A tax reform bill is in sight

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The big day is almost here, as the House Ways and Means Committee prepares to release its long-awaited tax bill Wednesday (now postponed until Thursday). Negotiations are still going on, with several rumors as to substance in the air.

“There are three key things everyone is watching,” said Howard Wagner, managing director at Crowe Horwath LLP. “How will the pass-through rate apply to professional service firms, how will the interest expense disallowance rules ultimately apply to corporate and non-corporate entities, and what will be the fate of the state and local tax deduction?”

“We’re still in ‘hurry up and wait’ mode,” he said. “The budget resolution gives the parameters of how much they can add to the deficit. Now they have to make the tough choices as to who will win and who will lose to make the numbers work.”

The step toward tax reform was made possible by the House passage of the Senate Budget resolution last week.

“It was a significant step, because the resolution calls for $1.5 trillion of additional deficit, which will translate to tax cuts,” said Todd Simmens, a partner at BDO USA and former staff member of the Joint Committee on Taxation. “The House is slated to release legislative language [Wednesday] that will contain more much more detail. Up to now we’ve had the House Blueprint, the proposal in April, and the framework. This is will be the first time we’ll see any granular detail.”

It should fill in the blanks on items such as the rate brackets, the elimination of the state and local deduction, and a fourth bracket, according to Simmens.

“The deduction for state and local taxes is very controversial,” he observed. “It’s not clear whether it will be addressed right out of the gate or held for later negotiation. And a fourth bracket may be held as an item necessary to win over some on-the fence members. The resolution passed in the House by a very narrow margin – some Republican members are queasy about the level of debt.”

“Passing of the budget resolution takes us one step closer to tax reform,” agreed Dustin Stamper, director at Grant Thornton’s Washington National Tax Office. “It adds momentum to the process.”

“The biggest sticking point is the proposal to repeal the state and local tax deduction,” he said. “Tax writers need it as a revenue-raiser but a lot of Republicans in high-tax states hate it. It’s going to be critical to find a common middle ground. We’ve heard various options, one of which might be to allow the deduction for property taxes but not for state income taxes.”

Another sticking point is the interest elimination of the interest deduction, Stamper indicated: “That would be one of the toughest for public companies to swallow because full expensing has a timing benefit that doesn’t show up on the financial statement, but a limit on the interest deduction would be a permanent loss of the deduction. There will be many businesses that don’t consider that a good tradeoff.”

“The next step will be to release a whole bill, which they promise to have out on Wednesday,” he said. “Markup would be the following week, with the goal to pass it in the House the week after that.”

“They’re talking about keeping the property tax as an itemized deduction, while leaving in the elimination of the deduction for state and local income taxes,” said Annie Schwab, a CPA and tax manager at Padgett Business Services. “With a doubling of the standard deduction, though, many taxpayers who historically would itemize might find themselves simply taking the standard deduction.”

Between the House passing the Senate budget resolution last Friday and today, the only thing we know for sure is that property taxes will likely continue to be deductible, according to Roger Harris, president of Padgett Business Services. “They’re trying to make sure they hold enough votes from high-tax states,” he said. “That will be enough for some, but I don’t know if it will be enough to get it through the House.”

Be prepared for opposition from all sides, he cautioned. “In 1986, everyone screamed about the deduction they lost, but many came out better in terms of tax they owed. At the end of the day, what do you care about the deduction you lost if your total tax has gone down?”

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Tax reform Tax rates Tax deductions Tax planning Tax credits