[House Report 115-466]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-466
_______________________________________________________________________
TAX CUTS AND JOBS ACT
__________
CONFERENCE REPORT
TO ACCOMPANY
H.R. 1
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
December 15, 2017.--Ordered to be printed
U.S. GOVERNMENT PUBLISHING OFFICE
27-788 WASHINGTON: 2017
C O N T E N T S
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Page
CONFERENCE REPORT................................................ 1
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE....... 191
TITLE I--INDIVIDUAL TAX REFORM................................... 191
A. Reduction and Simplification of Individual Income
Tax Rates (sec. 1001 of the House bill, sec. 11001
of the Senate amendment, and sec. 1 of the Code)... 191
1. Increase in standard deduction (sec. 1002 of the
House bill, sec. 11021 of the Senate amendment,
and sec. 63 of the Code)....................... 201
2. Repeal of the deduction for personal exemptions
(sec. 1003 of the House bill, sec. 11041 of the
Senate amendment, and sec. 151 of the Code).... 202
3. Alternative inflation adjustment (secs. 1001 and
1005 of the House bill, sec. 11002 of the
Senate amendment, and sec. 1 of the Code)...... 204
B. Treatment of Business Income of Individuals, Trusts,
and Estates........................................ 205
1. Deduction for qualified business income (sec.
1004 of the House bill, sec. 11011 of the
Senate amendment, and sec. 199A of the Code)... 205
C. Simplification and Reform of Family and Individual
Tax Credits........................................ 225
1. Enhancement of child tax credit and new family
credit (sec. 1101 of the House bill, sec. 11022
of the Senate amendment, and sec. 24 of the
Code).......................................... 225
2. Credit for the elderly and permanently disabled
(sec. 1102(a) of the House bill and sec. 22 of
the Code)...................................... 228
3. Repeal of credit for plug-in electric drive
motor vehicles (sec. 1102(c) of the House bill
and sec. 30D of the Code)...................... 229
4. Termination of credit for interest on certain
home mortgages (sec. 1102(b) of the House bill
and sec. 25 of the Code)....................... 229
5. Modification of taxpayer identification number
requirements for the child tax credit, earned
income credit, and American Opportunity credit
(sec. 1103 of the House bill, sec. 11022 of the
Senate amendment and secs. 24, 25A and 32 of
the Code)...................................... 230
6. Procedures to reduce improper claims of earned
income credit (sec. 1104 of the House bill and
new secs. 32(c)(2)(B)(vii) and 6011(i) of the
Code).......................................... 233
7. Certain income disallowed for purposes of the
earned income tax credit (sec. 1105 of the
House 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)........................... 235
8. Limitation on losses for taxpayers other than
corporations (sec. 11012 of the Senate
amendment and sec. 461(l) of the Code)......... 238
9. Reform of American opportunity tax credit and
repeal of lifetime learning credit (sec. 1201
of the House bill and sec. 25A of the Code).... 240
10. Consolidation and modification of education
savings rules (sec. 1202 of the House bill,
sec. 11033 of the Senate amendment, and secs.
529 and 530 of the Code)....................... 241
11. Reforms to discharge of certain student loan
indebtedness (sec. 1203 of the House bill, sec.
11031 of the Senate amendment, and sec. 108 of
the Code)...................................... 246
12. Repeal of deduction for student loan interest
(sec. 1204 of the House bill and sec. 221 of
the Code)...................................... 248
13. Repeal of deduction for qualified tuition and
related expenses (sec. 1204 of the House bill
and sec. 222 of the Code)...................... 249
14. Repeal of exclusion for qualified tuition
reductions (sec. 1204 of the House bill and
sec. 117(d) of the Code)....................... 249
15. Repeal of exclusion for interest on United
States savings bonds used for higher education
expenses (sec. 1204 of the House bill and sec.
135 of the Code)............................... 250
16. Repeal of exclusion for educational assistance
programs (sec. 1204 of the House bill and sec.
127 of the Code)............................... 251
17. Rollovers between qualified tuition programs
and qualified ABLE programs (sec. 1205 of the
House bill, sec. 11025 of the Senate amendment
and secs. 529 and 529A of the Code)............ 252
18. Repeal of overall limitation on itemized
deductions (sec. 1301 of the House bill, sec.
11046 of the Senate amendment, and sec. 68 of
the Code)...................................... 255
D. Simplification and Reform of Deductions and
Exclusions......................................... 256
1. Modification of deduction for home mortgage
interest (sec. 1302 of the House bill, sec.
11043 of the Senate amendment, and sec. 163(h)
of the Code)................................... 256
2. Modification of deduction for taxes not paid or
accrued in a trade or business (sec. 1303 of
the House bill, sec. 11042 of the Senate
amendment, and sec. 164 of the Code)........... 259
3. Repeal of deduction for personal casualty and
theft losses (sec. 1304 of the House bill, sec.
11044 of the Senate amendment, and sec. 165 of
the Code)...................................... 261
4. Limitation on wagering losses (sec. 1305 of the
House bill, sec. 11051 of the Senate amendment,
and sec. 165 of the Code)...................... 262
5. Modifications to the deduction for charitable
contributions (sec. 1306 of the House bill,
secs. 11023, 13703, and 13704 of the Senate
amendment, and sec. 170 of the Code)........... 263
6. Repeal of Certain Miscellaneous Itemized
Deductions Subject to the Two-Percent Floor
(secs. 1307 and 1312 of the House bill, sec.
11045 of the Senate amendment, and secs. 62, 67
and 212 of the Code)........................... 273
7. Repeal of deduction for medical expenses (sec.
1308 of the House bill, sec. 11028 of the
Senate amendment and sec. 213 of the Code)..... 276
8. Repeal of deduction for alimony payments and
corresponding inclusion in gross income (sec.
1309 of the House bill and secs. 61, 71, and
215 of the Code)............................... 277
9. Repeal of deduction for moving expenses (sec.
1310 of the House bill, sec. 11050 of the
Senate amendment, and sec. 217 of the Code).... 278
10. Termination of deduction and exclusions for
contributions to medical savings accounts (sec.
1311 of the House bill, secs. 106(b) and 220 of
the Code)...................................... 279
11. Denial of deduction for performing artists and
certain officials; Modification of deduction
for educator expenses (sec. 1312 of the House
bill, sec. 11032 of the Senate amendment and
sec. 62 of the Code)........................... 281
12. Suspension of exclusion for qualified bicycle
commuting reimbursement (sec. 11048 of the
Senate amendment and secs. 132(f) of the Code). 282
13. Limitation on exclusion for employer-provided
housing (sec. 1401 of the House bill and sec.
119 of the Code)............................... 283
14. Modification of exclusion of gain on sale of a
principal residence (sec. 1402 of the House
bill, sec. 11047 of the Senate amendment, and
sec. 121 of the Code).......................... 284
15. Sunset of exclusion for dependent care
assistance programs (sec. 1404 of the House
bill and sec. 129 of the Code)................. 285
16. Repeal of exclusion for qualified moving
expense reimbursement (sec. 1405 of the House
bill, sec. 11049 of the Senate amendment, and
sec. 132(g) of the Code)....................... 286
17. Repeal of exclusion for adoption assistance
programs (sec. 1406 of the House bill and sec.
137 of the Code)............................... 286
E. Simplification and Reform of Savings, Pensions,
Retirement......................................... 288
1. Repeal of special rule permitting
recharacterization of IRA contributions (sec.
1501 of the House bill, sec. 13611 of the
Senate amendment, and sec. 408A of the Code)... 288
2. Reduction in minimum age for allowable in-
service distributions (sec. 1502 of the House
bill and secs. 401 and 457 of the Code)........ 291
3. Modification of rules governing hardship
distributions (sec. 1503 of the House bill and
secs. 401 and 403 of the Code)................. 292
4. Modification of rules relating to hardship
withdrawals from cash or deferred arrangements
(sec. 1504 of the bill, sec. 11033(c) of the
Senate amendment, and sec. 401 of the Code).... 293
5. Extended rollover period for the rollover of
plan loan offset amounts in certain cases (sec.
1505 of the bill, sec. 13613 of the Senate
amendment, and sec. 402 of the Code)........... 294
6. Modification of nondiscrimination rules for
certain plans providing benefits or
contributions to older, longer service
participants (sec. 1506 of the House bill and
sec. 401 of the Code).......................... 296
7. Modification of rules applicable to length of
service award programs for bona fide public
safety volunteers (sec. 13612 of the Senate
amendment and sec. 457(e) of the Code)......... 306
F. Modifications to Estate, Gift, and Generation-
Skipping Transfers Taxes (secs 1601 and 1602 of the
House bill, sec. 11061 of the Senate amendment, and
secs. 2001 and 2010 of the Code)................... 307
G. Alternative Minimum Tax (sec. 2001 of the House
bill, sec. 12001 of the Senate amendment, and secs.
53 and 55-59 of the Code).......................... 317
H. Elimination of Shared Responsibility Payment for
Individuals Failing to Maintain Minimal Essential
Coverage (sec. 11081 of the Senate amendment and
sec. 5000A of the Code)............................ 323
I. Other Provisions.................................... 325
1. Temporarily allow increased contributions to
ABLE accounts, and allow contributions to be
eligible for saver's credit (sec. 11024 of the
Senate amendment and sec. 529A of the Code).... 325
2. Extension of time limit for contesting IRS levy
(sec. 11071 of the Senate amendment and secs.
6343 and 6532 of the Code)..................... 329
3. Treatment of certain individuals performing
services in the Sinai Peninsula of Egypt (sec.
11026 of the Senate amendment and secs. 2, 112,
692, 2201, 3401, 4253, 6013, and 7508 of the
Code).......................................... 330
4. Modifications of user fees requirements for
installment agreements (sec. 11073 of the
Senate amendment and new sec. 6159(f) of the
Code).......................................... 331
5. Relief for 2016 disaster areas (sec. 11029 of
the Senate amendment and secs. 72(t), 165, 401-
403, 408, 457, and 3405 of the Code)........... 332
6. Attorneys' fees relating to awards to
whistleblowers (sec. 11078 of the Senate
amendment and sec. 62(a)(21) of the Code)...... 335
7. Clarification of whistleblower awards (sec.
11079 of the Senate amendment and new sec.
7623(c) of the Code)........................... 336
8. Exclusion from gross income of certain amounts
received by wrongly incarcerated individuals
(sec. 11027 of the Senate amendment and sec.
139F of the Code).............................. 340
BUSINESS TAX REFORM.............................................. 341
A. Tax Rates........................................... 341
1. Reduction in corporate tax rate (sec. 3001 of
the House bill, secs. 13001 and 13002 of the
Senate amendment, and secs. 11 and 243 of the
Code).......................................... 341
B. Cost Recovery....................................... 346
1. Increased expensing (sec. 3101 of the House
bill, secs. 13201 and 13311 of the Senate
amendment, and sec. 168(k) of the Code)........ 346
2. Modifications to depreciation limitations on
luxury automobiles and personal use property
(sec. 13202 of the Senate amendment and sec.
280F of the Code).............................. 357
3. Modifications of treatment of certain farm
property (sec. 13203 of the Senate amendment
and sec. 168 of the Code)...................... 360
4. Applicable recovery period for real property
(sec. 13204 of the Senate amendment and sec.
168 of the Code)............................... 362
5. Use of alternative depreciation system for
electing farming businesses (sec. 13205 of the
Senate amendment and sec. 168 of the Code)..... 367
6. Expensing of certain costs of replanting citrus
plants lost by reason of casualty (sec. 13207
of the Senate amendment and sec. 263A of the
Code).......................................... 370
C. Small Business Reforms.............................. 372
1. Expansion of section 179 expensing (sec. 3201 of
the House bill, sec. 13101 of the Senate
amendment, and sec. 179 of the Code)........... 372
2. Small business accounting method reform and
simplification (sec. 3202 of the House bill,
secs. 13102 through 13105 of the Senate
amendment, and secs. 263A, 448, 460, and 471 of
the Code)...................................... 375
3. Modification of treatment of S corporation
conversions to C corporations (sec. 3204 of the
House bill, sec. 13543 of the Senate amendment,
and secs. 481 and 1371 of the Code)............ 382
D. Reform of Business Related Exclusions, Deductions,
etc................................................ 385
1. Interest (secs. 3203 and 3301 of the House bill,
secs. 13301 and 13311 of the Senate amendment,
and sec. 163(j) of the Code)................... 385
2. Modification of net operating loss deduction
(sec. 3302 of the House bill, sec. 13302 of the
Senate amendment, and sec. 172 of the Code).... 393
3. Like-kind exchanges of real property (sec. 3303
of the House bill, and sec. 13303 of the Senate
amendment, and sec. 1031 of the Code).......... 394
4. Revision of treatment of contributions to
capital (sec. 3304 of the House bill and sec.
118 of the Code)............................... 397
5. Repeal of deduction for local lobbying expenses
(sec. 3305 of the House bill, sec. 13308 of the
Senate amendment, and sec. 162(e) of the Code). 399
6. Repeal of deduction for income attributable to
domestic production activities (sec. 3306 of
the House bill, sec. 13305 of the Senate
amendment, and sec. 199 of the Code)........... 400
7. Entertainment, etc. expenses (sec. 3307 of the
House bill, sec. 13304 of the Senate amendment,
and sec. 274 of the Code)...................... 402
8. Repeal of exclusion, etc., for employee
achievement awards (sec. 1403 of the House
bill, sec. 13310 of the Senate amendment, and
secs. 74(c) and 274(j) of the Code)............ 407
9. Unrelated business taxable income increased by
amount of certain fringe benefit expenses for
which deduction is disallowed (sec. 3308 of the
House bill and sec. 512 of the Code)........... 408
10. Limitation on deduction for FDIC premiums (sec.
3309 of the House bill, sec. 13531 of the
Senate amendment, and sec. 162 of the Code).... 410
11. Repeal of rollover of publicly traded
securities gain into specialized small business
investment companies (sec. 3310 of the House
bill and sec. 1044 of the Code)................ 412
12. Certain self-created property not treated as a
capital asset (sec. 3311 of the House bill and
sec. 1221 of the Code)......................... 413
13. Repeal of special rule for sale or exchange of
patents (sec. 3312 of the House bill and sec.
1235 of the Code))............................. 414
14. Repeal of technical termination of partnerships
(sec. 3313 of the House bill and sec. 708(b) of
the Code)...................................... 415
15. Recharacterization of certain gains in the case
of partnership profits interests held in
connection with performance of investment
services (sec. 3314 of the House bill, sec.
13310 of the Senate amendment, and secs. 1061
and 83 of the Code)............................ 416
16. Amortization of research and experimental
expenditures (sec. 3315 of the House bill, sec.
13206 of the Senate amendment, and sec. 174 of
the Code)...................................... 423
17. Certain special rules for taxable year of
inclusion (sec. 13221 of the Senate amendment
and sec. 451 of the Code)...................... 425
18. Denial of deduction for certain fines,
penalties, and other amounts (sec. 13306 of the
Senate amendment and sec. 162(f) and new sec.
6050X of the Code)............................. 430
19. Denial of deduction for settlements subject to
nondisclosure agreements paid in connection
with sexual harassment or sexual abuse (sec.
13307 of the Senate amendment and new sec.
162(q) of the Code)............................ 431
20. Uniform treatment of expenses in contingency
fee cases (sec. 3316 of the House bill and new
sec. 162(q) of the Code)....................... 432
E. Reform of Business Credits.......................... 433
1. Repeal of credit for clinical testing expenses
for certain drugs for rare diseases or
conditions (sec. 3401 of the House bill, sec.
13401 of the Senate amendment, and sec. 45C of
the Code)...................................... 433
2. Repeal of employer-provided child care credit
(sec. 3402 of the House bill and sec. 42F of
the Code)...................................... 434
3. Rehabilitation credit (sec. 3403 of the House
bill, sec. 13402 of the Senate amendment, and
sec. 47 of the Code)........................... 435
4. Repeal of work opportunity tax credit (sec. 3404
of the House bill and sec. 51 of the Code)..... 436
5. Repeal of deduction for certain unused business
credits (sec. 3405 of the House bill, sec.
13403 of the Senate amendment, and sec. 196 of
the Code)...................................... 438
6. Termination of new markets tax credit (sec. 3406
of the House bill and sec. 45D of the Code).... 439
7. Repeal of credit for expenditures to provide
access to disabled individuals (sec. 3407 of
the House bill and sec. 44 of the Code)........ 441
8. Modification of credit for portion of employer
social security taxes paid with respect to
employee tips (sec. 3408 of the House bill and
sec. 45B of the Code).......................... 442
9. Employer credit for paid family and medical
leave (sec. 13403 of the Senate amendment, and
new sec. 45S of the Code)...................... 443
F. Energy Credits...................................... 445
1. Modifications to credit for electricity produced
from certain renewable resources (sec. 3501 of
the House bill and sec. 45 of the Code)........ 445
2. Modification of the energy investment tax credit
(sec. 3502 of the House bill and sec. 48 of the
Code).......................................... 446
3. Extension and phaseout of residential energy
efficient property credit (sec. 3503 of the
House bill and sec. 25D of the Code)........... 450
4. Repeal of enhanced oil recovery credit (sec.
3504 of the House bill and sec. 43 of the Code) 452
5. Repeal of credit for producing oil and gas from
marginal wells (sec. 3505 of the House bill and
sec. 45I of the Code).......................... 452
6. Modification of credit for production from
advanced nuclear power facilities (sec. 3506 of
the House bill and sec. 45J of the Code)....... 453
G. Bond Reforms........................................ 455
1. Termination of private activity bonds (sec. 3601
of the bill and sec. 103 of the Code).......... 455
2. Repeal of advance refunding bonds (sec. 3602 of
the bill, sec. 13532 of the Senate amendment,
and sec. 149(d) of the Code)................... 458
3. Repeal of tax credit bonds (sec. 3603 of the
bill and secs. 54A, 54B, 54C, 54D, 54E, 54F and
6431 of the Code).............................. 459
4. No tax-exempt bonds for professional stadiums
(sec. 3604 of the bill and sec. 103 of the
Code).......................................... 462
H. Insurance........................................... 464
1. Net operating losses of life insurance companies
(sec. 3701 of the House bill, sec. 13511 of the
Senate amendment, and sec. 810 of the Code).... 464
2. Repeal of small life insurance company deduction
(sec. 3702 of the House bill, sec. 13512 of the
Senate amendment, and sec. 806 of the Code).... 465
3. Surtax on life insurance company taxable income
(sec. 3703 of the House bill and sec. 801 of
the Code)...................................... 466
4. Adjustment for change in computing reserves
(sec. 3704 of the House bill, sec. 13513 of the
Senate amendment, and sec. 807 of the Code).... 466
5. Repeal of special rule for distributions to
shareholders from pre-1984 policyholders
surplus account (sec. 3705 of the House bill,
sec. 13514 of the Senate amendment, and sec.
815 of the Code)............................... 467
6. Modification of proration rules for property and
casualty insurance companies (sec. 3706 of the
House bill, sec. 13515 of the Senate amendment,
and sec. 832 of the Code)...................... 469
7. Modification of discounting rules for property
and casualty insurance companies (sec. 3707 of
the House bill and sec. 832 of the Code)....... 470
8. Repeal of special estimated tax payments (sec.
3708 of the House bill, sec. 13516 of the
Senate amendment, and sec. 847 of the Code).... 473
9. Computation of life insurance tax reserves (sec.
13517 of the Senate amendment and sec. 807 of
the Code)...................................... 476
10. Modification of rules for life insurance
proration for purposes of determining the
dividends received deduction (sec. 13518 of the
Senate amendment and sec. 812 of the Code)..... 479
11. Capitalization of certain policy acquisition
expenses (sec. 13519 of the Senate amendment
and sec. 848 of the Code)...................... 482
12. Tax reporting for life settlement transactions,
clarification of tax basis of life insurance
contracts, and exception to transfer for
valuable consideration rules (secs. 13518
through 13520 of the Senate amendment and secs.
101, 1016, and 6050X of the Code).............. 483
I. Compensation........................................ 486
1. Modification of limitation on excessive employee
remuneration (sec. 3801 of the House bill, sec.
13601 of the Senate amendment, and sec. 162(m)
of the Code)................................... 486
2. Excise tax on excess tax-exempt organization
executive compensation (sec. 3802 of the House
bill, sec. 13602 of the Senate amendment, and
sec. 4960 of the Code)......................... 491
3. Treatment of qualified equity grants (sec. 3803
of the House bill, sec. 13603 of the Senate
amendment, and secs. 83, 3401, and 6051 of the
Code).......................................... 494
4. Increase in excise tax rate for stock
compensation of insiders in expatriated
corporations (sec. 13604 of the Senate
amendment and sec. 4985 of the Code)........... 503
J. Other Provisions.................................... 509
1. Treatment of gain or loss of foreign persons
from sale or exchange of interests in
partnerships engaged in trade or business
within the United States (sec. 13501 of the
Senate amendment and secs. 864(c) and 1446 of
the Code)...................................... 509
2. Modification of the definition of substantial
built-in loss in the case of transfer of
partnership interest (sec. 13502 of the Senate
amendment and sec. 743 of the Code)............ 512
3. Charitable contributions and foreign taxes taken
into account in determining limitation on
allowance of partner's share of loss (sec.
13503 of the Senate amendment and sec. 704 of
the Code)...................................... 513
4. Cost basis of specified securities determined
without regard to identification (sec. 13533 of
the Senate amendment and sec. 1012 of the Code) 515
5. Expansion of qualifying beneficiaries of an
electing small business trust (sec. 13541 of
the Senate amendment and sec. 1361 of the Code) 517
6. Charitable contribution deduction for electing
small business trusts (sec. 13542 of the Senate
amendment and sec. 642(c) of the Code)......... 518
7. Production period for beer, wine, and distilled
spirits (sec. 13801 of the Senate amendment and
sec. 263A of the Code)......................... 519
8. Reduced rate of excise tax on beer (sec. 13802
of the Senate amendment and sec. 5051 of the
Code).......................................... 520
9. Transfer of beer between bonded facilities (sec.
13803 of the Senate amendment and sec. 5414 of
the Code)...................................... 522
10. Reduced rate of excise tax on certain wine
(sec. 13804 of the Senate amendment and sec.
5041 of the Code).............................. 524
11. Adjustment of alcohol content level for
application of excise tax rates (sec. 13805 of
the Senate amendment and sec. 5041 of the Code) 526
12. Definition of mead and low alcohol by volume
wine (sec. 13806 of the Senate amendment and
sec. 5041 of the Code)......................... 527
13. Reduced rate of excise tax on certain distilled
spirits (sec. 13807 of the Senate amendment and
sec. 5001 of the Code)......................... 529
14. Bulk distilled spirits (sec. 13808 of the
Senate amendment and sec. 5212 of the Code).... 530
15. Modification of tax treatment of Alaska Native
Corporations and Settlement Trusts (sec. 13821
of the Senate amendment and sec. 6039H and new
secs. 139G and 247 of the Code)................ 531
16. Amounts paid for aircraft management services
(sec. 13822 of the Senate amendment and sec.
4261 of the Code).............................. 534
17. Opportunity zones (sec. 13823 of the Senate
amendment and new secs. 1400Z-1 and 1400Z-2 of
the Code)...................................... 537
18. Provisions relating to the low-income housing
credit (secs. 13411 and 13412 of the Senate
amendment and sec. 42 of the Code)............. 540
EXEMPT ORGANIZATIONS............................................. 542
A. Unrelated Business Income Tax....................... 542
1. Clarification of unrelated business income tax
treatment of entities exempt from tax under
section 501(a) (sec. 5001 of the House bill and
sec. 511 of the Code).......................... 542
2. Exclusion of research income from unrelated
business taxable income limited to publicly
available research (sec. 5002 of the House bill
and sec. 512(b)(9) of the Code)................ 543
3. Unrelated business taxable income separately
computed for each trade or business activity
(sec. 13703 of the Senate amendment and sec.
512(a) of the Code)............................ 545
B. Excise Taxes........................................ 548
1. Simplification of excise tax on private
foundation investment income (sec. 5101 of the
House bill and sec. 4940 of the Code).......... 548
2. Private operating foundation requirements
relating to operation of an art museum (sec.
5102 of the House bill and sec. 4942(j) of the
Code).......................................... 549
3. Excise tax based on investment income of private
colleges and universities (sec. 5103 of the
House bill, sec. 13701 of the Senate amendment,
and new sec. 4968 of the Code)................. 552
4. Provide an exception to the private foundation
excess business holdings rules for
philanthropic business holdings (sec. 5104 of
the House bill and sec. 4943 of the Code)...... 556
C. Requirements for Organizations Exempt From Tax...... 559
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 House bill
and sec. 501 of the Code)...................... 559
2. Additional reporting requirements for donor
advised fund sponsoring organizations (sec.
5202 of the House bill and sec. 6033 of the
Code).......................................... 561
INTERNATIONAL TAX PROVISIONS..................................... 595
A. Establishment of Participation Exemption System for
Taxation of Foreign Income......................... 595
1. Deduction for foreign-source portion of
dividends received by domestic corporations
from specified 10-percent owned foreign
corporations (sec. 4001 of the House bill, sec.
14101 of the Senate amendment, and new sec.
245A of the Code).............................. 595
2. Modification of subpart F inclusion for
increased investments in United States property
(sec. 4002 of the House bill, sec. 14218 of the
Senate amendment, and sec. 956 of the Code).... 600
3. Special rules relating to sales or transfers
involving specified 10-percent owned foreign
corporations (sec. 4003 of the House bill, sec.
14102 of the Senate Amendment and secs.
367(a)(3)(C), 961, 1248 and new sec. 91 of the
Code).......................................... 601
4. Treatment of deferred foreign income upon
transition to participation exemption system of
taxation and deemed repatriation at two-tier
rate (sec. 4004 of the House bill, sec. 14103
of the Senate amendment, and secs. 78, 904, 907
and 965 of the Code)........................... 606
5. Election to increase percentage of domestic
taxable income offset by overall domestic loss
treated as foreign source (sec. 14305 of the
Senate amendment and sec. 904(g) of the Code).. 622
B. Rules Related to Passive and Mobile Income.......... 622
1. Deduction for foreign-derived intangible income
and global intangible low-taxed income (sec.
14202 of the Senate amendment and new sec. 250
of the Code)................................... 622
2. Special rules for transfers of intangible
property from controlled foreign corporations
to United States shareholders (sec. 14203 of
the Senate amendment and new sec. 966 of the
Code).......................................... 627
C. Modifications Related to Foreign Tax Credit System.. 628
1. Repeal of section 902 indirect foreign tax
credits; determination of section 960 credit on
current year basis (sec. 4101 of the House
bill, sec. 14301 of the Senate amendment, and
secs. 902 and 960 of the Code)................. 628
2. Source of income from sales of inventory
determined solely on basis of production
activities (sec. 4102 of the House bill, sec.
14304 of the Senate amendment, and sec. 863(b)
of the Code)................................... 629
3. Separate foreign tax credit limitation basket
for foreign branch income (sec. 14302 of the
Senate amendment and sec. 904 of the Code)..... 630
4. Acceleration of election to allocate interest,
etc., on a worldwide basis (sec. 14303 of the
Senate amendment and sec. 864 of the Code)..... 630
D. Modification of Subpart F Provisions................ 631
1. Repeal of inclusion based on withdrawal of
previously excluded subpart F income from
qualified investment (sec. 4201 of the House
bill, sec. 14213 of the Senate amendment, and
sec. 955 of the Code).......................... 631
2. Repeal of treatment of foreign base company oil
related income as subpart F income (sec. 4202
of the House bill, sec. 14211 of the Senate
amendment, and sec. 954(a) of the Code)........ 631
3. Inflation adjustment of de minimis exception for
foreign base company income (sec. 4203 of the
House bill, sec. 14212 of the Senate amendment,
and sec. 954(b)(3) of the Code)................ 632
4. Look-thru rule for related controlled foreign
corporations made permanent (sec. 4204 of the
House bill, sec. 14217 of the Senate amendment,
and sec. 954(c)(6) of the Code)................ 632
5. Modification of stock attribution rules for
determining CFC status (sec. 4205 of the House
bill, sec. 14214 of the Senate amendment, and
secs. 318 and 958 of the Code)................. 633
6. Modification of definition of United States
shareholder (sec. 14215 of the Senate amendment
and sec. 951 of the Code)...................... 634
7. Elimination of requirement that corporation must
be controlled for 30 days before subpart F
inclusions apply (sec. 4206 of the House bill,
sec. 14216 of the Senate amendment, and sec.
951(a)(1) of the Code)......................... 634
8. Current year inclusion of foreign high return
amounts or global intangible low-taxed income
by United States shareholders (sec. 4301 of the
House bill, sec. 14201 of the Senate amendment,
and secs. 78 and 960 and new sec. 951A of the
Code).......................................... 635
9. Limitation on deduction of interest by domestic
corporations which are members of an
international group (sec. 4302 of the House
bill, sec. 14221 of the Senate amendment, and
new sec. 163(n) of the Code)................... 645
E. Prevention of Base Erosion.......................... 649
1. Base erosion using deductible cross-border
payments between affiliated companies (sec.
4303 of the House bill and new secs. 4491 and
6038E of the Code; sec. 14401 of the Senate
amendment and secs. 6038A and 6038C and new
secs. 59A and 59B of the Code)................. 649
2. Limitations on income shifting through
intangible property transfers (sec. 14222 of
the bill and secs. 367, 482, and 936 of the
Code).......................................... 661
3. Certain related party amounts paid or accrued in
hybrid transactions or with hybrid entities
(sec. 14223 of the Senate amendment and sec.
267A of the Code).............................. 662
4. Shareholders of surrogate foreign corporations
not eligible not eligible for reduced rate on
dividends (sec. 14225 of the Senate amendment
and sec. 1 of the Code)........................ 664
F. Provisions Related to the Possessions of the United
States............................................. 664
1. Extension of deduction allowable with respect to
income attributable to domestic production
activities in Puerto Rico (sec. 4401 of the
House bill and sec. 199 of the Code)........... 664
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 House
bill and sec. 7652(f) of the Code)............. 666
3. Extension of American Samoa economic development
credit (sec. 4403 of the House bill and sec.
119 of Pub. L. No. 109-432).................... 667
G. Other International Reforms......................... 669
1. Restriction on insurance business exception to
the passive foreign investment company rules
(sec. 4501 of the House bill, sec. 14502 of the
Senate amendment, and sec. 1297 of the Code)... 669
2. Repeal of fair market value of interest expense
apportionment (sec. 14503 of the Senate
amendment and sec. 864 of the Code)............ 672
3. Modification to source rules involving
possessions (sec. 14504 of the Senate amendment
and sec. 865 of the Code)...................... 672
TITLE II--JOINT EXPLANATORY STATEMENT............................ 675
CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND LIMITED TARIFF
BENEFITS....................................................... 676
TAX COMPLEXITY ANALYSIS.......................................... 676
115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-466
======================================================================
TAX CUTS AND JOBS ACT
_______
December 15, 2017.--Ordered to be printed
_______
Mr. Brady of Texas, from the Committee of Conference, submitted the
following
CONFERENCE REPORT
[To accompany H.R. 1]
The committee of conference on the disagreeing votes of
the two Houses on the amendment of the Senate to the bill (H.R.
1), to provide for reconciliation pursuant to titles II and V
of the concurrent resolution on the budget for fiscal year
2018, having met, after full and free conference, have agreed
to recommend and do recommend to their respective Houses as
follows:
That the House recede from its disagreement to the
amendment of the Senate and agree to the same with an amendment
as follows:
In lieu of the matter proposed to be inserted by the
Senate amendment, insert the following:
TITLE I
SEC. 11000. SHORT TITLE, ETC.
(a) Short Title.--This title may be cited as the ``Tax Cuts
and Jobs Act''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this title 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.
Subtitle A--Individual Tax Reform
PART I--TAX RATE REFORM
SEC. 11001. MODIFICATION OF RATES.
(a) In General.--Section 1 is amended by adding at the end
the following new subsection:
``(j) Modifications for Taxable Years 2018 Through 2025.--
``(1) In general.--In the case of a taxable year
beginning after December 31, 2017, and before January
1, 2026--
``(A) subsection (i) shall not apply, and
``(B) this section (other than subsection
(i)) shall be applied as provided in paragraphs
(2) through (6).
``(2) Rate tables.--
``(A) Married individuals filing joint
returns and surviving spouses.--The following
table shall be applied in lieu of the table
contained in subsection (a):
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $19,050..................... 10% of taxable income.
Over $19,050 but not over $77,400.... $1,905, plus 12% of the excess
over $19,050.
Over $77,400 but not over $165,000... $8,907, plus 22% of the excess
over $77,400.
Over $165,000 but not over $315,000.. $28,179, plus 24% of the excess
over $165,000.
Over $315,000 but not over $400,000.. $64,179, plus 32% of the excess
over $315,000.
Over $400,000 but not over $600,000.. $91,379, plus 35% of the excess
over $400,000.
Over $600,000........................ $161,379, plus 37% of the excess
over $600,000.
``(B) Heads of households.--The following
table shall be applied in lieu of the table
contained in subsection (b):
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $13,600..................... 10% of taxable income.
Over $13,600 but not over $51,800.... $1,360, plus 12% of the excess
over $13,600.
Over $51,800 but not over $82,500.... $5,944, plus 22% of the excess
over $51,800.
Over $82,500 but not over $157,500... $12,698, plus 24% of the excess
over $82,500.
Over $157,500 but not over $200,000.. $30,698, plus 32% of the excess
over $157,500.
Over $200,000 but not over $500,000.. $44,298, plus 35% of the excess
over $200,000.
Over $500,000........................ $149,298, plus 37% of the excess
over $500,000.
``(C) Unmarried individuals other than
surviving spouses and heads of households.--The
following table shall be applied in lieu of the
table contained in subsection (c):
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $500,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $500,000........................ $150,689.50, plus 37% of the
excess over $500,000.
``(D) Married individuals filing separate
returns.--The following table shall be applied
in lieu of the table contained in subsection
(d):
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $9,525...................... 10% of taxable income.
Over $9,525 but not over $38,700..... $952.50, plus 12% of the excess
over $9,525.
Over $38,700 but not over $82,500.... $4,453.50, plus 22% of the excess
over $38,700.
Over $82,500 but not over $157,500... $14,089.50, plus 24% of the
excess over $82,500.
Over $157,500 but not over $200,000.. $32,089.50, plus 32% of the
excess over $157,500.
Over $200,000 but not over $300,000.. $45,689.50, plus 35% of the
excess over $200,000.
Over $300,000........................ $80,689.50, plus 37% of the
excess over $300,000.
``(E) Estates and trusts.--The following
table shall be applied in lieu of the table
contained in subsection (e):
``If taxable income is: The tax is:
------------------------------------------------------------------------
Not over $2,550...................... 10% of taxable income.
Over $2,550 but not over $9,150...... $255, plus 24% of the excess over
$2,550.
Over $9,150 but not over $12,500..... $1,839, plus 35% of the excess
over $9,150.
Over $12,500......................... $3,011.50, plus 37% of the excess
over $12,500.
``(F) References to rate tables.--Any
reference in this title to a rate of tax under
subsection (c) shall be treated as a reference
to the corresponding rate bracket under
subparagraph (C) of this paragraph, except that
the reference in section 3402(q)(1) to the
third lowest rate of tax applicable under
subsection (c) shall be treated as a reference
to the fourth lowest rate of tax under
subparagraph (C).
``(3) Adjustments.--
``(A) No adjustment in 2018.--The tables
contained in paragraph (2) shall apply without
adjustment for taxable years beginning after
December 31, 2017, and before January 1, 2019.
``(B) Subsequent years.--For taxable years
beginning after December 31, 2018, the
Secretary shall prescribe tables which shall
apply in lieu of the tables contained in
paragraph (2) in the same manner as under
paragraphs (1) and (2) of subsection (f)
(applied without regard to clauses (i) and (ii)
of subsection (f)(2)(A)), except that in
prescribing such tables--
``(i) subsection (f)(3) shall be
applied by substituting `calendar year
2017' for `calendar year 2016' in
subparagraph (A)(ii) thereof,
``(ii) subsection (f)(7)(B) shall
apply to any unmarried individual other
than a surviving spouse or head of
household, and
``(iii) subsection (f)(8) shall not
apply.
``(4) Special rules for certain children with
unearned income.--
``(A) In general.--In the case of a child
to whom subsection (g) applies for the taxable
year, the rules of subparagraphs (B) and (C)
shall apply in lieu of the rule under
subsection (g)(1).
``(B) Modifications to applicable rate
brackets.--In determining the amount of tax
imposed by this section for the taxable year on
a child described in subparagraph (A), the
income tax table otherwise applicable under
this subsection to the child shall be applied
with the following modifications:
``(i) 24-percent bracket.--The
maximum taxable income which is taxed
at a rate below 24 percent shall not be
more than the sum of--
``(I) the earned taxable
income of such child, plus
``(II) the minimum taxable
income for the 24-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
``(ii) 35-percent bracket.--The
maximum taxable income which is taxed
at a rate below 35 percent shall not be
more than the sum of--
``(I) the earned taxable
income of such child, plus
``(II) the minimum taxable
income for the 35-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
``(iii) 37-percent bracket.--The
maximum taxable income which is taxed
at a rate below 37 percent shall not be
more than the sum of--
``(I) the earned taxable
income of such child, plus
``(II) the minimum taxable
income for the 37-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
``(C) Coordination with capital gains
rates.--For purposes of applying section 1(h)
(after the modifications under paragraph
(5)(A))--
``(i) the maximum zero rate amount
shall not be more than the sum of--
``(I) the earned taxable
income of such child, plus
``(II) the amount in effect
under paragraph (5)(B)(i)(IV)
for the taxable year, and
``(ii) the maximum 15-percent rate
amount shall not be more than the sum
of--
``(I) the earned taxable
income of such child, plus
``(II) the amount in effect
under paragraph (5)(B)(ii)(IV)
for the taxable year.
``(D) Earned taxable income.--For purposes
of this paragraph, the term `earned taxable
income' means, with respect to any child for
any taxable year, the taxable income of such
child reduced (but not below zero) by the net
unearned income (as defined in subsection
(g)(4)) of such child.
``(5) Application of current income tax brackets to
capital gains brackets.--
``(A) In general.--Section 1(h)(1) shall be
applied--
``(i) by substituting `below the
maximum zero rate amount' for `which
would (without regard to this
paragraph) be taxed at a rate below 25
percent' in subparagraph (B)(i), and
``(ii) by substituting `below the
maximum 15-percent rate amount' for
`which would (without regard to this
paragraph) be taxed at a rate below
39.6 percent' in subparagraph
(C)(ii)(I).
``(B) Maximum amounts defined.--For
purposes of applying section 1(h) with the
modifications described in subparagraph (A)--
``(i) Maximum zero rate amount.--
The maximum zero rate amount shall be--
``(I) in the case of a
joint return or surviving
spouse, $77,200,
``(II) in the case of an
individual who is a head of
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 subclause (I), and
``(IV) in the case of an
estate or trust, $2,600.
``(ii) Maximum 15-percent rate
amount.--The maximum 15-percent rate
amount 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 clauses (i) and (ii) of
subparagraph (B) shall be increased by an
amount equal to--
``(i) such dollar amount,
multiplied by
``(ii) the cost-of-living
adjustment determined under subsection
(f)(3) 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.
If any increase under this subparagraph is not
a multiple of $50, such increase shall be
rounded to the next lowest multiple of $50.
``(6) Section 15 not to apply.--Section 15 shall
not apply to any change in a rate of tax by reason of
this subsection.''.
(b) Due Diligence Tax Preparer Requirement With Respect to
Head of Household Filing Status.--Subsection (g) of section
6695 is amended to read as follows:
``(g) Failure to Be Diligent in Determining Eligibility for
Certain Tax Benefits.--Any person who is a tax return preparer
with respect to any return or claim for refund who fails to
comply with due diligence requirements imposed by the Secretary
by regulations with respect to determining--
``(1) eligibility to file as a head of household
(as defined in section 2(b)) on the return, or
``(2) eligibility for, or the amount of, the credit
allowable by section 24, 25A(a)(1), or 32,
shall pay a penalty of $500 for each such failure.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11002. INFLATION ADJUSTMENTS BASED ON CHAINED CPI.
(a) In General.--Subsection (f) of section 1 is amended by
striking paragraph (3) and by inserting after paragraph (2) the
following new paragraph:
``(3) 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 CPI for calendar year
2016, multiplied by the amount
determined under subparagraph (B).
``(B) Amount determined.--The amount
determined under this clause is the amount
obtained by dividing--
``(i) the C-CPI-U for calendar year
2016, by
``(ii) the CPI for calendar year
2016.
``(C) Special rule for adjustments with a
base year after 2016.--For purposes of any
provision of this title which provides for the
substitution of a year after 2016 for `2016' in
subparagraph (A)(ii), subparagraph (A) shall be
applied by substituting `the C-CPI-U for
calendar year 2016' for `the CPI for calendar
year 2016' and all that follows in clause (ii)
thereof.''.
(b) C-CPI-U.--Subsection (f) of section 1 is amended by
striking paragraph (7), by redesignating paragraph (6) as
paragraph (7), and by inserting after paragraph (5) the
following new paragraph:
``(6) 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.''.
(c) Application to Permanent Tax Tables.--
(1) In general.--Section 1(f)(2)(A) is amended to
read as follows:
``(A) except as provided in paragraph (8),
by increasing the minimum and maximum dollar
amounts for each bracket for which a tax is
imposed under such table by the cost-of-living
adjustment for such calendar year, determined--
``(i) except as provided in clause
(ii), by substituting `1992' for `2016'
in paragraph (3)(A)(ii), and
``(ii) in the case of adjustments
to the dollar amounts at which the 36
percent rate bracket begins or at which
the 39.6 percent rate bracket begins,
by substituting `1993' for `2016' in
paragraph (3)(A)(ii),''.
(2) Conforming amendments.--Section 1(i) is
amended--
(A) by striking ``for `1992' in
subparagraph (B)'' in paragraph (1)(C) and
inserting ``for `2016' in subparagraph
(A)(ii)'', and
(B) by striking ``subsection (f)(3)(B)
shall be applied by substituting `2012' for
`1992''' in paragraph (3)(C) and inserting
``subsection (f)(3)(A)(ii) shall be applied by
substituting `2012' for `2016'''.
(d) Application to Other Internal Revenue Code of 1986
Provisions.--
(1) The following sections are each amended by
striking ``for `calendar year 1992' in subparagraph
(B)'' and inserting ``for `calendar year 2016' in
subparagraph (A)(ii)'':
(A) Section 23(h)(2).
(B) Paragraphs (1)(A)(ii) and (2)(A)(ii) of
section 25A(h).
(C) Section 25B(b)(3)(B).
(D) Subsection (b)(2)(B)(ii)(II), and
clauses (i) and (ii) of subsection (j)(1)(B),
of section 32.
(E) Section 36B(f)(2)(B)(ii)(II).
(F) Section 41(e)(5)(C)(i).
(G) Subsections (e)(3)(D)(ii) and
(h)(3)(H)(i)(II) of section 42.
(H) Section 45R(d)(3)(B)(ii).
(I) Section 55(d)(4)(A)(ii).
(J) Section 62(d)(3)(B).
(K) Section 63(c)(4)(B).
(L) Section 125(i)(2)(B).
(M) Section 135(b)(2)(B)(ii).
(N) Section 137(f)(2).
(O) Section 146(d)(2)(B).
(P) Section 147(c)(2)(H)(ii).
(Q) Section 151(d)(4)(B).
(R) Section 179(b)(6)(A)(ii).
(S) Subsections (b)(5)(C)(i)(II) and
(g)(8)(B) of section 219.
(T) Section 220(g)(2).
(U) Section 221(f)(1)(B).
(V) Section 223(g)(1)(B).
(W) Section 408A(c)(3)(D)(ii).
(X) Section 430(c)(7)(D)(vii)(II).
(Y) Section 512(d)(2)(B).
(Z) Section 513(h)(2)(C)(ii).
(AA) Section 831(b)(2)(D)(ii).
(BB) Section 877A(a)(3)(B)(i)(II).
(CC) Section 2010(c)(3)(B)(ii).
(DD) Section 2032A(a)(3)(B).
(EE) Section 2503(b)(2)(B).
(FF) Section 4261(e)(4)(A)(ii).
(GG) Section 5000A(c)(3)(D)(ii).
(HH) Section 6323(i)(4)(B).
(II) Section 6334(g)(1)(B).
(JJ) Section 6601(j)(3)(B).
(KK) Section 6651(i)(1).
(LL) Section 6652(c)(7)(A).
(MM) Section 6695(h)(1).
(NN) Section 6698(e)(1).
(OO) Section 6699(e)(1).
(PP) Section 6721(f)(1).
(QQ) Section 6722(f)(1).
(RR) Section 7345(f)(2).
(SS) Section 7430(c)(1).
(TT) Section 9831(d)(2)(D)(ii)(II).
(2) Sections 41(e)(5)(C)(ii) and 68(b)(2)(B) are
each amended--
(A) by striking ``1(f)(3)(B)'' and
inserting ``1(f)(3)(A)(ii)'', and
(B) by striking ``1992'' and inserting
``2016''.
(3) Section 42(h)(6)(G) is amended--
(A) by striking ``for `calendar year
1987''' in clause (i)(II) and inserting ``for
`calendar year 2016' in subparagraph (A)(ii)
thereof'', and
(B) by striking ``if the CPI for any
calendar year'' and all that follows in clause
(ii) and inserting ``if the C-CPI-U for any
calendar year (as defined in section 1(f)(6))
exceeds the C-CPI-U for the preceding calendar
year by more than 5 percent, the C-CPI-U for
the base calendar year shall be increased such
that such excess shall never be taken into
account under clause (i). In the case of a base
calendar year before 2017, the C-CPI-U for such
year shall be determined by multiplying the CPI
for such year by the amount determined under
section 1(f)(3)(B).''.
(4) Section 59(j)(2)(B) is amended by striking
``for `1992' in subparagraph (B)'' and inserting ``for
`2016' in subparagraph (A)(ii)''.
(5) Section 132(f)(6)(A)(ii) is amended by striking
``for `calendar year 1992''' and inserting ``for
`calendar year 2016' in subparagraph (A)(ii) thereof''.
(6) Section 162(o)(3) is amended by striking
``adjusted for changes in the Consumer Price Index (as
defined in section 1(f)(5)) since 1991'' and inserting
``adjusted by increasing any such amount under the 1991
agreement by an amount equal to--
``(A) such amount, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
by substituting `calendar year 1990' for
`calendar year 2016' in subparagraph (A)(ii)
thereof''.
(7) So much of clause (ii) of section 213(d)(10)(B)
as precedes the last sentence is amended to read as
follows:
``(ii) Medical care cost
adjustment.--For purposes of clause
(i), the medical care cost adjustment
for any calendar year is the percentage
(if any) by which--
``(I) the medical care
component of the C-CPI-U (as
defined in section 1(f)(6)) for
August of the preceding
calendar year, exceeds
``(II) such component of
the CPI (as defined in section
1(f)(4)) for August of 1996,
multiplied by the amount
determined under section
1(f)(3)(B).''.
(8) Subparagraph (B) of section 280F(d)(7) is
amended to read as follows:
``(B) Automobile price inflation
adjustment.--For purposes of this paragraph--
``(i) In general.--The automobile
price inflation adjustment for any
calendar year is the percentage (if
any) by which--
``(I) the C-CPI-U
automobile component for
October of the preceding
calendar year, exceeds
``(II) the automobile
component of the CPI (as
defined in section 1(f)(4)) for
October of 1987, multiplied by
the amount determined under
1(f)(3)(B).
``(ii) C-CPI-U automobile
component.--The term `C-CPI-U
automobile component' means the
automobile component of the Chained
Consumer Price Index for All Urban
Consumers (as described in section
1(f)(6)).''.
(9) Section 911(b)(2)(D)(ii)(II) is amended by
striking ``for `1992' in subparagraph (B)'' and
inserting ``for `2016' in subparagraph (A)(ii)''.
(10) Paragraph (2) of section 1274A(d) is amended
to read as follows:
``(2) Adjustment for inflation.--In the case of any
debt instrument arising out of a sale or exchange
during any calendar year after 1989, each dollar amount
contained in the preceding provisions of this section
shall be increased by an amount equal to--
``(A) such amount, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
by substituting `calendar year 1988' for
`calendar year 2016' in subparagraph (A)(ii)
thereof.
Any increase under the preceding sentence shall be
rounded to the nearest multiple of $100 (or, if such
increase is a multiple of $50, such increase shall be
increased to the nearest multiple of $100).''.
(11) Section 4161(b)(2)(C)(i)(II) is amended by
striking ``for `1992' in subparagraph (B)'' and
inserting ``for `2016' in subparagraph (A)(ii)''.
(12) Section 4980I(b)(3)(C)(v)(II) is amended by
striking ``for `1992' in subparagraph (B)'' and
inserting ``for `2016' in subparagraph (A)(ii)''.
(13) Section 6039F(d) is amended by striking
``subparagraph (B) thereof shall be applied by
substituting `1995' for `1992''' and inserting
``subparagraph (A)(ii) thereof shall be applied by
substituting `1995' for `2016'''.
(14) Section 7872(g)(5) is amended to read as
follows:
``(5) Adjustment of limit for inflation.--In the
case of any loan made during any calendar year after
1986, the dollar amount in paragraph (2) shall be
increased by an amount equal to--
``(A) such amount, multiplied by
``(B) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year in which the taxable year begins,
by substituting `calendar year 1985' for
`calendar year 2016' in subparagraph (A)(ii)
thereof.
Any increase under the preceding sentence shall be
rounded to the nearest multiple of $100 (or, if such
increase is a multiple of $50, such increase shall be
increased to the nearest multiple of $100).''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
PART II--DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES
SEC. 11011. DEDUCTION FOR QUALIFIED BUSINESS INCOME.
(a) In General.--Part VI of subchapter B of chapter 1 is
amended by adding at the end the following new section:
``SEC. 199A. QUALIFIED BUSINESS INCOME.
``(a) In General.--In the case of a taxpayer other than a
corporation, there shall be allowed as a deduction for any
taxable year an amount equal to the sum of--
``(1) the lesser of--
``(A) the combined qualified business
income amount of the taxpayer, or
``(B) an amount equal to 20 percent of the
excess (if any) of--
``(i) the taxable income of the
taxpayer for the taxable year, over
``(ii) the sum of any net capital
gain (as defined in section 1(h)), plus
the aggregate amount of the qualified
cooperative dividends, of the taxpayer
for the taxable year, plus
``(2) the lesser of--
``(A) 20 percent of the aggregate amount of
the qualified cooperative dividends of the
taxpayer for the taxable year, or
``(B) taxable income (reduced by the net
capital gain (as so defined)) of the taxpayer
for the taxable year.
The amount determined under the preceding sentence shall not
exceed the taxable income (reduced by the net capital gain (as
so defined)) of the taxpayer for the taxable year.
``(b) Combined Qualified Business Income Amount.--For
purposes of this section--
``(1) In general.--The term `combined qualified
business income amount' means, with respect to any
taxable year, an amount equal to--
``(A) the sum of the amounts determined
under paragraph (2) for each qualified trade or
business carried on by the taxpayer, plus
``(B) 20 percent of the aggregate amount of
the qualified REIT dividends and qualified
publicly traded partnership income of the
taxpayer for the taxable year.
``(2) Determination of deductible amount for each
trade or business.--The amount determined under this
paragraph with respect to any qualified trade or
business is the lesser of--
``(A) 20 percent of the taxpayer's
qualified business income with respect to the
qualified trade or business, or
``(B) the greater of--
``(i) 50 percent of the W-2 wages
with respect to the qualified trade or
business, or
``(ii) the sum of 25 percent of the
W-2 wages with respect to the qualified
trade or business, plus 2.5 percent of
the unadjusted basis immediately after
acquisition of all qualified property.
``(3) Modifications to limit based on taxable
income.--
``(A) Exception from limit.--In the case of
any taxpayer whose taxable income for the
taxable year does not exceed the threshold
amount, paragraph (2) shall be applied without
regard to subparagraph (B).
``(B) Phase-in of limit for certain
taxpayers.--
``(i) In general.--If--
``(I) the taxable income of
a taxpayer for any taxable year
exceeds the threshold amount,
but does not exceed the sum of
the threshold amount plus
$50,000 ($100,000 in the case
of a joint return), and
``(II) the amount
determined under paragraph
(2)(B) (determined without
regard to this subparagraph)
with respect to any qualified
trade or business carried on by
the taxpayer is less than the
amount determined under
paragraph (2)(A) with respect
such trade or business,
then paragraph (2) shall be applied
with respect to such trade or business
without regard to subparagraph (B)
thereof and by reducing the amount
determined under subparagraph (A)
thereof by the amount determined under
clause (ii).
``(ii) Amount of reduction.--The
amount determined under this
subparagraph is the amount which bears
the same ratio to the excess amount
as--
``(I) the amount by which
the taxpayer's taxable income
for the taxable year exceeds
the threshold amount, bears to
``(II) $50,000 ($100,000 in
the case of a joint return).
``(iii) Excess amount.--For
purposes of clause (ii), the excess
amount is the excess of--
``(I) the amount determined
under paragraph (2)(A)
(determined without regard to
this paragraph), over
``(II) the amount
determined under paragraph
(2)(B) (determined without
regard to this paragraph).
``(4) Wages, etc.--
``(A) In general.--The term `W-2 wages'
means, with respect to any person for any
taxable year of such person, the amounts
described in paragraphs (3) and (8) of section
6051(a) paid by such person with respect to
employment of employees by such person during
the calendar year ending during such taxable
year.
``(B) Limitation to wages attributable to
qualified business income.--Such term shall not
include any amount which is not properly
allocable to qualified business income for
purposes of subsection (c)(1).
``(C) Return requirement.--Such term shall
not include any amount which is not properly
included in a return filed with the Social
Security Administration on or before the 60th
day after the due date (including extensions)
for such return.
``(5) Acquisitions, dispositions, and short taxable
years.--The Secretary shall provide for the application
of this subsection in cases of a short taxable year or
where the taxpayer acquires, or disposes of, the major
portion of a trade or business or the major portion of
a separate unit of a trade or business during the
taxable year.
``(6) Qualified property.--For purposes of this
section:
``(A) In general.--The term `qualified
property' means, with respect to any qualified
trade or business for a taxable year, tangible
property of a character subject to the
allowance for depreciation under section 167--
``(i) which is held by, and
available for use in, the qualified
trade or business at the close of the
taxable year,
``(ii) which is used at any point
during the taxable year in the
production of qualified business
income, and
``(iii) the depreciable period for
which has not ended before the close of
the taxable year.
``(B) Depreciable period.--The term
`depreciable period' means, with respect to
qualified property of a taxpayer, the period
beginning on the date the property was first
placed in service by the taxpayer and ending on
the later of--
``(i) the date that is 10 years
after such date, or
``(ii) the last day of the last
full year in the applicable recovery
period that would apply to the property
under section 168 (determined without
regard to subsection (g) thereof).
``(c) Qualified Business Income.--For purposes of this
section--
``(1) In general.--The term `qualified business
income' means, for any taxable year, the net amount of
qualified items of income, gain, deduction, and loss
with respect to any qualified trade or business of the
taxpayer. Such term shall not include any qualified
REIT dividends, qualified cooperative dividends, or
qualified publicly traded partnership income.
``(2) Carryover of losses.--If the net amount of
qualified income, gain, deduction, and loss with
respect to qualified trades or businesses of the
taxpayer for any taxable year is less than zero, such
amount shall be treated as a loss from a qualified
trade or business in the succeeding taxable year.
``(3) Qualified items of income, gain, deduction,
and loss.--For purposes of this subsection--
``(A) In general.--The term `qualified
items of income, gain, deduction, and loss'
means items of income, gain, deduction, and
loss to the extent such items are--
``(i) effectively connected with
the conduct of a trade or business
within the United States (within the
meaning of section 864(c), determined
by substituting `qualified trade or
business (within the meaning of section
199A)' for `nonresident alien
individual or a foreign corporation' or
for `a foreign corporation' each place
it appears), and
``(ii) included or allowed in
determining taxable income for the
taxable year.
``(B) Exceptions.--The following investment
items shall not be taken into account as a
qualified item of income, gain, deduction, or
loss:
``(i) Any item of short-term
capital gain, short-term capital loss,
long-term capital gain, or long-term
capital loss.
``(ii) Any dividend, income
equivalent to a dividend, or payment in
lieu of dividends described in section
954(c)(1)(G).
``(iii) Any interest income other
than interest income which is properly
allocable to a trade or business.
``(iv) Any item of gain or loss
described in subparagraph (C) or (D) of
section 954(c)(1) (applied by
substituting `qualified trade or
business' for `controlled foreign
corporation').
``(v) 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)).
``(vi) Any amount received from an
annuity which is not received in
connection with the trade or business.
``(vii) Any item of deduction or
loss properly allocable to an amount
described in any of the preceding
clauses.
``(4) Treatment of reasonable compensation and
guaranteed payments.--Qualified business income shall
not include--
``(A) reasonable compensation paid to the
taxpayer by any qualified trade or business of
the taxpayer for services rendered with respect
to the trade or business,
``(B) any guaranteed payment described in
section 707(c) paid to a partner for services
rendered with respect to the trade or business,
and
``(C) to the extent provided in
regulations, any payment described in section
707(a) to a partner for services rendered with
respect to the trade or business.
``(d) Qualified Trade or Business.--For purposes of this
section--
``(1) In general.--The term `qualified trade or
business' means any trade or business other than--
``(A) a specified service trade or
business, or
``(B) the trade or business of performing
services as an employee.
``(2) Specified service trade or business.--The
term `specified service trade or business' means any
trade or business--
``(A) which is described in section
1202(e)(3)(A) (applied without regard to the
words `engineering, architecture,') or which
would be so described if the term `employees or
owners' were substituted for `employees'
therein, or
``(B) which involves the performance of
services that consist of investing and
investment management, trading, or dealing in
securities (as defined in section 475(c)(2)),
partnership interests, or commodities (as
defined in section 475(e)(2)).
``(3) Exception for specified service businesses
based on taxpayer's income.--
``(A) In general.--If, for any taxable
year, the taxable income of any taxpayer is
less than the sum of the threshold amount plus
$50,000 ($100,000 in the case of a joint
return), then--
``(i) any specified service trade
or business of the taxpayer shall not
fail to be treated as a qualified trade
or business due to paragraph (1)(A),
but
``(ii) only the applicable
percentage of qualified items of
income, gain, deduction, or loss, and
the W-2 wages and the unadjusted basis
immediately after acquisition of
qualified property, of the taxpayer
allocable to such specified service
trade or business shall be taken into
account in computing the qualified
business income, W-2 wages, and the
unadjusted basis immediately after
acquisition of qualified property of
the taxpayer for the taxable year for
purposes of applying this section.
