other source, whereas foreign-source income
in a particular category can be fully recharacterized as income
in another category until the losses from prior years are fully
recaptured.\925\
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\924\Secs. 904(f), (g).
\925\Secs. 904(f)(1), (g)(1).
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In addition to the foreign tax credit limitation just
described, a taxpayer's ability to claim a foreign tax credit
may be further limited by a matching rule that prevents the
separation of creditable foreign taxes from the associated
foreign income. Under this rule, a foreign tax generally is not
taken into account for U.S. tax purposes, and thus no foreign
tax credit is available with respect to that foreign tax, until
the taxable year in which the related income is taken into
account for U.S. tax purposes.\926\
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\926\Sec. 909.
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4. Special rules
Dual consolidated loss rules
Under the rules applicable to corporations filing
consolidated returns, a dual consolidated loss (``DCL'') is any
net operating loss of a domestic corporation if the corporation
is subject to an income tax of a foreign country without regard
to whether such income is from sources in or outside of such
foreign country, or if the corporation is subject to such a tax
on a residence basis (a ``dual resident corporation'').\927\ A
DCL generally cannot be used to reduce the taxable income of
any member of the corporation's affiliated group. Losses of a
separate unit of a domestic corporation (a foreign branch or an
interest in a hybrid entity owned by the corporation) are
subject to this limitation in the same manner as if the unit
were a wholly owned subsidiary of such corporation. An
exemption is available under Treasury regulations in the case
of DCLs for which a domestic use election (that is, an election
to use the loss only for domestic, and not foreign, tax
purposes) has been made.\928\ Recapture is required, however,
upon the occurrence of certain triggering events, including the
conversion of a separate unit to a foreign corporation and the
transfer of 50 percent or more of the assets of a separate unit
within a twelve-month period.\929\
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\927\Sec. 1503(d).
\928\Treas. Reg. sec. 1.1503(d)-6(d).
\929\ See Treas. Reg. sec. 1.1503(d)-6(e)(1).
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Temporary dividends-received deduction for repatriated
foreign earnings
AJCA section 421 added to the Code section 965, a temporary
provision intended to encourage U.S. multinational companies to
repatriate foreign earnings. Under section 965, for one taxable
year certain dividends received by a U.S. corporation from its
CFCs were eligible for an 85-percent dividends-received
deduction. At the taxpayer's election, this deduction was
available for dividends received either during the taxpayer's
first taxable year beginning on or after October 22, 2004, or
during the taxpayer's last taxable year beginning before such
date.
The temporary deduction was subject to a number of general
limitations. First, it applied only to cash repatriations
generally in excess of the taxpayer's average repatriation
level calculated for a three-year base period preceding the
year of the deduction. Second, the amount of dividends eligible
for the deduction was generally limited to the amount of
earnings shown as permanently invested outside the United
States on the taxpayer's recent audited financial statements.
Third, to qualify for the deduction, dividends were required to
be invested in the United States according to a domestic
reinvestment plan approved by the taxpayer's senior management
and board of directors.\930\
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\930\Section 965(b)(4). The plan was required to provide for the
reinvestment of the repatriated dividends in the United States,
including as a source for the funding of worker hiring and training,
infrastructure, research and development, capital investments, and the
financial stabilization of the corporation for the purposes of job
retention or creation.
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No foreign tax credit (or deduction) was allowed for
foreign taxes attributable to the deductible portion of any
dividend.\931\ For this purpose, the taxpayer was permitted to
specifically identify which dividends were treated as carrying
the deduction and which dividends were not. In other words, the
taxpayer was allowed to choose which of its dividends were
treated as meeting the base-period repatriation level (and thus
carry foreign tax credits, to the extent otherwise allowable),
and which of its dividends were treated as part of the excess
eligible for the deduction (and thus subject to proportional
disallowance of any associated foreign tax credits).\932\
Deductions were disallowed for expenses that were directly
allocable to the deductible portion of any dividend.\933\
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\931\Sec. 965(d)(1).
\932\Accordingly, taxpayers generally were expected to pay regular
dividends out of high-taxed CFC earnings (thereby generating deemed-
paid credits available to offset foreign-source income) and section 965
dividends out of low-taxed CFC earnings (thereby availing themselves of
the 85-percent deduction).
\933\Sec. 965(d)(2).
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Domestic international sales corporations
A domestic international sales corporations (``DISC'') is a
domestic corporation that satisfies the following conditions:
95 percent of its gross receipts must be qualified export
receipts; 95 percent of the sum of the adjusted bases of all
its assets must be attributable to the sum of the adjusted
bases of qualified export assets; the corporation must have no
more than one class of stock; the par or stated value of the
outstanding stock must be at least $2,500 on each day of the
taxable year; and an election must be in effect to be taxed as
a DISC.\934\ In general, a DISC is not subject to corporate-
level tax and offers limited deferral of tax liability to its
shareholders.\935\ DISC income attributable to a maximum of $10
million annually of qualified export receipts is generally
exempt from income tax at both the corporate and shareholder
level. Shareholders must pay interest to account for the
benefit of deferring the tax liability on undistributed DISC
income related to this $10 million maximum annual amount.\936\
Such entities are also referred to as interest charge DISCs, or
IC-DISCs. Shareholders of a DISC are deemed to receive a
dividend out of current earnings and profits from qualified
export receipts in excess of $10 million.\937\ Gain on the sale
of DISC stock is treated as a dividend to the extent of
accumulated DISC income.\938\ The shareholders of a corporation
which is not a DISC, but was a DISC in a previous taxable year,
and which has previously taxed income or accumulated DISC
income, are also required to pay interest on the deferral
benefit, and gain on the sale or exchange of stock in such
corporation is treated as a dividend.
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\934\Secs. 992(a) and (b). If a corporation fails to satisfy either
or both of the 95-percent tests, it is deemed to satisfy such tests if
it makes a pro rata distribution of its gross receipts which are not
qualified export receipts and the fair market value of its assets which
are not qualified export assets. Sec. 992(c).
\935\Sec. 991. Prior to the 1984 Revenue Act (Pub. L. 98-369),
DISCs were eligible for more generous tax benefits that were eliminated
in favor of the since-repealed foreign sales corporation regime
(``FSC''). An overview of the history of the DISCs and FSCs regimes is
provided in Joseph Isenbergh, Vol. 3 U.S. Taxation of Foreign Persons
and Foreign Income, Para. 81. (Fourth Ed. 2016).
\936\The rate is the average of one-year constant maturity Treasury
yields. The deferral benefit is the excess of the amount of tax for
which the shareholder would be liable if deferred DISC income were
included as ordinary income over the actual tax liability of such
shareholder. Sec. 995(f).
\937\The amount of the deemed distribution is the sum of several
items, including qualified export receipts in excess of $10 million.
See sec. 955(b).
\938\Sec. 995(c).
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TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS
A. Establishment of Participation Exemption System for Taxation of
Foreign Income
1. Deduction for foreign-source portion of dividends received by
domestic corporations from specified 10-percent owned foreign
corporations (sec. 4001 of the bill and new sec. 245A of the Code)
REASONS FOR CHANGE
The Committee believes that the current tax system puts
American workers and companies at a severe disadvantage to
foreign workers and companies. This is primarily because the
United States is one of the few industrialized countries with a
worldwide system of taxation and has the highest corporate tax
rate among OECD member countries. The worldwide system of
taxation with deferral provides perverse incentives to keep
funds offshore because dividends from foreign subsidiaries are
not taxed until repatriated to the United States. The Committee
believes that a territorial system with appropriate anti-base
erosion safeguards, combined with a lower corporate tax rate,
will make American workers and companies competitive again, and
also will remove tax-driven incentives to keep funds offshore.
EXPLANATION OF PROVISION
In general
The provision generally establishes a participation
exemption system for foreign income. This exemption is provided
for by means of a 100-percent deduction for the foreign-source
portion of dividends received from specified 10-percent owned
foreign corporations by domestic corporations that are United
States shareholders of those foreign corporations within the
meaning of section 951(b) (referred to here as ``participation
DRD'').\939\
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\939\Under section 951(b), a domestic corporation is a United
States shareholder of a foreign corporation if it owns, within the
meaning of section 958(a), or is considered as owning by applying the
rules of section 958(b), 10 percent or more of the voting stock of the
foreign corporation.
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A specified 10-percent owned foreign corporation is any
foreign corporation with respect to which any domestic
corporation is a United States shareholder. The phrase does not
include a passive foreign investment company within the meaning
of subpart D of part VI of subchapter P.
The term ``dividend received'' is intended to be
interpreted broadly, consistently with the meaning of the
phrases ``amount received as dividends'' and ``dividends
received'' under sections 243 and 245, respectively.\940\ Under
proposed section 245A(e), the Secretary of the Treasury may
prescribe such regulations or other guidance as may be
necessary or appropriate to carry out the rules of section
245A, including clarifying the intended broad scope of the term
``dividend received.''
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\940\Consequently, for example, gain included in gross income as a
dividend under section 1248(a) or 964(e) would constitute a dividend
received for which the deduction under section 245A may be available.
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For example, if a domestic corporation indirectly owns
stock of a foreign corporation through a foreign partnership
and the domestic corporation would qualify for the
participation DRD with respect to dividends from the foreign
corporation if the domestic corporation owned such stock
directly, the domestic corporation would be allowed a
participation DRD with respect to its distributive share of the
partnership's dividend from the foreign corporation.
Foreign-source portion of a dividend
The participation DRD is available only for the foreign-
source portion of dividends received from specified 10-percent
owned foreign corporations. The foreign-source portion of any
dividend is the amount that bears the same ratio to the
dividend as the specified foreign corporation's post-1986
undistributed foreign earnings bears to the corporation's total
post-1986 undistributed earnings. Post-1986 undistributed
earnings are the amount of the earnings and profits of a
specified 10-percent owned foreign corporation accumulated in
taxable years beginning after December 31, 1986, as of the
close of the taxable year of the foreign corporation in which
the dividend is distributed and not reduced by dividends\941\
distributed during that year. Post-1986 undistributed foreign
earnings are, in general, the portion of post-1986
undistributed earnings that is not attributable to post-1986
undistributed U.S. earnings. Post-1986 undistributed U.S.
earnings are, in general, undistributed earnings attributable
to: (a) the corporation's income that is effectively connected
with the conduct of a trade or business within the United
States, or (b) any dividend received (directly or through a
wholly owned foreign corporation) from an 80-percent-owned (by
vote or value) domestic corporation.
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\941\Pursuant to section 959(d), a distribution of previously taxed
income does not constitute a dividend even if it reduces earnings and
profits.
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Rules similar to the rules described above apply when a
dividend is paid out of earnings and profits of a specified 10-
percent owned foreign corporation accumulated in taxable years
beginning before January 1, 1987. As a consequence, the
participation exemption system is available for both post-1986
and pre-1987 foreign earnings. An ordering rule provides that
dividends are treated as first being paid out of post-1986
undistributed earnings to the extent of those earnings.
An additional rule provides for the treatment of
distributions of a specified 10-percent owned foreign
corporation in excess of undistributed earnings. Under section
316(a)(2), a distribution of earnings and profits of a
corporation in the taxable year of the distribution is treated
as a dividend even if the distribution exceeds accumulated
earnings and profits.\942\ The determination of the foreign-
source portion of such a distribution is calculated in a
similar manner as for other types of dividends.
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\942\Called a ``nimble dividend.'' See, Boris I. Bittker and James
S. Eustice, Federal Income Taxation of Corporations and Shareholders,
(7th ed. 2016) para. 8-12.
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Foreign tax credit disallowance; foreign tax credit limitation
No foreign tax credit or deduction is allowed for any taxes
(including withholding taxes) paid or accrued with respect to a
dividend that qualifies for the participation DRD.
For purposes of computing the section 904(a) foreign tax
credit limitation, a domestic corporation that is a United
States shareholder of a specified 10-percent owned foreign
corporation must compute its foreign-source taxable income (and
entire taxable income) by disregarding the foreign-source
portion of any dividend received from that foreign corporation
for which the participation DRD is taken, as well as and any
deductions properly allocable or apportioned to that foreign-
source portion or the stock with respect to which it is paid.
Six-month holding period requirement
A domestic corporation is not permitted a participation DRD
in respect of any dividend on any share of stock that is held
by the domestic corporation for 180 days or less during the
361-day period beginning on the date that is 180 days before
the date on which the share becomes ex-dividend with respect to
the dividend. For this purpose, a domestic corporation is
treated as holding a share of stock for any period only if the
corporation is a specified 10-percent owned foreign corporation
and the taxpayer is a United States shareholder with respect to
such corporation during that period.
EFFECTIVE DATE
The provision applies to distributions made (and for
purposes of determining a taxpayer's foreign tax credit
limitation under section 904, deductions in taxable years
beginning) after December 31, 2017.
2. Application of participation exemption to investments in United
States property (sec. 4002 of the bill sec. 956 of the Code)
REASONS FOR CHANGE
The Committee believes that including amounts that a CFC
invests in United States property in a domestic corporate
shareholder's gross income would be the wrong result under a
participation exemption system, when the CFC could otherwise
pay a dividend or distribute property to the domestic corporate
shareholder in a manner that would be tax-free. The Committee
further believes that retention of such a rule would needlessly
discourage investment in the United States. However, because
the participation exemption does not extend to individuals,
section 956 should remain in effect with respect to individuals
who are United States shareholders of CFCs.
EXPLANATION OF PROVISION
Under the provision, the amount determined under section
956 (relating to CFC investments in United States property)
with respect to a domestic corporation is zero. A similar rule
is intended for domestic corporations that own a CFC through a
domestic partnership. The provision includes a specific grant
of authority to the Secretary to issue regulations to effect
that intent.
EFFECTIVE DATE
The provision applies to taxable years of foreign
corporations beginning after December 31, 2017.
3. Limitation on losses with respect to specified 10-percent owned
foreign corporations (sec. 4003 of the bill secs. 367(a)(3)(C) and 961
of the Code, and new sec. 91 of the Code)
REASONS FOR CHANGE
The Committee is concerned that a participation exemption
system could provide inappropriate double benefits in certain
circumstances. In particular, a distribution from a foreign
subsidiary that is eligible for a participation DRD would
reduce the value of the foreign subsidiary, thereby reducing
any built-in gain or increasing any built-in loss in the
shareholder's stock of the subsidiary. Reducing gain in this
manner is consistent with the application of section 1248(a)
(or section 964(e)) to recharacterize gain as a dividend for
which a participation DRD may be permitted. Increasing loss in
this manner, however, creates an inappropriate and double U.S.
tax benefit for receiving a tax-free distribution from a
foreign subsidiary.
Separately, the Committee is concerned that taxpayers may
wish to arbitrage the application of the participation
exemption system to foreign subsidiaries but not foreign
branches. Specifically, a taxpayer may deduct losses from a
foreign branch operation against U.S. taxable income and then
incorporate that branch once it becomes profitable. Present law
provides an array of loss recapture rules to address such a
fact pattern,\943\ but those rules generally rely on the
worldwide system of taxation to recapture losses in excess of
built-in gains by taxing future earnings when repatriated.
Instead of only recapturing such losses upon later repatriation
of earning, the Committee wishes to recapture the U.S. tax
benefits of these losses immediately upon the incorporation of
a foreign branch that has generated losses. This is so that the
repatriation of foreign earnings will not carry negative tax
consequences thereby discouraging such repatriation, which is
one of the reasons for moving to a participation exemption
system of taxation.
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\943\See, e.g., secs. 367(a)(3)(C), 904(f)(3), 1503(d).
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EXPLANATION OF PROVISION
Reduction in basis of certain foreign stock
Under the provision, solely for the purpose of determining
a loss, a domestic corporate shareholder's adjusted basis in
the stock of a specified 10-percent owned foreign corporation
(as defined in new section 245A) is reduced by an amount equal
to the portion of any dividend received with respect to such
stock from such foreign corporation that was not taxed by
reason of a dividends received deduction allowable under
section 245A in any taxable year of such domestic corporation.
This rule applies in coordination with section 1059, such that
any reduction in basis required pursuant to this provision will
be disregarded, to the extent the basis in the 10-percent owned
foreign corporation's stock has already been reduced pursuant
to section 1059.
Inclusion of transferred loss amount in certain assets transfers
Under the provision, if a domestic corporation transfers
substantially all of the assets of a foreign branch (within the
meaning of section 367(a)(3)(C)) to a foreign corporation
which, after such transfer, is a specified 10-percent owned
foreign corporation with respect to which the domestic
corporation is a United States shareholder, the domestic
corporation includes in gross income an amount equal to the
transferred loss amount, subject to certain limitations.
The transferred loss amount is the excess of: (1) losses
incurred by the foreign branch after December 31, 2017 for
which a deduction was allowed to the domestic corporation, over
(2) the sum of taxable income earned by the foreign branch and
gain recognized by reason of an overall foreign loss recapture
arising out of disposition of assets on account of the
underlying transfer. For the purposes of (2), only taxable
income of the foreign branch in taxable years after the loss is
incurred through the close of the taxable year of the transfer
is included.
For transfers not covered by section 367(a)(3)(C), the
transferred loss amount is reduced by the amount of gain
recognized by the domestic corporation on the transfer (other
than gains recognized by reason of overall foreign loss
recapture). For transfers covered by section 367(a)(3)(C), the
transferred loss amount is reduced by the amount of gain
recognized by reason of such subparagraph.
Amounts included in gross income by reason of the provision
or by reason of section 367(a)(3)(C) are treated as derived
from sources within the United States.
The provision provides authority for the Secretary of the
Treasury to prescribe regulations or other guidance for proper
adjustments to the adjusted basis of the specified 10 percent
owned foreign corporation to which the transfer is made, and to
the adjusted basis of the property transferred, to reflect
amounts included in gross income under the provision.
EFFECTIVE DATE
The provision relating to reduction of basis in certain
foreign stock for the purposes of determining a loss is
effective for distributions made after December 31, 2017.
The provision relating to transfer of loss amounts from
foreign branches to certain foreign corporations is effective
for transfers after December 31, 2017.
4. Treatment of deferred foreign income upon transition to
participation exemption system of taxation (sec. 4004 of the bill and
secs. 78, 904, 907, and 965 of the Code)
REASONS FOR CHANGE
In transitioning to a new participation exemption system,
the Committee seeks to enhance both the global competitiveness
of U.S. businesses and to encourage investment in the United
States. The Committee believes that many domestic companies
were reluctant to reinvest foreign earnings in the United
States, when doing so would subject those earnings to high
rates of corporate income tax rates. Accordingly, the Committee
is aware that such companies have accumulated significant
untaxed and undistributed foreign earnings as a result.
The Committee is also aware that such companies are
eligible for a 100-percent dividend-received deduction with
respect to any distributions made under the new participation
exemption system. To avoid a potential windfall for
corporations that deferred income, and to ensure that all
distributions from foreign subsidiaries are treated in the same
manner under the participation exemption system, the Committee
believes that it is appropriate to tax such earnings as if they
had been repatriated under present law, but at a reduced rate.
The Committee believes the tax on accumulated foreign
earnings should apply without requiring an actual distribution
of earnings, and further believes that the tax rate should take
into account the liquidity of the accumulated earnings.
Accordingly, the provision establishes a bifurcated rate, i.e.,
14 percent for earnings held in liquid form and 7 percent for
accumulated foreign earnings that have been reinvested in the
foreign subsidiary's business. Finally, the Committee has
provided procedures for payment and collection of the
transition tax that mitigate the burden on taxpayers.
EXPLANATION OF PROVISION
In general
The provision generally requires that, for the last taxable
year beginning before January 1, 2018, a U.S. shareholders of
any CFC or other foreign corporation that is at least 10-
percent U.S.-owned but not controlled (other than a PFIC) must
include in income its pro rata share of the accumulated post-
1986 deferred foreign income which was not previously taxed. A
portion of that pro rata share of deferred foreign income is
deductible; the amount deductible varies depending upon whether
the deferred foreign income is held in the form of liquid or
illiquid assets. The deduction results in a reduced rate of tax
of 14 percent for the included deferred foreign income held in
liquid form and 7 percent for the remaining deferred foreign
income. A corresponding portion of the credit for foreign taxes
is disallowed, thus limiting the credit to the taxable portion
of the included income. The increased tax liability generally
may be paid over an eight-year period.
Subpart F inclusion of deferred foreign income
The mechanism for the mandatory inclusion of pre-effective
date foreign earnings is subpart F. The provision provides that
the subpart F income of a specified foreign corporation is
increased for the last taxable year\944\ that begins before
January 1, 2018, by its accumulated post-1986 deferred foreign
income. In contrast to the participation exemption deduction
available only to domestic corporations that are U.S.
shareholders under subpart F, the transition ruleplies
to all U.S. shareholders\945\ of a specified foreign
corporation. A specified foreign corporation means (1) a CFC or
(2) any foreign corporation in which a domestic corporation is
a U.S. shareholder (determined without regard to the special
attribution rules of section 958(b)(4)), other than a PFIC that
is not a CFC.\946\ A specified foreign corporation that has
deferred foreign income is a deferred foreign income
corporation. Consistent with the general operation of subpart
F, each U.S. shareholder of a specified foreign corporation
must include in income its pro rata share of the foreign
corporation's subpart F income attributable to its accumulated
deferred foreign income.\947\
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\944\Foreign corporations no longer in existence and for which
there is no taxable year beginning or ending in 2017 are not within the
scope of this provision.
\545\Sec. 951(b), which defines United States shareholder as any
U.S. person that owns 10 percent or more of the voting classes of stock
of a foreign corporation.
\546\Taxation of income earned by PFICs remains subject to the
antideferral PFIC regime and dividends received from non-CFC PFICs are
ineligible for the dividend received deduction under new section 245A.
\547\For purposes of taking into account its subpart F income under
this rule, a noncontrolled 10/50 corporation is treated as a CFC.
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Accumulated post-1986 deferred foreign income
Accumulated post-1986 deferred foreign income of a
specified foreign corporation that is the subject to mandatory
inclusion under this provision is the greater of the
accumulated post-1986 deferred foreign income determined as of
November 2, 2017 (the date of introduction of the bill) or as
of December 31, 2017. The includible portion of the accumulated
post-1986 deferred foreign income is all post-1986 earnings and
profits (``E&P;'') that are not (1) attributable to income that
is effectively connected with the conduct of a trade or
business in the United States and thus subject to current U.S.
income tax, or (2) when distributed, excludible from the gross
income of a U.S. shareholder as previously taxed income under
section 959.
Post-1986 earnings and profits are those earnings that
accumulated in taxable years beginning after 1986, computed in
accordance with sections 964(a) and 986, even if arising from
periods during which the U.S. shareholder did not own stock of
the foreign corporation. Post-1986 earnings are not reduced by
dividends during the taxable year in which measurement occurs.
Such earnings are increased by the amount of qualified
deficits\948\ that arose in a taxable year beginning before
January 1, 2018, if such deficit is also treated as a qualified
deficit for purposes of taxable years beginning after December
31, 2017. Finally, the post-1986 earnings and profits are
determined by reference to the foreign corporation's total
earnings and profits, irrespective of the foreign tax credit
separate category limitations.\949\
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\948\Sec. 952(c)(1)(B)(ii).
\949\For example, assume that a foreign corporation organized after
December 31, 1986 has $100 of accumulated earnings and profits as of
November 1, 2017, and December 31, 2017 (determined without diminution
by reason of dividends distributed during the taxable year and after
any increase for qualified deficits), which consist of $120 general
limitation earnings and profits and a $20 passive limitation deficit,
the foreign corporation's post-1986 earnings and profits would be $100,
even if the $20 passive limitation deficit was a hovering deficit
described in Treas. Reg. sec. 1.367(b)-17(d)(2). Foreign income taxes
related to the hovering deficit, however, would not be deemed paid by
the U.S. shareholder recognizing an incremental income inclusion. The
same would be true of a hovering deficit in the general limitation
category.
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The Secretary may prescribe regulations or other guidance
regarding the treatment of accumulated post-1986 foreign
deferred income of specified foreign corporations that have
shareholders who are not U.S. shareholders. Such rules may also
include rules that are appropriate to implement the intent of
the revised section 965 and the use of the date of introduction
as one of the measurement dates in order to establish a floor
for determining the post-1986 deferred foreign earnings and
profits. For example, guidance may address the extent to which
retroactive effective dates selected in entity classification
elections filed after introduction of the bill will be
permitted.\950\
---------------------------------------------------------------------------
\950\See Treas, Reg, 301.7701-3(c), under which an election may
specify an effective date up to 75 days prior to the date on which the
election is filed.
---------------------------------------------------------------------------
Reductions of amounts included in income of U.S.
shareholder of foreign corporations with deficits
in E&P;
The income inclusion required of a U.S. shareholder under
this transition rule is reduced by the portion of aggregate
foreign earnings and profits deficit allocated to that person
by reason of that person's interest in one or more E&P; deficit
foreign corporations. An E&P; deficit foreign corporation is
defined as any specified foreign corporation owned by the U.S.
shareholder as of the date on which accumulated earnings and
profits are measure for that corporation (November 2, 2017 or
December 31, 2017, as the case may be) and which also has a
deficit in post-1986 earnings and profits as of that date.
Accordingly, the deficits of a foreign subsidiary that
accumulated prior to its acquisition by the U.S. shareholder
may be taken into account in determining the aggregate foreign
earnings and profits deficit of a U.S. shareholder.
The U.S. shareholder aggregates its pro rata share in the
foreign E&P; deficits of each such company and allocates such
aggregate amount among the deferred foreign income corporations
in which the shareholder is a U.S. shareholder. The aggregate
foreign E&P; deficit is allocable to a specified foreign
corporation in the same ratio as the U.S. shareholder's pro
rata share of post-1986 deferred income in that corporation
bears to the U.S. shareholder's pro rata share of accumulated
post-1986 deferred foreign income from all deferred income
companies of such shareholder.
To illustrate the ratio, assume that Z, a domestic
corporation, is a U.S. shareholder with respect to each of four
specified foreign corporations, two of which are E&P; deficit
foreign corporations. Assume further the foreign companies have
the following accumulated post-1986 deferred foreign income or
foreign E&P; deficits as of November 2, 2017 and December 31,
2017:
Example
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Specified Foreign Corp. Percentage Owned Post-1986 profit/deficit USD Pro Rata Share
--------------------------------------------------------------------------------------------------------------------------------------------------------
A............................................................. 60% ($1,000) ($600)
B............................................................. 10% ($200) ($20)
C............................................................. $2,000 $1,400 70%
D............................................................. 100% $1,000 $1,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
The aggregate foreign E&P; deficit of the U.S. shareholder
is ($620), and the aggregate share of accumulated post-1986
deferred foreign income is $2,400. Thus, the portion of the
aggregate foreign E&P; deficit allocable to Corporation C is
($362), that is, ($620) 1400/2400. The remainder of
the aggregate foreign E&P; deficit is allocable to Corporation
D. The U.S. shareholder has a net surplus of E&P; in the amount
of $1,780.
