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House Passes Comprehensive Tax Reform Plan

 

Senate Finance Committee Passes its Version

Yesterday, the House passed the “Tax Cuts and Jobs Act,” a tax reform plan which would include the biggest cuts and changes in 30 years, by a vote of 227-205. Thirteen Republicans, mostly those representing high-tax states, joined all House Democrats in opposing the bill. The House bill reduces the number of total individual rates from seven to four (12 percent, 25 percent and 35 percent) and the top rate would remain at 39.6 percent for high-income Americans. The corporate rate would be reduced from 35 to 20 percent while pass-through businesses’ tax rate would be reduced to 25 percent for businesses and 9 percent for businesses earning less than $75,000 in annual income. The majority of small businesses are organized as pass-throughs meaning that profits are passed on to the owner and reported on his/her individual tax return.

Some of the highlights of the House GOP Tax Reform Plan important to petroleum marketers include:

  • Doubles the estate tax (death tax) exemption to roughly $11 million, from $5.49 million, and eventually repeals the estate tax altogether, phasing it out entirely in six years. PMAA supported repealing the death tax.
  • Reduces the Pass-through rate. The House tax plan treats pass through entities by providing a new tax rate of 9 percent for businesses earning less than $75,000 in income. The benefit is phased out as taxable income exceeds $150,000 and fully phased out at $225,000. The bill would still limit access to the new 25 percent tax rate. For business owners, just 30 percent of their income would qualify for that rate; the remaining 70 percent would be treated as wages. Or they could use a formula based on their level of capital investment to determine how much income would get the new rate.
  • Preserves the step-up in basis on property transferred during an estate settlement which is good news for petroleum marketers. Under current law, family members who inherit a business take the business at its value as of the date of the original owner’s death. However, if the step-up in basis were eliminated, the family members would be required to pay capital gains taxes on the original owners’ gains in the business. Due to the detrimental effects, it would have on businesses, PMAA opposed any attempt to repeal the step-up in basis.
  • Expands Business Expensing: Companies would be able to immediately write off the full cost of investments in their businesses, starting with assets purchased after September 28, 2017 and before January 1, 2023. Moreover, companies with average gross receipts of $25 million or less will be able to continue to deduct business interest. For those with average gross receipts of greater than $25m, the business interest deduction will be limited to 30% of adjusted gross income.
  • Preserves the inventory accounting method, last in, first out (LIFO), which is good news for marketers. LIFO considers the costs of replacing inventory, thereby, giving a more accurate measure of the financial condition of the business and the economic income to which tax should apply. Repealing LIFO would force PMAA member companies currently using this method to report their LIFO reserves as income, resulting in a massive tax increase for small business petroleum marketers across the country.
  • Increases Section 179 expensing limitation to $5 million and the phase-out amount would be increased to $20 million while modifying the definition of section 179 property to include qualified energy efficient heating and air-conditioning property would be effective for property acquired and placed in service after November 2, 2017.
  • Preserves Section 1031 exchanges of like-kind property which is good news for petroleum marketers. Without the tax-deferral benefit that Section 1031 exchanges provide; small and medium sized businesses would not be as equipped to reinvest in their businesses and real estate values would decline.
  • Increases the availability of the cash method of accounting by raising the current $5 million average gross receipts ceiling to $25 million.
  • Repeals the Alternative Minimum Tax (ATM).
  • Eliminates the electric vehicle tax credit of up to $7,500 that’s currently offered to buyers of vehicles such as the Tesla Model 3, Chevrolet Bolt and Nissan Leaf. Currently, this tax credit is available until 200,000 qualified EVs have been sold in the United States by each manufacturer, at which point the credit begins to phase out for that manufacturer. Currently, no manufacturers have been phased out yet.

Meanwhile, the Senate Finance Committee passed its version last night which would keep the seven brackets, but generally with lower or equivalent rates – 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent and 38.5 percent. The standard deduction would be $12,000 for single filers and $24,000 for married couples. The Senate plan would also eliminate taxpayers’ ability to deduct both state and local income and property taxes. The corporate rate would be reduced from 35 to 20 percent but would be delayed for one year and provides a 17.4 percent deduction for certain pass-through businesses’ which would expire after 2025. Furthermore, whereas the House bill doubles the exclusion and fully repeals the estate tax, the Senate bill doubles the exclusion but does not fully repeal the tax. Lastly, the Senate bill repeals the penalties under the individual mandate in Obamacare, which requires everyone to obtain health insurance, in 2019. PMAA will have a more detailed analysis next week.

The Senate bill is being considered under budget reconciliation, which allows for expedited consideration and requires only a simple majority. However, to pass the tax overhaul under reconciliation rules in the Senate, the legislation can only increase the deficit by $1.5 trillion through fiscal 2027, with no deficit effects beyond the 10-year window. The committee-approved House bill would reduce revenue by $1.44 trillion over fiscal years 2018 through 2027, according to a recent estimate. The plan would continue to lose revenue in its tenth year, suggesting its deficit effects would continue outside the budget window. The Senate plan would reduce revenue by $1.41 trillion over a decade, according to a recent estimate. It would increase revenue by $30 billion in 2027, suggesting it wouldn’t affect the deficit outside the budget window.

Senate leadership plans to move the measure to a floor vote the week of November 27. If the Senate can pass its version of the bill, then each chamber will need to reconcile differences. That bill would then need to be approved by both chambers before heading to Trump's desk. Lawmakers are hoping to put a final comprehensive tax bill on President Trump’s desk before Christmas.

 

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