``(B) Applicable percentage.--For purposes
of subparagraph (A), the term `applicable
percentage' means, with respect to any taxable
year, 100 percent reduced (not below zero) by
the percentage equal to the ratio of--
``(i) the taxable income of the
taxpayer for the taxable year in excess
of the threshold amount, bears to
``(ii) $50,000 ($100,000 in the
case of a joint return).
``(e) Other Definitions.--For purposes of this section--
``(1) Taxable income.--Taxable income shall be
computed without regard to the deduction allowable
under this section.
``(2) Threshold amount.--
``(A) In general.--The term `threshold
amount' means $157,500 (200 percent of such
amount in the case of a joint return).
``(B) Inflation adjustment.--In the case of
any taxable year beginning after 2018, the
dollar amount in subparagraph (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(f)(3) 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.
The amount of any increase under the preceding
sentence shall be rounded as provided in
section 1(f)(7).
``(3) Qualified reit dividend.--The term `qualified
REIT dividend' means any dividend from a real estate
investment trust received during the taxable year
which--
``(A) is not a capital gain dividend, as
defined in section 857(b)(3), and
``(B) is not qualified dividend income, as
defined in section 1(h)(11).
``(4) Qualified cooperative dividend.--The term
`qualified cooperative dividend' means any patronage
dividend (as defined in section 1388(a)), any per-unit
retain allocation (as defined in section 1388(f)), and
any qualified written notice of allocation (as defined
in section 1388(c)), or any similar amount received
from an organization described in subparagraph (B)(ii),
which--
``(A) is includible in gross income, and
``(B) is received from--
``(i) an organization or
corporation described in section
501(c)(12) or 1381(a), or
``(ii) an organization which is
governed under this title by the rules
applicable to cooperatives under this
title before the enactment of
subchapter T.
``(5) Qualified publicly traded partnership
income.--The term `qualified publicly traded
partnership income' means, with respect to any
qualified trade or business of a taxpayer, the sum of--
``(A) the net amount of such taxpayer's
allocable share of each qualified item of
income, gain, deduction, and loss (as defined
in subsection (c)(3) and determined after the
application of subsection (c)(4)) from a
publicly traded partnership (as defined in
section 7704(a)) which is not treated as a
corporation under section 7704(c), plus
``(B) any gain recognized by such taxpayer
upon disposition of its interest in such
partnership to the extent such gain is treated
as an amount realized from the sale or exchange
of property other than a capital asset under
section 751(a).
``(f) Special Rules.--
``(1) Application to partnerships and s
corporations.--
``(A) In general.--In the case of a
partnership or S corporation--
``(i) this section shall be applied
at the partner or shareholder level,
``(ii) each partner or shareholder
shall take into account such person's
allocable share of each qualified item
of income, gain, deduction, and loss,
and
``(iii) each partner or shareholder
shall be treated for purposes of
subsection (b) as having W-2 wages and
unadjusted basis immediately after
acquisition of qualified property for
the taxable year in an amount equal to
such person's allocable share of the W-
2 wages and the unadjusted basis
immediately after acquisition of
qualified property of the partnership
or S corporation for the taxable year
(as determined under regulations
prescribed by the Secretary).
For purposes of clause (iii), a partner's or
shareholder's allocable share of W-2 wages
shall be determined in the same manner as the
partner's or shareholder's allocable share of
wage expenses. For purposes of such clause,
partner's or shareholder's allocable share of
the unadjusted basis immediately after
acquisition of qualified property shall be
determined in the same manner as the partner's
or shareholder's allocable share of
depreciation. For purposes of this
subparagraph, in the case of an S corporation,
an allocable share shall be the shareholder's
pro rata share of an item.
``(B) Application to trusts and estates.--
Rules similar to the rules under section
199(d)(1)(B)(i) (as in effect on December 1,
2017) for the apportionment of W-2 wages shall
apply to the apportionment of W-2 wages and the
apportionment of unadjusted basis immediately
after acquisition of qualified property under
this section.
``(C) Treatment of trades or business in
puerto rico.--
``(i) In general.--In the case of
any taxpayer with qualified business
income from sources within the
commonwealth of Puerto Rico, if all
such income is taxable under section 1
for such taxable year, then for
purposes of determining the qualified
business income of such taxpayer for
such taxable year, the term `United
States' shall include the Commonwealth
of Puerto Rico.
``(ii) Special rule for applying
limit.--In the case of any taxpayer
described in clause (i), the
determination of W-2 wages of such
taxpayer with respect to any qualified
trade or business conducted in Puerto
Rico shall be made without regard to
any exclusion under section 3401(a)(8)
for remuneration paid for services in
Puerto Rico.
``(2) Coordination with minimum tax.--For purposes
of determining alternative minimum taxable income under
section 55, qualified business income shall be
determined without regard to any adjustments under
sections 56 through 59.
``(3) Deduction limited to income taxes.--The
deduction under subsection (a) shall only be allowed
for purposes of this chapter.
``(4) Regulations.--The Secretary shall prescribe
such regulations as are necessary to carry out the
purposes of this section, including regulations--
``(A) for requiring or restricting the
allocation of items and wages under this
section and such reporting requirements as the
Secretary determines appropriate, and
``(B) for the application of this section
in the case of tiered entities.
``(g) Deduction Allowed to Specified Agricultural or
Horticultural Cooperatives.--
``(1) In general.--In the case of any taxable year
of a specified agricultural or horticultural
cooperative beginning after December 31, 2017, there
shall be allowed a deduction in an amount equal to the
lesser of--
``(A) 20 percent of the excess (if any)
of--
``(i) the gross income of a
specified agricultural or horticultural
cooperative, over
``(ii) the qualified cooperative
dividends (as defined in subsection
(e)(4)) paid during the taxable year
for the taxable year, or
``(B) the greater of--
``(i) 50 percent of the W-2 wages
of the cooperative with respect to its
trade or business, or
``(ii) the sum of 25 percent of the
W-2 wages of the cooperative with
respect to its trade or business, plus
2.5 percent of the unadjusted basis
immediately after acquisition of all
qualified property of the cooperative.
``(2) Limitation.--The amount determined under
paragraph (1) shall not exceed the taxable income of
the specified agricultural or horticultural for the
taxable year.
``(3) Specified agricultural or horticultural
cooperative.--For purposes of this subsection, the term
`specified agricultural or horticultural cooperative'
means an organization to which part I of subchapter T
applies which is engaged in--
``(A) the manufacturing, production,
growth, or extraction in whole or significant
part of any agricultural or horticultural
product,
``(B) the marketing of agricultural or
horticultural products which its patrons have
so manufactured, produced, grown, or extracted,
or
``(C) the provision of supplies, equipment,
or services to farmers or to organizations
described in subparagraph (A) or (B).
``(h) Anti-abuse Rules.--The Secretary shall--
``(1) apply rules similar to the rules under
section 179(d)(2) in order to prevent the manipulation
of the depreciable period of qualified property using
transactions between related parties, and
``(2) prescribe rules for determining the
unadjusted basis immediately after acquisition of
qualified property acquired in like-kind exchanges or
involuntary conversions.
``(i) Termination.--This section shall not apply to taxable
years beginning after December 31, 2025.''.
(b) Treatment of Deduction in Computing Adjusted Gross and
Taxable Income.--
(1) Deduction not allowed in computing adjusted
gross income.--Section 62(a) is amended by adding at
the end the following new sentence: ``The deduction
allowed by section 199A shall not be treated as a
deduction described in any of the preceding paragraphs
of this subsection.''.
(2) Deduction allowed to nonitemizers.--Section
63(b) is amended by striking ``and'' at the end of
paragraph (1), by striking the period at the end of
paragraph (2) and inserting ``, and'', and by adding at
the end the following new paragraph:
``(3) the deduction provided in section 199A.''.
(3) Deduction allowed to itemizers without limits
on itemized deductions.--Section 63(d) is amended by
striking ``and'' at the end of paragraph (1), by
striking the period at the end of paragraph (2) and
inserting ``, and'', and by adding at the end the
following new paragraph:
``(3) the deduction provided in section 199A.''.
(4) Conforming amendment.--Section 3402(m)(1) is
amended by inserting ``and the estimated deduction
allowed under section 199A'' after ``chapter 1''.
(c) Accuracy-related Penalty on Determination of Applicable
Percentage.--Section 6662(d)(1) is amended by inserting at the
end the following new subparagraph:
``(C) Special rule for taxpayers claiming
section 199a deduction.--In the case of any
taxpayer who claims the deduction allowed under
section 199A for the taxable year, subparagraph
(A) shall be applied by substituting `5
percent' for `10 percent'.''.
(d) Conforming Amendments.--
(1) Section 172(d) is amended by adding at the end
the following new paragraph:
``(8) Qualified business income deduction.--The
deduction under section 199A shall not be allowed.''.
(2) Section 246(b)(1) is amended by inserting
``199A,'' before ``243(a)(1)''.
(3) Section 613(a) is amended by inserting ``and
without the deduction under section 199A'' after ``and
without the deduction under section 199''.
(4) Section 613A(d)(1) is amended by redesignating
subparagraphs (C), (D), and (E) as subparagraphs (D),
(E), and (F), respectively, and by inserting after
subparagraph (B), the following new subparagraph:
``(C) any deduction allowable under section
199A,''.
(5) Section 170(b)(2)(D) is amended by striking
``and'' in clause (iv), by striking the period at the
end of clause (v), and by adding at the end the
following new clause:
``(vi) section 199A(g).''.
(6) The table of sections for part VI of subchapter
B of chapter 1 is amended by inserting at the end the
following new item:
``Sec. 199A. Qualified business income.''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11012. LIMITATION ON LOSSES FOR TAXPAYERS OTHER THAN CORPORATIONS.
(a) In General.--Section 461 is amended by adding at the
end the following new subsection:
``(l) Limitation on Excess Business Losses of Noncorporate
Taxpayers.--
``(1) Limitation.--In the case of taxable year of a
taxpayer other than a corporation beginning after
December 31, 2017, and before January 1, 2026--
``(A) subsection (j) (relating to
limitation on excess farm losses of certain
taxpayers) shall not apply, and
``(B) any excess business loss of the
taxpayer for the taxable year shall not be
allowed.
``(2) Disallowed loss carryover.--Any loss which is
disallowed under paragraph (1) shall be treated as a
net operating loss carryover to the following taxable
year under section 172.
``(3) Excess business loss.--For purposes of this
subsection--
``(A) In general.--The term `excess
business loss' means the excess (if any) of--
``(i) the aggregate deductions of
the taxpayer for the taxable year which
are attributable to trades or
businesses of such taxpayer (determined
without regard to whether or not such
deductions are disallowed for such
taxable year under paragraph (1)), over
``(ii) the sum of--
``(I) the aggregate gross
income or gain of such taxpayer
for the taxable year which is
attributable to such trades or
businesses, plus
``(II) $250,000 (200
percent of such amount in the
case of a joint return).
``(B) Adjustment for inflation.--In the
case of any taxable year beginning after
December 31, 2018, the $250,000 amount in
subparagraph (A)(ii)(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(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `2017' for `2016' in
subparagraph (A)(ii) thereof.
If any amount as increased under the
preceding sentence is not a multiple of
$1,000, such amount shall be rounded to
the nearest multiple of $1,000.
``(4) Application of subsection in case of
partnerships and s corporations.--In the case of a
partnership or S corporation--
``(A) this subsection shall be applied at
the partner or shareholder level, and
``(B) each partner's or shareholder's
allocable share of the items of income, gain,
deduction, or loss of the partnership or S
corporation for any taxable year from trades or
businesses attributable to the partnership or S
corporation shall be taken into account by the
partner or shareholder in applying this
subsection to the taxable year of such partner
or shareholder with or within which the taxable
year of the partnership or S corporation ends.
For purposes of this paragraph, in the case of an S
corporation, an allocable share shall be the
shareholder's pro rata share of an item.
``(5) Additional reporting.--The Secretary shall
prescribe such additional reporting requirements as the
Secretary determines necessary to carry out the
purposes of this subsection.
``(6) Coordination with section 469.--This
subsection shall be applied after the application of
section 469.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
PART III--TAX BENEFITS FOR FAMILIES AND INDIVIDUALS
SEC. 11021. INCREASE IN STANDARD DEDUCTION.
(a) In General.--Subsection (c) of section 63 is amended by
adding at the end the following new paragraph:
``(7) Special rules for taxable years 2018 through
2025.--In the case of a taxable year beginning after
December 31, 2017, and before January 1, 2026--
``(A) Increase in standard deduction.--
Paragraph (2) shall be applied--
``(i) by substituting `$18,000' for
`$4,400' in subparagraph (B), and
``(ii) by substituting `$12,000'
for `$3,000' in subparagraph (C).
``(B) Adjustment for inflation.--
``(i) In general.--Paragraph (4)
shall not apply to the dollar amounts
contained in paragraphs (2)(B) and
(2)(C).
``(ii) Adjustment of increased
amounts.--In the case of a taxable year
beginning after 2018, the $18,000 and
$12,000 amounts in subparagraph (A)
shall each be increased by an amount
equal to--
``(I) such dollar amount,
multiplied by
``(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting `2017' for
`2016' in subparagraph (A)(ii)
thereof.
If any increase under this clause is
not a multiple of $50, such increase
shall be rounded to the next lowest
multiple of $50.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11022. INCREASE IN AND MODIFICATION OF CHILD TAX CREDIT.
(a) In General.--Section 24 is amended by adding at the end
the following new subsection:
``(h) Special Rules for Taxable Years 2018 Through 2025.--
``(1) In general.--In the case of a taxable year
beginning after December 31, 2017, and before January
1, 2026, this section shall be applied as provided in
paragraphs (2) through (7).
``(2) Credit amount.--Subsection (a) shall be
applied by substituting `$2,000' for `$1,000'.
``(3) Limitation.--In lieu of the amount determined
under subsection (b)(2), the threshold amount shall be
$400,000 in the case of a joint return ($200,000 in any
other case).
``(4) Partial credit allowed for certain other
dependents.--
``(A) In general.--The credit determined
under subsection (a) (after the application of
paragraph (2)) shall be increased by $500 for
each dependent of the taxpayer (as defined in
section 152) other than a qualifying child
described in subsection (c).
``(B) Exception for certain noncitizens.--
Subparagraph (A) shall not apply with respect
to any individual who would not be a dependent
if subparagraph (A) of section 152(b)(3) were
applied without regard to all that follows
`resident of the United States'.
``(C) Certain qualifying children.--In the
case of any qualifying child with respect to
whom a credit is not allowed under this section
by reason of paragraph (7), such child shall be
treated as a dependent to whom subparagraph (A)
applies.
``(5) Maximum amount of refundable credit.--
``(A) In general.--The amount determined
under subsection (d)(1)(A) with respect to any
qualifying child shall not exceed $1,400, and
such subsection shall be applied without regard
to paragraph (4) of this subsection.
``(B) Adjustment for inflation.--In the
case of a taxable year beginning after 2018,
the $1,400 amount in subparagraph (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(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `2017' for `2016' in
subparagraph (A)(ii) thereof.
If any increase under this clause is not a
multiple of $100, such increase shall be
rounded to the next lowest multiple of $100.
``(6) Earned income threshold for refundable
credit.--Subsection (d)(1)(B)(i) shall be applied by
substituting `$2,500' for `$3,000'.
``(7) Social security number required.--No credit
shall be allowed under this section to a taxpayer with
respect to any qualifying child unless the taxpayer
includes the social security number of such child on
the return of tax for the taxable year. For purposes of
the preceding sentence, the term `social security
number' means a social security number issued to an
individual by the Social Security Administration, but
only if the social security number is issued--
``(A) 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, and
``(B) before the due date for such
return.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11023. INCREASED LIMITATION FOR CERTAIN CHARITABLE CONTRIBUTIONS.
(a) In General.--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 beginning after December
31, 2017, and before January 1, 2026,
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) for any
taxable year described in such clause,
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.--For each taxable
year described in clause (i),
and each taxable year to which
any contribution under this
subparagraph is carried over
under clause (ii), subparagraph
(A) shall be applied by
reducing (but not below zero)
the contribution limitation
allowed for the taxable year
under such subparagraph by the
aggregate contributions allowed
under this subparagraph for
such taxable year, and
subparagraph (B) shall be
applied by treating any
reference to subparagraph (A)
as a reference to both
subparagraph (A) and this
subparagraph.''.
(b) Effective Date.--The amendment made by this section
shall apply to contributions in taxable years beginning after
December 31, 2017.
SEC. 11024. INCREASED CONTRIBUTIONS TO ABLE ACCOUNTS.
(a) Increase in Limitation for Contributions From
Compensation of Individuals With Disabilities.--
(1) In general.--Section 529A(b)(2)(B) is amended
to read as follows:
``(B) except in the case of contributions
under subsection (c)(1)(C), if such
contribution to an ABLE account would result in
aggregate contributions from all contributors
to the ABLE account for the taxable year
exceeding the sum of--
``(i) the amount in effect under
section 2503(b) for the calendar year
in which the taxable year begins, plus
``(ii) in the case of any
contribution by a designated
beneficiary described in paragraph (7)
before January 1, 2026, the lesser of--
``(I) compensation (as
defined by section 219(f)(1))
includible in the designated
beneficiary's gross income for
the taxable year, or
``(II) an amount equal to
the poverty line for a one-
person household, as determined
for the calendar year preceding
the calendar year in which the
taxable year begins.''.
(2) Responsibility for contribution limitation.--
Paragraph (2) of section 529A(b) is amended by adding
at the end the following: ``A designated beneficiary
(or a person acting on behalf of such beneficiary)
shall maintain adequate records for purposes of
ensuring, and shall be responsible for ensuring, that
the requirements of subparagraph (B)(ii) are met.''
(3) Eligible designated beneficiary.--Section
529A(b) is amended by adding at the end the following:
``(7) Special rules related to contribution
limit.--For purposes of paragraph (2)(B)(ii)--
``(A) Designated beneficiary.--A designated
beneficiary described in this paragraph is an
employee (including an employee within the
meaning of section 401(c)) with respect to
whom--
``(i) no contribution is made for
the taxable year to a defined
contribution plan (within the meaning
of section 414(i)) with respect to
which the requirements of section
401(a) or 403(a) are met,
``(ii) no contribution is made for
the taxable year to an annuity contract
described in section 403(b), and
``(iii) no contribution is made for
the taxable year to an eligible
deferred compensation plan described in
section 457(b).
``(B) Poverty line.--The term `poverty
line' has the meaning given such term by
section 673 of the Community Services Block
Grant Act (42 U.S.C. 9902).''.
(b) Allowance of Saver's Credit for ABLE Contributions by
Account Holder.--Section 25B(d)(1) is amended by striking
``and'' at the end of subparagraph (B)(ii), by striking the
period at the end of subparagraph (C) and inserting ``, and'',
and by inserting at the end the following:
``(D) the amount of contributions made
before January 1, 2026, by such individual to
the ABLE account (within the meaning of section
529A) of which such individual is the
designated beneficiary.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 11025. ROLLOVERS TO ABLE PROGRAMS FROM 529 PROGRAMS.
(a) In General.--Clause (i) of section 529(c)(3)(C) 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:
``(III) before January 1,
2026, 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)(i).''.
(b) Effective Date.--The amendments made by this section
shall apply to distributions after the date of the enactment of
this Act.
SEC. 11026. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING SERVICES IN THE
SINAI PENINSULA OF EGYPT.
(a) In General.--For purposes of the following provisions
of the Internal Revenue Code of 1986, with respect to the
applicable period, a qualified hazardous duty area shall be
treated in the same manner as if it were a combat zone (as
determined under section 112 of such Code):
(1) Section 2(a)(3) (relating to special rule where
deceased spouse was in missing status).
(2) Section 112 (relating to the exclusion of
certain combat pay of members of the Armed Forces).
(3) Section 692 (relating to income taxes of
members of Armed Forces on death).
(4) Section 2201 (relating to members of the Armed
Forces dying in combat zone or by reason of combat-
zone-incurred wounds, etc.).
(5) Section 3401(a)(1) (defining wages relating to
combat pay for members of the Armed Forces).
(6) Section 4253(d) (relating to the taxation of
phone service originating from a combat zone from
members of the Armed Forces).
(7) Section 6013(f)(1) (relating to joint return
where individual is in missing status).
(8) Section 7508 (relating to time for performing
certain acts postponed by reason of service in combat
zone).
(b) Qualified Hazardous Duty Area.--For purposes of this
section, the term ``qualified hazardous duty area'' means the
Sinai Peninsula of Egypt, if as of the date of the enactment of
this section any member of the Armed Forces of the United
States is entitled to special pay under section 310 of title
37, United States Code (relating to special pay; duty subject
to hostile fire or imminent danger), for services performed in
such location. Such term includes such location only during the
period such entitlement is in effect.
(c) Applicable Period.--
(1) In general.--Except as provided in paragraph
(2), the applicable period is--
(A) the portion of the first taxable year
ending after June 9, 2015, which begins on such
date, and
(B) any subsequent taxable year beginning
before January 1, 2026.
(2) Withholding.--In the case of subsection (a)(5),
the applicable period is--
(A) the portion of the first taxable year
ending after the date of the enactment of this
Act which begins on such date, and
(B) any subsequent taxable year beginning
before January 1, 2026.
(d) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the provisions of this section shall take effect
on June 9, 2015.
(2) Withholding.--Subsection (a)(5) shall apply to
remuneration paid after the date of the enactment of
this Act.
SEC. 11027. TEMPORARY REDUCTION IN MEDICAL EXPENSE DEDUCTION FLOOR.
(a) In General.--Subsection (f) of section 213 is amended
to read as follows:
``(f) Special Rules for 2013 Through 2018.--In the case of
any taxable year--
``(1) beginning after December 31, 2012, and ending
before January 1, 2017, in the case of a taxpayer if
such taxpayer or such taxpayer's spouse has attained
age 65 before the close of such taxable year, and
``(2) beginning after December 31, 2016, and ending
before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by
substituting `7.5 percent' for `10 percent'.''.
(b) Minimum Tax Preference Not to Apply.--Section
56(b)(1)(B) is amended by adding at the end the following new
sentence:``This subparagraph shall not apply to taxable years
beginning after December 31, 2016, and ending before January 1,
2019''.
(c) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2016.
SEC. 11028. RELIEF FOR 2016 DISASTER AREAS.
(a) In General.--For purposes of this section, the term
``2016 disaster area'' means any area with respect to which a
major disaster has been declared by the President under section
401 of the Robert T. Stafford Disaster Relief and Emergency
Assistance Act during calendar year 2016.
(b) Special Rules for Use of Retirement Funds With Respect
to Areas Damaged by 2016 Disasters.--
(1) Tax-favored withdrawals from retirement
plans.--
(A) In general.--Section 72(t) of the
Internal Revenue Code of 1986 shall not apply
to any qualified 2016 disaster distribution.
(B) Aggregate dollar limitation.--
(i) In general.--For purposes of
this subsection, the aggregate amount
of distributions received by an
individual which may be treated as
qualified 2016 disaster distributions
for any taxable year shall not exceed
the excess (if any) of--
(I) $100,000, over
(II) the aggregate amounts
treated as qualified 2016
disaster distributions received
by such individual for all
prior taxable years.
(ii) Treatment of plan
distributions.--If a distribution to an
individual would (without regard to
clause (i)) be a qualified 2016
disaster distribution, a plan shall not
be treated as violating any requirement
of this title merely because the plan
treats such distribution as a qualified
2016 disaster distribution, unless the
aggregate amount of such distributions
from all plans maintained by the
employer (and any member of any
controlled group which includes the
employer) to such individual exceeds
$100,000.
(iii) Controlled group.--For
purposes of clause (ii), the term
``controlled group'' means any group
treated as a single employer under
subsection (b), (c), (m), or (o) of
section 414 of the Internal Revenue
Code of 1986.
(C) Amount distributed may be repaid.--
(i) In general.--Any individual who
receives a qualified 2016 disaster
distribution may, at any time during
the 3-year period beginning on the day
after the date on which such
distribution was received, make one or
more contributions in an aggregate
amount not to exceed the amount of such
distribution to an eligible retirement
plan of which such individual is a
beneficiary and to which a rollover
contribution of such distribution could
be made under section 402(c),
403(a)(4), 403(b)(8), 408(d)(3), or
457(e)(16) of the Internal Revenue Code
of 1986, as the case may be.
(ii) Treatment of repayments of
distributions from eligible retirement
plans other than iras.--For purposes of
the Internal Revenue Code of 1986, if a
contribution is made pursuant to clause
(i) with respect to a qualified 2016
disaster distribution from an eligible
retirement plan other than an
individual retirement plan, then the
taxpayer shall, to the extent of the
amount of the contribution, be treated
as having received the qualified 2016
disaster distribution in an eligible
rollover distribution (as defined in
section 402(c)(4) of the Internal
Revenue Code of 1986) and as having
transferred the amount to the eligible
retirement plan in a direct trustee to
trustee transfer within 60 days of the
distribution.
(iii) Treatment of repayments for
distributions from iras.--For purposes
of the Internal Revenue Code of 1986,
if a contribution is made pursuant to
clause (i) with respect to a qualified
2016 disaster distribution from an
individual retirement plan (as defined
by section 7701(a)(37) of the Internal
Revenue Code of 1986), then, to the
extent of the amount of the
contribution, the qualified 2016
disaster distribution shall be treated
as a distribution described in section
408(d)(3) of such Code and as having
been transferred to the eligible
retirement plan in a direct trustee to
trustee transfer within 60 days of the
distribution.
(D) Definitions.--For purposes of this
paragraph--
(i) Qualified 2016 disaster
distribution.--Except as provided in
subparagraph (B), the term ``qualified
2016 disaster distribution'' means any
distribution from an eligible
retirement plan made on or after
January 1, 2016, and before January 1,
2018, to an individual whose principal
place of abode at any time during
calendar year 2016 was located in a
disaster area described in subsection
(a) and who has sustained an economic
loss by reason of the events giving
rise to the Presidential declaration
described in subsection (a) which was
applicable to such area.
(ii) Eligible retirement plan.--The
term ``eligible retirement plan'' shall
have the meaning given such term by
section 402(c)(8)(B) of the Internal
Revenue Code of 1986.
(E) Income inclusion spread over 3-year
period.--
(i) In general.--In the case of any
qualified 2016 disaster distribution,
unless the taxpayer elects not to have
this subparagraph apply for any taxable
year, any amount required to be
included in gross income for such
taxable year shall be so included
ratably over the 3-taxable-year period
beginning with such taxable year.
(ii) Special rule.--For purposes of
clause (i), rules similar to the rules
of subparagraph (E) of section
408A(d)(3) of the Internal Revenue Code
of 1986 shall apply.
(F) Special rules.--
(i) Exemption of distributions from
trustee to trustee transfer and
withholding rules.--For purposes of
sections 401(a)(31), 402(f), and 3405
of the Internal Revenue Code of 1986,
qualified 2016 disaster distribution
shall not be treated as eligible
rollover distributions.
(ii) Qualified 2016 disaster
distributions treated as meeting plan
distribution requirements.--For
purposes of the Internal Revenue Code
of 1986, a qualified 2016 disaster
distribution shall be treated as
meeting the requirements of sections
401(k)(2)(B)(i), 403(b)(7)(A)(ii),
403(b)(11), and 457(d)(1)(A) of the
Internal Revenue Code of 1986.
(2) Provisions relating to plan amendments.--
(A) In general.--If this paragraph applies
to any amendment to any plan or annuity
contract, such plan or contract shall be
treated as being operated in accordance with
the terms of the plan during the period
described in subparagraph (B)(ii)(I).
(B) Amendments to which subsection
applies.--
(i) In general.--This paragraph
shall apply to any amendment to any
plan or annuity contract which is
made--
(I) pursuant to any
provision of this section, or
pursuant to any regulation
under any provision of this
section, and
(II) on or before the last
day of the first plan year
beginning on or after January
1, 2018, or such later date as
the Secretary prescribes.
In the case of a governmental plan (as
defined in section 414(d) of the
Internal Revenue Code of 1986),
subclause (II) shall be applied by
substituting the date which is 2 years
after the date otherwise applied under
subclause (II).
(ii) Conditions.--This paragraph
shall not apply to any amendment to a
plan or contract unless such amendment
applies retroactively for such period,
and shall not apply to any such
amendment unless the plan or contract
is operated as if such amendment were
in effect during the period--
(I) beginning on the date
that this section or the
regulation described in clause
(i)(I) takes effect (or in the
case of a plan or contract
amendment not required by this
section or such regulation, the
effective date specified by the
plan), and
(II) ending on the date
described in clause (i)(II)
(or, if earlier, the date the
plan or contract amendment is
adopted).
(c) Special Rules for Personal Casualty Losses Related to
2016 Major Disaster.--
(1) In general.--If an individual has a net
disaster loss for any taxable year beginning after
December 31, 2015, and before January 1, 2018--
(A) the amount determined under section
165(h)(2)(A)(ii) of the Internal Revenue Code
of 1986 shall be equal to the sum of--
(i) such net disaster loss, and
(ii) so much of the excess referred
to in the matter preceding clause (i)
of section 165(h)(2)(A) of such Code
(reduced by the amount in clause (i) of
this subparagraph) as exceeds 10
percent of the adjusted gross income of
the individual,
(B) section 165(h)(1) of such Code shall be
applied by substituting ``$500'' for ``$500
($100 for taxable years beginning after
December 31, 2009)'',
(C) the standard deduction determined under
section 63(c) of such Code shall be increased
by the net disaster loss, and
(D) section 56(b)(1)(E) of such Code shall
not apply to so much of the standard deduction
as is attributable to the increase under
subparagraph (C) of this paragraph.
(2) Net disaster loss.--For purposes of this
subsection, the term ``net disaster loss'' means the
excess of qualified disaster-related personal casualty
losses over personal casualty gains (as defined in
section 165(h)(3)(A) of the Internal Revenue Code of
1986).
(3) Qualified disaster-related personal casualty
losses.--For purposes of this paragraph, the term
``qualified disaster-related personal casualty losses''
means losses described in section 165(c)(3) of the
Internal Revenue Code of 1986 which arise in a disaster
area described in subsection (a) on or after January 1,
2016, and which are attributable to the events giving
rise to the Presidential declaration described in
subsection (a) which was applicable to such area.
PART IV--EDUCATION
SEC. 11031. TREATMENT OF STUDENT LOANS DISCHARGED ON ACCOUNT OF DEATH
OR DISABILITY.
(a) In General.--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 for such taxable
year by reasons of the discharge (in whole or
in part) of any loan described in subparagraph
(B) after December 31, 2017, and before January
1, 2026, 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) Effective Date.--The amendment made by this section
shall apply to discharges of indebtedness after December 31,
2017.
SEC. 11032. 529 ACCOUNT FUNDING FOR ELEMENTARY AND SECONDARY EDUCATION.
(a) In General.--
(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--
``(A) expenses for tuition in connection
with enrollment or attendance at an elementary
or secondary public, private, or religious
school, and
``(B) expenses for--
``(i) curriculum and curricular
materials,
``(ii) books or other instructional
materials,
``(iii) online educational
materials,
``(iv) tuition for tutoring or
educational classes outside of the home
(but only if the tutor or instructor is
not related (within the meaning of
section 152(d)(2)) to the student),
``(v) dual enrollment in an
institution of higher education, and
``(vi) educational therapies for
students with disabilities,
in connection with a homeschool (whether
treated as a homeschool or a private school for
purposes of applicable State law).''.
(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
described in subsection (c)(7) incurred during the
taxable year.''.
(b) Effective Date.--The amendments made by this section
shall apply to distributions made after December 31, 2017.
PART V--DEDUCTIONS AND EXCLUSIONS
SEC. 11041. SUSPENSION OF DEDUCTION FOR PERSONAL EXEMPTIONS.
(a) In General.--Subsection (d) of section 151 is amended--
(1) by striking ``In the case of'' in paragraph (4)
and inserting ``Except as provided in paragraph (5), in
the case of'', and
(2) by adding at the end the following new
paragraph:
``(5) Special rules for taxable years 2018 through
2025.--In the case of a taxable year beginning after
December 31, 2017, and before January 1, 2026--
``(A) Exemption amount.--The term
`exemption amount' means zero.
``(B) References.--For purposes of any
other provision of this title, the reduction of
the exemption amount to zero under subparagraph
(A) shall not be taken into account in
determining whether a deduction is allowed or
allowable, or whether a taxpayer is entitled to
a deduction, under this section.''.
(b) Application to Estates and Trusts.--Section
642(b)(2)(C) is amended by adding at the end the following new
clause:
``(iii) Years when personal
exemption amount is zero.--
``(I) In general.--In the
case of any taxable year in
which the exemption amount
under section 151(d) is zero,
clause (i) shall be applied by
substituting `$4,150' for `the
exemption amount under section
151(d)'.
``(II) Inflation
adjustment.--In the case of any
taxable year beginning in a
calendar year after 2018, the
$4,150 amount in subparagraph
(A) shall be increased in the
same manner as provided in
section 6334(d)(4)(C).''.
(c) Modification of Wage Withholding Rules.--
(1) In general.--Section 3402(a)(2) is amended by
striking ``means the amount'' and all that follows and
inserting ``means the amount by which the wages exceed
the taxpayer's withholding allowance, prorated to the
payroll period.''.
(2) Conforming amendments.--
(A) Section 3401 is amended by striking
subsection (e).
(B) Paragraphs (1) and (2) of section
3402(f) are amended to read as follows:
``(1) In general.--Under rules determined by the
Secretary, an employee receiving wages shall on any day
be entitled to a withholding allowance determined based
on--
``(A) whether the employee is an individual
for whom a deduction is allowable with respect
to another taxpayer under section 151;
``(B) if the employee is married, whether
the employee's spouse is entitled to an
allowance, or would be so entitled if such
spouse were an employee receiving wages, under
subparagraph (A) or (D), but only if such
spouse does not have in effect a withholding
allowance certificate claiming such allowance;
``(C) the number of individuals with
respect to whom, on the basis of facts existing
at the beginning of such day, there may
reasonably be expected to be allowable a credit
under section 24(a) for the taxable year under
subtitle A in respect of which amounts deducted
and withheld under this chapter in the calendar
year in which such day falls are allowed as a
credit;
``(D) any additional amounts to which the
employee elects to take into account under
subsection (m), but only if the employee's
spouse does not have in effect a withholding
allowance certificate making such an election;
``(E) the standard deduction allowable to
such employee (one-half of such standard
deduction in the case of an employee who is
married (as determined under section 7703) and
whose spouse is an employee receiving wages
subject to withholding); and
``(F) whether the employee has withholding
allowance certificates in effect with respect
to more than 1 employer.
``(2) Allowance certificates.--
``(A) On commencement of employment.--On or
before the date of the commencement of
employment with an employer, the employee shall
furnish the employer with a signed withholding
allowance certificate relating to the
withholding allowance claimed by the employee,
which shall in no event exceed the amount to
which the employee is entitled.
``(B) Change of status.--If, on any day
during the calendar year, an employee's
withholding allowance is in excess of the
withholding allowance to which the employee
would be entitled had the employee submitted a
true and accurate withholding allowance
certificate to the employer on that day, the
employee shall within 10 days thereafter
furnish the employer with a new withholding
allowance certificate. If, on any day during
the calendar year, an employee's withholding
allowance is greater than the withholding
allowance claimed, the employee may furnish the
employer with a new withholding allowance
certificate relating to the withholding
allowance to which the employee is so entitled,
which shall in no event exceed the amount to
which the employee is entitled on such day.
``(C) Change of status which affects next
calendar year.--If on any day during the
calendar year the withholding allowance to
which the employee will be, or may reasonably
be expected to be, entitled at the beginning of
the employee's next taxable year under subtitle
A is different from the allowance to which the
employee is entitled on such day, the employee
shall, in such cases and at such times as the
Secretary shall by regulations prescribe,
furnish the employer with a withholding
allowance certificate relating to the
withholding allowance which the employee claims
with respect to such next taxable year, which
shall in no event exceed the withholding
allowance to which the employee will be, or may
reasonably be expected to be, so entitled.''.
(C) Subsections (b)(1), (b)(2), (f)(3),
(f)(4), (f)(5), (f)(7) (including the heading
thereof), (g)(4), (l)(1), (l)(2), and (n) of
section 3402 are each amended by striking
``exemption'' each place it appears and
inserting ``allowance''.
(D) The heading of section 3402(f) is
amended by striking ``Exemptions'' and
inserting ``Allowance''.
(E) Section 3402(m) is amended by striking
``additional withholding allowances or
additional reductions in withholding under this
subsection. In determining the number of
additional withholding allowances'' and
inserting ``an additional withholding allowance
or additional reductions in withholding under
this subsection. In determining the additional
withholding allowance''.
(F) Paragraphs (3) and (4) of section
3405(a) (and the heading for such paragraph
(4)) are each amended by striking ``exemption''
each place it appears and inserting
``allowance''.
(G) Section 3405(a)(4) is amended by
striking ``shall be determined'' and all that
follows through ``3 withholding exemptions''
and inserting ``shall be determined under rules
prescribed by the Secretary''.
(d) Exception for Determining Property Exempt From Levy.--
Section 6334(d) is amended by adding at the end the following
new paragraph:
``(4) Years when personal exemption amount is
zero.--
``(A) In general.--In the case of any
taxable year in which the exemption amount
under section 151(d) is zero, paragraph (2)
shall not apply and for purposes of paragraph
(1) the term `exempt amount' means an amount
equal to--
``(i) the sum of the amount
determined under subparagraph (B) and
the standard deduction, divided by
``(ii) 52.
``(B) Amount determined.--For purposes of
subparagraph (A), the amount determined under
this subparagraph is $4,150 multiplied by the
number of the taxpayer's dependents for the
taxable year in which the levy occurs.
``(C) Inflation adjustment.--In the case of
any taxable year beginning in a calendar year
after 2018, the $4,150 amount in subparagraph
(B) shall be increased by an amount equal to--
``(i) such dollar amount,
multiplied by
``(ii) the cost-of-living
adjustment determined under section
1(f)(3) for the calendar year in which
the taxable year begins, determined by
substituting `2017' for `2016' in
subparagraph (A)(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.
``(D) 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.''.
(e) Persons Required to Make Returns of Income.--Section
6012 is amended by adding at the end the following new
subsection:
``(f) Special Rule for Taxable Years 2018 Through 2025.--In
the case of a taxable year beginning after December 31, 2017,
and before January 1, 2026, subsection (a)(1) shall not apply,
and every individual who has gross income for the taxable year
shall be required to make returns with respect to income taxes
under subtitle A, except that a return shall not be required
of--
``(1) 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
``(2) an individual entitled to make a joint return
if--
``(A) 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,
``(B) such individual and such individual's
spouse have the same household as their home at
the close of the taxable year,
``(C) such individual's spouse does not
make a separate return, and
``(D) neither such individual nor such
individual's spouse is an individual described
in section 63(c)(5) who has income (other than
earned income) in excess of the amount in
effect under section 63(c)(5)(A).''.
(f) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after December 31, 2017.
(2) Wage withholding.--The Secretary of the
Treasury may administer section 3402 for taxable years
beginning before January 1, 2019, without regard to the
amendments made by subsections (a) and (c).
SEC. 11042. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. TAXES.
(a) In General.--Subsection (b) of section 164 is amended
by adding at the end the following new paragraph:
``(6) Limitation on individual deductions for
taxable years 2018 through 2025.--In the case of an
individual and a taxable year beginning after December
31, 2017, and before January 1, 2026--
``(A) foreign real property taxes shall not
be taken into account under subsection (a)(1),
and
``(B) the aggregate amount of taxes taken
into account under paragraphs (1), (2), and (3)
of subsection (a) and paragraph (5) of this
subsection for any taxable year shall not
exceed $10,000 ($5,000 in the case of a married
individual filing a separate return).
The preceding sentence shall not apply to any foreign
taxes described in subsection (a)(3) or to any taxes
described in paragraph (1) and (2) of subsection (a)
which are paid or accrued in carrying on a trade or
business or an activity described in section 212. For
purposes of subparagraph (B), an amount paid in a
taxable year beginning before January 1, 2018, with
respect to a State or local income tax imposed for a
taxable year beginning after December 31, 2017, shall
be treated as paid on the last day of the taxable year
for which such tax is so imposed.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2016.
SEC. 11043. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST.
(a) In General.--Section 163(h)(3) is amended by adding at
the end the following new subparagraph:
``(F) Special rules for taxable years 2018
through 2025.--
``(i) In general.--In the case of
taxable years beginning after December
31, 2017, and before January 1, 2026--
``(I) Disallowance of home
equity indebtedness interest.--
Subparagraph (A)(ii) shall not
apply.
``(II) Limitation on
acquisition indebtedness.--
Subparagraph (B)(ii) shall be
applied by substituting
`$750,000 ($375,000' for
`$1,000,000 ($500,000'.
``(III) Treatment of
indebtedness incurred on or
before december 15, 2017.--
Subclause (II) shall not apply
to any indebtedness incurred on
or before December 15, 2017,
and, in applying such subclause
to any indebtedness incurred
after such date, the limitation
under such subclause shall be
reduced (but not below zero) by
the amount of any indebtedness
incurred on or before December
15, 2017, which is treated as
acquisition indebtedness for
purposes of this subsection for
the taxable year.
``(IV) Binding contract
exception.--In the case of a
taxpayer who enters into a
written binding contract before
December 15, 2017, to close on
the purchase of a principal
residence before January 1,
2018, and who purchases such
residence before April 1, 2018,
subclause (III) shall be
applied by substituting `April
1, 2018' for `December 15,
2017'.
``(ii) Treatment of limitation in
taxable years after december 31,
2025.--In the case of taxable years
beginning after December 31, 2025, the
limitation under subparagraph (B)(ii)
shall be applied to the aggregate
amount of indebtedness of the taxpayer
described in subparagraph (B)(i)
without regard to the taxable year in
which the indebtedness was incurred.
``(iii) Treatment of refinancings
of indebtedness.--
``(I) In general.--In the
case of any indebtedness which
is incurred to refinance
indebtedness, such refinanced
indebtedness shall be treated
for purposes of clause (i)(III)
as incurred on the date that
the original indebtedness was
incurred to the extent the
amount of the indebtedness
resulting from such refinancing
does not exceed the amount of
the refinanced indebtedness.
``(II) Limitation on period
of refinancing.--Subclause (I)
shall not apply to any
indebtedness after the
expiration of the term of the
original indebtedness or, 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) Coordination with exclusion
of income from discharge of
indebtedness.--Section 108(h)(2) shall
be applied without regard to this
subparagraph.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11044. MODIFICATION OF DEDUCTION FOR PERSONAL CASUALTY LOSSES.
(a) In General.--Subsection (h) of section 165 is amended
by adding at the end the following new paragraph:
``(5) Limitation for taxable years 2018 through
2025.--
``(A) In general.--In the case of an
individual, except as provided in subparagraph
(B), any personal casualty loss which (but for
this paragraph) would be deductible in a
taxable year beginning after December 31, 2017,
and before January 1, 2026, shall be allowed as
a deduction under subsection (a) only to the
extent it is attributable to a Federally
declared disaster (as defined in subsection
(i)(5)).
``(B) Exception related to personal
casualty gains.--If a taxpayer has personal
casualty gains for any taxable year to which
subparagraph (A) applies--
``(i) subparagraph (A) shall not
apply to the portion of the personal
casualty loss not attributable to a
Federally declared disaster (as so
defined) to the extent such loss does
not exceed such gains, and
``(ii) in applying paragraph (2)
for purposes of subparagraph (A) to the
portion of personal casualty loss which
is so attributable to such a disaster,
the amount of personal casualty gains
taken into account under paragraph
(2)(A) shall be reduced by the portion
of such gains taken into account under
clause (i).''.
(b) Effective Date.--The amendment made by this section
shall apply to losses incurred in taxable years beginning after
December 31, 2017.
SEC. 11045. SUSPENSION OF MISCELLANEOUS ITEMIZED DEDUCTIONS.
(a) In General.--Section 67 is amended by adding at the end
the following new subsection:
``(g) Suspension for Taxable Years 2018 Through 2025.--
Notwithstanding subsection (a), no miscellaneous itemized
deduction shall be allowed for any taxable year beginning after
December 31, 2017, and before January 1, 2026.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11046. SUSPENSION OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.
(a) In General.--Section 68 is amended by adding at the end
the following new subsection:
``(f) Section Not to Apply.--This section shall not apply
to any taxable year beginning after December 31, 2017, and
before January 1, 2026.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11047. SUSPENSION OF EXCLUSION FOR QUALIFIED BICYCLE COMMUTING
REIMBURSEMENT.
(a) In General.--Section 132(f) is amended by adding at the
end the following new paragraph:
``(8) Suspension of qualified bicycle commuting
reimbursement exclusion.--Paragraph (1)(D) shall not
apply to any taxable year beginning after December 31,
2017, and before January 1, 2026.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11048. SUSPENSION OF EXCLUSION FOR QUALIFIED MOVING EXPENSE
REIMBURSEMENT.
(a) In General.--Section 132(g) is amended--
(1) by striking ``For purposes of this section, the
term'' and inserting ``For purposes of this section--
``(1) In general.--The term'', and
(2) by adding at the end the following new
paragraph:
``(2) Suspension for taxable years 2018 through
2025.--Except in the case of a member of the Armed
Forces of the United States on active duty who moves
pursuant to a military order and incident to a
permanent change of station, subsection (a)(6) shall
not apply to any taxable year beginning after December
31, 2017, and before January 1, 2026.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11049. SUSPENSION OF DEDUCTION FOR MOVING EXPENSES.
(a) In General.--Section 217 is amended by adding at the
end the following new subsection:
``(k) Suspension of Deduction for Taxable Years 2018
Through 2025.--Except in the case of an individual to whom
subsection (g) applies, this section shall not apply to any
taxable year beginning after December 31, 2017, and before
January 1, 2026.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11050. 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, in
the case of taxable years beginning after December 31, 2017,
and before January 1, 2026, 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 amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 11051. 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)''.
(C) Section 6724(d)(3) is amended by
striking subparagraph (C) and by redesignating
subparagraph (D) as subparagraph (C).
(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 152(d)(5) is amended to read as
follows:
``(5) Special rules for support.--
``(A) In general.--For purposes of this
subsection--
``(i) payments to a spouse of
alimony or separate maintenance
payments shall not be treated as a
payment by the payor spouse for the
support of any dependent, and
``(ii) in the case of the
remarriage of a parent, support of a
child received from the parent's spouse
shall be treated as received from the
parent.
``(B) Alimony or separate maintenance
payment.--For purposes of subparagraph (A), the
term `alimony or separate maintenance payment'
means any payment in cash if--
``(i) such payment is received by
(or on behalf of) a spouse under a
divorce or separation instrument (as
defined in section 121(d)(3)(C)),
``(ii) in the case of an individual
legally separated from the individual's
spouse under a decree of divorce or of
separate maintenance, the payee spouse
and the payor spouse are not members of
the same household at the time such
payment is made, and
``(iii) there is no liability to
make any such payment for any period
after the death of the payee spouse and
there is no liability to make any
payment (in cash or property) as a
substitute for such payments after the
death of the payee spouse.''.
(C) Section 219(f)(1) is amended by
striking the third sentence.
(D) 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)''.
(E) 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)''.
(F) Section 382(l)(3)(B)(iii) is amended by
striking ``section 71(b)(2)'' and inserting
``section 121(d)(3)(C)''.
(G) 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)''.
(4) Additional conforming amendments.--Section
7701(a)(17) is amended--
(A) by striking ``sections 682 and 2516''
and inserting ``section 2516'', and
(B) by striking ``such sections'' each
place it appears and inserting ``such
section''.
(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,
2018, 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.
PART VI--INCREASE IN ESTATE AND GIFT TAX EXEMPTION
SEC. 11061. INCREASE IN ESTATE AND GIFT TAX EXEMPTION.
(a) In General.--Section 2010(c)(3) is amended by adding at
the end the following new subparagraph:
``(C) Increase in basic exclusion amount.--
In the case of estates of decedents dying or
gifts made after December 31, 2017, and before
January 1, 2026, subparagraph (A) shall be
applied by substituting `$10,000,000' for
`$5,000,000'.''.
(b) Conforming Amendment.--Subsection (g) of section 2001
is amended to read as follows:
``(g) Modifications to Tax Payable.--
``(1) Modifications to gift tax payable to reflect
different tax rates.--For purposes of applying
subsection (b)(2) with respect to 1 or more gifts, the
rates of tax under subsection (c) in effect at the
decedent's death shall, in lieu of the rates of tax in
effect at the time of such gifts, be used both to
compute--
``(A) the tax imposed by chapter 12 with
respect to such gifts, and
``(B) the credit allowed against such tax
under section 2505, including in computing--
``(i) the applicable credit amount
under section 2505(a)(1), and
``(ii) the sum of the amounts
allowed as a credit for all preceding
periods under section 2505(a)(2).
``(2) Modifications to estate tax payable to
reflect different basic exclusion amounts.--The
Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out this section with
respect to any difference between--
``(A) the basic exclusion amount under
section 2010(c)(3) applicable at the time of
the decedent's death, and
``(B) the basic exclusion amount under such
section applicable with respect to any gifts
made by the decedent.''.
(c) Effective Date.--The amendments made by this section
shall apply to estates of decedents dying and gifts made after
December 31, 2017.
PART VII--EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY
SEC. 11071. EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY.
(a) Extension of Time for Return of Property Subject to
Levy.--Subsection (b) of section 6343 is amended by striking
``9 months'' and inserting ``2 years''.
(b) Period of Limitation on Suits.--Subsection (c) of
section 6532 is amended--
(1) by striking ``9 months'' in paragraph (1) and
inserting ``2 years'', and
(2) by striking ``9-month'' in paragraph (2) and
inserting ``2-year''.
(c) Effective Date.--The amendments made by this section
shall apply to--
(1) levies made after the date of the enactment of
this Act, and
(2) levies made on or before such date if the 9-
month period has not expired under section 6343(b) of
the Internal Revenue Code of 1986 (without regard to
this section) as of such date.
PART VIII--INDIVIDUAL MANDATE
SEC. 11081. ELIMINATION OF SHARED RESPONSIBILITY PAYMENT FOR
INDIVIDUALS FAILING TO MAINTAIN MINIMUM ESSENTIAL
COVERAGE.
(a) In General.--Section 5000A(c) is amended--
(1) in paragraph (2)(B)(iii), by striking ``2.5
percent'' and inserting ``Zero percent'', and
(2) in paragraph (3)--
(A) by striking ``$695'' in subparagraph
(A) and inserting ``$0'', and
(B) by striking subparagraph (D).
(b) Effective Date.--The amendments made by this section
shall apply to months beginning after December 31, 2018.
Subtitle B--Alternative Minimum Tax
SEC. 12001. REPEAL OF TAX FOR CORPORATIONS.
(a) In General.--Section 55(a) is amended by striking
``There'' and inserting ``In the case of a taxpayer other than
a corporation, there''.
(b) Conforming Amendments.--
(1) Section 38(c)(6) is amended by adding at the
end the following new subparagraph:
``(E) Corporations.--In the case of a
corporation, this subsection shall be applied
by treating the corporation as having a
tentative minimum tax of zero.''.
(2) Section 53(d)(2) is amended by inserting ``,
except that in the case of a corporation, the tentative
minimum tax shall be treated as zero'' before the
period at the end.
(3)(A) Section 55(b)(1) is amended to read as
follows:
``(1) Amount of tentative tax.--
``(A) In general.--The tentative minimum
tax for the taxable year is the sum of--
``(i) 26 percent of so much of the
taxable excess as does not exceed
$175,000, plus
``(ii) 28 percent of so much of the
taxable excess as exceeds $175,000.
The amount determined under the preceding
sentence shall be reduced by the alternative
minimum tax foreign tax credit for the taxable
year.
``(B) Taxable excess.--For purposes of this
subsection, the term `taxable excess' means so
much of the alternative minimum taxable income
for the taxable year as exceeds the exemption
amount.
``(C) Married individual filing separate
return.--In the case of a married individual
filing a separate return, subparagraph (A)
shall be applied by substituting 50 percent of
the dollar amount otherwise applicable under
clause (i) and clause (ii) thereof. For
purposes of the preceding sentence, marital
status shall be determined under section
7703.''.
(B) Section 55(b)(3) is amended by striking
``paragraph (1)(A)(i)'' and inserting ``paragraph
(1)(A)''.
(C) Section 59(a) is amended--
(i) by striking ``subparagraph (A)(i) or
(B)(i) of section 55(b)(1) (whichever applies)
in lieu of the highest rate of tax specified in
section 1 or 11 (whichever applies)'' in
paragraph (1)(C) and inserting ``section
55(b)(1) in lieu of the highest rate of tax
specified in section 1'', and
(ii) in paragraph (2), by striking
``means'' and all that follows and inserting
``means the amount determined under the first
sentence of section 55(b)(1)(A).''.
(D) Section 897(a)(2)(A) is amended by striking
``section 55(b)(1)(A)'' and inserting ``section
55(b)(1)''.
(E) Section 911(f) is amended--
(i) in paragraph (1)(B)--
(I) by striking ``section
55(b)(1)(A)(ii)'' and inserting
``section 55(b)(1)(B)'', and
(II) by striking ``section
55(b)(1)(A)(i)'' and inserting
``section 55(b)(1)(A)'', and
(ii) in paragraph (2)(B), by striking
``section 55(b)(1)(A)(ii)'' each place it
appears and inserting ``section 55(b)(1)(B)''.
(4) Section 55(c)(1) is amended by striking ``, the
section 936 credit allowable under section 27(b), and
the Puerto Rico economic activity credit under section
30A''.
(5) Section 55(d), as amended by section 11002, is
amended--
(A) by striking paragraph (2) and
redesignating paragraphs (3) and (4) as
paragraphs (2) and (3), respectively,
(B) in paragraph (2) (as so redesignated),
by inserting ``and'' at the end of subparagraph
(B), by striking ``, and'' at the end of
subparagraph (C) and inserting a period, and by
striking subparagraph (D), and
(C) in paragraph (3) (as so redesignated)--
(i) by striking ``(b)(1)(A)(i)'' in
subparagraph (B)(i) and inserting
``(b)(1)(A)'', and
(ii) by striking ``paragraph (3)''
in subparagraph (B)(iii) and inserting
``paragraph (2)''.
(6) Section 55 is amended by striking subsection
(e).
(7) Section 56(b)(2) is amended by striking
subparagraph (C) and by redesignating subparagraph (D)
as subparagraph (C).
(8)(A) Section 56 is amended by striking
subsections (c) and (g).
(B) Section 847 is amended by striking the last
sentence of paragraph (9).
(C) Section 848 is amended by striking subsection
(i).
(9) Section 58(a) is amended by striking paragraph
(3) and redesignating paragraph (4) as paragraph (3).
(10) Section 59 is amended by striking subsections
(b) and (f).
(11) Section 11(d) is amended by striking ``the
taxes imposed by subsection (a) and section 55'' and
inserting ``the tax imposed by subsection (a)''.
(12) Section 12 is amended by striking paragraph
(7).
(13) Section 168(k) is amended by striking
paragraph (4).
(14) Section 882(a)(1) is amended by striking ``,
55,''.
(15) Section 962(a)(1) is amended by striking
``sections 11 and 55'' and inserting ``section 11''.
(16) 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.
(17) Section 6425(c)(1)(A) is amended to read as
follows:
``(A) the tax imposed by section 11 or
1201(a), or subchapter L of chapter 1,
whichever is applicable, over''.
(18) Section 6655(e)(2) is amended by striking
``and alternative minimum taxable income'' each place
it appears in subparagraphs (A) and (B)(i).
(19) Section 6655(g)(1)(A) is amended by inserting
``plus'' at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 12002. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY OF
CORPORATIONS.
(a) 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
of a corporation beginning in 2018, 2019, 2020, or
2021, 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 2021) 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.''.
(b) Treatment of References.--Section 53(d) is amended by
adding at the end the following new paragraph:
``(3) AMT term references.--In the case of a
corporation, any references in this subsection to
section 55, 56, or 57 shall be treated as a reference
to such section as in effect before the amendments made
by Tax Cuts and Jobs Act.''.
(c) Conforming Amendment.--Section 1374(b)(3)(B) is amended
by striking the last sentence thereof.
(d) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to taxable years beginning after
December 31, 2017.
(2) Conforming amendment.--The amendment made by
subsection (c) shall apply to taxable years beginning
after December 31, 2021.
SEC. 12003. INCREASED EXEMPTION FOR INDIVIDUALS.
(a) In General.--Section 55(d), as amended by the preceding
provisions of this Act, is amended by adding at the end the
following new paragraph:
``(4) Special rule for taxable years beginning
after 2017 and before 2026.--
``(A) In general.--In the case of any
taxable year beginning after December 31, 2017,
and before January 1, 2026--
``(i) paragraph (1) shall be
applied--
``(I) by substituting
`$109,400' for `$78,750' in
subparagraph (A), and
``(II) by substituting
`$70,300' for `$50,600' in
subparagraph (B), and
``(ii) paragraph (2) shall be
applied--
``(I) by substituting
`$1,000,000' for `$150,000' in
subparagraph (A),
``(II) by substituting `50
percent of the dollar amount
applicable under subparagraph
(A)' for `$112,500' in
subparagraph (B), and
``(III) in the case of a
taxpayer described in paragraph
(1)(D), without regard to the
substitution under subclause
(I).
``(B) Inflation adjustment.--
``(i) In general.--In the case of
any taxable year beginning in a
calendar year after 2018, the amounts
described in clause (ii) shall each be
increased by an amount equal to--
``(I) such dollar amount,
multiplied by
``(II) the cost-of-living
adjustment determined under
section 1(f)(3) 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.
``(ii) Amounts described.--The
amounts described in this clause are
the $109,400 amount in subparagraph
(A)(i)(I), the $70,300 amount in
subparagraph (A)(i)(II), and the
$1,000,000 amount in subparagraph
(A)(ii)(I).
``(iii) Rounding.--Any increased
amount determined under clause (i)
shall be rounded to the nearest
multiple of $100.
``(iv) Coordination with current
adjustments.--In the case of any
taxable year to which subparagraph (A)
applies, no adjustment shall be made
under paragraph (3) to any of the
numbers which are substituted under
subparagraph (A) and adjusted under
this subparagraph.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
Subtitle C--Business-related Provisions
PART I--CORPORATE PROVISIONS
SEC. 13001. 21-PERCENT CORPORATE TAX RATE.