The provision also permits intragroup netting among U.S.
shareholders in an affiliated group in which there is at least
one U.S. shareholder with a net E&P; surplus and another with a
net E&P; deficit. The net E&P; surplus shareholder may reduce its
net surplus by the shareholder's applicable share of aggregate
unused E&P; deficit, based on the group's ownership percentage
of the members. For example, assume that a U.S. corporation has
two domestic subsidiaries, X and Y, each of which it owns 100
percent and 80 percent, respectively. If X has a $1,000 net E&P;
surplus, and Y has $1,000 net E&P; deficit, X is an E&P; net
surplus shareholder, and Y is an E&P; net deficit shareholder.
The net E&P; surplus of X is reduced by the net E&P; deficit of Y
to the extent of the group's ownership percentage in Y, which
is 80-percent. The remaining net E&P; deficit of Y is unused. If
the U.S. shareholder Z is also a wholly owned subsidiary of the
same U.S. parent as X and Y, the group ownership percentage of
Y is unchanged, and the surpluses of X and Z are reduced
ratably by 800 of the net E&P; deficit of Y.
Participation exemption applied to accumulated post-1986
deferred foreign income
A U.S. shareholder of a specified foreign corporation is
allowed a deduction of a portion of the increased subpart F
income attributable to the inclusion of pre-effective date
deferred foreign income. The amount of the deduction is the sum
of the 14-percent rate equivalent percentage of the inclusion
amount that is the shareholder's aggregate cash position and
the 7 percent rate equivalent percentage of the portion of the
inclusion that exceeds the aggregate cash position. By stating
the permitted deduction in the form of a tax rate equivalent
percentage, the provision ensures that all pre-effective date
accumulated post-1986 deferred foreign income is subject to
either a 7-percent or 14-percent rate of tax, depending on the
underlying assets as of the measurement date, without regard to
the corporate tax rate that may be in effect at the time of the
inclusion. For example, corporate taxpayers that use a fiscal
year as the taxable year may report the increased subpart F
income in a taxable year for which a reduced corporate tax rate
would otherwise apply (on a pro-rated basis under section 15),
but the allowable deduction would be reduced such that the rate
of U.S. tax on the income inclusion would be 7 or 14 percent.
Aggregate cash position
The aggregate cash position of a U.S. shareholder is the
average of the shareholder's pro rata share of the cash
position of each specified foreign corporation with respect to
which that shareholder is a U.S. shareholder on each of three
dates: date of introduction (November 2, 2017) and the last day
of the two most recent taxable years ending before the date of
introduction. Appropriate adjustments are made if a specified
foreign corporation is not in existence on one or more of those
dates. By using a three-year average as the aggregate cash
position for a U.S. shareholders, the effect of unusual or
anomalous transactions is muted.
For purposes of this computation, the cash position of
certain non-corporate entities that would be treated as
specified foreign corporations if they were foreign
corporations is also included. The cash position of an entity
consists of all cash, net accounts receivables, and the fair
market value of similarly liquid assets, specifically including
personal property that is actively traded on an established
financial market, government securities, certificates of
deposit, commercial paper, foreign currency, and short-term
obligations. In addition, the Secretary may identify other
assets that are economically equivalent to the enumerated
assets that are treated as cash.
Certain reductions from the aggregate cash position are
specified in the provision. First, rules are provided to avoid
the double counting of cash positions of specified foreign
corporations in an affiliated group, while ensuring that all of
the cash position is taken into account. Second, regardless of
the form in which a specified foreign corporation holds
earnings, to the extent the earnings constitute blocked income
that could not be distributed by the corporation due to local
jurisdiction restrictions,\951\ such earnings are not included
in the cash position of that specified foreign corporation. The
blocked income remains within the scope of the accumulated
post-1986 deferred foreign income that is subject to inclusion
under this provision.
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\951\ 1ASec. 964(b) and regulations thereunder.
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In addition to the authority to identify other assets that
are subject to the cash position determination by regulation,
the provision also authorizes the Secretary to disregard
transactions that are determined to have the principal purpose
of reducing the aggregate foreign cash position.
Foreign tax credits reduced
A portion of foreign income taxes deemed paid or accrued
with respect to the increased subpart F income attributable to
the inclusion of pre-effective date deferred foreign income is
not creditable against the Federal income tax attributable to
the inclusion, nor are they deductible. The disallowed portion
of foreign tax credits is 60 percent of foreign taxes paid
attributable to the portion of the inclusion attributable to
the aggregate cash position plus 80 percent of foreign taxes
paid attributable to the remaining portion of the section 965
inclusion.\952\
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\952\Other foreign tax credits used by a taxpayer against tax
liability resulting from the deemed inclusion apply in full.
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The provision coordinates the disallowance of foreign tax
credits described above with the requirement\953\ that a
domestic corporate shareholder is deemed to receive a dividend
in an amount equal to foreign taxes it is deemed to have paid
and for which it claimed a credit. Under the coordination rule,
the foreign taxes treated as paid or accrued by a domestic
corporation as a result of the inclusion are limited to those
taxes in proportion to the taxable portion of the section 965
inclusion. The gross-up amount equals the total foreign income
taxes multiplied by a fraction, the numerator of which is
taxable portion of the increased subpart F income under this
provision and the denominator of which is the total increase in
subpart F income under this provision.
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\953\ 1ASec. 78.
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The amount of deferred foreign income required to be
included in subpart F income under this provision is
disregarded for purposes of determining the amount of income
from foreign sources and the combined foreign oil and gas
income that a U.S. shareholder has for purposes of the
recapture rules applicable to overall foreign losses, separate
limitation losses, and foreign oil and gas losses under
sections 904(f)(1) and 907(c)(4).
The foreign income taxes deemed paid with respect to the
inclusion required by the provision and for which no credit is
allowed in the year of inclusion by reason of section 904
limitations (e.g., because part or all of the inclusion
required by the provision is offset by a net operating loss
deduction) are eligible for a special 20 year carry-forward
period, rather than the otherwise applicable 10 year carry-
forward period.
Installment payments
A U.S. shareholder may elect to pay the net tax liability
resulting from the mandatory inclusion of pre-effective-date
undistributed CFC earnings in eight equal installments. The net
tax liability that may be paid in installments is the excess of
the U.S. shareholder's net income tax for the taxable year in
which the pre-effective-date undistributed CFC earnings are
included in income over the taxpayer's net income tax for that
year determined without regard to the inclusion. Net income tax
means net income tax as defined for purposes of the general
business credit, but reduced by the amount of that credit.
An election to pay tax in installments must be made by the
due date for the tax return for the taxable year in which the
pre-effective-date undistributed CFC earnings are included in
income. The Treasury Secretary has authority to prescribe the
manner of making the election. The first installment must be
paid on the due date (determined without regard to extensions)
for the tax return for the taxable year of the income
inclusion. Succeeding installments must be paid annually no
later than the due dates (without extensions) for the income
tax return of each succeeding year. If a deficiency is later
determined with respect to the net tax liability, the
additional tax due may be prorated among all installment
payments in most circumstances. The portions of the deficiency
prorated to an installment that was due before the deficiency
was assessed must be paid upon notice and demand. The portion
prorated to any remaining installment is payable with the
timely payment of that installment payment, unless the
deficiency is attributable to negligence, intentional disregard
of rules or regulations, or fraud with intent to evade tax, in
which case the entire deficiency is payable upon notice and
demand.
The timely payment of an installment does not incur
interest. If a deficiency is determined that is attributable to
an understatement of the net tax liability due under this
provision, the deficiency is payable with underpayment interest
for the period beginning on the date on which the net tax
liability would have been due, without regard to an election to
pay in installments, and ending with the payment of the
deficiency. Furthermore, any amount of deficiency prorated to a
remaining installment also bears interest on the deficiency,
but not on the original installment amount.
The provision also includes an acceleration rule. If (1)
there is a failure to pay timely any required installment, (2)
there is a liquidation or sale of substantially all of the U.S.
shareholder's assets (including in a bankruptcy case), (3) the
U.S. shareholder ceases business, or (4) another similar
circumstance arises, the unpaid portion of all remaining
installments is due on the date of the event (or, in a title 11
or similar case, the day before the petition is filed).
Special rule for S corporations
A special rule permits deferral of the transition net tax
liability for shareholders of a U.S. shareholder that is a
flow-through entity known as an S corporation.\954\ The S
corporation is required to report on its income tax return the
amount includible in gross income by reason of this provision,
as well as the amount of deduction that would be allowable, and
provide a copy of such information to its shareholders. Any
shareholder of the S corporation may elect to defer his portion
of the net tax liability at transition to the participation
exemption system until the shareholder's taxable year in which
a triggering event occurs. The election to defer the tax is due
not later than the due date for the return of the S corporation
for its last taxable year that begins before January 1, 2018.
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\954\Section 1361 defines an S corporation as a domestic small
business corporation that has an election in effect for status as an S
corporation, with fewer than 100 shareholders, none of whom are
nonresident aliens, and all of whom are individuals, estates, trusts or
certain exempt organizations.
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Three types of events may trigger an end to deferral of the
net tax liability. The first type of triggering event is a
change in the status of the corporation as an S corporation.
The second category includes liquidation, sale of substantially
all corporate assets, termination of the company or end of
business, or similar event, including reorganization in
bankruptcy. The third type of triggering event is a transfer of
shares of stock in the S corporation by the electing taxpayer,
whether by sale, death or otherwise, unless the transferee of
the stock agrees with the Secretary to be liable for net tax
liability in the same manner as the transferor. Partial
transfers trigger the end of deferral only with respect to the
portion of tax properly allocable to the portion of stock sold.
If a shareholder of an S corporation has elected deferral
under the special rule for S corporation shareholders and a
triggering event occurs, the S corporation and the electing
shareholder are jointly and severally liable for any net tax
liability and related interest or penalties. The period within
which the IRS may collect such liability does not begin before
the date of an event that triggers the end of the deferral. If
an election to defer payment of the net tax liability is in
effect for a shareholder, that shareholder must report the
amount of the deferred net tax liability on each income tax
return due during the period that the election is in effect.
Failure to include that information with each income tax return
will result in a penalty equal to five-percent of the amount
that should have been reported.
After a triggering event occurs, a shareholder is the S
corporation may elect to pay the net tax liability in eight
equal installments, subject to rules similar to those generally
applicable absent deferral. Whether a shareholder may elect to
pay in installments depends upon the type of event that
triggered the end of deferral. If the triggering event is a
liquidation, sale of substantially all corporate assets,
termination of the company or end of business, or similar
event, the installment payment election is not available.
Instead, the entire net tax liability is due upon notice and
demand. The installment election is due with the timely return
for the year in which the triggering event occurs. The first
installment payment is required by the due date of the same
return, determined without regard to extensions of time to
file.
Future considerations
The Committee is aware that certain aspects of this section
require additional attention. For example, the Committee
recognizes that the definition of post-1986 earnings and
profits could operate to count the same earnings twice where a
specified foreign corporation makes a distribution to another
specified foreign corporation on or after November 2, 2017, but
prior to the end of the taxable year to which section 965
applies. The Committee intends to correct this inappropriate
result. Additionally, the Committee is aware that the
definition of post-1986 earnings and profits in this section
includes a provision that increases post-1986 earnings and
profits by the amount of any qualified deficit, within the
meaning of section 952 of the Code. The Committee intends to
revise this provision to allow qualified deficits to reduce
post-1986 earnings and profits for purposes of section 965 and
to ensure that qualified deficits taken into account under
section 965 cannot be used to reduce future subpart F income.
The Committee also understands that the existing net operating
loss (NOL), overall domestic loss (ODL), and foreign tax credit
carry-forward rules may interact with income inclusions arising
from section 965 in ways that may not be appropriate and that
require additional consideration.
EFFECTIVE DATE
The provision is effective for the last taxable year of a
foreign corporation that begins before January 1, 2018, and
with respect to U.S. shareholders, for the taxable years in
which or with which such taxable years of the foreign
corporations end, and subsequent years.
B. Modifications Related to Foreign Tax Credit System
1. Repeal of section 902 indirect foreign tax credits; determination of
section 960 credit on current year basis (sec. 4101 of the bill and
secs. 78, 902 and 960 of the Code)
REASONS FOR CHANGE
The Committee believes that a section 902 credit is not
appropriate in a participation exemption system under which 100
percent of dividends received by certain domestic corporate
shareholders of specified foreign corporations are exempt from
U.S. taxation. To continue to offer section 902 credits for
taxes deemed paid would result in a double benefit to the U.S.
shareholder, by first allowing a dividend to be recognized in
income with no U.S. tax liability associated therewith, and by
further reducing existing U.S. tax liability with a credit for
taxes paid on foreign source income. Rather, offering deemed
paid foreign tax credits on a current year basis solely under
section 960 reflects what the Committee believes to be a
simpler and more appropriate application of the foreign tax
credit regime in a 100 percent participation exemption system.
EXPLANATION OF PROVISION
The provision repeals the deemed-paid credit with respect
to dividends received by a domestic corporation that owns 10
percent or more of the voting stock of a foreign corporation.
A deemed-paid credit is provided with respect to any income
inclusion under subpart F. The deemed-paid credit is limited to
the amount of foreign income taxes properly attributable to the
subpart F inclusion. Foreign income taxes under the provision
include income, war profits, or excess profits taxes paid or
accrued by the CFC to any foreign country or possession of the
United States. The provision eliminates the need for computing
and tracking cumulative tax pools.
Additionally, the provision provides rules applicable to
foreign taxes attributable to distributions from previously
taxed earnings and profits, including distributions made
through tiered-CFCs.
The Secretary is granted authority under the provision to
provide regulations and other guidance as may be necessary and
appropriate to carry out the purposes of this provision. It is
anticipated that the Secretary would provide regulations with
rules for allocating taxes similar to rules in place for
purposes of determining the allocation of taxes to specific
foreign tax credit baskets.\955\ Under such rules, taxes are
not attributable to an item of subpart F income if the base
upon which the tax was imposed does not include the item of
subpart F income. For example, if foreign law exempts a certain
type of income from its tax base, no deemed-paid credit results
from the inclusion of such income as subpart F. Tax imposed on
income that is not included in subpart F income, is not
considered attributable to subpart F income.
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\955\See Treas. Reg. sec. 1.904-6(a).
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In addition to the rules described in this section, the
provision makes several conforming amendments to various other
sections of the Code reflecting the repeal of section 902 and
the modification of section 960. These conforming amendments
include amending the section 78 gross-up provision to apply
solely to taxes deemed paid under the amended section 960.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
2. Source of income from sales of inventory determined solely on basis
of production activities (sec. 4102 of the bill and sec. 863 of the
Code)
REASONS FOR CHANGE
The Committee acknowledges that current administrative
guidance, which sources sales income, in part, based on the
place of destination rather than the place of production, may
be appropriate in the context of our current tax system.
However, the Committee believes this approach is not
appropriate under a participation exemption system with lower
tax rates. Rather than providing targeted relief to particular
kinds of income, the Committee is instead reducing tax rates
for all taxpayers, while also modernizing the U.S. system for
taxing cross-border income. Therefore, the Committee believes
changing present law in this area will more accurately measure
foreign-source taxable income as part of providing a flatter,
fairer, and simpler tax system.
EXPLANATION OF PROVISION
Under this provision, gains, profits, and income from the
sale or exchange of inventory property produced partly in, and
partly outside, the United States is allocated and apportioned
on the basis of the location of production with respect to the
property. For example, income derived from the sale of
inventory property to a foreign jurisdiction is sourced wholly
within the United States if the property was produced entirely
in the United States, even if title passage occurred elsewhere.
Likewise, income derived from inventory property sold in the
United States, but produced entirely in another country, is
sourced in that country even if title passage occurs in the
United States. If the inventory property is produced partly in,
and partly outside, the United States, however, the income
derived from its sale is sourced partly in the United States.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
C. Modifications of Subpart F Provisions
1. Repeal of inclusion based on withdrawal of previously excluded
subpart F income from qualified investment (sec. 4201 of the bill and
sec. 955 of the Code)
REASONS FOR CHANGE
In the transition to a participation exemption system,
foreign earned income that is not subject to immediate
inclusion in the U.S. shareholder's gross income under the
subpart F regime will generally be exempt from U.S. taxation
upon repatriation through a dividend paid from a specified
foreign corporation to its U.S. shareholder. Foreign base
company shipping income was repealed as a type of foreign base
company income (and therefore, subpart F income) in 2004.\956\
The Committee believes that since a CFC's foreign base shipping
company income is no longer subject to immediate inclusion in
its U.S. shareholder's gross income, a corresponding decrease
in the CFC's investment in that otherwise exempt income should
not trigger an immediate income inclusion to its U.S.
shareholder.
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\956\American Jobs Creation Act, Pub. L 108-357, 118 Stat. 1511
(Oct. 22, 2004).
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EXPLANATION OF PROVISION
The provision repeals section 955. As a result, a U.S.
shareholder in a CFC that invested its previously excluded
subpart F income in qualified foreign base company shipping
operations is no longer required to include in income a pro
rata share of the previously excluded subpart F income when the
CFC decreases such investments.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2017, and to taxable
years of U.S. shareholders within which or with which such
taxable years of foreign corporations end.
2. Repeal of treatment of foreign base company oil related income as
subpart F income (sec. 4202 of the bill and sec. 954(a) of the Code)
REASONS FOR CHANGE
The move to a participation exemption system and the repeal
of section 902 are expected to result in the loss of a
significant amount of foreign tax credits that are attributable
to foreign oil and gas operations and that are available to
offset U.S. tax liability imposed on current inclusions of
foreign base company oil related income. Consequently, the
Committee is concerned that moving to a participation exemption
system could undermine the intended application of those rules
and put U.S. oil and gas companies at a competitive
disadvantage relative to their foreign peers. Furthermore, the
Committee believes the introduction of additional anti-base
erosion rules under the bill obviates the need for separate
anti-base erosion rules with respect to foreign oil and gas
operations. Therefore, the Committee believes the foreign base
company oil related income rules are not necessary in the
context of the international tax reforms made in the bill.
EXPLANATION OF PROVISION
The provision eliminates foreign base company oil related
income as a category of foreign base company income.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2017, and for taxable
years of U.S. shareholders in which or with which such taxable
years of foreign corporations end.
3. Inflation adjustment of de minimis exception for foreign base
company income (sec. 4203 of the bill and sec. 954(b)(3) of the Code)
REASON FOR CHANGE
The de minimis exception contained in current section
954(b)(3)(A) has not been adjusted for inflation since its
enactment in 1986. The Committee believes that indexing the de
minimis amount to inflation is warranted so that it serves as a
more accurate reflection of the changing economic environment.
EXPLANATION OF PROVISION
The provision amends the de minimis exception of present
law, which permits a CFC to exclude its foreign base company
income if the sum of its total foreign base company income and
gross insurance income is the lesser of 5 percent of its gross
income or $1,000,000. In the case of any taxable year beginning
after 2017, the provision indexes for inflation the $1,000,000
de minimis amount for foreign base company income, with all
increases rounded to the nearest multiple of $50,000.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2017, and for taxable
years of U.S. shareholders in which or with which such taxable
years of foreign corporations end.
4. Look-thru rule for related controlled foreign corporations made
permanent (sec. 4204 of the bill and sec. 954(c)(6) of the Code)
REASONS FOR CHANGE
As was the case when section 954(c)(6) was originally
enacted, today most countries allow their companies to redeploy
active foreign earnings with no additional tax burden. The
Committee believes that this provision will make U.S. companies
and U.S. workers more competitive with respect to such
countries. By allowing U.S. companies to reinvest their active
foreign earnings where they are most needed without incurring
additional tax that companies based in many other countries
never incur, the Committee believes that the provision will
continue to enable U.S. companies to make more sales overseas
and thus produce more goods in the United States. These
benefits should be enhanced by making this provision permanent,
thereby eliminating uncertainty as to its future application.
EXPLANATION OF PROVISION
The provision makes the exclusion from foreign personal
holding company income for certain dividends, interest
(including factoring income that is treated as equivalent to
interest under section 954(c)(1)(E)), rents, and royalties
received or accrued by one CFC from a related CFC permanent.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2019, and for taxable
years of U.S. shareholders in which or with which such taxable
years of foreign corporations end.
5. Modification of stock attribution rules for determining status as a
controlled foreign corporation (sec. 4205 of the bill secs. 318, 958
and 6038 of the Code).
REASONS FOR CHANGE
The Committee is aware of certain transactions used to
avoid subpart F provisions. One such transaction involves
effectuating ``de-control'' of a foreign subsidiary, by taking
advantage of the section 958(b)(4) rule that effectively turns
off the constructive stock ownership rules of 318(a)(3) when to
do otherwise would result in a U.S. person being treated as
owning stock owned by a foreign person. Accordingly, such a
transaction converts former CFCs to non-CFCs, despite
continuous ownership by U.S. shareholders. The Committee
believes this provision is necessary to render de-controlling
transactions ineffective as a means of avoiding the subpart F
provisions.
EXPLANATION OF PROVISION
The provision amends the ownership attribution rules of
section 958(b) so that certain stock of a foreign corporation
owned by a foreign person is attributed to a related U.S.
person for purposes of determining whether the related U.S.
person is a U.S. shareholder of the foreign corporation and,
therefore, whether the foreign corporation is a CFC. In other
words, the provision provides ``downward attribution'' from a
foreign person to a related U.S. person in circumstances in
which present law does not so provide. The pro rata share of a
CFC's subpart F income that a U.S. shareholder is required to
include in gross income, however, continues to be determined
based on direct or indirect ownership of the CFC, without
application of the new downward attribution rule. The Secretary
is granted authority to alleviate any unnecessary reporting
burdens that may be triggered by the provision.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2017, and for taxable
years of U.S. shareholders in which or with which such taxable
years of foreign corporations end.
6. Elimination of requirement that corporation must be controlled for
30 days before subpart F inclusions apply (sec. 4206 of the bill and
951(a)(1) of the Code)
REASONS FOR CHANGE
The Committee believes the original purpose for the 30-day
rule to facilitate tax administration--is no longer necessary
in light of the availability of technology to track owner and
corporate attributes on a daily basis. At the same time, the
Committee believes the 30-day rule under present law provides
inappropriate opportunities for taxpayers to structure
transactions to avoid U.S. tax.
EXPLANATION OF PROVISION
The provision eliminates the requirement that a corporation
must be controlled for an uninterrupted period of 30 days
before subpart F inclusions apply.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2017, and for taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
D. Prevention of Base Erosion
1. Current year inclusion by United States shareholders with foreign
high returns (sec. 4301 of the bill and secs. 78 and 960 and new sec.
951A of the Code)
REASONS FOR CHANGE
Under present law, multinational enterprises have
flexibility to attribute profits to low-tax jurisdictions
because each enterprise can structure transactions between
affiliates in a manner that minimizes overall tax liability.
The arm's length standard, which the Committee believes
continues to be the best standard for determining the
appropriate pricing of a transaction between affiliates,
provides that profits are attributable based on the functions
performed, the assets employed, and the risks assumed by the
relevant parties.\957\ To the extent that these functions,
assets, and risks are mobile, taxpayers may seek to situate
them in, or relocate them to, low-tax jurisdictions.
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\957\See generally Treas. Reg. sec. 1.482-1 et seq.
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Changing the U.S. international tax system from a worldwide
system of taxation to a participation exemption system of
taxation exacerbates the incentive under present law to shift
profits abroad. Specifically, under present law, most foreign
profits earned through a subsidiary are not subject to current
taxation but will eventually be subject to U.S. taxation upon
repatriation. Under the participation exemption system provided
for in the bill, however, foreign profits earned through a
subsidiary generally will never be subject to U.S. taxation.
Accordingly, new measures to protect against the erosion of the
U.S. tax base are warranted.
One common form of erosion is the concentration of a
multinational enterprise's high-value functions, assets, and
risks abroad in low-tax jurisdictions in order to generate
profits offshore. The internal supply chain giving rise to
these profits may or may not involve U.S. activities, although
the existence of a U.S. shareholder may indicate some U.S.
connection (e.g., U.S. research and development, U.S.-sourced
capital, etc.). The concentration of these functions, assets,
and risks may occur through the relocation of employees, the
acquisition or development of intellectual property offshore,
or the contractual allocation of risk within the enterprise.
Although present law addresses transfers of property from a
U.S. shareholder to its foreign subsidiary\958\ and subjects
certain forms of passive or highly mobile income to current
U.S. taxation,\959\ present law does not adequately address the
actions described in the preceding sentence.\960\
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\958\See, e.g., secs. 367(d) and 482.
\959\See secs. 951-964; see also sec. 367(a)(3)(B).
\960\For example, the Tax Court has concluded a foreign
subsidiary's use of its U.S. parent's business opportunities or
employees does not necessarily constitute a compensable transfer of
property. See Hospital Corp. v. Commissioner, 81 T.C. 520 (1983),
nonacq. 1987-2 C.B. 1; Veritas Software Corp. v. Commissioner, 133 T.C.
297 (2009), nonacq. AOD-2010-05. Additionally, the Tax Court has
concluded that a foreign subsidiary's use of its own resources, even if
originating from or connected with its U.S. parent's resources, does
not necessarily result in taxable income of the U.S. parent. See, e.g.,
Amazon.com, Inc. v. Commissioner, 148 T.C. No. 8 (2017); Eaton Corp. v.
Commissioner, T.C. Memo. 2017-147; Medtronic Inc. v. Commissioner, T.C.
Memo. 2016-112. The Committee does not believe the U.S. tax base would
be adequately protected from erosion under a participation exemption
system if these opportunities for concentrating high returns abroad
remained available to taxpayers.
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The Committee recognizes that multinational companies
concentrate valuable functions, assets, and risks for reasons
other than tax savings. For example, centralizing decision-
making, quality control, and brand management into regional
centers of excellence can provide significant value to an
enterprise. This may result in the concentration of complex
functions, valuable intellectual property, and entrepreneurial
risk in a particular principal affiliate in a particular
country, entirely independent of tax considerations. This also
results, however, in significant profits being attributable to
a single entity, which may result in significant tax savings if
that entity is subject to a low effective tax rate. The
Committee believes that the ability to obtain this result
provides significant financial incentive for companies to
structure in this manner in order to concentrate profits in
low-tax jurisdictions, ultimately leading to the migration of
valuable jobs and property from the United States.
Therefore, the Committee has studied various mechanisms for
taxing high returns concentrated in U.S. shareholders' foreign
subsidiaries. Other proposals, including those released by the
Committee, have considered approaches based on specific
transfers of intellectual property, foreign earnings
attributable to all foreign activities, and foreign earnings
attributable only to intellectual property.\961\ These
proposals have fallen short conceptually and administratively,
leading the Committee to focus on foreign high returns.\962\
Specifically, the Committee believes that foreign high returns
attributable to mobile functions, assets, and risks are best
measured as the excess of foreign earnings over a normal
equity-holder's return on assets with limited mobility--i.e.,
depreciable tangible property.\963\ In making this measurement,
the Committee recognizes the integrated nature of modern supply
chains and believes it is more appropriate to look at a
multinational enterprise's foreign operations on an aggregate
basis, rather than by entity or by country.
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\961\See, e.g., Ways and Means Discussion Draft, 112th Cong, 1st
Sess. (October 26, 2011), available at https://waysandmeans.house.gov/
UploadedFiles/Discussion_Draft.pdf.
