House Has Passed Legislation on Tax Reform 2.0 - Senate is up Next
House of Representatives Tax Reform Bill
The House of Representatives passed three new tax bills collectively referred to as Tax Reform 2.0 on September 28. These bills were introduced by House Republicans as a follow-up to the Tax Cuts and Jobs Act (TCJA) legislation passed last year. Some of the bills must still receive at least 60 votes in the Senate, which most commentators consider an unlikely outcome.Protecting Family and Small Business Tax Cuts Act of 2018
The Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760) is the largest of the three bills, and would permanently extend many of the TCJA provisions that would otherwise sunset after 2025. These provisions include many of the following TCJA changes related to individual taxpayers:
- revised income tax rates and thresholds
- the elimination of personal exemptions
- increased standard deductions and child tax credit
- increased alternative minimum tax exemption threshold
- increased Tax Reform 2.0 Estate tax and gift tax exemption amounts
- decreased cap on mortgage interest indebtedness subject to deductibility
- the $10,000 cumulative cap on certain itemized deductions including state and local income and property taxes
- the Section 199A deduction for qualified business income from pass-through entities
The structure of this first Act also creates most of the challenges to the procedural future of Tax Reform 2.0. By designing most of its changes to sunset after 2025, the TCJA followed Senate budget reconciliation rules that allowed it to pass with a simple majority. Since H.R. 6760 would permanently extend those provisions, however, it must now receive at least 60 votes of support in the Senate to survive. Moreover, its inclusion of a permanent $10,000 limitation on state and local income and property taxes presents a political challenge for representatives and senators from states with higher-income constituents.
Family Savings Act of 2018
A second bill, the Family Savings Act of 2018 (H.R. 6757), provides retirement savings incentives for both families and businesses. The Act would allow small businesses to join in formation of multiple employer retirement plans, giving them more leverage with plan service providers and the opportunity to streamline plan administration. It also features more flexible rules for individuals, including exemption from mandatory distributions for certain accounts under $50,000, the elimination of an age limit on deductible contributions, the creation of a Universal Savings Account not tied to retirement that allows annual contributions up to $2,500 with tax-free earnings, and expansion of the scope of Section 529 education savings accounts.
American Innovation Act of 2018
Tax Reform 2.0’s third bill is the American Innovation Act of 2018 (H.R. 6756), which is designed to encourage the creation of small business. Its provisions would increase from $5,000 to $20,000 the aggregate amount of deductible start-up and organization expenditures of new businesses. The cap on such expenditures above which that deduction is reduced would also increase from $50,000 to $120,000. Furthermore, if a start-up with certain losses is acquired by another entity, the acquiring entity could, subject to various qualifications, claim those as net operating losses.
While the passage of the House legislation on Tax Reform 2.0 makes a Senate vote before midterm elections in November possible, the success of the legislation is uncertain. The retirement plan and other savings incentives are likely to have broad support, but extending multiple aspects of the TCJA will face resistance. Given the separate bills, possible amendments, the 60-vote threshold for Senate approval of certain provisions, and upcoming elections, Tax Reform 2.0 faces a difficult future.
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