(a) In General.--Subsection (b) of section 11 is amended to
read as follows:
``(b) Amount of Tax.--The amount of the tax imposed by
subsection (a) shall be 21 percent of taxable income.''.
(b) Conforming Amendments.--
(1) The following sections are each amended by
striking ``section 11(b)(1)'' and inserting ``section
11(b)'':
(A) Section 280C(c)(3)(B)(ii)(II).
(B) Paragraphs (2)(B) and (6)(A)(ii) of
section 860E(e).
(C) Section 7874(e)(1)(B).
(2)(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 paragraphs
(4) and (6), and by redesignating paragraph (5) as
paragraph (4).
(C) Section 453A(c)(3) is amended by striking ``or
1201 (whichever is appropriate)''.
(D) 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''.
(E) Sections 594(a) is amended by striking ``taxes
imposed by section 11 or 1201(a)'' and inserting ``tax
imposed by section 11''.
(F) Section 691(c)(4) is amended by striking
``1201,''.
(G) 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''.
(H) Section 831(e) is amended by striking paragraph
(1) and by redesignating paragraphs (2) and (3) as
paragraphs (1) and (2), respectively.
(I) Sections 832(c)(5) and 834(b)(1)(D) are each
amended by striking ``sec. 1201 and following,''.
(J) Section 852(b)(3)(A) is amended by striking
``section 1201(a)'' and inserting ``section 11(b)''.
(K) 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.''.
(L) Section 882(a)(1), as amended by section 12001,
is further amended by striking ``or 1201(a)''.
(M) Section 904(b) is amended--
(i) by striking ``or 1201(a)'' in paragraph
(2)(C),
(ii) by striking paragraph (3)(D) and
inserting the following:
``(D) Capital gain rate differential.--
There is a capital gain rate differential for
any year if subsection (h) of section 1 applies
to such taxable year.'', and
(iii) by striking paragraph (3)(E) and
inserting the following:
``(E) Rate differential portion.--The rate
differential portion of foreign source net
capital gain, net capital gain, or the excess
of net capital gain from sources within the
United States over net capital gain, as the
case may be, is the same proportion of such
amount as--
``(i) the excess of--
``(I) the highest rate of
tax set forth in subsection
(a), (b), (c), (d), or (e) of
section 1 (whichever applies),
over
``(II) the alternative rate
of tax determined under section
1(h), bears to
``(ii) that rate referred to in
subclause (I).''.
(N) Section 1374(b) is amended by striking
paragraph (4).
(O) Section 1381(b) is amended by striking ``taxes
imposed by section 11 or 1201'' and inserting ``tax
imposed by section 11''.
(P) Sections 6425(c)(1)(A), as amended by section
12001, and 6655(g)(1)(A)(i) are each amended by
striking ``or 1201(a),''.
(Q) Section 7518(g)(6)(A) is amended by striking
``or 1201(a)''.
(3)(A) Section 1445(e)(1) is amended--
(i) by striking ``35 percent'' and
inserting ``the highest rate of tax in effect
for the taxable year under section 11(b)'', and
(ii) by striking ``of the gain'' and
inserting ``multiplied by the gain''.
(B) Section 1445(e)(2) is amended by striking ``35
percent of the amount'' and inserting ``the highest
rate of tax in effect for the taxable year under
section 11(b) multiplied by the amount''.
(C) Section 1445(e)(6) is amended--
(i) by striking ``35 percent'' and
inserting ``the highest rate of tax in effect
for the taxable year under section 11(b)'', and
(ii) by striking ``of the amount'' and
inserting ``multiplied by the amount''.
(D) Section 1446(b)(2)(B) is amended by striking
``section 11(b)(1)'' and inserting ``section 11(b)''.
(4) Section 852(b)(1) is amended by striking the
last sentence.
(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 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 section 12001,
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) Effective Date.--
(1) In general.--Except as otherwise provided in
this subsection, the amendments made by subsections (a)
and (b) shall apply to taxable years beginning after
December 31, 2017.
(2) Withholding.--The amendments made by subsection
(b)(3) shall apply to distributions made after December
31, 2017.
(3) Certain transfers.--The amendments made by
subsection (b)(6) shall apply to transfers made after
December 31, 2017.
(d) 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 of the day
before the corporate rate reductions
provided in the amendments made by this
section take effect, 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, during
the time period in which the 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 for the corporate
rate reductions provided in the amendments made by this
section--
(A) 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, and
(B) such taxpayer shall not be treated as
using a normalization method of accounting for
purposes of subsections (f)(2) and (i)(9)(C) of
section 168 of the Internal Revenue Code of
1986.
SEC. 13002. REDUCTION IN DIVIDEND RECEIVED DEDUCTIONS TO REFLECT LOWER
CORPORATE INCOME TAX RATES.
(a) Dividends Received by Corporations.--
(1) In general.--Section 243(a)(1) is amended by
striking ``70 percent'' and inserting ``50 percent''.
(2) Dividends from 20-percent owned corporations.--
Section 243(c)(1) is amended--
(A) by striking ``80 percent'' and
inserting ``65 percent'', and
(B) by striking ``70 percent'' and
inserting ``50 percent''.
(3) Conforming amendment.--The heading for section
243(c) is amended by striking ``Retention of 80-percent
Dividend Received Deduction'' and inserting ``Increased
Percentage''.
(b) Dividends Received From FSC.--Section 245(c)(1)(B) is
amended--
(1) by striking ``70 percent'' and inserting ``50
percent'', and
(2) by striking ``80 percent'' and inserting ``65
percent''.
(c) Limitation on Aggregate Amount of Deductions.--Section
246(b)(3) is amended--
(1) by striking ``80 percent'' in subparagraph (A)
and inserting ``65 percent'', and
(2) by striking ``70 percent'' in subparagraph (B)
and inserting ``50 percent''.
(d) Reduction in Deduction Where Portfolio Stock Is Debt-
financed.--Section 246A(a)(1) is amended--
(1) by striking ``70 percent'' and inserting ``50
percent'', and
(2) by striking ``80 percent'' and inserting ``65
percent''.
(e) Income From Sources Within the United States.--Section
861(a)(2) is amended--
(1) by striking ``100/70th'' and inserting ``100/
50th'' in subparagraph (B), and
(2) in the flush sentence at the end--
(A) by striking ``100/80th'' and inserting
``100/65th'', and
(B) by striking ``100/70th'' and inserting
``100/50th''.
(f) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
PART II--SMALL BUSINESS REFORMS
SEC. 13101. MODIFICATIONS OF RULES FOR EXPENSING DEPRECIABLE BUSINESS
ASSETS.
(a) Increase in Limitation.--
(1) Dollar limitation.--Section 179(b)(1) is
amended by striking ``$500,000'' and inserting
``$1,000,000''.
(2) Reduction in limitation.--Section 179(b)(2) is
amended by striking ``$2,000,000'' and inserting
``$2,500,000''.
(3) Inflation adjustments.--
(A) In general.--Subparagraph (A) of
section 179(b)(6), as amended by section
11002(d), is amended--
(i) by striking ``2015'' and
inserting ``2018'', and
(ii) in clause (ii), by striking
``calendar year 2014'' and inserting
``calendar year 2017''.
(B) Sport utility vehicles.--Section
179(b)(6) is amended--
(i) in subparagraph (A), by
striking ``paragraphs (1) and (2)'' and
inserting ``paragraphs (1), (2), and
(5)(A)'', and
(ii) in subparagraph (B), by
inserting ``($100 in the case of any
increase in the amount under paragraph
(5)(A))'' after ``$10,000''.
(b) Section 179 Property To Include Qualified Real
Property.--
(1) In general.--Subparagraph (B) of section
179(d)(1) is amended to read as follows:
``(B) which is--
``(i) section 1245 property (as
defined in section 1245(a)(3)), or
``(ii) at the election of the
taxpayer, qualified real property (as
defined in subsection (f)), and''.
(2) Qualified real property defined.--Subsection
(f) of section 179 is amended to read as follows:
``(f) Qualified Real Property.--For purposes of this
section, the term `qualified real property' means--
``(1) any qualified improvement property described
in section 168(e)(6), and
``(2) any of the following improvements to
nonresidential real property placed in service after
the date such property was first placed in service:
``(A) Roofs.
``(B) Heating, ventilation, and air-
conditioning property.
``(C) Fire protection and alarm systems.
``(D) Security systems.''.
(c) Repeal of Exclusion for Certain Property.--The last
sentence of section 179(d)(1) is amended by inserting ``(other
than paragraph (2) thereof)'' after ``section 50(b)''.
(d) Effective Date.--The amendments made by this section
shall apply to property placed in service in taxable years
beginning after December 31, 2017.
SEC. 13102. 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(f)(3) 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' has the meaning given the term in section
451(b)(3).
``(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.
PART III--COST RECOVERY AND ACCOUNTING METHODS
Subpart A--Cost Recovery
SEC. 13201. TEMPORARY 100-PERCENT EXPENSING FOR CERTAIN BUSINESS
ASSETS.
(a) Increased Expensing.--
(1) In general.--Section 168(k) is amended--
(A) in paragraph (1)(A), by striking ``50
percent'' and inserting ``the applicable
percentage'', and
(B) in paragraph (5)(A)(i), by striking
``50 percent'' and inserting ``the applicable
percentage''.
(2) Applicable percentage.--Paragraph (6) of
section 168(k) is amended to read as follows:
``(6) Applicable percentage.--For purposes of this
subsection--
``(A) In general.--Except as otherwise
provided in this paragraph, the term
`applicable percentage' means--
``(i) in the case of property
placed in service after September 27,
2017, and before January 1, 2023, 100
percent,
``(ii) in the case of property
placed in service after December 31,
2022, and before January 1, 2024, 80
percent,
``(iii) in the case of property
placed in service after December 31,
2023, and before January 1, 2025, 60
percent,
``(iv) in the case of property
placed in service after December 31,
2024, and before January 1, 2026, 40
percent, and
``(v) in the case of property
placed in service after December 31,
2025, and before January 1, 2027, 20
percent.
``(B) Rule for property with longer
production periods.--In the case of property
described in subparagraph (B) or (C) of
paragraph (2), the term `applicable percentage'
means--
``(i) in the case of property
placed in service after September 27,
2017, and before January 1, 2024, 100
percent,
``(ii) in the case of property
placed in service after December 31,
2023, and before January 1, 2025, 80
percent,
``(iii) in the case of property
placed in service after December 31,
2024, and before January 1, 2026, 60
percent,
``(iv) in the case of property
placed in service after December 31,
2025, and before January 1, 2027, 40
percent, and
``(v) in the case of property
placed in service after December 31,
2026, and before January 1, 2028, 20
percent.
``(C) Rule for plants bearing fruits and
nuts.--In the case of a specified plant
described in paragraph (5), the term
`applicable percentage' means--
``(i) in the case of a plant which
is planted or grafted after September
27, 2017, and before January 1, 2023,
100 percent,
``(ii) in the case of a plant which
is planted or grafted after December
31, 2022, and before January 1, 2024,
80 percent,
``(iii) in the case of a plant
which is planted or grafted after
December 31, 2023, and before January
1, 2025, 60 percent,
``(iv) in the case of a plant which
is planted or grafted after December
31, 2024, and before January 1, 2026,
40 percent, and
``(v) in the case of a plant which
is planted or grafted after December
31, 2025, and before January 1, 2027,
20 percent.''.
(3) Conforming amendment.--
(A) Paragraph (5) of section 168(k) is
amended by striking subparagraph (F).
(B) Section 168(k) is amended by adding at
the end the following new paragraph:
``(8) 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 (6) shall be applied by
substituting for each percentage therein--
``(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,
``(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,
and
``(D) `0 percent' in the case of--
``(i) property placed in service
after 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 after
2020.''.
(b) Extension.--
(1) In general.--Section 168(k) is amended--
(A) in paragraph (2)--
(i) in subparagraph (A)(iii),
clauses (i)(III) and (ii) of
subparagraph (B), and subparagraph
(E)(i), by striking ``January 1, 2020''
each place it appears and inserting
``January 1, 2027'', and
(ii) in subparagraph (B)--
(I) in clause (i)(II), by
striking ``January 1, 2021''
and inserting ``January 1,
2028'', and
(II) in the heading of
clause (ii), by striking ``pre-
january 1, 2020'' and inserting
``pre-january 1, 2027'', and
(B) in paragraph (5)(A), by striking
``January 1, 2020'' and inserting ``January 1,
2027''.
(2) Conforming amendments.--
(A) Clause (ii) of section 460(c)(6)(B) is
amended by striking ``January 1, 2020 (January
1, 2021'' and inserting ``January 1, 2027
(January 1, 2028''.
(B) The heading of section 168(k) is
amended by striking ``Acquired After December
31, 2007, and Before January 1, 2020''.
(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 Property.--Section 168(k), as
amended by this section, is amended by adding at the end the
following new paragraph:
``(9) Exception for certain property.--The term
`qualified property' shall not include--
``(A) any property which is primarily used
in a trade or business described in clause (iv)
of section 163(j)(7)(A), or
``(B) any property used in 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) Special Rule.--Section 168(k), as amended by this
section, is amended by adding at the end the following new
paragraph:
``(10) Special rule for property placed in service
during certain periods.--
``(A) In general.--In the case of qualified
property placed in service by the taxpayer
during the first taxable year ending after
September 27, 2017, if the taxpayer elects to
have this paragraph apply for such taxable
year, paragraphs (1)(A) and (5)(A)(i) shall be
applied by substituting `50 percent' for `the
applicable percentage'.
``(B) Form of election.--Any election under
this paragraph shall be made at such time and
in such form and manner as the Secretary may
prescribe.''.
(f) Coordination With Section 280F.--Clause (iii) of
section 168(k)(2)(F) is amended 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''.
(g) Qualified Film and Television and Live Theatrical
Productions.--
(1) In general.--Clause (i) of section
168(k)(2)(A), as amended by section 13204, is amended--
(A) in subclause (II), by striking ``or'',
(B) in subclause (III), by adding ``or''
after the comma, and
(C) by adding at the end the following:
``(IV) which is a qualified film or
television production (as defined in
subsection (d) of section 181) for
which a deduction would have been
allowable under section 181 without
regard to subsections (a)(2) and (g) of
such section or this subsection, or
``(V) which is a qualified live
theatrical production (as defined in
subsection (e) of section 181) for
which a deduction would have been
allowable under section 181 without
regard to subsections (a)(2) and (g) of
such section or this subsection,''.
(2) Production placed in service.--Paragraph (2) of
section 168(k) is amended by adding at the end the
following:
``(H) Production placed in service.--For
purposes of subparagraph (A)--
``(i) a qualified film or
television production shall be
considered to be placed in service at
the time of initial release or
broadcast, and
``(ii) a qualified live theatrical
production shall be considered to be
placed in service at the time of the
initial live staged performance.''.
(h) Effective Date.--
(1) In general.--Except as 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 this
section shall apply to specified plants planted or
grafted after September 27, 2017.
SEC. 13202. MODIFICATIONS TO DEPRECIATION LIMITATIONS ON LUXURY
AUTOMOBILES AND PERSONAL USE PROPERTY.
(a) Luxury Automobiles.--
(1) In general.--280F(a)(1)(A) is amended--
(A) in clause (i), by striking ``$2,560''
and inserting ``$10,000'',
(B) in clause (ii), by striking ``$4,100''
and inserting ``$16,000'',
(C) in clause (iii), by striking ``$2,450''
and inserting ``$9,600'', and
(D) in clause (iv), by striking ``$1,475''
and inserting ``$5,760''.
(2) Conforming amendments.--
(A) Clause (ii) of section 280F(a)(1)(B) is
amended by striking ``$1,475'' in the text and
heading and inserting ``$5,760''.
(B) Paragraph (7) of section 280F(d) is
amended--
(i) in subparagraph (A), by
striking ``1988'' and inserting
``2018'', and
(ii) in subparagraph (B)(i)(II), by
striking ``1987'' and inserting
``2017''.
(b) Removal of Computer Equipment From Listed Property.--
(1) In general.--Section 280F(d)(4)(A) is amended--
(A) by inserting ``and'' at the end of
clause (iii),
(B) by striking clause (iv), and
(C) by redesignating clause (v) as clause
(iv).
(2) Conforming amendment.--Section 280F(d)(4) is
amended by striking subparagraph (B) and by
redesignating subparagraph (C) as subparagraph (B).
(c) Effective Date.--The amendments made by this section
shall apply to property placed in service after December 31,
2017, in taxable years ending after such date.
SEC. 13203. MODIFICATIONS OF TREATMENT OF CERTAIN FARM PROPERTY.
(a) Treatment of Certain Farm Property as 5-Year
Property.--Clause (vii) of section 168(e)(3)(B) is amended by
striking ``after December 31, 2008, and which is placed in
service before January 1, 2010'' and inserting ``after December
31, 2017''.
(b) Repeal of Required Use of 150-Percent Declining Balance
Method.--Section 168(b)(2) is amended by striking subparagraph
(B) and by redesignating subparagraphs (C) and (D) as
subparagraphs (B) and (C), respectively.
(c) Effective Date.--The amendments made by this section
shall apply to property placed in service after December 31,
2017, in taxable years ending after such date.
SEC. 13204. APPLICABLE RECOVERY PERIOD FOR REAL PROPERTY.
(a) Improvements to Real Property.--
(1) Elimination of qualified leasehold improvement,
qualified restaurant, and qualified retail improvement
property.--Subsection (e) of section 168 is amended--
(A) in subparagraph (E) of paragraph (3)--
(i) by striking clauses (iv), (v),
and (ix),
(ii) in clause (vii), by inserting
``and'' at the end,
(iii) in clause (viii), by striking
``, and'' and inserting a period, and
(iv) by redesignating clauses (vi),
(vii), and (viii), as so amended, as
clauses (iv), (v), and (vi),
respectively, and
(B) by striking paragraphs (6), (7), and
(8).
(2) Application of straight line method to
qualified improvement property.--Paragraph (3) of
section 168(b) is amended--
(A) by striking subparagraphs (G), (H), and
(I), and
(B) by inserting after subparagraph (F) the
following new subparagraph:
``(G) Qualified improvement property
described in subsection (e)(6).''.
(3) Alternative depreciation system.--
(A) Electing real property trade or
business.--Subsection (g) of section 168 is
amended--
(i) in paragraph (1)--
(I) in subparagraph (D), by
striking ``and'' at the end,
(II) in subparagraph (E),
by inserting ``and'' at the
end, and
(III) by inserting after
subparagraph (E) the following
new subparagraph:
``(F) any property described in paragraph
(8),'', and
(ii) by adding at the end the
following new paragraph:
``(8) Electing real property trade or business.--
The property described in this paragraph shall consist
of any nonresidential real property, residential rental
property, and qualified improvement property held by an
electing real property trade or business (as defined in
163(j)(7)(B)).''.
(B) Qualified improvement property.--The
table contained in subparagraph (B) of section
168(g)(3) is amended--
(i) by inserting after the item
relating to subparagraph (D)(ii) the
following new item:
``(D)(v).................................................. 20''
, and
(ii) by striking the item relating
to subparagraph (E)(iv) and all that
follows through the item relating to
subparagraph (E)(ix) and inserting the
following:
``(E)(iv)................................................. 20
(E)(v).................................................... 30
(E)(vi)................................................... 35''.
(C) Applicable recovery period for
residential rental property.--The table
contained in subparagraph (C) of section
168(g)(2) is amended by striking clauses (iii)
and (iv) and inserting the following:
``(iii) Residential rental property....................... 30 years
(iv) Nonresidential real property......................... 40 years
(v) Any railroad grading or tunnel bore or water utility
property...............................................50 years''.
(4) Conforming amendments.--
(A) Clause (i) of section 168(k)(2)(A) is
amended--
(i) in subclause (II), by inserting
``or'' after the comma,
(ii) in subclause (III), by
striking ``or'' at the end, and
(iii) by striking subclause (IV).
(B) Section 168 is amended--
(i) in subsection (e), as amended
by paragraph (1)(B), by adding at the
end the following:
``(6) Qualified improvement property.--
``(A) In general.--The term `qualified
improvement property' means any improvement to
an interior portion of a building which is
nonresidential real property if such
improvement is placed in service after the date
such building was first placed in service.
``(B) Certain improvements not included.--
Such term shall not include any improvement for
which the expenditure is attributable to--
``(i) the enlargement of the
building,
``(ii) any elevator or escalator,
or
``(iii) the internal structural
framework of the building.'', and
(ii) in subsection (k), by striking
paragraph (3).
(b) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
property placed in service after December 31, 2017.
(2) Amendments related to electing real property
trade or business.--The amendments made by subsection
(a)(3)(A) shall apply to taxable years beginning after
December 31, 2017.
SEC. 13205. USE OF ALTERNATIVE DEPRECIATION SYSTEM FOR ELECTING FARMING
BUSINESSES.
(a) In General.--Section 168(g)(1), as amended by section
13204, is amended by striking ``and'' at the end of
subparagraph (E), by inserting ``and'' at the end of
subparagraph (F), and by inserting after subparagraph (F) the
following new subparagraph:
``(G) any property with a recovery period
of 10 years or more which is held by an
electing farming business (as defined in
section 163(j)(7)(C)),''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13206. 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) Change in Method of Accounting.--The amendments made by
subsection (a) shall be treated as a change in method of
accounting for purposes of section 481 of the Internal Revenue
Code of 1986 and--
(1) such change shall be treated as initiated by
the taxpayer,
(2) such change shall be treated as made with the
consent of the Secretary, and
(3) such change shall be applied only on a cut-off
basis for any research or experimental expenditures
paid or incurred in taxable years beginning after
December 31, 2021, and no adjustments under section
481(a) shall be made.
(c) 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.''.
(d) Conforming Amendments.--
(1) Section 41(d)(1)(A) is amended by striking
``expenses under section 174'' and inserting
``specified research or experimental expenditures under
section 174''.
(2) Subsection (c) of section 280C is amended--
(A) by striking paragraph (1) and inserting
the following:
``(1) In general.--If--
``(A) the amount of the credit determined
for the taxable year under section 41(a)(1),
exceeds
``(B) the amount allowable as a deduction
for such taxable year for qualified research
expenses or basic research expenses,
the amount chargeable to capital account for the
taxable year for such expenses shall be reduced by the
amount of such excess.'',
(B) by striking paragraph (2),
(C) by redesignating paragraphs (3) (as
amended by this Act) and (4) as paragraphs (2)
and (3), respectively, and
(D) in paragraph (2), as redesignated by
subparagraph (C), by striking ``paragraphs (1)
and (2)'' and inserting ``paragraph (1)''.
(e) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred in taxable years
beginning after December 31, 2021.
SEC. 13207. EXPENSING OF CERTAIN COSTS OF REPLANTING CITRUS PLANTS LOST
BY REASON OF CASUALTY.
(a) In General.--Section 263A(d)(2) is amended by adding at
the end the following new subparagraph:
``(C) Special temporary rule for citrus
plants lost by reason of casualty.--
``(i) In general.--In the case of
the replanting of citrus plants,
subparagraph (A) shall apply to amounts
paid or incurred by a person (other
than the taxpayer described in
subparagraph (A)) if--
``(I) the taxpayer
described in subparagraph (A)
has an equity interest of not
less than 50 percent in the
replanted citrus plants at all
times during the taxable year
in which such amounts were paid
or incurred and such other
person holds any part of the
remaining equity interest, or
``(II) such other person
acquired the entirety of such
taxpayer's equity interest in
the land on which the lost or
damaged citrus plants were
located at the time of such
loss or damage, and the
replanting is on such land.
``(ii) Termination.--Clause (i)
shall not apply to any cost paid or
incurred after the date which is 10
years after the date of the enactment
of the Tax Cuts and Jobs Act.''.
(b) Effective Date.--The amendment made by this section
shall apply to costs paid or incurred after the date of the
enactment of this Act.
Subpart B--Accounting Methods
SEC. 13221. CERTAIN SPECIAL RULES FOR TAXABLE YEAR OF INCLUSION.
(a) Inclusion Not Later Than for Financial Accounting
Purposes.--Section 451 is amended by redesignating subsections
(b) through (i) as subsections (c) through (j), respectively,
and by inserting after subsection (a) the following new
subsection:
``(b) Inclusion Not Later Than for Financial Accounting
Purposes.--
``(1) Income taken into account in financial
statement.--
``(A) In general.--In the case of a
taxpayer the taxable income of which is
computed under an accrual method of accounting,
the all events test with respect to any item of
gross income (or portion thereof) shall not be
treated as met any later than when such item
(or portion thereof) is taken into account as
revenue in--
``(i) an applicable financial
statement of the taxpayer, or
``(ii) such other financial
statement as the Secretary may specify
for purposes of this subsection.
``(B) Exception.--This paragraph shall not
apply to--
``(i) a taxpayer which does not
have a financial statement described in
clause (i) or (ii) of subparagraph (A)
for a taxable year, or
``(ii) any item of gross income in
connection with a mortgage servicing
contract.
``(C) All events test.--For purposes of
this section, the all events test is met with
respect to any item of gross income if all the
events have occurred which fix the right to
receive such income and the amount of such
income can be determined with reasonable
accuracy.
``(2) Coordination with special methods of
accounting.--Paragraph (1) shall not apply with respect
to any item of gross income for which the taxpayer uses
a special method of accounting provided under any other
provision of this chapter, other than any provision of
part V of subchapter P (except as provided in clause
(ii) of paragraph (1)(B)).
``(3) 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 agency for purposes
other than Federal tax purposes, but
only if there is no statement of the
taxpayer described in clause (i) or
(ii),
``(B) a financial statement which is made
on the basis of international financial
reporting standards and is filed by the
taxpayer with an agency of a foreign government
which is equivalent to the United States
Securities and Exchange Commission and which
has reporting standards not less stringent than
the standards required by such Commission, but
only if there is no statement of the taxpayer
described in subparagraph (A), or
``(C) a financial statement filed by the
taxpayer with any other regulatory or
governmental body specified by the Secretary,
but only if there is no statement of the
taxpayer described in subparagraph (A) or (B).
``(4) Allocation of transaction price.--For
purposes of this subsection, in the case of a contract
which contains multiple performance obligations, the
allocation of the transaction price to each performance
obligation shall be equal to the amount allocated to
each performance obligation for purposes of including
such item in revenue in the applicable financial
statement of the taxpayer.
``(5) Group of entities.--For purposes of paragraph
(1), if the financial results of a taxpayer are
reported on the applicable financial statement (as
defined in paragraph (3)) for a group of entities, such
statement shall be treated as the applicable financial
statement of the taxpayer.''.
(b) Treatment of Advance Payments.--Section 451, as amended
by subsection (a), is amended by redesignating subsections (c)
through (j) as subsections (d) through (k), respectively, and
by inserting after subsection (b) the following new subsection:
``(c) Treatment of Advance Payments.--
``(1) In general.--A taxpayer which computes
taxable income under the accrual method of accounting,
and receives any advance payment during the taxable
year, shall--
``(A) except as provided in subparagraph
(B), include such advance payment in gross
income for such taxable year, or
``(B) if the taxpayer elects the
application of this subparagraph with respect
to the category of advance payments to which
such advance payment belongs, the taxpayer
shall--
``(i) to the extent that any
portion of such advance payment is
required under subsection (b) to be
included in gross income in the taxable
year in which such payment is received,
so include such portion, and
``(ii) include the remaining
portion of such advance payment in
gross income in the taxable year
following the taxable year in which
such payment is received.
``(2) Election.--
``(A) In general.--Except as otherwise
provided in this paragraph, the election under
paragraph (1)(B) shall be made at such time, in
such form and manner, and with respect to such
categories of advance payments, as the
Secretary may provide.
``(B) Period to which election applies.--An
election under paragraph (1)(B) shall be
effective for the taxable year with respect to
which it is first made and for all subsequent
taxable years, unless the taxpayer secures the
consent of the Secretary to revoke such
election. For purposes of this title, the
computation of taxable income under an election
made under paragraph (1)(B) shall be treated as
a method of accounting.
``(3) Taxpayers ceasing to exist.--Except as
otherwise provided by the Secretary, the election under
paragraph (1)(B) shall not apply with respect to
advance payments received by the taxpayer during a
taxable year if such taxpayer ceases to exist during
(or with the close of) such taxable year.
``(4) Advance payment.--For purposes of this
subsection--
``(A) In general.--The term `advance
payment' means any payment--
``(i) the full inclusion of which
in the gross income of the taxpayer for
the taxable year of receipt is a
permissible method of accounting under
this section (determined without regard
to this subsection),
``(ii) any portion of which is
included in revenue by the taxpayer in
a financial statement described in
clause (i) or (ii) of subsection
(b)(1)(A) for a subsequent taxable
year, and
``(iii) which is for goods,
services, or such other items as may be
identified by the Secretary for
purposes of this clause.
``(B) Exclusions.--Except as otherwise
provided by the Secretary, such term shall not
include--
``(i) rent,
``(ii) insurance premiums governed
by subchapter L,
``(iii) payments with respect to
financial instruments,
``(iv) payments with respect to
warranty or guarantee contracts under
which a third party is the primary
obligor,
``(v) payments subject to section
871(a), 881, 1441, or 1442,
``(vi) payments in property to
which section 83 applies, and
``(vii) any other payment
identified by the Secretary for
purposes of this subparagraph.
``(C) Receipt.--For purposes of this
subsection, an item of gross income is received
by the taxpayer if it is actually or
constructively received, or if it is due and
payable to the taxpayer.
``(D) Allocation of transaction price.--For
purposes of this subsection, rules similar to
subsection (b)(4) shall apply.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
(d) Coordination With Section 481.--
(1) In general.--In the case of any qualified
change in method of accounting for the taxpayer's first
taxable year beginning after December 31, 2017--
(A) such change shall be treated as
initiated by the taxpayer, and
(B) such change shall be treated as made
with the consent of the Secretary of the
Treasury.
(2) Qualified change in method of accounting.--For
purposes of this subsection, the term ``qualified
change in method of accounting'' means any change in
method of accounting which--
(A) is required by the amendments made by
this section, or
(B) was prohibited under the Internal
Revenue Code of 1986 prior to such amendments
and is permitted under such Code after such
amendments.
(e) Special Rules for Original Issue Discount.--
Notwithstanding subsection (c), in the case of income from a
debt instrument having original issue discount--
(1) the amendments made by this section shall apply
to taxable years beginning after December 31, 2018, and
(2) the period for taking into account any
adjustments under section 481 by reason of a qualified
change in method of accounting (as defined in
subsection (d)) shall be 6 years.
PART IV--BUSINESS-RELATED EXCLUSIONS AND DEDUCTIONS
SEC. 13301. LIMITATION ON DEDUCTION FOR INTEREST.
(a) In General.--Section 163(j) is amended to read as
follows:
``(j) Limitation on Business Interest.--
``(1) In general.--The amount allowed as a
deduction under this chapter for any taxable year 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) shall not
be less than zero.
``(2) Carryforward of disallowed business
interest.--The amount of any business interest not
allowed as a deduction for any taxable year by reason
of paragraph (1) shall be treated as business interest
paid or accrued in the succeeding taxable year.
``(3) 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.
``(4) 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, and
``(ii) the adjusted taxable income
of each partner of such partnership--
``(I) shall be determined
without regard to such
partner's distributive share of
any items of income, gain,
deduction, or loss of such
partnership, and
``(II) shall be increased
by such partner's distributive
share of such partnership's
excess taxable income.
For purposes of clause (ii)(II), a
partner's distributive share of
partnership excess taxable income shall
be determined in the same manner as the
partner's distributive share of
nonseparately stated taxable income or
loss of the partnership.
``(B) Special rules for carryforwards.--
``(i) In general.--The amount of
any business interest not allowed as a
deduction to a partnership for any
taxable year by reason of paragraph (1)
for any taxable year--
``(I) shall not be treated
under paragraph (2) as business
interest paid or accrued by the
partnership in the succeeding
taxable year, and
``(II) shall, subject to
clause (ii), be treated as
excess business interest which
is allocated to each partner in
the same manner as the non-
separately stated taxable
income or loss of the
partnership.
``(ii) Treatment of excess business
interest allocated to partners.--If a
partner is allocated any excess
business interest from a partnership
under clause (i) for any taxable year--
``(I) such excess business
interest shall be treated as
business interest paid or
accrued by the partner in the
next succeeding taxable year in
which the partner is allocated
excess taxable income from such
partnership, but only to the
extent of such excess taxable
income, and
``(II) any portion of such
excess business interest
remaining after the application
of subclause (I) shall, subject
to the limitations of subclause
(I), be treated as business
interest paid or accrued in
succeeding taxable years.
For purposes of applying this
paragraph, excess taxable income
allocated to a partner from a
partnership for any taxable year shall
not be taken into account under
paragraph (1)(A) with respect to any
business interest other than excess
business interest from the partnership
until all such excess business interest
for such taxable year and all preceding
taxable years has been treated as paid
or accrued under clause (ii).
``(iii) Basis adjustments.--
``(I) In general.--The
adjusted basis of a partner in
a partnership interest shall be
reduced (but not below zero) by
the amount of excess business
interest allocated to the
partner under clause (i)(II).
``(II) Special rule for
dispositions.--If a partner
disposes of a partnership
interest, the adjusted basis of
the partner in the partnership
interest shall be increased
immediately before the
disposition by the amount of
the excess (if any) of the
amount of the basis reduction
under subclause (I) over the
portion of any excess business
interest allocated to the
partner under clause (i)(II)
which has previously been
treated under clause (ii) as
business interest paid or
accrued by the partner. The
preceding sentence shall also
apply to transfers of the
partnership interest (including
by reason of death) in a
transaction in which gain is
not recognized in whole or in
part. No deduction shall be
allowed to the transferor or
transferee under this chapter
for any excess business
interest resulting in a basis
increase under this subclause.
``(C) Excess taxable income.--The term
`excess taxable income' means, with respect to
any partnership, the amount which bears the
same ratio to the partnership's adjusted
taxable income as--
``(i) the excess (if any) of--
``(I) the amount determined
for the partnership under
paragraph (1)(B), over
``(II) the amount (if any)
by which the business interest
of the partnership, reduced by
the floor plan financing
interest, exceeds the business
interest income of the
partnership, bears to
``(ii) the amount determined for
the partnership under paragraph (1)(B).
``(D) Application to s corporations.--Rules
similar to the rules of subparagraphs (A) and
(C) shall apply with respect to any S
corporation and its shareholders.
``(5) 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)).
``(6) 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)).
``(7) Trade or business.--For purposes of this
subsection--
``(A) In general.--The term `trade or
business' shall not include--
``(i) the trade or business of
performing services as an employee,
``(ii) any electing real property
trade or business,
``(iii) any electing farming
business, or
``(iv) 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, by a public service or public
utility commission or other similar
body of any State or political
subdivision thereof, or by the
governing or ratemaking body of an
electric cooperative.
``(B) Electing real property trade or
business.--For purposes of this paragraph, the
term `electing real property trade or business'
means any trade or business which is described
in section 469(c)(7)(C) and which makes an
election under this subparagraph. Any such
election shall be made at such time and in such
manner as the Secretary shall prescribe, and,
once made, shall be irrevocable.
``(C) Electing farming business.--For
purposes of this paragraph, the term `electing
farming business' means--
``(i) a farming business (as
defined in section 263A(e)(4)) which
makes an election under this
subparagraph, or
``(ii) any trade or business of a
specified agricultural or horticultural
cooperative (as defined in section
199A(g)(2)) with respect to which the
cooperative makes an election under
this subparagraph.
Any such election shall be made at such time
and in such manner as the Secretary shall
prescribe, and, once made, shall be
irrevocable.
``(8) 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,
``(iv) the amount of any deduction
allowed under section 199A, and
``(v) in the case of taxable years
beginning before January 1, 2022, any
deduction allowable for depreciation,
amortization, or depletion, and
``(B) computed with such other adjustments
as provided by the Secretary.
``(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 or lease, 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) Any self-propelled vehicle
designed for transporting persons or
property on a public street, highway,
or road.
``(ii) A boat.
``(iii) Farm machinery or
equipment.
``(10) Cross references.--
``(A) For requirement that an electing real
property trade or business use the alternative
depreciation system, see section 168(g)(1)(F).
``(B) For requirement that an electing
farming business use the alternative
depreciation system, see section
168(g)(1)(G).''.
(b) 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 business
interest.--The carryover of disallowed business
interest described in section 163(j)(2) 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(j)(2) 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).''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13302. MODIFICATION OF NET OPERATING LOSS DEDUCTION.
(a) Limitation on Deduction.--
(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) 80 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'.''.
(b) Repeal of Net Operating Loss Carryback; Indefinite
Carryforward.--
(1) In general.--Section 172(b)(1)(A) is amended--
(A) by striking ``shall be a net operating
loss carryback to each of the 2 taxable years''
in clause (i) and inserting ``except as
otherwise provided in this paragraph, shall not
be a net operating loss carryback to any
taxable year'', and
(B) by striking ``to each of the 20 taxable
years'' in clause (ii) and inserting ``to each
taxable year''.
(2) Conforming amendment.--Section 172(b)(1) is
amended by striking subparagraphs (B) through (F).
(c) Treatment of Farming Losses.--
(1) Allowance of carrybacks.--Section 172(b)(1), as
amended by subsection (b)(2), is amended by adding at
the end the following new subparagraph:
``(B) Farming losses.--
``(i) In general.--In the case of
any portion of a net operating loss for
the taxable year which is a farming
loss with respect to the taxpayer, such
loss shall be a net operating loss
carryback to each of the 2 taxable
years preceding the taxable year of
such loss.
``(ii) Farming loss.--For purposes
of this section, the term `farming
loss' means the lesser of--
``(I) the amount which
would be the net operating loss
for the taxable year if only
income and deductions
attributable to farming
businesses (as defined in
section 263A(e)(4)) are taken
into account, or
``(II) the amount of the
net operating loss for such
taxable year.
``(iii) Coordination with paragraph
(2).--For purposes of applying
paragraph (2), a farming loss for any
taxable year shall be treated as a
separate net operating loss for such
taxable year to be taken into account
after the remaining portion of the net
operating loss for such taxable year.
``(iv) Election.--Any taxpayer
entitled to a 2-year carryback under
clause (i) from any loss year may elect
not to have such clause apply to such
loss year. Such election shall be made
in such manner as prescribed by the
Secretary and shall be made by the due
date (including extensions of time) for
filing the taxpayer's return for the
taxable year of the net operating loss.
Such election, once made for any
taxable year, shall be irrevocable for
such taxable year.''.
(2) Conforming amendments.--
(A) Section 172 is amended by striking
subsections (f), (g), and (h), and by
redesignating subsection (i) as subsection (f).
(B) Section 537(b)(4) is amended by
inserting ``(as in effect before the date of
enactment of the Tax Cuts and Jobs Act)'' after
``as defined in section 172(f)''.
(d) Treatment of Certain Insurance Losses.--
(1) Treatment of carryforwards and carrybacks.--
Section 172(b)(1), as amended by subsections (b)(2) and
(c)(1), is amended by adding at the end the following
new subparagraph:
``(C) Insurance companies.--In the case of
an insurance company (as defined in section
816(a)) other than a life insurance company,
the net operating loss for any taxable year--
``(i) shall be a net operating loss
carryback to each of the 2 taxable
years preceding the taxable year of
such loss, and
``(ii) shall be a net operating
loss carryover to each of the 20
taxable years following the taxable
year of the loss.''.
(2) Exemption from limitation.--Section 172, as
amended by subsection (c)(2)(A), is amended by
redesignating subsection (f) as subsection (g) and
inserting after subsection (e) the following new
subsection:
``(f) Special Rule for Insurance Companies.--In the case of
an insurance company (as defined in section 816(a)) other than
a life insurance company--
``(1) the amount of the deduction allowed under
subsection (a) shall be the aggregate of the net
operating loss carryovers to such year, plus the net
operating loss carrybacks to such year, and
``(2) subparagraph (C) of subsection (b)(2) shall
not apply.''.
(e) Effective Date.--
(1) Net operating loss limitation.--The amendments
made by subsections (a) and (d)(2) shall apply to
losses arising in taxable years beginning after
December 31, 2017.
(2) Carryforwards and carrybacks.--The amendments
made by subsections (b), (c), and (d)(1) shall apply to
net operating losses arising in taxable years ending
after December 31, 2017.
SEC. 13303. 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)(A) 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.''.
(B) Section 1031 is amended by striking subsection
(i).
(2) Section 1031 is amended by striking subsection
(e).
(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. 13304. LIMITATION ON DEDUCTION BY EMPLOYERS OF EXPENSES FOR FRINGE
BENEFITS.
(a) No Deduction Allowed for Entertainment Expenses.--
(1) In general.--Section 274(a) is amended--
(A) in paragraph (1)(A), by striking
``unless'' and all that follows through ``trade
or business,'',
(B) by striking the flush sentence at the
end of paragraph (1), and
(C) by striking paragraph (2)(C).
(2) Conforming amendments.--
(A) Section 274(d) is amended--
(i) by striking paragraph (2) and
redesignating paragraphs (3) and (4) as
paragraphs (2) and (3), respectively,
and
(ii) in the flush text following
paragraph (3) (as so redesignated)--
(I) by striking ``,
entertainment, amusement,
recreation, or use of the
facility or property,'' 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'',
(B) Section 274 is amended by striking
subsection (l).
(C) Section 274(n) is amended by striking
``and Entertainment'' in the heading.
(D) Section 274(n)(1) is amended to read as
follows:
``(1) In general.--The amount allowable as a
deduction under this chapter for any expense for food
or beverages shall not exceed 50 percent of the amount
of such expense which would (but for this paragraph) be
allowable as a deduction under this chapter.''.
(E) Section 274(n)(2) is amended--
(i) in subparagraph (B), by
striking ``in the case of an expense
for food or beverages,'',
(ii) by striking subparagraph (C)
and redesignating subparagraphs (D) and
(E) as subparagraphs (C) and (D),
respectively,
(iii) by striking ``of subparagraph
(E)'' the last sentence and inserting
``of subparagraph (D)'', and
(iv) by striking ``in subparagraph
(D)'' in the last sentence and
inserting ``in subparagraph (C)''.
(F) Clause (iv) of section 7701(b)(5)(A) is
amended to read as follows:
``(iv) a professional athlete who
is temporarily in the United States to
compete in a sports event--
``(I) which is organized
for the primary purpose of
benefiting an organization
which is described in section
501(c)(3) and exempt from tax
under section 501(a),
``(II) all of the net
proceeds of which are
contributed to such
organization, and,
``(III) which utilizes
volunteers for substantially
all of the work performed in
carrying out such event.''.
(b) Only 50 Percent of Expenses for Meals Provided on or
Near Business Premises Allowed as Deduction.--Paragraph (2) of
section 274(n), as amended by subsection (a), is amended--
(1) by striking subparagraph (B),
(2) by redesignating subparagraphs (C) and (D) as
subparagraphs (B) and (C), respectively,
(3) by striking ``of subparagraph (D)'' in the last
sentence and inserting ``of subparagraph (C)'', and
(4) by striking ``in subparagraph (C)'' in the last
sentence and inserting ``in subparagraph (B)''.
(c) Treatment of Transportation Benefits.--Section 274, as
amended by subsection (a), is amended--
(1) in subsection (a)--
(A) in the heading, by striking ``or
Recreation'' and inserting ``Recreation, or
Qualified Transportation Fringes'', and
(B) by adding at the end the following new
paragraph:
``(4) Qualified transportation fringes.--No
deduction shall be allowed under this chapter for the
expense of any qualified transportation fringe (as
defined in section 132(f)) provided to an employee of
the taxpayer.'', and
(2) by inserting after subsection (k) the following
new subsection:
``(l) Transportation and Commuting Benefits.--
``(1) In general.--No deduction shall be allowed
under this chapter for any expense incurred for
providing any transportation, or any payment or
reimbursement, to an employee of the taxpayer in
connection with travel between the employee's residence
and place of employment, except as necessary for
ensuring the safety of the employee.
``(2) Exception.--In the case of any qualified
bicycle commuting reimbursement (as described in
section 132(f)(5)(F)), this subsection shall not apply
for any amounts paid or incurred after December 31,
2017, and before January 1, 2026.''.
(d) Elimination of Deduction for Meals Provided at
Convenience of Employer.--Section 274, as amended by subsection
(c), is amended--
(1) by redesignating subsection (o) as subsection
(p), and
(2) by inserting after subsection (n) the following
new subsection:
``(o) Meals Provided at Convenience of Employer.--No
deduction shall be allowed under this chapter for--
``(1) any expense for the operation of a facility
described in section 132(e)(2), and any expense for
food or beverages, including under section 132(e)(1),
associated with such facility, or
``(2) any expense for meals described in section
119(a).''.
(e) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
amounts incurred or paid after December 31, 2017.
(2) Effective date for elimination of deduction for
meals provided at convenience of employer.--The
amendments made by subsection (d) shall apply to
amounts incurred or paid after December 31, 2025.
SEC. 13305. 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),
135(c)(4)(A), 137(b)(3)(A), 219(g)(3)(A)(ii),
221(b)(2)(C), 222(b)(2)(C), 246(b)(1), and
469(i)(3)(F)(iii) are each amended by striking
``199,''.
(2) Section 170(b)(2)(D), as amended by subtitle A,
is amended by striking clause (iv), and by
redesignating clauses (v) and (vi) as clauses (iv) and
(v).
(3) Section 172(d) is amended by striking paragraph
(7).
(4) Section 613(a), as amended by section 11011, is
amended by striking ``and without the deduction under
section 199''.
(5) Section 613A(d)(1), as amended by section
11011, is amended by striking subparagraph (B) and by
redesignating subparagraphs (C), (D), (E), and (F) as
subparagraphs (B), (C), (D), and (E), respectively.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13306. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER
AMOUNTS.
(a) Denial of Deduction.--
(1) In general.--Subsection (f) of section 162 is
amended to read as follows:
``(f) Fines, Penalties, and Other Amounts.--
``(1) In general.--Except as provided in the
following paragraphs of this subsection, no deduction
otherwise allowable shall be allowed under this chapter
for any amount paid or incurred (whether by suit,
agreement, or otherwise) to, or at the direction of, a
government or governmental entity in relation to the
violation of any law or the investigation or inquiry by
such government or entity into the potential violation
of any law.
``(2) Exception for amounts constituting
restitution or paid to come into compliance with law.--
``(A) In general.--Paragraph (1) shall not
apply to any amount that--
``(i) the taxpayer establishes--
``(I) constitutes
restitution (including
remediation of property) for
damage or harm which was or may
be caused by the violation of
any law or the potential
violation of any law, or
``(II) is paid to come into
compliance with any law which
was violated or otherwise
involved in the investigation
or inquiry described in
paragraph (1),
``(ii) is identified as restitution
or as an amount paid to come into
compliance with such law, as the case
may be, in the court order or
settlement agreement, and
``(iii) in the case of any amount
of restitution for failure to pay any
tax imposed under this title in the
same manner as if such amount were such
tax, would have been allowed as a
deduction under this chapter if it had
been timely paid.
The identification under clause (ii) alone
shall not be sufficient to make the
establishment required under clause (i).
``(B) Limitation.--Subparagraph (A) shall
not apply to any amount paid or incurred as
reimbursement to the government or entity for
the costs of any investigation or litigation.
``(3) Exception for amounts paid or incurred as the
result of certain court orders.--Paragraph (1) shall
not apply to any amount paid or incurred by reason of
any order of a court in a suit in which no government
or governmental entity is a party.
``(4) Exception for taxes due.--Paragraph (1) shall
not apply to any amount paid or incurred as taxes due.
``(5) Treatment of certain nongovernmental
regulatory entities.--For purposes of this subsection,
the following nongovernmental entities shall be treated
as governmental entities:
``(A) Any nongovernmental entity which
exercises self-regulatory powers (including
imposing sanctions) in connection with a
qualified board or exchange (as defined in
section 1256(g)(7)).
``(B) To the extent provided in
regulations, any nongovernmental entity which
exercises self-regulatory powers (including
imposing sanctions) as part of performing an
essential governmental function.''.
(2) Effective date.--The amendment made by this
subsection shall apply to amounts paid or incurred on
or after the date of the enactment of this Act, except
that such amendments shall not apply to amounts paid or
incurred under any binding order or agreement entered
into before such date. Such exception shall not apply
to an order or agreement requiring court approval
unless the approval was obtained before such date.
(b) Reporting of Deductible Amounts.--
(1) In general.--Subpart B of part III of
subchapter A of chapter 61 is amended by inserting
after section 6050W the following new section:
``SEC. 6050X. INFORMATION WITH RESPECT TO CERTAIN FINES, PENALTIES, AND
OTHER AMOUNTS.
``(a) Requirement of Reporting.--
``(1) In general.--The appropriate official of any
government or any entity described in section 162(f)(5)
which is involved in a suit or agreement described in
paragraph (2) shall make a return in such form as
determined by the Secretary setting forth--
``(A) the amount required to be paid as a
result of the suit or agreement to which
paragraph (1) of section 162(f) applies,
``(B) any amount required to be paid as a
result of the suit or agreement which
constitutes restitution or remediation of
property, and
``(C) any amount required to be paid as a
result of the suit or agreement for the purpose
of coming into compliance with any law which
was violated or involved in the investigation
or inquiry.
``(2) Suit or agreement described.--
``(A) In general.--A suit or agreement is
described in this paragraph if--
``(i) it is--
``(I) a suit with respect
to a violation of any law over
which the government or entity
has authority and with respect
to which there has been a court
order, or
``(II) an agreement which
is entered into with respect to
a violation of any law over
which the government or entity
has authority, or with respect
to an investigation or inquiry
by the government or entity
into the potential violation of
any law over which such
government or entity has
authority, and
``(ii) the aggregate amount
involved in all court orders and
agreements with respect to the
violation, investigation, or inquiry is
$600 or more.
``(B) Adjustment of reporting threshold.--
The Secretary shall adjust the $600 amount in
subparagraph (A)(ii) as necessary in order to
ensure the efficient administration of the
internal revenue laws.
``(3) Time of filing.--The return required under
this subsection shall be filed at the time the
agreement is entered into, as determined by the
Secretary.
``(b) Statements to Be Furnished to Individuals Involved in
the Settlement.--Every person required to make a return under
subsection (a) shall furnish to each person who is a party to
the suit or agreement a written statement showing--
``(1) the name of the government or entity, and
``(2) the information supplied to the Secretary
under subsection (a)(1).
The written statement required under the preceding sentence
shall be furnished to the person at the same time the
government or entity provides the Secretary with the
information required under subsection (a).
``(c) Appropriate Official Defined.--For purposes of this
section, the term `appropriate official' means the officer or
employee having control of the suit, investigation, or inquiry
or the person appropriately designated for purposes of this
section.''.
(2) Conforming amendment.--The table of sections
for subpart B of part III of subchapter A of chapter 61
is amended by inserting after the item relating to
section 6050W the following new item:
``Sec. 6050X. Information with respect to certain fines, penalties, and
other amounts.''.
(3) Effective date.--The amendments made by this
subsection shall apply to amounts paid or incurred on
or after the date of the enactment of this Act, except
that such amendments shall not apply to amounts paid or
incurred under any binding order or agreement entered
into before such date. Such exception shall not apply
to an order or agreement requiring court approval
unless the approval was obtained before such date.
SEC. 13307. DENIAL OF DEDUCTION FOR SETTLEMENTS SUBJECT TO
NONDISCLOSURE AGREEMENTS PAID IN CONNECTION WITH
SEXUAL HARASSMENT OR SEXUAL ABUSE.
(a) Denial of Deduction.--Section 162 is amended by
redesignating subsection (q) as subsection (r) and by inserting
after subsection (p) the following new subsection:
``(q) Payments Related to Sexual Harassment and Sexual
Abuse.--No deduction shall be allowed under this chapter for--
``(1) any settlement or payment related to sexual
harassment or sexual abuse if such settlement or
payment is subject to a nondisclosure agreement, or
``(2) attorney's fees related to such a settlement
or payment.''.
(b) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred after the date of the
enactment of this Act.
SEC. 13308. 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 on or after the date of
the enactment of this Act.
SEC. 13309. 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, notwithstanding
section 83 or any election in effect under section 83(b).
``(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) 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.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13310. PROHIBITION ON CASH, GIFT CARDS, AND OTHER NON-TANGIBLE
PERSONAL PROPERTY AS EMPLOYEE ACHIEVEMENT AWARDS.
(a) In General.--Subparagraph (A) of section 274(j)(3) is
amended--
(1) by striking ``The term'' and inserting the
following:
``(i) In general.--The term''.
(2) by redesignating clauses (i), (ii), and (iii)
as subclauses (I), (II), and (III), respectively, and
conforming the margins accordingly, and
(3) by adding at the end the following new clause:
``(ii) Tangible personal
property.--For purposes of clause (i),
the term `tangible personal property'
shall not include--
``(I) cash, cash
equivalents, gift cards, gift
coupons, or gift certificates
(other than arrangements
conferring only the right to
select and receive tangible
personal property from a
limited array of such items
pre-selected or pre-approved by
the employer), or
``(II) vacations, meals,
lodging, tickets to theater or
sporting events, stocks, bonds,
other securities, and other
similar items.''.
(b) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred after December 31,
2017.
SEC. 13311. ELIMINATION OF DEDUCTION FOR LIVING EXPENSES INCURRED BY
MEMBERS OF CONGRESS.
(a) In General.--Subsection (a) of section 162 is amended
in the matter following paragraph (3) by striking ``in excess
of $3,000''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 13312. CERTAIN CONTRIBUTIONS BY GOVERNMENTAL ENTITIES NOT TREATED
AS CONTRIBUTIONS TO CAPITAL.
(a) In General.--Section 118 is amended--
(1) by striking subsections (b), (c), and (d),
(2) by redesignating subsection (e) as subsection
(d), and
(3) by inserting after subsection (a) the following
new subsections:
``(b) Exceptions.--For purposes of subsection (a), the term
`contribution to the capital of the taxpayer' does not
include--
``(1) any contribution in aid of construction or
any other contribution as a customer or potential
customer, and
``(2) any contribution by any governmental entity
or civic group (other than a contribution made by a
shareholder as such).
``(c) Regulations.--The Secretary shall issue such
regulations or other guidance as may be necessary or
appropriate to carry out this section, including regulations or
other guidance for determining whether any contribution
constitutes a contribution in aid of construction.''.
(b) Effective Date.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
contributions made after the date of enactment of this
Act.
(2) Exception.--The amendments made by this section
shall not apply to any contribution, made after the
date of enactment of this Act by a governmental entity,
which is made pursuant to a master development plan
that has been approved prior to such date by a
governmental entity.
SEC. 13313. 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. 13314. 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.
PART V--BUSINESS CREDITS
SEC. 13401. MODIFICATION OF ORPHAN DRUG CREDIT.
(a) Credit Rate.--Subsection (a) of section 45C is amended
by striking ``50 percent'' and inserting ``25 percent''.
(b) Election of Reduced Credit.--Subsection (b) of section
280C is amended by redesignating paragraph (3) as paragraph (4)
and by inserting after paragraph (2) the following new
paragraph:
``(3) Election of reduced credit.--
``(A) In general.--In the case of any
taxable year for which an election is made
under this paragraph--
``(i) paragraphs (1) and (2) shall
not apply, and
``(ii) the amount of the credit
under section 45C(a) shall be the
amount determined under subparagraph
(B).
``(B) Amount of reduced credit.--The amount
of credit determined under this subparagraph
for any taxable year shall be the amount equal
to the excess of--
``(i) the amount of credit
determined under section 45C(a) without
regard to this paragraph, over
``(ii) the product of--
``(I) the amount described
in clause (i), and
``(II) the maximum rate of
tax under section 11(b).
``(C) Election.--An election under this
paragraph for any taxable year shall be made
not later than the time for filing the return
of tax for such year (including extensions),
shall be made on such return, and shall be made
in such manner as the Secretary shall
prescribe. Such an election, once made, shall
be irrevocable.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13402. REHABILITATION CREDIT LIMITED TO CERTIFIED HISTORIC
STRUCTURES.
(a) In General.--Subsection (a) of section 47 is amended to
read as follows:
``(a) General Rule.--
``(1) In general.--For purposes of section 46, for
any taxable year during the 5-year period beginning in
the taxable year in which a qualified rehabilitated
building is placed in service, the rehabilitation
credit for such year is an amount equal to the ratable
share for such year.
``(2) Ratable share.--For purposes of paragraph
(1), the ratable share for any taxable year during the
period described in such paragraph is the amount equal
to 20 percent of the qualified rehabilitation
expenditures with respect to the qualified
rehabilitated building, as allocated ratably to each
year during such period.''.
(b) Conforming Amendments.--
(1) Section 47(c) is amended--
(A) in paragraph (1)--
(i) in subparagraph (A), by
amending clause (iii) to read as
follows:
``(iii) such building is a
certified historic structure, and'',
(ii) by striking subparagraph (B),
and
(iii) by redesignating
subparagraphs (C) and (D) as
subparagraphs (B) and (C),
respectively, and
(B) in paragraph (2)(B), by amending clause
(iv) to read as follows:
``(iv) Certified historic
structure.--Any expenditure
attributable to the rehabilitation of a
qualified rehabilitated building unless
the rehabilitation is a certified
rehabilitation (within the meaning of
subparagraph (C)).''.
(2) Paragraph (4) of section 145(d) is amended--
(A) by striking ``of section 47(c)(1)(C)''
each place it appears and inserting ``of
section 47(c)(1)(B)'', and
(B) by striking ``section 47(c)(1)(C)(i)''
and inserting ``section 47(c)(1)(B)(i)''.
(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 with respect to any
building--
(A) owned or leased by the taxpayer during
the entirety of the period after December 31,
2017, and
(B) with respect to which the 24-month
period selected by the taxpayer under clause
(i) of section 47(c)(1)(B) of the Internal
Revenue Code (as amended by subsection (b)), or
the 60-month period applicable under clause
(ii) of such section, begins not later than 180
days after 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, or the 60-
month period, referred to in subparagraph (B) ends.
SEC. 13403. EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL LEAVE.
(a) In General.--
(1) Allowance of credit.--Subpart D of part IV of
subchapter A of chapter 1 is amended by adding at the
end the following new section:
``SEC. 45S. EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL LEAVE.
``(a) Establishment of Credit.--
``(1) In general.--For purposes of section 38, in
the case of an eligible employer, the paid family and
medical leave credit is an amount equal to the
applicable percentage of the amount of wages paid to
qualifying employees during any period in which such
employees are on family and medical leave.