\962\See the Tax Reform Act of 2014, H.R. 1 (113th Cong., 2nd
Sess., February 26, 2014). The Committee has also considered and
continues to consider moving to a destination-based system of taxation,
although the bill does not do so.
\963\The Committee also believes that looking to a normal equity-
holder's return--i.e., by excluding creditors' returns paid through
interest--will prevent distortions that would otherwise arise if
taxpayers could obtain a tax advantage by acquiring depreciable
tangible property with debt that is not expected to produce a return in
excess of the financing costs.
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Notwithstanding these considerations, certain kinds of
income are not appropriately subject to scrutiny under
additional anti-base erosion rules. Subpart F income and ECI
are already subject to full U.S. taxation and need not be
subject to this provision's anti-base erosion rules. Income
from the redeployment of active foreign earnings should not be
subject to additional U.S. tax for the same reasons that
section 954(c)(6) is made permanent under section 4204 of the
bill--i.e., to make U.S. companies and U.S. workers more
competitive globally. Income subject to the active financing
exception rules of sections 954(c)(2)(C), (h), and (i) have
already passed scrutiny under existing anti-base erosion rules
based on local presence and are unlikely to be the mobile
income with which the Committee is concerned. And profits from
the disposition of market-priced commodities generally do not
relate to functions, assets, or risks easily relocated within a
multinational group. Accordingly, these categories of income
generally can be excluded in computing foreign high returns.
As previously mentioned, the Committee does not believe the
concentration of high returns abroad by itself is a sufficient
indicium of erosion of the U.S. tax base. Where those returns
are subject to a low effective tax rate that achieves
significant tax savings, however, the Committee believes base
erosion may have been a consideration and that U.S. taxation is
appropriate.
Conditioning the application of an anti-base erosion rule
on low effective tax rates can be accomplished through a low-
tax test or a reduced U.S. tax rate with a credit. Under the
former approach, foreign earnings would be subject to U.S. tax
only if the effective foreign tax rate is below a certain
threshold, leading to a cliff effect and the potential for
significant double taxation if credits are not allowed. Under
the latter approach, U.S. tax is imposed at a reduced rate with
a credit allowed for foreign taxes paid, which is more complex
and encourages foreign jurisdictions to raise taxes to ``soak
up'' the credit, but which also applies more smoothly to
companies near the effective tax rate threshold. The Committee
believes the latter approach is more favorable both to the
competitiveness of U.S. workers and companies and the U.S.
fisc. Furthermore, the Committee believes that relying on the
framework of existing law can mitigate complexity and that
partially disallowing foreign tax credits, combined with
measuring foreign high return income and foreign taxes on such
income on a global basis, will protect against foreign soak-up
taxes. Determining the appropriate threshold for a low
effective tax rate requires a balance between protecting the
U.S. tax base and promoting the global competitiveness of U.S.
workers and companies.
EXPLANATION OF PROVISION
In general
Under the provision, a U.S. shareholder of any CFC must
include in gross income for a taxable year an amount equal to
50 percent of its foreign high return amount (``FHRA'') in a
manner generally similar to inclusions of subpart F income.
FHRA means, with respect to any U.S. shareholder for the
shareholder's taxable year, the shareholder's net CFC tested
income less an amount equal to the excess (if any) of (1) the
applicable percentage of the aggregate of the shareholder's pro
rata share of the qualified business asset investment
(``QBAI'') of each CFC with respect to which it is a U.S.
shareholder over (2) the amount of interest expense taken into
account in determining the shareholder's net CFC tested income.
The applicable percentage is the Federal short-term rate
(determined under section 1274(d) for the month in which such
shareholder's taxable year ends) plus seven percentage points.
The formula for FHRA, which is calculated at the U.S.
shareholder level, is generally:\964\
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\964\If the amount of interest expense exceeds [(7% + AFR) x QBAI],
then the quantity in brackets in the formula equals zero in the
determination of FHRA.
FHRA = Net CFC Tested Income - [(7% + AFR) x QBAI -
---------------------------------------------------------------------------
Interest Expense]
where AFR is the short-term Federal rate.
Net CFC tested income
Net CFC tested income means, with respect to any U.S.
shareholder, the excess of the aggregate of its pro rata share
of the tested income of each CFC with respect to which it is a
U.S. shareholder over the aggregate of its pro rata share of
the tested loss of each CFC with respect to which it is a U.S.
shareholder. Pro rata shares are determined under the rules of
section 951(a)(2).
The formula for net CFC tested income, which is calculated
at the U.S. shareholder level, is:
Net CFC Tested Income = Sum of CFC Tested Income -
Sum of CFC Tested Loss
The tested income of a CFC means the excess (if any) of the
gross income of the corporation determined without regard to
amounts excluded from tested income, over deductions (including
taxes) properly allocable to such gross income. The amounts
excluded from test income are: (1) the corporation's ECI if the
income is subject to tax;\965\ (2) any gross income taken into
account in determining the corporation's subpart F income; (3)
any amount, except as otherwise provided by the Secretary, that
qualifies for CFC look-through treatment, but only to the
extent that any deduction allowable for the payment or accrual
of such amount does not result in a reduction of the FHRA of
any U.S. shareholder (determined without regard to such
amount); (4) any gross income excluded as foreign personal
holding company income by reason of the exceptions for active
financing income and active insurance income, as well as the
exception for dealers under section 954(c)(2)(C); (5) any gross
income excluded from foreign base company income or insurance
income by reason of the high-tax exception under section
954(b)(4); (6) any dividend received from a related person (as
defined in section 954(d)(3)); and (7) any commodities gross
income.
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\965\ECI includes income that is treated as ECI under a section
882(g) election. As a result, income that a CFC derives from certain
sales to the U.S. market is excluded from the FHRA calculation and is
subject to new section 4491, to the extent that the sales are made to a
related party.
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Commodities gross income means (1) gross income of a
corporation (or of a partnership in which the corporation is a
partner) from the disposition of commodities that it has
produced or extracted and that are commodities described in
sections 475(e)(2)(A) and 475(e)(2)(D), and (2) the gross
income of the corporation from the disposition of property that
gives rise to income described in (1). Commodities income is
intended to include any foreign oil and gas extraction
income\966\ and any foreign oil related income.\967\
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\966\ Sec. 907(c)(1).
\967\ Sec. 907(c)(2).
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The tested loss of a CFC means the excess (if any) of the
deductions (including taxes) properly allocable to the
corporation's gross income determined without regard to the
tested income exceptions over the amount of such gross income.
Qualified business asset investment
QBAI means, with respect to any CFC for a taxable year, the
aggregate of its adjusted bases (determined as of the close of
the taxable year and after any adjustments with respect to such
taxable year) in specified tangible property used in its trade
or business and with respect to which a deduction is allowable
under section 168. Specified tangible property means any
tangible property to the extent such property is used in the
production of tested income or tested loss. The adjusted basis
in any property is determined without regard to any provision
of law that is enacted after the date of enactment of this
provision, unless such law specifically and directly amends
this provision's definition.
If a CFC holds an interest in a partnership as of the close
of the corporation's taxable year, the corporation takes into
account its distributive share of the aggregate of the
partnership's adjusted bases (determined as of such date in the
hands of the partnership) in tangible property held by the
partnership to the extent that such property is used in the
trade or business of the partnership, is of a type with respect
to which a deduction is allowable under section 168, and is
used in the production of tested income or tested loss
(determined with respect to the corporation's distributive
share of income or loss with respect to such property). The
corporation's distributive share of the adjusted basis of any
property is the corporation's distributive share of income and
loss with respect to such property.
For purposes of determining QBAI, the Secretary is
authorized to issue anti-avoidance regulations or other
guidance as the Secretary determines appropriate, including
regulations or other guidance that provide for the treatment of
property if the property is transferred or held temporarily, or
if avoidance was a factor in the transfer or holding of the
property.
Foreign tax credits and coordination with subpart F
Deemed-paid credit for taxes properly attributable to
tested income
For any FHRA included in the gross income of a domestic
corporation, the corporation is deemed to have paid foreign
income taxes equal to 80 percent of its foreign high return
percentage multiplied by the aggregate tested foreign income
taxes paid or accrued by each CFC with respect to which the
corporation is a U.S. shareholder. The foreign high return
percentage is the corporation's FHRA divided by the aggregate
amount of its pro rata share of the tested income of each CFC
with respect to which it is a U.S. shareholder. Tested foreign
income taxes are the foreign income taxes paid or accrued by a
CFC that are properly attributable to gross income taken into
account in determining tested income or tested loss.
The provision creates a separate foreign tax credit basket
for the FHRA inclusion, with no carryforward or carryback
available for excess credits. For purpose of determining the
foreign tax credit limitation, any FHRA is not general category
income, and income that can be classified as both a FHRA and
passive category income is considered passive category income.
The taxes deemed to have been paid are treated as an increase
in the FHRA for purposes of section 78, determined by taking
into account 100 percent of its foreign high return percentage
multiplied by the the aggregate tested foreign income taxes.
Coordination with subpart F
Although FHRA inclusions do not constitute subpart F
income, FHRA inclusions are generally treated similarly to
subpart F inclusions. Thus, with respect to any CFC any pro
rata amount from which is taken into account in determining the
FHRA included in gross income of a U.S. shareholder, such
amount, except as otherwise provided by the Secretary, is
treated in the same manner as an amount included under section
951(a)(1)(A) for purposes of applying sections 168(h)(2)(B),
535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E),
996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C),
6654(d)(2)(D), and 6655(e)(4).
The provision requires that the amount of FHRA included by
a U.S. corporation be allocated across each CFC with respect to
which it is a U.S. shareholder. The portion of the FHRA treated
as being with respect to a CFC equals zero for a foreign
corporation with tested loss and, for a foreign corporation
with tested income, the portion of the FHRA which bears the
same ratio to the total FHRA as the shareholder's pro rata
amount of the tested income of the foreign corporation bears to
the aggregate amount of the shareholder's pro rata share of the
tested income of each CFC with respect to which it is a U.S.
shareholder.
Tested losses taken into account in determining a U.S.
shareholder's FHRA cannot also reduce the shareholder's
inclusions in gross income under section 951(a)(1)(A) by reason
of the earnings and profits limitation in section 952(c).
Accordingly, a U.S. shareholder's amount included in gross
income under section 951(a)(1)(A) with respect to a CFC is
determined by increasing the earnings and profits of such
corporation (solely for purposes of determining such amount) by
an amount that bears the same ratio (not greater than 1) to the
shareholder's pro rata share of the tested loss of such CFC as
(1) the aggregate amount of the shareholder's pro rata share of
the tested income of each CFC with respect to which it is a
U.S. shareholder bears to (2) the aggregate amount of the
shareholder's tested loss of each CFC with respect to which it
is a U.S. shareholder. If this increase in earnings and profits
results in an incremental inclusion under section 951(a)(1)(A),
the CFC will increases its earnings and profits described in
section 959(c)(2) by that amount and decrease its earnings and
profits in section 959(c)(3) by that amount (even if that
results in, or increases, a deficit).
Taxable years for which persons are treated as U.S.
shareholders of a CFC
For purposes of the FHRA inclusion, a U.S. shareholder of a
CFC is treated as a U.S. shareholder of the corporation for any
taxable year of the shareholder if a taxable year of the
corporation ends in or with the taxable year of such person and
the person owns (within the meaning of section 958(a)) stock in
the corporation on the last day in the taxable year of the
corporation on which the corporation is a CFC. A corporation is
generally treated as a CFC for any taxable year if the
corporation is a CFC at any time during the taxable year.
Examples
The following examples illustrate how FHRA is calculated.
The examples are highly stylized and are not meant to represent
actual taxpayer scenarios.
Example 1: Two Wholly Owned CFCs, Each with Tested Income
Assume a domestic corporation, US1, wholly owns two CFCs,
CFC1 and CFC2. These are the only CFCs with respect to which
US1 is a U.S. shareholder. Assume that the applicable
percentage to be applied to QBAI is 10 percent. The following
table includes more information about CFC1 and CFC2. Assume
that their foreign sales income are items of gross income
included in the computation of tested income, and that all
expenses are allocable to their foreign sales income. Also
assume a U.S. corporate tax rate of 20 percent, and that the
foreign tax rates faced by CFC1 and CFC2 are applied evenly
across each of its sources of income.
FACTS FOR EXAMPLE 1
------------------------------------------------------------------------
CFC1 CFC2
------------------------------------------------------------------------
GROSS INCOME
Foreign Sales Income.............. $300 $2,000
Subpart F Income.................. $100 $0
Commodities Income................ $600 $0
EXPENSES
Operating Expenses................ $200 $300
NET INCOME $800 $1,700
Foreign Tax Rate.................. 20 percent 5 percent
QBAI.............................. $500 $0
------------------------------------------------------------------------
CFC-level calculations of tested income and QBAI
CFC1 has foreign sales income of $300 (assumed to be
included in the tested income calculation) and expenses of $220
(including $20 of taxes, computed below) allocable to its
foreign sales income. Therefore, it has tested income of $80 (=
$300-$220) and tested foreign income tax of $20 (= 20%
$100). CFC1 has QBAI of $500.
CFC2 has foreign sales income of $2,000 (assumed to be
included in the tested income calculation) and expenses of $385
(including $85 of taxes, computed below) allocable to its
foreign sales income. Therefore, it has tested income of $1,615
(= $2,000-$385) and tested foreign income tax of $85 (= 5%
$1,700). CFC2 has QBAI of $0.
U.S.-shareholder-level calculation of FHRA and tax
liability US1 has net CFC tested income of $1,695, which is the
sum of CFC1's tested income of $80 and CFC2's tested income of
$1,615. Its pro rata share of QBAI is $500 (= [100%
$500] + [100% $0]). No interest expense is taken into
account in determining US1's net CFC tested income. Therefore,
US1's FHRA = $1,695-([10% $500]-$0) = $1,645.
US1 receives a deemed-paid credit equal to 80 percent of
its foreign high return percentage multiplied by the aggregate
tested foreign income taxes paid or accrued by CFC1 and CFC2.
Its foreign high return percentage is 97.1 percent (= FHRA/
Aggregate Tested Income = $1,645/$1,695). The aggregate tested
foreign income taxes paid or accrued by CFC1 and CFC2 is $105
(= $20 + $85). Therefore, US1's deemed-paid credit is 80
percent 97.1 percent $105 = $81.52.
US1 includes 50 percent of its FHRA and 50 percent of its
section 78 gross-up in gross income, or $873.45 (= 50%
[$1,645 $101.90]).\968\ The tentative U.S.
tax owed on this income is the U.S. corporate tax rate of 20
percent applied to the total inclusion of $873.45, or $174.69.
---------------------------------------------------------------------------
\968\The section 78 gross-up amount = 100 percent 97.1
percent $105 = 101.90
---------------------------------------------------------------------------
The residual U.S. tax paid by US1 on its FHRA is its
tentative U.S. tax of $174.69 less its deemed-paid credit of
$81.52, or $93.17, for an effective U.S. tax rate (after
foreign tax credits) of 5.7 percent on its FHRA of $1,645.
Example 2: Variant of Example 1, With Tested Loss
Example 2 generally has the same facts as example 1, except
that CFC2 has foreign sales of $360. This means that CFC2 has
tested income (before taking into account taxes) of $60.
Assume, for simplicity, that it still pays foreign taxes of $85
with respect to the $360 of foreign sales, so that its tested
loss is $25 (= $60-$85) and its tested foreign income tax is
$85.
Like in Example 1, CFC1 has tested income of $80 and tested
foreign income tax of $20.
U.S.-shareholder-level calculation of FHRA and tax
liability
US1 has net CFC tested income of $55, which is CFC1's
tested income of $80 less CFC2's tested loss of $25. Its pro
rata share of QBAI is $500 (= [100% $500] + [100%
$0]). No interest expense is taken into account in
determining US1's net CFC tested income. Therefore, US1's FHRA
= $55-(10% $500)-$0 = $5.
US1 receives a deemed-paid credit equal to 80 percent of
its foreign high return percentage multiplied by the aggregate
tested foreign income taxes paid or accrued by CFC1 and CFC2.
Its foreign high return percentage is 5 percent (= FHRA/
Aggregate Tested Income = $5/$100). The aggregate tested
foreign income taxes paid or accrued by CFC1 and CFC2 is $105
(= $20 + $85). Therefore, US1's deemed-paid credit is 80
percent 5 percent $105 = $4.20.
US1 includes 50 percent of its FHRA in gross income and 50
percent of its section 78 gross-up in gross income, or $5.13 (=
50% [$5 + $5.25]).\969\ The tentative U.S. tax owed
on this income is the U.S. corporate tax rate of 20 percent
applied to the total inclusion of $5.13, or $1.03.
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\969\The section 78 gross-up amount = 100 percent 5
percent $105 = $5.25
---------------------------------------------------------------------------
The residual U.S. tax paid by US1 on its FHRA is its
tentative U.S. tax of $1.03 less its deemed-paid credit of
$5.25, or $0, for an effective U.S. tax rate of 0% on its FHRA
of $5. The amount of US1's deemed-paid credit that is unused,
$4.22, may not be carried back or carried forward.
Example 3: CFC Look-Through Payment
Example 3 illustrates how the FHRA calculation is applied
when there are payments that qualify for CFC look-through
treatment. Example 3 is limited to the calculation of the FHRA
and does not provide calculations of the amount of U.S. or
foreign income tax related to the FHRA.
USCo, a domestic corporation, wholly owns US1 and US2, each
a domestic corporation. US1 wholly owns CFC1, and US2 wholly
owns CFC2. These are the only CFCs with respect to which either
US1 or US2 is a U.S. shareholder. Assume the applicable
percentage for QBAI is 10 percent.
CFC1 has total gross income of $100, none of which
qualifies for a tested income exception, and has interest
expense of $30, which it pays to CFC2. CFC1 has no other
deductions and has QBAI of $200. As a result, CFC1 has tested
income of $70 (= $100 of gross income less $30 of interest
expense). US1's net CFC tested income is $70 and the applicable
percentage of its pro rata share of QBAI is $20 (= 10%
$200). As CFC1's interest expense of $30 was taken
into account in determining its tested income of $70, the
excess of US1's applicable percentage of QBAI over this amount
of interest expense is $0. As a result, US1's FHRA is $70 (=
$70-$0).
CFC2 has $30 of interest income, all of which qualifies for
CFC look-through treatment because CFC1 has no subpart F
income. Assume CFC2 has no other gross income, no deductions,
and no QBAI. CFC2's interest income is not includible in its
tested income, but only to the extent a deduction for its
payment or accrual does not reduce the FHRA of any U.S.
shareholder. Absent the $30 interest expense deduction used in
determining its net CFC tested income, US1's net CFC tested
income would have been $100, and US1's FHRA would have been $80
(= $100-$20). With the $30 deduction, US1's net CFC's tested
income is $70. Therefore, the deduction allowable for the
payment or accrual of the interest reduced the FHRA of US1 by
$10, so only $20 of CFC2's interest income is excluded from
tested income. As a result, CFC2 has tested income of $10 (=
$30-$20), and US2 has net CFC tested income of $10 (= $10-$0).
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2017, and for taxable
years of U.S. shareholders in which or with which such taxable
years of foreign corporations end.
2. Limitation on deduction of interest by domestic corporations which
are members of an international financial reporting group (sec. 4302 of
the bill and sec. 163 of the Code)
REASONS FOR CHANGE
The Committee believes that it is important to provide
measures to discourage excessive leverage directly in
conjunction with the adoption of a participation exemption
system. The Committee further believes that the provision would
prevent multinational companies from generating excessive
interest deductions in the United States on debt that is issued
to foreign affiliates or that is incurred to produce exempt
foreign income in a dividend exemption system in a manner that
applies equally to foreign and U.S. companies in order to
provide a level playing field while recognizing standard non-
tax business practices that involve parent corporations
incurring debt to finance the acquisition or establishment of
subsidiaries. The fungibility of money and the ease with which
multinational enterprises may generally redeploy capital among
affiliates within the group provides multinational enterprises
with significant flexibility in locating interest expense
within the group. Under present law, this enables multinational
enterprises to locate significant interest expense in high-tax
jurisdictions such as the United States in order to maximize
the tax benefits of interest deductions, irrespective of the
location of the operations funded by the debt proceeds.
Furthermore, U.S. subsidiaries of foreign-parented
multinationals have an incentive to issue related-party debt to
increase the interest deductions allowed against U.S. taxable
income. Present law provides a limited set of rules to combat
these concerns.\970\
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\970\With respect to the former concern, interest expense
allocation rules generally limit the availability of foreign tax
credits to the extent a U.S. shareholder deducts interest to fund the
operations of its foreign subsidiaries. See Treas. Reg. secs. 1.861-8
through -13T. With respect to the latter concern, sections 163(j),
267(a)(3), and 482 limit the deductibility of related-party interest
payments in certain circumstances, and the subpart F rules limit the
U.S. tax benefits of issuing debt to a foreign subsidiary.
Additionally, recent regulations issued under section 385 limit the
deductibility of related-party interest payments in certain cases by
recharacterizing intercompany debt instruments as equity.
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Therefore, the Committee believes it is necessary to
restrict the deductibility of interest by a U.S. taxpayer to
the extent to which the interest expense gives rise to U.S.
taxable income. Similarly, the Committee does not believe
interest expense should be deductible to the extent it gives
rise to foreign earnings, whether of a foreign subsidiary or of
a non-subsidiary foreign affiliate, that will never be subject
to U.S. tax.
In applying such a limitation, the Committee is cognizant
of the imperative to provide U.S. and foreign companies with a
level playing field. Accordingly, the Committee's approach
applies equally to U.S.- and foreign-parented multinationals.
In order for such an approach to be administrable, it is
appropriate to look at information readily available to U.S.
and foreign companies alike, as well as the IRS, such as
financial accounting information, so as to minimize the need
for burdensome calculations and record-keeping specific to U.S.
tax considerations.
EXPLANATION OF PROVISION
The provision limits the amount of U.S. interest expense
that a domestic corporation which is a member of an
international financial reporting group can deduct to the sum
of the member's interest income plus the allowable percentage
of 110 percent of net interest expense. An international
financial reporting group is a group that: (1) includes at
least one foreign corporation engaged in a U.S. trade or
business or at least one domestic corporation and one foreign
corporation at any time during the group's reporting year, (2)
prepares consolidated financial statements in accordance with
U.S. Generally Accepted Accounting Principles (``GAAP''),
International Financial Reporting Standards (``IFRS''), or any
other comparable method identified by the Secretary,\971\ and
(3) reports in such statements average annual gross receipts in
excess of $100,000,000 (determined in the aggregate with
respect to all entities which are part of such group) for the
three-reporting-year period ending with such reporting year.
---------------------------------------------------------------------------
\971\The International Financial Reporting Standards are a set of
accounting standards commonly used for the preparation of financial
statements of public companies listed in countries outside the United
States.
---------------------------------------------------------------------------
The allowable percentage is the ratio of a corporation's
allocable share of the international financial reporting
group's net interest expense over such corporation's reported
net interest expense. A corporation's allocable share of an
international financial reporting group's net interest expense
is determined based on the corporation's share of the group's
earnings (computed by adding back net interest expense, taxes,
depreciation, and amortization) as reflected in the group's
consolidated financial statements. A corporation's reported net
interest expense is its net interest expense reported in the
books and records used to prepare the group's consolidated
financial statements. For international financial reporting
groups that do not prepare consolidated financial statements
under U.S. GAAP, IFRS, or any other comparable method
identified by the Secretary and which are filed with the United
States Securities and Exchange Commission, the provision
provides a hierarchy of other audited consolidated financial
statements that may be relied upon by such group.
The provision applies to partnerships at the partnership
level under rules similar to the rules of section 3301 of the
bill. The provision also applies to foreign corporations
engaged in a U.S. trade or business. A U.S. consolidated group
is considered a single corporation under this provision.
The amount of any interest not allowed as a deduction for
any taxable year by reason of this provision or section 3301 of
the bill (depending on whichever imposes the lower limitation
for the amount allowed as an interest deduction with respect to
such taxable year) can be carried forward as interest (and as
business interest for purposes of section 3301 of the bill) for
up to five years.
The following example illustrates the coordination of this
provision with section 3301 of the bill in a context involving
a partnership.
Example
FP, a foreign corporation, wholly owns USS, a
domestic corporation. FP and USS each own 50 percent of
PS, a partnership. FP, USS, and PS prepare audited
consolidated financial statements in accordance with
U.S. GAAP that are used for internal management
purposes and under which average annual gross receipts
for the 3-reporting-year period ending with the current
reporting year in excess of $100 million are reported.
During the current reporting year, the FP-USS-PS group
has consolidated EBITDA of 300 and consolidated
interest expense of 50. During that period, USS has
EBITDA of 50 (determined without regard to
distributions from PS), reported interest expense of
25, business interest of 30, and adjusted taxable
income (determined without regard to USS's distributive
share of PS's non-separately stated taxable income or
loss) of 40. Also during that period, PS has EBITDA of
150, reported interest expense of 15, business interest
of 20, and adjusted taxable income of 120.
PS's business interest is deductible only to the
extent it does not exceed the limitations in each of
section 163(j) (as provided in section 3301 of the
bill) and section 163(n) (as provided in section 4302
of the bill). PS's limitation under section 163(j) is
36, which equals 30 percent of its adjusted taxable
income of 120 (i.e., 30% 120 = 36). PS's
limitation under section 163(n) is 22, which equals the
allowable percentage (i.e., 160% = 50 150/
300/15, not greater than 100%) of 110 percent of PS's
business interest (i.e., 22 = 110% 20).
Therefore, all 20 of PS's business interest is
deductible. PS's excess amount under section 163(j)
(i.e., 36-20 = 16) and excess EBITDA under section
163(n) (i.e., 150-300 15/50 = 60) flow
through to its partners.
Similarly, USS's business interest is deductible only
to the extent it does not exceed the limitations in
each of section 163(j) and section 163(n). USS's
limitation under section 163(j) is 20, which equals 30
percent of the sum of its adjustable taxable income of
40 (determined without regard to USS's distributive
share of PS's non-separately stated taxable income or
loss) or 12 (i.e., 30% 40 = 12) plus USS's
distributive share of PS's excess amount under section
163(j)(3)(B) (i.e., 50% 16 = 8). USS's
limitation under section 163(n) is 17.60, which equals
the allowable percentage (i.e., 53% = 50 (50
+ 30)/300/25) of 110 percent of USS's business interest
(i.e., 33 = 110% 30) after taking into
account USS's distributive share of PS's excess EBITDA
under section 163(n) (i.e., 50% 60 = 30).
Therefore, USS may deduct 17.60 of its 30 of business
interest in the current year.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
3. Excise tax on certain payments from domestic corporations to related
foreign corporations; election to treat such payments as effectively
connected income (sec. 4303 of the bill and secs. 882, 4491, 6038C, and
6038E of the Code)
REASONS FOR CHANGE
The Committee recognizes that, under the current system,
companies have been able to base erode by making outbound,
related-party deductible payments. This is true for both
foreign-and U.S.-parented multinationals, the former of which
often make outbound royalty or interest payments, and the
latter of which make outbound payments to remunerate foreign
affiliates for tangible goods or intercompany services. There
is no reason to believe such behavior would not continue in the
future. The Committee is not persuaded by arguments that once
the United States has a competitive corporate tax rate,
multinationals will have no incentive to base erode. Indeed, in
a participation exemption system, the need for anti-base
erosion measures remains critical as long as there are foreign
jurisdictions in which corporations can achieve effective tax
rates lower than that which they can achieve in the United
States. That is to say, until the United States has a corporate
tax rate of zero, there will be a need for anti-base erosion
measures. The Committee believes it is of paramount importance
that anti-base erosion measures designed to address this
problem apply equally to U.S. and foreign multinationals.
