27 12 2017

US Congress Approves Tax Reform Bill

The United States House of Representatives has approved the final version of the Tax Cuts and Jobs Act (TCJA), paving the way for President Trump to sign the changes into law, although this final act may be delayed until the New Year.

The TCJA was passed a second and final time by the House of Representatives on December 21 in a 224-201 vote after both chambers had earlier approved a compromise version agreed by the Tax Reform Conference Committee Hearing on December 13. Notably, no House Democrats voted for the bill, with 12 Republicans dissenting.

The bill brings about sweeping tax cuts for corporations from 2018, with corporate tax, which currently tops 35 percent, to be reduced to a flat rate of 21 percent, and a form of territorial corporate taxation to be introduced through the provision of a 100 percent dividend tax exemption on the foreign income of domestic corporations, provided the domestic corporations owns at least 10 percent of the foreign subsidiary.

In addition, there will be a deemed repatriation tax on foreign deferred income of US corporations of 15.5 percent for cash and eight percent for illiquid assets.

Small business owners will be able to take advantage of a 20 percent tax deduction on pass-through business income under the reforms, up from 17.9 percent in the original Senate proposals, and in preference to the 25 percent tax cap initially favored by the House.

For individual taxpayers, the bill retains a seven-tier income tax regime, but with lower rates. These are set at 10, 12, 22, 24, 32, 35, and 37 percent. Under existing law, these rate are 10, 15, 25, 28, 33, 35, and 39.6 percent.

In addition, the standard deduction for individuals will be increased to USD12,000 for single filers, USD18,000 for heads of household, and USD24,000 for joint filers.

The individual tax rate changes and the higher standard deductions are set to expire in 2025.

The bill retains and expands the deduction for charitable donations but curtails and repeals many others. The mortgage interest deduction is retained for new purchases, subject to a cap of USD750,000 in mortgage debt. Taxpayers will also be able to continue claiming a deduction for a combination of state and local taxes, but only up to a maximum of USD10,000. Such deductions are unlimited under existing law.

The bill retains the individual alternative minimum tax (AMT), although the exemption limit will be raised. The corporate AMT will be eliminated.

The bill also reduces the Obamacare individual mandate to zero from 2019, which effectively amounts to a repeal of the provision. The individual mandate, a key pillar of the Affordable Care Act, requires US taxpayers to pay a tax penalty if they fail to maintain a minimum level of health insurance.

"This is day one of a new era for American companies and individuals, as a tax reform package that will likely be transformative for many moves another step closer to becoming law," said Jeffery C. LeSage, Americas Vice Chairman – Tax, KPMG. "Over the coming months and years, business leaders will have to effectively balance the challenges and opportunities before them, especially as they adapt, and perhaps redefine, their organizations in response to this sweeping change."

"After the dust settles and Congressional Republicans celebrate their hard-won victory, their attention will likely soon turn to the inevitable legislative work of fine-tuning and perfecting the new tax framework," said John Gimigliano, Partner-in-Charge of Federal Tax Legislative and Regulatory Services at KPMG. "As we've seen with other major tax legislation, it can often take years to issue all the regulations and revisions related to a bill, and there's no reason to think this one will be any different."