``(2) Applicable percentage.--For purposes of
paragraph (1), the term `applicable percentage' means
12.5 percent increased (but not above 25 percent) by
0.25 percentage points for each percentage point by
which the rate of payment (as described under
subsection (c)(1)(B)) exceeds 50 percent.
``(b) Limitation.--
``(1) In general.--The credit allowed under
subsection (a) with respect to any employee for any
taxable year shall not exceed an amount equal to the
product of the normal hourly wage rate of such employee
for each hour (or fraction thereof) of actual services
performed for the employer and the number of hours (or
fraction thereof) for which family and medical leave is
taken.
``(2) Non-hourly wage rate.--For purposes of
paragraph (1), in the case of any employee who is not
paid on an hourly wage rate, the wages of such employee
shall be prorated to an hourly wage rate under
regulations established by the Secretary.
``(3) Maximum amount of leave subject to credit.--
The amount of family and medical leave that may be
taken into account with respect to any employee under
subsection (a) for any taxable year shall not exceed 12
weeks.
``(c) Eligible Employer.--For purposes of this section--
``(1) In general.--The term `eligible employer'
means any employer who has in place a written policy
that meets the following requirements:
``(A) The policy provides--
``(i) in the case of a qualifying
employee who is not a part-time
employee (as defined in section
4980E(d)(4)(B)), not less than 2 weeks
of annual paid family and medical
leave, and
``(ii) in the case of a qualifying
employee who is a part-time employee,
an amount of annual paid family and
medical leave that is not less than an
amount which bears the same ratio to
the amount of annual paid family and
medical leave that is provided to a
qualifying employee described in clause
(i) as--
``(I) the number of hours
the employee is expected to
work during any week, bears to
``(II) the number of hours
an equivalent qualifying
employee described in clause
(i) is expected to work during
the week.
``(B) The policy requires that the rate of
payment under the program is not less than 50
percent of the wages normally paid to such
employee for services performed for the
employer.
``(2) Special rule for certain employers.--
``(A) In general.--An added employer shall
not be treated as an eligible employer unless
such employer provides paid family and medical
leave in compliance with a written policy which
ensures that the employer--
``(i) will not interfere with,
restrain, or deny the exercise of or
the attempt to exercise, any right
provided under the policy, and
``(ii) will not discharge or in any
other manner discriminate against any
individual for opposing any practice
prohibited by the policy.
``(B) Added employer; added employee.--For
purposes of this paragraph--
``(i) Added employee.--The term
`added employee' means a qualifying
employee who is not covered by title I
of the Family and Medical Leave Act of
1993, as amended.
``(ii) Added employer.--The term
`added employer' means an eligible
employer (determined without regard to
this paragraph), whether or not covered
by that title I, who offers paid family
and medical leave to added employees.
``(3) Aggregation rule.--All persons which are
treated as a single employer under subsections (a) and
(b) of section 52 shall be treated as a single
taxpayer.
``(4) Treatment of benefits mandated or paid for by
state or local governments.--For purposes of this
section, any leave which is paid by a State or local
government or required by State or local law shall not
be taken into account in determining the amount of paid
family and medical leave provided by the employer.
``(5) No inference.--Nothing in this subsection
shall be construed as subjecting an employer to any
penalty, liability, or other consequence (other than
ineligibility for the credit allowed by reason of
subsection (a) or recapturing the benefit of such
credit) for failure to comply with the requirements of
this subsection.
``(d) Qualifying Employees.--For purposes of this section,
the term `qualifying employee' means any employee (as defined
in section 3(e) of the Fair Labor Standards Act of 1938, as
amended) who--
``(1) has been employed by the employer for 1 year
or more, and
``(2) for the preceding year, had compensation not
in excess of an amount equal to 60 percent of the
amount applicable for such year under clause (i) of
section 414(q)(1)(B).
``(e) Family and Medical Leave.--
``(1) In general.--Except as provided in paragraph
(2), for purposes of this section, the term `family and
medical leave' means leave for any 1 or more of the
purposes described under subparagraph (A), (B), (C),
(D), or (E) of paragraph (1), or paragraph (3), of
section 102(a) of the Family and Medical Leave Act of
1993, as amended, whether the leave is provided under
that Act or by a policy of the employer.
``(2) Exclusion.--If an employer provides paid
leave as vacation leave, personal leave, or medical or
sick leave (other than leave specifically for 1 or more
of the purposes referred to in paragraph (1)), that
paid leave shall not be considered to be family and
medical leave under paragraph (1).
``(3) Definitions.--In this subsection, the terms
`vacation leave', `personal leave', and `medical or
sick leave' mean those 3 types of leave, within the
meaning of section 102(d)(2) of that Act.
``(f) Determinations Made by Secretary of Treasury.--For
purposes of this section, any determination as to whether an
employer or an employee satisfies the applicable requirements
for an eligible employer (as described in subsection (c)) or
qualifying employee (as described in subsection (d)),
respectively, shall be made by the Secretary based on such
information, to be provided by the employer, as the Secretary
determines to be necessary or appropriate.
``(g) Wages.--For purposes of this section, the term
`wages' has the meaning given such term by subsection (b) of
section 3306 (determined without regard to any dollar
limitation contained in such section). Such term shall not
include any amount taken into account for purposes of
determining any other credit allowed under this subpart.
``(h) Election to Have Credit Not Apply.--
``(1) In general.--A taxpayer may elect to have
this section not apply for any taxable year.
``(2) Other rules.--Rules similar to the rules of
paragraphs (2) and (3) of section 51(j) shall apply for
purposes of this subsection.
``(i) Termination.--This section shall not apply to wages
paid in taxable years beginning after December 31, 2019.''.
(b) Credit Part of General Business Credit.--Section 38(b)
is amended by striking ``plus'' at the end of paragraph (35),
by striking the period at the end of paragraph (36) and
inserting ``, plus'', and by adding at the end the following
new paragraph:
``(37) in the case of an eligible employer (as
defined in section 45S(c)), the paid family and medical
leave credit determined under section 45S(a).''.
(c) Credit Allowed Against AMT.--Subparagraph (B) of
section 38(c)(4) is amended by redesignating clauses (ix)
through (xi) as clauses (x) through (xii), respectively, and by
inserting after clause (viii) the following new clause:
``(ix) the credit determined under
section 45S,''.
(d) Conforming Amendments.--
(1) Denial of double benefit.--Section 280C(a) is
amended by inserting ``45S(a),'' after ``45P(a),''.
(2) Election to have credit not apply.--Section
6501(m) is amended by inserting ``45S(h),'' after
``45H(g),''.
(3) Clerical amendment.--The table of sections for
subpart D of part IV of subchapter A of chapter 1 is
amended by adding at the end the following new item:
``Sec. 45S. Employer credit for paid family and medical leave.''.
(e) Effective Date.--The amendments made by this section
shall apply to wages paid in taxable years beginning after
December 31, 2017.
SEC. 13404. 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.
PART VI--PROVISIONS RELATED TO SPECIFIC ENTITIES AND INDUSTRIES
Subpart A--Partnership Provisions
SEC. 13501. TREATMENT OF GAIN OR LOSS OF FOREIGN PERSONS FROM SALE OR
EXCHANGE OF INTERESTS IN PARTNERSHIPS ENGAGED IN
TRADE OR BUSINESS WITHIN THE UNITED STATES.
(a) Amount Treated as Effectively Connected.--
(1) In general.--Section 864(c) is amended by
adding at the end the following:
``(8) Gain or loss of foreign persons from sale or
exchange of certain partnership interests.--
``(A) In general.--Notwithstanding any
other provision of this subtitle, if a
nonresident alien individual or foreign
corporation owns, directly or indirectly, an
interest in a partnership which is engaged in
any trade or business within the United States,
gain or loss on the sale or exchange of all (or
any portion of) such interest shall be treated
as effectively connected with the conduct of
such trade or business to the extent such gain
or loss does not exceed the amount determined
under subparagraph (B).
``(B) Amount treated as effectively
connected.--The amount determined under this
subparagraph with respect to any partnership
interest sold or exchanged--
``(i) in the case of any gain on
the sale or exchange of the partnership
interest, is--
``(I) the portion of the
partner's distributive share of
the amount of gain which would
have been effectively connected
with the conduct of a trade or
business within the United
States if the partnership had
sold all of its assets at their
fair market value as of the
date of the sale or exchange of
such interest, or
``(II) zero if no gain on
such deemed sale would have
been so effectively connected,
and
``(ii) in the case of any loss on
the sale or exchange of the partnership
interest, is--
``(I) the portion of the
partner's distributive share of
the amount of loss on the
deemed sale described in clause
(i)(I) which would have been so
effectively connected, or
``(II) zero if no loss on
such deemed sale would be have
been so effectively connected.
For purposes of this subparagraph, a
partner's distributive share of gain or
loss on the deemed sale shall be
determined in the same manner as such
partner's distributive share of the
non-separately stated taxable income or
loss of such partnership.
``(C) Coordination with united states real
property interests.--If a partnership described
in subparagraph (A) holds any United States
real property interest (as defined in section
897(c)) at the time of the sale or exchange of
the partnership interest, then the gain or loss
treated as effectively connected income under
subparagraph (A) shall be reduced by the amount
so treated with respect to such United States
real property interest under section 897.
``(D) Sale or exchange.--For purposes of
this paragraph, the term `sale or exchange'
means any sale, exchange, or other disposition.
``(E) Secretarial authority.--The Secretary
shall prescribe such regulations or other
guidance as the Secretary determines
appropriate for the application of this
paragraph, including with respect to exchanges
described in section 332, 351, 354, 355, 356,
or 361.''.
(2) Conforming amendments.--Section 864(c)(1) is
amended--
(A) by striking ``and (7)'' in subparagraph
(A), and inserting ``(7), and (8)'', and
(B) by striking ``or (7)'' in subparagraph
(B), and inserting ``(7), or (8)''.
(b) Withholding Requirements.--Section 1446 is amended by
redesignating subsection (f) as subsection (g) and by inserting
after subsection (e) the following:
``(f) Special Rules for Withholding on Dispositions of
Partnership Interests.--
``(1) In general.--Except as provided in this
subsection, if any portion of the gain (if any) on any
disposition of an interest in a partnership would be
treated under section 864(c)(8) as effectively
connected with the conduct of a trade or business
within the United States, the transferee shall be
required to deduct and withhold a tax equal to 10
percent of the amount realized on the disposition.
``(2) Exception if nonforeign affidavit
furnished.--
``(A) In general.--No person shall be
required to deduct and withhold any amount
under paragraph (1) with respect to any
disposition if the transferor furnishes to the
transferee an affidavit by the transferor
stating, under penalty of perjury, the
transferor's United States taxpayer
identification number and that the transferor
is not a foreign person.
``(B) False affidavit.--Subparagraph (A)
shall not apply to any disposition if--
``(i) the transferee has actual
knowledge that the affidavit is false,
or the transferee receives a notice (as
described in section 1445(d)) from a
transferor's agent or transferee's
agent that such affidavit or statement
is false, or
``(ii) the Secretary by regulations
requires the transferee to furnish a
copy of such affidavit or statement to
the Secretary and the transferee fails
to furnish a copy of such affidavit or
statement to the Secretary at such time
and in such manner as required by such
regulations.
``(C) Rules for agents.--The rules of
section 1445(d) shall apply to a transferor's
agent or transferee's agent with respect to any
affidavit described in subparagraph (A) in the
same manner as such rules apply with respect to
the disposition of a United States real
property interest under such section.
``(3) Authority of secretary to prescribe reduced
amount.--At the request of the transferor or
transferee, the Secretary may prescribe a reduced
amount to be withheld under this section if the
Secretary determines that to substitute such reduced
amount will not jeopardize the collection of the tax
imposed under this title with respect to gain treated
under section 864(c)(8) as effectively connected with
the conduct of a trade or business with in the United
States.
``(4) Partnership to withhold amounts not withheld
by the transferee.--If a transferee fails to withhold
any amount required to be withheld under paragraph (1),
the partnership shall be required to deduct and
withhold from distributions to the transferee a tax in
an amount equal to the amount the transferee failed to
withhold (plus interest under this title on such
amount).
``(5) Definitions.--Any term used in this
subsection which is also used under section 1445 shall
have the same meaning as when used in such section.
``(6) Regulations.--The Secretary shall prescribe
such regulations or other guidance as may be necessary
to carry out the purposes of this subsection, including
regulations providing for exceptions from the
provisions of this subsection.''.
(c) Effective Dates.--
(1) Subsection (a).--The amendments made by
subsection (a) shall apply to sales, exchanges, and
dispositions on or after November 27, 2017.
(2) Subsection (b).--The amendment made by
subsection (b) shall apply to sales, exchanges, and
dispositions after December 31, 2017.
SEC. 13502. MODIFY DEFINITION OF SUBSTANTIAL BUILT-IN LOSS IN THE CASE
OF TRANSFER OF PARTNERSHIP INTEREST.
(a) In General.--Paragraph (1) of section 743(d) is to read
as follows:
``(1) In general.--For purposes of this section, a
partnership has a substantial built-in loss with
respect to a transfer of an interest in the partnership
if--
``(A) the partnership's adjusted basis in
the partnership property exceeds by more than
$250,000 the fair market value of such
property, or
``(B) the transferee partner would be
allocated a loss of more than $250,000 if the
partnership assets were sold for cash equal to
their fair market value immediately after such
transfer.''.
(b) Effective Date.--The amendments made by this section
shall apply to transfers of partnership interests after
December 31, 2017.
SEC. 13503. CHARITABLE CONTRIBUTIONS AND FOREIGN TAXES TAKEN INTO
ACCOUNT IN DETERMINING LIMITATION ON ALLOWANCE OF
PARTNER'S SHARE OF LOSS.
(a) In General.--Subsection (d) of section 704 is amended--
(1) by striking ``A partner's distributive share''
and inserting the following:
``(1) In general.--A partner's distributive
share'',
(2) by striking ``Any excess of such loss'' and
inserting the following:
``(2) Carryover.--Any excess of such loss'', and
(3) by adding at the end the following new
paragraph:
``(3) Special rules.--
``(A) In general.--In determining the
amount of any loss under paragraph (1), there
shall be taken into account the partner's
distributive share of amounts described in
paragraphs (4) and (6) of section 702(a).
``(B) Exception.--In the case of a
charitable contribution of property whose fair
market value exceeds its adjusted basis,
subparagraph (A) shall not apply to the extent
of the partner's distributive share of such
excess.''.
(b) Effective Date.--The amendments made by this section
shall apply to partnership taxable years beginning after
December 31, 2017.
SEC. 13504. 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) Conforming Amendment.--
(1) Section 168(i)(7)(B) is amended by striking the
second sentence.
(2) Section 743(e) is amended by striking paragraph
(4) and redesignating paragraphs (5), (6), and (7) as
paragraphs (4), (5), and (6).
(c) Effective Date.--The amendments made by this section
shall apply to partnership taxable years beginning after
December 31, 2017.
Subpart B--Insurance Reforms
SEC. 13511. 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)(A) 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).
(B) Section 831(b)(3) is amended by striking
``except as provided in section 844,''
(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 805(b)(2)(A)(iv) is amended to read as
follows:
``(iv) any net operating loss
carryback to the taxable year under
section 172, and''.
(7) 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.''.
(8) Section 1351(i)(3) is amended by striking ``or
the operations loss deduction under section 810,''.
(c) Effective Date.--The amendments made by this section
shall apply to losses arising in taxable years beginning after
December 31, 2017.
SEC. 13512. 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 this Act,
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), as amended by this Act,
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 13511,
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. 13513. 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. 13514. 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. 13515. MODIFICATION OF PRORATION RULES FOR PROPERTY AND CASUALTY
INSURANCE COMPANIES.
(a) In General.--Section 832(b)(5)(B) is amended--
(1) by striking ``15 percent'' and inserting ``the
applicable percentage'', and
(2) by inserting at the end the following new
sentence: ``For purposes of this subparagraph, the
applicable percentage is 5.25 percent divided by the
highest rate in effect under section 11(b).''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13516. 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.
SEC. 13517. COMPUTATION OF LIFE INSURANCE TAX RESERVES.
(a) In General.--
(1) Appropriate rate of interest.--The second
sentence of section 807(c) is amended to read as
follows: ``For purposes of paragraph (3), the
appropriate rate of interest is the highest rate or
rates permitted to be used to discount the obligations
by the National Association of Insurance Commissioners
as of the date the reserve is determined.''.
(2) Method of computing reserves.--Section 807(d)
is amended--
(A) by striking paragraphs (1), (2), (4),
and (5),
(B) by redesignating paragraph (6) as
paragraph (4),
(C) by inserting before paragraph (3) the
following new paragraphs:
``(1) Determination of reserve.--
``(A) In general.--For purposes of this
part (other than section 816), the amount of
the life insurance reserves for any contract
(other than a contract to which subparagraph
(B) applies) shall be the greater of--
``(i) the net surrender value of
such contract, or
``(ii) 92.81 percent of the reserve
determined under paragraph (2).
``(B) Variable contracts.--For purposes of
this part (other than section 816), the amount
of the life insurance reserves for a variable
contract shall be equal to the sum of--
``(i) the greater of--
``(I) the net surrender
value of such contract, or
``(II) the portion of the
reserve that is separately
accounted for under section
817, plus
``(ii) 92.81 percent of the excess
(if any) of the reserve determined
under paragraph (2) over the amount in
clause (i).
``(C) Statutory cap.--In no event shall the
reserves determined under subparagraphs (A) or
(B) for any contract as of any time exceed the
amount which would be taken into account with
respect to such contract as of such time in
determining statutory reserves (as defined in
paragraph (4)).
``(D) No double counting.--In no event
shall any amount or item be taken into account
more than once in determining any reserve under
this subchapter.
``(2) Amount of reserve.--The amount of the reserve
determined under this paragraph with respect to any
contract shall be determined by using the tax reserve
method applicable to such contract.''.
(D) by striking ``(other than a qualified
long-term care insurance contract, as defined
in section 7702B(b)), a 2-year full preliminary
term method'' in paragraph (3)(A)(iii) and
inserting ``, the reserve method prescribed by
the National Association of Insurance
Commissioners which covers such contract as of
the date the reserve is determined'',
(E) by striking ``(as of the date of
issuance)'' in paragraph (3)(A)(iv)(I) and
inserting ``(as of the date the reserve is
determined)'',
(F) by striking ``as of the date of the
issuance of'' in paragraph (3)(A)(iv)(II) and
inserting ``as of the date the reserve is
determined for'',
(G) by striking ``in effect on the date of
the issuance of the contract'' in paragraph
(3)(B)(i) and inserting ``applicable to the
contract and in effect as of the date the
reserve is determined'', and
(H) by striking ``in effect on the date of
the issuance of the contract'' in paragraph
(3)(B)(ii) and inserting ``applicable to the
contract and in effect as of the date the
reserve is determined''.
(3) Special rules.--Section 807(e) is amended--
(A) by striking paragraphs (2) and (5),
(B) by redesignating paragraphs (3), (4),
(6), and (7) as paragraphs (2), (3), (4), and
(5), respectively,
(C) by amending paragraph (2) (as so
redesignated) to read as follows:
``(2) Qualified supplemental benefits.--
``(A) Qualified supplemental benefits
treated separately.--For purposes of this part,
the amount of the life insurance reserve for
any qualified supplemental benefit shall be
computed separately as though such benefit were
under a separate contract.
``(B) Qualified supplemental benefit.--For
purposes of this paragraph, the term `qualified
supplemental benefit' means any supplemental
benefit described in subparagraph (C) if--
``(i) there is a separately
identified premium or charge for such
benefit, and
``(ii) any net surrender value
under the contract attributable to any
other benefit is not available to fund
such benefit.
``(C) Supplemental benefits.--For purposes
of this paragraph, the supplemental benefits
described in this subparagraph are any--
``(i) guaranteed insurability,
``(ii) accidental death or
disability benefit,
``(iii) convertibility,
``(iv) disability waiver benefit,
or
``(v) other benefit prescribed by
regulations,
which is supplemental to a contract for which
there is a reserve described in subsection
(c).'', and
(D) by adding at the end the following new
paragraph:
``(6) Reporting rules.--The Secretary shall require
reporting (at such time and in such manner as the
Secretary shall prescribe) with respect to the opening
balance and closing balance of reserves and with
respect to the method of computing reserves for
purposes of determining income.''.
(4) Definition of life insurance contract.--Section
7702 is amended--
(A) by striking clause (i) of subsection
(c)(3)(B) and inserting the following:
``(i) reasonable mortality charges
which meet the requirements prescribed
in regulations to be promulgated by the
Secretary or that do not exceed the
mortality charges specified in the
prevailing commissioners' standard
tables as defined in subsection
(f)(10),'' and
(B) by adding at the end of subsection (f)
the following new paragraph:
``(10) Prevailing commissioners' standard tables.--
For purposes of subsection (c)(3)(B)(i), the term
`prevailing commissioners' standard tables' means the
most recent commissioners' standard tables prescribed
by the National Association of Insurance Commissioners
which are permitted to be used in computing reserves
for that type of contract under the insurance laws of
at least 26 States when the contract was issued. If the
prevailing commissioners' standard tables as of the
beginning of any calendar year (hereinafter in this
paragraph referred to as the `year of change') are
different from the prevailing commissioners' standard
tables as of the beginning of the preceding calendar
year, the issuer may use the prevailing commissioners'
standard tables as of the beginning of the preceding
calendar year with respect to any contract issued after
the change and before the close of the 3-year period
beginning on the first day of the year of change.''.
(b) Conforming Amendments.--
(1) Section 808 is amended by adding at the end the
following new subsection:
``(g) Prevailing State Assumed Interest Rate.--For purposes
of this subchapter--
``(1) In general.--The term `prevailing State
assumed interest rate' means, with respect to any
contract, the highest assumed interest rate permitted
to be used in computing life insurance reserves for
insurance contracts or annuity contracts (as the case
may be) under the insurance laws of at least 26 States.
For purposes of the preceding sentence, the effect of
nonforfeiture laws of a State on interest rates for
reserves shall not be taken into account.
``(2) When rate determined.--The prevailing State
assumed interest rate with respect to any contract
shall be determined as of the beginning of the calendar
year in which the contract was issued.''.
(2) Paragraph (1) of section 811(d) is amended by
striking ``the greater of the prevailing State assumed
interest rate or applicable Federal interest rate in
effect under section 807'' and inserting ``the interest
rate in effect under section 808(g)''.
(3) Subparagraph (A) of section 846(f)(6) is
amended by striking ``except that'' and all that
follows and inserting ``except that the limitation of
subsection (a)(3) shall apply, and''.
(4) Section 848(e)(1)(B)(iii) is amended by
striking ``807(e)(4)'' and inserting ``807(e)(3)''.
(5) Subparagraph (B) of section 954(i)(5) is
amended by striking ``shall be substituted for the
prevailing State assumed interest rate,'' and inserting
``shall apply,''.
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to taxable years beginning after
December 31, 2017.
(2) Transition rule.--For the first taxable year
beginning after December 31, 2017, the reserve with
respect to any contract (as determined under section
807(d) of the Internal Revenue Code of 1986) at the end
of the preceding taxable year shall be determined as if
the amendments made by this section had applied to such
reserve in such preceding taxable year.
(3) Transition relief.--
(A) In general.--If--
(i) the reserve determined under
section 807(d) of the Internal Revenue
Code of 1986 (determined after
application of paragraph (2)) with
respect to any contract as of the close
of the year preceding the first taxable
year beginning after December 31, 2017,
differs from
(ii) the reserve which would have
been determined with respect to such
contract as of the close of such
taxable year under such section
determined without regard to paragraph
(2),
then the difference between the amount of the
reserve described in clause (i) and the amount
of the reserve described in clause (ii) shall
be taken into account under the method provided
in subparagraph (B).
(B) Method.--The method provided in this
subparagraph is as follows:
(i) If the amount determined under
subparagraph (A)(i) exceeds the amount
determined under subparagraph (A)(ii),
1/8 of such excess shall be taken into
account, for each of the 8 succeeding
taxable years, as a deduction under
section 805(a)(2) or 832(c)(4) of such
Code, as applicable.
(ii) If the amount determined under
subparagraph (A)(ii) exceeds the amount
determined under subparagraph (A)(i),
1/8 of such excess shall be included in
gross income, for each of the 8
succeeding taxable years, under section
803(a)(2) or 832(b)(1)(C) of such Code,
as applicable.
SEC. 13518. MODIFICATION OF RULES FOR LIFE INSURANCE PRORATION FOR
PURPOSES OF DETERMINING THE DIVIDENDS RECEIVED
DEDUCTION.
(a) In General.--Section 812 is amended to read as follows:
``SEC. 812. DEFINITION OF COMPANY'S SHARE AND POLICYHOLDER'S SHARE.
``(a) Company's Share.--For purposes of section 805(a)(4),
the term `company's share' means, with respect to any taxable
year beginning after December 31, 2017, 70 percent.
``(b) Policyholder's Share.--For purposes of section 807,
the term `policyholder's share' means, with respect to any
taxable year beginning after December 31, 2017, 30 percent.''.
(b) Conforming Amendment.--Section 817A(e)(2) is amended by
striking ``, 807(d)(2)(B), and 812'' and inserting ``and
807(d)(2)(B)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13519. CAPITALIZATION OF CERTAIN POLICY ACQUISITION EXPENSES.
(a) In General.--
(1) Section 848(a)(2) is amended by striking ``120-
month'' and inserting ``180-month''.
(2) Section 848(c)(1) is amended by striking ``1.75
percent'' and inserting ``2.09 percent''.
(3) Section 848(c)(2) is amended by striking ``2.05
percent'' and inserting ``2.45 percent''.
(4) Section 848(c)(3) is amended by striking ``7.7
percent'' and inserting ``9.2 percent''.
(b) Conforming Amendments.--Section 848(b)(1) is amended by
striking ``120-month'' and inserting ``180-month''.
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to net premiums for taxable years
beginning after December 31, 2017.
(2) Transition rule.--Specified policy acquisition
expenses first required to be capitalized in a taxable
year beginning before January 1, 2018, will continue to
be allowed as a deduction ratably over the 120-month
period beginning with the first month in the second
half of such taxable year.
SEC. 13520. TAX REPORTING FOR LIFE SETTLEMENT TRANSACTIONS.
(a) In General.--Subpart B of part III of subchapter A of
chapter 61, as amended by section 13306, is amended by adding
at the end the following new section:
``SEC. 6050Y. RETURNS RELATING TO CERTAIN LIFE INSURANCE CONTRACT
TRANSACTIONS.
``(a) Requirement of Reporting of Certain Payments.--
``(1) In general.--Every person who acquires a life
insurance contract or any interest in a life insurance
contract in a reportable policy sale during any taxable
year shall make a return for such taxable year (at such
time and in such manner as the Secretary shall
prescribe) setting forth--
``(A) the name, address, and TIN of such
person,
``(B) the name, address, and TIN of each
recipient of payment in the reportable policy
sale,
``(C) the date of such sale,
``(D) the name of the issuer of the life
insurance contract sold and the policy number
of such contract, and
``(E) the amount of each payment.
``(2) Statement to be furnished to persons with
respect to whom information is required.--Every person
required to make a return under this subsection shall
furnish to each person whose name is required to be set
forth in such return a written statement showing--
``(A) the name, address, and phone number
of the information contact of the person
required to make such return, and
``(B) the information required to be shown
on such return with respect to such person,
except that in the case of an issuer of a life
insurance contract, such statement is not
required to include the information specified
in paragraph (1)(E).
``(b) Requirement of Reporting of Seller's Basis in Life
Insurance Contracts.--
``(1) In general.--Upon receipt of the statement
required under subsection (a)(2) or upon notice of a
transfer of a life insurance contract to a foreign
person, each issuer of a life insurance contract shall
make a return (at such time and in such manner as the
Secretary shall prescribe) setting forth--
``(A) the name, address, and TIN of the
seller who transfers any interest in such
contract in such sale,
``(B) the investment in the contract (as
defined in section 72(e)(6)) with respect to
such seller, and
``(C) the policy number of such contract.
``(2) Statement to be furnished to persons with
respect to whom information is required.--Every person
required to make a return under this subsection shall
furnish to each person whose name is required to be set
forth in such return a written statement showing--
``(A) the name, address, and phone number
of the information contact of the person
required to make such return, and
``(B) the information required to be shown
on such return with respect to each seller
whose name is required to be set forth in such
return.
``(c) Requirement of Reporting With Respect to Reportable
Death Benefits.--
``(1) In general.--Every person who makes a payment
of reportable death benefits during any taxable year
shall make a return for such taxable year (at such time
and in such manner as the Secretary shall prescribe)
setting forth--
``(A) the name, address, and TIN of the
person making such payment,
``(B) the name, address, and TIN of each
recipient of such payment,
``(C) the date of each such payment,
``(D) the gross amount of each such
payment, and
``(E) such person's estimate of the
investment in the contract (as defined in
section 72(e)(6)) with respect to the buyer.
``(2) Statement to be furnished to persons with
respect to whom information is required.--Every person
required to make a return under this subsection shall
furnish to each person whose name is required to be set
forth in such return a written statement showing--
``(A) the name, address, and phone number
of the information contact of the person
required to make such return, and
``(B) the information required to be shown
on such return with respect to each recipient
of payment whose name is required to be set
forth in such return.
``(d) Definitions.--For purposes of this section:
``(1) Payment.--The term `payment' means, with
respect to any reportable policy sale, the amount of
cash and the fair market value of any consideration
transferred in the sale.
``(2) Reportable policy sale.--The term `reportable
policy sale' has the meaning given such term in section
101(a)(3)(B).
``(3) Issuer.--The term `issuer' means any life
insurance company that bears the risk with respect to a
life insurance contract on the date any return or
statement is required to be made under this section.
``(4) Reportable death benefits.--The term
`reportable death benefits' means amounts paid by
reason of the death of the insured under a life
insurance contract that has been transferred in a
reportable policy sale.''.
(b) Clerical Amendment.--The table of sections for subpart
B of part III of subchapter A of chapter 61, as amended by
section 13306, is amended by inserting after the item relating
to section 6050X the following new item:
``Sec. 6050Y. Returns relating to certain life insurance contract
transactions.''.
(c) Conforming Amendments.--
(1) Subsection (d) of section 6724 is amended--
(A) by striking ``or'' at the end of clause
(xxiv) of paragraph (1)(B), by striking ``and''
at the end of clause (xxv) of such paragraph
and inserting ``or'', and by inserting after
such clause (xxv) the following new clause:
``(xxvi) section 6050Y (relating to
returns relating to certain life
insurance contract transactions),
and'', and
(B) by striking ``or'' at the end of
subparagraph (HH) of paragraph (2), by striking
the period at the end of subparagraph (II) of
such paragraph and inserting ``, or'', and by
inserting after such subparagraph (II) the
following new subparagraph:
``(JJ) subsection (a)(2), (b)(2), or (c)(2)
of section 6050Y (relating to returns relating
to certain life insurance contract
transactions).''.
(2) Section 6047 is amended--
(A) by redesignating subsection (g) as
subsection (h),
(B) by inserting after subsection (f) the
following new subsection:
``(g) Information Relating to Life Insurance Contract
Transactions.--This section shall not apply to any information
which is required to be reported under section 6050Y.'', and
(C) by adding at the end of subsection (h),
as so redesignated, the following new
paragraph:
``(4) For provisions requiring reporting of
information relating to certain life insurance contract
transactions, see section 6050Y.''.
(d) Effective Date.--The amendments made by this section
shall apply to--
(1) reportable policy sales (as defined in section
6050Y(d)(2) of the Internal Revenue Code of 1986 (as
added by subsection (a)) after December 31, 2017, and
(2) reportable death benefits (as defined in
section 6050Y(d)(4) of such Code (as added by
subsection (a)) paid after December 31, 2017.
SEC. 13521. CLARIFICATION OF TAX BASIS OF LIFE INSURANCE CONTRACTS.
(a) Clarification With Respect to Adjustments.--Paragraph
(1) of section 1016(a) is amended by striking subparagraph (A)
and all that follows and inserting the following:
``(A) for--
``(i) taxes or other carrying
charges described in section 266; or
``(ii) expenditures described in
section 173 (relating to circulation
expenditures),
for which deductions have been taken by the
taxpayer in determining taxable income for the
taxable year or prior taxable years; or
``(B) for mortality, expense, or other
reasonable charges incurred under an annuity or
life insurance contract;''.
(b) Effective Date.--The amendment made by this section
shall apply to transactions entered into after August 25, 2009.
SEC. 13522. EXCEPTION TO TRANSFER FOR VALUABLE CONSIDERATION RULES.
(a) In General.--Subsection (a) of section 101 is amended
by inserting after paragraph (2) the following new paragraph:
``(3) Exception to valuable consideration rules for
commercial transfers.--
``(A) In general.--The second sentence of
paragraph (2) shall not apply in the case of a
transfer of a life insurance contract, or any
interest therein, which is a reportable policy
sale.
``(B) Reportable policy sale.--For purposes
of this paragraph, the term `reportable policy
sale' means the acquisition of an interest in a
life insurance contract, directly or
indirectly, if the acquirer has no substantial
family, business, or financial relationship
with the insured apart from the acquirer's
interest in such life insurance contract. For
purposes of the preceding sentence, the term
`indirectly' applies to the acquisition of an
interest in a partnership, trust, or other
entity that holds an interest in the life
insurance contract.''.
(b) Conforming Amendment.--Paragraph (1) of section 101(a)
is amended by striking ``paragraph (2)'' and inserting
``paragraphs (2) and (3)''.
(c) Effective Date.--The amendments made by this section
shall apply to transfers after December 31, 2017.
SEC. 13523. 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), determined by substituting
`60-month period' for `24-month period' therein).''.
(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
subparagraph:
``(B) Treatment of certain losses.--
``(i) 3-year loss payment
pattern.--In the case of any line of
business not described in subparagraph
(A)(ii), losses paid after the 1st year
following the accident year shall be
treated as paid equally in the 2nd and
3rd year following the accident 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 24th
year after the accident year,
they shall be treated as paid
in such 24th year.''.
(c) Repeal of Historical Payment Pattern Election.--Section
846, as amended by this Act, 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.
Subpart C--Banks and Financial Instruments
SEC. 13531. LIMITATION ON DEDUCTION FOR FDIC PREMIUMS.
(a) In General.--Section 162, as amended by sections 13307,
is amended by redesignating subsection (r) as subsection (s)
and by inserting after subsection (q) the following new
subsection:
``(r) 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.--
``(i) In general.--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).
``(ii) Control of non-corporate
entities.--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 clause).''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13532. 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.
Subpart D--S Corporations
SEC. 13541. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL
BUSINESS TRUST.
(a) No Look-through for Eligibility Purposes.--Section
1361(c)(2)(B)(v) is amended by adding at the end the following
new sentence: ``This clause shall not apply for purposes of
subsection (b)(1)(C).''.
(b) Effective Date.--The amendment made by this section
shall take effect on January 1, 2018.
SEC. 13542. CHARITABLE CONTRIBUTION DEDUCTION FOR ELECTING SMALL
BUSINESS TRUSTS.
(a) In General.--Section 641(c)(2) is amended by inserting
after subparagraph (D) the following new subparagraph:
``(E)(i) Section 642(c) shall not apply.
``(ii) For purposes of section
170(b)(1)(G), adjusted gross income shall be
computed in the same manner as in the case of
an individual, except that the deductions for
costs which are paid or incurred in connection
with the administration of the trust and which
would not have been incurred if the property
were not held in such trust shall be treated as
allowable in arriving at adjusted gross
income.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13543. 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.''.
PART VII--EMPLOYMENT
Subpart A--Compensation
SEC. 13601. 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.--Paragraph (4) of section 162(m) 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) Modification of Definition of Covered Employees.--
Paragraph (3) of section 162(m) 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 any individual described in subparagraph
(A))'', 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.''.
(c) Expansion of Applicable Employer.--
(1) In general.--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)).''.
(2) Conforming amendment.--Section 162(m)(3), as
amended by subsection (b), is amended by adding at the
end the following flush sentence:
``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.--Paragraph (4) of section 162(m), 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.--
(1) In general.--Except as provided in paragraph
(2), the amendments made by this section shall apply to
taxable years beginning after December 31, 2017.
(2) Exception for binding contracts.--The
amendments made by this section shall not apply to
remuneration which is provided pursuant to a written
binding contract which was in effect on November 2,
2017, and which was not modified in any material
respect on or after such date.
SEC. 13602. 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
the product of the rate of tax under section 11 and 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.
For purposes of the preceding sentence, remuneration shall be
treated as paid when there is no substantial risk of forfeiture
(within the meaning of section 457(f)(3)(B)) of the rights to
such remuneration.
``(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 which 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:
``(A) In general.--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)) and shall include amounts
required to be included in gross income under
section 457(f).
``(B) Exception for remuneration for
medical services.--The term `remuneration'
shall not include the portion of any
remuneration paid to a licensed medical
professional (including a veterinarian) which
is for the performance of medical or veterinary
services by such professional.
``(4) Remuneration from related organizations.--
``(A) In general.--Remuneration of a
covered employee 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 which control the organization,
``(iii) is a supported organization
(as defined in section 509(f)(3))
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 which is a voluntary
employees' beneficiary association
described in section 501(c)(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 of
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.
``(C) Exception.--Such term does not
include any payment--
``(i) described in section
280G(b)(6) (relating to exemption for
payments under qualified plans),
``(ii) made under or to an annuity
contract described in section 403(b) or
a plan described in section 457(b),
``(iii) to a licensed medical
professional (including a veterinarian)
to the extent that such payment is for
the performance of medical or
veterinary services by such
professional, or
``(iv) to an individual who is not
a highly compensated employee as
defined in section 414(q).
``(D) Base amount.--Rules similar to the
rules of 280G(b)(3) shall apply for purposes of
determining the base amount.
``(E) 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 tax
under this section, including regulations to prevent avoidance
of such tax through the performance of services other than as
an employee or by providing compensation through a pass-through
or other entity to avoid such tax.''.
(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 tax-exempt organization executive
compensation.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13603. TREATMENT OF QUALIFIED EQUITY GRANTS.
(a) In General.--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--
``(A) Timing of inclusion.--If qualified
stock is transferred to a qualified employee
who makes an election with respect to such
stock under this subsection, subsection (a)
shall be applied by including the amount
determined under such subsection with respect
to such stock in income of the employee in the
taxable year determined under subparagraph (B)
in lieu of the taxable year described in
subsection (a).
``(B) Taxable year determined.--The taxable
year determined under this subparagraph is the
taxable year of the employee which includes the
earliest of--
``(i) the first date such qualified
stock becomes transferable (including,
solely for purposes of this clause,
becoming 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 provides)
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 granted 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 are granted
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 made in a
similar manner as 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 are 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 is a 1-percent owner
(within the meaning of section
416(i)(1)(B)(ii)) at any time during
the calendar year or who was such a 1
percent owner 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 is one of the 4 highest
compensated officers of such
corporation for the taxable year, or
was one of the 4 highest compensated
officers of such corporation for any of
the 10 preceding taxable years,
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 date 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 date 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
subparagraph (B)(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 requires for purposes of
administering this paragraph.
``(5) Controlled groups.--For purposes of this
subsection, all persons treated as a single employer
under section 414(b) shall be treated as 1 corporation.
``(6) Notice requirement.--Any corporation which
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 be
eligible to 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.''.
(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)(2)) 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 is amended--
(i) in subsection (b)(5), by
striking ``and'' before ``the plan''
and by inserting ``, and the rules of
section 83(i) shall apply in
determining which employees have a
right to make an election under such
section'' before the semicolon at the
end, and
(ii) by adding at the end the
following new subsection:
``(d) Coordination With Qualified Equity Grants.--An option
for which an election is made under section 83(i) with respect
to the stock received in connection with its exercise shall not
be considered as granted pursuant an employee stock purchase
plan.''.
(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 with respect to
such employee solely because of such 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 (14)(B), by striking
the period at the end of paragraph (15) and inserting a comma,
and by inserting after paragraph (15) the following new
paragraphs:
``(16) the amount includible in gross income under
subparagraph (A) of section 83(i)(1) with respect to an
event described in subparagraph (B) of such section
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:
``(p) 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) issues 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.
SEC. 13604. INCREASE IN EXCISE TAX RATE FOR STOCK COMPENSATION OF
INSIDERS IN EXPATRIATED CORPORATIONS.
(a) In General.--Section 4985(a)(1) is amended by striking
``section 1(h)(1)(C)'' and inserting ``section 1(h)(1)(D)''.
(b) Effective Date.--The amendment made by this section
shall apply to corporations first becoming expatriated
corporations (as defined in section 4985 of the Internal
Revenue Code of 1986) after the date of enactment of this Act.
Subpart B--Retirement Plans
SEC. 13611. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZATION OF
ROTH CONVERSIONS.
(a) In General.--Section 408A(d)(6)(B) is amended by adding
at the end the following new clause:
``(iii) Conversions.--Subparagraph
(A) shall not apply in the case of a
qualified rollover contribution to
which subsection (d)(3) applies
(including by reason of subparagraph
(C) thereof).''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13612. MODIFICATION OF RULES APPLICABLE TO LENGTH OF SERVICE AWARD
PLANS.
(a) Maximum Deferral Amount.--Clause (ii) of section
457(e)(11)(B) is amended by striking ``$3,000'' and inserting
``$6,000''.
(b) Cost of Living Adjustment.--Subparagraph (B) of section
457(e)(11) is amended by adding at the end the following:
``(iii) Cost of living
adjustment.--In the case of taxable
years beginning after December 31,
2017, the Secretary shall adjust the
$6,000 amount under clause (ii) at the
same time and in the same manner as
under section 415(d), except that the
base period shall be the calendar
quarter beginning July 1, 2016, and any
increase under this paragraph that is
not a multiple of $500 shall be rounded
to the next lowest multiple of $500.''.
(c) Application of Limitation on Accruals.--Subparagraph
(B) of section 457(e)(11), as amended by subsection (b), is
amended by adding at the end the following:
``(iv) Special rule for application
of limitation on accruals for certain
plans.--In the case of a plan described
in subparagraph (A)(ii) which is a
defined benefit plan (as defined in
section 414(j)), the limitation under
clause (ii) shall apply to the
actuarial present value of the
aggregate amount of length of service
awards accruing with respect to any
year of service. Such actuarial present
value with respect to any year shall be
calculated using reasonable actuarial
assumptions and methods, assuming
payment will be made under the most
valuable form of payment under the plan
with payment commencing at the later of
the earliest age at which unreduced
benefits are payable under the plan or
the participant's age at the time of
the calculation.''.
(d) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 13613. EXTENDED ROLLOVER PERIOD FOR PLAN LOAN OFFSET AMOUNTS.
(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
severance from employment of
the participant.
``(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 Amendments.--Section 402(c)(3) is amended--
(1) by striking ``Transfer must be made within 60
days of receipt'' in the heading and inserting ``Time
limit on transfers'', and
(2) by striking ``subparagraph (B)'' in
subparagraph (A) and inserting ``subparagraphs (B) and
(C)''.
(c) Effective Date.--The amendments made by this section
shall apply to plan loan offset amounts which are treated as
distributed in taxable years beginning after December 31, 2017.
PART VIII--EXEMPT ORGANIZATIONS
SEC. 13701. 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. 4968. Excise tax based on investment income of private colleges
and universities.
``SEC. 4968. 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(f)(2))--
``(A) which had at least 500 tuition-paying
students during the preceding taxable year,
``(B) more than 50 percent of the tuition-
paying students of which are located in the
United States,
``(C) which is not described in the first
sentence of section 511(a)(2)(B) (relating to
State colleges and universities), and
``(D) 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 $500,000 per
student of the institution.
``(2) Students.--For purposes of paragraph (1), the
number of students of an institution (including for
purposes of determining the number of students at a
particular location) 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), assets and net investment income of
any related organization with respect to an educational
institution shall be treated as assets and net
investment income, respectively, of the educational
institution, except that--
``(A) no such amount shall be taken into
account with respect to more than 1 educational
institution, and
``(B) unless such organization is
controlled by such institution or is described
in section 509(a)(3) with respect to such
institution for the taxable year, assets and
net investment income which are not intended or
available for the use or benefit of the
educational institution shall not be taken into
account.
``(2) Related organization.--For purposes of this
subsection, the term `related organization' means, with
respect to an educational institution, any organization
which--
``(A) controls, or is controlled by, such
institution,
``(B) is controlled by 1 or more persons
which also 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. 13702. UNRELATED BUSINESS TAXABLE INCOME SEPARATELY COMPUTED FOR
EACH TRADE OR BUSINESS ACTIVITY.
(a) In General.--Subsection (a) of section 512 is amended
by adding at the end the following new paragraph:
``(6) Special rule for organization with more than
1 unrelated trade or business.--In the case of any
organization with more than 1 unrelated trade or
business--
``(A) unrelated business taxable income,
including for purposes of determining any net
operating loss deduction, shall be computed
separately with respect to each such trade or
business and without regard to subsection
(b)(12),
``(B) the unrelated business taxable income
of such organization shall be the sum of the
unrelated business taxable income so computed
with respect to each such trade or business,
less a specific deduction under subsection
(b)(12), and
``(C) for purposes of subparagraph (B),
unrelated business taxable income with respect
to any such trade or business shall not be less
than zero.''.
(b) Effective Date.--
(1) In general.--Except to the extent provided in
paragraph (2), the amendment made by this section shall
apply to taxable years beginning after December 31,
2017.
(2) Carryovers of net operating losses.--If any net
operating loss arising in a taxable year beginning
before January 1, 2018, is carried over to a taxable
year beginning on or after such date--
(A) subparagraph (A) of section 512(a)(6)
of the Internal Revenue Code of 1986, as added
by this Act, shall not apply to such net
operating loss, and
(B) the unrelated business taxable income
of the organization, after the application of
subparagraph (B) of such section, shall be
reduced by the amount of such net operating
loss.
SEC. 13703. UNRELATED BUSINESS TAXABLE INCOME INCREASED BY AMOUNT OF
CERTAIN FRINGE BENEFIT EXPENSES FOR WHICH DEDUCTION
IS DISALLOWED.
(a) In General.--Section 512(a), as amended by this Act, is
further amended by adding at the end the following new
paragraph:
``(7) 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
shall 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. 13704. REPEAL OF DEDUCTION FOR AMOUNTS PAID IN EXCHANGE FOR
COLLEGE ATHLETIC EVENT SEATING RIGHTS.
(a) In General.--Section 170(l) is amended--
(1) by striking paragraph (1) and inserting the
following:
``(1) In general.--No deduction shall be allowed
under this section for any amount described in
paragraph (2).'', and
(2) in paragraph (2)(B), by striking ``such amount
would be allowable as a deduction under this section
but for the fact that''.
(b) Effective Date.--The amendments made by this section
shall apply to contributions made in taxable years beginning
after December 31, 2017.
SEC. 13705. REPEAL OF SUBSTANTIATION EXCEPTION IN CASE OF CONTRIBUTIONS
REPORTED BY DONEE.
(a) In General.--Section 170(f)(8) is amended by striking
subparagraph (D) and by redesignating subparagraph (E) as
subparagraph (D).
(b) Effective Date.--The amendments made by this section
shall apply to contributions made in taxable years beginning
after December 31, 2016.
PART IX--OTHER PROVISIONS
Subpart A--Craft Beverage Modernization and Tax Reform
SEC. 13801. PRODUCTION PERIOD FOR BEER, WINE, AND DISTILLED SPIRITS.
(a) In General.--Section 263A(f) is amended--
(1) by redesignating paragraph (4) as paragraph
(5), and
(2) by inserting after paragraph (3) the following
new paragraph:
``(4) Exemption for aging process of beer, wine,
and distilled spirits.--
``(A) In general.--For purposes of this
subsection, the production period shall not
include the aging period for--
``(i) beer (as defined in section
5052(a)),
``(ii) wine (as described in
section 5041(a)), or
``(iii) distilled spirits (as
defined in section 5002(a)(8)), except
such spirits that are unfit for use for
beverage purposes.
``(B) Termination.--This paragraph shall
not apply to interest costs paid or accrued
after December 31, 2019.''.
(b) Conforming Amendment.--Paragraph (5)(B)(ii) of section
263A(f), as redesignated by this section, is amended by
inserting ``except as provided in paragraph (4),'' before
``ending on the date''.
(c) Effective Date.--The amendments made by this section
shall apply to interest costs paid or accrued in calendar years
beginning after December 31, 2017.
SEC. 13802. REDUCED RATE OF EXCISE TAX ON BEER.
(a) In General.--Paragraph (1) of section 5051(a) is
amended to read as follows:
``(1) In general.--
``(A) Imposition of tax.--A tax is hereby
imposed on all beer brewed or produced, and
removed for consumption or sale, within the
United States, or imported into the United
States. Except as provided in paragraph (2),
the rate of such tax shall be the amount
determined under this paragraph.
``(B) Rate.--Except as provided in
subparagraph (C), the rate of tax shall be $18
for per barrel.
``(C) Special rule.--In the case of beer
removed after December 31, 2017, and before
January 1, 2020, the rate of tax shall be--
``(i) $16 on the first 6,000,000
barrels of beer--
``(I) brewed by the brewer
and removed during the calendar
year for consumption or sale,
or
``(II) imported by the
importer into the United States
during the calendar year, and
``(ii) $18 on any barrels of beer
to which clause (i) does not apply.
``(D) Barrel.--For purposes of this
section, a barrel shall contain not more than
31 gallons of beer, and any tax imposed under
this section shall be applied at a like rate
for any other quantity or for fractional parts
of a barrel.''.
(b) Reduced Rate for Certain Domestic Production.--
Subparagraph (A) of section 5051(a)(2) is amended--
(1) in the heading, by striking ``$7 a barrel'',
and
(2) by inserting ``($3.50 in the case of beer
removed after December 31, 2017, and before January 1,
2020)'' after ``$7''.
(c) Application of Reduced Tax Rate for Foreign
Manufacturers and Importers.--Subsection (a) of section 5051 is
amended--
(1) in subparagraph (C)(i)(II) of paragraph (1), as
amended by subsection (a), by inserting ``but only if
the importer is an electing importer under paragraph
(4) and the barrels have been assigned to the importer
pursuant to such paragraph'' after ``during the
calendar year'', and
(2) by adding at the end the following new
paragraph:
``(4) Reduced tax rate for foreign manufacturers
and importers.--
``(A) In general.--In the case of any
barrels of beer which have been brewed or
produced outside of the United States and
imported into the United States, the rate of
tax applicable under clause (i) of paragraph
(1)(C) (referred to in this paragraph as the
`reduced tax rate') may be assigned by the
brewer (provided that the brewer makes an
election described in subparagraph (B)(ii)) to
any electing importer of such barrels pursuant
to the requirements established by the
Secretary under subparagraph (B).
``(B) Assignment.--The Secretary shall,
through such rules, regulations, and procedures
as are determined appropriate, establish
procedures for assignment of the reduced tax
rate provided under this paragraph, which shall
include--
``(i) a limitation to ensure that
the number of barrels of beer for which
the reduced tax rate has been assigned
by a brewer--
``(I) to any importer does
not exceed the number of
barrels of beer brewed or
produced by such brewer during
the calendar year which were
imported into the United States
by such importer, and
``(II) to all importers
does not exceed the 6,000,000
barrels to which the reduced
tax rate applies,
``(ii) procedures that allow the
election of a brewer to assign and an
importer to receive the reduced tax
rate provided under this paragraph,
``(iii) requirements that the
brewer provide any information as the
Secretary determines necessary and
appropriate for purposes of carrying
out this paragraph, and
``(iv) procedures that allow for
revocation of eligibility of the brewer
and the importer for the reduced tax
rate provided under this paragraph in
the case of any erroneous or fraudulent
information provided under clause (iii)
which the Secretary deems to be
material to qualifying for such reduced
rate.
``(C) Controlled group.--For purposes of
this section, any importer making an election
described in subparagraph (B)(ii) shall be
deemed to be a member of the controlled group
of the brewer, as described under paragraph
(5).''.
(d) Controlled Group and Single Taxpayer Rules.--Subsection
(a) of section 5051, as amended by this section, is amended--
(1) in paragraph (2)--
(A) by striking subparagraph (B), and
(B) by redesignating subparagraph (C) as
subparagraph (B), and
(2) by adding at the end the following new
paragraph:
``(5) Controlled group and single taxpayer rules.--
``(A) In general.--Except as provided in
subparagraph (B), in the case of a controlled
group, the 6,000,000 barrel quantity specified
in paragraph (1)(C)(i) and the 2,000,000 barrel
quantity specified in paragraph (2)(A) shall be
applied to the controlled group, and the
6,000,000 barrel quantity specified in
paragraph (1)(C)(i) and the 60,000 barrel
quantity specified in paragraph (2)(A) shall be
apportioned among the brewers who are members
of such group in such manner as the Secretary
or their delegate shall by regulations
prescribe. For purposes of the preceding
sentence, the term `controlled group' has the
meaning assigned to it by subsection (a) of
section 1563, except that for such purposes the
phrase `more than 50 percent' shall be
substituted for the phrase `at least 80
percent' in each place it appears in such
subsection. Under regulations prescribed by the
Secretary, principles similar to the principles
of the preceding two sentences shall be applied
to a group of brewers under common control
where one or more of the brewers is not a
corporation.
``(B) Foreign manufacturers and
importers.--For purposes of paragraph (4), in
the case of a controlled group, the 6,000,000
barrel quantity specified in paragraph
(1)(C)(i) shall be applied to the controlled
group and apportioned among the members of such
group in such manner as the Secretary shall by
regulations prescribe. For purposes of the
preceding sentence, the term `controlled group'
has the meaning given such term under
subparagraph (A). Under regulations prescribed
by the Secretary, principles similar to the
principles of the preceding two sentences shall
be applied to a group of brewers under common
control where one or more of the brewers is not
a corporation.
``(C) Single taxpayer.--Pursuant to rules
issued by the Secretary, two or more entities
(whether or not under common control) that
produce beer marketed under a similar brand,
license, franchise, or other arrangement shall
be treated as a single taxpayer for purposes of
the application of this subsection.''.
(e) Effective Date.--The amendments made by this section
shall apply to beer removed after December 31, 2017.
SEC. 13803. TRANSFER OF BEER BETWEEN BONDED FACILITIES.
(a) In General.--Section 5414 is amended--
(1) by striking ``Beer may be removed'' and
inserting ``(a) In General--Beer may be removed'', and
(2) by adding at the end the following:
``(b) Transfer of Beer Between Bonded Facilities.--
``(1) In general.--Beer may be removed from one
bonded brewery to another bonded brewery, without
payment of tax, and may be mingled with beer at the
receiving brewery, subject to such conditions,
including payment of the tax, and in such containers,
as the Secretary by regulations shall prescribe, which
shall include--
``(A) any removal from one brewery to
another brewery belonging to the same brewer,
``(B) any removal from a brewery owned by
one corporation to a brewery owned by another
corporation when--
``(i) one such corporation owns the
controlling interest in the other such
corporation, or
``(ii) the controlling interest in
each such corporation is owned by the
same person or persons, and
``(C) any removal from one brewery to
another brewery when--
``(i) the proprietors of
transferring and receiving premises are
independent of each other and neither
has a proprietary interest, directly or
indirectly, in the business of the
other, and
``(ii) the transferor has divested
itself of all interest in the beer so
transferred and the transferee has
accepted responsibility for payment of
the tax.
``(2) Transfer of liability for tax.--For purposes
of paragraph (1)(C), such relief from liability shall
be effective from the time of removal from the
transferor's bonded premises, or from the time of
divestment of interest, whichever is later.
``(3) Termination.--This subsection shall not apply
to any calendar quarter beginning after December 31,
2019.''.
(b) Removal From Brewery by Pipeline.--Section 5412 is
amended by inserting ``pursuant to section 5414 or'' before
``by pipeline''.
(c) Effective Date.--The amendments made by this section
shall apply to any calendar quarters beginning after December
31, 2017.
SEC. 13804. REDUCED RATE OF EXCISE TAX ON CERTAIN WINE.
(a) In General.--Section 5041(c) is amended by adding at
the end the following new paragraph:
``(8) Special rule for 2018 and 2019.--
``(A) In general.--In the case of wine
removed after December 31, 2017, and before
January 1, 2020, paragraphs (1) and (2) shall
not apply and there shall be allowed as a
credit against any tax imposed by this title
(other than chapters 2, 21, and 22) an amount
equal to the sum of--
``(i) $1 per wine gallon on the
first 30,000 wine gallons of wine, plus
``(ii) 90 cents per wine gallon on
the first 100,000 wine gallons of wine
to which clause (i) does not apply,
plus
``(iii) 53.5 cents per wine gallon
on the first 620,000 wine gallons of
wine to which clauses (i) and (ii) do
not apply,
which are produced by the producer and removed
during the calendar year for consumption or
sale, or which are imported by the importer
into the United States during the calendar
year.
``(B) Adjustment of credit for hard
cider.--In the case of wine described in
subsection (b)(6), subparagraph (A) of this
paragraph shall be applied--
``(i) in clause (i) of such
subparagraph, by substituting `6.2
cents' for `$1',
``(ii) in clause (ii) of such
subparagraph, by substituting `5.6
cents' for `90 cents', and
``(iii) in clause (iii) of such
subparagraph, by substituting `3.3
cents' for `53.5 cents'.'',
(b) Controlled Group and Single Taxpayer Rules.--Paragraph
(4) of section 5041(c) is amended by striking ``section
5051(a)(2)(B)'' and inserting ``section 5051(a)(5)''.
(c) Allowance of Credit for Foreign Manufacturers and
Importers.--Subsection (c) of section 5041, as amended by
subsection (a), is amended--
(1) in subparagraph (A) of paragraph (8), by
inserting ``but only if the importer is an electing
importer under paragraph (9) and the wine gallons of
wine have been assigned to the importer pursuant to
such paragraph'' after ``into the United States during
the calendar year'', and
(2) by adding at the end the following new
paragraph:
``(9) Allowance of credit for foreign manufacturers
and importers.--
``(A) In general.--In the case of any wine
gallons of wine which have been produced
outside of the United States and imported into
the United States, the credit allowable under
paragraph (8) (referred to in this paragraph as
the `tax credit') may be assigned by the person
who produced such wine (referred to in this
paragraph as the `foreign producer'), provided
that such person makes an election described in
subparagraph (B)(ii), to any electing importer
of such wine gallons pursuant to the
requirements established by the Secretary under
subparagraph (B).