In the context of this provision, it is critical to note
that the Committee views base erosion in the truest, most
fundamental sense of the term--U.S. taxpayers reducing their
base of U.S. taxable income by making certain payments to
foreign affiliates. The Committee recognizes the importance and
vitality of transfer pricing generally, and of section 482, its
regulations, and the vast body of case law and administrative
guidance issued to date specifically. The Committee affirms its
belief that the arm's length standard continues to be the
foundational principle underpinning the pricing of intercompany
transactions. However, the role transfer pricing plays in the
larger base erosion problem cannot be ignored.
The basic tenets of transfer pricing rules--in the United
States and worldwide--operate on the premise that related
entities are to be remunerated for their activities on the
basis of the functions performed, assets owned, and risks
undertaken. Within these parameters, multinationals have the
unique ability to determine which entities will be endowed with
the high value assets, complex functions and risk-bearing
activities within the supply chain, and thereby justify the
higher profits these entities are rightfully deemed to earn
under even the most accurate application of section 482
principles. The Committee is concerned that these entities are
often, and increasingly, overseas. Thus, the base erosion
problem remains and is exacerbated; whether the price is arm's
length or not, multinationals are permitted to send payments to
foreign affiliates to compensate them for their activities. In
the course of so doing, the U.S. affiliate enjoys a deduction
(or another tax benefit to reduce its U.S. taxable income),
while the foreign affiliate generates foreign source income
that will never be subject to U.S. tax. Accordingly, rather
than implementing a provision to combat perceived transfer
pricing abuses, the Committee instead seeks to address the
mismatch created by the reduction to U.S. taxable income via
outbound, related-party payments and the recognition of foreign
income that is attributable to those payments and never subject
to U.S. tax.
The Committee recognizes that instances of double taxation
are possible when the corresponding foreign jurisdiction also
taxes the foreign-earned income. Relief is provided through the
allowance of a partial foreign tax credit.
EXPLANATION OF PROVISION
In general
This provision imposes an excise tax on certain amounts
paid by U.S. payors to certain related foreign recipients to
the extent the amounts are deductible by the U.S. payor.
However, the excise tax does not apply if the foreign recipient
elects to be subject to U.S. income tax on the amounts
received. In calculating the U.S. income tax liability imposed
under such an election, deemed expenses are allowed as a
deduction. A foreign tax credit of 80% of applicable foreign
credits are allowed against the U.S. tax liability imposed by
this provision if an election is made.
Excise tax
The provision provides for an excise tax on specified
amounts paid or incurred by a domestic corporation to a foreign
corporation if both the foreign and domestic corporations are
members of the same international financial reporting group.
The amount of the tax is equal to 20 percent of the specified
amounts paid or incurred. The excise tax is not imposed with
respect to amounts that are or are deemed to be effectively
connected with a U.S. trade or business of the foreign
corporation. The excise tax imposed is neither deductible nor
creditable.
A specified amount is any amount which is allowable by the
payor as a deduction or includible in costs of goods sold, or
inventory, or in the basis of an amortizable or depreciable
asset. A specified amount does not include: (i) interest, (ii)
an amount paid or incurred for the acquisition of a security
defined in section 475(c)(2) (without regard to the last
sentence thereof) or a commodity defined in sections 475(e)(2),
that is, a commodity actively traded within the meaning of
section 1092(d)(1) or an identified hedge of such commodity,
or, (iii) for a payor which has elected to use a services cost
method under section 482, an amount paid or incurred for
services if such amount is the total services cost with no
markup.
An international financial reporting group is any group of
entities that prepares consolidated financial statements\972\
if the average annual aggregate payment amount for the group
for the three-year period ending in the reporting year exceeds
$100,000,000. The annual aggregate payment amount means the
aggregate of the specified amounts made by U.S. members of the
group to foreign members of the group during the reporting
year.
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\972\This term is defined in new section 163(n)(4) as a financial
statement certified as being prepared in accordance with generally
accepted accounting principles, international financial reporting
standards, or any other comparable method of accounting identified by
the Secretary of the Treasury and which is: (i) a 10-K (or successor
form), or annual statement to shareholders required to be filed with
the United States Securities and Exchange Commission, or, if this is
not available, (ii) an audited financial statement used for (1) credit
purposes, (2) reporting to shareholders, partners or other proprietors,
or to beneficiaries, or (3) any other substantial nontax purpose, or,
if (i) and (ii) are not available, (iii) filed with any other Federal
or State agency for nontax purposes, or, if (i), (ii), or (iii) are not
available, a financial statement used for a purpose described in
(ii)(1), (2) and (3), or filed with any regulatory or governmental
body, within or outside the United States, specified by the Secretary
of the Treasury.
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Partnerships and branches
For purposes of this provision, a partnership is treated as
an aggregate of its partners. Accordingly, a payment made to a
partnership is treated as a payment to the partners, and a
payment from a partnership is treated as a payment from the
partners, in an amount equal to the partner's distributive
share of the relevant item of income, gain, deduction, or loss.
For purposes of this provision, U.S. branches are treated
as separate entities for purposes of determining the treatment
of payments between a branch and entities other than its owner
and for purposes of deemed payments between a branch and its
owner.
Election to treat payments as effectively connected income
If a specified amount is paid or incurred by a domestic
corporation with respect to a foreign corporation and both the
foreign and domestic corporations are members of the same
international financial reporting group, the foreign
corporation may elect to take into account all such specified
amounts as if the foreign corporation were engaged in a U.S.
trade or business and had a permanent establishment and as if
the payment were effectively connected with that U.S. trade or
business and were attributable to the permanent establishment,
irrespective of any otherwise applicable treaty. If the foreign
corporation makes such election, the excise tax is not imposed
and tax is imposed on a net basis on such specified amounts
less deemed expenses. The election applies for the taxable year
for which the election is made and all subsequent taxable years
unless revoked with consent of the Secretary of the Treasury.
In general, the amount treated as effectively connected
income under this provision is treated as such for all purposes
of the Code. For example, it is subject to the branch profit
tax (unless otherwise reduced, such as by an applicable treaty)
and is not subject to the excise tax under section 4371.
However, for purposes of section 245 and new section 245A,
these amounts are not treated as effectively connected income.
Therefore, a distribution of earnings attributable to the
amounts described in this provision is eligible for the
participation DRD under new section 245A.
The deemed expenses with respect to any specified amount
received by a foreign corporation during any reporting year is
the amount of expenses such that the net income ratio of the
foreign corporation with respect to the specified amount
(taking into account only such specified amounts and such
deemed expenses) is equal to the net income ratio of the
international financial reporting group determined for the
reporting year with respect to the product line to which the
specified amount relates. The net income ratio is the ratio of
net income determined without regard to income taxes, interest
income, and interest expense, divided by revenue. The net
income ratio is calculated in accordance with the books and
records used in preparing the group's consolidated financial
statements. The net income ratio is determined by taking into
account only revenues and expenses of the foreign members of
the international financial reporting group (other than the
members of the group that are or are treated as domestic
corporations for purposes of the provision) derived from, or
incurred with respect to, persons that are not members of the
group or members of the group that are or are treated as
domestic corporations for purposes of the provision.
The following example illustrates the determination of a
foreign affiliate's deemed expenses under the provision:
According to the books and records (after taking into
account intercompany transactions otherwise eliminated in
consolidation) of an international financial reporting group
consisting of US, FS1, and FS2, a domestic corporation, US has
third-party revenues of $1000, incurs third-party expenses of
$500, and makes a $300 payment for intercompany services to its
foreign affiliate, FS1. FS1 has revenues of $500 ($200 of which
are third-party) and incurs third-party expenses of $250. US's
other foreign affiliate, FS2, has $300 of revenues, incurs $150
of third-party expenses, and makes a $100 intercompany payment
to US. US's entire payment to FS1 is deductible for Federal
income tax purposes, and FS1 elects to treat the $300 amount as
subject to section 882(g)(1). On a consolidated basis, the US-
FS1-FS2 group has revenues of $1500 and incurs third-party
expenses of $900.
To determine the foreign affiliate's deemed expenses, its
foreign profit margin will be determined by reference to ratio
of the foreign earnings before interest and taxes (``EBIT'')
against the foreign revenues, with adjustments for related
party inbound and outbound payments. In other words, the
foreign affiliate's profit margin can be determined as follows:
(GEBIT - USEBIT + RPOP - RPIP) (GREV - USREV -
USREV + RPOP)
GEBIT is global EBIT (determined on a consolidated basis),
USEBIT is the domestic corporation's EBIT (without regard to
related party transactions), RPOP is the group's related party
outbound payments made from domestic corporations to foreign
affiliates, and RPIP is the group's related party inbound
payments made from foreign affiliates to domestic corporations.
In the denominator, GREV is global revenues (determined on
a consolidated basis) and USREV is the domestic corporation's
revenues (without regard to related party transactions).
Under the aforementioned facts, the foreign affiliate's
profit margin would be 37.5%, or
(600 - 500 + 300 - 100) (1500 - 1000 + 300)
Accordingly, of the $300 payment from U.S. to FS1, $112.50
would be deemed to be income effectively connected to a U.S.
trade or business, and subject to corporate tax. The remaining
$187.50 of the payment would be deemed expenses for which FSI
would be allowed a deduction.
Coordination with FDAP
Amounts treated as effectively connected income under this
provision are not excluded from the definition of fixed or
determinable annual or periodical (``FDAP'') income. Payments
subject to tax under section 881 do not constitute specified
payments under this provision except to the extent that the
rate of tax imposed under section 881 is reduced by a bilateral
income tax treaty.
Joint and several liability
If there is an underpayment with respect to any taxable
year of an electing foreign corporation which is a member of an
international financial accounting group, each domestic
corporation in the group is jointly and severally liable for as
much of the underpayment as does not exceed the excess of such
underpayment over the amount of such underpayment determined
without regard to this rule and any penalty, addition to tax,
or additional amount attributable to the above amount.
Foreign tax credit
The foreign tax credit allowed under section 906(a) with
respect to amounts taken into account as effectively connected
income is limited to 80 percent of the amount of taxes paid or
accrued (and determined without regard to section 906(b)(1)).
These foreign tax credits are effectively separately basketed
and may not be carried backwards or forwards.
Reporting
An electing foreign corporation that receives a specified
amount is required to report, with respect to each member of
the international financial reporting group from which any such
amount is received: (i) the name and taxpayer identification
number of each member, (ii) the aggregate amounts received from
each member, (iii) the product lines to which such amounts
relate, the aggregate amounts relating to each product line,
and the net income ratio for each product line, and (iv) a
summary of changes in financial accounting methods that affect
the computation of any net income ratio described above.
A domestic corporation that pays or accrues a specified
amount with respect to which a foreign corporation has made the
election is required to make a return according to the forms
and regulations prescribed by the Secretary of the Treasury
containing certain information and to maintain sufficient
records to determine the tax liability imposed by this
provision. The information required to be provided is as
follows: (1) the name and taxpayer identification number of the
common parent of the international financial reporting group of
which the domestic corporation is a member, and (2) with
respect to a specified amount: (A) the name and taxpayer
identification number of the recipient of the amount, (B) the
aggregate amounts received by the recipient, (C) the product
lines to which the amounts relate and the aggregate amounts for
each product line, and the net income ratio for each product
line, and (D) a summary of any changes in financial accounting
methods that affect the computation of any net income ratio
described in (C).
Treasury may prescribe regulations or other guidance that
address reporting requirements of foreign affiliates under this
provision, such as allowing reporting or elections on a group
basis.
EFFECTIVE DATE
The provisions of this section apply to amounts paid or
incurred after December 31, 2018.
E. Provisions Related to Possessions of the United States
1. Extension of deduction allowable with respect to income attributable
to domestic production activities in Puerto Rico (sec. 4401 of the bill
and sec. 199 of the Code)
PRESENT LAW
In general
Present law generally provides a deduction from taxable
income (or, in the case of an individual, adjusted gross
income) that is equal to nine percent of the lesser of the
taxpayer's qualified production activities income or taxable
income for the taxable year. For taxpayers subject to the 35-
percent corporate income tax rate, the nine-percent deduction
effectively reduces the corporate income tax rate to slightly
less than 32 percent on qualified production activities income.
In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the costs of goods sold that are allocable to those
receipts; and (2) other expenses, losses, or deductions which
are properly allocable to those receipts.
Domestic production gross receipts generally are gross
receipts of a taxpayer that are derived from: (1) any sale,
exchange, or other disposition, or any lease, rental, or
license, of qualifying production property\973\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States; (2) any
sale, exchange, or other disposition, or any lease, rental, or
license, of qualified film\974\ produced by the taxpayer; (3)
any lease, rental, license, sale, exchange, or other
disposition of electricity, natural gas, or potable water
produced by the taxpayer in the United States; (4) construction
of real property performed in the United States by a taxpayer
in the ordinary course of a construction trade or business; or
(5) engineering or architectural services performed in the
United States for the construction of real property located in
the United States.
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\973\Qualifying production property generally includes any tangible
personal property, computer software, and sound recordings.
\974\Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers.
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The amount of the deduction for a taxable year is limited
to 50 percent of the wages paid by the taxpayer, and properly
allocable to domestic production gross receipts, during the
calendar year that ends in such taxable year.\975\ Wages paid
to bona fide residents of Puerto Rico generally are not
included in the definition of wages for purposes of computing
the wage limitation amount.\976\
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\975\For purposes of the provision, ``wages'' include the sum of
the amounts of wages as defined in section 3401(a) and elective
deferrals that the taxpayer properly reports to the Social Security
Administration with respect to the employment of employees of the
taxpayer during the calendar year ending during the taxpayer's taxable
year.
\976\Section 3401(a)(8)(C) excludes wages paid to United States
citizens who are bona fide residents of Puerto Rico from the term wages
for purposes of income tax withholding.
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Rules for Puerto Rico
When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the
District of Columbia.\977\ A special rule for determining
domestic production gross receipts, however, provides that in
the case of any taxpayer with gross receipts from sources
within the Commonwealth of Puerto Rico, the term ``United
States'' includes the Commonwealth of Puerto Rico, but only if
all of the taxpayer's Puerto Rico-sourced gross receipts are
taxable under the Federal income tax for individuals or
corporations.\978\ In computing the 50-percent wage limitation,
the taxpayer is permitted to take into account wages paid to
bona fide residents of Puerto Rico for services performed in
Puerto Rico.\979\
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\977\Sec. 7701(a)(9).
\978\Sec. 199(d)(8)(A).
\979\Sec. 199(d)(8)(B).
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The special rules for Puerto Rico apply only with respect
to the first 11 taxable years of a taxpayer beginning after
December 31, 2005, and before January 1, 2017.
REASONS FOR CHANGE
The Committee recognizes the importance of supporting
manufacturing activities in Puerto Rico, as such activities
promote employment and investment.
EXPLANATION OF PROVISION
The provision extends the special domestic production
activities rules for Puerto Rico to apply for the first 12
taxable years of a taxpayer beginning after December 31, 2005
and before January 1, 2018.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2016.
2. Extension of temporary increase in limit on cover over of rum excise
taxes to Puerto Rico and the Virgin Islands (sec. 4402 of the bill and
sec. 119(d) of the Code)
PRESENT LAW
A $13.50 per proof gallon\980\ excise tax is imposed on
distilled spirits produced in or imported into the United
States.\981\ The excise tax does not apply to distilled spirits
that are exported from the United States, including exports to
U.S. possessions (e.g., Puerto Rico and the Virgin
Islands).\982\
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\980\A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See secs. 5002(a)(10) and (11).
\981\Sec. 5001(a)(1).
\982\Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
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The Code provides for cover over (payment) to Puerto Rico
and the Virgin Islands of the excise tax imposed on rum
imported (or brought) into the United States, without regard to
the country of origin.\983\ The amount of the cover over is
limited under Code section 7652(f) to $10.50 per proof gallon
($13.25 per proof gallon before January 1, 2017).
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\983\Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the
amount of excise tax collected from imports into the United States of
articles produced in the Virgin Islands is retained by the United
States under section 7652(b)(3).
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Tax amounts attributable to shipments to the United States
of rum produced in Puerto Rico are covered over to Puerto Rico.
Tax amounts attributable to shipments to the United States of
rum produced in the Virgin Islands are covered over to the
Virgin Islands. Tax amounts attributable to shipments to the
United States of rum produced in neither Puerto Rico nor the
Virgin Islands are divided and covered over to the two
possessions under a formula.\984\ Amounts covered over to
Puerto Rico and the Virgin Islands are deposited into the
treasuries of the two possessions for use as those possessions
determine.\985\ All of the amounts covered over are subject to
the limitation.
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\984\Sec. 7652(e)(2).
\985\Secs. 7652(a)(3), (b)(3), and (e)(1).
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REASONS FOR CHANGE
The Committee recognizes the importance of providing
dedicated revenue sources to Puerto Rico and the Virgin Islands
in order to fund their economic development and infrastructure.
EXPLANATION OF PROVISION
The provision suspends for six years the $10.50 per proof
gallon limitation on the amount of excise taxes on rum covered
over to Puerto Rico and the Virgin Islands. Under the
provision, the cover-over limitation of $13.25 per proof gallon
is extended for rum brought into the United States after
December 31, 2016, and before January 1, 2023. After December
31, 2022, the cover over amount reverts to $10.50 per proof
gallon.
EFFECTIVE DATE
The provision applies to distilled spirits brought into the
United States after December 31, 2016.
3. Extension of American Samoa economic development credit (sec. 4403
of the bill and sec. 119 of Pub. L. No. 109-432)
PRESENT LAW
A domestic corporation that was an existing credit claimant
with respect to American Samoa and that elected the application
of section 936 for its last taxable year beginning before
January 1, 2006 is allowed a credit based on the corporation's
economic activity-based limitation with respect to American
Samoa. The credit is not part of the Code but is computed based
on the rules of sections 30A and 936. The credit is allowed for
the first eleven taxable years of a corporation that begin
after December 31, 2005, and before January 1, 2017.
A corporation was an existing credit claimant with respect
to a American Samoa if (1) the corporation was engaged in the
active conduct of a trade or business within American Samoa on
October 13, 1995, and (2) the corporation elected the benefits
of the possession tax credit\986\ in an election in effect for
its taxable year that included October 13, 1995.\987\ A
corporation that added a substantial new line of business
(other than in a qualifying acquisition of all the assets of a
trade or business of an existing credit claimant) ceased to be
an existing credit claimant as of the close of the taxable year
ending before the date on which that new line of business was
added.
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\986\For taxable years beginning before January 1, 2006, certain
domestic corporations with business operations in the U.S. possessions
were eligible for the possession tax credit. Secs. 27(b) and 936. This
credit offset the U.S. tax imposed on certain income related to
operations in the U.S. possessions. Subject to certain limitations, the
amount of the possession tax credit allowed to any domestic corporation
equaled the portion of that corporation's U.S. tax that was
attributable to the corporation's non-U.S. source taxable income from
(1) the active conduct of a trade or business within a U.S. possession,
(2) the sale or exchange of substantially all of the assets that were
used in such a trade or business, or (3) certain possessions
investment. No deduction or foreign tax credit was allowed for any
possessions or foreign tax paid or accrued with respect to taxable
income that was taken into account in computing the credit under
section 936. Under the economic activity-based limit, the amount of the
credit could not exceed an amount equal to the sum of (1) 60 percent of
the taxpayer's qualified possession wages and allocable employee fringe
benefit expenses, (2) 15 percent of depreciation allowances with
respect to short-life qualified tangible property, plus 40 percent of
depreciation allowances with respect to medium-life qualified tangible
property, plus 65 percent of depreciation allowances with respect to
long-life qualified tangible property, and (3) in certain cases, a
portion of the taxpayer's possession income taxes. A taxpayer could
elect, instead of the economic activity-based limit, a limit equal to
the applicable percentage of the credit that otherwise would have been
allowable with respect to possession business income, beginning in
1998, the applicable percentage was 40 percent.
To qualify for the possession tax credit for a taxable year, a
domestic corporation was required to satisfy two conditions. First, the
corporation was required to derive at least 80 percent of its gross
income for the three-year period immediately preceding the close of the
taxable year from sources within a possession. Second, the corporation
was required to derive at least 75 percent of its gross income for that
same period from the active conduct of a possession business. Sec.
936(a)(2). The section 936 credit generally expired for taxable years
beginning after December 31, 2005.
\987\A corporation will qualify as an existing credit claimant if
it acquired all the assets of a trade or business of a corporation that
(1) actively conducted that trade or business in a possession on
October 13, 1995, and (2) had elected the benefits of the possession
tax credit in an election in effect for the taxable year that included
October 13, 1995.
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The amount of the credit allowed to a qualifying domestic
corporation under the provision is equal to the sum of the
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no
credit is allowed for the amount of any American Samoa income
taxes. Thus, for any qualifying corporation the amount of the
credit equals the sum of (1) 60 percent of the corporation's
qualified American Samoa wages and allocable employee fringe
benefit expenses and (2) 15 percent of the corporation's
depreciation allowances with respect to short-life qualified
American Samoa tangible property, plus 40 percent of the
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65
percent of the corporation's depreciation allowances with
respect to long-life qualified American Samoa tangible
property.
The section 936(c) rule denying a credit or deduction for
any possessions or foreign tax paid with respect to taxable
income taken into account in computing the credit under section
936 does not apply with respect to the credit allowed by the
provision.
For taxable years beginning after December 31, 2016, the
credit rules are modified in two ways. First, domestic
corporations with operations in American Samoa are allowed the
credit even if those corporations are not existing credit
claimants. Second, the credit is available to a domestic
corporation (either an existing credit claimant or a new credit
claimant) only if, in addition to satisfying all the present
law requirements for claiming the credit, the corporation also
has qualified production activities income (as defined in
section 199(c) by substituting ``American Samoa'' for ``the
United States'' in each place that latter term appears).
In the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, the credit applies to the first nine
taxable years of the corporation which begin after December 31,
2005, and before January 1, 2017. For any other corporation,
the credit applies to the first three taxable years of that
corporation which begin after December 31, 2011 and before
January 1, 2017.
REASON FOR CHANGE
The Committee recognizes the importance of providing
incentives to stimulate economic development, create jobs, and
fund infrastructure in American Samoa.
EXPLANATION OF PROVISION
The provision extends the credit for five years to apply
(a) in the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, to the first 17 taxable years of the
corporation which begin after December 31, 2005, and before
January 1, 2023, and (b) in the case of any other corporation,
to the first 11 taxable years of the corporation which begin
after December 31, 2011, and before January 1, 2023.
For purposes of this provision, section 119(e) of division
A of the Tax Relief and Health Care Act of 2006\988\ is amended
to indicate that any reference to section 199 of the Code is to
be treated as a reference to section 199 as in effect before
its repeal by this bill.
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\988\Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432,
sec. 119.
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EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2016.
F. Other International Reforms
1. Restriction on insurance business exception to the passive foreign
investment company rules (sec. 4501 of the bill and sec. 1297 of the
Code)\989\
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\989\For a description of present law, see the description in part
C.2 above relating to passive foreign investment companies.
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REASONS FOR CHANGE
The Committee is concerned about a lack of clarity and
precision in the exception to the passive foreign investment
company rules for income derived in the active conduct of an
insurance business by a corporation that is predominantly
engaged in an insurance business. This lack of clarity and
precision makes the scope of the exception difficult to
ascertain and to enforce. In particular, the Committee is
concerned about the lack of precision regarding how much
insurance or reinsurance business the company must do to
qualify under the exception. The Committee has been informed of
offshore arrangements applying the present-law exception that
reinsure risks and that invest in U.S. hedge funds, and that
have been structured in a manner that raises concerns about the
potential for base erosion.\990\ The Committee believes that a
more mechanical, formulaic rule that is more straightforward to
enforce and to apply is appropriate while still preserving the
opportunity for a corporation to present facts and
circumstances showing it is predominantly engaged in the
insurance business, provided the corporation's applicable
insurance liabilities are at least 10 percent of its total
assets. The Committee also believes that it is important to
separately treat different categories of reserves to more
accurately determine whether a company meets the insurance
exception.
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\990\The hedge fund reinsurance arrangement is said to provide
indefinite deferral of U.S. taxation of the hedge fund's investment
earnings, such as interest and dividends. At the time the taxpayer
liquidates the investment, ordinary investment earnings are said to be
converted to capital gains, which are subject to a lower rate of tax.
Press reports have discussed the arrangements. See, e.g., Hal Lux,
``The Great Hedge Fund Reinsurance Tax Game,'' Institutional Investor,
April 2001, pages 52-58, http://www.institutionalinvestor.com/Article/
1027978/The-Great-hedge-fund-reinsurance-tax-ame.html; Steven Davidoff
Solomon, ``With Lax Regulation, a Risky Industry Flourishes Offshore,''
Deal Book, New York Times, September 4 2012, http://
dealbook.nytimes.com/2012/09/04/with-lax-regulation-a-risky-
industryflourishes-offshore/?_php=true&_type=blogs&_r=0.
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EXPLANATION OF PROVISION
The provision modifies the requirements for a corporation
the income of which is not included in passive income for
purposes of the PFIC rules. The provision replaces the test
based on whether a corporation is predominantly engaged in an
insurance business with a test based on the corporation's
insurance liabilities.\991\ The requirement that the foreign
corporation would be subject to tax under subchapter L if it
were a domestic corporation is retained.
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\991\Treasury regulations proposed in 2015 have taken a different
approach that is based on the current statutory rule. Prop. Treas. Reg.
sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 24, 2015. The
proposed regulations provide that ``the term insurance business means
the business of issuing insurance and annuity contracts and the
reinsuring of risks underwritten by insurance companies, together with
those investment activities and administrative services that are
required to support or are substantially related to insurance and
annuity contracts issued or reinsured by the foreign corporation.'' The
proposed regulations provide that an investment activity is an activity
producing foreign personal holding company income, and that is
``required to support or [is] substantially related to insurance and
annuity contracts issued or reinsured by the foreign corporation to the
extent that income from the activities is earned from assets held by
the foreign corporation to meet obligations under the contracts.'' The
preamble to the proposed regulations specifically requests comments on
the proposed regulations ``with regard to how to determine the portion
of a foreign insurance company's assets that are held to meet
obligations under insurance contracts issued or reinsured by the
company,'' for example, if the assets ``do not exceed a specified
percentage of the corporation's total insurance liabilities for the
year.'' Ibid.
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Under the provision, passive income for purposes of the
PFIC rules does not include income derived in the active
conduct of an insurance business by a corporation (1) that
would be subject to tax under subchapter L if it were a
domestic corporation; and (2) the applicable insurance
liabilities of which constitute more than 25 percent of its
total assets as reported on the company's applicable financial
statement for the last year ending with or within the taxable
year.