``(B) Assignment.--The Secretary shall,
through such rules, regulations, and procedures
as are determined appropriate, establish
procedures for assignment of the tax credit
provided under this paragraph, which shall
include--
``(i) a limitation to ensure that
the number of wine gallons of wine for
which the tax credit has been assigned
by a foreign producer--
``(I) to any importer does
not exceed the number of wine
gallons of wine produced by
such foreign producer during
the calendar year which were
imported into the United States
by such importer, and
``(II) to all importers
does not exceed the 750,000
wine gallons of wine to which
the tax credit applies,
``(ii) procedures that allow the
election of a foreign producer to
assign and an importer to receive the
tax credit provided under this
paragraph,
``(iii) requirements that the
foreign producer provide any
information as the Secretary determines
necessary and appropriate for purposes
of carrying out this paragraph, and
``(iv) procedures that allow for
revocation of eligibility of the
foreign producer and the importer for
the tax credit provided under this
paragraph in the case of any erroneous
or fraudulent information provided
under clause (iii) which the Secretary
deems to be material to qualifying for
such credit.
``(C) Controlled group.--For purposes of
this section, any importer making an election
described in subparagraph (B)(ii) shall be
deemed to be a member of the controlled group
of the foreign producer, as described under
paragraph (4).''.
(d) Effective Date.--The amendments made by this section
shall apply to wine removed after December 31, 2017.
SEC. 13805. ADJUSTMENT OF ALCOHOL CONTENT LEVEL FOR APPLICATION OF
EXCISE TAX RATES.
(a) In General.--Paragraphs (1) and (2) of section 5041(b)
are each amended by inserting ``(16 percent in the case of wine
removed after December 31, 2017, and before January 1, 2020''
after ``14 percent''.
(b) Effective Date.--The amendments made by this section
shall apply to wine removed after December 31, 2017.
SEC. 13806. DEFINITION OF MEAD AND LOW ALCOHOL BY VOLUME WINE.
(a) In General.--Section 5041 is amended--
(1) in subsection (a), by striking ``Still wines''
and inserting ``Subject to subsection (h), still
wines'', and
(2) by adding at the end the following new
subsection:
``(h) Mead and Low Alcohol by Volume Wine.--
``(1) In general.--For purposes of subsections (a)
and (b)(1), mead and low alcohol by volume wine shall
be deemed to be still wines containing not more than 16
percent of alcohol by volume.
``(2) Definitions.--
``(A) Mead.--For purposes of this section,
the term `mead' means a wine--
``(i) containing not more than 0.64
gram of carbon dioxide per hundred
milliliters of wine, except that the
Secretary shall by regulations
prescribe such tolerances to this
limitation as may be reasonably
necessary in good commercial practice,
``(ii) which is derived solely from
honey and water,
``(iii) which contains no fruit
product or fruit flavoring, and
``(iv) which contains less than 8.5
percent alcohol by volume.
``(B) Low alcohol by volume wine.--For
purposes of this section, the term `low alcohol
by volume wine' means a wine--
``(i) containing not more than 0.64
gram of carbon dioxide per hundred
milliliters of wine, except that the
Secretary shall by regulations
prescribe such tolerances to this
limitation as may be reasonably
necessary in good commercial practice,
``(ii) which is derived--
``(I) primarily from
grapes, or
``(II) from grape juice
concentrate and water,
``(iii) which contains no fruit
product or fruit flavoring other than
grape, and
``(iv) which contains less than 8.5
percent alcohol by volume.
``(3) Termination.--This subsection shall not apply
to wine removed after December 31, 2019.''.
(b) Effective Date.--The amendments made by this section
shall apply to wine removed after December 31, 2017.
SEC. 13807. REDUCED RATE OF EXCISE TAX ON CERTAIN DISTILLED SPIRITS.
(a) In General.--Section 5001 is amended by redesignating
subsection (c) as subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Reduced Rate for 2018 and 2019.--
``(1) In general.--In the case of a distilled
spirits operation, the otherwise applicable tax rate
under subsection (a)(1) shall be--
``(A) $2.70 per proof gallon on the first
100,000 proof gallons of distilled spirits, and
``(B) $13.34 per proof gallon on the first
22,130,000 of proof gallons of distilled
spirits to which subparagraph (A) does not
apply,
which have been distilled or processed by such
operation and removed during the calendar year for
consumption or sale, or which have been imported by the
importer into the United States during the calendar
year.
``(2) Controlled groups.--
``(A) In general.--In the case of a
controlled group, the proof gallon quantities
specified under subparagraphs (A) and (B) of
paragraph (1) shall be applied to such group
and apportioned among the members of such group
in such manner as the Secretary or their
delegate shall by regulations prescribe.
``(B) Definition.--For purposes of
subparagraph (A), the term `controlled group'
shall have the meaning given such term by
subsection (a) of section 1563, except that
`more than 50 percent' shall be substituted for
`at least 80 percent' each place it appears in
such subsection.
``(C) Rules for non-corporations.--Under
regulations prescribed by the Secretary,
principles similar to the principles of
subparagraphs (A) and (B) shall be applied to a
group under common control where one or more of
the persons is not a corporation.
``(D) Single taxpayer.--Pursuant to rules
issued by the Secretary, two or more entities
(whether or not under common control) that
produce distilled spirits marketed under a
similar brand, license, franchise, or other
arrangement shall be treated as a single
taxpayer for purposes of the application of
this subsection.
``(3) Termination.--This subsection shall not apply
to distilled spirits removed after December 31,
2019.''.
(b) Conforming Amendment.--Section 7652(f)(2) is amended by
striking ``section 5001(a)(1)'' and inserting ``subsection
(a)(1) of section 5001, determined as if subsection (c)(1) of
such section did not apply''.
(c) Application of Reduced Tax Rate for Foreign
Manufacturers and Importers.--Subsection (c) of section 5001,
as added by subsection (a), is amended--
(1) in paragraph (1), by inserting ``but only if
the importer is an electing importer under paragraph
(3) and the proof gallons of distilled spirits have
been assigned to the importer pursuant to such
paragraph'' after ``into the United States during the
calendar year'', and
(2) by redesignating paragraph (3) as paragraph (4)
and by inserting after paragraph (2) the following new
paragraph:
``(3) Reduced tax rate for foreign manufacturers
and importers.--
``(A) In general.--In the case of any proof
gallons of distilled spirits which have been
produced outside of the United States and
imported into the United States, the rate of
tax applicable under paragraph (1) (referred to
in this paragraph as the `reduced tax rate')
may be assigned by the distilled spirits
operation (provided that such operation makes
an election described in subparagraph (B)(ii))
to any electing importer of such proof gallons
pursuant to the requirements established by the
Secretary under subparagraph (B).
``(B) Assignment.--The Secretary shall,
through such rules, regulations, and procedures
as are determined appropriate, establish
procedures for assignment of the reduced tax
rate provided under this paragraph, which shall
include--
``(i) a limitation to ensure that
the number of proof gallons of
distilled spirits for which the reduced
tax rate has been assigned by a
distilled spirits operation--
``(I) to any importer does
not exceed the number of proof
gallons produced by such
operation during the calendar
year which were imported into
the United States by such
importer, and
``(II) to all importers
does not exceed the 22,230,000
proof gallons of distilled
spirits to which the reduced
tax rate applies,
``(ii) procedures that allow the
election of a distilled spirits
operation to assign and an importer to
receive the reduced tax rate provided
under this paragraph,
``(iii) requirements that the
distilled spirits operation provide any
information as the Secretary determines
necessary and appropriate for purposes
of carrying out this paragraph, and
``(iv) procedures that allow for
revocation of eligibility of the
distilled spirits operation and the
importer for the reduced tax rate
provided under this paragraph in the
case of any erroneous or fraudulent
information provided under clause (iii)
which the Secretary deems to be
material to qualifying for such reduced
rate.
``(C) Controlled group.--
``(i) In general.--For purposes of
this section, any importer making an
election described in subparagraph
(B)(ii) shall be deemed to be a member
of the controlled group of the
distilled spirits operation, as
described under paragraph (2).
``(ii) Apportionment.--For purposes
of this paragraph, in the case of a
controlled group, rules similar to
section 5051(a)(5)(B) shall apply.''.
(d) Effective Date.--The amendments made by this section
shall apply to distilled spirits removed after December 31,
2017.
SEC. 13808. BULK DISTILLED SPIRITS.
(a) In General.--Section 5212 is amended by adding at the
end the following sentence: ``In the case of distilled spirits
transferred in bond after December 31, 2017, and before January
1, 2020, this section shall be applied without regard to
whether distilled spirits are bulk distilled spirits.''.
(b) Effective Date.--The amendments made by this section
shall apply distilled spirits transferred in bond after
December 31, 2017.
Subpart B--Miscellaneous Provisions
SEC. 13821. MODIFICATION OF TAX TREATMENT OF ALASKA NATIVE CORPORATIONS
AND SETTLEMENT TRUSTS.
(a) Exclusion for ANCSA Payments Assigned to Alaska Native
Settlement Trusts.--
(1) In general.--Part III of subchapter B of
chapter 1 is amended by inserting before section 140
the following new section:
``SEC. 139G. ASSIGNMENTS TO ALASKA NATIVE SETTLEMENT TRUSTS.
``(a) In General.--In the case of a Native Corporation,
gross income shall not include the value of any payments that
would otherwise be made, or treated as being made, to such
Native Corporation pursuant to, or as required by, any
provision of the Alaska Native Claims Settlement Act (43 U.S.C.
1601 et seq.), including any payment that would otherwise be
made to a Village Corporation pursuant to section 7(j) of the
Alaska Native Claims Settlement Act (43 U.S.C. 1606(j)),
provided that any such payments--
``(1) are assigned in writing to a Settlement
Trust, and
``(2) were not received by such Native Corporation
prior to the assignment described in paragraph (1).
``(b) Inclusion in Gross Income.--In the case of a
Settlement Trust which has been assigned payments described in
subsection (a), gross income shall include such payments when
received by such Settlement Trust pursuant to the assignment
and shall have the same character as if such payments were
received by the Native Corporation.
``(c) Amount and Scope of Assignment.--The amount and scope
of any assignment under subsection (a) shall be described with
reasonable particularity and may either be in a percentage of
one or more such payments or in a fixed dollar amount.
``(d) Duration of Assignment; Revocability.--Any assignment
under subsection (a) shall specify--
``(1) a duration either in perpetuity or for a
period of time, and
``(2) whether such assignment is revocable.
``(e) Prohibition on Deduction.--Notwithstanding section
247, no deduction shall be allowed to a Native Corporation for
purposes of any amounts described in subsection (a).
``(f) Definitions.--For purposes of this section, the terms
`Native Corporation' and `Settlement Trust' have the same
meaning given such terms under section 646(h).''.
(2) Conforming amendment.--The table of sections
for part III of subchapter B of chapter 1 is amended by
inserting before the item relating to section 140 the
following new item:
``Sec. 139G. Assignments to Alaska Native Settlement Trusts.''.
(3) Effective date.--The amendments made by this
subsection shall apply to taxable years beginning after
December 31, 2016.
(b) Deduction of Contributions to Alaska Native Settlement
Trusts.--
(1) In general.--Part VIII of subchapter B of
chapter 1 is amended by inserting before section 248
the following new section:
``SEC. 247. CONTRIBUTIONS TO ALASKA NATIVE SETTLEMENT TRUSTS.
``(a) In General.--In the case of a Native Corporation,
there shall be allowed a deduction for any contributions made
by such Native Corporation to a Settlement Trust (regardless of
whether an election under section 646 is in effect for such
Settlement Trust) for which the Native Corporation has made an
annual election under subsection (e).
``(b) Amount of Deduction.--The amount of the deduction
under subsection (a) shall be equal to--
``(1) in the case of a cash contribution
(regardless of the method of payment, including
currency, coins, money order, or check), the amount of
such contribution, or
``(2) in the case of a contribution not described
in paragraph (1), the lesser of--
``(A) the Native Corporation's adjusted
basis in the property contributed, or
``(B) the fair market value of the property
contributed.
``(c) Limitation and Carryover.--
``(1) In general.--Subject to paragraph (2), the
deduction allowed under subsection (a) for any taxable
year shall not exceed the taxable income (as determined
without regard to such deduction) of the Native
Corporation for the taxable year in which the
contribution was made.
``(2) Carryover.--If the aggregate amount of
contributions described in subsection (a) for any
taxable year exceeds the limitation under paragraph
(1), such excess shall be treated as a contribution
described in subsection (a) in each of the 15
succeeding years in order of time.
``(d) Definitions.--For purposes of this section, the terms
`Native Corporation' and `Settlement Trust' have the same
meaning given such terms under section 646(h).
``(e) Manner of Making Election.--
``(1) In general.--For each taxable year, a Native
Corporation may elect to have this section apply for
such taxable year on the income tax return or an
amendment or supplement to the return of the Native
Corporation, with such election to have effect solely
for such taxable year.
``(2) Revocation.--Any election made by a Native
Corporation pursuant to this subsection may be revoked
pursuant to a timely filed amendment or supplement to
the income tax return of such Native Corporation.
``(f) Additional Rules.--
``(1) Earnings and profits.--Notwithstanding
section 646(d)(2), in the case of a Native Corporation
which claims a deduction under this section for any
taxable year, the earnings and profits of such Native
Corporation for such taxable year shall be reduced by
the amount of such deduction.
``(2) Gain or loss.--No gain or loss shall be
recognized by the Native Corporation with respect to a
contribution of property for which a deduction is
allowed under this section.
``(3) Income.--Subject to subsection (g), a
Settlement Trust shall include in income the amount of
any deduction allowed under this section in the taxable
year in which the Settlement Trust actually receives
such contribution.
``(4) Period.--The holding period under section
1223 of the Settlement Trust shall include the period
the property was held by the Native Corporation.
``(5) Basis.--The basis that a Settlement Trust has
for which a deduction is allowed under this section
shall be equal to the lesser of--
``(A) the adjusted basis of the Native
Corporation in such property immediately before
such contribution, or
``(B) the fair market value of the property
immediately before such contribution.
``(6) Prohibition.--No deduction shall be allowed
under this section with respect to any contributions
made to a Settlement Trust which are in violation of
subsection (a)(2) or (c)(2) of section 39 of the Alaska
Native Claims Settlement Act (43 U.S.C. 1629e).
``(g) Election by Settlement Trust to Defer Income
Recognition.--
``(1) In general.--In the case of a contribution
which consists of property other than cash, a
Settlement Trust may elect to defer recognition of any
income related to such property until the sale or
exchange of such property, in whole or in part, by the
Settlement Trust.
``(2) Treatment.--In the case of property described
in paragraph (1), any income or gain realized on the
sale or exchange of such property shall be treated as--
``(A) for such amount of the income or gain
as is equal to or less than the amount of
income which would be included in income at the
time of contribution under subsection (f)(3)
but for the taxpayer's election under this
subsection, ordinary income, and
``(B) for any amounts of the income or gain
which are in excess of the amount of income
which would be included in income at the time
of contribution under subsection (f)(3) but for
the taxpayer's election under this subsection,
having the same character as if this subsection
did not apply.
``(3) Election.--
``(A) In general.--For each taxable year, a
Settlement Trust may elect to apply this
subsection for any property described in
paragraph (1) which was contributed during such
year. Any property to which the election
applies shall be identified and described with
reasonable particularity on the income tax
return or an amendment or supplement to the
return of the Settlement Trust, with such
election to have effect solely for such taxable
year.
``(B) Revocation.--Any election made by a
Settlement Trust pursuant to this subsection
may be revoked pursuant to a timely filed
amendment or supplement to the income tax
return of such Settlement Trust.
``(C) Certain dispositions.--
``(i) In general.--In the case of
any property for which an election is
in effect under this subsection and
which is disposed of within the first
taxable year subsequent to the taxable
year in which such property was
contributed to the Settlement Trust--
``(I) this section shall be
applied as if the election
under this subsection had not
been made,
``(II) any income or gain
which would have been included
in the year of contribution
under subsection (f)(3) but for
the taxpayer's election under
this subsection shall be
included in income for the
taxable year of such
contribution, and
``(III) the Settlement
Trust shall pay any increase in
tax resulting from such
inclusion, including any
applicable interest, and
increased by 10 percent of the
amount of such increase with
interest.
``(ii) Assessment.--Notwithstanding
section 6501(a), any amount described
in subclause (III) of clause (i) may be
assessed, or a proceeding in court with
respect to such amount may be initiated
without assessment, within 4 years
after the date on which the return
making the election under this
subsection for such property was
filed.''.
(2) Conforming amendment.--The table of sections
for part VIII of subchapter B of chapter 1 is amended
by inserting before the item relating to section 248
the following new item:
``Sec. 247. Contributions to Alaska Native Settlement Trusts.''.
(3) Effective date.--
(A) In general.--The amendments made by
this subsection shall apply to taxable years
for which the period of limitation on refund or
credit under section 6511 of the Internal
Revenue Code of 1986 has not expired.
(B) One-year waiver of statute of
limitations.--If the period of limitation on a
credit or refund resulting from the amendments
made by paragraph (1) expires before the end of
the 1-year period beginning on the date of the
enactment of this Act, refund or credit of such
overpayment (to the extent attributable to such
amendments) may, nevertheless, be made or
allowed if claim therefor is filed before the
close of such 1-year period.
(c) Information Reporting for Deductible Contributions to
Alaska Native Settlement Trusts.--
(1) In general.--Section 6039H is amended--
(A) in the heading, by striking
``sponsoring'', and
(B) by adding at the end the following new
subsection:
``(e) Deductible Contributions by Native Corporations to
Alaska Native Settlement Trusts.--
``(1) In general.--Any Native Corporation (as
defined in subsection (m) of section 3 of the Alaska
Native Claims Settlement Act (43 U.S.C. 1602(m))) which
has made a contribution to a Settlement Trust (as
defined in subsection (t) of such section) to which an
election under subsection (e) of section 247 applies
shall provide such Settlement Trust with a statement
regarding such election not later than January 31 of
the calendar year subsequent to the calendar year in
which the contribution was made.
``(2) Content of statement.--The statement
described in paragraph (1) shall include--
``(A) the total amount of contributions to
which the election under subsection (e) of
section 247 applies,
``(B) for each contribution, whether such
contribution was in cash,
``(C) for each contribution which consists
of property other than cash, the date that such
property was acquired by the Native Corporation
and the adjusted basis and fair market value of
such property on the date such property was
contributed to the Settlement Trust,
``(D) the date on which each contribution
was made to the Settlement Trust, and
``(E) such information as the Secretary
determines to be necessary or appropriate for
the identification of each contribution and the
accurate inclusion of income relating to such
contributions by the Settlement Trust.''.
(2) Conforming amendment.--The item relating to
section 6039H in the table of sections for subpart A of
part III of subchapter A of chapter 61 is amended to
read as follows:
``Sec. 6039H. Information With Respect to Alaska Native Settlement
Trusts and Native Corporations.''.
(3) Effective date.--The amendments made by this
subsection shall apply to taxable years beginning after
December 31, 2016.
SEC. 13822. AMOUNTS PAID FOR AIRCRAFT MANAGEMENT SERVICES.
(a) In General.--Subsection (e) of section 4261 is amended
by adding at the end the following new paragraph:
``(5) Amounts paid for aircraft management
services.--
``(A) In general.--No tax shall be imposed
by this section or section 4271 on any amounts
paid by an aircraft owner for aircraft
management services related to--
``(i) maintenance and support of
the aircraft owner's aircraft, or
``(ii) flights on the aircraft
owner's aircraft.
``(B) Aircraft management services.--For
purposes of subparagraph (A), the term
`aircraft management services' includes--
``(i) assisting an aircraft owner
with administrative and support
services, such as scheduling, flight
planning, and weather forecasting,
``(ii) obtaining insurance,
``(iii) maintenance, storage and
fueling of aircraft,
``(iv) hiring, training, and
provision of pilots and crew,
``(v) establishing and complying
with safety standards, and
``(vi) such other services as are
necessary to support flights operated
by an aircraft owner.
``(C) Lessee treated as aircraft owner.--
``(i) In general.--For purposes of
this paragraph, the term `aircraft
owner' includes a person who leases the
aircraft other than under a
disqualified lease.
``(ii) Disqualified lease.--For
purposes of clause (i), the term
`disqualified lease' means a lease from
a person providing aircraft management
services with respect to such aircraft
(or a related person (within the
meaning of section 465(b)(3)(C)) to the
person providing such services), if
such lease is for a term of 31 days or
less.
``(D) Pro rata allocation.--In the case of
amounts paid to any person which (but for this
subsection) are subject to the tax imposed by
subsection (a), a portion of which consists of
amounts described in subparagraph (A), this
paragraph shall apply on a pro rata basis only
to the portion which consists of amounts
described in such subparagraph.''.
(b) Effective Date.--The amendment made by this section
shall apply to amounts paid after the date of the enactment of
this Act.
SEC. 13823. OPPORTUNITY ZONES.
(a) In General.--Chapter 1 is amended by adding at the end
the following:
``Subchapter Z--Opportunity Zones
``Sec. 1400Z-1. Designation.
``Sec. 1400Z-2. Special rules for capital gains invested in opportunity
zones.
``SEC. 1400Z-1. DESIGNATION.
``(a) Qualified Opportunity Zone Defined.--For the purposes
of this subchapter, the term `qualified opportunity zone' means
a population census tract that is a low-income community that
is designated as a qualified opportunity zone.
``(b) Designation.--
``(1) In general.--For purposes of subsection (a),
a population census tract that is a low-income
community is designated as a qualified opportunity zone
if--
``(A) not later than the end of the
determination period, the chief executive
officer of the State in which the tract is
located--
``(i) nominates the tract for
designation as a qualified opportunity
zone, and
``(ii) notifies the Secretary in
writing of such nomination, and
``(B) the Secretary certifies such
nomination and designates such tract as a
qualified opportunity zone before the end of
the consideration period.
``(2) Extension of periods.--A chief executive
officer of a State may request that the Secretary
extend either the determination or consideration
period, or both (determined without regard to this
subparagraph), for an additional 30 days.
``(c) Other Definitions.--For purposes of this subsection--
``(1) Low-income communities.--The term `low-income
community' has the same meaning as when used in section
45D(e).
``(2) Definition of periods.--
``(A) Consideration period.--The term
`consideration period' means the 30-day period
beginning on the date on which the Secretary
receives notice under subsection (b)(1)(A)(ii),
as extended under subsection (b)(2).
``(B) Determination period.--The term
`determination period' means the 90-day period
beginning on the date of the enactment of the
Tax Cuts and Jobs Act, as extended under
subsection (b)(2).
``(3) State.--For purposes of this section, the
term `State' includes any possession of the United
States.
``(d) Number of Designations.--
``(1) In general.--Except as provided by paragraph
(2), the number of population census tracts in a State
that may be designated as qualified opportunity zones
under this section may not exceed 25 percent of the
number of low-income communities in the State.
``(2) Exception.--If the number of low-income
communities in a State is less than 100, then a total
of 25 of such tracts may be designated as qualified
opportunity zones.
``(e) Designation of Tracts Contiguous With Low-income
Communities.--
``(1) In general.--A population census tract that
is not a low-income community may be designated as a
qualified opportunity zone under this section if--
``(A) the tract is contiguous with the low-
income community that is designated as a
qualified opportunity zone, and
``(B) the median family income of the tract
does not exceed 125 percent of the median
family income of the low-income community with
which the tract is contiguous.
``(2) Limitation.--Not more than 5 percent of the
population census tracts designated in a State as a
qualified opportunity zone may be designated under
paragraph (1).
``(f) Period for Which Designation Is in Effect.--A
designation as a qualified opportunity zone shall remain in
effect for the period beginning on the date of the designation
and ending at the close of the 10th calendar year beginning on
or after such date of designation.
``SEC. 1400Z-2. SPECIAL RULES FOR CAPITAL GAINS INVESTED IN OPPORTUNITY
ZONES.
``(a) In General.--
``(1) Treatment of gains.--In the case of gain from
the sale to, or exchange with, an unrelated person of
any property held by the taxpayer, at the election of
the taxpayer--
``(A) gross income for the taxable year
shall not include so much of such gain as does
not exceed the aggregate amount invested by the
taxpayer in a qualified opportunity fund during
the 180-day period beginning on the date of
such sale or exchange,
``(B) the amount of gain excluded by
subparagraph (A) shall be included in gross
income as provided by subsection (b), and
``(C) subsection (c) shall apply.
``(2) Election.--No election may be made under
paragraph (1)--
``(A) with respect to a sale or exchange if
an election previously made with respect to
such sale or exchange is in effect, or
``(B) with respect to any sale or exchange
after December 31, 2026.
``(b) Deferral of Gain Invested in Opportunity Zone
Property.--
``(1) Year of inclusion.--Gain to which subsection
(a)(1)(B) applies shall be included in income in the
taxable year which includes the earlier of--
``(A) the date on which such investment is
sold or exchanged, or
``(B) December 31, 2026.
``(2) Amount includible.--
``(A) In general.--The amount of gain
included in gross income under subsection
(a)(1)(A) shall be the excess of--
``(i) the lesser of the amount of
gain excluded under paragraph (1) or
the fair market value of the investment
as determined as of the date described
in paragraph (1), over
``(ii) the taxpayer's basis in the
investment.
``(B) Determination of basis.--
``(i) In general.--Except as
otherwise provided in this clause or
subsection (c), the taxpayer's basis in
the investment shall be zero.
``(ii) Increase for gain recognized
under subsection (a)(1)(B).--The basis
in the investment shall be increased by
the amount of gain recognized by reason
of subsection (a)(1)(B) with respect to
such property.
``(iii) Investments held for 5
years.--In the case of any investment
held for at least 5 years, the basis of
such investment shall be increased by
an amount equal to 10 percent of the
amount of gain deferred by reason of
subsection (a)(1)(A).
``(iv) Investments held for 7
years.--In the case of any investment
held by the taxpayer for at least 7
years, in addition to any adjustment
made under clause (iii), the basis of
such property shall be increased by an
amount equal to 5 percent of the amount
of gain deferred by reason of
subsection (a)(1)(A).
``(c) Special Rule for Investments Held for at Least 10
Years.--In the case of any investment held by the taxpayer for
at least 10 years and with respect to which the taxpayer makes
an election under this clause, the basis of such property shall
be equal to the fair market value of such investment on the
date that the investment is sold or exchanged.
``(d) Qualified Opportunity Fund.--For purposes of this
section--
``(1) In general.--The term `qualified opportunity
fund' means any investment vehicle which is organized
as a corporation or a partnership for the purpose of
investing in qualified opportunity zone property (other
than another qualified opportunity fund) that holds at
least 90 percent of its assets in qualified opportunity
zone property, determined by the average of the
percentage of qualified opportunity zone property held
in the fund as measured--
``(A) on the last day of the first 6-month
period of the taxable year of the fund, and
``(B) on the last day of the taxable year
of the fund.
``(2) Qualified opportunity zone property.--
``(A) In general.--The term `qualified
opportunity zone property' means property which
is--
``(i) qualified opportunity zone
stock,
``(ii) qualified opportunity zone
partnership interest, or
``(iii) qualified opportunity zone
business property.
``(B) Qualified opportunity zone stock.--
``(i) In general.--Except as
provided in clause (ii), the term
`qualified opportunity zone stock'
means any stock in a domestic
corporation if--
``(I) such stock is
acquired by the qualified
opportunity fund after December
31, 2017, at its original issue
(directly or through an
underwriter) from the
corporation solely in exchange
for cash,
``(II) as of the time such
stock was issued, such
corporation was a qualified
opportunity zone business (or,
in the case of a new
corporation, such corporation
was being organized for
purposes of being a qualified
opportunity zone business), and
``(III) during
substantially all of the
qualified opportunity fund's
holding period for such stock,
such corporation qualified as a
qualified opportunity zone
business.
``(ii) Redemptions.--A rule similar
to the rule of section 1202(c)(3) shall
apply for purposes of this paragraph.
``(C) Qualified opportunity zone
partnership interest.--The term `qualified
opportunity zone partnership interest' means
any capital or profits interest in a domestic
partnership if--
``(i) such interest is acquired by
the qualified opportunity fund after
December 31, 2017, from the partnership
solely in exchange for cash,
``(ii) as of the time such interest
was acquired, such partnership was a
qualified opportunity zone business
(or, in the case of a new partnership,
such partnership was being organized
for purposes of being a qualified
opportunity zone business), and
``(iii) during substantially all of
the qualified opportunity fund's
holding period for such interest, such
partnership qualified as a qualified
opportunity zone business.
``(D) Qualified opportunity zone business
property.--
``(i) In general.--The term
`qualified opportunity zone business
property' means tangible property used
in a trade or business of the qualified
opportunity fund if--
``(I) such property was
acquired by the qualified
opportunity fund by purchase
(as defined in section
179(d)(2)) after December 31,
2017,
``(II) the original use of
such property in the qualified
opportunity zone commences with
the qualified opportunity fund
or the qualified opportunity
fund substantially improves the
property, and
``(III) during
substantially all of the
qualified opportunity fund's
holding period for such
property, substantially all of
the use of such property was in
a qualified opportunity zone.
``(ii) Substantial improvement.--
For purposes of subparagraph (A)(ii),
property shall be treated as
substantially improved by the qualified
opportunity fund only if, during any
30-month period beginning after the
date of acquisition of such property,
additions to basis with respect to such
property in the hands of the qualified
opportunity fund exceed an amount equal
to the adjusted basis of such property
at the beginning of such 30-month
period in the hands of the qualified
opportunity fund.
``(iii) Related party.--For
purposes of subparagraph (A)(i), the
related person rule of section
179(d)(2) shall be applied pursuant to
paragraph (8) of this subsection in
lieu of the application of such rule in
section 179(d)(2)(A).
``(3) Qualified opportunity zone business.--
``(A) In general.--The term `qualified
opportunity zone business' means a trade or
business--
``(i) in which substantially all of
the tangible property owned or leased
by the taxpayer is qualified
opportunity zone business property
(determined by substituting `qualified
opportunity zone business' for
`qualified opportunity fund' each place
it appears in paragraph (2)(D)),
``(ii) which satisfies the
requirements of paragraphs (2), (4),
and (8) of section 1397C(b), and
``(iii) which is not described in
section 144(c)(6)(B).
``(B) Special rule.--For purposes of
subparagraph (A), tangible property that ceases
to be a qualified opportunity zone business
property shall continue to be treated as a
qualified opportunity zone business property
for the lesser of--
``(i) 5 years after the date on
which such tangible property ceases to
be so qualified, or
``(ii) the date on which such
tangible property is no longer held by
the qualified opportunity zone
business.
``(e) Applicable Rules.--
``(1) Treatment of investments with mixed funds.--
In the case of any investment in a qualified
opportunity fund only a portion of which consists of
investments of gain to which an election under
subsection (a) is in effect--
``(A) such investment shall be treated as 2
separate investments, consisting of--
``(i) one investment that only
includes amounts to which the election
under subsection (a) applies, and
``(ii) a separate investment
consisting of other amounts, and
``(B) subsections (a), (b), and (c) shall
only apply to the investment described in
subparagraph (A)(i).
``(2) Related persons.--For purposes of this
section, persons are related to each other if such
persons are described in section 267(b) or 707(b)(1),
determined by substituting `20 percent' for `50
percent' each place it occurs in such sections.
``(3) Decedents.--In the case of a decedent,
amounts recognized under this section shall, if not
properly includible in the gross income of the
decedent, be includible in gross income as provided by
section 691.
``(4) Regulations.--The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section, including--
``(A) rules for the certification of
qualified opportunity funds for the purposes of
this section,
``(B) rules to ensure a qualified
opportunity fund has a reasonable period of
time to reinvest the return of capital from
investments in qualified opportunity zone stock
and qualified opportunity zone partnership
interests, and to reinvest proceeds received
from the sale or disposition of qualified
opportunity zone property, and
``(C) rules to prevent abuse.
``(f) Failure of Qualified Opportunity Fund to Maintain
Investment Standard.--
``(1) In general.--If a qualified opportunity fund
fails to meet the 90-percent requirement of subsection
(c)(1), the qualified opportunity fund shall pay a
penalty for each month it fails to meet the requirement
in an amount equal to the product of--
``(A) the excess of--
``(i) the amount equal to 90
percent of its aggregate assets, over
``(ii) the aggregate amount of
qualified opportunity zone property
held by the fund, multiplied by
``(B) the underpayment rate established
under section 6621(a)(2) for such month.
``(2) Special rule for partnerships.--In the case
that the qualified opportunity fund is a partnership,
the penalty imposed by paragraph (1) shall be taken
into account proportionately as part of the
distributive share of each partner of the partnership.
``(3) Reasonable cause exception.--No penalty shall
be imposed under this subsection with respect to any
failure if it is shown that such failure is due to
reasonable cause.''.
(b) Basis Adjustments.--Section 1016(a) is amended by
striking ``and'' at the end of paragraph (36), by striking the
period at the end of paragraph (37) and inserting ``, and'',
and by inserting after paragraph (37) the following:
``(38) to the extent provided in subsections (b)(2)
and (c) of section 1400Z-2.''.
(c) Clerical Amendment.--The table of subchapters for
chapter 1 is amended by adding at the end the following new
item:
``subchapter z. opportunity zones''.
(d) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
Subtitle D--International Tax Provisions
PART I--OUTBOUND TRANSACTIONS
Subpart A--Establishment of Participation Exemption System for Taxation
of Foreign Income
SEC. 14101. 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--
``(1) In general.--The term `specified 10-percent
owned foreign corporation' means any foreign
corporation with respect to which any domestic
corporation is a United States shareholder with respect
to such corporation.
``(2) Exclusion of passive foreign investment
companies.--Such term shall not include any corporation
which is a passive foreign investment company (as
defined in section 1297) with respect to the
shareholder and which 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 from a specified 10-percent owned foreign
corporation is an amount which bears the same ratio to
such dividend as--
``(A) the undistributed foreign earnings of
the specified 10-percent owned foreign
corporation, bears to
``(B) the total undistributed earnings of
such foreign corporation.
``(2) Undistributed earnings.--The term
`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)--
``(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) Undistributed foreign earnings.--The term
`undistributed foreign earnings' means the portion of
the 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)).
``(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) Special Rules for Hybrid Dividends.--
``(1) In general.--Subsection (a) shall not apply
to any dividend received by a United States shareholder
from a controlled foreign corporation if the dividend
is a hybrid dividend.
``(2) Hybrid dividends of tiered corporations.--If
a controlled foreign corporation with respect to which
a domestic corporation is a United States shareholder
receives a hybrid dividend from any other controlled
foreign corporation with respect to which such domestic
corporation is also a United States shareholder, then,
notwithstanding any other provision of this title--
``(A) the hybrid dividend shall be treated
for purposes of section 951(a)(1)(A) as subpart
F income of the receiving controlled foreign
corporation for the taxable year of the
controlled foreign corporation in which the
dividend was received, and
``(B) the United States shareholder shall
include in gross income an amount equal to the
shareholder's pro rata share (determined in the
same manner as under section 951(a)(2)) of the
subpart F income described in subparagraph (A).
``(3) Denial of foreign tax credit, etc.--The rules
of subsection (d) shall apply to any hybrid dividend
received by, or any amount included under paragraph (2)
in the gross income of, a United States shareholder.
``(4) Hybrid dividend.--The term `hybrid dividend'
means an amount received from a controlled foreign
corporation--
``(A) for which a deduction would be
allowed under subsection (a) but for this
subsection, and
``(B) for which the controlled foreign
corporation received a deduction (or other tax
benefit) with respect to any income, war
profits, or excess profits taxes imposed by any
foreign country or possession of the United
States.
``(f) Special Rule for Purging Distributions of Passive
Foreign Investment Companies.--Any amount which is treated as a
dividend under section 1291(d)(2)(B) shall not be treated as a
dividend for purposes of this section.
``(g) Regulations.--The Secretary shall prescribe such
regulations or other guidance as may be necessary or
appropriate to carry out the provisions of this section,
including regulations for the treatment of United States
shareholders owning stock of a specified 10 percent owned
foreign corporation through a partnership.''.
(b) Application of Holding Period Requirement.--Subsection
(c) of section 246 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) 1-year holding period requirement.--
For purposes of section 245A--
``(i) paragraph (1)(A) shall be
applied--
``(I) by substituting `365
days' for `45 days' each place
it appears, and
``(II) by substituting
`731-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 at
all times during such period, and
``(ii) the taxpayer is a United
States shareholder with respect to such
specified 10-percent owned foreign
corporation at all times during such
period.''.
(c) Application of Rules Generally Applicable to Deductions
for Dividends Received.--
(1) Treatment of dividends from certain
corporations.--Paragraph (1) of section 246(a) is
amended by striking ``and 245'' and inserting ``245,
and 245A''.
(2) Coordination with section 1059.--Subparagraph
(B) of section 1059(b)(2) is amended by striking ``or
245'' and inserting ``245, or 245A''.
(d) Coordination With Foreign Tax Credit Limitation.--
Subsection (b) of section 904 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 domestic corporation which is 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 amounts
includible under section 951(a)(1) or
951A(a)) 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 amounts includible under
section 951(a)(1) or 951A(a).
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) Subsection (b) of section 951 is amended by
striking ``subpart'' and inserting ``title''.
(2) Subsection (a) of section 957 is amended by
striking ``subpart'' in the matter preceding paragraph
(1) and inserting ``title''.
(3) The table of sections for part VIII of
subchapter B of chapter 1 is amended by inserting after
the item relating to section 245 the following new
item:
``Sec. 245A. Deduction for foreign source-portion of dividends received
by domestic corporations from certain 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. 14102. SPECIAL RULES RELATING TO SALES OR TRANSFERS INVOLVING
SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS.
(a) Sales by United States Persons of Stock.--
(1) In general.--Section 1248 is amended by
redesignating subsection (j) as subsection (k) and by
inserting after subsection (i) the following new
subsection:
``(j) Coordination With Dividends Received Deduction.--In
the case of the sale or exchange by a domestic corporation of
stock in a foreign corporation held for 1 year or more, any
amount received by the domestic corporation which is treated as
a dividend by reason of this section shall be treated as a
dividend for purposes of applying section 245A.''.
(2) Effective date.--The amendments made by this
subsection shall apply to sales or exchanges after
December 31, 2017.
(b) 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.
(c) Sale by a CFC of a Lower Tier CFC.--
(1) In general.--Section 964(e) is amended by
adding at the end the following new paragraph:
``(4) Coordination with dividends received
deduction.--
``(A) In general.--If, for any taxable year
of a controlled foreign corporation beginning
after December 31, 2017, any amount is treated
as a dividend under paragraph (1) by reason of
a sale or exchange by the controlled foreign
corporation of stock in another foreign
corporation held for 1 year or more, then,
notwithstanding any other provision of this
title--
``(i) the foreign-source portion of
such dividend shall be treated for
purposes of section 951(a)(1)(A) as
subpart F income of the selling
controlled foreign corporation for such
taxable year,
``(ii) a United States shareholder
with respect to the selling controlled
foreign corporation shall include in
gross income for the taxable year of
the shareholder with or within which
such taxable year of the controlled
foreign corporation ends an amount
equal to the shareholder's pro rata
share (determined in the same manner as
under section 951(a)(2)) of the amount
treated as subpart F income under
clause (i), and
``(iii) the deduction under section
245A(a) shall be allowable to the
United States shareholder with respect
to the subpart F income included in
gross income under clause (ii) in the
same manner as if such subpart F income
were a dividend received by the
shareholder from the selling controlled
foreign corporation.
``(B) Application of basis or similar
adjustment.--For purposes of this title, in the
case of a sale or exchange by a controlled
foreign corporation of stock in another foreign
corporation in a taxable year of the selling
controlled foreign corporation beginning after
December 31, 2017, rules similar to the rules
of section 961(d) shall apply.
``(C) Foreign-source portion.--For purposes
of this paragraph, the foreign-source portion
of any amount treated as a dividend under
paragraph (1) shall be determined in the same
manner as under section 245A(c).''.
(2) Effective date.--The amendments made by this
subsection shall apply to sales or exchanges after
December 31, 2017.
(d) 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), as in effect before the date
of the enactment of the Tax Cuts and Jobs Act) 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.--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
(b)(2)(B)).
``(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 shall 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) 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.''.
(3) Effective date.--The amendments made by this
subsection shall apply to transfers after December 31,
2017.
(4) Transition rule.--The amount of gain taken into
account under section 91(c) of the Internal Revenue
Code of 1986, as added by this subsection, shall be
reduced by the amount of gain which would be recognized
under section 367(a)(3)(C) (determined without regard
to the amendments made by subsection (e)) with respect
to losses incurred before January 1, 2018.
(e) Repeal of Active Trade or Business Exception Under
Section 367.--
(1) In general.--Section 367(a) is amended by
striking paragraph (3) and redesignating paragraphs
(4), (5), and (6) as paragraphs (3), (4), and (5),
respectively.
(2) Conforming amendments.--Section 367(a)(4), as
redesignated by paragraph (1), is amended--
(A) by striking ``Paragraphs (2) and (3)''
and inserting ``Paragraph (2)'', and
(B) by striking ``Paragraphs (2) and (3)''
in the heading and inserting ``Paragraph (2)''.
(3) Effective date.--The amendments made by this
subsection shall apply to transfers after December 31,
2017.
SEC. 14103. 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 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.--
``(i) In general.--The term
`aggregate foreign E&P deficit' means,
with respect to any United States
shareholder, the lesser of--
``(I) 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, or
``(II) the amount
determined under paragraph
(2)(B).
``(ii) Allocation of deficit.--If
the amount described in clause (i)(II)
is less than the amount described in
clause (i)(I), then the shareholder
shall designate, in such form and
manner as the Secretary determines--
``(I) the amount of the
specified E&P deficit which is
to be taken into account for
each E&P deficit corporation
with respect to the taxpayer,
and
``(II) in the case of an
E&P deficit corporation which
has a qualified deficit (as
defined in section 952), the
portion (if any) of the deficit
taken into account under
subclause (I) which is
attributable to a qualified
deficit, including the
qualified activities to which
such portion is attributable.
``(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, as
of November 2, 2017--
``(i) such specified foreign
corporation has a deficit in post-1986
earnings and profits,
``(ii) such corporation was a
specified foreign corporation, and
``(iii) 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) Treatment of earnings and profits in future
years.--
``(A) Reduced earnings and profits treated
as previously taxed income when distributed.--
For purposes of applying section 959 in any
taxable year beginning with the taxable year
described in subsection (a), with respect to
any United States shareholder of a deferred
foreign income corporation, an amount equal to
such shareholder's reduction under paragraph
(1) which is allocated to such deferred foreign
income corporation under this subsection shall
be treated as an amount which was included in
the gross income of such United States
shareholder under section 951(a).
``(B) E&P deficits.--For purposes of this
title, with respect to any taxable year
beginning with the taxable year described in
subsection (a), a United States shareholder's
pro rata share of the earnings and profits of
any E&P deficit foreign corporation under this
subsection shall be increased by the amount of
the specified E&P deficit of such corporation
taken into account by such shareholder under
paragraph (1), and, for purposes of section
952, such increase shall be attributable to the
same activity to which the deficit so taken
into account was attributable.
``(5) 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) without regard to clause (i)(II)
thereof), 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 8
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 15.5
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) 8 and 15.5 percent rate equivalent
percentages.--For purposes of this subsection--
``(A) 8 percent rate equivalent
percentage.--The term `8 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 8 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) 15.5 percent rate equivalent
percentage.--The term `15.5 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 `15.5
percent rate of tax' for `8 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, the greater 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 the
close of the last taxable year of such
specified foreign corporation which
begins before January 1, 2018, or
``(ii) one half of the sum of--
``(I) 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, plus
``(II) 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 subclause (I).
``(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) Personal property
which is of a type that is
actively traded and 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.--Cash
positions of a specified foreign corporation
described in clause (ii), (iii)(I), or
(iii)(IV) of subparagraph (B) shall not be
taken into account by a United States
shareholder under subparagraph (A) to the
extent that such United States shareholder
demonstrates to the satisfaction of the
Secretary that such amount is so taken into
account by such United States shareholder with
respect to another specified foreign
corporation.
``(E) Cash positions of certain non-
corporate entities taken into account.--An
entity (other than a 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.
``(F) Anti-abuse.--If the Secretary
determines that a 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)) 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) in the case of a controlled foreign
corporation, 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, and by only
taking into account periods when the foreign
corporation was a specified foreign corporation)
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, and
``(B) without diminution by reason of
dividends distributed during the taxable year
described in subsection (a) other than
dividends distributed to another specified
foreign corporation.
``(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.
``(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) Exclusion of passive foreign investment
companies.--Such term shall not include any corporation
which is a passive foreign investment company (as
defined in section 1297) with respect to the
shareholder and which is not a controlled foreign
corporation.
``(f) Determinations of Pro Rata Share.--
``(1) In general.--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).
``(2) Special rules.--The portion which is included
in the income of a United States shareholder under
section 951(a)(1) by reason of subsection (a) which is
equal to the deduction allowed under subsection (c) by
reason of such inclusion--
``(A) shall be treated as income exempt
from tax for purposes of sections 705(a)(1)(B)
and 1367(a)(1)(A), and
``(B) shall not be treated as income exempt
from tax for purposes of determining whether an
adjustment shall be made to an accumulated
adjustment account under section 1368(e)(1)(A).
``(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) 0.771 multiplied by 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) 0.557 multiplied by 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.
``(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 installments of
the following amounts:
``(A) 8 percent of the net tax liability in
the case of each of the first 5 of such
installments,
``(B) 15 percent of the net tax liability
in the case of the 6th such installment,
``(C) 20 percent of the net tax liability
in the case of the 7th such installment, and
``(D) 25 percent of the net tax liability
in the case of the 8th such installment.
``(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 shall 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 or deduction
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 of tax 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) of subparagraph (A)
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.--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 shall provide.
``(j) Reporting by S Corporation.--Each S corporation which
is a United States shareholder of a specified foreign
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) Extension of Limitation on Assessment.--
Notwithstanding section 6501, the limitation on the time period
for the assessment of the net tax liability under this section
(as defined in subsection (h)(6)) shall not expire before the
date that is 6 years after the return for the taxable year
described in such subsection was filed.
``(l) Recapture for Expatriated Entities.--
``(1) In general.--If a deduction is allowed under
subsection (c) to a United States shareholder and such
shareholder first becomes an expatriated entity at any
time during the 10-year period beginning on the date of
the enactment of the Tax Cuts and Jobs Act (with
respect to a surrogate foreign corporation which first
becomes a surrogate foreign corporation during such
period), then--
``(A) the tax imposed by this chapter shall
be increased for the first taxable year in
which such taxpayer becomes an expatriated
entity by an amount equal to 35 percent of the
amount of the deduction allowed under
subsection (c), and
``(B) no credits shall be allowed against
the increase in tax under subparagraph (A).
``(2) Expatriated entity.--For purposes of this
subsection, the term `expatriated entity' has the same
meaning given such term under section 7874(a)(2),
except that such term shall not include an entity if
the surrogate foreign corporation with respect to the
entity is treated as a domestic corporation under
section 7874(b).
``(3) Surrogate foreign corporation.--For purposes
of this subsection, the term `surrogate foreign
corporation' has the meaning given such term in section
7874(a)(2)(B).
``(m) Special Rules for United States Shareholders Which
Are Real Estate Investment Trusts.--
``(1) In general.--If a real estate investment
trust is a United States shareholder in 1 or more
deferred foreign income corporations--
``(A) any amount required to be taken into
account under section 951(a)(1) by reason of
this section shall not be taken into account as
gross income of the real estate investment
trust for purposes of applying paragraphs (2)
and (3) of section 856(c) to any taxable year
for which such amount is taken into account
under section 951(a)(1), and
``(B) if the real estate investment trust
elects the application of this subparagraph,
notwithstanding subsection (a), any amount
required to be taken into account under section
951(a)(1) by reason of this section shall, in
lieu of the taxable year in which it would
otherwise be included in gross income (for
purposes of the computation of real estate
investment trust taxable income under section
857(b)), be included in gross income as
follows:
``(i) 8 percent of such amount in
the case of each of the taxable years
in the 5-taxable year period beginning
with the taxable year in which such
amount would otherwise be included.
``(ii) 15 percent of such amount in
the case of the 1st taxable year
following such period.
``(iii) 20 percent of such amount
in the case of the 2nd taxable year
following such period.
``(iv) 25 percent of such amount in
the case of the 3rd taxable year
following such period.
``(2) Rules for trusts electing deferred
inclusion.--
``(A) Election.--Any election under
paragraph (1)(B) shall be made not later than
the due date for the first taxable year in the
5-taxable year period described in clause (i)
of paragraph (1)(B) and shall be made in such
manner as the Secretary shall provide.
``(B) Special rules.--If an election under
paragraph (1)(B) is in effect with respect to
any real estate investment trust, the following
rules shall apply:
``(i) Application of participation
exemption.--For purposes of subsection
(c)(1)--
``(I) the aggregate amount
to which subparagraph (A) or
(B) of subsection (c)(1)
applies shall be determined
without regard to the election,
``(II) each such aggregate
amount shall be allocated to
each taxable year described in
paragraph (1)(B) in the same
proportion as the amount
included in the gross income of
such United States shareholder
under section 951(a)(1) by
reason of this section is
allocated to each such taxable
year.
``(III) No installment
payments.--The real estate
investment trust may not make
an election under subsection
(g) for any taxable year
described in paragraph (1)(B).
``(ii) Acceleration of inclusion.--
If there is a liquidation or sale of
substantially all the assets of the
real estate investment trust (including
in a title 11 or similar case), a
cessation of business by such trust, or
any similar circumstance, then any
amount not yet included in gross income
under paragraph (1)(B) shall be
included in gross income as of the day
before the date of the event and the
unpaid portion of any tax liability
with respect to such inclusion 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).
``(n) Election Not to Apply Net Operating Loss Deduction.--
``(1) In general.--If a United States shareholder
of a deferred foreign income corporation elects the
application of this subsection for the taxable year
described in subsection (a), then the amount described
in paragraph (2) shall not be taken into account--
``(A) in determining the amount of the net
operating loss deduction under section 172 of
such shareholder for such taxable year, or
``(B) in determining the amount of taxable
income for such taxable year which may be
reduced by net operating loss carryovers or
carrybacks to such taxable year under section
172.
``(2) Amount described.--The amount described in
this paragraph is the sum of--
``(A) the amount required to be taken into
account under section 951(a)(1) by reason of
this section (determined after the application
of subsection (c)), plus
``(B) in the case of a domestic corporation
which chooses to have the benefits of subpart A
of part III of subchapter N for the taxable
year, the taxes deemed to be paid by such
corporation under subsections (a) and (b) of
section 960 for such taxable year with respect
to the amount described in subparagraph (A)
which are treated as a dividends under section
78.
``(3) Election.--Any election under this subsection
shall be made not later than the due date (including
extensions) for filing the return of tax for the
taxable year and shall be made in such manner as the
Secretary shall prescribe.
``(o) Regulations.--The Secretary shall prescribe such
regulations or other guidance as may be necessary or
appropriate to carry out the provisions of this section,
including--
``(1) regulations or other guidance to provide
appropriate basis adjustments, and
``(2) regulations or other guidance to prevent the
avoidance of the purposes of this section, including
through a reduction in earnings and profits, through
changes in entity classification or accounting methods,
or otherwise.''.
(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.''.
Subpart B--Rules Related to Passive and Mobile Income
CHAPTER 1--TAXATION OF FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL
INTANGIBLE LOW-TAXED INCOME
SEC. 14201. CURRENT YEAR INCLUSION OF GLOBAL INTANGIBLE LOW-TAXED
INCOME BY UNITED STATES SHAREHOLDERS.
(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. GLOBAL INTANGIBLE LOW-TAXED INCOME 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 such shareholder's global intangible low-taxed
income for such taxable year.
``(b) Global Intangible Low-taxed Income.--For purposes of
this section--
``(1) In general.--The term `global intangible low-
taxed income' 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) such shareholder's net deemed
tangible income return for such taxable year.
``(2) Net deemed tangible income return.--The term
`net deemed tangible income return' means, with respect
to any United States shareholder for any taxable year,
the excess of--
``(A) 10 percent 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
``(B) 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 to the extent the
interest income attributable to such expense is
not taken into account in determining such
shareholder's net CFC tested income.
``(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
described in section 952(b),
``(II) any gross income
taken into account in
determining the subpart F
income of such corporation,
``(III) any gross income
excluded from the foreign base
company income (as defined in
section 954) and the insurance
income (as defined in section
953) of such corporation by
reason of section 954(b)(4),
``(IV) any dividend
received from a related person
(as defined in section
954(d)(3)), and
``(V) any foreign oil and
gas extraction income (as
defined in section 907(c)(1))
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 to which such
deductions would be allocable if there
were such gross income).
``(B) Tested loss.--
``(i) In general.--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).
``(ii) Coordination with subpart f
to deny double benefit of losses.--
Section 952(c)(1)(A) shall be applied
by increasing the earnings and profits
of the controlled foreign corporation
by the tested loss of such corporation.
``(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, the average
of such corporation's aggregate adjusted bases as of
the close of each quarter of 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 167.
``(2) Specified tangible property.--
``(A) In general.--The term `specified
tangible property' means, except as provided in
subparagraph (B), any tangible property used in
the production of tested income.
``(B) Dual use property.--In the case of
property used both in the production of tested
income and income which is not tested income,
such property shall be treated as specified
tangible property in the same proportion that
the gross income described in subsection
(c)(1)(A) produced with respect to such
property bears to the total gross income
produced with respect to such property.
``(3) Determination of adjusted basis.--For
purposes of this subsection, notwithstanding any
provision of this title (or any other provision of law)
which is enacted after the date of the enactment of
this section, the adjusted basis in any property shall
be determined--
``(A) by using the alternative depreciation
system under section 168(g), and
``(B) by allocating the depreciation
deduction with respect to such property ratably
to each day during the period in the taxable
year to which such depreciation relates.
``(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 167, and
``(C) is used in the production of tested
income (determined with respect to such
controlled foreign corporation's distributive
share of income 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 with respect
to such property.
``(4) 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) Determination of Pro Rata Share, etc.--For purposes
of this section--
``(1) In general.--The pro rata shares referred to
in subsections (b), (c)(1)(A), and (c)(1)(B),
respectively, shall be determined under the rules of
section 951(a)(2) in the same manner as such section
applies to subpart F income and shall be taken into
account in the taxable year of the United States
shareholder in which or with which the taxable year of
the controlled foreign corporation ends.
``(2) Treatment as united states shareholder.--A
person shall be treated as a United States shareholder
of a controlled foreign corporation for any taxable
year of such person only if such person owns (within
the meaning of section 958(a)) stock in such foreign
corporation on the last day in the taxable year of such
foreign corporation on which such foreign corporation
is a controlled foreign corporation.
``(3) Treatment as controlled foreign
corporation.--A foreign corporation shall be treated as
a controlled foreign corporation for any taxable year
if such foreign corporation is a controlled foreign
corporation at any time during such taxable year.
``(f) Treatment as Subpart F Income for Certain Purposes.--
``(1) In general.--
``(A) Application.--Except as provided in
subparagraph (B), any global intangible low-
taxed income 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).
``(B) Exception.--The Secretary shall
provide rules for the application of
subparagraph (A) to other provisions of this
title in any case in which the determination of
subpart F income is required to be made at the
level of the controlled foreign corporation.
``(2) Allocation of global intangible low-taxed
income 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 global intangible low-taxed income
included in gross income of a United States shareholder
under subsection (a), the portion of such global
intangible low-taxed income which is treated as being
with respect to such controlled foreign corporation
is--
``(A) in the case of a controlled foreign
corporation with no tested income, zero, and
``(B) in the case of a controlled foreign
corporation with tested income, the portion of
such global intangible low-taxed income which
bears the same ratio to such global intangible
low-taxed income 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
described in subsection (c)(1)(A) with
respect to such United States
shareholder.''.
(b) Foreign Tax Credit.--
(1) Application of deemed paid foreign tax
credit.--Section 960 is amended adding at the end the
following new subsection:
``(d) Deemed Paid Credit for Taxes Properly Attributable to
Tested Income.--
``(1) In general.--For purposes of subpart A of
this part, 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 the product
of--
``(A) such domestic corporation's inclusion
percentage, multiplied by
``(B) the aggregate tested foreign income
taxes paid or accrued by controlled foreign
corporations.
``(2) Inclusion percentage.--For purposes of
paragraph (1), the term `inclusion percentage' means,
with respect to any domestic corporation, the ratio
(expressed as a percentage) of--
``(A) such corporation's global intangible
low-taxed income (as defined in section
951A(b)), divided by
``(B) the aggregate amount described in
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 the tested income of such foreign
corporation taken into account by such domestic
corporation under section 951A.''.
(2) Application of foreign tax credit limitation.--
(A) Separate basket for global intangible
low-taxed income.--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 (other than passive category
income),''.
(B) Exclusion from general category
income.--Section 904(d)(2)(A)(ii) is amended by
inserting ``income described in paragraph
(1)(A) and'' before ``passive category
income''.
(C) No carryover or carryback 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).''.
(c) Clerical Amendment.--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. Global intangible low-taxed income 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. 14202. DEDUCTION FOR FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL
INTANGIBLE LOW-TAXED INCOME.
(a) In General.--Part VIII of subchapter B of chapter 1 is
amended by adding at the end the following new section:
``SEC. 250. FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL INTANGIBLE
LOW-TAXED INCOME.
``(a) Allowance of Deduction.--
``(1) In general.--In the case of a domestic
corporation for any taxable year, there shall be
allowed as a deduction an amount equal to the sum of--
``(A) 37.5 percent of the foreign-derived
intangible income of such domestic corporation
for such taxable year, plus
``(B) 50 percent of--
``(i) the global intangible low-
taxed income amount (if any) which is
included in the gross income of such
domestic corporation under section 951A
for such taxable year, and
``(ii) the amount treated as a
dividend received by such corporation
under section 78 which is attributable
to the amount described in clause (i).
``(2) Limitation based on taxable income.--
``(A) In general.--If, for any taxable
year--
``(i) the sum of the foreign-
derived intangible income and the
global intangible low-taxed income
amount otherwise taken into account by
the domestic corporation under
paragraph (1), exceeds
``(ii) the taxable income of the
domestic corporation (determined
without regard to this section),
then the amount of the foreign-derived
intangible income and the global intangible
low-taxed income amount so taken into account
shall be reduced as provided in subparagraph
(B).
``(B) Reduction.--For purposes of
subparagraph (A)--
``(i) foreign-derived intangible
income shall be reduced by an amount
which bears the same ratio to the
excess described in subparagraph (A) as
such foreign-derived intangible income
bears to the sum described in
subparagraph (A)(i), and
``(ii) the global intangible low-
taxed income amount shall be reduced by
the remainder of such excess.