For the purpose of the provision's exception from passive
income, applicable insurance liabilities means, with respect to
any property and casualty or life insurance business (1) loss
and loss adjustment expenses, (2) reserves (other than
deficiency, contingency, or unearned premium reserves) for life
and health insurance risks and life and health insurance claims
with respect to contracts providing coverage for mortality or
morbidity risks. This includes loss reserves for property and
casualty, life, and health insurance contracts and annuity
contracts. Unearned premium reserves with respect to any type
of risk are not treated as applicable insurance liabilities for
purposes of the provision. For purposes of the provision, the
amount of any applicable insurance liability may not exceed the
lesser of such amount (1) as reported to the applicable
insurance regulatory body in the applicable financial statement
(or, if less, the amount required by applicable law or
regulation), or (2) as determined under regulations prescribed
by the Secretary.
An applicable financial statement is a statement for
financial reporting purposes that (1) is made on the basis of
generally accepted accounting principles, (2) is made on the
basis of international financial reporting standards, but only
if there is no statement made on the basis of generally
accepted accounting principles, or (3) except as otherwise
provided by the Secretary in regulations, is the annual
statement required to be filed with the applicable insurance
regulatory body, but only if there is no statement made on
either of the foregoing bases. Unless otherwise provided in
regulations, it is intended that generally accepted accounting
principles means U.S. GAAP.
The applicable insurance regulatory body means, with
respect to any insurance business, the entity established by
law to license, authorize, or regulate such insurance business
and to which the applicable financial statement is provided.
For example, in the United States, the applicable insurance
regulatory body is the State insurance regulator to which the
corporation provides its annual statement.
If a corporation fails to qualify solely because its
applicable insurance liabilities constitute 25 percent or less
of its total assets, a United States person who owns stock of
the corporation may elect in such manner as the Secretary
prescribes to treat the stock as stock of a qualifying
insurance corporation if (1) the corporation's applicable
insurance liabilities constitute at least 10 percent of its
total assets, and (2) based on the applicable facts and
circumstances, the corporation is predominantly engaged in an
insurance business, and its failure to qualify under the 25
percent threshold is due solely to runoff-related or rating-
related circumstances involving such insurance business.
Facts and circumstances that tend to show the firm may not
be predominantly engaged in an insurance business include a
small number of insured risks with low likelihood but large
potential costs; workers focused to a greater degree on
investment activities than underwriting activities; and low
loss exposure. Additional relevant facts for determining
whether the firm is predominantly engaged in an insurance
business include: claims payment patterns for the current and
prior years; the firm's loss exposure as calculated for a
regulator such as the SEC or for a rating agency, or if those
are not calculated, for internal pricing purposes; the
percentage of gross receipts constituting premiums for the
current and prior years; and the number and size of insurance
contracts issued or taken on through reinsurance by the firm.
The fact that a firm has been holding itself out as an insurer
for a long period is not determinative either way.
Runoff-related or rating-related circumstances include, for
example, the fact that the company is in runoff, that is, it is
not taking on new insurance business (and consequently has
little or no premium income), and is using its remaining assets
to pay off claims with respect to pre-existing insurance risks
on its books. Such circumstances also include, for example, the
application to the company of specific requirements with
respect to capital and surplus relating to insurance
liabilities imposed by a rating agency as a condition of
obtaining a rating necessary to write new insurance business
for the current year.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2017.
TITLE V--EXEMPT ORGANIZATIONS
A. Unrelated Business Income Tax
1. Clarification of unrelated business income tax treatment of entities
exempt from tax under section 501(a) (sec. 5001 of the bill and sec.
511 of the Code)
PRESENT LAW
Tax exemption for certain organizations
Section 501(a) exempts certain organizations from Federal
income tax. Such organizations include: (1) tax-exempt
organizations described in section 501(c) (including among
others section 501(c)(3) charitable organizations and section
501(c)(4) social welfare organizations); (2) religious and
apostolic organizations described in section 501(d); and (3)
trusts forming part of a pension, profit-sharing, or stock
bonus plan of an employer described in section 401(a).
Section 115 excludes from gross income certain income of
entities that perform an essential government function. The
exemption applies to: (1) income derived from any public
utility or the exercise of any essential governmental function
and accruing to a State or any political subdivision thereof,
or the District of Columbia; or (2) income accruing to the
government of any possession of the United States, or any
political subdivision thereof.
Unrelated business income tax, in general
An exempt organization generally may have revenue from four
sources: contributions, gifts, and grants; trade or business
income that is related to exempt activities (e.g., program
service revenue); investment income; and trade or business
income that is not related to exempt activities. The Federal
income tax exemption generally extends to the first three
categories, and does not extend to an organization's unrelated
trade or business income. In some cases, however, the
investment income of an organization is taxed as if it were
unrelated trade or business income.\992\
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\992\This is the case for social clubs (sec. 501(c)(7)), voluntary
employees' beneficiary associations (sec. 501(c)(9)), and organizations
and trusts described in sections 501(c)(17) and 501(c)(20). Sec.
512(a)(3).
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The unrelated business income tax (``UBIT'') generally
applies to income derived from a trade or business regularly
carried on by the organization that is not substantially
related to the performance of the organization's tax-exempt
functions.\993\ An organization that is subject to UBIT and
that has $1,000 or more of gross unrelated business taxable
income must report that income on Form 990-T (Exempt
Organization Business Income Tax Return).
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\993\Secs. 511-514.
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Most exempt organizations may operate an unrelated trade or
business so long as the organization remains primarily engaged
in activities that further its exempt purposes. Therefore, an
organization may engage in a substantial amount of unrelated
business activity without jeopardizing exempt status. A section
501(c)(3) (charitable) organization, however, may not operate
an unrelated trade or business as a substantial part of its
activities.\994\ Therefore, the unrelated trade or business
activity of a section 501(c)(3) organization must be
insubstantial.
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\994\Treas. Reg. sec. 1.501(c)(3)-1(e).
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Organizations subject to tax on unrelated business income
Most exempt organizations are subject to the tax on
unrelated business income. Specifically, organizations subject
to the unrelated business income tax generally include: (1)
organizations exempt from tax under section 501(a), including
organizations described in section 501(c) (except for U.S.
instrumentalities and certain charitable trusts);\995\ (2)
qualified pension, profit-sharing, and stock bonus plans
described in section 401(a);\996\ and (3) certain State
colleges and universities.\997\
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\995\Sec. 511(a)(2)(A).
\996\Sec. 511(a)(2)(A).
\997\Sec. 511(a)(2)(B).
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REASONS FOR CHANGE
The Committee believes it is necessary and desirable to
clarify the applicability of the UBIT rules to certain tax-
exempt organizations. The UBIT rules, by their express terms,
apply to most organizations described in section 401(a) and
501(c) and do not exclude section 115 organizations that are
also described in section 401(a) or 501(c). The Committee
understands, however, that certain organizations (such as State
pension funds) that are described in section 401(a) or 501(c)
of the Code take the position that they are not subject to UBIT
because their income is derived from the exercise of an
essential government function as described in section 115 of
the Code. This provision clarifies that organizations with
income described in section 115 are not exempt from application
of the UBIT rules.
EXPLANATION OF PROVISION
The provision clarifies that an organization does not fail
to be subject to tax on its unrelated business income as an
organization exempt from tax under section 501(a) solely
because the organization also is exempt, or excludes amounts
from gross income, by reason of another provision of the Code.
For example, if an organization is described in section 401(a)
(and thus is exempt from tax under section 501(a)) and its
income also is described in section 115 (relating to the
exclusion from gross income of certain income derived from the
exercise of an essential governmental function), its status
under section 115 does not cause it to be exempt from tax on
its unrelated business income.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
2. Exclusion of research income from unrelated business taxable income
limited to publicly available research (sec. 5002 of the bill and sec.
512(b)(9) of the Code)
PRESENT LAW
Tax exemption for certain organizations
Section 501(a) exempts certain organizations from Federal
income tax. Such organizations include: (1) tax-exempt
organizations described in section 501(c) (including among
others section 501(c)(3) charitable organizations and section
501(c)(4) social welfare organizations); (2) religious and
apostolic organizations described in section 501(d); and (3)
trusts forming part of a pension, profit-sharing, or stock
bonus plan of an employer described in section 401(a).
Unrelated business income tax, in general
The unrelated business income tax (``UBIT'') generally
applies to income derived from a trade or business regularly
carried on by the organization that is not substantially
related to the performance of the organization's tax-exempt
functions.\998\ An organization that is subject to UBIT and
that has $1,000 or more of gross unrelated business taxable
income must report that income on Form 990-T (Exempt
Organization Business Income Tax Return).
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\998\Secs. 511-514.
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Most exempt organizations may operate an unrelated trade or
business so long as the organization remains primarily engaged
in activities that further its exempt purposes. Therefore, an
organization may engage in a substantial amount of unrelated
business activity without jeopardizing exempt status. A section
501(c)(3) (charitable) organization, however, may not operate
an unrelated trade or business as a substantial part of its
activities.\999\ Therefore, the unrelated trade or business
activity of a section 501(c)(3) organization must be
insubstantial.
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\999\Treas. Reg. sec. 1.501(c)(3)-1(e).
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Organizations subject to tax on unrelated business income
Most exempt organizations are subject to the tax on
unrelated business income. Specifically, organizations subject
to the unrelated business income tax generally include: (1)
organizations exempt from tax under section 501(a), including
organizations described in section 501(c) (except for U.S.
instrumentalities and certain charitable trusts);\1000\ (2)
qualified pension, profit-sharing, and stock bonus plans
described in section 401(a);\1001\ and (3) certain State
colleges and universities.\1002\
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\1000\Sec. 511(a)(2)(A).
\1001\Sec. 511(a)(2)(A).
\1002\Sec. 511(a)(2)(B).
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Exclusions from unrelated business taxable income
In general
Certain types of income are specifically exempt from
unrelated business taxable income, such as dividends, interest,
royalties, and certain rents,\1003\ unless derived from debt-
financed property or from certain 50-percent controlled
subsidiaries.\1004\ Other exemptions from UBIT are provided for
activities in which substantially all the work is performed by
volunteers, for income from the sale of donated goods, and for
certain activities carried on for the convenience of members,
students, patients, officers, or employees of a charitable
organization. In addition, special UBIT provisions exempt from
tax activities of trade shows and State fairs, income from
bingo games, and income from the distribution of low-cost items
incidental to the solicitation of charitable contributions.
Organizations liable for tax on unrelated business taxable
income may be liable for alternative minimum tax determined
after taking into account adjustments and tax preference items.
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\1003\Secs. 511-514.
\1004\Sec. 512(b)(13).
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Research income
Certain income derived from research activities of exempt
organizations is excluded from unrelated business taxable
income. For example, income derived from research performed for
the United States, a State, and certain agencies and
subdivisions is excluded.\1005\ Income from research performed
by a college, university, or hospital for any person also is
excluded.\1006\ Finally, if an organization is operated
primarily for purposes of carrying on fundamental research the
results of which are freely available to the general public,
all income derived by research performed by such organization
for any person, not just income derived from research available
to the general public, is excluded.\1007\
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\1005\Sec. 512(b)(7).
\1006\Sec. 512(b)(8).
\1007\Sec. 512(b)(9).
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REASONS FOR CHANGE
The Committee believes it is desirable to carefully tailor
the exclusions from the UBIT rules to better encourage tax-
exempt organizations to engage in fundamental research the
results of which are made available to the general public.
EXPLANATION OF PROVISION
The provision modifies the exclusion of income from
research performed by an organization operated primarily for
purposes of carrying on fundamental research the results of
which are freely available to the general public (section
512(b)(9)). Under the provision, the organization may exclude
from unrelated business taxable income under section 512(b)(9)
only income from such fundamental research the results of which
are freely available to the general public.
EFFECTIVE DATE
The proposal is effective for taxable years beginning after
December 31, 2017.
B. Excise Taxes
1. Simplification of excise tax on private foundation investment income
(sec. 5101 of the bill and sec. 4940 of the Code)
PRESENT LAW
Excise tax on the net investment income of private foundations
Under section 4940(a), private foundations that are
recognized as exempt from Federal income tax under section
501(a) (other than exempt operating foundations\1008\) are
subject to a two-percent excise tax on their net investment
income. Net investment income generally includes interest,
dividends, rents, royalties (and income from similar sources),
and capital gain net income, and is reduced by expenses
incurred to earn this income. The two-percent rate of tax is
reduced to one-percent in any year in which a foundation
exceeds the average historical level of its charitable
distributions. Specifically, the excise tax rate is reduced if
the foundation's qualifying distributions (generally, amounts
paid to accomplish exempt purposes)\1009\ equal or exceed the
sum of (1) the amount of the foundation's assets for the
taxable year multiplied by the average percentage of the
foundation's qualifying distributions over the five taxable
years immediately preceding the taxable year in question, and
(2) one percent of the net investment income of the foundation
for the taxable year.\1010\ In addition, the foundation cannot
have been subject to tax in any of the five preceding years for
failure to meet minimum qualifying distribution requirements in
section 4942.
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\1008\Sec. 4940(d)(1). Exempt operating foundations generally
include organizations such as museums or libraries that devote their
assets to operating charitable programs but have difficulty meeting the
``public support'' tests necessary not to be classified as a private
foundation. To be an exempt operating foundation, an organization must:
(1) be an operating foundation (as defined in section 4942(j)(3)); (2)
be publicly supported for at least 10 taxable years; (3) have a
governing body no more than 25 percent of whom are disqualified persons
and that is broadly representative of the general public; and (4) have
no officers who are disqualified persons. Sec. 4940(d)(2).
\1009\Sec. 4942(g).
\1010\Sec. 4940(e).
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Private foundations that are not exempt from tax under
section 501(a), such as certain charitable trusts, are subject
to an excise tax under section 4940(b). The tax is equal to the
excess of the sum of the excise tax that would have been
imposed under section 4940(a) if the foundation were tax exempt
and the amount of the tax on unrelated business income that
would have been imposed if the foundation were tax exempt, over
the income tax imposed on the foundation under subtitle A of
the Code.
Private foundations are required to make a minimum amount
of qualifying distributions each year to avoid tax under
section 4942. The minimum amount of qualifying distributions a
foundation has to make to avoid tax under section 4942 is
reduced by the amount of section 4940 excise taxes paid.\1011\
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\1011\Sec. 4942(d)(2).
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REASONS FOR CHANGE
Under the present-law, two-tier private foundation excise
tax rate structure, a foundation must carefully manage the
timing and amount of its grant making to minimize its excise
tax burden. Compliance can be costly and consume resources that
otherwise would have been used for grant making or other
charitable activity.
In addition, to qualify for the lower tax rate in a year, a
foundation must ensure that its distributions for the year
exceed a historical, average level of distributions. This
structure creates an incentive for foundations to limit
distributions in any one year, because a significant increase
in distributions will raise the foundation's average level of
distributions, making it more difficult to qualify for the
reduced rate in future years. As a result, a foundation that
might have been inclined to distribute a larger amount in a
time of public need, such as during the response to a natural
disaster, has a disincentive to do so.
For these reasons, the Committee believes it is appropriate
to replace the present-law, two-tier private foundation excise
tax rate structure with a simplified structure that uses a
single tax rate of 1.4 percent.
EXPLANATION OF PROVISION
The provision replaces the two rates of excise tax on tax-
exempt private foundations with a single rate of tax of 1.4
percent. Thus, under the provision, a tax-exempt private
foundation generally is subject to an excise tax of 1.4 percent
on its net investment income. A taxable private foundation is
subject to an excise tax equal to the excess (if any) of the
sum of the 1.4 percent net investment income excise tax and the
amount of the tax on unrelated business income (both calculated
as if the foundation were tax-exempt), over the income tax
imposed on the foundation. The provision repeals the special
reduced excise tax rate for private foundations that exceed
their historical level of qualifying distributions.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
2. Private operating foundation requirements relating to operation of
an art museum (sec. 5102 of the bill and sec. 4942(j) of the Code)
PRESENT LAW
Public charities and private foundations
An organization qualifying for tax-exempt status under
section 501(c)(3) is further classified as either a public
charity or a private foundation. An organization may qualify as
a public charity in several ways.\1012\ Certain organizations
are classified as public charities per se, regardless of their
sources of support. These include churches, certain schools,
hospitals and other medical organizations, certain
organizations providing assistance to colleges and
universities, and governmental units.\1013\ Other organizations
qualify as public charities because they are broadly publicly
supported. First, a charity may qualify as publicly supported
if at least one-third of its total support is from gifts,
grants, or other contributions from governmental units or the
general public.\1014\ Alternatively, it may qualify as publicly
supported if it receives more than one-third of its total
support from a combination of gifts, grants, and contributions
from governmental units and the public plus revenue arising
from activities related to its exempt purposes (e.g., fee for
service income). In addition, this category of public charity
must not rely excessively on endowment income as a source of
support.\1015\ A supporting organization, i.e., an organization
that provides support to another section 501(c)(3) entity that
is not a private foundation and meets certain other
requirements of the Code, also is classified as a public
charity.\1016\
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\1012\The Code does not expressly define the term ``public
charity,'' but rather provides exceptions to those entities that are
treated as private foundations.
\1013\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\1014\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical
test, the organization may qualify as a public charity if it passes a
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
\1015\To meet this requirement, the organization must normally
receive more than one-third of its support from a combination of (1)
gifts, grants, contributions, or membership fees and (2) certain gross
receipts from admissions, sales of merchandise, performance of
services, and furnishing of facilities in connection with activities
that are related to the organization's exempt purposes. Sec.
509(a)(2)(A). In addition, the organization must not normally receive
more than one-third of its public support in each taxable year from the
sum of (1) gross investment income and (2) the excess of unrelated
business taxable income as determined under section 512 over the amount
of unrelated business income tax imposed by section 511. Sec.
509(a)(2)(B).
\1016\Sec. 509(a)(3). Supporting organizations are further
classified as Type I, II, or III depending on the relationship they
have with the organizations they support. Supporting organizations must
support public charities listed in one of the other categories (i.e.,
per se public charities, broadly supported public charities, or revenue
generating public charities), and they are not permitted to support
other supporting organizations or testing for public safety
organizations.
Organizations organized and operated exclusively for testing for
public safety also are classified as public charities. Sec. 509(a)(4).
Such organizations, however, are not eligible to receive deductible
charitable contributions under section 170.
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A section 501(c)(3) organization that does not fit within
any of the above categories is a private foundation. In
general, private foundations receive funding from a limited
number of sources (e.g., an individual, a family, or a
corporation).
The deduction for charitable contributions to private
foundations is in some instances less generous than the
deduction for charitable contributions to public charities. In
addition, private foundations are subject to a number of
operational rules and restrictions that do not apply to public
charities.\1017\
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\1017\Unlike public charities, private foundations are subject to
tax on their net investment income at a rate of two percent (one
percent in some cases). Sec. 4940. Private foundations also are subject
to more restrictions on their activities than are public charities. For
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount
of charitable distributions each year, (sec. 4942), are limited in the
extent to which they may control a business (sec. 4943), may not make
speculative investments (sec. 4944), and may not make certain
expenditures (sec. 4945). Violations of these rules result in excise
taxes on the foundation and, in some cases, may result in excise taxes
on the managers of the foundation.
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Tax on failure to distribute income by private nonoperating foundations
Private nonoperating foundations are required to pay out a
minimum amount each year as qualifying distributions.\1018\ In
general, a qualifying distribution is an amount paid to
accomplish one or more of the organization's exempt purposes,
including reasonable and necessary administrative
expenses.\1019\ Failure to pay out the minimum required amount
results in an initial excise tax on the foundation of 30
percent of the undistributed amount. An additional tax of 100
percent of the undistributed amount applies if an initial tax
is imposed and the required distributions have not been made by
the end of the applicable taxable period.\1020\ A foundation
may include as a qualifying distribution the salaries,
occupancy expenses, travel costs, and other reasonable and
necessary administrative expenses that the foundation incurs in
operating a grant program. A qualifying distribution also
includes any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more of the organization's
exempt purposes and certain amounts set aside for exempt
purposes.\1021\
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\1018\Sec. 4942.
\1019\Sec. 4942(g)(1)(A).
\1020\Sec. 4942(a) and (b). Taxes imposed may be abated if certain
conditions are met. Secs. 4961 and 4962.
\1021\Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an
organization is permitted to adjust the distributable amount in those
cases where distributions during the five preceding years have exceeded
the payout requirements. Sec. 4942(i).
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Private operating foundations
The tax on failure to distribute income does not apply to
the undistributed income of a private foundation for any
taxable year for which it is an operating foundation.\1022\
Private operating foundations generally operate their own
charitable programs directly, rather than serving primarily as
a grantmaking entity.
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\1022\Sec. 4942(a)(1).
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Private operating foundations must satisfy several tests
designed to distinguish them from nonoperating (grantmaking)
foundations. First, an operating foundation generally must make
qualifying distributions for the direct conduct of activities
that are related to its exempt purpose (as opposed to making
such distributions in the form of grants to other charities)
equal to 85 percent of the lesser of its adjusted net income or
its minimum investment return, each as defined under section
4942.\1023\ In addition, an operating foundation must satisfy
one of the following three alternative tests: (1) an asset
test, under which substantially more than half of the
organization's assets (generally, 65 percent) are devoted to
the direct conduct of exempt activities or to functionally
related businesses; (2) an endowment test, under which the
organization normally makes qualifying distributions for the
direct conduct of activities related to its exempt purpose in
an amount not less than two-thirds of its minimum investment
return; or (3) a support test, under which the organization
must meet certain measures to show that it receives public
support.\1024\
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\1023\Sec. 4942(j)(3)(A); Treas. Reg. sec. 53.4942(b)-1(c).
\1024\Sec. 4942(j)(3)(B).
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REASONS FOR CHANGE
Because private operating foundations run their own
charitable programs (rather than serving primarily as grant
makers to operating charities), private operating foundations
are given preferential treatment under Code. It has come to the
attention of the Committee, however, that certain private
operating foundations that operate art museums severely
restrict public access to their collections, raising the
question whether the museums are operated for a public or a
private purpose. For this reason, the Committee believes that
an organization that operates an art museum as a substantial
activity should not qualify for private operating foundation
status unless it offers meaningful access to the public during
normal business hours.
EXPLANATION OF PROVISION
Under the provision, an organization that operates an art
museum as a substantial activity does not qualify as a private
operating foundation unless the museum is open during normal
business hours to the public for at least 1,000 hours during
the taxable year.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
3. Excise tax based on investment income of private colleges and
universities (sec. 5103 of the bill and new sec. 4969 of the Code)
PRESENT LAW
Public charities and private foundations
An organization qualifying for tax-exempt status under
section 501(c)(3) is further classified as either a public
charity or a private foundation. An organization may qualify as
a public charity in several ways.\1025\ Certain organizations
are classified as public charities per se, regardless of their
sources of support. These include churches, certain schools,
hospitals and other medical organizations, certain
organizations providing assistance to colleges and
universities, and governmental units.\1026\ Other organizations
qualify as public charities because they are broadly publicly
supported. First, a charity may qualify as publicly supported
if at least one-third of its total support is from gifts,
grants, or other contributions from governmental units or the
general public.\1027\ Alternatively, it may qualify as publicly
supported if it receives more than one-third of its total
support from a combination of gifts, grants, and contributions
from governmental units and the public plus revenue arising
from activities related to its exempt purposes (e.g., fee for
service income). In addition, this category of public charity
must not rely excessively on endowment income as a source of
support.\1028\ A supporting organization, i.e., an organization
that provides support to another section 501(c)(3) entity that
is not a private foundation and meets the requirements of the
Code, also is classified as a public charity.\1029\
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\1025\The Code does not expressly define the term ``public
charity,'' but rather provides exceptions to those entities that are
treated as private foundations.
\1026\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\1027\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical
test, the organization may qualify as a public charity if it passes a
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
\1028\To meet this requirement, the organization must normally
receive more than one-third of its support from a combination of (1)
gifts, grants, contributions, or membership fees and (2) certain gross
receipts from admissions, sales of merchandise, performance of
services, and furnishing of facilities in connection with activities
that are related to the organization's exempt purposes. Sec.
509(a)(2)(A). In addition, the organization must not normally receive
more than one-third of its public support in each taxable year from the
sum of (1) gross investment income and (2) the excess of unrelated
business taxable income as determined under section 512 over the amount
of unrelated business income tax imposed by section 511. Sec.
509(a)(2)(B).
\1029\Sec. 509(a)(3). Supporting organizations are further
classified as Type I, II, or III depending on the relationship they
have with the organizations they support. Supporting organizations must
support public charities listed in one of the other categories (i.e.,
per se public charities, broadly supported public charities, or revenue
generating public charities), and they are not permitted to support
other supporting organizations or testing for public safety
organizations.
Organizations organized and operated exclusively for testing for
public safety also are classified as public charities. Sec. 509(a)(4).
Such organizations, however, are not eligible to receive deductible
charitable contributions under section 170.
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A section 501(c)(3) organization that does not fit within
any of the above categories is a private foundation. In
general, private foundations receive funding from a limited
number of sources (e.g., an individual, a family, or a
corporation).
The deduction for charitable contributions to private
foundations is in some instances less generous than the
deduction for charitable contributions to public charities. In
addition, private foundations are subject to a number of
operational rules and restrictions that do not apply to public
charities.\1030\
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\1030\Unlike public charities, private foundations are subject to
tax on their net investment income at a rate of two percent (one
percent in some cases). Sec. 4940. Private foundations also are subject
to more restrictions on their activities than are public charities. For
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount
of charitable distributions each year, (sec. 4942), are limited in the
extent to which they may control a business (sec. 4943), may not make
speculative investments (sec. 4944), and may not make certain
expenditures (sec. 4945). Violations of these rules result in excise
taxes on the foundation and, in some cases, may result in excise taxes
on the managers of the foundation.
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Excise tax on investment income of private foundations
Under section 4940(a), private foundations that are
recognized as exempt from Federal income tax under section
501(a) (other than exempt operating foundations)\1031\ are
subject to a two-percent excise tax on their net investment
income. Net investment income generally includes interest,
dividends, rents, royalties (and income from similar sources),
and capital gain net income, and is reduced by expenses
incurred to earn this income. The two-percent rate of tax is
reduced to one-percent in any year in which a foundation
exceeds the average historical level of its charitable
distributions. Specifically, the excise tax rate is reduced if
the foundation's qualifying distributions (generally, amounts
paid to accomplish exempt purposes)\1032\ equal or exceed the
sum of (1) the amount of the foundation's assets for the
taxable year multiplied by the average percentage of the
foundation's qualifying distributions over the five taxable
years immediately preceding the taxable year in question, and
(2) one percent of the net investment income of the foundation
for the taxable year.\1033\ In addition, the foundation cannot
have been subject to tax in any of the five preceding years for
failure to meet minimum qualifying distribution requirements in
section 4942.\1034\
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\1031\Exempt operating foundations are exempt from the section 4940
tax. Sec. 4940(d)(1). Exempt operating foundations generally include
organizations such as museums or libraries that devote their assets to
operating charitable programs but have difficulty meeting the ``public
support'' tests necessary not to be classified as a private foundation.