``(3) Reduction in deduction for taxable years
after 2025.--In the case of any taxable year beginning
after December 31, 2025, paragraph (1) shall be applied
by substituting--
``(A) `21.875 percent' for `37.5 percent'
in subparagraph (A), and
``(B) `37.5 percent' for `50 percent' in
subparagraph (B).
``(b) Foreign-derived Intangible Income.--For purposes of
this section--
``(1) In general.--The foreign-derived intangible
income of any domestic corporation is the amount which
bears the same ratio to the deemed intangible income of
such corporation as--
``(A) the foreign-derived deduction
eligible income of such corporation, bears to
``(B) the deduction eligible income of such
corporation.
``(2) Deemed intangible income.--For purposes of
this subsection--
``(A) In general.--The term `deemed
intangible income' means the excess (if any)
of--
``(i) the deduction eligible income
of the domestic corporation, over
``(ii) the deemed tangible income
return of the corporation.
``(B) Deemed tangible income return.--The
term `deemed tangible income return' means,
with respect to any corporation, an amount
equal to 10 percent of the corporation's
qualified business asset investment (as defined
in section 951A(d), determined by substituting
`deduction eligible income' for `tested income'
in paragraph (2) thereof and without regard to
whether the corporation is a controlled foreign
corporation).
``(3) Deduction eligible income.--
``(A) In general.--The term `deduction
eligible income' means, with respect to any
domestic corporation, the excess (if any) of--
``(i) gross income of such
corporation determined without regard
to--
``(I) any amount included
in the gross income of such
corporation under section
951(a)(1),
``(II) the global
intangible low-taxed income
included in the gross income of
such corporation under section
951A,
``(III) any financial
services income (as defined in
section 904(d)(2)(D)) of such
corporation,
``(IV) any dividend
received from a corporation
which is a controlled foreign
corporation of such domestic
corporation,
``(V) any domestic oil and
gas extraction income of such
corporation, and
``(VI) any foreign branch
income (as defined in section
904(d)(2)(J)), over
``(ii) the deductions (including
taxes) properly allocable to such gross
income.
``(B) Domestic oil and gas extraction
income.--For purposes of subparagraph (A), the
term `domestic oil and gas extraction income'
means income described in section 907(c)(1),
determined by substituting `within the United
States' for `without the United States'.
``(4) Foreign-derived deduction eligible income.--
The term `foreign-derived deduction eligible income'
means, with respect to any taxpayer for any taxable
year, any deduction eligible income of such taxpayer
which is derived in connection with--
``(A) property--
``(i) which is sold by the taxpayer
to any person who is not a United
States person, and
``(ii) which the taxpayer
establishes to the satisfaction of the
Secretary is for a foreign use, or
``(B) services provided by the taxpayer
which the taxpayer establishes to the
satisfaction of the Secretary are provided to
any person, or with respect to property, not
located within the United States.
``(5) Rules relating to foreign use property or
services.--For purposes of this subsection--
``(A) Foreign use.--The term `foreign use'
means any use, consumption, or disposition
which is not within the United States.
``(B) Property or services provided to
domestic intermediaries.--
``(i) Property.--If a taxpayer
sells property to another person (other
than a related party) for further
manufacture or other modification
within the United States, such property
shall not be treated as sold for a
foreign use even if such other person
subsequently uses such property for a
foreign use.
``(ii) Services.--If a taxpayer
provides services to another person
(other than a related party) located
within the United States, such services
shall not be treated as described in
paragraph (4)(B) even if such other
person uses such services in providing
services which are so described.
``(C) Special rules with respect to related
party transactions.--
``(i) Sales to related parties.--If
property is sold to a related party who
is not a United States person, such
sale shall not be treated as for a
foreign use unless--
``(I) such property is
ultimately sold by a related
party, or used by a related
party in connection with
property which is sold or the
provision of services, to
another person who is an
unrelated party who is not a
United States person, and
``(II) the taxpayer
establishes to the satisfaction
of the Secretary that such
property is for a foreign use.
For purposes of this clause, a sale of
property shall be treated as a sale of
each of the components thereof.
``(ii) Service provided to related
parties.--If a service is provided to a
related party who is not located in the
United States, such service shall not
be treated described in subparagraph
(A)(ii) unless the taxpayer established
to the satisfaction of the Secretary
that such service is not substantially
similar to services provided by such
related party to persons located within
the United States.
``(D) Related party.--For purposes of this
paragraph, the term `related party' means any
member of 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).
Any person (other than a corporation) shall be
treated as a member of such group if such
person is controlled by members of such group
(including any entity treated as a member of
such group by reason of this sentence) or
controls any such member. For purposes of the
preceding sentence, control shall be determined
under the rules of section 954(d)(3).
``(E) Sold.--For purposes of this
subsection, the terms `sold', `sells', and
`sale' shall include any lease, license,
exchange, or other disposition.
``(c) Regulations.--The Secretary shall prescribe such
regulations or other guidance as may be necessary or
appropriate to carry out the provisions of this section.''.
(b) Conforming Amendments.--
(1) Section 172(d), as amended by this Act, is
amended by adding at the end the following new
paragraph:
``(9) Deduction for foreign-derived intangible
income.--The deduction under section 250 shall not be
allowed.''.
(2) Section 246(b)(1) is amended--
(A) by striking ``and subsection (a) and
(b) of section 245'' the first place it appears
and inserting ``, subsection (a) and (b) of
section 245, and section 250'',
(B) by striking ``and subsection (a) and
(b) of section 245'' the second place it
appears and inserting ``subsection (a) and (b)
of section 245, and 250''.
(3) Section 469(i)(3)(F)(iii) is amended by
striking ``and 222'' and inserting ``222, and 250''.
(4) The table of sections for part VIII of
subchapter B of chapter 1 is amended by adding at the
end the following new item:
``Sec. 250. Foreign-derived intangible income and global intangible low-
taxed income.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
CHAPTER 2--OTHER MODIFICATIONS OF SUBPART F PROVISIONS
SEC. 14211. ELIMINATION OF INCLUSION OF FOREIGN BASE COMPANY OIL
RELATED INCOME.
(a) Repeal.--Subsection (a) of section 954 is amended--
(1) by inserting ``and'' at the end of paragraph
(2),
(2) by striking the comma at the end of paragraph
(3) and inserting a period, and
(3) by striking paragraph (5).
(b) Conforming Amendments.--
(1) Section 952(c)(1)(B)(iii) is amended by
striking subclause (I) and redesignating subclauses
(II) through (V) as subclauses (I) through (IV),
respectively.
(2) Section 954(b) is amended--
(A) by striking the second sentence of
paragraph (4),
(B) by striking ``the foreign base company
services income, and the foreign base company
oil related income'' in paragraph (5) and
inserting ``and the foreign base company
services income'', and
(C) by striking paragraph (6).
(3) 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 with or within which such taxable years of foreign
corporations end.
SEC. 14212. 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) 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. 14213. 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) Effective Date.--The amendments made by this section
shall apply to--
(1) the last taxable year of foreign corporations
beginning before January 1, 2018, and each subsequent
taxable year of such foreign corporations, and
(2) taxable years of United States shareholders in
which or with which such taxable years of foreign
corporations end.
SEC. 14214. MODIFICATION OF DEFINITION OF UNITED STATES SHAREHOLDER.
(a) In General.--Section 951(b) is amended by inserting ``,
or 10 percent or more of the total value of shares of all
classes of stock of such foreign corporation'' after ``such
foreign corporation''.
(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.
SEC. 14215. 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.
CHAPTER 3--PREVENTION OF BASE EROSION
SEC. 14221. LIMITATIONS ON INCOME SHIFTING THROUGH INTANGIBLE PROPERTY
TRANSFERS.
(a) Definition of Intangible Asset.--Section 936(h)(3)(B)
is amended--
(1) by striking ``or'' at the end of clause (v),
(2) by striking clause (vi) and inserting the
following:
``(vi) any goodwill, going concern
value, or workforce in place (including
its composition and terms and
conditions (contractual or otherwise)
of its employment); or
``(vii) any other item the value or
potential value of which is not
attributable to tangible property or
the services of any individual.'', and
(3) by striking the flush language after clause
(vii), as added by paragraph (2).
(b) Clarification of Allowable Valuation Methods.--
(1) Foreign corporations.--Section 367(d)(2) is
amended by adding at the end the following new
subparagraph:
``(D) Regulatory authority.--For purposes
of the last sentence of subparagraph (A), the
Secretary shall require--
``(i) the valuation of transfers of
intangible property, including
intangible property transferred with
other property or services, on an
aggregate basis, or
``(ii) the valuation of such a
transfer on the basis of the realistic
alternatives to such a transfer,
if the Secretary determines that such basis is
the most reliable means of valuation of such
transfers.''.
(2) Allocation among taxpayers.--Section 482 is
amended by adding at the end the following: ``For
purposes of this section, the Secretary shall require
the valuation of transfers of intangible property
(including intangible property transferred with other
property or services) on an aggregate basis or the
valuation of such a transfer on the basis of the
realistic alternatives to such a transfer, if the
Secretary determines that such basis is the most
reliable means of valuation of such transfers.''.
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to transfers in taxable years
beginning after December 31, 2017.
(2) No inference.--Nothing in the amendment made by
subsection (a) shall be construed to create any
inference with respect to the application of section
936(h)(3) of the Internal Revenue Code of 1986, or the
authority of the Secretary of the Treasury to provide
regulations for such application, with respect to
taxable years beginning before January 1, 2018.
SEC. 14222. CERTAIN RELATED PARTY AMOUNTS PAID OR ACCRUED IN HYBRID
TRANSACTIONS OR WITH HYBRID ENTITIES.
(a) In General.--Part IX of subchapter B of chapter 1 is
amended by inserting after section 267 the following:
``SEC. 267A. CERTAIN RELATED PARTY AMOUNTS PAID OR ACCRUED IN HYBRID
TRANSACTIONS OR WITH HYBRID ENTITIES.
``(a) In General.--No deduction shall be allowed under this
chapter for any disqualified related party amount paid or
accrued pursuant to a hybrid transaction or by, or to, a hybrid
entity.
``(b) Disqualified Related Party Amount.--For purposes of
this section--
``(1) Disqualified related party amount.--The term
`disqualified related party amount' means any interest
or royalty paid or accrued to a related party to the
extent that--
``(A) such amount is not included in the
income of such related party under the tax law
of the country of which such related party is a
resident for tax purposes or is subject to tax,
or
``(B) such related party is allowed a
deduction with respect to such amount under the
tax law of such country.
Such term shall not include any payment to the extent
such payment is included in the gross income of a
United States shareholder under section 951(a).
``(2) Related party.--The term `related party'
means a related person as defined in section 954(d)(3),
except that such section shall be applied with respect
to the person making the payment described in paragraph
(1) in lieu of the controlled foreign corporation
otherwise referred to in such section.
``(c) Hybrid Transaction.--For purposes of this section,
the term `hybrid transaction' means any transaction, series of
transactions, agreement, or instrument one or more payments
with respect to which are treated as interest or royalties for
purposes of this chapter and which are not so treated for
purposes the tax law of the foreign country of which the
recipient of such payment is resident for tax purposes or is
subject to tax.
``(d) Hybrid Entity.--For purposes of this section, the
term `hybrid entity' means any entity which is either--
``(1) treated as fiscally transparent for purposes
of this chapter but not so treated for purposes of the
tax law of the foreign country of which the entity is
resident for tax purposes or is subject to tax, or
``(2) treated as fiscally transparent for purposes
of such tax law but not so treated for purposes of this
chapter.
``(e) Regulations.--The Secretary shall 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 providing for--
``(1) rules for treating certain conduit
arrangements which involve a hybrid transaction or a
hybrid entity as subject to subsection (a),
``(2) rules for the application of this section to
branches or domestic entities,
``(3) rules for treating certain structured
transactions as subject to subsection (a),
``(4) rules for treating a tax preference as an
exclusion from income for purposes of applying
subsection (b)(1) if such tax preference has the effect
of reducing the generally applicable statutory rate by
25 percent or more,
``(5) rules for treating the entire amount of
interest or royalty paid or accrued to a related party
as a disqualified related party amount if such amount
is subject to a participation exemption system or other
system which provides for the exclusion or deduction of
a substantial portion of such amount,
``(6) rules for determining the tax residence of a
foreign entity if the entity is otherwise considered a
resident of more than one country or of no country,
``(7) exceptions from subsection (a) with respect
to--
``(A) cases in which the disqualified
related party amount is taxed under the laws of
a foreign country other than the country of
which the related party is a resident for tax
purposes, and
``(B) other cases which the Secretary
determines do not present a risk of eroding the
Federal tax base,
``(8) requirements for record keeping and
information reporting in addition to any requirements
imposed by section 6038A.''.
(b) Conforming Amendment.--The table of sections for part
IX of subchapter B of chapter 1 is amended by inserting after
the item relating to section 267 the following new item:
``Sec. 267A. Certain related party amounts paid or accrued in hybrid
transactions or with hybrid entities.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 14223. SHAREHOLDERS OF SURROGATE FOREIGN CORPORATIONS NOT ELIGIBLE
FOR REDUCED RATE ON DIVIDENDS.
(a) In General.--Section 1(h)(11)(C)(iii) is amended--
(1) by striking ``shall not include any foreign
corporation'' and inserting ``shall not include--
``(I) any foreign
corporation'',
(2) by striking the period at the end and inserting
``, and'', and
(3) by adding at the end the following new
subclause:
``(II) any corporation
which first becomes a surrogate
foreign corporation (as defined
in section 7874(a)(2)(B)) after
the date of the enactment of
this subclause, other than a
foreign corporation which is
treated as a domestic
corporation under section
7874(b).''.
(b) Effective Date.--The amendments made by this section
shall apply to dividends received after the date of the
enactment of this Act.
Subpart C--Modifications Related to Foreign Tax Credit System
SEC. 14301. 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, as amended by section 14201, 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 subpart A of this part,
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 subpart A of this part--
``(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 (d) (as added by
section 14201) the following new subsections:
``(e) 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.
``(f) Regulations.--The Secretary shall 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),
(b), and (d) of section 960 (determined without regard to the
phrase `80 percent of' in subsection (d)(1) thereof) for such
taxable year shall be treated for purposes of this title (other
than sections 245 and 245A) as a dividend received by such
domestic corporation from the foreign corporation.''.
(2) Paragraph (4) of section 245(a) is amended to
read as follows:
``(4) Post-1986 undistributed earnings.--The term
`post-1986 undistributed earnings' means the amount of
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--
``(A) as of the close of the taxable year
of the foreign corporation in which the
dividend is distributed, and
``(B) without diminution by reason of
dividends distributed during such taxable
year.''.
(3) Section 245(a)(10)(C) is amended by striking
``902, 907, and 960'' and inserting ``907 and 960''.
(4) Sections 535(b)(1) and 545(b)(1) are each
amended by striking ``section 902(a) or 960(a)(1)'' and
inserting ``section 960''.
(5) 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.--''.
(6) Section 865(h)(1)(B) is amended by striking
``902, 907,'' and inserting ``907''.
(7) Section 901(a) is amended by striking
``sections 902 and 960'' and inserting ``section 960''.
(8) 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''.
(9) Section 901(f) is amended by striking
``sections 902 and 960'' and inserting ``section 960''.
(10) Section 901(j)(1)(A) is amended by striking
``902 or''.
(11) Section 901(j)(1)(B) is amended by striking
``sections 902 and 960'' and inserting ``section 960''.
(12) Section 901(k)(2) is amended by striking ``,
902,''.
(13) Section 901(k)(6) is amended by striking ``902
or''.
(14) Section 901(m)(1)(B) is amended to read as
follows:
``(B) in the case of a foreign income tax
paid by a foreign corporation, shall not be
taken into account for purposes of section
960.''.
(15) Section 904(d)(2)(E) is amended--
(A) by amending clause (i) to read as
follows:
``(i) Noncontrolled 10-percent
owned foreign corporation.--The term
`noncontrolled 10-percent owned foreign
corporation' means any foreign
corporation which is--
``(I) a specified 10-
percent owned foreign
corporation (as defined in
section 245A(b)), or
``(II) a passive foreign
investment company (as defined
in section 1297(a)) with
respect to which the taxpayer
meets the stock ownership
requirements of section 902(a)
(or, for purposes of applying
paragraphs (3) and (4), the
requirements of section
902(b)).
A controlled foreign corporation shall
not be treated as a noncontrolled 10-
percent owned foreign corporation with
respect to any distribution out of its
earnings and profits for periods during
which it was a controlled foreign
corporation. Any reference to section
902 in this clause shall be treated as
a reference to such section as in
effect before its repeal.'', and
(B) by striking ``non-controlled section
902 corporation'' in clause (ii) and inserting
``noncontrolled 10-percent owned foreign
corporation''.
(16) Section 904(d)(4) is amended--
(A) by striking ``noncontrolled section 902
corporation'' each place it appears and
inserting ``noncontrolled 10-percent owned
foreign corporation'',
(B) by striking ``noncontrolled section 902
corporations'' in the heading thereof and
inserting ``noncontrolled 10-percent owned
foreign corporations''.
(17) Section 904(d)(6)(A) is amended by striking
``902, 907,'' and inserting ``907''.
(18) Section 904(h)(10)(A) is amended by striking
``sections 902, 907, and 960'' and inserting ``sections
907 and 960''.
(19) Section 904(k) is amended to read as follows:
``(k) Cross References.--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(c).''.
(20) Section 905(c)(1) is amended by striking the
last sentence.
(21) 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''.
(22) Section 906(a) is amended by striking ``(or
deemed, under section 902, paid or accrued during the
taxable year)''.
(23) Section 906(b) is amended by striking
paragraphs (4) and (5).
(24) Section 907(b)(2)(B) is amended by striking
``902 or''.
(25) Section 907(c)(3)(A) is amended--
(A) by striking subparagraph (A) and
inserting the following:
``(A) interest, to the extent the category
of income of such interest is determined under
section 904(d)(3),'', and
(B) by striking ``section 960(a)'' in
subparagraph (B) and inserting ``section 960''.
(26) Section 907(c)(5) is amended by striking ``902
or''.
(27) Section 907(f)(2)(B)(i) is amended by striking
``902 or''.
(28) Section 908(a) is amended by striking ``902
or''.
(29) Section 909(b) is amended--
(A) by striking ``section 902 corporation''
in the matter preceding paragraph (1) and
inserting ``specified 10-percent owned foreign
corporation (as defined in section 245A(b)
without regard to paragraph (2) thereof)'',
(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 specified 10-percent owned foreign
corporation or a domestic corporation which is
a United States shareholder with respect to
such specified 10-percent owned foreign
corporation.'', and
(D) by striking ``Section 902
Corporations'' in the heading thereof and
inserting ``Specified 10-percent Owned Foreign
Corporations''.
(30) Section 909(d) is amended by striking
paragraph (5).
(31) Section 958(a)(1) is amended by striking
``960(a)(1)'' and inserting ``960''.
(32) Section 959(d) is amended by striking ``Except
as provided in section 960(a)(3), any'' and inserting
``Any''.
(33) Section 959(e) is amended by striking
``section 960(b)'' and inserting ``section 960(c)''.
(34) 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''.
(35) Section 1293(f) is amended by striking ``and''
at the end of paragraph (1), by striking the period at
the end of paragraph (2) and inserting ``, and'', and
by adding at the end the following new paragraph:
``(3) a domestic corporation which owns (or is
treated under section 1298(a) as owning) stock of a
qualified electing fund shall be treated in the same
manner as a United States shareholder of a controlled
foreign corporation (and such qualified electing fund
shall be treated in the same manner as such controlled
foreign corporation) if such domestic corporation meets
the stock ownership requirements of subsection (a) or
(b) of section 902 (as in effect before its repeal)
with respect to such qualified electing fund.''.
(36) 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''.
(37) Section 6038(c)(4) is amended by striking
subparagraph (C).
(38) 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.
(39) 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 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. 14302. SEPARATE FOREIGN TAX CREDIT LIMITATION BASKET FOR FOREIGN
BRANCH INCOME.
(a) In General.--Section 904(d)(1), as amended by section
14201, is amended by redesignating subparagraphs (B) and (C) as
subparagraphs (C) and (D), respectively, and by inserting after
subparagraph (A) the following new subparagraph:
``(B) foreign branch income,''.
(b) Foreign Branch Income.--
(1) In general.--Section 904(d)(2) is amended by
inserting after subparagraph (I) the following new
subparagraph:
``(J) Foreign branch income.--
``(i) In general.--The term
`foreign branch income' means the
business profits of such United States
person which are attributable to 1 or
more qualified business units (as
defined in section 989(a)) in 1 or more
foreign countries. For purposes of the
preceding sentence, the amount of
business profits attributable to a
qualified business unit shall be
determined under rules established by
the Secretary.
``(ii) Exception.--Such term shall
not include any income which is passive
category income.''.
(2) Conforming amendment.--Section
904(d)(2)(A)(ii), as amended by section 14201, is
amended by striking ``income described in paragraph
(1)(A) and'' and inserting ``income described in
paragraph (1)(A), foreign branch income, and''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2017.
SEC. 14303. 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.
SEC. 14304. ELECTION TO INCREASE PERCENTAGE OF DOMESTIC TAXABLE INCOME
OFFSET BY OVERALL DOMESTIC LOSS TREATED AS FOREIGN
SOURCE.
(a) In General.--Section 904(g) is amended by adding at the
end the following new paragraph:
``(5) Election to increase percentage of taxable
income treated as foreign source.--
``(A) In general.--If any pre-2018 unused
overall domestic loss is taken into account
under paragraph (1) for any applicable taxable
year, the taxpayer may elect to have such
paragraph applied to such loss by substituting
a percentage greater than 50 percent (but not
greater than 100 percent) for 50 percent in
subparagraph (B) thereof.
``(B) Pre-2018 unused overall domestic
loss.--For purposes of this paragraph, the term
`pre-2018 unused overall domestic loss' means
any overall domestic loss which--
``(i) arises in a qualified taxable
year beginning before January 1, 2018,
and
``(ii) has not been used under
paragraph (1) for any taxable year
beginning before such date.
``(C) Applicable taxable year.--For
purposes of this paragraph, the term
`applicable taxable year' means any taxable
year of the taxpayer beginning after December
31, 2017, and before January 1, 2028.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
PART II--INBOUND TRANSACTIONS
SEC. 14401. BASE EROSION AND ANTI-ABUSE TAX.
(a) Imposition of Tax.--Subchapter A of chapter 1 is
amended by adding at the end the following new part:
``PART VII--BASE EROSION AND ANTI-ABUSE TAX
``Sec. 59A. Tax on base erosion payments of taxpayers with substantial
gross receipts.
``SEC. 59A. TAX ON BASE EROSION PAYMENTS OF TAXPAYERS WITH SUBSTANTIAL
GROSS RECEIPTS.
``(a) Imposition of Tax.--There is hereby imposed on each
applicable taxpayer for any taxable year a tax equal to the
base erosion minimum tax amount for the taxable year. Such tax
shall be in addition to any other tax imposed by this subtitle.
``(b) Base Erosion Minimum Tax Amount.--For purposes of
this section--
``(1) In general.--Except as provided in paragraphs
(2) and (3), the term `base erosion minimum tax amount'
means, with respect to any applicable taxpayer for any
taxable year, the excess (if any) of--
``(A) an amount equal to 10 percent (5
percent in the case of taxable years beginning
in calendar year 2018) of the modified taxable
income of such taxpayer for the taxable year,
over
``(B) an amount equal to the regular tax
liability (as defined in section 26(b)) of the
taxpayer for the taxable year, reduced (but not
below zero) by the excess (if any) of--
``(i) the credits allowed under
this chapter against such regular tax
liability, over
``(ii) the sum of--
``(I) the credit allowed
under section 38 for the
taxable year which is properly
allocable to the research
credit determined under section
41(a), plus
``(II) the portion of the
applicable section 38 credits
not in excess of 80 percent of
the lesser of the amount of
such credits or the base
erosion minimum tax amount
(determined without regard to
this subclause).
``(2) Modifications for taxable years beginning
after 2025.--In the case of any taxable year beginning
after December 31, 2025, paragraph (1) shall be
applied--
``(A) by substituting `12.5 percent' for
`10 percent' in subparagraph (A) thereof, and
``(B) by reducing (but not below zero) the
regular tax liability (as defined in section
26(b)) for purposes of subparagraph (B) thereof
by the aggregate amount of the credits allowed
under this chapter against such regular tax
liability rather than the excess described in
such subparagraph.
``(3) Increased rate for certain banks and
securities dealers.--
``(A) In general.--In the case of a
taxpayer described in subparagraph (B) who is
an applicable taxpayer for any taxable year,
the percentage otherwise in effect under
paragraphs (1)(A) and (2)(A) shall each be
increased by one percentage point.
``(B) Taxpayer described.--A taxpayer is
described in this subparagraph if such taxpayer
is a member of an affiliated group (as defined
in section 1504(a)(1)) which includes--
``(i) a bank (as defined in section
581), or
``(ii) a registered securities
dealer under section 15(a) of the
Securities Exchange Act of 1934.
``(4) Applicable section 38 credits.--For purposes
of paragraph (1)(B)(ii)(II), the term `applicable
section 38 credits' means the credit allowed under
section 38 for the taxable year which is properly
allocable to--
``(A) the low-income housing credit
determined under section 42(a),
``(B) the renewable electricity production
credit determined under section 45(a), and
``(C) the investment credit determined
under section 46, but only to the extent
properly allocable to the energy credit
determined under section 48.
``(c) Modified Taxable Income.--For purposes of this
section--
``(1) In general.--The term `modified taxable
income' means the taxable income of the taxpayer
computed under this chapter for the taxable year,
determined without regard to--
``(A) any base erosion tax benefit with
respect to any base erosion payment, or
``(B) the base erosion percentage of any
net operating loss deduction allowed under
section 172 for the taxable year.
``(2) Base erosion tax benefit.--
``(A) In general.--The term `base erosion
tax benefit' means--
``(i) any deduction described in
subsection (d)(1) which is allowed
under this chapter for the taxable year
with respect to any base erosion
payment,
``(ii) in the case of a base
erosion payment described in subsection
(d)(2), any deduction allowed under
this chapter for the taxable year for
depreciation (or amortization in lieu
of depreciation) with respect to the
property acquired with such payment,
``(iii) in the case of a base
erosion payment described in subsection
(d)(3)--
``(I) any reduction under
section 803(a)(1)(B) in the
gross amount of premiums and
other consideration on
insurance and annuity contracts
for premiums and other
consideration arising out of
indemnity insurance, and
``(II) any deduction under
section 832(b)(4)(A) from the
amount of gross premiums
written on insurance contracts
during the taxable year for
premiums paid for reinsurance,
and
``(iv) in the case of a base
erosion payment described in subsection
(d)(4), any reduction in gross receipts
with respect to such payment in
computing gross income of the taxpayer
for the taxable year for purposes of
this chapter.
``(B) Tax benefits disregarded if tax
withheld on base erosion payment.--
``(i) In general.--Except as
provided in clause (ii), any base
erosion tax benefit attributable to any
base erosion payment--
``(I) on which tax is
imposed by section 871 or 881,
and
``(II) with respect to
which tax has been deducted and
withheld under section 1441 or
1442,
shall not be taken into account in
computing modified taxable income under
paragraph (1)(A) or the base erosion
percentage under paragraph (4).
``(ii) Exception.--The amount not
taken into account in computing
modified taxable income by reason of
clause (i) shall be reduced under rules
similar to the rules under section
163(j)(5)(B) (as in effect before the
date of the enactment of the Tax Cuts
and Jobs Act).
``(3) Special rules for determining interest for
which deduction allowed.--For purposes of applying
paragraph (1), in the case of a taxpayer to which
section 163(j) applies for the taxable year, the
reduction in the amount of interest for which a
deduction is allowed by reason of such subsection shall
be treated as allocable first to interest paid or
accrued to persons who are not related parties with
respect to the taxpayer and then to such related
parties.
``(4) Base erosion percentage.--For purposes of
paragraph (1)(B)--
``(A) In general.--The term `base erosion
percentage' means, for any taxable year, the
percentage determined by dividing--
``(i) the aggregate amount of base
erosion tax benefits of the taxpayer
for the taxable year, by
``(ii) the sum of--
``(I) the aggregate amount
of the deductions (including
deductions described in clauses
(i) and (ii) of paragraph
(2)(A)) allowable to the
taxpayer under this chapter for
the taxable year, plus
``(II) the base erosion tax
benefits described in clauses
(iii) and (iv) of paragraph
(2)(A) allowable to the
taxpayer for the taxable year.
``(B) Certain items not taken into
account.--The amount under subparagraph (A)(ii)
shall be determined by not taking into
account--
``(i) any deduction allowed under
section 172, 245A, or 250 for the
taxable year,
``(ii) any deduction for amounts
paid or accrued for services to which
the exception under subsection (d)(5)
applies, and
``(iii) any deduction for qualified
derivative payments which are not
treated as a base erosion payment by
reason of subsection (h).
``(d) Base Erosion Payment.--For purposes of this section--
``(1) In general.--The term `base erosion payment'
means any amount paid or accrued by the taxpayer to a
foreign person which is a related party of the taxpayer
and with respect to which a deduction is allowable
under this chapter.
``(2) Purchase of depreciable property.--Such term
shall also include any amount paid or accrued by the
taxpayer to a foreign person which is a related party
of the taxpayer in connection with the acquisition by
the taxpayer from such person of property of a
character subject to the allowance for depreciation (or
amortization in lieu of depreciation).
``(3) Reinsurance payments.--Such term shall also
include any premium or other consideration paid or
accrued by the taxpayer to a foreign person which is a
related party of the taxpayer for any reinsurance
payments which are taken into account under sections
803(a)(1)(B) or 832(b)(4)(A).
``(4) Certain payments to expatriated entities.--
``(A) In general.--Such term shall also
include any amount paid or accrued by the
taxpayer with respect to a person described in
subparagraph (B) which results in a reduction
of the gross receipts of the taxpayer.
``(B) Person described.--A person is
described in this subparagraph if such person
is a--
``(i) surrogate foreign corporation
which is a related party of the
taxpayer, but only if such person first
became a surrogate foreign corporation
after November 9, 2017, or
``(ii) foreign person which is a
member of the same expanded affiliated
group as the surrogate foreign
corporation.
``(C) Definitions.--For purposes of this
paragraph--
``(i) Surrogate foreign
corporation.--The term `surrogate
foreign corporation' has the meaning
given such term by section
7874(a)(2)(B) but does not include a
foreign corporation treated as a
domestic corporation under section
7874(b).
``(ii) Expanded affiliated group.--
The term `expanded affiliated group'
has the meaning given such term by
section 7874(c)(1).
``(5) Exception for certain amounts with respect to
services.--Paragraph (1) shall not apply to any amount
paid or accrued by a taxpayer for services if--
``(A) such services are services which meet
the requirements for eligibility for use of the
services cost method under section 482
(determined without regard to the requirement
that the services not contribute significantly
to fundamental risks of business success or
failure), and
``(B) such amount constitutes the total
services cost with no markup component.
``(e) Applicable Taxpayer.--For purposes of this section--
``(1) In general.--The term `applicable taxpayer'
means, with respect to any taxable year, a taxpayer--
``(A) which is a corporation other than a
regulated investment company, a real estate
investment trust, or an S corporation,
``(B) the average annual gross receipts of
which for the 3-taxable-year period ending with
the preceding taxable year are at least
$500,000,000, and
``(C) the base erosion percentage (as
determined under subsection (c)(4)) of which
for the taxable year is 3 percent (2 percent in
the case of a taxpayer described in subsection
(b)(3)(B)) or higher.
``(2) Gross receipts.--
``(A) Special rule for foreign persons.--In
the case of a foreign person the gross receipts
of which are taken into account for purposes of
paragraph (1)(B), only gross receipts which are
taken into account in determining income which
is effectively connected with the conduct of a
trade or business within the United States
shall be taken into account. In the case of a
taxpayer which is a foreign person, the
preceding sentence shall not apply to the gross
receipts of any United States person which are
aggregated with the taxpayer's gross receipts
by reason of paragraph (3).
``(B) Other rules made applicable.--Rules
similar to the rules of subparagraphs (B), (C),
and (D) of section 448(c)(3) shall apply in
determining gross receipts for purposes of this
section.
``(3) Aggregation rules.--All persons treated as a
single employer under subsection (a) of section 52
shall be treated as 1 person for purposes of this
subsection and subsection (c)(4), except that in
applying section 1563 for purposes of section 52, the
exception for foreign corporations under section
1563(b)(2)(C) shall be disregarded.
``(f) Foreign Person.--For purposes of this section, the
term `foreign person' has the meaning given such term by
section 6038A(c)(3).
``(g) Related Party.--For purposes of this section--
``(1) In general.--The term `related party' means,
with respect to any applicable taxpayer--
``(A) any 25-percent owner of the taxpayer,
``(B) any person who is related (within the
meaning of section 267(b) or 707(b)(1)) to the
taxpayer or any 25-percent owner of the
taxpayer, and
``(C) any other person who is related
(within the meaning of section 482) to the
taxpayer.
``(2) 25-percent owner.--The term `25-percent
owner' means, with respect to any corporation, any
person who owns at least 25 percent of--
``(A) the total voting power of all classes
of stock of a corporation entitled to vote, or
``(B) the total value of all classes of
stock of such corporation.
``(3) Section 318 to apply.--Section 318 shall
apply for purposes of paragraphs (1) and (2), except
that--
``(A) `10 percent' shall be substituted for
`50 percent' in section 318(a)(2)(C), and
``(B) subparagraphs (A), (B), and (C) of
section 318(a)(3) shall not be applied so as to
consider a United States person as owning stock
which is owned by a person who is not a United
States person.
``(h) Exception for Certain Payments Made in the Ordinary
Course of Trade or Business.--For purposes of this section--
``(1) In general.--Except as provided in paragraph
(3), any qualified derivative payment shall not be
treated as a base erosion payment.
``(2) Qualified derivative payment.--
``(A) In general.--The term `qualified
derivative payment' means any payment made by a
taxpayer pursuant to a derivative with respect
to which the taxpayer--
``(i) recognizes gain or loss as if
such derivative were sold for its fair
market value on the last business day
of the taxable year (and such
additional times as required by this
title or the taxpayer's method of
accounting),
``(ii) treats any gain or loss so
recognized as ordinary, and
``(iii) treats the character of all
items of income, deduction, gain, or
loss with respect to a payment pursuant
to the derivative as ordinary.
``(B) Reporting requirement.--No payments
shall be treated as qualified derivative
payments under subparagraph (A) for any taxable
year unless the taxpayer includes in the
information required to be reported under
section 6038B(b)(2) with respect to such
taxable year such information as is necessary
to identify the payments to be so treated and
such other information as the Secretary
determines necessary to carry out the
provisions of this subsection.
``(3) Exceptions for payments otherwise treated as
base erosion payments.--This subsection shall not apply
to any qualified derivative payment if--
``(A) the payment would be treated as a
base erosion payment if it were not made
pursuant to a derivative, including any
interest, royalty, or service payment, or
``(B) in the case of a contract which has
derivative and nonderivative components, the
payment is properly allocable to the
nonderivative component.
``(4) Derivative defined.--For purposes of this
subsection--
``(A) In general.--The term `derivative'
means any contract (including any option,
forward contract, futures contract, short
position, swap, or similar contract) the value
of which, or any payment or other transfer with
respect to which, is (directly or indirectly)
determined by reference to one or more of the
following:
``(i) Any share of stock in a
corporation.
``(ii) Any evidence of
indebtedness.
``(iii) Any commodity which is
actively traded.
``(iv) Any currency.
``(v) Any rate, price, amount,
index, formula, or algorithm.
Such term shall not include any item described
in clauses (i) through (v).
``(B) Treatment of american depository
receipts and similar instruments.--Except as
otherwise provided by the Secretary, for
purposes of this part, American depository
receipts (and similar instruments) with respect
to shares of stock in foreign corporations
shall be treated as shares of stock in such
foreign corporations.
``(C) Exception for certain contracts.--
Such term shall not include any insurance,
annuity, or endowment contract issued by an
insurance company to which subchapter L applies
(or issued by any foreign corporation to which
such subchapter would apply if such foreign
corporation were a domestic corporation).
``(i) Regulations.--The Secretary shall prescribe such
regulations or other guidance as may be necessary or
appropriate to carry out the provisions of this section,
including regulations--
``(1) providing for such adjustments to the
application of this section as are necessary to prevent
the avoidance of the purposes of this section,
including through--
``(A) the use of unrelated persons, conduit
transactions, or other intermediaries, or
``(B) transactions or arrangements
designed, in whole or in part--
``(i) to characterize payments
otherwise subject to this section as
payments not subject to this section,
or
``(ii) to substitute payments not
subject to this section for payments
otherwise subject to this section and
``(2) for the application of subsection (g),
including rules to prevent the avoidance of the
exceptions under subsection (g)(3).''.
(b) Reporting Requirements and Penalties.--
(1) In general.--Subsection (b) of section 6038A is
amended to read as follows:
``(b) Required Information.--
``(1) In general.--For purposes of subsection (a),
the information described in this subsection is such
information as the Secretary prescribes by regulations
relating to--
``(A) the name, principal place of
business, nature of business, and country or
countries in which organized or resident, of
each person which--
``(i) is a related party to the
reporting corporation, and
``(ii) had any transaction with the
reporting corporation during its
taxable year,
``(B) the manner in which the reporting
corporation is related to each person referred
to in subparagraph (A), and
``(C) transactions between the reporting
corporation and each foreign person which is a
related party to the reporting corporation.
``(2) Additional information regarding base erosion
payments.--For purposes of subsection (a) and section
6038C, if the reporting corporation or the foreign
corporation to whom section 6038C applies is an
applicable taxpayer, the information described in this
subsection shall include--
``(A) such information as the Secretary
determines necessary to determine the base
erosion minimum tax amount, base erosion
payments, and base erosion tax benefits of the
taxpayer for purposes of section 59A for the
taxable year, and
``(B) such other information as the
Secretary determines necessary to carry out
such section.
For purposes of this paragraph, any term used in this
paragraph which is also used in section 59A shall have
the same meaning as when used in such section.''.
(2) Increase in penalty.--Paragraphs (1) and (2) of
section 6038A(d) are each amended by striking
``$10,000'' and inserting ``$25,000''.
(c) Disallowance of Credits Against Base Erosion Tax.--
Paragraph (2) of section 26(b) is amended by inserting after
subparagraph (A) the following new subparagraph:
``(B) section 59A (relating to base erosion
and anti-abuse tax),''.
(d) Conforming Amendments.--
(1) The table of parts for subchapter A of chapter
1 is amended by adding after the item relating to part
VI the following new item:
``Part VII. Base Erosion and Anti-abuse Tax''.
(2) Paragraph (1) of section 882(a), as amended by
this Act, is amended by inserting `` or 59A,'' after
``section 11,''.
(3) Subparagraph (A) of section 6425(c)(1), as
amended by section 13001, is amended to read as
follows:
``(A) the sum of--
``(i) the tax imposed by section
11, or subchapter L of chapter 1,
whichever is applicable, plus
``(ii) the tax imposed by section
59A, over''.
(4)(A) Subparagraph (A) of section 6655(g)(1), as
amended by sections 12001 and 13001, is amended by
striking ``plus'' at the end of clause (i), by
redesignating clause (ii) as clause (iii), and by
inserting after clause (i) the following new clause:
``(ii) the tax imposed by section
59A, plus''.
(B) Subparagraphs (A)(i) and (B)(i) of section
6655(e)(2), as amended by sections 12001 and 13001, are
each amended by inserting ``and modified taxable
income'' after ``taxable income''.
(C) Subparagraph (B) of section 6655(e)(2) is
amended by adding at the end the following new clause:
``(iii) Modified taxable income.--
The term `modified taxable income' has
the meaning given such term by section
59A(c)(1).''.
(e) Effective Date.--The amendments made by this section
shall apply to base erosion payments (as defined in section
59A(d) of the Internal Revenue Code of 1986, as added by this
section) paid or accrued in taxable years beginning after
December 31, 2017.
PART III--OTHER PROVISIONS
SEC. 14501. 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.
SEC. 14502. REPEAL OF FAIR MARKET VALUE METHOD OF INTEREST EXPENSE
APPORTIONMENT.
(a) In General.--Paragraph (2) of section 864(e) is amended
to read as follows:
``(2) Gross income and fair market value methods
may not be used for interest.--All allocations and
apportionments of interest expense shall be determined
using the adjusted bases of assets rather than on the
basis of the fair market value of the assets or gross
income.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2017.
TITLE II
SEC. 20001. OIL AND GAS PROGRAM.
(a) Definitions.--In this section:
(1) Coastal plain.--The term ``Coastal Plain''
means the area identified as the 1002 Area on the
plates prepared by the United States Geological Survey
entitled ``ANWR Map - Plate 1'' and ``ANWR Map - Plate
2'', dated October 24, 2017, and on file with the
United States Geological Survey and the Office of the
Solicitor of the Department of the Interior.
(2) Secretary.--The term ``Secretary'' means the
Secretary of the Interior, acting through the Bureau of
Land Management.
(b) Oil and Gas Program.--
(1) In general.--Section 1003 of the Alaska
National Interest Lands Conservation Act (16 U.S.C.
3143) shall not apply to the Coastal Plain.
(2) Establishment.--
(A) In general.--The Secretary shall
establish and administer a competitive oil and
gas program for the leasing, development,
production, and transportation of oil and gas
in and from the Coastal Plain.
(B) Purposes.--Section 303(2)(B) of the
Alaska National Interest Lands Conservation Act
(Public Law 96-487; 94 Stat. 2390) is amended--
(i) in clause (iii), by striking
``and'' at the end;
(ii) in clause (iv), by striking
the period at the end and inserting ``;
and''; and
(iii) by adding at the end the
following:
``(v) to provide for an oil and gas
program on the Coastal Plain.''.
(3) Management.--Except as otherwise provided in
this section, the Secretary shall manage the oil and
gas program on the Coastal Plain in a manner similar to
the administration of lease sales under the Naval
Petroleum Reserves Production Act of 1976 (42 U.S.C.
6501 et seq.) (including regulations).
(4) Royalties.--Notwithstanding the Mineral Leasing
Act (30 U.S.C. 181 et seq.), the royalty rate for
leases issued pursuant to this section shall be 16.67
percent.
(5) Receipts.--Notwithstanding the Mineral Leasing
Act (30 U.S.C. 181 et seq.), of the amount of adjusted
bonus, rental, and royalty receipts derived from the
oil and gas program and operations on Federal land
authorized under this section--
(A) 50 percent shall be paid to the State
of Alaska; and
(B) the balance shall be deposited into the
Treasury as miscellaneous receipts.
(c) 2 Lease Sales Within 10 Years.--
(1) Requirement.--
(A) In general.--Subject to subparagraph
(B), the Secretary shall conduct not fewer than
2 lease sales area-wide under the oil and gas
program under this section by not later than 10
years after the date of enactment of this Act.
(B) Sale acreages; schedule.--
(i) Acreages.--The Secretary shall
offer for lease under the oil and gas
program under this section--
(I) not fewer than 400,000
acres area-wide in each lease
sale; and
(II) those areas that have
the highest potential for the
discovery of hydrocarbons.
(ii) Schedule.--The Secretary shall
offer--
(I) the initial lease sale
under the oil and gas program
under this section not later
than 4 years after the date of
enactment of this Act; and
(II) a second lease sale
under the oil and gas program
under this section not later
than 7 years after the date of
enactment of this Act.
(2) Rights-of-way.--The Secretary shall issue any
rights-of-way or easements across the Coastal Plain for
the exploration, development, production, or
transportation necessary to carry out this section.
(3) Surface development.--In administering this
section, the Secretary shall authorize up to 2,000
surface acres of Federal land on the Coastal Plain to
be covered by production and support facilities
(including airstrips and any area covered by gravel
berms or piers for support of pipelines) during the
term of the leases under the oil and gas program under
this section.
SEC. 20002. LIMITATIONS ON AMOUNT OF DISTRIBUTED QUALIFIED OUTER
CONTINENTAL SHELF REVENUES.
Section 105(f)(1) of the Gulf of Mexico Energy Security Act
of 2006 (43 U.S.C. 1331 note; Public Law 109-432) is amended by
striking ``exceed $500,000,000 for each of fiscal years 2016
through 2055.'' and inserting the following: ``exceed--
``(A) $500,000,000 for each of fiscal years
2016 through 2019;
``(B) $650,000,000 for each of fiscal years
2020 and 2021; and
``(C) $500,000,000 for each of fiscal years
2022 through 2055.''.
SEC. 20003. STRATEGIC PETROLEUM RESERVE DRAWDOWN AND SALE.
(a) Drawdown and Sale.--
(1) In general.--Notwithstanding section 161 of the
Energy Policy and Conservation Act (42 U.S.C. 6241),
except as provided in subsections (b) and (c), the
Secretary of Energy shall draw down and sell from the
Strategic Petroleum Reserve 7,000,000 barrels of crude
oil during the period of fiscal years 2026 through
2027.
(2) Deposit of amounts received from sale.--Amounts
received from a sale under paragraph (1) shall be
deposited in the general fund of the Treasury during
the fiscal year in which the sale occurs.
(b) Emergency Protection.--The Secretary of Energy shall
not draw down and sell crude oil under subsection (a) in a
quantity that would limit the authority to sell petroleum
products under subsection (h) of section 161 of the Energy
Policy and Conservation Act (42 U.S.C. 6241) in the full
quantity authorized by that subsection.
(c) Limitation.--The Secretary of Energy shall not drawdown
or conduct sales of crude oil under subsection (a) after the
date on which a total of $600,000,000 has been deposited in the
general fund of the Treasury from sales authorized under that
subsection.
And the Senate agree to the same.
From the Committee on Ways and Means, for
consideration of the House bill and the Senate
amendment, and modifications committed to
conference:
Kevin Brady,
Devin Nunes,
Peter J. Roskam,
Diane Black,
Kristi L. Noem,
From the Committee on Energy and Commerce, for
consideration of sec. 20003 of the Senate
amendment, and modifications committed to
conference:
Fred Upton,
John Shimkus,
From the Committee on Natural Resources, for
consideration of secs. 20001 and 20002 of the
Senate amendment, and modifications committed
to conference:
Rob Bishop,
Don Young,
Managers on the Part of the House.
Orrin G. Hatch,
Michael B. Enzi,
Lisa Murkowski,
John Cornyn,
John Thune,
Rob Portman,
Tim Scott,
Patrick J. Toomey,
Managers on the Part of the Senate.
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at
the conference on the disagreeing votes of the two Houses on
the amendment of the Senate to the bill (H.R. 1), the Tax Cuts
and Jobs Act, submit the following joint statement to the House
and the Senate in explanation of the effect of the action
agreed upon by the managers and recommended in the accompanying
conference report:
The Senate amendment struck all of the House bill after
the enacting clause and inserted a substitute text.
The House recedes from its disagreement to the amendment
of the Senate with an amendment that is a substitute for the
House bill and the Senate amendment. The differences between
the House bill, the Senate amendment, and the substitute agreed
to in conference are noted below, except for clerical
corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clarifying
changes.
TITLE I
INDIVIDUAL TAX PROVISIONS
A. Reduction and Simplification of Individual Income Tax Rates (sec.
1001 of the House bill, sec. 11001 of the Senate amendment, 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(e)(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).
---------------------------------------------------------------------------
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.
HOUSE BILL
Modification of rates
The House bill replaces the individual income tax rate
structure with a new rate structure.
TABLE 2.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE HOUSE
BILL
------------------------------------------------------------------------
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 dollar amounts for bracket thresholds are all
adjusted for inflation and then rounded to the next lowest
multiple of $100 in future years.\12\ Unlike present law, which
uses a measure of the Consumer Price Index for All Urban
Consumers (``CPI-U''), the new inflation adjustment uses the
Chained Consumer Price Index for All Urban Consumers (``C-CPI-
U'').
---------------------------------------------------------------------------
\12\Some thresholds are defined as 1/2 of dollar amounts and thus
may be multiples of $50.
---------------------------------------------------------------------------
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 ordinary and capital gains rates
applicable to trusts and estates to the net unearned income of
a child. Thus, as under present law, taxable income
attributable to earned income is taxed according to an
unmarried taxpayers' brackets and rates. Taxable income
attributable to net unearned income is taxed according to the
brackets applicable to trusts and estates, with respect to both
ordinary income and income taxed at preferential rates. Thus,
under the provision, the child's tax is unaffected by the tax
situation of the child's parent or the unearned income of any
siblings.
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 based on 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, such gain 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 applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
Temporary modification of rates
The Senate amendment temporarily replaces the individual
income tax rate structure with a new rate structure.
TABLE 3.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE SENATE
AMENDMENT
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals
Not over $9,525........................... 10% of the taxable income
Over $9,525 but not over $38,700.......... $952.50 plus 12% of the
excess over $9,525
Over $38,700 but not over $70,000......... $4,453.50 plus 22% of the
excess over $38,700
Over $70,000 but not over $160,000........ $11,339.50 plus 24% of the
excess over $70,000
Over $160,000 but not over $200,000....... $32,939.50 plus 32% of the
excess over $160,000
Over $200,000 but not over $500,000....... $45,739.50 plus 35% of the
excess over $200,000
Over $500,000............................. $150,739.50 plus 38.5% of
the excess over $500,000
------------------------------------------------------------------------
Heads of Households
Not over $13,600.......................... 10% of the taxable income
Over $13,600 but not over $51,800......... $1,360 plus 12% of the
excess over $13,600
Over $51,800 but not over $70,000......... $5,944 plus 22% of the
excess over $51,800
Over $70,000 but not over $160,000........ $9,948 plus 24% of the
excess over $70,000
Over $160,000 but not over $200,000....... $31,548 plus 32% of the
excess over $160,000
Over $200,000 but not over $500,000....... $44,348 plus 35% of the
excess over $200,000
Over $500,000............................. $149,348 plus 38.5% of the
excess over $500,000
------------------------------------------------------------------------
Married Individuals Filing Joint Returns and Surviving Spouses
Not over $19,050.......................... 10% of the taxable income
Over $19,050 but not over $77,400......... $1,905 plus 12% of the
excess over $19,050
Over $77,400 but not over $140,000........ $8,907 plus 22% of the
excess over $77,400
Over $140,000 but not over $320,000....... $22,679 plus 24% of the
excess over $140,000
Over $320,000 but not over $400,000....... $65,879 plus 32% of the
excess over $320,000
Over $400,000 but not over $1,000,000..... $91,479 plus 35% of the
excess over $400,000
Over $1,000,000........................... $301,479 plus 38.5% of the
excess over $1,000,000
------------------------------------------------------------------------
Married Individuals Filing Separate Returns
Not over $9,525........................... 10% of the taxable income
Over $9,525 but not over $38,700.......... $952.50 plus 12% of the
excess over $9,525
Over $38,700 but not over $70,000......... $4,453.50 plus 22% of the
excess over $38,700
Over $70,000 but not over $160,000........ $11,339.50 plus 24% of the
excess over $70,000
Over $160,000 but not over $200,000....... $32,939.50 plus 32% of the
excess over $160,000
Over $200,000 but not over $500,000....... $45,739.50 plus 35% of the
excess over $200,000
Over $500,000............................. $150,739.50 plus 38.5% of
the excess over $500,000
------------------------------------------------------------------------
Estates and Trusts
Not over $2,550........................... 10% of the taxable income
Over $2,550 but not over $9,150........... $255 plus 24% of the excess
over $2,550
Over $9,150 but not over $12,500.......... $1,839 plus 35% of the
excess over $9,150
Over $12,500.............................. $3,011.50 plus 38.5% of the
excess over $12,500
------------------------------------------------------------------------
Unlike present law, which uses a measure of the CPI-U,
the new inflation adjustment uses the C-CPI-U.
The provision's rate structure does not apply to taxable
years beginning after December 31, 2025.
Temporary simplification of tax on unearned income of children
The Senate amendment follows the House bill in applying
ordinary and capital gains rates applicable to trusts and
estates to the net unearned income of a child, but does not
apply these changes to taxable years beginning after December
31, 2025.
Maximum rates on capital gains and qualified dividends
The Senate amendment follows the House bill and generally
retains the present-law maximum rates on net capital gain and
qualified dividends.
Paid preparer due diligence requirement for head of household status
The Senate amendment directs the Secretary of the
Treasury to promulgate due diligence requirements for paid
preparers in determining eligibility for a taxpayer to file as
head of household. A penalty of $500 is imposed for each
failure to meet these requirements.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement temporarily replaces the
existing rate structure with a new rate structure.
TABLE 4.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE
CONFERENCE AGREEMENT
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals
Not over $9,525........................... 10% of the taxable income
Over $9,525 but not over $38,700.......... $952.50 plus 12% of the
excess over $9,525
Over $38,700 but not over $82,500......... $4,453.50 plus 22% of the
excess over $38,700
Over $82,500 but not over $157,500........ $14,089.50 plus 24% of the
excess over $82,500
Over $157,500 but not over $200,000....... $32,089.50 plus 32% of the
excess over $157,500
Over $200,000 but not over $500,000....... $45,689.50 plus 35% of the
excess over $200,000
Over $500,000............................. $150,689.50 plus 37% of the
excess over $500,000
------------------------------------------------------------------------
Heads of Households
Not over $13,600.......................... 10% of the taxable income
Over $13,600 but not over $51,800......... $1,360 plus 12% of the
excess over $13,600
Over $51,800 but not over $82,500......... $5,944 plus 22% of the
excess over $51,800
Over $82,500 but not over $157,500........ $12,698 plus 24% of the
excess over $82,500
Over $157,500 but not over $200,000....... $30,698 plus 32% of the
excess over $157,500
Over $200,000 but not over $500,000....... $44,298 plus 35% of the
excess over $200,000
Over $500,000............................. $149,298 plus 37% of the
excess over $500,000
------------------------------------------------------------------------
Married Individuals Filing Joint Returns and Surviving Spouses
Not over $19,050.......................... 10% of the taxable income
Over $19,050 but not over $77,400......... $1,905 plus 12% of the
excess over $19,050
Over $77,400 but not over $165,000........ $8,907 plus 22% of the
excess over $77,400
Over $165,000 but not over $315,000....... $28,179 plus 24% of the
excess over $165,000
Over $315,000 but not over $400,000....... $64,179 plus 32% of the
excess over $315,000
Over $400,000 but not over $600,000....... $91,379 plus 35% of the
excess over $400,000
Over $600,000............................. $161,379 plus 37% of the
excess over $600,000
------------------------------------------------------------------------
Married Individuals Filing Separate Returns
Not over $9,525........................... 10% of the taxable income
Over $9,525 but not over $38,700.......... $952.50 plus 12% of the
excess over $9,525
Over $38,700 but not over $82,500......... $4,453.50 plus 22% of the
excess over $38,700
Over $82,500 but not over $157,500........ $14,089.50 plus 24% of the
excess over $82,500
Over $157,500 but not over $200,000....... $32,089.50 plus 32% of the
excess over $157,500
Over $200,000 but not over $300,000....... $45,689.50 plus 35% of the
excess over $200,000
Over $300,000............................. $80,689.50 plus 37% of the
excess over $300,000
------------------------------------------------------------------------
Estates and Trusts
Not over $2,550........................... 10% of the taxable income
Over $2,550 but not over $9,150........... $255 plus 24% of the excess
over $2,550
Over $9,150 but not over $12,500.......... $1,839 plus 35% of the
excess over $9,150
Over $12,500.............................. $3,011.50 plus 37% of the
excess over $12,500
------------------------------------------------------------------------
The provision's rate structure does not apply to taxable
years beginning after December 31, 2025.
The conference agreement does not follow the House bill
in phasing out the 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 conference agreement follows the House bill and
generally retains present-law maximum rates on net capital
gains and qualified dividends.
The conference agreement follows the House bill in
simplifying the tax on the unearned income of children. This
provision does not apply to taxable years beginning after
December 31, 2025.
The conference agreement follows the Senate amendment and
directs the Secretary of the Treasury to promulgate due
diligence requirements for paid preparers in determining
eligibility for a taxpayer to file as head of household.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
1. Increase in standard deduction (sec. 1002 of the House bill, sec.
11021 of the Senate amendment, and sec. 63 of the Code)
PRESENT LAW
Under present law, an individual who does not elect to
itemize deductions may reduce his or her adjusted gross income
(``AGI'') by the amount of the applicable standard deduction in
arriving at his or her 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.
---------------------------------------------------------------------------
\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 deductions, for a total
additional amount (for 2017) of $2,500 or $3,100, as applicable.
---------------------------------------------------------------------------
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.
HOUSE BILL
The House bill 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 C-CPI-U for taxable years beginning after December 31,
2019.\14\
---------------------------------------------------------------------------
\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.
SENATE AMENDMENT
The Senate amendment temporarily increases the basic
standard deduction for individuals across all filing statuses.
Under the provision, the amount of the standard deduction is
temporarily increased to $24,000 for married individuals filing
a joint return, $18,000 for head-of-household filers, and
$12,000 for all other individuals. The amount of the standard
deduction is indexed for inflation using the C-CPI-U for
taxable years beginning after December 31, 2018.
The additional standard deduction for the elderly and the
blind is not changed by the provision.
The increase of the basic standard deduction does not
apply to taxable years beginning after December 31, 2025.\15\
---------------------------------------------------------------------------
\15\The standard deduction continues to be indexed with the C-CPI-U
after this sunset.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
2. Repeal of the deduction for personal exemptions (sec. 1003 of the
House bill, sec. 11041 of the Senate amendment, and sec. 151 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 married taxpayers filing
jointly, $287,650 for heads of household, $156,900 for married
taxpayers filing separately, 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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
The Senate amendment suspends the deduction for personal
exemptions.\16\
---------------------------------------------------------------------------
\16\The provision also clarifies that, for purposes of taxable
years in which the personal exemption is reduced to zero, this should
not alter the operation of those provisions of the Code which refer to
a taxpayer allowed a deduction (or an individual with respect to whom a
taxpayer is allowed a deduction) under section 151. Thus, for instance,
sec. 24(a) allows a credit against tax with respect to each qualifying
child of the taxpayer for which the taxpayer is allowed a deduction
under section 151. A qualifying child, as defined under section 152(c),
remains eligible for the credit, notwithstanding that the deduction
under section 151 has been reduced to zero.
---------------------------------------------------------------------------
The Senate amendment follows the House bill in modifying
the requirements for those who are required to file a tax
return.
The provision does not apply to taxable years beginning
after December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment and
suspends the deduction for personal exemptions. The suspension
does not apply to taxable years beginning after December 31,
2025.
The conference agreement generally follows the House bill
in modifying the withholding rules to reflect that taxpayers no
longer claim personal exemptions under the conference
agreement.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017. The conference
agreement provides that the Secretary may administer the
withholding rules under section 3402 for taxable years
beginning before January 1, 2019, without regard to the
amendments made under this provision. Thus, at the Secretary's
discretion, wage withholding rules may remain the same as under
present law for 2018.
3. Alternative inflation adjustment (secs. 1001 and 1005 of the House
bill, sec. 11002 of the Senate amendment, and sec. 1 of the
Code)
PRESENT LAW
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'').\17\ 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.
---------------------------------------------------------------------------
\17\Generally, the Code adjusts calendar year values for cost of
living by using the percentage by which the price index for the
preceding calendar year exceeds the price index for a base calendar
year. Sec. 1(f).
---------------------------------------------------------------------------
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.
HOUSE BILL
The House bill requires the use of the Chained Consumer
Price Index for All Urban Consumers (``C-CPI-U'') to adjust 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.
Under the provision, indexed parameters in the Code
switch from CPI-U indexing to C-CPI-U indexing going forward in
taxable years beginning after December 31, 2017. Therefore, in
the case of any existing tax parameters that are not reset for
2018, the provision indexes parameters as if CPI-U applies
through 2017 and C-CPI-U applies for years thereafter; the
provision does not index all existing tax parameters from their
base years using the C-CPI-U. Tax parameters with cost-of-
living adjustment base years of 2016 and later are indexed
solely with C-CPI-U. Therefore, tax values that are reset for
2018 are indexed by the C-CPI-U in taxable years beginning
after December 31, 2018.\18\
---------------------------------------------------------------------------
\18\One exception is the increased standard deduction which is
indexed by C-CPI-U in taxable years beginning after December 31, 2019
and therefore is the same in 2018 and 2019.
---------------------------------------------------------------------------
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment generally follows the House
bill.\19\
---------------------------------------------------------------------------
\19\The Senate Amendment indexes all tax values that are
temporarily reset for 2018, including the basic standard deduction,
with the C-CPI-U in taxable years beginning after December 31, 2018.
---------------------------------------------------------------------------
The provision requiring C-CPI-U indexing after 2017 is
permanent. Thus, after certain temporary tax parameters sunset,
such as bracket thresholds and the increased basic standard
deduction, corresponding present law values in the Code are
indexed appropriately with the C-CPI-U.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
B. Treatment of Business Income of Individuals, Trusts, and Estates
1. Deduction for qualified business income (sec. 1004 of the House
bill, sec. 11011 of the Senate amendment, and sec. 199A 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.
Partnerships
Partnerships generally are treated for Federal income tax
purposes as pass-through entities not subject to tax at the
entity level.\20\ 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).\21\ A partner's deduction for partnership
losses is limited to the partner's adjusted basis in its
partnership interest.\22\ 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.\23\ Partners generally may
receive distributions of partnership property without
recognition of gain or loss, subject to some exceptions.\24\
---------------------------------------------------------------------------
\20\Sec. 701.
\21\Sec. 702(a).
\22\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.
\23\Sec. 705.
\24\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).
---------------------------------------------------------------------------
Partnerships may allocate items of income, gain, loss,
deduction, and credit among the partners, provided the
allocations have substantial economic effect.\25\ 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.\26\
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\25\Sec. 704(b)(2).
\26\Treas. Reg. sec. 1.704-1(b)(2).
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State laws of every State provide for limited liability
companies\27\ (``LLCs''), which are neither partnerships nor
corporations under applicable State law, but which are
generally treated as partnerships for Federal tax purposes.\28\
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\27\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.
\28\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 be treated 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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Under present law, a publicly traded partnership
generally is treated as a corporation for Federal tax
purposes.\29\ 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).\30\
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\29\Sec. 7704(a).
\30\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.\31\
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\31\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)).
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S corporations
For Federal income tax purposes, an S corporation\32\
generally is not subject to tax at the corporate level.\33\
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.\34\
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\32\An S corporation is so named because its Federal tax treatment
is governed by subchapter S of the Code.
\33\Secs. 1363 and 1366.
\34\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).
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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.
Electing S corporation status
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.\35\ Only individuals (other
than nonresident aliens), certain tax-exempt organizations, and
certain trusts and estates are permitted shareholders of an S
corporation.
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\35\Sec. 1361. For this purpose, a husband and wife and all members
of a family are treated as one shareholder. Sec. 1361(c)(1).
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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.\36\ 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,\37\ for certain excise
taxes,\38\ and certain information reporting requirements.\39\
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\36\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).
\37\Treas. Reg. sec. 301.7701-2(c)(2)(iv).
\38\Treas. Reg. sec. 301.7701-2(c)(2)(v).
\39\Treas. Reg. sec. 301.7701-2(c)(2)(vi).
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HOUSE BILL
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,
<7> - (2 + 2) = <3>).
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.
SENATE AMENDMENT
In general
For taxable years beginning after December 31, 2017 and
before January 1, 2026, an individual taxpayer generally may
deduct 23 percent of qualified business income from a
partnership, S corporation, or sole proprietorship, as well as
23 percent of aggregate qualified REIT dividends, qualified
cooperative dividends, and qualified publicly traded
partnership income. Special rules apply to specified
agricultural or horticultural cooperatives. A limitation based
on W-2 wages paid is phased in above a threshold amount of
taxable income. A disallowance of the deduction with respect to
specified service trades or businesses is also phased in above
the threshold amount of taxable income.\40\
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\40\For purposes of this provision, taxable income is computed
without regard to the 23 percent deduction.
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Qualified business income
Qualified business income is determined for each
qualified trade or business of the taxpayer. For any taxable
year, qualified business income means the net amount of
qualified items of income, gain, deduction, and loss with
respect to the qualified trade or business of the taxpayer. The
determination of qualified items of income, gain, deduction,
and loss takes into account these items only to the extent
included or allowed in the determination of taxable income for
the year. For example, if in a taxable year, a qualified
business has $100,000 of ordinary income from inventory sales,
and makes an expenditure of $25,000 that is required to be
capitalized and amortized over 5 years under applicable tax
rules, the qualified business income is $100,000 minus $5,000
(current-year ordinary amortization deduction), or $95,000. The
qualified 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.
If the net amount of qualified business income from all
qualified trades or businesses during the taxable year is a
loss, it is carried forward as a loss from a qualified trade or
business in the next taxable year. Similar to a qualified trade
or business that has a qualified business loss for the current
taxable year, any deduction allowed in a subsequent year is
reduced (but not below zero) by 23 percent of any carryover
qualified business loss. For example, Taxpayer has qualified
business income of $20,000 from qualified business A and a
qualified business loss of $50,000 from qualified business B in
Year 1. Taxpayer is not permitted a deduction for Year 1 and
has a carryover qualified business loss of $30,000 to Year 2.
In Year 2, Taxpayer has qualified business income of $20,000
from qualified business A and qualified business income of
$50,000 from qualified business B. To determine the deduction
for Year 2, Taxpayer reduces the 23 percent deductible amount
determined for the qualified business income of $70,000 from
qualified businesses A and B by 23 percent of the $30,000
carryover qualified business loss.
Domestic business
Items are treated as qualified items of income, gain,
deduction, and loss only to the extent they are effectively
connected with the conduct of a trade or business within the
United States.\41\ In the case of a taxpayer who is an
individual with otherwise qualified business income from
sources within the commonwealth of Puerto Rico, if all the
income is taxable under section 1 (income tax rates for
individuals) for the taxable year, the ``United States'' is
considered to include Puerto Rico for purposes of determining
the individual's qualified business income.
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\41\For this purpose, section 864(c) is applied substituting
``qualified trade or business (within the meaning of section 199A)''
for ``nonresident alien individual or a foreign corporation'' or ``a
foreign corporation.''
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Treatment of investment income
Qualified items do not include specified investment-
related income, deductions, or loss. Specifically, qualified
items of income, gain, deduction and loss do 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 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. Qualified items under this
provision do not include any item of deduction or loss properly
allocable to such income.
Reasonable compensation and guaranteed payments
Qualified business income does not include any amount
paid by an S corporation that is treated as reasonable
compensation of the taxpayer. Similarly, qualified business
income does not include any guaranteed payment for services
rendered with respect to the trade or business,\42\ and to the
extent provided in regulations, does not include any amount
paid or incurred by a partnership to a partner who is acting
other than in his or her capacity as a partner for
services.\43\
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\42\Described in sec. 707(c).
\43\Described in sec. 707(a).
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Qualified trade or business
A qualified trade or business means any trade or business
other than a specified service trade or business and other than
the trade or business of being an employee.
Specified service business
A specified service trade or business means any trade or
business involving the performance of services in the fields of
health,\44\ law, engineering, architecture, accounting,
actuarial science, performing arts,\45\ consulting,\46\
athletics, financial services, brokerage services, including
investing and investment management, trading, or dealing in
securities, partnership interests, or commodities, and 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. 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).
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\44\A similar list of service trades or business is provided in
section 448(d)(2)(A) and Treas. Reg. sec. 1.448-1T(e)(4)(i). For
purposes of section 448, Treasury regulations provide that the
performance of services in the field of health means the provision of
medical services by physicians, nurses, dentists, and other similar
healthcare professionals. The performance of services in the field of
health does not include the provision of services not directly related
to a medical field, even though the services may purportedly relate to
the health of the service recipient. For example, the performance of
services in the field of health does not include the operation of
health clubs or health spas that provide physical exercise or
conditioning to their customers. See Treas. Reg. sec. 1.448-
1T(e)(4)(ii).
\45\For purposes of the similar list of services in section 448,
Treasury regulations provide that the performance of services in the
field of the performing arts means the provision of services by actors,
actresses, singers, musicians, entertainers, and similar artists in
their capacity as such. The performance of services in the field of the
performing arts does not include the provision of services by persons
who themselves are not performing artists (e.g., persons who may manage
or promote such artists, and other persons in a trade or business that
relates to the performing arts). Similarly, the performance of services
in the field of the performing arts does not include the provision of
services by persons who broadcast or otherwise disseminate the
performance of such artists to members of the public (e.g., employees
of a radio station that broadcasts the performances of musicians and
singers). See Treas. Reg. sec. 1.448-1T(e)(4)(iii).
\46\For purposes of the similar list of services in section 448,
Treasury regulations provide that the performance of services in the
field of consulting means the provision of advice and counsel. The
performance of services in the field of consulting does not include the
performance of services other than advice and counsel, such as sales or
brokerage services, or economically similar services. For purposes of
the preceding sentence, the determination of whether a person's
services are sales or brokerage services, or economically similar
services, shall be based on all the facts and circumstances of that
person's business. Such facts and circumstances include, for example,
the manner in which the taxpayer is compensated for the services
provided (e.g., whether the compensation for the services is contingent
upon the consummation of the transaction that the services were
intended to effect). See Treas. Reg. sec. 1.448-1T(e)(4)(iv).
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Phase-in of specified service business limitation
The exclusion from the definition of a qualified business
for specified service trades or businesses phases in for a
taxpayer with taxable income in excess of a threshold amount.
The threshold amount is $250,000 (200 percent of that amount,
or $500,000, in the case of a joint return) (the ``threshold
amount''). The threshold amount is indexed for inflation. The
exclusion from the definition of a qualified business for
specified service trades or businesses is fully phased in for a
taxpayer with taxable income in excess of the threshold amount
plus $50,000 ($100,000 in the case of a joint return). For a
taxpayer with taxable income within the phase-in range, the
exclusion applies as follows.
In computing the qualified business income with respect
to a specified service trade or business, the taxpayer takes
into account only the applicable percentage of qualified items
of income, gain, deduction, or loss, and of allocable W-2
wages. The applicable percentage with respect to any taxable
year is 100 percent reduced by the percentage equal to the
ratio of the excess of the taxable income of the taxpayer over
the threshold amount bears to $50,000 ($100,000 in the case of
a joint return).
For example, Taxpayer has taxable income of $280,000, of
which $200,000 is attributable to an accounting sole
proprietorship after paying wages of $100,000 to employees.
Taxpayer has an applicable percentage of 40 percent.\47\ In
determining includible qualified business income, Taxpayer
takes into account 40 percent of $200,000, or $80,000. In
determining the includible W-2 wages, Taxpayer takes into
account 40 percent of $100,000, or $40,000. Taxpayer calculates
the deduction by taking the lesser of 23 percent of $80,000
($18,400) or 50 percent of $40,000 ($20,000). Taxpayer takes a
deduction for $18,400.
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\47\1 - ($280,000 - $250,000)/$50,000 = 1 - 30,000/50,000 = 1 -.6 =
40 percent.
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Tentative deductible amount for a qualified trade or business
In general
For each qualified trade or business, the taxpayer is
allowed a deductible amount equal to the lesser of 23 percent
of the qualified business income with respect to such trade or
business or 50 percent of the W-2 wages with respect to such
business (the ``wage limit''). However, if the taxpayer's
taxable income is below the threshold amount, the deductible
amount for each qualified trade or business is equal to 23
percent of the qualified business income with respect to each
respective trade or business.
W-2 wages
W-2 wages are the total wages\48\ subject to wage
withholding, elective deferrals,\49\ and deferred
compensation\50\ paid by the qualified trade or business with
respect to employment of its employees during the calendar year
ending during the taxable year of the taxpayer.\51\ W-2 wages
do not include any amount which is not properly allocable to
the qualified business income as a qualified item of deduction.
In addition, W-2 wages do not include any amount which was not
properly included in a return filed with the Social Security
Administration on or before the 60th day after the due date
(including extensions) for such return.
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\48\Defined in sec. 3401(a).
\49\Within the meaning of sec. 402(g)(3).
\50\Deferred compensation includes compensation deferred under
section 457, as well as the amount of any designated Roth contributions
(as defined in section 402A).
\51\In the case of a taxpayer with a short taxable year that does
not contain a calendar year ending during such short taxable year, the
Committee intends that the following amounts shall be treated as the W-
2 wages of the taxpayer for the short taxable year: (1) only those
wages paid during the short taxable year to employees of the qualified
trade or business, (2) only those elective deferrals (within the
meaning of section 402(g)(3)) made during the short taxable year by
employees of the qualified trade or business, and (3) only compensation
actually deferred under section 457 during the short taxable year with
respect to employees of the qualified trade or business. The Committee
intends that amounts that are treated as W-2 wages for a taxable year
shall not be treated as W-2 wages of any other taxable year.
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In the case of a taxpayer who is an individual with
otherwise qualified business income from sources within the
commonwealth of Puerto Rico, if all the income is taxable under
section 1 (income tax rates for individuals) for the taxable
year, the determination of W-2 wages with respect to the
taxpayer's trade or business conducted in Puerto Rico is made
without regard to any exclusion under the wage withholding
rules\52\ for remuneration paid for services in Puerto Rico.
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\52\As provided in sec. 3401(a)(8).
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Phase-in of wage limit
The application of the wage limit phases in for a
taxpayer with taxable income in excess of the threshold amount.
The wage limit applies fully for a taxpayer with taxable income
in excess of the threshold amount plus $50,000 ($100,000 in the
case of a joint return). For a taxpayer with taxable income
within the phase-in range, the wage limit applies as follows.
With respect to any qualified trade or business, the
taxpayer compares (1) 23 percent of the taxpayer's qualified
business income with respect to the qualified trade or business
with (2) 50 percent of the W-2 wages with respect to the
qualified trade or business. If the amount determined under (2)
is less than the amount determined (1), (that is, if the wage
limit is binding), the taxpayer's deductible amount is the
amount determined under (1) reduced by the same proportion of
the difference between the two amounts as the excess of the
taxable income of the taxpayer over the threshold amount bears
to $50,000 ($100,000 in the case of a joint return).
For example, H and W file a joint return on which they
report taxable income of $520,000. W has a qualified trade or
business that is not a specified service business, such that 23
percent of the qualified business income with respect to the
business is $15,000. W's share of wages paid by the business is
$20,000, such that 50 percent of the W-2 wages with respect to
the business is $10,000. The $15,000 amount is reduced by 20
percent\53\ of the difference between $15,000 and $10,000, or
$1,000. H and W take a deduction for $14,000.
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\53\($520,000- $500,000)/$100,000 = 20 percent.
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Qualified REIT dividends, cooperative dividends, and publicly traded
partnership income
A deduction is allowed under the provision for 23 percent
of the taxpayer's aggregate amount of qualified REIT dividends,
qualified cooperative dividends, and qualified publicly traded
partnership income for the taxable year. Qualified REIT
dividends do not include any portion of a dividend received
from a REIT that is a capital gain dividend\54\ or a qualified
dividend.\55\ A qualified cooperative dividend means a
patronage dividend,\56\ per-unit retain allocation,\57\
qualified written notice of allocation,\58\ or any similar
amount, provided it is includible in gross income and is
received from either (1) a tax-exempt benevolent life insurance
association, mutual ditch or irrigation company, cooperative
telephone company, like cooperative organization,\59\ or a
taxable or tax-exempt cooperative that is described in section
1381(a), or (2) a taxable cooperative governed by tax rules
applicable to cooperatives before the enactment of subchapter T
of the Code in 1962. Qualified publicly traded partnership
income means (with respect to any qualified trade or business
of the taxpayer), the sum of the (a) net amount of the
taxpayer's allocable share of each qualified item of income,
gain, deduction, and loss (that are effectively connected with
a U.S. trade or business and are included or allowed in
determining taxable income for the taxable year and do not
constitute excepted enumerated investment-type income, and not
including the taxpayer's reasonable compensation, guaranteed
payments for services, or (to the extent provided in
regulations) section 707(a) payments for services) from a
publicly traded partnership not treated as a corporation, and
(b) gain recognized by the taxpayer on disposition of its
interest in the partnership that is treated as ordinary income
(for example, by reason of section 751).
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\54\Defined in sec. 857(b)(3).
\55\Defined in sec. 1(h)(11).
\56\Defined in sec. 1388(a).
\57\Defined in sec. 1388(f).
\58\Defined in sec. 1388(c).
\59\Described in sec. 501(c)(12).
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Determination of the taxpayer's deduction
The taxpayer's deduction for qualified business income is
equal to the lesser of the combined qualified business income
amount for the taxable year or an amount equal to 23 percent of
the taxpayer's taxable income (reduced by any net capital
gain\60\) for the taxable year. The combined qualified business
income amount is the sum of the deductible amounts determined
for each qualified trade or business for the taxable year and
23 percent of the qualified REIT dividends and qualified
cooperative dividends received by the taxpayer for the taxable
year.
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\60\Defined in sec. 1(h).
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Specified agricultural or horticultural cooperatives
For taxable years beginning after December 31, 2018 but
not after December 31, 2025, a deduction is allowed to any
specified agricultural or horticultural cooperative equal to
the lesser of 23 percent of the cooperative's taxable income
for the taxable year or 50 percent of the W-2 wages paid by the
cooperative with respect to its trade or business. A specified
agricultural or horticultural cooperative is an organization to
which subchapter T applies that is engaged in (a) the
manufacturing, production, growth, or extraction in whole or
significant part of any agricultural or horticultural product,
(b) the marketing of agricultural or horticultural products
that its patrons have so manufactured, produced, grown, or
extracted, or (c) the provision of supplies, equipment, or
services to farmers or organizations described in the
foregoing.
Special rules and definitions
For purposes of the provision, taxable income is
determined without regard to the deduction allowable under the
provision.
In the case of a partnership or S corporation, the
provision applies at the partner or shareholder level. Each
partner takes into account the partner's allocable share of
each qualified item of income, gain, deduction, and loss, and
is treated as having W-2 wages for the taxable year equal to
the partner's allocable share of W-2 wages of the partnership.
The partner's allocable share of W-2 wages is required to be
determined in the same manner as the partner's share of wage
expenses. For example, if a partner is allocated a deductible
amount of 10 percent of wages paid by the partnership to
employees for the taxable year, the partner is required to be
allocated 10 percent of the W-2 wages of the partnership for
purposes of calculating the wage limit under this deduction.
Similarly, each shareholder of an S corporation takes into
account the shareholder's pro rata share of each qualified item
of income, gain, deduction, and loss, and is treated as having
W-2 wages for the taxable year equal to the shareholder's pro
rata share of W-2 wages of the S corporation.
Qualified business income is determined without regard to
any adjustments prescribed under the rules of the alternative
minimum tax.
The provision does not apply to a trust or estate.
The deduction under the provision is allowed only for
Federal income tax purposes.
For purposes of determining a substantial underpayment of
income tax under the accuracy related penalty,\61\ a
substantial underpayment exists if the amount of the
understatement exceeds the greater of five percent (not 10
percent) of the tax required to be shown on the return or
$5,000.
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\61\Sec. 6662(d)(1)(A).
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Authority is provided to promulgate regulations needed to
carry out the purposes of the provision, including regulations
requiring, or restricting, the allocation of items of income,
gain, loss, or deduction, or of wages under the provision. In
addition, regulatory authority is provided to address reporting
requirements appropriate under the provision, and the
application of the provision in the case of tiered entities.
The provision does not apply to taxable years beginning
after December 31, 2025.
Additional examples
The following examples provide a comprehensive
illustration of the provision.
Example 1
H and W file a joint return on which they report taxable
income of $520,000 (determined without regard to this
provision). H is a partner in a qualified trade or business
that is not a specified service business (``qualified business
A''). W has a sole proprietorship qualified trade or business
that is a specified service business (``qualified business
B''). H and W also received $10,000 in qualified REIT dividends
during the tax year.
H's allocable share of qualified business income from
qualified business A is $300,000, such that 23 percent of the
qualified business income with respect to the business is
$69,000.\62\ H's allocable share of wages paid by qualified
business A is $100,000, such that 50 percent of the W-2 wages
with respect to the business is $50,000.\63\ As H and W's
taxable income is above the threshold amount for a joint
return, the application of the wage limit for qualified
business A is phased in. Accordingly, the $69,000 amount is
reduced by 20 percent\64\ of the difference between $69,000 and
$50,000, or $3,800.\65\ H's deductible amount for qualified
business A is $65,200.\66\
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\62\$300,000*.23 = $69,000.
\63\$100,000*.5 = $50,000.
\64\($520,000-$500,000)/$100,000 = 20 percent.
\65\($69,000-$50,000)*.2 = $3,800.
\66\$69,000-$3,800 = $65,200.
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W's qualified business income and W-2 wages from
qualified business B, which is a specified service business,
are $325,000 and $150,000, respectively. H and W's taxable
income is above the threshold amount for a joint return. Thus,
the exclusion of qualified business income and W-2 wages from
the specified service business are phased in. W has an
applicable percentage of 80 percent.\67\ In determining
includible qualified business income, W takes into account 80
percent of $325,000, or $260,000. In determining includible W-2
wages, W takes into account 80 percent of $150,000, or
$120,000. W calculates the deductible amount for qualified
business B by taking the lesser of 23 percent of $260,000
($59,800) or 50 percent of includible W-2 wages of $120,000
($60,000).\68\ W's deductible amount for qualified business B
is $59,800.
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\67\1-($520,000-$500,000)/$100,000 = 1-$20,000/$100,000 = 1-.2 = 80
percent.
\68\Although H and W's taxable income is above the threshold amount
for a joint return, the wage limit is not binding as the 23 percent of
includible qualified business income of qualified business B ($59,800)
is less than 50 percent of includible W-2 wages of qualified business B
($60,000).
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H and W's combined qualified business income amount of
$127,300 is comprised of the deductible amount for qualified
business A of $65,200, the deductible amount for qualified
business B of $59,800, and 23 percent of the $10,000 qualified
REIT dividends ($2,300). H and W's deduction is limited to 23
percent of their taxable income for the year ($520,000), or
$119,600. Accordingly, H and W's deduction for the taxable year
is $119,600.
Example 2
H and W file a joint return on which they report taxable
income of $200,000 (determined without regard to this
provision). H has a sole proprietorship qualified trade or
business that is not a specified service business (``qualified
business A''). W is a partner in a qualified trade or business
that is not a specified service business (``qualified business
B''). H and W have a carryover qualified business loss of
$50,000.
H's qualified business income from qualified business A
is $150,000, such that 23 percent of the qualified business
income with respect to the business is $34,500. As H and W's
taxable income is below the threshold amount for a joint
return, the wage limit does not apply to qualified business A.
H's deductible amount for qualified business A is $34,500.
W's allocable share of qualified business loss is
$40,000, such that 23 percent of the qualified business loss
with respect to the business is $9,200. As H and W's taxable
income is below the threshold amount for a joint return, the
wage limit does not apply to qualified business B. W's
deductible amount for qualified business B is a reduction to
the deduction of $9,200.
H and W's combined qualified business income amount of
$13,800 is comprised of the deductible amount for qualified
business A of $34,500, the reduction to the deduction for
qualified business B of $9,200, and the reduction to the
deduction of $11,500 attributable to the carryover qualified
business loss. H and W's deduction is limited to 23 percent of
their taxable income for the year ($200,000), or $46,000.
Accordingly, H and W's deduction for the taxable year is
$13,800.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications.
Deduction percentage
Under the conference agreement, the percentage of the
deduction allowable under the provision is 20 percent (not 23
percent).
Threshold amount
The conference agreement reduces the threshold amount
above which both the limitation on specified service businesses
and the wage limit are phased in. Under the conference
agreement, the threshold amount is $157,500 (twice that amount
or $315,000 in the case of a joint return), indexed. The
conferees expect that the reduced threshold amount will serve
to deter high-income taxpayers from attempting to convert wages
or other compensation for personal services to income eligible
for the 20-percent deduction under the provision.
The conference agreement provides that the range over
which the phase-in of these limitations applies is $50,000
($100,000 in the case of a joint return).
Limitation based on W-2 wages and capital
The conference agreement modifies the wage limit
applicable to taxpayers with taxable income above the threshold
amount to provide a limit based either on wages paid or on
wages paid plus a capital element. Under the conference
agreement, the limitation is the greater of (a) 50 percent of
the W-2 wages paid with respect to the qualified trade or
business, or (b) the sum of 25 of percent of the W-2 wages with
respect to the qualified trade or business plus 2.5 percent of
the unadjusted basis, immediately after acquisition, of all
qualified property.
For purposes of the provision, qualified property means
tangible property of a character subject to depreciation that
is held by, and available for use in, the qualified trade or
business at the close of the taxable year, and which is used in
the production of qualified business income, and for which the
depreciable period has not ended before the close of the
taxable year. The depreciable period with respect to qualified
property of a taxpayer means the period beginning on the date
the property is first placed in service by the taxpayer and
ending on the later of (a) the date 10 years after that date,
or (b) the last day of the last full year in the applicable
recovery period that would apply to the property under section
168 (without regard to section 168(g)).
For example, a taxpayer (who is subject to the limit)
does business as a sole proprietorship conducting a widget-
making business. The business buys a widget-making machine for
$100,000 and places it in service in 2020. The business has no
employees in 2020. The limitation in 2020 is the greater of (a)
50 percent of W-2 wages, or $0, or (b) the sum of 25 percent of
W-2 wages ($0) plus 2.5 percent of the unadjusted basis of the
machine immediately after its acquisition: $100,000
.025 = $2,500. The amount of the limitation on the taxpayer's
deduction is $2,500.
In the case of property that is sold, for example, the
property is no longer available for use in the trade or
business and is not taken into account in determining the
limitation. The Secretary is required to provide rules for
applying the limitation in cases of a short taxable year of
where the taxpayer acquires, or disposes of, the major portion
of a trade or business or the major portion of a separate unit
of a trade or business during the year. The Secretary is
required to provide guidance applying rules similar to the
rules of section 179(d)(2) to address acquisitions of property
from a related party, as well as in a sale-leaseback or other
transaction as needed to carry out the purposes of the
provision and to provide anti-abuse rules, including under the
limitation based on W-2 wages and capital. Similarly, the
Secretary shall provide guidance prescribing rules for
determining the unadjusted basis immediately after acquisition
of qualified property acquired in like-kind exchanges or
involuntary conversions as needed to carry out the purposes of
the provision and to provide anti-abuse rules, including under
the limitation based on W-2 wages and capital.
Specified service trade or business
The conference agreement modifies the definition of a
specified service trade or business in several respects. The
definition is modified to exclude engineering and architecture
services, and to take into account the reputation or skill of
owners.
A specified service trade or business means any trade or
business involving the performance of services in the fields of
health, law, consulting, athletics, financial services,
brokerage services, or 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 owners, or which
involves the performance of services that consist of investing
and investment management 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).
Determination of the taxpayer's deduction
The taxpayer's deduction for qualified business income
for the taxable year is equal to the sum of (a) the lesser of
the combined qualified business income amount for the taxable
year or an amount equal to 20 percent of the excess of
taxpayer's taxable income over any net capital gain\69\ and
qualified cooperative dividends, plus (b) the lesser of 20
percent of qualified cooperative dividends and taxable income
(reduced by net capital gain). This sum may not exceed the
taxpayer's taxable income for the taxable year (reduced by net
capital gain). Under the provision, the 20-percent deduction
with respect to qualified cooperative dividends is limited to
taxable income (reduced by net capital gain) for the year. The
combined qualified business income amount for the taxable year
is the sum of the deductible amounts determined for each
qualified trade or business carried on by the taxpayer and 20
percent of the taxpayer's qualified REIT dividends and
qualified publicly traded partnership income. The deductible
amount for each qualified trade or business is the lesser of
(a) 20 percent of the taxpayer's qualified business income with
respect to the trade or business, or (b) the greater of 50
percent of the W-2 wages with respect to the trade or business
or the sum of 25 percent of the W-2 wages with respect to the
trade or business and 2.5 percent of the unadjusted basis,
immediately after acquisition, of all qualified property.
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\69\Defined in sec. 1(h).
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Deduction against taxable income
The conference agreement clarifies that the 20-percent
deduction is not allowed in computing adjusted gross income,
and instead is allowed as a deduction reducing taxable income.
Thus, for example, the provision does not affect limitations
based on adjusted gross income. Similarly the conference
agreement clarifies that the deduction is available to both
non-itemizers and itemizers.
Treatment of agricultural and horticultural cooperatives
For taxable years beginning after December 31, 2017 but
not after December 31, 2025, a deduction is allowed to any
specified agricultural or horticultural cooperative equal to
the lesser of (a) 20 percent of the cooperative's taxable
income for the taxable year or (b) the greater of 50 percent of
the W-2 wages paid by the cooperative with respect to its trade
or business or the sum of 25 percent of the W-2 wages of the
cooperative with respect to its trade or business plus 2.5
percent of the unadjusted basis immediately after acquisition
of qualified property of the cooperative. A specified
agricultural or horticultural cooperative is a organization to
which subchapter T applies that is engaged in (a) the
manufacturing, production, growth, or extraction in whole or
significant part of any agricultural or horticultural product,
(b) the marketing of agricultural or horticultural products
that its patrons have so manufactured, produced, grown, or
extracted, or (c) the provision of supplies, equipment, or
services to farmers or organizations described in the
foregoing.
Treatment of trusts and estates
The conference agreement provides that trusts and estates
are eligible for the 20-percent deduction under the provision.
Rules similar to the rules under present-law section 199 (as in
effect on December 1, 2017) apply for apportioning between
fiduciaries and beneficiaries any W-2 wages and unadjusted
basis of qualified property under the limitation based on W-2
wages and capital.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
C. Simplification and Reform of Family and Individual Tax Credits
1. Enhancement of child tax credit and new family credit (sec. 1101 of
the House bill, sec. 11022 of the Senate amendment, 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\70\ (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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\70\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.
HOUSE BILL
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.\71\ 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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\71\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.\72\
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\72\See a description of sec. 1103 of the House bill for
modifications to the taxpayer identification number requirement.
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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.
SENATE AMENDMENT
The provision temporarily increases the child tax credit
to $2,000 per qualifying child. Additionally, the age limit for
a qualifying child is temporarily increased by one year, such
that a taxpayer may claim the credit with respect to any
qualifying child under the age of 18. This increase in the age
limit expires for taxable years after December 31, 2024.
The credit is further modified to temporarily provide for
a $500 nonrefundable credit for qualifying dependents other
than qualifying children. The provision generally retains the
present-law definition of dependent.
Under the temporary provision, beginning in 2018, the
threshold at which the credit begins to phase out is increased
to $500,000 for all taxpayers. These amounts are not indexed
for inflation.
The provision temporarily lowers the earned income
threshold for the refundable child tax credit to $2,500. As
under present law, the maximum amount refundable may not exceed
$1,000 per qualifying child. Under the provision, this $1,000
threshold is indexed for inflation with a base year of 2017,
rounding up to the nearest $100 (such that the threshold is
$1,100 in 2018). A temporary rule provides that, for the
taxable years for which the above-described changes are in
effect, in order to receive the refundable portion of the child
tax credit, a taxpayer must include a Social Security number
for each qualifying child for whom the credit is claimed on the
tax return.
The temporary provision (other than the increase in the
age limit, which expires one year earlier) expires for taxable
years beginning after December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement temporarily increases the child
tax credit to $2,000 per qualifying child. The credit is
further modified to temporarily provide for a $500
nonrefundable credit for qualifying dependents other than
qualifying children. The provision generally retains the
present-law definition of dependent.
Under the conference agreement, the maximum amount
refundable may not exceed $1,400 per qualifying child.\73\
Additionally, the conference agreement provides that, in order
to receive the child tax credit (i.e., both the refundable and
non-refundable portion), a taxpayer must include a Social
Security number for each qualifying child for whom the credit
is claimed on the tax return. For these purposes, a Social
Security number must be issued before the due date for the
filing of the return for the taxable year. This requirement
does not apply to a non-child dependent for whom the $500 non-
refundable credit is claimed.\74\
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\73\Unlike both the House bill and the Senate amendment, the
conference agreement uses an indexing convention that rounds the $1,400
amount to the next lowest multiple of $100.
\74\Additionally, a qualifying child who is ineligible to receive
the child tax credit because that child did not have a Social Security
number as the child's taxpayer identification number may nonetheless
qualify for the non-refundable $500 credit.
---------------------------------------------------------------------------
Further, the conference agreement retains the present-law
age limit for a qualifying child. Thus, a qualifying child is
an individual who has not attained age 17 during the taxable
year.
Finally, the conference agreement modifies the adjusted
gross income phaseout thresholds. Under the conference
agreement, the credit begins to phase out for taxpayers with
adjusted gross income in excess of $400,000 (in the case of
married taxpayers filing a joint return) and $200,000 (for all
other taxpayers). These phaseout thresholds are not indexed for
inflation.
As was the case with the Senate amendment, the provision
expires for taxable years beginning after December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
2. Credit for the elderly and permanently disabled (sec. 1102(a) of the
House 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.\75\ Thus, the
maximum credit amounts are $750 and $1,125, respectively.
---------------------------------------------------------------------------
\75\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.\76\ 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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\76\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.\77\
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\77\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.\78\ 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.\79\
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\78\Sec. 22(b).
\79\Sec. 22(e)(3).
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HOUSE BILL
The House bill repeals the credit for the elderly and
permanently disabled.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
3. Repeal of credit for plug-in electric drive motor vehicles (sec.
1102(c) of the House 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.\80\ 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-per-manufacturer
limitation. Once the limitation has been reached the credit is
phased down over four calendar quarters.
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\80\Sec. 30D.
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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
4. Termination of credit for interest on certain home mortgages (sec.
1102(b) of the House 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'').\81\
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.\82\
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\81\Sec. 25.
\82\Sec. 143.
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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not contain the House bill
provision.
5. Modification of taxpayer identification number requirements for the
child tax credit, earned income credit, and American
Opportunity credit (sec. 1103 of the House bill, sec. 11022 of
the Senate amendment 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\83\ 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.
---------------------------------------------------------------------------
\83\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\84\
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.
---------------------------------------------------------------------------
\84\See description of sec. 1101 of the House bill for the House
bill and Senate amendment modifications to the child tax credit.
---------------------------------------------------------------------------
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\85\ earned by U.S. citizens
or residents living abroad or in certain U.S. territories.
---------------------------------------------------------------------------
\85\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\86\
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.
---------------------------------------------------------------------------
\86\See description of sec. 1201 of the House bill for the bill's
modifications to the American Opportunity credit.
---------------------------------------------------------------------------
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'').\87\ 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.\88\ An individual who is eligible to
receive an SSN may not obtain an ITIN for purposes of his or
her tax filing obligations.\89\ An ITIN does not provide
eligibility to work in the United States or claim Social
Security benefits.
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\87\Sec. 6109(a).
\88\Treas. Reg. Sec. 301.6109-1(d)(3)(i).
\89\Treas. Reg. Sec. 301.6109-1(d)(3)(ii).
---------------------------------------------------------------------------
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,\90\ an individual who
is a U.S. resident alien under the substantial presence test
and who therefore must file a U.S. tax return,\91\ a dependent
or spouse of the prior two categories of individuals, or a
dependent or spouse of a nonresident alien visa holder.
---------------------------------------------------------------------------
\90\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.
\91\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.\92\ 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.
---------------------------------------------------------------------------
\92\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.
---------------------------------------------------------------------------
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.
HOUSE BILL
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.\93\
---------------------------------------------------------------------------
\93\See description of sec. 1101 of the House bill.
---------------------------------------------------------------------------
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 is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
Under the Senate amendment, as a part of the temporary
modifications to the child tax credit, for the taxable years
2018 through 2025, in order to receive the refundable portion
of the child tax credit, a taxpayer must include a Social
Security number for each qualifying child for whom the credit
is claimed on the tax return.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement does not contain the House bill
provision.\94\
---------------------------------------------------------------------------
\94\But see description of sec. 11022 of the conference agreement
for a description of modifications with respect to the taxpayer
identification number requirements pertaining to the child tax credit.
---------------------------------------------------------------------------
6. Procedures to reduce improper claims of earned income credit (sec.
1104 of the House 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.\95\ Special rules apply in computing
earned income for purposes of the EIC.\96\ 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.\97\
---------------------------------------------------------------------------
\95\Sec. 32(c)(2)(A).
\96\Sec. 32(c)(2)(B).
\97\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'').\98\
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.
---------------------------------------------------------------------------
\98\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.
---------------------------------------------------------------------------
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.\99\ 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.\100\ 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.
---------------------------------------------------------------------------
\99\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 to file annually on Form 944,
Employer's Annual Federal Tax Return. Separate forms and filing
requirement apply with respect to RRTA and FUTA taxes.
\100\Sec. 6051(a). Employees are required to include a copy of Form
W-2 when filing their income tax returns.
---------------------------------------------------------------------------
HOUSE BILL
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.
Effective date.--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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
7. Certain income disallowed for purposes of the earned income tax
credit (sec. 1105 of the House 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.\101\ Special
rules apply in computing earned income for purposes of the
EIC.\102\
---------------------------------------------------------------------------
\101\Sec. 32(c)(2)(A).
\102\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.\103\
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.
---------------------------------------------------------------------------
\103\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.\104\ 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.\105\ 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.\106\
---------------------------------------------------------------------------
\104\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).
\105\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.
\106\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.\107\ 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.\108\
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\107\Sec. 6051(a).
\108\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.\109\
---------------------------------------------------------------------------
\109\Sec. 6050W.
---------------------------------------------------------------------------
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.\110\ 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.\111\
---------------------------------------------------------------------------
\110\Sec. 6041(d).
\111\Sec. 6071(d).
---------------------------------------------------------------------------
Failure to comply with the information reporting
requirements results in penalties, which may include a penalty
for failure to file the information return,\112\ to furnish
payee statements,\113\ or to comply with other various
reporting requirements.\114\ No penalty is imposed if the
failure is due to reasonable cause.\115\ 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.
---------------------------------------------------------------------------
\112\Sec. 6721.
\113\Sec. 6722.
\114\Sec. 6723.
\115\Sec. 6724.
---------------------------------------------------------------------------
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.\116\ 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.\117\ 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.\118\
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\116\Sec. 6001.
\117\Treas. sec. 1.6001-1(a).
\118\Treas. sec. 1.6001-1(e).
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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
8. Limitation on losses for taxpayers other than corporations (sec.
11012 of the Senate amendment and sec. 461(l) of the Code)
PRESENT LAW
Loss limitation rules applicable to individuals
Passive loss rules
The passive loss rules limit deductions and credits from
passive trade or business activities.\119\ The passive loss
rules apply to individuals, estates and trusts, and closely
held corporations. A passive activity for this purpose is a
trade or business activity in which the taxpayer owns an
interest, but in which the taxpayer does not materially
participate. A taxpayer is treated as materially participating
in an activity only if the taxpayer is involved in the
operation of the activity on a basis that is regular,
continuous, and substantial.\120\ Deductions attributable to
passive activities, to the extent they exceed income from
passive activities, generally may not be deducted against other
income. Deductions and credits that are suspended under these
rules are carried forward and treated as deductions and credits
from passive activities in the next year. The suspended losses
from a passive activity are allowed in full when a taxpayer
makes a taxable disposition of his entire interest in the
passive activity to an unrelated person.
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\119\Sec. 469.
\120\Regulations provide more detailed standards for material
participation. See Treas. Reg. sec. 1.469-5 and -5T.
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Excess farm loss rules
A limitation on excess farm losses applies to taxpayers
other than C corporations.\121\ If a taxpayer other than a C
corporation receives an applicable subsidy for the taxable
year, the amount of the excess farm loss is not allowed for the
taxable year, and is carried forward and treated as a deduction
attributable to farming businesses in the next taxable year. An
excess farm loss for a taxable year means the excess of
aggregate deductions that are attributable to farming
businesses over the sum of aggregate gross income or gain
attributable to farming businesses plus the threshold amount.
The threshold amount is the greater of (1) $300,000 ($150,000
for married individuals filing separately), or (2) for the
five-consecutive-year period preceding the taxable year, the
excess of the aggregate gross income or gain attributable to
the taxpayer's farming businesses over the aggregate deductions
attributable to the taxpayer's farming businesses.
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\121\Sec. 461(j).
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HOUSE BILL
No provision.
SENATE AMENDMENT
For taxable years beginning after December 31, 2017 and
before January 1, 2026, excess business losses of a taxpayer
other than a corporation are not allowed for the taxable year.
Such losses are carried forward and treated as part of the
taxpayer's net operating loss (``NOL'') carryforward in
subsequent taxable years. Under the bill, NOL carryovers
generally are allowed for a taxable year up to the lesser of
the carryover amount or 90 percent (80 percent for taxable
years beginning after December 31, 2022) of taxable income
determined without regard to the deduction for NOLs.
An excess business loss for the taxable year is the
excess of aggregate deductions of the taxpayer attributable to
trades or businesses of the taxpayer (determined without regard
to the limitation of the provision), over the sum of aggregate
gross income or gain of the taxpayer plus a threshold amount.
The threshold amount for a taxable year is $250,000 (or twice
the otherwise applicable threshold amount in the case of a
joint return). The threshold amount is indexed for inflation.
In the case of a partnership or S corporation, the
provision applies at the partner or shareholder level. Each
partner's distributive share and each S corporation
shareholder's pro rata share of items of income, gain,
deduction, or loss of the partnership or S corporation are
taken into account in applying the limitation under the
provision for the taxable year of the partner or S corporation
shareholder. Regulatory authority is provided to apply the
provision to any other passthrough entity to the extent
necessary to carry out the provision. Regulatory authority is
also provided to require any additional reporting as the
Secretary determines is appropriate to carry out the purposes
of the provision.
The provision applies after the application of the
passive loss rules.\122\
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\122\Sec. 469.
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For taxable years beginning after December 31, 2017 and
before January 1, 2026, the present-law limitation relating to
excess farm losses does not apply.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Thus, excess business losses not allowed are carried forward
and treated as part of the taxpayer's net operating loss
(``NOL'') carryforward in subsequent taxable years as
determined under the NOL rules provided under the conference
agreement.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
9. Reform of American opportunity tax credit and repeal of lifetime
learning credit (sec. 1201 of the House 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.\123\
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\123\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.\124\ 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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\124\Sec. 25A(a)(2).
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HOUSE BILL
The House bill modifies the American Opportunity
credit\125\ 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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\125\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 provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
10. Consolidation and modification of education savings rules (sec.
1202 of the House bill, sec. 11033 of the Senate amendment, 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.\126\
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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\126\Sec. 530.
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Earnings on contributions to a Coverdell education
savings account generally are subject to tax when
withdrawn.\127\ 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.\128\
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\127\In addition, Coverdell education savings accounts are subject
to the unrelated business income tax imposed by section 511.
\128\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.\129\
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.\130\
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\129\Qualified higher education expenses are defined in the same
manner as for qualified tuition programs.
\130\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.\131\ 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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\131\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'')\132\ 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.
---------------------------------------------------------------------------
\132\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.
HOUSE BILL
Under the House bill, 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.
SENATE AMENDMENT
The Senate amendment 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 the definition of higher
education expenses to include certain expenses incurred in
connection with a homeschool. Those expenses are (1) curriculum
and curricular materials; (2) books or other instructional
materials; (3) online educational materials; (4) tuition for
tutoring or educational classes outside of the home (but only
if the tutor or instructor is not related to the student); (5)
dual enrollment in an institution of higher education; and (6)
educational therapies for students with disabilities.
Effective date.--The provision applies to distributions
made after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
11. Reforms to discharge of certain student loan indebtedness (sec.
1203 of the House bill, sec. 11031 of the Senate amendment, and
sec. 108 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.\133\
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\133\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).
HOUSE BILL
The House bill 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).\134\
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\134\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.\135\
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\135\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.\136\
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\136\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.
SENATE AMENDMENT
The Senate amendment generally follows the House bill.
However, the Senate amendment does not contain the provision in
the House bill excluding amounts received under the Indian
Health Service loan repayment program from income.
Additionally, the Senate amendment does not apply to
discharges of indebtedness occurring after December 31, 2025.
Effective date.--The provision is effective for
discharges of indebtedness after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
12. Repeal of deduction for student loan interest (sec. 1204 of the
House 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.\137\ 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.\138\
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\137\Sec. 221.
\138\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.\139\
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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\139\Sec. 221(b)(1).
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HOUSE BILL
The provision repeals the deduction for student loan
interest.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
13. Repeal of deduction for qualified tuition and related expenses
(sec. 1204 of the House 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.\140\ 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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\140\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).\141\ 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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\141\Sec. 222(b)(2)(B).
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HOUSE BILL
The provision repeals the deduction for qualified tuition
and related expenses.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
14. Repeal of exclusion for qualified tuition reductions (sec. 1204 of
the House bill and sec. 117(d) of the Code)
PRESENT LAW
Qualified tuition reductions for certain education
provided to employees (and their spouses and dependents\142\)
of certain educational organizations are excludible from gross
income.\143\ The tuition reduction is subject to
nondiscrimination rules.\144\ 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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\142\Individuals described under the rules of Sec. 132(h).
\143\Educational organization described in section
170(b)(1)(A)(ii). Sec. 117(d)(2).
\144\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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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
15. Repeal of exclusion for interest on United States savings bonds
used for higher education expenses (sec. 1204 of the House 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.\145\ 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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\145\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.
HOUSE BILL
The House bill repeals exclusion for interest on Series
EE savings bond used for qualified higher education expenses.
Effective date.--The provision generally applies to
taxable years beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
16. Repeal of exclusion for educational assistance programs (sec. 1204
of the House 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.\146\ Nondiscrimination rules\147\ 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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\146\Sec. 127(a).
\147\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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
17. Rollovers between qualified tuition programs and qualified ABLE
programs (sec. 1205 of the House bill, sec. 11025 of the Senate
amendment and secs. 529 and 529A of the Code)
PRESENT LAW
Qualified ABLE programs
The Code provides for a tax-favored savings program
intended to benefit disabled individuals, known as qualified
ABLE programs.\148\ 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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\148\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.\149\ 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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\149\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.\150\ 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\151\ or another
ABLE account for the designated beneficiary's brother, sister,
stepbrother or stepsister who is also an eligible individual.
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\150\The rules of section 72 apply in determining the portion of a
distribution that consists of earnings.
\151\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,\152\ 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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\152\In which case the contributor ABLE account must be closed 60
days after the transfer to the new ABLE account is made.
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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\153\ based on
blindness or disability, and such blindness or disability
occurred before the individual attained age 26.
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\153\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.\154\
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\154\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.
HOUSE BILL
The House bill 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.\155\ Such
rolled-over amounts count towards the overall limitation on
amounts that can be contributed to an ABLE account within a
taxable year.\156\ 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.\157\
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\155\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.
\156\529A(b)(2)(B).
\157\529(c)(3)(A).
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Effective date.--The provision applies to distributions
after December 31, 2017.
SENATE AMENDMENT
The Senate amendment generally follows the House Bill.
Under the Senate amendment, the provision is not effective for
distributions after December 31, 2025.
Effective date.--The provision applies to distributions
after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
18. Repeal of overall limitation on itemized deductions (sec. 1301 of
the House bill, sec. 11046 of the Senate amendment, 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.\158\ 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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\158\Sec. 68.
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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.
HOUSE BILL
The House bill repeals the overall limitation on itemized
deductions.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment follows the House bill. Under the
Senate amendment, the suspension of the overall limitation on
itemized deductions does not apply to taxable years beginning
after December 31, 2025.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
D. Simplification and Reform of Deductions and Exclusions
1. Modification of deduction for home mortgage interest (sec. 1302 of
the House bill, sec. 11043 of the Senate amendment, and sec.
163(h) of the Code)
PRESENT LAW
As a general matter, personal interest is not
deductible.\159\ Qualified residence interest is not treated as
personal interest and is allowed as an itemized deduction,
subject to limitations.\160\ 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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\159\Sec. 163(h)(1).
\160\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).
HOUSE BILL
The House bill 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).\161\ 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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\161\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.
SENATE AMENDMENT
The Senate amendment suspends the deduction for interest
on home equity indebtedness. Thus, for taxable years beginning
after December 31, 2017, a taxpayer may not claim a deduction
for interest on home equity indebtedness. The suspension ends
for taxable years beginning after December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement provides that, in the case of
taxable years beginning after December 31, 2017, and beginning
before January 1, 2026, a taxpayer may treat no more than
$750,000 as acquisition indebtedness ($375,000 in the case of
married taxpayers filing separately). In the case of
acquisition indebtedness incurred before December 15, 2017\162\
this limitation is $1,000,000 ($500,000 in the case of married
taxpayers filing separately).\163\ For taxable years beginning
after December 31, 2025, a taxpayer may treat up to $1,000,000
($500,000 in the case of married taxpayers filing separately)
of indebtedness as acquisition indebtedness, regardless of when
the indebtedness was incurred.
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\162\The conference agreement provides that a taxpayer who has
entered into a binding written contract before December 15, 2017 to
close on the purchase of a principal residence before January 1, 2018,
and who purchases such residence before April 1, 2018, shall be
considered to incurred acquisition indebtedness prior to December 15,
2017 under this provision.
\163\Special rules apply in the case of indebtedness from
refinancing existing 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 December 15, 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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Additionally, the conference agreement suspends the
deduction for interest on home equity indebtedness. Thus, for
taxable years beginning after December 31, 2017, a taxpayer may
not claim a deduction for interest on home equity indebtedness.
The suspension ends for taxable years beginning after December
31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
2. Modification of deduction for taxes not paid or accrued in a trade
or business (sec. 1303 of the House bill, sec. 11042 of the
Senate amendment, and sec. 164 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;\164\ (ii) State and local personal
property taxes;\165\ (iii) State, local, and foreign income,
war profits, and excess profits taxes.\166\ 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.\167\
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\164\Sec. 164(a)(1).
\165\Sec. 164(a)(2).
\166\ Sec. 164(a)(3). A foreign tax credit, in lieu of a deduction,
is allowable for foreign taxes if the taxpayer so elects.
\167\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.\168\
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\168\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.\169\
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\169\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.
HOUSE BILL
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).\170\ 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).
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\170\The proposal does not modify the deductibility of GST tax
imposed on certain income distributions. Additionally, taxes imposed at
the entity level, such as a business tax imposed on pass-through
entities, that are reflected in a partner's or S corporation
shareholder's distributive or pro-rata share of income or loss on a
Schedule K-1 (or similar form), will continue to reduce such partner's
or shareholder's distributive or pro-rata share of income as under
present law.
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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.
SENATE AMENDMENT
The Senate amendment follows the House bill. However,
under the Senate amendment, the suspension of the deduction for
State and local taxes expires for taxable years beginning after
December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement provides that in the case of an
individual,\171\ 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).\172\ 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).
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\171\See sec. 641(b) regarding the computation of taxable income of
an estate or trust in the same manner as an individual.
\172\The proposal does not modify the deductibility of GST tax
imposed on certain income distributions. Additionally, taxes imposed at
the entity level, such as a business tax imposed on pass-through
entities, that are reflected in a partner's or S corporation
shareholder's distributive or pro-rata share of income or loss on a
Schedule K-1 (or similar form), will continue to reduce such partner's
or shareholder's distributive or pro-rata share of income as under
present law.
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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.
The provision contains an exception to the above-stated
rule. Under the provision a taxpayer may claim an itemized
deduction of up to $10,000 ($5,000 for married taxpayer filing
a separate return) for the aggregate of (i) State and local
property taxes not paid or accrued in carrying on a trade or
business, or an activity described in section 212, and (ii)
State and local income, war profits, and excess profits taxes
(or sales taxes in lieu of income, etc. taxes) paid or accrued
in the taxable year. Foreign real property taxes may not be
deducted under this exception.
The above rules apply to taxable years beginning after
December 31, 2017, and beginning before January 1, 2026.
The conference agreement also provides that, in the case
of an amount paid in a taxable year beginning before January 1,
2018, with respect to a State or local income tax imposed for a
taxable year beginning after December 31, 2017, the payment
shall be treated as paid on the last day of the taxable year
for which such tax is so imposed for purposes of applying the
provision limiting the dollar amount of the deduction. Thus,
under the provision, an individual may not claim an itemized
deduction in 2017 on a pre-payment of income tax for a future
taxable year in order to avoid the dollar limitation applicable
for taxable years beginning after 2017.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2016.
3. Repeal of deduction for personal casualty and theft losses (sec.
1304 of the House bill, sec. 11044 of the Senate amendment, 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.\173\
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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\173\Sec. 165(c).
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HOUSE BILL
The House bill 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,\174\ for those individuals
who sustained a personal casualty loss arising from hurricanes
Harvey, Irma, or Maria.
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\174\Pub. L. No. 115-63.
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Effective date.--The provision is effective for losses
incurred in taxable years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment temporarily modifies the deduction
for personal casualty and theft losses. Under the provision, a
taxpayer may claim a personal casualty loss (subject to the
limitations described above) only if such loss was attributable
to a disaster declared by the President under section 401 of
the Robert T. Stafford Disaster Relief and Emergency Assistance
Act.
The above-described limitation does not apply with
respect to losses incurred after December 31, 2025.
Effective date.--The provision is effective for losses
incurred in taxable years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
4. Limitation on wagering losses (sec. 1305 of the House bill, sec.
11051 of the Senate amendment, 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.\175\
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\175\Sec. 165(d).
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HOUSE BILL
The House bill 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.\176\ 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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\176\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.
SENATE AMENDMENT
The Senate amendment follows the House bill. However, the
Senate amendment does not apply to taxable years beginning
after December 31, 2025.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
5. Modifications to the deduction for charitable contributions (sec.
1306 of the House bill, secs. 11023, 13703, and 13704 of the
Senate amendment, 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.\177\ Fourth, the transfer
must be of money or property--contributions of services are not
deductible.\178\ Finally, the transfer must be substantiated
and in the proper form.
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\177\Sec. 170(a)(1).
\178\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.\179\ 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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\179\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.\180\ 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.''\181\
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\180\Sec. 170(a)(3).
\181\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.\182\ 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.\183\ 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.\184\
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\182\Sec. 170(f)(3)(B)(ii).
\183\Treas. Reg. sec. 1.170A-7(b)(1).
\184\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.\185\
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.
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\185\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.\186\ 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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\186\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.\187\ Charitable
contributions of income interests (where deductible) also
generally are treated as contributions for the use of the donee
organization.
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\187\Rockefeller v. Commissioner, 676 F.2d 35, 39 (2d Cir. 1982).
TABLE 3.--CHARITABLE CONTRIBUTION PERCENTAGE LIMITS FOR INDIVIDUAL TAXPAYERS\188\
----------------------------------------------------------------------------------------------------------------
Ordinary Capital Gain
Income Capital Gain Property for
Property and Property to the the use of the
Cash Recipient\189\ Recipient
----------------------------------------------------------------------------------------------------------------
Public Charities, Private Operating Foundations, and Private 50% \190\30% 20%
Distributing Foundations......................................
Nonoperating Private Foundations............................... 30% 20% 20%
----------------------------------------------------------------------------------------------------------------
Corporate taxpayers
A corporation generally may deduct charitable
contributions up to 10 percent of the corporation's taxable
income for the year.\191\ 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.\192\
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\188\Percentages shown are the percentage of an individual's
contribution base.
\189\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.
\190\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.
\191\ Sec. 170(b)(2)(A).
\192\ 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.\193\ 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.
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\193\Sec. 170(d).
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Qualified conservation contributions
Preferential percentage limits and carryforward rules
apply for qualified conservation contributions.\194\ 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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\194\ 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.\195\
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\195\ 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.\196\ 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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\196\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).
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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;\197\ (2) contributions of tangible personal property
if the use by the recipient charitable organization is
unrelated to the organization's tax-exempt purpose;\198\ and
(3) contributions to or for the use of a private foundation
(other than certain private operating foundations).\199\
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\197\Sec. 170(e). Special rules, discussed below, apply for certain
contributions of inventory and other property.
\198\Sec. 170(e)(1)(B)(i)(I).
\199\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.
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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.\200\ 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.\201\ 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.\202\
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\200\Sec. 170(e)(5).
\201\Sec. 170(e)(5)(B).
\202\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.\203\ 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.\204\ 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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\203\Sec. 170(e)(3).
\204\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.\205\
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\205\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)\206\ 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.\207\ 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).\208\
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\206\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).
\207\Sec. 170(e)(1)(B)(iii).
\208\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.\209\
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.\210\
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\209\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.
\210\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.\211\
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\211\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.\212\ 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.\213\
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\212\Treas. Reg. sec. 1.170A-1(g).
\213\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.\214\ 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.\215\
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\214\Sec. 170(i).
\215\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.\216\ 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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\216\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.\217\
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\217\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.\218\
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\218\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.\219\ 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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\219\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.''\220\ No such final regulations have been
issued.\221\
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\220\See IRS, Notice of Proposed Rulemaking, Substantiation
Requirement for Certain Contributions, REG-138344-13 (October 13,
2015), I.R.B. 2015-41 (preamble).