To be an exempt operating foundation, an organization must: (1) be an
operating foundation (as defined in section 4942(j)(3)); (2) be
publicly supported for at least 10 taxable years; (3) have a governing
body no more than 25 percent of whom are disqualified persons and that
is broadly representative of the general public; and (4) have no
officers who are disqualified persons. Sec. 4940(d)(2).
\1032\Sec. 4942(g).
\1033\Sec. 4940(e).
\1034\Under a separate provision, the private foundation excise tax
would be simplified by replacing the two-tier rate structure with a
single-rate tax set at 1.4 percent.
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Private foundations that are not exempt from tax under
section 501(a), such as certain charitable trusts, are subject
to an excise tax under section 4940(b). The tax is equal to the
excess of the sum of the excise tax that would have been
imposed under section 4940(a) if the foundation were tax exempt
and the amount of the tax on unrelated business income that
would have been imposed if the foundation were tax exempt, over
the income tax imposed on the foundation under subtitle A of
the Code.
Private foundations are required to make a minimum amount
of qualifying distributions each year to avoid tax under
section 4942. The minimum amount of qualifying distributions a
foundation has to make to avoid tax under section 4942 is
reduced by the amount of section 4940 excise taxes paid.\1035\
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\1035\Sec. 4942(d)(2).
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Private colleges and universities
Private colleges and universities generally are treated as
public charities rather than private foundations\1036\ and thus
are not subject to the private foundation excise tax on net
investment income.
---------------------------------------------------------------------------
\1036\Secs. 509(a)(1) and 170(b)(1)(A)(ii).
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REASONS FOR CHANGE
In recent years, the endowment balances at many private
colleges and universities have increased dramatically. At the
same time, college tuition has risen at rates in excess of the
rate of inflation. Where the endowment of a private college or
university has grown so large that it is not commensurate with
the scope of the institution's activities in educating
students, the Committee believes it is appropriate to impose a
modest excise tax on the investment income derived from the
endowment.
EXPLANATION OF PROVISION
The provision imposes an excise tax on an applicable
educational institution for each taxable year equal to 1.4
percent of the net investment income of the institution for the
taxable year. Net investment income is determined using rules
similar to the rules of section 4940(c) (relating to the net
investment income of a private foundation).
For purposes of the provision, an applicable educational
institution is an institution: (1) that has at least 500
students during the preceding taxable year; (2) that is an
eligible education institution as described in section 25A of
the Code;\1037\ (3) that is not described in the first section
of section 511(a)(2)(B) of the Code (generally describing State
colleges and universities); and (4) the aggregate fair market
value of the assets of which at the end of the preceding
taxable year (other than those assets that are used directly in
carrying out the institution's exempt purpose)\1038\ is at
least $250,000 per student. For these purposes, the number of
students of an institution is based on the daily average number
of full-time students attending the institution, with part-time
students being taken into account on a full-time student
equivalent basis.
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\1037\Section 25A defines an eligible educational institution as an
institution (1) which is described in section 481 of the Higher
Education Act of 1965 (20 U.S.C. sec. 1088), as in effect on August 5,
1977, and (2) which is eligible to participate in a program under title
IV of such Act.
\1038\Assets used directly in carrying out the institution's exempt
purpose include, for example, classroom buildings and physical
facilities used for educational activities and office equipment or
other administrative assets used by employees of the institution in
carrying out exempt activities, among other assets. 1039 Secs.
509(f)(3). 1040 Secs. 509(a)(3).
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For purposes of determining whether an institution meets
the asset-per-student threshold and determining net investment
income, assets and net investment income include amounts with
respect to an organization that is related to the institution.
An organization is treated as related to the institution for
this purpose if the organization: (1) controls, or is
controlled by, the institution; (2) is controlled by one or
more persons that control the institution; or (3) is a
supported organization\1039\ or a supporting organization\1040\
during the taxable year with respect to the institution.
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\1039\Secs. 509(f)(3).
\1040\Secs. 509(a)(3).
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
4. Provide an exception to the private foundation excess business
holdings rules for philanthropic business holdings (sec. 5104 of the
bill and sec. 4943 of the Code)
PRESENT LAW
Public charities and private foundations
An organization qualifying for tax-exempt status under
section 501(c)(3) is further classified as either a public
charity or a private foundation. An organization may qualify as
a public charity in several ways.\1041\ Certain organizations
are classified as public charities per se, regardless of their
sources of support. These include churches, certain schools,
hospitals and other medical organizations (including medical
research organizations), certain organizations providing
assistance to colleges and universities, and governmental
units.\1042\ Other organizations qualify as public charities
because they are broadly publicly supported. First, a charity
may qualify as publicly supported if at least one-third of its
total support is from gifts, grants, or other contributions
from governmental units or the general public.\1043\
Alternatively, it may qualify as publicly supported if it
receives more than one-third of its total support from a
combination of gifts, grants, and contributions from
governmental units and the public plus revenue arising from
activities related to its exempt purposes (e.g., fee for
service income). In addition, this category of public charity
must not rely excessively on endowment income as a source of
support.\1044\ A supporting organization, i.e., an organization
that provides support to another section 501(c)(3) entity that
is not a private foundation and meets certain other
requirements of the Code, also is classified as a public
charity.\1045\
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\1041\The Code does not expressly define the term ``public
charity,'' but rather provides exceptions to those entities that are
treated as private foundations.
\1042\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\1043\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical
test, the organization may qualify as a public charity if it passes a
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
\1044\To meet this requirement, the organization must normally
receive more than one-third of its support from a combination of (1)
gifts, grants, contributions, or membership fees and (2) certain gross
receipts from admissions, sales of merchandise, performance of
services, and furnishing of facilities in connection with activities
that are related to the organization's exempt purposes. Sec.
509(a)(2)(A). In addition, the organization must not normally receive
more than one-third of its public support in each taxable year from the
sum of (1) gross investment income and (2) the excess of unrelated
business taxable income as determined under section 512 over the amount
of unrelated business income tax imposed by section 511. Sec.
509(a)(2)(B).
\1045\Sec. 509(a)(3). Organizations organized and operated
exclusively for testing for public safety also are classified as public
charities. Sec. 509(a)(4). Such organizations, however, are not
eligible to receive deductible charitable contributions under section
170.
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A section 501(c)(3) organization that does not fit within
any of the above categories is a private foundation. In
general, private foundations receive funding from a limited
number of sources (e.g., an individual, a family, or a
corporation).
The deduction for charitable contributions to private
foundations is in some instances less generous than the
deduction for charitable contributions to public charities. In
addition, private foundations are subject to a number of
operational rules and restrictions that do not apply to public
charities, as well as a tax on their net investment
income.\1046\
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\1046\Unlike public charities, private foundations are subject to
tax on their net investment income at a rate of two percent (one
percent in some cases). Sec. 4940. Private foundations also are subject
to more restrictions on their activities than are public charities. For
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount
of charitable distributions each year (sec. 4942), are limited in the
extent to which they may control a business (sec. 4943), may not make
speculative investments (sec. 4944), and may not make certain
expenditures (sec. 4945). Violations of these rules result in excise
taxes on the foundation and, in some cases, may result in excise taxes
on the managers of the foundation.
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Excess business holdings of private foundations
Private foundations are subject to tax on excess business
holdings.\1047\ In general, a private foundation is permitted
to hold 20 percent of the voting stock in a corporation,
reduced by the amount of voting stock held by all disqualified
persons (as defined in section 4946). If it is established that
no disqualified person has effective control of the
corporation, a private foundation and disqualified persons
together may own up to 35 percent of the voting stock of a
corporation. A private foundation shall not be treated as
having excess business holdings in any corporation if it owns
(together with certain other related private foundations) not
more than two percent of the voting stock and not more than two
percent in value of all outstanding shares of all classes of
stock in that corporation. Similar rules apply with respect to
holdings in a partnership (substituting ``profits interest''
for ``voting stock'' and ``capital interest'' for ``nonvoting
stock'') and to other unincorporated enterprises (by
substituting ``beneficial interest'' for ``voting stock'').
Private foundations are not permitted to have holdings in a
proprietorship. Foundations generally have a five-year period
to dispose of excess business holdings (acquired other than by
purchase) without being subject to tax.\1048\ This five-year
period may be extended an additional five years in limited
circumstances.\1049\ The excess business holdings rules do not
apply to holdings in a functionally related business or to
holdings in a trade or business at least 95 percent of the
gross income of which is derived from passive sources.\1050\
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\1047\Sec. 4943. Taxes imposed may be abated if certain conditions
are met. Secs. 4961 and 4962.
\1048\Sec. 4943(c)(6).
\1049\Sec. 4943(c)(7).
\1050\Sec. 4943(d)(3).
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The initial tax is equal to five percent of the value of
the excess business holdings held during the foundation's
applicable taxable year. An additional tax is imposed if an
initial tax is imposed and at the close of the applicable
taxable period, the foundation continues to hold excess
business holdings. The amount of the additional tax is equal to
200 percent of such holdings.
REASONS FOR CHANGE
In recent years, a new type of philanthropy has combined
private sector entrepreneurship with charitable giving, such as
through the donation of a private company's after-tax profits
to charity. The Committee believes it is appropriate to
encourage this form of philanthropy by eliminating certain
legal impediments to its use, while also ensuring that private
individuals cannot improperly benefit from amounts intended for
a charitable purpose or inappropriately manage a taxable
business. The Committee therefore believes it is appropriate to
create an exception to the present-law private foundation
excess business holdings rules for certain philanthropic
business holdings. By so doing, the law will permit private
philanthropists to bequeath an entire business to a private
foundation, provided that the after-tax profits of the business
will be paid to the foundation and certain other requirements
are satisfied, while also ensuring that the donor's heirs
cannot improperly benefit from the arrangement.
EXPLANATION OF PROVISION
The provision creates an exception to the excess business
holdings rules for certain philanthropic business holdings.
Specifically, the tax on excess business holdings does not
apply with respect to the holdings of a private foundation in
any business enterprise that, for the taxable year, satisfies
the following requirements: (1) the ownership requirements; (2)
the ``all profits to charity'' distribution requirement; and
(3) the independent operation requirements.
The ownership requirements are satisfied if: (1) all
ownership interests in the business enterprise are held by the
private foundation at all times during the taxable year; and
(2) all the private foundation's ownership interests in the
business enterprise were acquired not by purchase.
The ``all profits to charity'' distribution requirement is
satisfied if the business enterprise, not later than 120 days
after the close of the taxable year, distributes an amount
equal to its net operating income for such taxable year to the
private foundation. For this purpose, the net operating income
of any business enterprise for any taxable year is an amount
equal to the gross income of the business enterprise for the
taxable year, reduced by the sum of: (1) the deductions allowed
by chapter 1 of the Code for the taxable year that are directly
connected with the production of the income; (2) the tax
imposed by chapter 1 on the business enterprise for the taxable
year; and (3) an amount for a reasonable reserve for working
capital and other business needs of the business enterprise.
The independent operation requirements are met if, at all
times during the taxable year, the following three requirements
are satisfied. First, no substantial contributor to the private
foundation, or family member of such a contributor, is a
director, officer, trustee, manager, employee, or contractor of
the business enterprise (or an individual having powers or
responsibilities similar to any of the foregoing). Second, at
least a majority of the board of directors of the private
foundation are not also directors or officers of the business
enterprise or members of the family of a substantial
contributor to the private foundation. Third, there is no loan
outstanding from the business enterprise to a substantial
contributor to the private foundation or a family member of
such contributor. For purposes of the independent operation
requirements, ``substantial contributor'' has the meaning given
to the term under section 4958(c)(3)(C), and family members are
determined under section 4958(f)(4).
The provision does not apply to the following
organizations: (1) donor advised funds or supporting
organizations that are subject to the excess business holdings
rules by reason of section 4943(e) or (f); (2) any trust
described in section 4947(a)(1) (relating to charitable
trusts); or (3) any trust described in section 4947(a)(2)
(relating to split-interest trusts).
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2017.
C. Requirements for Organizations Exempt From Tax
1. Section 501(c)(3) organizations permitted to make statements
relating to political campaign in ordinary course of activities in
carrying out exempt purpose (sec. 5201 of the bill and sec. 501 of the
Code)
PRESENT LAW
Section 501(c)(3) organizations
Charitable organizations, i.e., organizations described in
section 501(c)(3), generally are exempt from Federal income tax
and are eligible to receive tax deductible contributions. A
charitable organization must operate primarily in pursuance of
one or more tax-exempt purposes constituting the basis of its
tax exemption.\1051\ The Code specifies such purposes as
religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or to foster international
amateur sports competition, or for the prevention of cruelty to
children or animals.\1052\ In general, an organization is
organized and operated for charitable purposes if it provides
relief for the poor and distressed or the underprivileged. In
order to qualify as operating primarily for a purpose described
in section 501(c)(3), an organization must satisfy the
following operational requirements: (1) its net earnings may
not inure to the benefit of any person in a position to
influence the activities of the organization; (2) it must
operate to provide a public benefit, not a private
benefit;\1053\ (3) it may not be operated primarily to conduct
an unrelated trade or business;\1054\ (4) it may not engage in
substantial legislative lobbying; and (5) it may not
participate or intervene in any political campaign.
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\1051\Treas. Reg. sec. 1.501(c)(3)-1(c)(1).
\1052\Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
\1053\Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
\1054\Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a certain
level of unrelated trade or business activity will not jeopardize tax-
exempt status.
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Section 501(c)(3) organizations are classified either as
``public charities'' or ``private foundations.''\1055\ Private
foundations generally are defined under section 509(a) as all
organizations described in section 501(c)(3) other than an
organization granted public charity status by reason of: (1)
being a specified type of organization (i.e., churches,
educational institutions, hospitals and certain other medical
organizations, certain organizations providing assistance to
colleges and universities, or a governmental unit); (2)
receiving a substantial part of its support from governmental
units or direct or indirect contributions from the general
public; or (3) providing support to another section 501(c)(3)
entity that is not a private foundation. In contrast to public
charities, private foundations generally are funded from a
limited number of sources (e.g., an individual, family, or
corporation). Donors to private foundations and persons related
to such donors together often control the operations of private
foundations.
---------------------------------------------------------------------------
\1055\Sec. 509(a).
---------------------------------------------------------------------------
Because private foundations receive support from, and
typically are controlled by, a small number of supporters,
private foundations are subject to a number of anti-abuse rules
and excise taxes not applicable to public charities.\1056\
Public charities also have certain advantages over private
foundations regarding the deductibility of contributions.
---------------------------------------------------------------------------
\1056\Secs. 4940-4945.
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Political campaign activities
Charitable organizations may not participate in, or
intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in
opposition to) any candidate for public office.\1057\ The
prohibition on such political campaign activity is absolute
and, in general, includes activities such as making
contributions to a candidate's political campaign, endorsements
of a candidate, lending employees to work in a political
campaign, or providing facilities for use by a candidate. The
absolute prohibition on campaign activities was added in 1954
by the so called ``Johnson amendment.''\1058\ Many other
activities may constitute political campaign activity,
depending on the facts and circumstances. The sanction for a
violation of the prohibition is loss of the organization's tax-
exempt status.
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\1057\Sec. 501(c)(3).
\1058\Internal Revenue Code of 1954, sec. 501(c)(3), Pub. L. No.
591 (August 16, 1954).
---------------------------------------------------------------------------
For organizations that engage in prohibited political
campaign activity, the Code provides three penalties that may
be applied either as alternatives to revocation of tax
exemption or in addition to loss of tax-exempt status: an
excise tax on political expenditures,\1059\ termination
assessment of all taxes due,\1060\ and an injunction against
further political expenditures.\1061\
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\1059\Sec. 4955.
\1060\Sec. 6852(a)(1).
\1061\Sec. 7409.
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REASONS FOR CHANGE
The Committee believes that the Johnson amendment's
prohibition on the making of candidate-related statements
creates an undue chilling effect on free speech by curtailing
charity employees'--including ministers' and other religious
leaders'--expression of their political opinions. The Committee
therefore believes that the restriction should be modified to
permit charities to engage in certain candidate-related speech
in the course of their exempt activities in a manner that would
not fundamentally change the nature of what makes them
charities under the Code.
EXPLANATION OF PROVISION
The provision modifies the present-law rules relating to
political campaign activity by section 501(c)(3) organizations
for the following purposes: (1) section 501(c)(3) tax-exempt
status; (2) qualifying as an eligible recipient of tax-
deductible contributions for income,\1062\ gift,\1063\ and
estate tax\1064\ purposes; and (3) application of the excise
tax on political expenditures by section 501(c)(3)
organizations.\1065\
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\1062\Sec. 170(c)(2).
\1063\Sec. 2522.
\1064\Secs. 2055 and 2106.
\1065\Sec. 4955.
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For such purposes, an organization shall not fail to be
treated as organized and operated exclusively for a purpose
described in section 501(c)(3), nor shall it be deemed to have
participated in, or intervened in any political campaign on
behalf of (or in opposition to) any candidate for public
office, solely because of the content of any statement that:
(A) is made in the ordinary course of the organization's
regular and customary activities in carrying out its exempt
purpose; and (B) results in the organization incurring not more
than de minimis incremental expenses.
The provision does not apply to taxable years beginning
after December 31, 2023.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2018.
2. Additional reporting requirements for donor advised fund sponsoring
organizations (sec. 5202 of the bill and sec. 6033 of the Code)
PRESENT LAW
Overview
Some charitable organizations (including community
foundations) establish accounts to which donors may contribute
and thereafter provide nonbinding advice or recommendations
with regard to distributions from the fund or the investment of
assets in the fund. Such accounts are commonly referred to as
``donor advised funds.'' Donors who make contributions to
charities for maintenance in a donor advised fund generally
claim a charitable contribution deduction at the time of the
contribution.\1066\ Although sponsoring charities frequently
permit donors (or other persons appointed by donors) to provide
nonbinding recommendations concerning the distribution or
investment of assets in a donor advised fund, sponsoring
charities generally must have legal ownership and control of
such assets following the contribution. If the sponsoring
charity does not have such control (or permits a donor to
exercise control over amounts contributed), the donor's
contributions may not qualify for a charitable deduction, and,
in the case of a community foundation, the contribution may be
treated as being subject to a material restriction or condition
by the donor.
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\1066\Contributions to a sponsoring organization for maintenance in
a donor advised fund are not eligible for a charitable deduction for
income tax purposes if the sponsoring organization is a veterans'
organization described in section 170(c)(3), a fraternal society
described in section 170(c)(4), or a cemetery company described in
section 170(c)(5); for gift tax purposes if the sponsoring organization
is a fraternal society described in section 2522(a)(3) or a veterans'
organization described in section 2522(a)(4); or for estate tax
purposes if the sponsoring organization is a fraternal society
described in section 2055(a)(3) or a veterans' organization described
in section 2055(a)(4). In addition, contributions to a sponsoring
organization for maintenance in a donor advised fund are not eligible
for a charitable deduction for income, gift, or estate tax purposes if
the sponsoring organization is a Type III supporting organization
(other than a functionally integrated Type III supporting
organization). In addition to satisfying generally applicable
substantiation requirements under section 170(f), a donor must obtain,
with respect to each charitable contribution to a sponsoring
organization to be maintained in a donor advised fund, a
contemporaneous written acknowledgment from the sponsoring organization
providing that the sponsoring organization has exclusive legal control
over the assets contributed.
---------------------------------------------------------------------------
Statutory definition of a donor advised fund
The Code defines a ``donor advised fund'' as a fund or
account that is: (1) separately identified by reference to
contributions of a donor or donors; (2) owned and controlled by
a sponsoring organization; and (3) with respect to which a
donor (or any person appointed or designated by such donor (a
``donor advisor'')) has, or reasonably expects to have,
advisory privileges with respect to the distribution or
investment of amounts held in the separately identified fund or
account by reason of the donor's status as a donor. All three
prongs of the definition must be met in order for a fund or
account to be treated as a donor advised fund.\1067\
---------------------------------------------------------------------------
\1067\See sec. 4966(d)(2)(A). A donor advised fund does not include
a fund or account that makes distributions only to a single identified
organization or governmental entity. A donor advised fund also does not
include certain funds or accounts with respect to which a donor or
donor advisor provides advice as to which individuals receive grants
for travel, study, or other similar purposes. In addition, the
Secretary may exempt a fund or account from treatment as a donor
advised fund if such fund or account is advised by a committee not
directly or indirectly controlled by a donor, donor advisor, or persons
related to a donor or donor advisor. The Secretary also may exempt a
fund or account from treatment as a donor advised fund if such fund or
account benefits a single identified charitable purpose. Secs.
4966(d)(2)(B) and (C).
---------------------------------------------------------------------------
A ``sponsoring organization'' is an organization that: (1)
is described in section 170(c)\1068\ (other than a governmental
entity described in section 170(c)(1), and without regard to
any requirement that the organization be organized in the
United States\1069\); (2) is not a private foundation (as
defined in section 509(a)); and (3) maintains one or more donor
advised funds.\1070\
---------------------------------------------------------------------------
\1068\Section 170(c) describes organizations to which charitable
contributions that are deductible for income tax purposes can be made.
\1069\See sec. 170(c)(2)(A).
\1070\Sec. 4966(d)(1).
---------------------------------------------------------------------------
Reporting and disclosure
Each sponsoring organization must disclose on its
information return: (1) the total number of donor advised funds
it owns; (2) the aggregate value of assets held in those funds
at the end of the organization's taxable year; and (3) the
aggregate contributions to and grants made from those funds
during the year.\1071\ In addition, when seeking recognition of
its tax-exempt status, a sponsoring organization must disclose
whether it intends to maintain donor advised funds.\1072\
---------------------------------------------------------------------------
\1071\Sec. 6033(k).
\1072\Sec. 508(f).
---------------------------------------------------------------------------
REASONS FOR CHANGE
Organizations that sponsor donor advised funds are now
among the largest charities in the United States. To better
understand the operations of donor advised funds and to enhance
public oversight of the tax-exempt sector, the Committee
believes it is in the interest of the public and policymakers
to require sponsoring organizations to report on their annual
information returns additional information regarding levels of
grant making from donor advised funds and policies implemented
by the sponsoring organization relating to distributions from
donor advised funds.
EXPLANATION OF PROVISION
The provision requires a sponsoring organization to report
additional information on its annual information return (Form
990). Sponsoring organizations must indicate: (1) the average
amount of grants made from donor advised funds during the
taxable year (expressed as a percentage of the value of assets
held in such funds at the beginning of the taxable year), and
(2) whether the organization has a policy with respect to donor
advised funds relating to the frequency and minimum level of
distributions from donor advised funds. The sponsoring
organization must include with its return a copy of any such
policy.
EFFECTIVE DATE
The provision is effective for returns filed for taxable
years beginning after December 31, 2017.
III. VOTES OF THE COMMITTEE
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
6, 2017.
The vote on Mr. Doggett's motion to postpone consideration
of H.R. 1 was not agreed to by a roll call vote of 16 yeas to
24 nays (with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
6, 2017.
The vote on the amendment offered by Mr. Brady to the
amendment in the nature of a substitute to H.R. 1, which would
make modifications to several tax provisions including
administration of the earned income tax credit program, the
exclusion from gross income for dependent care assistance, the
tax on investment income on endowments, the tax treatment of
musical compositions, stock option compensation, carried
interest, and the rules on international base erosion, was
agreed to by a roll call vote of 24 yeas to 16 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ X ....... ......... Mr. Neal........... ....... X .........
Mr. Johnson...................... X ....... ......... Mr. Levin.......... ....... X .........
Mr. Nunes........................ X ....... ......... Mr. Lewis.......... ....... X .........
Mr. Tiberi....................... X ....... ......... Mr. Doggett........ ....... X .........
Mr. Reichert..................... X ....... ......... Mr. Thompson....... ....... X .........
Mr. Roskam....................... X ....... ......... Mr. Larson......... ....... X .........
Mr. Buchanan..................... X ....... ......... Mr. Blumenauer..... ....... X .........
Mr. Smith (NE)................... X ....... ......... Mr. Kind........... ....... X .........
Ms. Jenkins...................... X ....... ......... Mr. Pascrell....... ....... X .........
Mr. Paulsen...................... X ....... ......... Mr. Crowley........ ....... X .........
Mr. Marchant..................... X ....... ......... Mr. Davis.......... ....... X .........
Ms. Black........................ X ....... ......... Ms. Sanchez........ ....... X .........
Mr. Reed......................... X ....... ......... Mr. Higgins........ ....... X .........
Mr. Kelly........................ X ....... ......... Ms. Sewell......... ....... X .........
Mr. Renacci...................... X ....... ......... Ms. DelBene........ ....... X .........
Mr. Meehan....................... X ....... ......... Ms. Chu............ ....... X .........
Ms. Noem......................... X .......
Mr. Holding...................... X ....... .........
Mr. Smith (MO)................... X ....... .........
Mr. Rice......................... X ....... .........
Mr. Schweikert................... X ....... .........
Ms. Walorski..................... X ....... .........
Mr. Curbelo...................... X ....... .........
Mr. Bishop....................... X ....... .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Mr. Blumenauer to the
amendment in the nature of a substitute to H.R. 1, which would
sunset H.R. 1 in the event the deficit increases, was not
agreed to by a roll call vote of 16 yeas to 23 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... ....... .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Mr. Pascrell to the
amendment in the nature of a substitute to H.R. 1, which would
strike the changes to the state and local deduction, was not
agreed to by a roll call vote of 16 yeas to 23 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... ....... ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Mr. Kind to the
amendment in the nature of a substitute to H.R. 1, which would
repeal the state and local tax deduction for all business
organizations, was not agreed to by a roll call vote of 15 yeas
to 23 nays (with a quorum being present). The vote was as
follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... ....... ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ ....... ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Mr. Kind to the
amendment in the nature of a substitute to H.R. 1, which would
restore the Work Opportunity Tax Credit, was not agreed to by a
roll call vote of 16 yeas to 23 nays (with a quorum being
present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... ....... ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Ms. Sanchez to the
amendment in the nature of a substitute to H.R. 1, which would
expand the Child Tax Credit and make permanent the $300
``family flexibility'' credit, was not agreed to by a roll call
vote of 16 yeas to 23 nays (with a quorum being present). The
vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... ....... ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Mr. Davis to the
amendment in the nature of a substitute to H.R. 1, which would
reinstate the Adoption Tax Credit, the exclusion for employer-
related dependent care, and the exclusion for employer-related
adoption assistance and expand the Child and Dependent Care Tax
Credit, was not agreed to by a roll call vote of 16 yeas to 23
nays (with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... ....... ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Mr. Doggett to the
amendment in the nature of a substitute to H.R. 1, which would
include in gross income the net controlled foreign corporation
income of United States shareholders in controlled foreign
corporations, was not agreed to by a roll call vote of 16 yeas
to 23 nays (with a quorum being present). The vote was as
follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... ....... ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
7, 2017.
The vote on the amendment offered by Ms. Sewell to the
amendment in the nature of a substitute to H.R. 1, which would
provide a tax credit to qualified apprenticeship programs, was
not agreed to by a roll call vote of 16 yeas to 23 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... ....... ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Larson to the
amendment in the nature of a substitute to H.R. 1, which would
strike section 1308 and raise the corporate rate, was not
agreed to by a roll call vote of 16 yeas to 24 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Lewis to the
amendment in the nature of a substitute to H.R. 1, which would
strike section 5201, was not agreed to by a roll call vote of
16 yeas to 23 nays (with a quorum being present). The vote was
as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... ....... ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Doggett to the
amendment in the nature of a substitute to H.R. 1, which would
restore the above-and-line deductions for interest payments on
qualified education loans and tuition and related expenses, the
exclusions for interest on United States savings bonds used to
pay for tuition, qualified tuition reductions, and employer-
provided education assistance, and reinstate the above-the-
line-deduction for out-of-pocket teacher expenses, and expand
the American Opportunity Tax Credit, was not agreed to by a
roll call vote of 16 yeas to 24 nays (with a quorum being
present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Thompson to the
amendment in the nature of a substitute to H.R. 1, which would
retroactively extend and make permanent the exclusion from
income on mortgage debt forgiveness, and repeal the limitations
on the exclusion from capital gain on the sale of a taxpayer's
principal residence, with an offset, was not agreed to by a
roll call vote of 16 yeas to 24 nays (with a quorum being
present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Ms. Chu to the
amendment in the nature of a substitute to H.R. 1, which would
expand the Earned Income Tax Credit, and provide for an offset,
was not agreed to by a roll call vote of 16 yeas to 24 nays
(with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Ms. DelBene to the
amendment in the nature of a substitute to H.R. 1, which would
strike section 3601, and expand low income housing tax credits,
was not agreed to by a roll call vote of 16 yeas to 24 nays
(with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on Mr. Nunes' motion to table Mr. Pascrell's
appeal of the ruling of the Chair was agreed to by a roll call
vote of 23 yeas to 16 nays (with a quorum being present). The
vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ X ....... ......... Mr. Neal........... ....... X .........
Mr. Johnson...................... X ....... ......... Mr. Levin.......... ....... X .........
Mr. Nunes........................ X ....... ......... Mr. Lewis.......... ....... X .........
Mr. Tiberi....................... X ....... ......... Mr. Doggett........ ....... X .........
Mr. Reichert..................... X ....... ......... Mr. Thompson....... ....... X .........
Mr. Roskam....................... X ....... ......... Mr. Larson......... ....... X .........
Mr. Buchanan..................... X ....... ......... Mr. Blumenauer..... ....... X .........
Mr. Smith (NE)................... X ....... ......... Mr. Kind........... ....... X .........
Ms. Jenkins...................... X ....... ......... Mr. Pascrell....... ....... X .........
Mr. Paulsen...................... X ....... ......... Mr. Crowley........ ....... X .........
Mr. Marchant..................... X ....... ......... Mr. Davis.......... ....... X .........
Ms. Black........................ X ....... ......... Ms. Sanchez........ ....... X .........
Mr. Reed......................... X ....... ......... Mr. Higgins........ ....... X .........
Mr. Kelly........................ X ....... ......... Ms. Sewell......... ....... X .........
Mr. Renacci...................... X ....... ......... Ms. DelBene........ ....... X .........
Mr. Meehan....................... X ....... ......... Ms. Chu............ ....... X .........
Ms. Noem......................... X ....... .........
Mr. Holding...................... X ....... .........
Mr. Smith (MO)................... ....... ....... .........
Mr. Rice......................... X ....... .........
Mr. Schweikert................... X ....... .........
Ms. Walorski..................... X ....... .........
Mr. Curbelo...................... X ....... .........
Mr. Bishop....................... X ....... .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Ms. Sewell to the
amendment in the nature of a substitute to H.R. 1, which would
strike section 3602, was not agreed to by a roll call vote of
16 yeas to 24 nays (with a quorum being present). The vote was
as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Crowley to the
amendment in the nature of a substitute to H.R. 1, which would
restore the expired credit in section 36, add a new credit for
renters purchasing their first home, and provide a credit for
taxpayers who rent their homes and for whom their rent exceeds
30 percent of their income, was not agreed to by a roll call
vote of 16 yeas to 24 nays (with a quorum being present). The
vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Pascrell to the
amendment in the nature of a substitute to H.R. 1, which would
add a new title relating to disaster tax relief, was not agreed
to by a roll call vote of 15 yeas to 24 nays (with a quorum
being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Tiberi....................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Larson......... ....... ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Blumenauer..... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Kind........... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Crowley........ X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Davis.......... X ....... .........
Ms. Black........................ ....... X ......... Ms. Sanchez........ X ....... .........
Mr. Reed......................... ....... X ......... Mr. Higgins........ X ....... .........
Mr. Kelly........................ ....... X ......... Ms. Sewell......... X ....... .........
Mr. Renacci...................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Meehan....................... ....... X ......... Ms. Chu............ X ....... .........
Ms. Noem......................... ....... X .........
Mr. Holding...................... ....... X .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... X .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Ms. DelBene to the
amendment in the nature of a substitute to H.R. 1, which would
prevent the High Cost Plan Excise Tax from going into effect as
scheduled, was not agreed to by a roll call vote of 16 yeas to
24 nays (with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on Mr. Reichert's motion to table Mr. Higgins'
appeal of the ruling of the Chair was agreed to by a roll call
vote of 22 yeas to 16 nays (with a quorum being present). The
vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Reichert................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Buchanan................... ........ ........ ......... Mr. Blumenauer... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Davis........ ........ X .........
Ms. Black...................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Reed....................... X ........ ......... Mr. Higgins...... ........ X .........
Mr. Kelly...................... X ........ ......... Ms. Sewell....... ........ X .........
Mr. Renacci.................... X ........ ......... Ms. DelBene...... ........ X .........
Mr. Meehan..................... X ........ ......... Ms. Chu.......... ........ X .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
Mr. Rice....................... ........ ........ .........
Mr. Schweikert................. X ........ .........
Ms. Walorski................... X ........ .........
Mr. Curbelo.................... X ........ .........
Mr. Bishop..................... X ........ .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Doggett to the
amendment in the nature of a substitute to H.R. 1, which would
strike the repeal of the Alternative Minimum Tax, was not
agreed to by a roll call vote of 16 yeas to 24 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Levin to the
amendment in the nature of a substitute to H.R. 1, which would
provide a different method of taxing carried interest
compensation as ordinary income, was not agreed to by a roll
call vote of 16 yeas to 24 nays (with a quorum being present).
The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
8, 2017.
The vote on the amendment offered by Mr. Lewis to the
amendment in the nature of a substitute to H.R. 1, which would
delay the effective date of all revenue-reducing provisions
until the United States withdraws from current wars in
Afghanistan, Iraq, and Syria, and the deficit is zero, was not
agreed to by a roll call vote of 16 yeas to 24 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
9, 2017.
The vote on the amendment offered by Mr. Blumenauer to the
amendment in the nature of a substitute to H.R. 1, which would
maintain the wind energy production tax credit as under current
law, was not agreed to by a roll call vote of 15 yeas to 22
nays (with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ ........ ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... ........ ........ .........
Mr. Marchant................... ........ ........ ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
9, 2017.
The vote on the amendment offered by Ms. Chu to the
amendment in the nature of a substitute to H.R. 1, which would
strike Subtitle G of Title I related to Estate, Gift, and
Generation-skipping Transfer Taxes, was not agreed to by a roll
call vote of 14 yeas to 24 nays (with a quorum being present).
The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... ........ ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... ........ ........ .........
Mr. Marchant................... ........ X ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
9, 2017.
The vote on the amendment offered by Mr. Kind to the
amendment in the nature of a substitute to H.R. 1, which would
create a tax deduction for domestic production in excess of
current Section 199, was not agreed to by a roll call vote of
16 yeas to 24 nays (with a quorum being present). The vote was
as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
9, 2017.
The vote on the amendment offered by Mr. Pascrell to the
amendment in the nature of a substitute to H.R. 1, which would
require the disclosure to the Ways and Means Committee of the
income tax returns of the President, was not agreed to by a
roll call vote of 16 yeas to 24 nays (with a quorum being
present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... ........ X ......... Mr. Neal......... X ........ .........
Mr. Johnson.................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Nunes...................... ........ X ......... Mr. Lewis........ X ........ .........
Mr. Tiberi..................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. Reichert................... ........ X ......... Mr. Thompson..... X ........ .........
Mr. Roskam..................... ........ X ......... Mr. Larson....... X ........ .........
Mr. Buchanan................... ........ X ......... Mr. Blumenauer... X ........ .........
Mr. Smith (NE)................. ........ X ......... Mr. Kind......... X ........ .........
Ms. Jenkins.................... ........ X ......... Mr. Pascrell..... X ........ .........
Mr. Paulsen.................... ........ X ......... Mr. Crowley...... X ........ .........
Mr. Marchant................... ........ X ......... Mr. Davis........ X ........ .........
Ms. Black...................... ........ X ......... Ms. Sanchez...... X ........ .........
Mr. Reed....................... ........ X ......... Mr. Higgins...... X ........ .........
Mr. Kelly...................... ........ X ......... Ms. Sewell....... X ........ .........
Mr. Renacci.................... ........ X ......... Ms. DelBene...... X ........ .........
Mr. Meehan..................... ........ X ......... Ms. Chu.......... X ........ .........
Ms. Noem....................... ........ X .........
Mr. Holding.................... ........ X .........
Mr. Smith (MO)................. ........ X .........
Mr. Rice....................... ........ X .........
Mr. Schweikert................. ........ X .........
Ms. Walorski................... ........ X .........
Mr. Curbelo.................... ........ X .........
Mr. Bishop..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
9, 2017.
The vote on the amendment offered by Mr. Brady to the
amendment in the nature of a substitute to H.R. 1, which would
make improvements relating to the maximum rate on business
income of individuals, preserve the adoption tax credit,
improve the program integrity of the Child Tax Credit, improve
the consolidation of education savings rules, preserve the
above-the-line deduction for moving expenses of a member of the
Armed Forces on active duty, preserve the current law effective
tax rates on C corporation dividends subject to the dividends
received deduction, improve interest expense rules with respect
to accrued interest on floor plan financing indebtedness,
modify the treatment of S corporation conversions into C
corporations, modify the tax treatment of research and
experimentation expenditures, modify the treatment of expenses
in contingent fee cases, modify the transition rules on the
treatment of deferred foreign income, improve the excise tax on
investment income of private colleges and universities, and
modify rules with respect to political statements made by
certain tax-exempt entities, was agreed to by a roll call vote
of 24 yeas to 16 nays (with a quorum being present). The vote
was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Reichert................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Blumenauer... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Davis........ ........ X .........
Ms. Black...................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Reed....................... X ........ ......... Mr. Higgins...... ........ X .........
Mr. Kelly...................... X ........ ......... Ms. Sewell....... ........ X .........
Mr. Renacci.................... X ........ ......... Ms. DelBene...... ........ X .........
Mr. Meehan..................... X ........ ......... Ms. Chu.......... ........ X .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
Mr. Rice....................... X ........ .........
Mr. Schweikert................. X ........ .........
Ms. Walorski................... X ........ .........
Mr. Curbelo.................... X ........ .........
Mr. Bishop..................... X ........ .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November
9, 2017.
H.R. 1 was ordered favorably reported to the House of
Representatives as amended by a roll call vote of 24 yeas to 16
nays (with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Reichert................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Blumenauer... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Davis........ ........ X .........
Ms. Black...................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Reed....................... X ........ ......... Mr. Higgins...... ........ X .........
Mr. Kelly...................... X ........ ......... Ms. Sewell....... ........ X .........
Mr. Renacci.................... X ........ ......... Ms. DelBene...... ........ X .........
Mr. Meehan..................... X ........ ......... Ms. Chu.......... ........ X .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
Mr. Rice....................... X ........ .........
Mr. Schweikert................. X ........ .........
Ms. Walorski................... X ........ .........
Mr. Curbelo.................... X ........ .........
Mr. Bishop..................... X ........ .........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 1, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal fiscal year budget receipts for the period
2018-2027:
Clause 8 of rule XIII of the Rules of the House of
Representatives requires that an estimate provided by the Joint
Committee on Taxation to the Director of the Congressional
Budget Office under section 201(f) of the Congressional Budget
Act of 1974 for any major legislation shall, to the extent
practicable, incorporate the budgetary effects of changes in
economic output, employment, capital stock, and other
macroeconomic variables resulting from such legislation. Major
legislation is defined as legislation having a gross budgetary
effect (before incorporating macroeconomic effects) that is
greater in any fiscal year than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year. The bill meets this definition of major
legislation.
The staff of the Joint Committee on Taxation is currently
analyzing changes in economic output, employment, capital
stock, and other macroeconomic variables resulting from the
bill for purposes of determining these budgetary effects.
However, it was not practicable to complete this analysis,
which requires accounting for the effects of each provision in
this bill, along with interactions between these provisions, by
the filing of this report.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue-reducing provisions
of the bill include increased tax expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 13, 2017.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1, a bill to
provide for reconciliation pursuant to titles II and V of the
Concurrent Resolution on the Budget for Fiscal Year 2018. It
contains the revenue estimates prepared by the staff of the
Joint Committee on Taxation.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Cecilia
Pastrone.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 1--A bill to provide for reconciliation pursuant to titles II and
V of the Concurrent Resolution on the Budget for Fiscal Year
2018
Summary: H.R. 1, the Tax Cuts and Jobs Act, would amend
numerous provisions of U.S. tax law. The bill would modify the
individual income tax brackets and tax rates in effect under
current law. The bill also would increase the standard
deduction and the child tax credit. Deductions for personal
exemptions and certain itemized deductions would be repealed,
along with the individual and corporate alternative minimum tax
(AMT) and, starting in 2025, the estate tax. H.R. 1 would
replace the structure of corporate income tax rates, which has
a top rate of 35 percent under current law, with a single 20
percent rate, and would establish a maximum tax rate of 25
percent for qualified business income of an individual from
certain pass-through entities. Among other changes, the bill
would also substantially alter the current system under which
U.S. corporations are subject to taxation on their worldwide
income.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting the bill would reduce revenues by about
$1,438 billion over the 2018-2027 period, and decrease outlays
by $2 billion over the same period, leading to an increase in
the deficit of $1,437 billion over the next 10 years. A portion
of the changes in revenues would be from Social Security
payroll taxes, which are off-budget. Excluding the estimated
$19 billion increase in off-budget revenues over the next 10
years, JCT estimates that H.R. 1 would increase on-budget
deficits by about $1,456 billion over the period from 2018 to
2027. Pay-as-you-go procedures apply because enacting the
legislation would affect direct spending and revenues.
JCT estimates that enacting the legislation would not
increase net direct spending by more than $2.5 billion in any
of the four consecutive 10-year periods beginning in 2028.
Because of the magnitude of the estimated budgetary
effects, this bill is considered to be ``major legislation,''
as defined in section 5107 of H. Con. Res. 71, the Concurrent
Resolution on the Budget for Fiscal Year 2018. Hence, it
triggers the requirement that the cost estimate, to the extent
practicable, include the budgetary impact of its macroeconomic
effects. The staff of the Joint Committee on Taxation is
currently analyzing changes in economic output, employment,
capital stock, and other macroeconomic variables resulting from
the bill for purposes of determining these budgetary effects.
However, JCT indicates it is not practicable for a
macroeconomic analysis to incorporate the full effects of all
of the provisions in the bill, including interactions between
these provisions, within the very short time available between
completion of the bill and the filing of the committee report.
JCT has determined that the tax provisions of the bill
contain no intergovernmental or private sector mandates as
defined in the Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 1 is shown in the following table.
BASIS OF ESTIMATE
Revenues and direct spending
The Congressional Budget Act of 1974, as amended,
stipulates that revenue estimates provided by the staff of the
Joint Committee on Taxation will be the official estimates for
all tax legislation considered by the Congress. As such, CBO
incorporates those estimates into its cost estimates of the
effects of legislation. Virtually all of the estimates for the
provisions of H.R. 1 were provided by JCT. The date of
enactment is generally assumed to be December 1, 2017.
JCT estimates that, together, the provisions contained in
H.R. 1 would decrease federal revenues on net by about $118
billion in 2018, by $937 billion over the period from 2018 to
2022, and by $1,438 billion over the period from 2018 to 2027.
Net outlays would decrease by $9 billion in 2018, increase by
$13 billion from 2018 to 2022, and decrease by $2 billion over
the period from 2018 to 2027. On net, deficits would increase
by $108 billion in 2018, by $950 billion from 2018 to 2022, and
by $1,437 billion from 2018 to 2027. A portion of those effects
reflect changes to revenues from Social Security taxes, which
are off-budget. Over the 2018 to 2027 period, the bill would
increase on-budget deficits by $1,456 billion and reduce off-
budget deficits by $19 billion, as estimated by JCT.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in billions of dollars--
----------------------------------------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Tax Reform for Individuals............................. -64.2 -134.3 -124.5 -123.8 -123.3 -88.9 -69.1 -70.4 -88.8 -88.4 -569.6 -975.9
Business Tax Reform.................................... -124.3 -129.3 -116.3 -101.6 -89.0 -24.8 2.4 -27.0 -55.0 -80.4 -560.4 -744.5
Taxation of Foreign Income and Foreign Persons......... 70.7 42.2 24.4 27.2 27.6 28.6 28.3 28.1 10.4 -7.2 191.9 279.3
Exempt Organizations................................... 0.3 0.4 * 0.1 0.2 0.2 0.5 0.5 0.5 0.5 1.1 2.7
----------------------------------------------------------------------------------------------------------------------------------------
Total Estimated Changes in Revenues................ -117.6 -221.0 -216.5 -198.2 -184.5 -84.9 -37.9 -68.8 -132.9 -175.4 -937.1 -1,438.4
On-Budget...................................... -116.7 -220.6 -216.3 -198.2 -185.0 -88.8 -43.0 -73.0 -136.6 -178.7 -936.0 -1,457.7
Off-Budgeta.................................... -0.9 -0.4 -0.2 * 0.5 3.9 5.1 4.2 3.7 3.3 -1.1 19.3
CHANGES IN DIRECT SPENDING
Tax Reform for Individuals:
Estimated Budget Authority......................... -11.7 3.6 3.4 3.1 2.5 3.5 -3.4 -4.3 -4.8 -4.2 1.6 -12.2
Estimated Outlays.................................. -11.7 3.6 3.4 3.1 2.5 3.5 -3.4 -4.3 -4.8 -4.2 1.6 -12.2
Business Tax Reform:
Estimated Budget Authority......................... 2.2 2.3 1.7 1.9 1.8 -0.1 -0.1 -0.1 -0.1 -0.1 10.1 9.7
Estimated Outlays.................................. 2.2 2.3 1.7 1.9 1.8 -0.1 -0.1 -0.1 -0.1 -0.1 10.1 9.7
Taxation of Foreign Income and Foreign Persons:
Estimated Budget Authority......................... 0.3 0.1 0.1 0.1 0.1 * 0 0 0 0 0.8 0.9
Estimated Outlays.................................. 0.3 0.1 0.1 0.1 0.1 * 0 0 0 0 0.8 0.9
Total Changes in Direct Spending
Estimated Budget Authority..................... -9.2 6.0 5.2 5.1 4.4 3.4 -3.5 -4.4 -4.9 -4.3 12.5 -1.6
Estimated Outlays.............................. -9.2 6.0 5.2 5.1 4.4 3.4 -3.5 -4.4 -4.9 -4.3 12.5 -1.6
NET INCREASE OR DECREASE (-) IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES
Impact on Deficit...................................... 108.4 227.0 221.7 203.3 188.9 88.3 34.4 64.4 128.0 171.1 949.6 1,436.8
On-Budget Deficit.............................. 107.5 226.6 221.5 203.3 189.4 92.2 39.5 68.6 131.7 174.4 948.5 1,456.1
Off-Budget Deficit............................. 0.9 0.4 0.2 * -0.5 -3.9 -5.1 -4.2 -3.7 -3.3 1.1 -19.3
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Source: Staff of the Joint Committee on Taxation.
Note: Components may not add to totals due to rounding; * = between -$50 million and $50 million.
a. Off-budget revenues result from changes in Social Security payroll tax receipts.
Tax Reform for Individuals. H.R. 1 would make numerous
changes to tax law pertaining to individuals. Provisions in
this section include all of those in Title I of the bill and
the part of Title II pertaining to the individual alternative
minimum tax. Such provisions estimated to reduce revenues over
the 2018 to 2027 period include the following changes, which
would take effect in 2018 unless otherwise noted:
Establish four brackets instead of the seven
in place under current law, with tax rates of 12
percent, 25 percent, 35 percent, and 39.6 percent, plus
a phase out of the 12 percent tax bracket for taxpayers
with taxable income above $1 million ($1.2 million for
joint filers);
Increase the standard deduction;
Repeal the alternative minimum tax on
individuals;
Establish a maximum tax rate of 25 percent
for qualified business income of an individual from
certain pass-through entities, namely partnerships, S
corporations, and sole proprietorships;
Increase the child tax credit, which would
be consolidated into a new family tax credit that would
also include a temporary $300 credit for each taxpayer
(including both spouses for joint filers) and nonchild
dependents; and
Double the exemption amount allowed under
estate and gift taxes, and, starting in 2025, repeal
the estate tax and the generation-skipping transfer
tax.
Provisions estimated to increase revenues over the 2018 to
2027 period include the following changes:
Repeal deductions for personal exemptions;
Repeal and limit certain itemized
deductions, including repealing the deductions for
state and local income and sales taxes, limiting the
deduction for real property taxes, and limiting the
deductions for mortgage interest; and
Index tax parameters by the chained consumer
price index instead of the traditional consumer price
index.
JCT estimates that the individual tax provisions would, on
net, reduce revenues by $976 billion from 2018 to 2027. In
addition, the provisions would affect outlays for refundable
tax credits, decreasing them by an estimated $12 billion over
the 2018 to 2027 period. Some of the provisions in this section
would affect off-budget revenues, increasing them by $15
billion over the period from 2018 to 2027, JCT estimates. On-
budget revenues would decrease by an estimated $991 billion.
The largest revenue reductions would result from the
provision to establish a new income tax rate and bracket
structure, which JCT estimates would reduce revenues by $1,104
billion over the period from 2018 to 2027 and reduce outlays
for refundable tax credits by $15 billion over the same period.
In addition, the increase in the standard deduction would
reduce revenues by $819 billion over the period from 2018 to
2027 and increase outlays for refundable tax credits by $103
billion over the same period, according to JCT's estimates. The
repeal of the alternative minimum tax on individuals would
reduce revenues by $696 billion from 2018 to 2027.
JCT also estimates that the provisions providing a maximum
tax rate for pass-through entities would reduce revenues by
$597 billion over the period from 2018 to 2027, and that
modifications to the child tax credit and the new family tax
credit would, over the same 10-year period, reduce revenues by
$504 billion and increase outlays for refundable tax credits by
$136 billion. JCT estimates that additional revenue reductions,
totaling $151 billion from 2018 to 2027, would result from the
modifications to estate and gift taxes.
The largest revenue increases would result from the
provision to repeal deductions for personal exemptions, which
JCT estimates would increase revenues by $1,383 billion and
reduce outlays for refundable credits by $179 billion over the
2018 to 2027 period. In addition, JCT estimates that the repeal
and limitation of certain itemized deductions would increase
revenues by $1,258 billion and reduce outlays for refundable
credits by $4 billion from 2018 to 2027. The change in the
inflation measure used to index tax parameters would increase
revenues by $109 billion and reduce outlays for refundable
credits by $19 billion over the 2018 to 2027 period, according
to JCT estimates.
Business Tax Reform. The bill would make many changes to
business taxes. Provisions in this section include all of Title
III and the part of Title II pertaining to the corporate
alternative minimum tax. The ones with the largest effects on
revenues, as estimated by JCT, are the following:
Replace with a single 20 percent rate the
graduated structure of income tax rates for
corporations under current law that has a top rate of
35 percent;
Limit the amount of deductions for net
interest expenses to the sum of business interest
income and 30 percent of an adjusted measure of taxable
income; and
Limit the deduction for past net operating
losses to 90 percent of current taxable income and
generally repeal the two-year period over which losses
may be carried back to previous tax years.
JCT estimates that the business tax provisions would, on
net, reduce revenues by $745 billion from 2018 to 2027. In
addition, the provisions would increase outlays for refundable
tax credits by an estimated $10 billion over the 2018 to 2027
period.
JCT estimates that the modifications to the corporate tax
rate structure, including reducing the top tax rate from 35
percent that is assessed on most taxable income to a 20 percent
rate that would apply to all amounts of taxable income, would
reduce revenues by $1,456 billion over the 2018-2027 period.
JCT further estimates that limiting the deductions for interest
expenses would increase revenues by $172 billion over the same
10-year period. In addition, limiting the use of net operating
losses would raise revenues by $156 billion over the period
from 2018 to 2027.
Other changes to business taxes, including the following
ones, would increase revenues, on net, according to JCT:
Requiring that certain research or
experimental expenditures be amortized over a five-year
period or longer, starting in 2023, would increase
revenues by $109 billion over the period from 2023 to
2027.
Repealing the deduction for income
attributable to domestic production activities would
increase revenues by $95 billion over the 2018 to 2027
period;
Repealing the tax credit for clinical
testing expenses for certain drugs for rare diseases or
conditions would increase revenues by $54 billion over
the same period; and
Terminating private activity bonds would
increase revenues by $39 billion over the next 10
years.
Those increases in revenues would be partially offset by
the repeal of the alternative minimum tax on corporations,
which JCT estimates would reduce revenues by $30 billion from
2018 to 2027 and increase outlays for refundable credits by $10
billion over the same period.
Taxation of Foreign Income and Foreign Persons. Changes to
taxes pertaining to foreign income and foreign persons are
contained in Title IV of H.R. 1. The bill would substantially
modify the current system under which U.S. corporations are
subject to taxation on their worldwide income, generally
including foreign earnings in taxable income when paid to them
as dividends by their foreign subsidiaries and with an
allowance for tax credits for certain foreign taxes paid. The
system under H.R. 1 would provide an exemption for dividends
paid by a foreign corporation to its U.S. parent, with no
foreign tax credits allowed for taxes paid on the amount of
such dividends. A number of other changes would also be
implemented by Title IV.
The provisions in Title IV with the largest estimated
effects on revenues are the following:
Require that certain untaxed foreign income
of U.S. corporations be deemed to be immediately paid
to them as dividends and included in taxable income,
subject to taxation at a 14 percent rate (or 7 percent
for certain illiquid assets), and with an option to
spread the resulting tax amounts equally over an eight-
year period;
Provide a deduction for the foreign-source
portion of dividends received by domestic corporations
from certain foreign corporations;
Impose an excise tax of 20 percent on
certain payments to related foreign corporations; and
Require that U.S. corporations include in
taxable income a portion of a specified high income
amount earned by their foreign subsidiaries.
JCT estimates that the provisions related to foreign
taxation would, on net, increase revenues by $279 billion from
2018 to 2027. The provisions would also increase outlays by $1
billion over the 2018 to 2027 period, resulting from an
extension of certain payments to Puerto Rico and the Virgin
Islands of rum excise taxes, as estimated by CBO.
JCT estimates that the deduction for dividends received
from foreign corporations would reduce revenues by $205 billion
over the 2018-2027 period. Other provisions would result in
revenue increases from 2018 to 2027 as estimated by JCT:
requiring a deemed repatriation of untaxed foreign income ($293
billion); imposing an excise tax on certain payments ($95
billion); and requiring the inclusion in taxable income of
certain foreign earned high returns ($68 billion). The
additional revenue from the provision regarding deemed
repatriations would be concentrated earlier in the ten-year
period: it would increase revenues by an estimated $79 billion
in 2018, $54 billion in 2019, between $26 billion and $27
billion per year from 2020 through 2025, and $9 billion in
2026, before resulting in a reduction in revenue of $8 billion
in 2027.
Exempt Organizations. Title V of H.R. 1 would make several
changes to the tax treatment of tax-exempt organizations. Those
changes include the following: imposing an excise tax based on
the investment income of private colleges and universities;
revising the unrelated business income tax; and modifying
restrictions on political campaign activity for certain tax-
exempt organizations. JCT estimates that the changes from Title
V would, on net, increase revenues by $0.5 billion or less in
each year of the 2018 to 2027 period, for a total increase of
$3 billion over the 10-year period. No single provision would
have an effect of greater than $0.5 billion in any year,
according to JCT estimates.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table. Only on-budget changes to outlays or revenues
are subject to pay-as-you-go procedures.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 1, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 9, 2017
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in billions of dollars--
-----------------------------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE OR DECREASE (-) IN THE ON-BUDGET DEFICIT
Statutory Pay-As-You-Go Effects................................... 107.5 226.6 221.5 203.3 189.4 92.2 39.5 68.6 131.7 174.4 948.5 1,456.1
Memorandum:a
Change in Outlays............................................. -9.2 6.0 5.2 5.1 4.4 3.4 -3.5 -4.4 -4.9 -4.3 12.5 -1.6
Change in On-Budget Revenues.................................. 116.7 -220.6 -216.3 -198.2 -185.0 -88.8 -43.0 -73.0 -136.6 -178.7 -936.0 -1,457.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
aA positive sign for outlays indicates an increase in outlays. A negative sign for revenues indicates a reduction in revenues.
Note: Components do not add to totals due to rounding.
Increase in long term direct spending: JCT estimates that
enacting the legislation would not increase net direct spending
by more than $2.5 billion in any of the four consecutive 10-
year periods beginning in 2028.
Mandates: JCT has determined that H.R. 1 contains no
private-sector or intergovernmental mandates as defined by
UMRA.
Estimate prepared by: Staff of the Joint Committee on
Taxation and Cecilia Pastrone from the Congressional Budget
Office.
Estimate approved by: John McClelland, Assistant Director
for Tax Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives, the Committee made findings and
recommendations that are reflected in this report.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, for each such provision identified by
the staff of the Joint Committee on Taxation, a summary
description of the provision is provided below along with an
estimate of the number and type of affected taxpayers, and a
discussion regarding the relevant complexity and administrative
issues.
Following the analysis of the staff of the Joint Committee
on Taxation are the comments of the IRS and Treasury regarding
each provision included in the complexity analysis.
1. Simplification of rates, standard deduction, personal exemption
(secs. 1001, 1002, 1003 and 1004 of the bill)
Summary description of the provisions
The bill changes the structure of the individual income tax
by modifying the rate structure such that there are only four
tax brackets (12-percent, 25-percent, 35-percent and 39.6-
percent), significantly increasing the size of the standard
deduction (for 2018 the standard deduction is $24,400 for joint
filers, $18,300 for heads of household and $12,200 for other
filers), and eliminating personal exemptions.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 120 million tax returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to these provisions. It should not
result in an increase in disputes with the IRS, nor will
regulatory guidance be necessary to implement this provision.
The IRS will need to adjust its wage withholding tables to
reflect the repeal of personal exemptions. Because revised wage
withholding will occur within the first month of 2018, this
would require employers to switch to new withholding tables
somewhat quickly, which can be expected to result in a one-time
additional burden for employers (or potential additional costs
for employers that rely on a bookkeeping or payroll service).
Some taxpayers who currently itemize deductions may respond
to the provision by claiming the increased standard deduction
in lieu of itemizing. According to estimates by the staff of
the Joint Committee on Taxation, approximately 94 percent of
taxpayers will claim the standard deduction under the bill, up
from approximately 70 percent under present law. These
taxpayers will no longer have to file Schedule A to Form 1040,
a significant number of which will no longer need to engage in
the record keeping inherent in itemizing below-the-line
deductions. Moreover, by claiming the standard deduction, such
taxpayers may qualify to use simpler versions of the Form 1040
(i.e., Form 1040EZ or Form 1040A) that are not available to
individuals who itemize their deductions. These forms simplify
the return preparation process by eliminating from the Form
1040 those items that do not apply to particular taxpayers.
This reduction in complexity and record keeping also may
result in a decline in the number of individuals using a tax
preparation service, or tax preparation software, or a decline
in the cost of such service or software. The provision also
should reduce the number of disputes between taxpayers and the
IRS regarding the substantiation of itemized deductions.
2. Reduced rate for small businesses with net active business income
Under the bill, a special rule provides a reduced tax rate
of 11, 10, or nine percent in the case of an individual's
qualified active business income below an indexed threshold of
$75,000 (in the case of a joint return or a surviving spouse).
The indexed $75,000 threshold is three quarters of that amount
for individuals filing as head of household and half that
amount for other individuals. The reduced rate is not available
to estates and trusts.
The reduced rate is phased in. The reduced rate is 11
percent (that is, one percentage point below the 12 percent
rate) for taxable years beginning in 2018 and 2019, and is 10
percent (that is, two percentage points below the 12 percent
rate) in 2020 and 2021. For taxable years beginning in 2022 and
thereafter the reduced rate is nine percent.
The reduced tax rate applies to the least of three amounts,
the taxpayer's: (1) qualified active business income, (2)
taxable income reduced by net capital gain, or (3) 9-percent
bracket threshold amount (described above). Qualified active
business income means the excess of the taxpayer's net business
income from any active business activity over his or her net
business loss from any active business activity. Qualified
active business income includes income from any trade or
business activity, including service businesses. No capital
percentage limitation applies in determining qualified active
business income.
A phase-out applies to the amount subject to the 11-, 10-,
or nine-percent rate. The amount taxed at one of these rates is
reduced by the excess of taxable income over an indexed
applicable threshold amount, $150,000 in the case of married
individuals filing jointly. The applicable threshold amount is
three quarters of that amount for individuals filing as head of
household and half that amount for other individuals.
An active business activity is an activity that involves
the conduct of any trade or business and that is not a passive
activity for purposes of the passive loss rules of section 469
(that is, generally, the taxpayer materially participates in
the trade or business activity).
Number of affected taxpayers
It is estimated that the provision will affect over ten
percent of small business tax returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to this provision. It should not result
in an increase in disputes with the IRS, nor will regulatory
guidance be necessary to implement this provision. It may,
however, increase the number of questions that taxpayers ask
the IRS, such as how to calculate qualified active business
income. This increased volume of questions could have an
adverse impact on other elements of IRS' operation, such as the
levels of taxpayer service. The provision should not increase
the tax preparation costs for most individuals.
The IRS will need to add to the individual income tax forms
package a new worksheet so that taxpayers can calculate their
qualified active business income. This worksheet will require a
series of calculations.
3. Increase in child tax credit and addition of new family credit
exemption (sec. 1101 of the bill)
Summary description of the provisions
The bill increases the value of the child tax credit to
$1,600, providing that no more than $1,000 per child shall be
refundable. This $1,000 limitation is indexed and rounded up,
such that in 2018 it is $1,100. In order to qualify for the
child tax credit, a Social Security number must be provided for
the qualifying child. The bill also provides a $300
nonrefundable tax credit for the taxpayer, the taxpayer's
spouse, and any dependent other than a qualifying child. This
credit expires for taxable years beginning after December 31,
2022.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 90 million tax returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to these provisions. It should not
result in an increase in disputes with the IRS, nor will
regulatory guidance be necessary to implement this provision.
The provision may, however, increase the number of questions
that taxpayers ask the IRS, such as whether they may claim the
new family credit for certain members of their household, or
whether and to what extent the combined tax credit is
refundable.
The IRS will need to modify its forms and publications to
reflect this change.
4. Repeal of the deduction for State and local income taxes (sec. 1303
of the bill)
Summary description of the provisions
Under the provision, in the case of an individual, as a
general matter, State, local and foreign property taxes and
State and local sales taxes are allowed as a deduction only
when paid or accrued in carrying on a trade or business or an
activity described in section 212 (relating to expenses for the
production of income). Thus, the provision allows only those
deductions for State, local and foreign property taxes, and
sales taxes, that are presently deductible in computing income
on an individual's Schedule C, Schedule E, or Schedule F on
such individual's tax return.
The provision contains an exception to the above-stated
rule in the case of real property taxes. Under this exception,
an individual may claim an itemized deduction of up to $10,000
($5,000 for married taxpayer filing a separate return) for
property taxes paid or accrued in the taxable year, in addition
to any property taxes deducted in carrying on a trade or
business or an activity described in section 212. Foreign real
property taxes may not be deducted under this exception.
Under the provision, in the case of an individual, State
and local income, war profits, and excess profits taxes are not
allowable as a deduction.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 44 million tax returns.
Discussion
It is not anticipated that individuals will need to keep
additional records due to this provision. Because the deduction
for State and local taxes has been longstanding in the Code,
its repeal may require regulatory guidance, so as to provide
guidance for taxpayers regarding which taxes remain properly
deductible on an individual's Schedule C, Schedule E or
Schedule F. This may also result in an increase in disputes
with the IRS.
Additionally, if a technical correction is made to remove
the reporting requirement regarding State and local refunds of
income tax, this would relieve those jurisdictions with a
reporting obligation of the cost of complying with this
obligation, as well as reduce the need for taxpayers to retain
such reports for their books and records.
The IRS will need to modify its forms and publications to
reflect this change
5. Increased expensing
The bill extends and modifies the additional first-year
depreciation deduction through 2022 (through 2023 for longer
production period property and certain aircraft). The 50-
percent allowance is increased to 100 percent for property
acquired and placed in service after September 27, 2017, and
before January 1, 2023 (January 1, 2024, for longer production
period property and certain aircraft), as well as for specified
plants planted or grafted after September 27, 2017, and before
January 1, 2023. The $8,000 increase amount in the limitation
on the depreciation deductions allowed with respect to certain
passenger automobiles is increased to $16,000 for passenger
automobiles acquired and placed in service after September 27,
2017, and before January 1, 2023.
The bill maintains the present law phase-down of bonus
depreciation and the section 280F increase amount for property
acquired before September 28, 2017, and placed in service after
September 27, 2017.
The bill extends the special rule under the percentage-of-
completion method for the allocation of bonus depreciation to a
long-term contract for property placed in service before
January 1, 2023 (January 1, 2024, in the case of longer
production period property).
The bill removes the requirement that the original use of
qualified property must commence with the taxpayer. Thus, the
additional first-year depreciation deduction applies to
purchases of used as well as new items.
The bill excludes from the definition of qualified property
any property used (i) in a real property trade or business,
(ii) in the trade or business of certain regulated public
utilities, and (iii) in a trade or business that has had floor
plan financing indebtedness unless the taxpayer with such trade
or business is not a tax shelter precluded from using the cash
method and is exempt from the interest limitation rules in
section 3301 of the bill by satisfying the $25 million gross
receipts test of section 448(c).
As a conforming amendment to the repeal of AMT, the bill
repeals the election to accelerate AMT credits in lieu of bonus
depreciation.
Number of affected taxpayers
It is estimated that the provision will affect over ten
percent of small business tax returns.
Discussion
The reporting requirements are unchanged by this provision.
Capital assets purchased during the tax year will still need to
be reported on Form 4562, Depreciation and Amortization
(Including Information on Listed Property); however, the
current year tax deduction associated with such assets will
increase.
6. Expansion of section 179 expensing
The bill increases the maximum amount a taxpayer may
expense under section 179 to $5 million and increases the
phase-out threshold amount to $20 million for five taxable
years (i.e., for taxable years beginning in 2018, 2019, 2020,
2021, and 2022). The $5,000,000 and $20,000,000 amounts are
indexed for inflation for taxable years beginning after 2018.
The bill expands the definition of qualified real property
under section 179 to include qualified energy efficient heating
and air-conditioning property acquired and placed in service by
the taxpayer after November 2, 2017.
Number of affected taxpayers
It is estimated that the provision will affect over ten
percent of small business tax returns.
Discussion
While taxpayers purchasing section 179 property will still
be required to complete and file Form 4562, Depreciation and
Amortization (Including Information on Listed Property),
significantly less detail is required to be included on such
form. Accordingly, the compliance burden of many taxpayers will
be reduced.
E. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
F. Duplication of Federal Programs
In compliance with clause 3(c)(5) of Rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
G. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (115th Congress),
the bill contains the following directed rulemakings:
Section 1311 directs the Secretary of the Treasury to issue
regulations related to the termination of deduction and
exclusions for contributions to medical savings accounts.
Section 1503 directs the Secretary of the Treasury to
modify Treasury Regulation section 1.401(k)-1(d)(3)(iv)(E).
Section 3307 directs the Secretary of the Treasury to issue
regulations relating to entertainment and fringe-benefit
expenses.
Section 3314 directs the Secretary of the Treasury to issue
regulations to the recharacterization of certain gains in the
case of partnership profits interests held in connection with
performance of investment services.
Section 3802, addressing an excise tax on excess tax-exempt
organization executive compensation, directs the Secretary of
the Treasury to issue regulations as necessary to prevent
avoidance of the purposes of this section through the
performances of services other than as an employee.
Section 4301, addressing current year inclusion by United
States shareholders with foreign high returns, directs the
Secretary of the Treasury to issue regulations as the Secretary
determines appropriate to prevent the avoidance of the purposes
of this section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
With respect to clause 3(e) of rule XIII of the Rules of
the House of Representatives, the Committee advises that
compliance prior to consideration was not possible.
VII. DISSENTING VIEWS
The Tax Cuts and Jobs Act, H.R. 1, is a bad deal for
millions of Americans, particularly the middle class. The
legislation puts the wealthy and well-connected first, while
forcing millions of American families to watch as their taxes
go up at every stage of their lives--from childhood to
retirement. That's simply not what the American people asked us
to do, and it is not something that the Democrats on this
Committee can support.
Committee Democrats unanimously opposed H.R. 1 at the
markup, because the legislation disproportionately benefits the
wealthy and big corporations over hardworking taxpayers who are
struggling with the rising costs of education, housing, and
other expenses, not to mention the challenges of saving for
retirement. Under H.R. 1, nearly one-half of all middle-class
families would pay more taxes in 2026 than they would under
current law, and about one-third would pay more in 2018. As the
Wall Street Journal said this week, this is ``a middle class
tax cut that is really a hike.''
The Tax Cuts and Jobs Act would hurt middle-class families with
children
Rather than provide meaningful assistance to families with
children through a much-needed expansion to the Child Tax
Credit (CTC), the Republican bill prioritizes tax cuts to
wealthy individuals. In fact, the Center on Budget and Policy
Priorities estimated that the expanded CTC contained in H.R. 1
would leave out 10 million children in low-wage working
families and another roughly 13 million children in low- and
modest-income working families would receive something less
than the full $600 per-child credit increase. By making the CTC
increase nonrefundable, many families would simply not benefit.
The Tax Cuts and Jobs Act would hurt students and teachers
Our schools are woefully underfunded and students suffer
because of it. When their supplies budgets run out (often well
before securing essential items like books and paper), many
teachers buy supplies for their classrooms with money out of
their own pockets. H.R. 1 removes the tax credit these teachers
receive for buying these classroom supplies. A survey conducted
during the 2015-16 school year found that teachers spend an
average of $600 on classroom supplies and materials every year.
The current law above-the-line deduction gives them some of
that money back. While corporations can deduct the costs of
paper and pencils as necessary business expenses, H.R. 1 would
take away that ability from teachers across America.
H.R. 1 also harms students. It would repeal two tax credits
for students: the Lifetime Learning Credit and Hope Scholarship
Credit. The loss of these tax credits alone would cost low- and
middle-income students $17 billion over the next decade. While
the bill does put into place a one-year extension of the
American Opportunity Tax Credit (AOTC), it is less generous
than the two tax credits lost plus the extension is only
temporary. Under H.R. 1, the AOTC is cut in one-half after four
years, which would make the maximum credit $1,250 for the fifth
year of education.
Once out of school, H.R. 1 also removes the student loan
interest deduction. Currently, student loan borrowers can
deduct up to $2,500 of interest paid on student loans. In 2015,
more than 12 million people claimed the student loan interest
deduction.
For students who work, the bill eliminates the tax-free
status of employer tuition reimbursements. A 2013 employer
survey found that 61 percent of companies make available some
type of tuition-assistance program. While H.R. 1 provides big
corporations with extensive tax breaks, the Republicans chose
to tax middle-class workers when they benefit from tuition
reimbursement programs.
The Tax Cuts and Jobs Act would hurt middle-class Americans and
threaten state and local government services
H.R. 1 harms middle-class Americans by repealing the state
and local tax (SALT) deduction for individuals, except for a
property tax deduction capped at $10,000. The SALT deduction
prevents taxpayers from owing federal taxes on the income they
pay in taxes to state and local governments. State and local
tax payments are not disposable income, and it is unfair to
treat them as such. The SALT deduction is so common-sense that
it has been in force since the first federal income tax,
adopted more than a century ago, when the whole federal income
tax law was three pages long.
Ironically, H.R. 1 would allow corporations to continue
deducting state and local taxes, while eliminating much of the
benefit for individuals and families.
Currently, more than 100 million Americans in 44 million
households claim the SALT deduction. Almost 40 percent of
taxpayers earning between $50,000 and $75,000 claim SALT, and
over 70 percent of taxpayers making $100,000 to $200,000 use
it. Over one-half the value of the deduction went to households
with incomes below $200,000. People living in every
congressional district in every state in the country use this
deduction, and it benefits taxpayers of all income levels,
directly or indirectly.
Two-thirds of state and local government spending comes
from its income and sales taxes. These revenues support
essential public services investments, like schools, local law
enforcement, fire fighters, road construction and maintenance,
and health care. Nearly everyone who itemizes claims the SALT
deduction; therefore, repealing SALT would raise the cost of
state and local services on a wide swath of taxpayers. This
would pressure state and local governments to reduce revenues
and cut crucial public investments.
The Tax Cuts and Jobs Act would hurt homeowners and home values
H.R. 1 would hurt homeowners. The American Dream has long
included the idea of home ownership but H.R. 1 scales back the
tax benefit of buying a new home. It also eliminates private
activity bonds, which are key for financing affordable housing.
That's why groups like the National Association of Home
Builders (NAHB) oppose this bill. H.R. 1 depresses home
ownership and home values. The bill cuts the amount people can
claim as mortgage interest deductions so that only those people
who can afford large down payments can afford to buy homes--
especially in coastal cities where home prices are very high.
Also, because the bill discourages itemized deductions, many
who can now deduct modest mortgage interest will see no tax
benefit from that deduction. For many potential homeowners,
buying a home will be no better than renting, and they will
leave the market. Current home owners will have a smaller pool
of buyers to sell to and their home values--the primary source
of wealth for middle-class Americans--will decline. According
to NAHB President Granger MacDonald, ``The House Republican tax
reform plan abandons middle-class taxpayers in favor of high-
income Americans and wealthy corporations. The bill eviscerates
existing housing tax benefits by drastically reducing the
number of home owners who can take advantage of mortgage
interest and property tax incentives.'' National Association of
Realtors President William E. Brown agreed, ``The nation's 1.3
million Realtors cannot support a bill that takes homeownership
off the table for millions of middle-class families.''
The Tax Cuts and Jobs Act would hurt older Americans
H.R. 1 repeals the medical expense deduction, effectively
creating a new Health Tax on older and sick Americans. This
Health Tax would result in a tax increase for millions of
Americans with high medical costs, especially older Americans.
The end result is a massive tax increase for older Americans
and individuals living with expensive illnesses--like cancer,
Alzheimer's, or a rare disease--to pay for corporate tax cuts.
The medical expense deduction is particularly important for
older Americans. Over 73 percent of those claiming the tax
credit are over 50 years old, and 55 percent are over 65 years
old. One-half of those claiming the tax credit have incomes
below $50,000.
The Affordable Care Act helped lower the number of
Americans facing medical debt by giving millions health
insurance coverage for the first time. However, a severe
illness or even medical bills from a car accident, can still
mount to thousands of dollars. For the family caring for a
premature child, the couple trying to conceive, or the husband
caring for a wife diagnosed with Alzheimer's, this deduction is
one way to help prevent medical bills from crushing families in
debt.
For all of these reasons and more, we oppose The Tax Cuts and Jobs Act
The middle class in this country are struggling. In passing
tax reform, we must take those Americans who feel forgotten and
left behind into consideration and build a tax code founded on
fairness. This bill simply does not.
Instead, H.R. 1 lets the American people down at every step
of their life--from birth through retirement. It fails to
provide the needed improvements to the tax code that could
assist the hopeful young family trying to keep their head above
water; the student trying to do the right thing by getting an
education; and the factory worker at the end of a long career
just hoping to have enough left over to retire with dignity.
Democrats believe that instead of pulling down the ladder of
opportunity for those in the middle class, and the millions who
aspire to it, we should expand it to make sure that everyone
has a fair shot.
The secret, closed door negotiations produced a deeply
flawed bill that will hurt the teacher that spends her own
money to buy school supplies for their students; students
trying to responsibly pay back their student loans; the wife
trying to afford her husband's Alzheimer's care; and the
janitor who wants to retire with dignity so he can spoil his
grandchildren.
American families should not be forced watch as the rich
get richer, and they fall further and further behind. H.R. 1
would do just that.
Richard E. Neal,
Ranking Member.
ADDITIONAL VIEWS
In addition to the facts outlined by the Ranking Member,
the record must be clear: H.R. 1 is not long-awaited, once-in-
a-generation, bipartisan tax reform. This bill ignores long-
standing inequities in tax law and fails to simplify the tax
code. Instead, this legislation meticulously selects winners
and losers. Simply said, H.R. 1 robs poor Peter to pay
billionaire Paul.
H.R. 1 features deficit-creating tax cuts and irresponsible
policy changes. Some proposals are straightforward. For
example, the assault on the elderly, disabled, teachers,
caretakers, and immigrant families is a flagrant and heartless
attempt to find revenue to pay for corporate tax cuts. Workers
would lose employer-supported training and education benefits.
Changes to the mortgage interest deduction and the
deductibility of state and local taxes would cause unnecessary
harm to both taxpayers and local governments.
Unfortunately, the impact of other amendments in this bill
are much more difficult to decipher. H.R. 1 shifts tax
provisions and timelines in a manner that will force
individuals and communities to spend hours, days, weeks,
months, and resources calculating their real losses and gains.
Sadly, this bill neglects Congress' core constitutional
responsibility to develop sound fiscal policy, which serve all
American taxpayers, not just a select few. There are serious
challenges facing our country like affordable housing,
veterans' services, transportation financing, and student debt,
which should be core components of any legislation intended to
serve as a compass for a generation of policy makers.
An example of how H.R. 1 further complicates the tax code
is the bill's impact on those seeking to improve their lives
through the pursuit of higher education. As students of all
ages struggle to compete in a 21st Century workforce and face
increased burden of debt, the education tax provisions of this
bill create an additional and perhaps insurmountable hurdle; it
exacerbates an already dire situation. As graduate students in
Metro Atlanta and across the country began to review H.R. 1,
they learned the tax changes would only exacerbate their
financial woes. This is a grave and serious issue for my
Congressional District, which has many outstanding colleges and
universities. One student calculated her individual net loss to
be at least $550 per month. Many others fear that if Congress
passes this legislation, a graduate degree would no longer be
within their reach. This is unconscionable and unacceptable.
It is also important to examine the holistic impact of this
legislation on aging cities and counties that are struggling to
revitalize their communities. Notably, the effect of
eliminating the new markets tax credit and the historic
rehabilitation tax credit--combined with changes to private
activity bonds and limitations on the ability of State and
local governments to offer incentives to recruit new
businesses--would devastate major community development,
housing, transportation, water and sewer, and health
initiatives. Make no mistake--H.R. 1 will cripple policy makers
at every level of government.
Finally, this bill is a disservice to the role of Congress
and the legacy of our predecessors who put the good of our
nation ahead of a select few. In 1913, the United States
ratified the Sixteenth Amendment to the U.S. Constitution; this
amendment allowed Congress to develop legislation to tax
income. Congress developed subsequent revenue bills--the
Revenue Act of 1913 and the War Revenue Act of 1917--that
featured core standards. These included encouraging the best of
humanity through charitable and philanthropic endeavors and
ensuring that future generations did not bear the burden of the
financial costs of war. H.R. 1 undermines both of these
principles.
Since the Republican Majority developed and rushed this
bill through committee without congressional review or
bipartisan input, certain provisions are untested and could
cause irreparable damage. Upon examining H.R. 1, the non-
partisan Joint Committee on Taxation reported the bill would
result in $94.8 billion less in charitable contribution
deductions. This legislation pays tribute to the 100th
anniversary of the charitable contribution deduction by
proposing policies that will result in a 40 percent decline of
its usage. This bill turns the clock back on a century of
progress.
Some of the most blatant examples of dangerous,
undemocratic policy include this bill's impact on charitable
and faith-based institutions. Alarmingly, section 5201 of H.R.
1 would repeal the ``Johnson Amendment,'' a 53-year standard
that prohibits religious and philanthropic organizations from
engaging in political activities. The Joint Committee on
Taxation estimates this policy change would increase the
deficit by $2.1 billion. The bill would create a loophole in
campaign finance laws and increase tax-exempt political
contributions. Not only did the Majority reject efforts to
strip this costly provision, but the Chair also expanded
section 5201 to include all 501(c)3 (e.g. religious, nonprofit,
and charitable) organizations at the end of the Committee
markup. Faith-based, philanthropic, charitable, and
transparency groups in every State of our country
overwhelmingly oppose this dangerous policy change.
H.R. 1 ignores the grave reality that the United States is
engaged in the longest wars in history, for which sadly there
is no end in sight. Last week, Brown University's Cost of War
Project reported that the current wars in Afghanistan, Iraq,
Syria, and Pakistan cost at least $5.6 trillion or $23,386 per
taxpayer. Never before has Congress directly and repeatedly
shirked its responsibility to finance U.S. participation in
war. For 16 years, brave service members put their lives on the
line and their families on hold to protect and serve our
nation, as Congress fails to do our part. Instead, H.R. 1
continues to pay for these wars on a credit card. Not only does
H.R. 1 neglect to address this grave matter, but it will also
finance these irresponsible corporate tax cuts through massive
reductions to safety net programs and non-defense discretionary
programs upon which all Americans--including veterans and
military families--rely.
The record must be clear; H.R. 1 is not tax reform. This
legislation does not simplify the tax code. It does not give
hope and opportunity to those who strive to realize the
American dream. It does not rectify long-standing injustices
within U.S. tax law. Instead, this unprecedented and negligent
legislation puts the gains of a select few ahead of the best
interests of our children, grandchildren, and generations yet
unborn.
John Lewis.