\221\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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HOUSE BILL
The provision makes the following modifications to the
present law charitable deduction rules.
Increased percentage limit 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 charitable 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.
SENATE AMENDMENT
The Senate amendment includes three of the House bill's
four modifications to the present-law charitable contribution
rules: (1) the increase in the percentage limit for charitable
contributions of cash to public charities; (2) the denial of a
charitable deduction for payments made in exchange for college
athletic event seating rights; and (3) the repeal of the
substantiation exception for certain contributions reported by
the donee organization.
The Senate amendment does not include the provision from
the House bill that allows the charitable standard mileage rate
to be adjusted for inflation.
Effective date.--The provisions that increase the
charitable contribution percentage limit and deny a deduction
for stadium seating payments are effective for contributions
made in taxable years beginning after December 31, 2017. The
provision that repeals the substantiation exception for certain
contributions reported by the donee organization is effective
for contributions made in taxable years beginning after
December 31, 2016.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
6. Repeal of Certain Miscellaneous Itemized Deductions Subject to the
Two-Percent Floor (secs. 1307 and 1312 of the House bill, sec.
11045 of the Senate amendment, and secs. 62, 67 and 212 of the
Code)
PRESENT LAW
Individuals may claim itemized deductions for certain
miscellaneous expenses. Certain of these expenses are not
deductible unless, in aggregate, they exceed two percent of the
taxpayer's adjusted gross income (``AGI'').\222\ The deductions
described below are subject to the aggregate two-percent
floor.\223\
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\222\Sec. 67(a).
\223\The miscellaneous itemized deduction for tax preparation
expenses is described in a separate section of this document.
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Expenses for the production or collection of income
Individuals may deduct all ordinary and necessary
expenses paid or incurred during the taxable year for the
production or collection of income.\224\
---------------------------------------------------------------------------
\224\Sec. 212(1).
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Present law and IRS guidance provide examples of items
that may be deducted under this provision. This non-exhaustive
list includes:\225\
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\225\See IRS Publication 529, ``Miscellaneous Deductions'' (2016),
p. 9.
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Appraisal fees for a casualty loss or
charitable contribution;
Casualty and theft losses from property
used in performing services as an employee;
Clerical help and office rent in caring
for investments;
Depreciation on home computers used for
investments;
Excess deductions (including
administrative expenses) allowed a beneficiary on
termination of an estate or trust;
Fees to collect interest and dividends;
Hobby expenses, but generally not more
than hobby income;
Indirect miscellaneous deductions from
pass-through entities;
Investment fees and expenses;
Loss on deposits in an insolvent or
bankrupt financial institution;
Loss on traditional IRAs or Roth IRAs,
when all amounts have been distributed;
Repayments of income;
Safe deposit box rental fees, except for
storing jewelry and other personal effects;
Service charges on dividend reinvestment
plans; and
Trustee's fees for an IRA, if separately
billed and paid.
Tax preparation expenses
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.\226\
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\226\Sec. 212.
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Unreimbursed expenses attributable to the trade or business of being an
employee
In general, unreimbursed 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.\227\
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\227\Secs. 62(a)(1) and 67.
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Present law and IRS guidance provide examples of items
that may be deducted under this provision. This non-exhaustive
list includes:\228\
---------------------------------------------------------------------------
\228\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 perform his job;
Dues to professional societies;
Educator expenses;\229\
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\229\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 fees 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;
Purchase of 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.
Other miscellaneous itemized deductions subject to the two-percent
floor
Other miscellaneous itemized deductions subject to the
two-percent floor include:
Repayments of income received under a
claim of right (only subject to the two-percent floor
if less than $3,000);
Repayments of Social Security benefits;
and
The share of deductible investment
expenses from pass-through entities.
HOUSE BILL
The House bill repeals the deduction for expenses in
connection with the determination, collection, or refund of any
tax.
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).
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment suspends all miscellaneous itemized
deductions that are subject to the two-percent floor under
present law. Thus, under the provision, taxpayers may not claim
the above-listed items as itemized deductions for the taxable
years to which the suspension applies. The provision does not
apply for taxable years beginning after December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
7. Repeal of deduction for medical expenses (sec. 1308 of the House
bill, sec. 11028 of the Senate amendment 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.\230\ 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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\230\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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HOUSE BILL
The House bill repeals the deduction for unreimbursed
medical expenses.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment provides that, for taxable years
beginning after December 31, 2016 and ending before January 1,
2019, the threshold for deducting medical expenses shall be
7.5-percent for all taxpayers. For these years, this threshold
applies for purposes of the AMT in addition to the regular tax.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2016.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
8. Repeal of deduction for alimony payments and corresponding inclusion
in gross income (sec. 1309 of the House 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.\231\ Child support payments are not treated as
alimony.\232\
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\231\Secs. 215(a), 61(a)(8) and 71(a).
\232\Sec. 71(c).
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HOUSE BILL
Under the House bill, alimony and separate maintenance
payments are not deductible by the payor spouse. The House bill
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,\233\ 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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\233\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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement generally follows the House
bill. However, the conference agreement delays the effective
date of the provision by one year. Thus, the conference
agreement is effective for any divorce or separation instrument
executed after December 31, 2018, or for any divorce or
separation instrument executed on or before December 31, 2018,
and modified after that date, if the modification expressly
provides that the amendments made by this section apply to such
modification.
9. Repeal of deduction for moving expenses (sec. 1310 of the House
bill, sec. 11050 of the Senate amendment, and sec. 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.\234\ 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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\234\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.\235\ 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.\236\ 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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\235\Sec. 217(g).
\236\Sec. 217(g)(2).
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Present law provides income exclusions for various
benefits provided to members of the Armed Forces.\237\
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\237\Sec. 134.
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HOUSE BILL
The House bill 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.\238\ Thus, the provision retains the special rules
under present law that provide an exclusion 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.\239\
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\238\A technical amendment may be needed to reflect this intent for
the deduction for moving expenses for members of the Armed Forces.
\239\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.
SENATE AMENDMENT
The Senate amendment generally suspends the deduction for
moving expenses for taxable years 2018 through 2025. However,
during that suspension period, the provision retains the
deduction for moving expenses and the rules providing for
exclusions of 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.
The suspension of the deduction for moving expenses does
not apply to taxable years beginning after December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
10. Termination of deduction and exclusions for contributions to
medical savings accounts (sec. 1311 of the House bill, 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.\240\ 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\241\
purposes if made by the employer of an individual.\242\
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\240\Archer MSAs were originally called medical savings accounts or
MSAs.
\241\The FICA exclusion is provided under IRS Notice 96-53.
\242\Sections 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\243\ purposes if made by the employer of an
individual, and distributions for qualified medical expenses
are not includible in gross income.\244\ However, the rules for
HSAs are in various aspects more favorable than the rules for
Archer MSAs. 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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\243\The FICA exclusion is provided under IRS Notice 2004-2.
\244\Secs. 106(d) and 223.
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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 may 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.
HOUSE BILL
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.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not contain the House bill
provision.
11. Denial of deduction for performing artists and certain officials;
Modification of deduction for educator expenses (sec. 1312 of
the House bill, sec. 11032 of the Senate amendment and sec. 62
of the Code)
PRESENT LAW
In general, unreimbursed 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.\245\ 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.\246\
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\245\Secs. 62(a)(1) and 67.
\246\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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Eligible educators are elementary or secondary school
teachers, instructors, counselors, principals, or aides in a
school for at least 900 hours during a school year.\247\ An
eligible educator may take an ``above-the-line'' deduction for
ordinary and necessary expenses incurred (1) by reason of
participation in professional development courses related to
the curriculum or students the educator teaches, or (2) in
connection with books, supplies, computer and other equipment,
and supplementary materials to be used in the classroom. The
deduction may not exceed $250 (for 2017) in expenses, and is
indexed for inflation.
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\247\Sec. 62(d)(1).
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HOUSE BILL
The House bill repeals the present-law provisions
allowing for above-the-line deductions for expenses of
qualified performing artists, expenses of State or local
government officials performing services on a fee basis, and
expenses of eligible educators.\248\
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\248\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.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment temporarily increases the limit for
the deduction of certain expenses of eligible educators, in
determining adjusted gross income, to $500. Any deduction for
expenses in excess of this amount (under present law generally
a miscellaneous itemized deduction subject to the two-percent
floor) is suspended.\249\
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\249\Sec. 11045 of the Senate amendment.
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The provision does not apply to taxable years beginning
after December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision or the Senate amendment provision and retains the
present-law above-the-line deduction and limit for certain
expenses of eligible educators.
12. Suspension of exclusion for qualified bicycle commuting
reimbursement (sec. 11048 of the Senate amendment and sec.
132(f) of the Code)
PRESENT LAW
Qualified bicycle commuting reimbursements of up to $20
per qualifying bicycle commuting month are excludible from an
employee's gross income.\250\ A qualifying bicycle commuting
month is any month during which the employee regularly uses the
bicycle for a substantial portion of travel to a place of
employment and during which the employee does not receive
transportation in a commuter highway vehicle, a transit pass,
or qualified parking from an employer.
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\250\Section 132(a)(5) and 132(f)(1)(D).
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Qualified reimbursements are any amount received from an
employer during a 15-month period beginning with the first day
of the calendar year as payment for reasonable expenses during
a calendar year. Reasonable expenses are those incurred in a
calendar year for the purchase of a bicycle and bicycle
improvements, repair, and storage, if the bicycle is regularly
used for travel between the employee's residence and place of
employment.
Amounts that are excludible from gross income for income
tax purposes are also excluded from wages for employment tax
purposes.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision suspends the exclusion from gross income
and wages for qualified bicycle commuting reimbursements. The
exclusion does not apply to taxable years beginning after
December 31, 2017 and before January 1, 2026.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
13. Limitation on exclusion for employer-provided housing (sec. 1401 of
the House 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.\251\
Special rules apply with respect to employees living in foreign
camps\252\ and lodging furnished by certain educational
institutions to employees.\253\ 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.
---------------------------------------------------------------------------
\251\Sec. 119(a).
\252\Sec. 119(c).
\253\Sec. 119(d).
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HOUSE BILL
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.\254\ The provision also
denies any exclusion for employer-provided housing provided to
5% owners,\255\ regardless of their compensation level.
---------------------------------------------------------------------------
\254\The compensation threshold is that amount in effect under
section 414(q)(1)(B)(i).
\255\As defined in section 416(i)(1)(B)(i).
---------------------------------------------------------------------------
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
14. Modification of exclusion of gain on sale of a principal residence
(sec. 1402 of the House bill, sec. 11047 of the Senate
amendment, 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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment generally follows the House bill,
but does not include the provision that phases out the
exclusion for AGI in excess of $250,000 ($500,000 if married
filing a joint return). The Senate amendment does not apply to
taxable years beginning after December 31, 2025.
Effective date.--The provision is effective for sales and
exchanges after December 31, 2017.
CONFERENCE AGREEMENT
No provision.
15. Sunset of exclusion for dependent care assistance programs (sec.
1404 of the House 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\256\ 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\257\
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.
---------------------------------------------------------------------------
\256\Sec. 129(a).
\257\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.
---------------------------------------------------------------------------
HOUSE BILL
The provision repeals the deduction for qualified tuition
and related expenses.
Effective date.--The provision terminates the exclusions
from gross income and wages for dependent care assistance
programs for taxable years beginning after December 31, 2022.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
16. Repeal of exclusion for qualified moving expense reimbursement
(sec. 1405 of the House bill, sec. 11049 of the Senate
amendment, and sec. 132(g) of the Code)
PRESENT LAW
Qualified moving expense reimbursements are excluded from
an employee's gross income,\258\ 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\259\ if directly paid or
incurred by the employee. However, any such amount actually
deducted by the individual is not eligible for this exclusion.
Amounts that are excludible from gross income for income tax
purposes are also excluded from wages for employment tax
purposes.
---------------------------------------------------------------------------
\258\Secs. 132(a)(6) and 132(g).
\259\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.\259\ 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.
---------------------------------------------------------------------------
HOUSE BILL
The provision repeals the exclusion from gross income and
wages for qualified moving expense reimbursements except in the
case of a member of the Armed Forces of the United States on
active duty who moves pursuant to a military order.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill except
that the exclusion does not apply to taxable years beginning
after December 31, 2017 and before January 1, 2026.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
17. Repeal of exclusion for adoption assistance programs (sec. 1406 of
the House 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.\260\ 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).
---------------------------------------------------------------------------
\260\Sec. 137(a).
---------------------------------------------------------------------------
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).\261\
---------------------------------------------------------------------------
\261\Sec. 23(d)(1).
---------------------------------------------------------------------------
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.\262\
---------------------------------------------------------------------------
\262\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.
---------------------------------------------------------------------------
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).
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
E. Simplification and Reform of Savings, Pensions, Retirement
1. Repeal of special rule permitting recharacterization of IRA
contributions (sec. 1501 of the House bill, sec. 13611 of the
Senate amendment, 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,\263\ to which both deductible and nondeductible
contributions may be made,\264\ and Roth IRAs, to which only
nondeductible contributions may be made.\265\ The principal
difference between these two types of IRAs is the timing of
income tax inclusion.
---------------------------------------------------------------------------
\263\Sec. 408.
\264\Secs. 219(a) and 408(o).
\265\Sec. 408A.
---------------------------------------------------------------------------
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.\266\ 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 the close of
a year is not permitted to make contributions to a traditional
IRA for that year.
---------------------------------------------------------------------------
\266\Sec. 219(g).
---------------------------------------------------------------------------
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.\267\ All traditional IRAs of
an individual are treated as a single contract for purposes of
recovering basis in the IRAs.
---------------------------------------------------------------------------
\267\Basis results from after-tax contributions to traditional IRAs
or rollovers to traditional IRAs of after-tax amounts from another
eligible retirement plan.
---------------------------------------------------------------------------
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.\268\
---------------------------------------------------------------------------
\268\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.
---------------------------------------------------------------------------
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.\269\ The amount converted is
includible in the taxpayer's income as if a withdrawal had been
made.\270\ 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.
---------------------------------------------------------------------------
\269\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.
\270\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.
---------------------------------------------------------------------------
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\271\) are also permitted.
For tax-free rollovers, distributions from pretax accounts
under an employer-sponsored plan generally must be 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).\272\
---------------------------------------------------------------------------
\271\ Secs. 401(a), 403(a), 403(b) and 457(b).
\272\ 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.
---------------------------------------------------------------------------
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.\273\ 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.
---------------------------------------------------------------------------
\273\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.\274\ 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 recharacterization, 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.\275\
---------------------------------------------------------------------------
\274\Treas. Reg. sec. 1.408A-5, Q&A-2(b).
\275\Treas. Reg. sec. 1.408A-5, Q&A-9.
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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).\276\
---------------------------------------------------------------------------
\276\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.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment with a modification. Under the provision, the
special rule that allows a contribution to one type of IRA to
be recharacterized as a contribution to the other type of IRA
does not apply to a conversion contribution to a Roth IRA.
Thus, recharacterization cannot be used to unwind a Roth
conversion. However, recharacterization is still permitted with
respect to other contributions. For example, an individual may
make a contribution for a year to a Roth IRA and, before the
due date for the individual's income tax return for that year,
recharacterize it as a contribution to a traditional IRA.\277\
---------------------------------------------------------------------------
\277\In addition, an individual may still make a contribution to a
traditional IRA and convert the traditional IRA to a Roth IRA, but the
provision precludes the individual from later unwinding the conversion
through a recharacterization.
---------------------------------------------------------------------------
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 House 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'').\278\ 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.
---------------------------------------------------------------------------
\278\Secs. 401(a), 401(k), 403(a), 403(b), and 457(b).
---------------------------------------------------------------------------
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.\279\ 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.\280\
---------------------------------------------------------------------------
\279\ 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).
\280\Secs. 403(b)(7)(A)(ii) and 403(b)(11).
---------------------------------------------------------------------------
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.\281\
---------------------------------------------------------------------------
\281\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\).\282\
---------------------------------------------------------------------------
\282\Sec. 457(d)(1)(A).
---------------------------------------------------------------------------
HOUSE BILL
Under the House bill, 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
3. Modification of rules governing hardship distributions (sec. 1503 of
the House 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.\283\
---------------------------------------------------------------------------
\283\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.\284\ 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.
---------------------------------------------------------------------------
\284\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------
HOUSE BILL
Under the House bill, 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
4. Modification of rules relating to hardship withdrawals from cash or
deferred arrangements (sec. 1504 of the bill, sec. 11033(c) of
the Senate amendment, 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.\285\ Elective deferrals, but not associated
earnings, may be distributed on account of hardship.
---------------------------------------------------------------------------
\285\Sec. 401(k)(2)(B)(i).
---------------------------------------------------------------------------
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.\286\ 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.
---------------------------------------------------------------------------
\286\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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 is effective for plan
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision or Senate amendment.
5. Extended rollover period for the rollover of plan loan offset
amounts in certain cases (sec. 1505 of the bill, sec. 13613 of
the Senate amendment, 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.\287\ 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.\288\
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\287\Secs. 402(a) and (c), 402A(d), 403(a) and (b), 457(a) and
(e)(16).
\288\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.\289\ 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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\289\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.\290\ 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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\290\Treas. Reg. sec. 1.402(c)-2, QA-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.\291\ 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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\291\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.
HOUSE BILL
Under the House bill, 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 is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except that 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 severance from employment.
Effective date.--The provision is effective for plan loan
offset amounts treated as distributed in taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
6. Modification of nondiscrimination rules for certain plans providing
benefits or contributions to older, longer service participants
(sec. 1506 of the House 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.\292\ 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.\293\ 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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\292\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.
\293\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).\294\ Employees who are
not highly compensated are referred to as nonhighly compensated
employees.
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\294\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'').\295\ 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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\295\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.
---------------------------------------------------------------------------
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.\296\ 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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\296\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 contributions. (Under
these rules, contributions allocated to a participant's 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.
---------------------------------------------------------------------------
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.\297\
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\297\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.\298\
---------------------------------------------------------------------------
\298\Secs. 401(k) and (m), the latter of which applies also to
after-tax employee contributions under a defined contribution plan.
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The nondiscrimination rules allow contributions and
benefit accruals to be provided to highly compensated and
nonhighly compensated employees at the same percentage of
compensation.\299\ 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.\300\ The permitted disparity rules do not
apply in testing whether elective deferrals, matching
contributions, or ESOP contributions are nondiscriminatory.
---------------------------------------------------------------------------
\299\For this purpose, under section 401(a)(17), compensation
generally is limited to $265,000 per year (for 2016).
\300\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.
---------------------------------------------------------------------------
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.\301\ The plan coverage
and other nondiscrimination requirements are applied separately
to the portions of a multiple-employer plan covering employees
of different employers.\302\
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\301\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.
\302\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'').\303\ 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.\304\
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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\303\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.
\304\Treas. Reg. sec. 1.410(b)-7(f).
---------------------------------------------------------------------------
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.\305\ 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.
---------------------------------------------------------------------------
\305\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).
---------------------------------------------------------------------------
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.
HOUSE BILL
Closed or frozen defined benefit plans
In general
Under the House bill, nondiscrimination relief applies
with respect to benefits, rights, and features for a closed
class of participants (``closed class''),\306\ 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.
---------------------------------------------------------------------------
\306\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,\307\ 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.
---------------------------------------------------------------------------
\307\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;\308\ and
---------------------------------------------------------------------------
\308\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,\309\ 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.
---------------------------------------------------------------------------
\309\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.\310\ 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.
---------------------------------------------------------------------------
\310\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.
---------------------------------------------------------------------------
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.\311\ 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.
---------------------------------------------------------------------------
\311\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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
7. Modification of rules applicable to length of service award programs
for bona fide public safety volunteers (sec. 13612 of the
Senate amendment and sec. 457(e) of the Code)
PRESENT LAW
Special rules apply to deferred compensation plans of
State and local government and private, tax-exempt
employers.\312\ However, an exception to these rules applies in
the case of a plan paying solely length of service awards to
bona fide volunteers (or their beneficiaries) on account of
qualified services performed by the volunteers. For this
purpose, qualified services consist of firefighting and fire
prevention services, emergency medical services, and ambulance
services. An individual is treated as a bona fide volunteer for
this purpose if the only compensation received by the
individual for performing qualified services is in the form of
(1) reimbursement or a reasonable allowance for reasonable
expenses incurred in the performance of such services, or (2)
reasonable benefits (including length of service awards) and
nominal fees for the services, customarily paid in connection
with the performance of such services by volunteers. The
exception applies only if the aggregate amount of length of
service awards accruing for a bona fide volunteer with respect
to any year of service does not exceed $3,000.
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\312\Sec. 457.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment increases the aggregate amount of
length of service awards that may accrue for a bona fide
volunteer with respect to any year of service to $6,000 and
adjusts that amount in $500 increments to reflect changes in
cost-of-living for years after the first year the provision is
effective. In addition, under the provision, if the plan is a
defined benefit plan, the limit applies to the actuarial
present value of the aggregate amount of length of service
awards accruing with respect to any year of service. Actuarial
present value is to be calculated using reasonable actuarial
assumptions and methods, assuming payment will be made under
the most valuable form of payment under the plan with payment
commencing at the later of the earliest age at which unreduced
benefits are payable under the plan or the participant's age at
the time of the calculation.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
F. Modifications to Estate, Gift, and Generation-Skipping Transfers
Taxes (secs. 1601 and 1602 of the House bill, sec. 11061 of the Senate
amendment, and secs. 2001 and 2010 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.\313\
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\313\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.\314\ 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.\315\ For 2017, the
inflation-indexed exemption amount is $5.49 million.\316\
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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\314\Sec. 2010.
\315\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.
\316\For 2017, the $5.49 million 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.\317\ 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.
---------------------------------------------------------------------------
\317\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.\318\ 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.\319\ 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.\320\
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\318\Secs. 2055 and 2522.
\319\Sec. 2055(d).
\320\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.\321\ 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.\322\
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\321\Sec. 2001(a).
\322\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.
---------------------------------------------------------------------------
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.\323\ 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).\324\
---------------------------------------------------------------------------
\323\Sec. 2031(a).
\324\Sec. 2032.
---------------------------------------------------------------------------
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.\325\ 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;\326\ (2) certain transfers of property in which the
decedent retained a life estate;\327\ (3) certain transfers
taking effect at death;\328\ and (4) revocable transfers.\329\
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).\330\ 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.\331\
---------------------------------------------------------------------------
\325\Sec. 2033.
\326\Sec. 2035.
\327\Sec. 2036.
\328\Sec. 2037.
\329\Sec. 2038.
\330\Sec. 2041.
\331\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.\332\ 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.
---------------------------------------------------------------------------
\332\Sec. 2058.
---------------------------------------------------------------------------
Other deductions.--A deduction is available for funeral
expenses, estate administration expenses, and claims against
the estate, including certain taxes.\333\ A deduction also is
available for uninsured casualty and theft losses incurred
during the settlement of the estate.\334\
---------------------------------------------------------------------------
\333\Sec. 2053.
\334\Sec. 2054.
---------------------------------------------------------------------------
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.\335\ 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.
---------------------------------------------------------------------------
\335\Sec. 2010.
---------------------------------------------------------------------------
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);\336\ (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);\337\ 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).\338\
---------------------------------------------------------------------------
\336\Sec. 2012.
\337\Sec. 2013.
\338\Sec. 2014. In certain cases, an election may be made to deduct
foreign death taxes. See section 2053(d).
---------------------------------------------------------------------------
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.\339\ 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 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.
---------------------------------------------------------------------------
\339\Sec. 2032A.
---------------------------------------------------------------------------
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.
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).\340\ 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).\341\ Interest
paid on deferred estate taxes is not deductible for estate or
income tax purposes.
---------------------------------------------------------------------------
\340\Sec. 6166.
\341\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.\342\ 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.
---------------------------------------------------------------------------
\342\Sec. 2501(a).
---------------------------------------------------------------------------
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.\343\ 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.\344\ 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.\345\
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\343\Sec. 2511(a).
\344\Sec. 2512(a).
\345\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,\346\ transfers to section 527 political
organizations,\347\ and transfers to tax-exempt organizations
described in sections 501(c)(4), (5), or (6).\348\
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\346\Sec. 2503(e).
\347\Sec. 2501(a)(4).
\348\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.\349\ 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.\350\
---------------------------------------------------------------------------
\349\Sec. 2503(b).
\350\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.\351\
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).
---------------------------------------------------------------------------
\351\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).
HOUSE BILL
The provision doubles the estate and gift tax exemption
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.
SENATE AMENDMENT
The provision doubles the estate and gift tax exemption
for estates of decedents dying and gifts made after December
31, 2017, and before January 1, 2026. 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.
As a conforming amendment to section 2010(g) (regarding
computation of estate tax), the provision provides that the
Secretary shall prescribe regulations as may be necessary or
appropriate to carry out the purposes of the section with
respect to differences between the basic exclusion amount in
effect: (1) at the time of the decedent's death; and (2) at the
time of any gifts made by the decedent.
Effective date.--The provision is effective for estates
of decedents dying and gifts made after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
G. Alternative Minimum Tax (sec. 2001 of the House bill, sec. 12001 of
the Senate amendment, and secs. 53 and 55-59 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.
HOUSE BILL
The House bill 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 is effective for 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.
SENATE AMENDMENT
The Senate amendment temporarily increases both the
exemption amount and the exemption amount phaseout thresholds
for the individual AMT. Under the provision, for taxable years
beginning after December 31, 2017, and beginning before January
1, 2026, the AMT exemption amount is increased to $109,400 for
married taxpayers filing a joint return (half this amount for
married taxpayers filing a separate return), and $70,300 for
all other taxpayers (other than estates and trusts). The
phaseout thresholds are increased to $208,400 (half this amount
for married taxpayers filing a separate return), and $156,300
for all other taxpayers (other than estates and trusts). These
amounts are indexed for inflation.
The provision does not change the corporate alternative
minimum tax.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement temporarily increases both the
exemption amount and the exemption amount phaseout thresholds
for the individual AMT. Under the provision, for taxable years
beginning after December 31, 2017, and beginning before January
1, 2026, the AMT exemption amount is increased to $109,400 for
married taxpayers filing a joint return (half this amount for
married taxpayers filing a separate return), and $70,300 for
all other taxpayers (other than estates and trusts). The
phaseout thresholds are increased to $1,000,000 for married
taxpayers filing a joint return, and $500,000 for all other
taxpayers (other than estates and trusts). These amounts are
indexed for inflation.
The conference agreement follows the House bill in
repealing the corporate alternative minimum tax.
In the case of a corporation, the conference agreement
allows the AMT credit to offset the regular tax liability for
any taxable year. In addition, the AMT credit is refundable for
any taxable year beginning after 2017 and before 2022 in an
amount equal to 50 percent (100 percent in the case of taxable
years beginning in 2021) 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 2022.
Effective date.--The provisions are effective for taxable
years beginning after December 31, 2017.
H. Elimination of Shared Responsibility Payment for Individuals Failing
to Maintain Minimal Essential Coverage (sec. 11081 of the Senate
amendment and sec. 5000A of the Code)
PRESENT LAW
Under the Patient Protection and Affordable Care Act\352\
(also called the Affordable Care Act, or ``ACA''), individuals
must be covered by a health plan that provides at least minimum
essential coverage or be subject to a tax (also referred to as
a penalty) for failure to maintain the coverage (commonly
referred to as the ``individual mandate'').\353\ Minimum
essential coverage includes government-sponsored programs
(including Medicare, Medicaid, and CHIP, among others),
eligible employer-sponsored plans, plans in the individual
market, grandfathered group health plans and grandfathered
health insurance coverage, and other coverage as recognized by
the Secretary of Health and Human Services (``HHS'') in
coordination with the Secretary of the Treasury.\354\ The tax
is imposed for any month that an individual does not have
minimum essential coverage unless the individual qualifies for
an exemption for the month as described below.
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\352\ Pub. L. No. 111-148.
\353\Section 5000A. If an individual is a dependent, as defined in
section 152, of another taxpayer, the other taxpayer is liable for any
tax for failure to maintain the required coverage with respect to the
individual.
\354\ Sec. 5000A(f). Minimum essential coverage does not include
coverage that consists of only certain excepted benefits, such as
limited scope dental and vision benefits or long-term care insurance
offered under a separate policy, certificate or contract.
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The tax for any calendar month is one-twelfth of the tax
calculated as an annual amount. The annual amount is equal to
the greater of a flat dollar amount or an excess income amount.
The flat dollar amount is the lesser of (1) the sum of the
individual annual dollar amounts for the members of the
taxpayer's family and (2) 300 percent of the adult individual
dollar amount. The individual adult annual dollar amount is
$695 for 2017 and 2018.\355\ For an individual who has not
attained age 18, the individual annual dollar amount is one
half of the adult amount. The excess income amount is 2.5
percent of the excess of the taxpayer's household income for
the taxable year over the threshold amount of income for
requiring the taxpayer to file an income tax return.\356\ The
total annual household payment may not exceed the national
average annual premium for bronze level health plans for the
applicable family size offered through Exchanges that year.
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\355\For years after 2016, the $695 amount is indexed to CPI-U,
rounded to the next lowest multiple of $50.
\356\ Sec. 6012(a).
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Exemptions from the requirement to maintain minimum
essential coverage are provided for the following: (1) an
individual for whom coverage is unaffordable because the
required contribution exceeds 8.16\357\ percent of household
income, (2) an individual with household income below the
income tax return filing threshold, (3) a member of an Indian
tribe, (4) a member of certain recognized religious sects or a
health sharing ministry, (5) an individual with a coverage gap
for a continuous period of less than three months, and (6) an
individual who is determined by the Secretary of HHS to have
suffered a hardship with respect to the capability to obtain
coverage.\358\
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\357\ For 2017. The rate applicable for 2018 is 8.06 percent of
household income.
\358\In addition, certain individuals present or residing outside
of the United States and bona fide residents of United States
territories are deemed to maintain minimum essential coverage.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment reduces the amount of the individual
responsibility payment, enacted as part of the Affordable Care
Act, to zero.
Effective date.--The provision is effective with respect
to health coverage status for months beginning after December
31, 2018.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
I. Other Provisions
1. Temporarily allow increased contributions to ABLE accounts, and
allow contributions to be eligible for saver's credit (sec.
11024 of the Senate amendment and sec. 529A of the Code)
PRESENT LAW
Qualified ABLE programs
The Code provides for a tax-favored savings program
intended to benefit disabled individuals, known as qualified
ABLE programs.\359\ 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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\359\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.\360\ 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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\360\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.\361\ Distributions from an ABLE
account are excludible 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 excludible 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\362\ or another
ABLE account for the designated beneficiary's brother, sister,
stepbrother or stepsister who is also an eligible individual.
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\361\ The rules of section 72 apply in determining the portion of a
distribution that consists of earnings.
\362\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,\363\ 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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\363\In which case the contributor ABLE account must be closed 60
days after the transfer to the new ABLE account is made.
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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\364\ based on
blindness or disability, and such blindness or disability
occurred before the individual attained age 26.
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\364\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.\365\
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\365\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.
Saver's credit
Present law provides a nonrefundable tax credit for
eligible taxpayers for qualified retirement savings
contributions.\366\ The maximum annual contribution eligible
for the credit is $2,000 per individual. The credit rate
depends on the adjusted gross income (``AGI'') of the taxpayer.
For this purpose, AGI is determined without regard to certain
excludable foreign-source earned income and certain U.S.
possession income.
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\366\Sec. 25B.
---------------------------------------------------------------------------
For taxable years beginning in 2017, married taxpayers
filing joint returns with AGI of $61,500 or less, taxpayers
filing head of household returns with AGI of $46,125 or less,
and all other taxpayers filing returns with AGI of $30,750 or
less are eligible for the credit. As the taxpayer's AGI
increases, the credit rate available to the taxpayer is
reduced, until, at certain AGI levels, the credit is
unavailable. The credit rates based on AGI for taxable years
beginning in 2016 are provided in the table below. The AGI
levels used for the determination of the available credit rate
are indexed for inflation.
TABLE 3.--CREDIT RATES FOR SAVER'S CREDIT
----------------------------------------------------------------------------------------------------------------
Joint Filers Heads of Households All Other Filers Credit Rate
----------------------------------------------------------------------------------------------------------------
$0-$37,000........................... $0-$27,750............. $0-$18,500............. 50 percent
$37,001-$40,000...................... $27,751-$30,000........ $18,501-$20,000........ 20 percent
$40,001-$62,000...................... $30,001-$46,500........ $20,001-$31,000........ 10 percent
Over $62,000......................... Over $46,500........... Over $31,000........... 0 percent
----------------------------------------------------------------------------------------------------------------
The saver's credit is in addition to any deduction or
exclusion that would otherwise apply with respect to the
contribution. The credit offsets alternative minimum tax
liability as well as regular tax liability. The credit is
available to individuals who are 18 years old or older, other
than individuals who are full-time students or claimed as a
dependent on another taxpayer's return.
Qualified retirement savings contributions consist of (1)
elective deferrals to a section 401(k) plan, a section 403(b)
plan, a governmental section 457 plan, a SIMPLE plan, or a
SARSEP; (2) contributions to a traditional or Roth IRA; and (3)
voluntary after-tax employee contributions to a qualified
retirement plan or section 403(b) plan. Under the rules
governing these arrangements, an individual's contribution to
the arrangement generally cannot exceed the lesser of an annual
dollar amount (for example, in 2017, $5,500 in the case of an
IRA of an individual under age 50) or the individual's
compensation that is includible in income. In the case of IRA
contributions of a married couple, the combined includible
compensation of both spouses may be taken into account.
The amount of any contribution eligible for the credit is
reduced by distributions received by the taxpayer (or by the
taxpayer's spouse if the taxpayer files a joint return with the
spouse) from any retirement plan to which eligible
contributions can be made during the taxable year for which the
credit is claimed, during the two taxable years prior to the
year for which the credit is claimed, and during the period
after the end of the taxable year for which the credit is
claimed and prior to the due date (including extensions) for
filing the taxpayer's return for the year. Distributions that
are rolled over to another retirement plan do not affect the
credit.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment temporarily increases the
contribution limitation to ABLE accounts under certain
circumstances. While the general overall limitation on
contributions (the per-donee annual gift tax exclusion ($14,000
for 2017)) remains the same, the limitation is temporarily
increased with respect to contributions made by the designated
beneficiary of the ABLE account. Under the temporary provision,
after the overall limitation on contributions is reached, an
ABLE account's designated beneficiary may contribute an
additional amount, up to the lesser of (a) the Federal poverty
line for a one-person household; or (b) the individual's
compensation for the taxable year.
Additionally, the provision temporarily allows a
designated beneficiary of an ABLE account to claim the saver's
credit for contributions made to his or her ABLE account.
The provision does not apply to taxable years after
December 31, 2025.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment of this Act.
2. Extension of time limit for contesting IRS levy (sec. 11071 of the
Senate amendment and secs. 6343 and 6532 of the Code)
PRESENT LAW
The IRS is authorized to return property that has been
wrongfully levied upon.\367\ In general, monetary proceeds from
the sale of levied property may be returned within nine months
of the date of the levy.
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\367\Sec. 6343.
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Generally, any person (other than the person against whom
is assessed the tax out of which such levy arose) who claims an
interest in levied property and that such property was
wrongfully levied upon may bring a civil action for wrongful
levy in a district court of the United States.\368\ Generally,
an action for wrongful levy must be brought within nine months
from the date of levy.\369\
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\368\Sec. 7426.
\369\Sec. 6532.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision extends from nine months to two years the
period for returning the monetary proceeds from the sale of
property that has been wrongfully levied upon.
The provision also extends from nine months to two years
the period for bringing a civil action for wrongful levy.
Effective date.--The provision is effective with respect
to: (1) levies made after the date of enactment; and (2) levies
made on or before the date of enactment provided that the nine-
month period has not expired as of the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
3. Treatment of certain individuals performing services in the Sinai
Peninsula of Egypt (sec. 11026 of the Senate amendment and
secs. 2, 112, 692, 2201, 3401, 4253, 6013, and 7508 of the
Code)
PRESENT LAW
Members of the Armed Forces serving in a combat zone are
afforded a number of tax benefits. These include:
1. An exclusion from gross income of certain
military pay received for any month during which the
member served in a combat zone or was hospitalized as a
result of serving in a combat zone;\370\
---------------------------------------------------------------------------
\370\Sec. 112; see also, sec. 3401(a)(1), exempting such income
from wage withholding.
---------------------------------------------------------------------------
2. An exemption from taxes on death while serving
in combat zone or dying as a result of wounds, disease,
or injury incurred while so serving;\371\
---------------------------------------------------------------------------
\371\Sec. 692.
---------------------------------------------------------------------------
3. Special estate tax rules where death occurs in
a combat zone;\372\
---------------------------------------------------------------------------
\372\Sec. 2201.
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4. Special benefits to surviving spouses in the
event of a service member's death or missing
status;\373\
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\373\Secs. 2(a)(3) and 6013(f)(1).
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5. An extension of time limits governing the
filing of returns and other rules regarding timely
compliance with Federal income tax rules;\374\ and
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\374\Sec. 7508.
---------------------------------------------------------------------------
6. An exclusion from telephone excise taxes.\375\
---------------------------------------------------------------------------
\375\Sec. 4253(d).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision grants combat zone tax benefits to the
Sinai Peninsula of Egypt, if as of the date of enactment of the
provision any member of the Armed Forces of the United States
is entitled to special pay under section 310 of title 37,
United States Code (relating to special pay; duty subject to
hostile fire or imminent danger), for services performed in
such location. This benefit lasts only during the period such
entitlement is in effect but not later than taxable years
beginning before January 1, 2026.
Effective date.--The provision is generally effective
beginning June 9, 2015. The portion of the provision related to
wage withholding applies to remuneration paid after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
4. Modifications of user fees requirements for installment agreements
(sec. 11073 of the Senate amendment and new sec. 6159(f) of the
Code)
PRESENT LAW
The Code authorizes the IRS to enter into written
agreements with any taxpayer under which the taxpayer agrees to
pay taxes owed, as well as interest and penalties, in
installments over an agreed schedule, if the IRS determines
that doing so will facilitate collection of the amounts owed.
This agreement provides for a period during which payments may
be made and while other IRS enforcement actions are held in
abeyance.\376\ An installment agreement generally does not
reduce the amount of taxes, interest, or penalties owed.
However, the IRS is authorized to enter into installment
agreements with taxpayers which do not provide for full payment
of the taxpayer's liability over the life of the agreement. The
IRS is required to review such partial payment installment
agreements at least every two years to determine whether the
financial condition of the taxpayer has significantly changed
so as to warrant an increase in the value of the payments being
made.
---------------------------------------------------------------------------
\376\Sec. 6331(k).
---------------------------------------------------------------------------
Taxpayers can request an installment agreement by filing
Form 9465, Installment Agreement Request.\377\ If the request
for an installment agreement is approved by the IRS, the IRS
charges a user fee.\378\ The IRS currently charges $225 for
entering into an installment agreement.\379\ If the application
is for a direct debit installment agreement, whereby the
taxpayer authorizes the IRS to request the monthly electronic
transfer of funds from the taxpayer's bank account to the IRS,
the fee is reduced to $107.\380\ In addition, regardless of the
method of payment, the fee is $43 for low-income
taxpayers.\381\ For this purpose, low-income is defined as a
person who falls below 250 percent of the Federal poverty
guidelines published annually. Finally, there is no user fee if
the agreement qualifies for a short term agreement (120 days or
less).
---------------------------------------------------------------------------
\377\The IRS accepts applications for installment agreements
online, from individuals and businesses, if the total tax, penalties
and interest is below $50,000 for the former, and $25,000 for the
latter.
\378\31 U.S.C. sec. 9701; Treas. reg. sec. 300.1; The Independent
Offices Appropriations Act of 1952 (IOAA) 65 Stat. B70 (June 27, 1951).
A discussion of the IRS practice regarding user fees and a list of
actions for which fees are charged is included in the Internal Revenue
Manual. See ``User Fees,'' paragraph 1.32.19 IRM, available at https://
www.irs.gov/irm/part1/irm_01-035-019.
\379\Treas. reg. sec. 300.1.
\380\Ibid.
\381\Ibid.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision generally prohibits increases in the amount
of user fees charged by the IRS for installment agreements. For
low-income taxpayers (those whose income falls below 250
percent of the Federal poverty guidelines), it alleviates the
user fee requirement in two ways. First, it waives the user fee
if the low-income taxpayer enters into an installment agreement
under which the taxpayer agrees to make automated installment
payments through a debit account. Second, it provides that low-
income taxpayers who are unable to agree to make payments
electronically remain subject to the required user fee, but the
fee is reimbursed upon completion of the installment agreement.
Effective date.--The provision is effective for
agreements entered into on or after the date that is 60 days
after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
5. Relief for 2016 disaster areas (sec. 11029 of the Senate amendment
and secs. 72(t), 165, 401-403, 408, 457, and 3405 of the Code)
PRESENT LAW
Distributions from tax-favored retirement plans
A distribution from a qualified retirement plan, a tax-
sheltered annuity plan (a ``section 403(b) plan''), an eligible
deferred compensation plan of a State or local government
employer (a ``governmental section 457(b) plan''), or an
individual retirement arrangement (an ``IRA'') generally is
included in income for the year distributed.\382\ These plans
are referred to collectively as ``eligible retirement plans.''
In addition, unless an exception applies, a distribution from a
qualified retirement plan, a section 403(b) plan, or an IRA
received before age 59\1/2\ is subject to a 10-percent
additional tax (referred to as the ``early withdrawal tax'') on
the amount includible in income.\383\
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\382\Secs. 401(a), 403(a), 403(b), 457(b) and 408. Under section
3405, distributions from these plans are generally subject to income
tax withholding unless the recipient elects otherwise. In addition,
certain distributions from a qualified retirement plan, a section
403(b) plan, or a governmental section 457(b) plan are subject to
mandatory income tax withholding at a 20-percent rate unless the
distribution is rolled over.
\383\Sec. 72(t). Under present law, the 10-percent early withdrawal
tax does not apply to distributions from a governmental section 457(b)
plan.
---------------------------------------------------------------------------
In general, a distribution from an eligible retirement
plan may be rolled over to another eligible retirement plan
within 60 days, in which case the amount rolled over generally
is not includible in income. The IRS has the authority to waive
the 60-day requirement if failure to waive the requirement
would be against equity or good conscience, including cases of
casualty, disaster or other events beyond the reasonable
control of the individual.
The terms of a qualified retirement plan, section 403(b)
plan, or governmental section 457(b) plan generally determine
when distributions are permitted. However, in some cases,
restrictions may apply to distribution before an employee's
termination of employment, referred to as ``in-service''
distributions. Despite such restrictions, an in-service
distribution may be permitted in the case of financial hardship
or an unforeseeable emergency.
Tax-favored retirement plans are generally required to be
operated in accordance with the terms of the plan document, and
amendments to reflect changes to the plan generally must be
adopted within a limited period.
Itemized deduction for casualty losses
A taxpayer may generally claim a deduction for any loss
sustained during the taxable year and not compensated by
insurance or otherwise.\384\ 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. 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.
---------------------------------------------------------------------------
\384\Sec. 165.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The provision provides tax relief, as described below,
relating to a ``2016 disaster area,'' defined as any area with
respect to which a major disaster was declared by the President
under section 401 of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act during calendar year 2016.
Distributions from eligible retirement plans
Under the provision, an exception to the 10-percent early
withdrawal tax applies in the case of a qualified 2016 disaster
distribution from a qualified retirement plan, a section 403(b)
plan or an IRA. In addition, as discussed further, income
attributable to a qualified 2016 disaster distribution may be
included in income ratably over three years, and the amount of
a qualified 2016 disaster distribution may be recontributed to
an eligible retirement plan within three years.
A qualified 2016 disaster distribution is a distribution
from an eligible retirement plan made on or after January 1,
2016, and before January 1, 2018, to an individual whose
principal place of abode at any time during calendar year 2016
was located in a 2016 disaster area and who has sustained an
economic loss by reason of the events giving rise to the
Presidential disaster declaration.
The total amount of distributions to an individual from
all eligible retirement plans that may be treated as qualified
2016 disaster distributions is $100,000. Thus, any
distributions in excess of $100,000 during the applicable
period are not qualified 2016 disaster distributions.
Any amount required to be included in income as a result
of a qualified 2016 disaster is included in income ratably over
the three-year period beginning with the year of distribution
unless the individual elects not to have ratable inclusion
apply.
Any portion of a qualified 2016 disaster distribution
may, at any time during the three-year period beginning the day
after the date on which the distribution was received, be
recontributed to an eligible retirement plan to which a
rollover can be made. Any amount recontributed within the
three-year period is treated as a rollover and thus is not
includible in income. For example, if an individual receives a
qualified 2016 disaster distribution in 2016, that amount is
included in income, generally ratably over the year of the
distribution and the following two years, but is not subject to
the 10-percent early withdrawal tax. If, in 2018, the amount of
the qualified 2016 disaster distribution is recontributed to an
eligible retirement plan, the individual may file an amended
return to claim a refund of the tax attributable to the amount
previously included in income. In addition, if, under the
ratable inclusion provision, a portion of the distribution has
not yet been included in income at the time of the
contribution, the remaining amount is not includible in income.
A qualified 2016 disaster distribution is a permissible
distribution from a qualified retirement plan, section 403(b)
plan, or governmental section 457(b) plan, regardless of
whether a distribution otherwise would be permissible.\385\ A
plan is not treated as violating any Code requirement merely
because it treats a distribution as a qualified 2016 disaster
distribution, provided that the aggregate amount of such
distributions from plans maintained by the employer and members
of the employer's controlled group or affiliated service group
does not exceed $100,000. Thus, a plan is not treated as
violating any Code requirement merely because an individual
might receive total distributions in excess of $100,000, taking
into account distributions from plans of other employers or
IRAs.
---------------------------------------------------------------------------
\385\A qualified 2016 disaster distributions is subject to income
tax withholding unless the recipient elects otherwise. Mandatory 20-
percent withholding does not apply.
---------------------------------------------------------------------------
A plan amendment made pursuant to the provision (or a
regulation issued thereunder) may be retroactively effective
if, in addition to the requirements described below, the
amendment is made on or before the last day of the first plan
year beginning after December 31, 2018 (or in the case of a
governmental plan, December 31, 2020), or a later date
prescribed by the Secretary. In addition, the plan will be
treated as operated in accordance with plan terms during the
period beginning with the date the provision or regulation
takes effect (or the date specified by the plan if the
amendment is not required by the provision or regulation) and
ending on the last permissible date for the amendment (or, if
earlier, the date the amendment is adopted). In order for an
amendment to be retroactively effective, it must apply
retroactively for that period, and the plan must be operated in
accordance with the amendment during that period.
Modification of rules related to casualty losses
Under the provision, in the case of a personal casualty
loss which arose on or after January 1, 2016, in a 2016
disaster area and was attributable to the events giving rise to
the Presidential disaster declaration, such losses are
deductible without regard to whether aggregate net losses
exceed ten percent of a taxpayer's adjusted gross income. Under
the provision, in order to be deductible, the losses must
exceed $500 per casualty. Additionally, such losses may be
claimed in addition to the standard deduction.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with a clarification that casualty loss relief applies to
losses arising in taxable years beginning after December 31,
2015, and before January 1, 2018.
6. Attorneys' fees relating to awards to whistleblowers (sec. 11078 of
the Senate amendment and sec. 62(a)(21) of the Code)
PRESENT LAW
The Code provides an above-the-line deduction for
attorneys' fees and costs paid by, or on behalf of, the
taxpayer in connection with any action involving a claim of
unlawful discrimination, certain claims against the Federal
Government, or a private cause of action under the Medicare
Secondary Payer statute.\386\ The amount that may be deducted
above-the-line may not exceed the amount includible in the
taxpayer's gross income for the taxable year on account of a
judgment or settlement (whether by suit or agreement and
whether as lump sum or periodic payments) resulting from such
claim. Additionally, the Code provides an above-the-line
deduction for attorneys' fees and costs paid by, or on behalf
of, the individual in connection with any award for providing
information regarding violations of the tax laws.\387\ The
amount that may be deducted above-the-line may not exceed the
amount includible in the taxpayer's gross income for the
taxable year on account of such award.\388\
---------------------------------------------------------------------------
\386\Secs. 62(a)(20) and (e). Section 62(e) defines ``unlawful
discrimination'' to include a number of specific statutes, any federal
whistle-blower statute, and any federal, state, or local law
``providing for the enforcement of civil rights'' or ``regulating any
aspect of the employment relationship . . . or prohibiting the
discharge of an employee, the discrimination against an employee, or
any other form of retaliation or reprisal against an employee for
asserting rights or taking other actions permitted by law.''
\387\Secs. 7623 and 62(a)(21).
\388\Secs. 7623 and 62(a)(21).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides an above-the-line deduction for
attorney fees and court costs paid by, or on behalf of, the
taxpayer in connection with any action involving a claim under
State False Claim Acts, the SEC whistleblower program,\389\ and
the Commodity Future Trading Commission whistleblower
program.\390\
---------------------------------------------------------------------------
\389\15 U.S.C. secs. 78u-6 and 78u-7.
\390\7 U.S.C. sec. 26.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
7. Clarification of whistleblower awards (sec. 11079 of the Senate
amendment and new sec. 7623(c) of the Code)
PRESENT LAW
Awards to whistleblowers
The Code authorizes the IRS to pay such sums as deemed
necessary for: ``(1) detecting underpayments of tax; or (2)
detecting and bringing to trial and punishment persons guilty
of violating the internal revenue laws or conniving at the
same.''\391\ Generally, amounts are paid based on a percentage
of proceeds collected based on the information provided.
---------------------------------------------------------------------------
\391\Sec. 7623.
---------------------------------------------------------------------------
The Tax Relief and Health Care Act of 2006 (the
``Act'')\392\ established an enhanced reward program for
actions in which the tax, penalties, interest, additions to
tax, and additional amounts in dispute exceed $2,000,000 and,
if the taxpayer is an individual, the individual's gross income
exceeds $200,000 for any taxable year in issue. In such cases,
the award is calculated to be at least 15 percent but not more
than 30 percent of collected proceeds (including penalties,
interest, additions to tax, and additional amounts).
---------------------------------------------------------------------------
\392\Pub. L. No. 109-432.
---------------------------------------------------------------------------
The Act permits an individual to appeal the amount or a
denial of an award determination to the United States Tax Court
(the ``Tax Court'') within 30 days of such determination. Tax
Court review of an award determination may be assigned to a
special trial judge.
Rules relating to taxpayers with foreign assets
U.S. persons who transfer assets to, and hold interests
in, foreign bank accounts or foreign entities may be subject to
self-reporting requirements under both the Foreign Account Tax
Compliance Act provisions in the Code and the provisions in the
Bank Secrecy Act and its underlying regulations (which provide
for FinCEN Form 114, Report of Foreign Bank and Financial
Accounts, the ``FBAR''), as discussed below. Amounts recovered
for violations of FATCA provisions in the Code may be
considered for purposes of computing a whistleblower award
under the Code. However, the IRS has found that amounts
recovered for violations of non-tax laws, including the
provisions of the Bank Secrecy Act (and FBAR) for which the IRS
has delegated authority, may not be considered for purposes of
computing an award under the Code.\393\
---------------------------------------------------------------------------
\393\Chief Counsel Memorandum, ``Scope of Awards Payable Under
I.R.C. section 7623,'' April 23, 2012, available at http://www.tax-
whistleblower.com/resources/PMTA-2012-10.pdf. Under Title 31, ``[t]he
Secretary may pay a reward to an individual who provides original
information which leads to a recovery of a criminal fine, civil
penalty, or forfeiture, which exceeds $50,000, for a violation of
[chapter 53 of Title 31]. The Secretary shall determine the amount of a
reward . . . [and] . . . may not award more than 25 per centum of the
net amount of the fine, penalty, or forfeiture collected or $150,000,
whichever is less.'' 31 U.S.C. Sec. 5323.
---------------------------------------------------------------------------
Foreign Account Tax Compliance Act (``FATCA'')
The Code imposes a withholding and reporting regime for
U.S. persons engaged in foreign activities, directly or
indirectly, through a foreign business entity.\394\ This regime
for outbound payments,\395\ commonly referred to as the Foreign
Account Tax Compliance Act (``FATCA''),\396\ imposes a
withholding tax of 30 percent of the gross amount of certain
payments to foreign financial institutions (``FFIs'') unless
the FFI establishes that it is compliant with the information
reporting requirements of FATCA which include identifying
certain U.S. accounts held in the FFI. An FFI must report with
respect to a U.S. account (1) the name, address, and taxpayer
identification number of each U.S. person holding an account or
a foreign entity with one or more substantial U.S. owners
holding an account; (2) the account number; (3) the account
balance or value; and (4) except as provided by the Secretary,
the gross receipts, including from dividends and interest, and
gross withdrawals or payments from the account.\397\
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\394\See, e.g., secs. 6038, 6038B, and 6046.
\395\Hiring Incentives to Restore Employment Act of 2010, Pub. L.
No. 111-147.
\396\Foreign Account Tax Compliance Act of 2009 is the name of the
House and Senate bills in which the provisions first appeared. See H.R.
3933 and S. 1934 (October 27, 2009).
\397\Sec. 1471(c).
---------------------------------------------------------------------------
Individuals are required to disclose with their annual
Federal income tax return any interest in foreign accounts and
certain foreign securities if the aggregate value of such
assets is in excess of the greater of $50,000 or an amount
determined by the Secretary in regulations. Failure to do so is
punishable by a penalty of $10,000, which may increase for each
30-day period during which the failure continues after
notification by the IRS, up to a maximum penalty of
$50,000.\398\
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\398\Sec. 6038D. Guidance on the scope of reporting required, the
threshold values triggering reporting requirements for various fact
patterns and how the value of assets is to be determined is found in
Treas. Reg. secs. 1.6038D-1 to 1.6038D-8.
---------------------------------------------------------------------------
Report of Foreign Bank and Financial Accounts (the
``FBAR'')
In addition to the reporting requirements under the Code,
U.S. persons who transfer assets to, and hold interests in,
foreign bank accounts or foreign entities may be subject to
self-reporting requirements under the Bank Secrecy Act.\399\
---------------------------------------------------------------------------
\399\Bank Secrecy Act, 31 U.S.C. secs. 5311-5332.
---------------------------------------------------------------------------
The Bank Secrecy Act imposes reporting obligations on
both financial institutions and account holders. With respect
to account holders, a U.S. citizen, resident, or person doing
business in the United States is required to keep records and
file reports, as specified by the Secretary, when that person
enters into a transaction or maintains an account with a
foreign financial agency.\400\ Regulations promulgated pursuant
to broad regulatory authority granted to the Secretary in the
Bank Secrecy Act\401\ provide additional guidance regarding the
disclosure obligation with respect to foreign accounts.
---------------------------------------------------------------------------
\400\31 U.S.C. sec. 5314. The term ``agency'' in the Bank Secrecy
Act includes financial institutions.
\401\31 U.S.C. sec. 5314(a) provides: ``Considering the need to
avoid impeding or controlling the export or import of monetary
instruments and the need to avoid burdening unreasonably a person
making a transaction with a foreign financial agency, the Secretary of
the Treasury shall require a resident or citizen of the United States
or a person in, and doing business in, the United States, to keep
records, file reports, or keep records and file reports, when the
resident, citizen, or person makes a transaction or maintains a
relation for any person with a foreign financial agency.''
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The FBAR must be filed by June 30\402\ of the year
following the year in which the $10,000 filing threshold is
met.\403\ Failure to file the FBAR is subject to both
criminal\404\ and civil penalties.\405\ Willful failure to file
an FBAR may be subject to penalties in amounts not to exceed
the greater of $100,000 or 50 percent of the amount in the
account at the time of the violation.\406\ A non-willful, but
negligent, failure to file is subject to a penalty of $10,000
for each negligent violation.\407\ The penalty may be waived if
(1) there is reasonable cause for the failure to report and (2)
the amount of the transaction or balance in the account was
properly reported. In addition, serious violations are subject
to criminal prosecution, potentially resulting in both monetary
penalties and imprisonment. Civil and criminal sanctions are
not mutually exclusive.
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\402\The Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015, Pub. L. No. 114-41, changed the filing date
for FinCEN Form 114 from June 30 to April 15 (with a maximum extension
for a 6-month period ending on October 15 and with provision for an
extension under rules similar to the rules in Treas. Reg. section
1.6081-5) for tax returns for taxable years beginning after December
31, 2015.
\403\31 C.F.R. sec. 103.27(c). The $10,000 threshold is the
aggregate value of all foreign financial accounts in which a U.S.
person has a financial interest or over which the U.S. person has
signature or other authority.
\404\31 U.S.C. sec. 5322 (failure to file is punishable by a fine
up to $250,000 and imprisonment for five years, which may double if the
violation occurs in conjunction with certain other violations).
\405\31 U.S.C. sec. 5321(a)(5).
\406\31 U.S.C. sec. 5321(a)(5)(C).
\407\31 U.S.C. sec. 5321(a)(5)(B)(i), (ii).
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FBAR enforcement responsibility
Until 2003, the Financial Crimes Enforcement Network
(``FinCEN''), an agency of the Department of the Treasury, had
exclusive responsibility for civil penalty enforcement of FBAR,
although administration of the FBAR reporting regime was
delegated to the IRS.\408\ As a result, persons who were more
than 180 days delinquent in paying any FBAR penalties were
referred for collection action to the Financial Management
Service of the Treasury Department, which is responsible for
such non-tax collections.\409\ Continued nonpayment resulted in
a referral to the Department of Justice for institution of
court proceedings against the delinquent person. In 2003, the
Secretary delegated FBAR civil enforcement authority to the
IRS.\410\ The authority delegated to the IRS in 2003 included
the authority to determine and enforce civil penalties,\411\ as
well as to revise the form and instructions. However, the Bank
Secrecy Act does not include collection powers similar to those
available for enforcement of the tax laws under the Code. As a
consequence, FBAR civil penalties remain collectible only in
accord with the procedures for non-tax collection described
above.
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\408\Treas. Directive 15-14 (December 1, 1992), in which the
Secretary delegated to the IRS authority to investigate violations of
the Bank Secrecy Act. If the IRS Criminal Investigation Division
declines to pursue a possible criminal case, it is to refer the matter
to FinCEN for civil enforcement.
\409\31 U.S.C. sec. 3711(g).
\410\31 C.F.R. sec. 103.56(g). Memorandum of Agreement and
Delegation of Authority for Enforcement of FBAR Requirements (April 2,
2003); News Release, Internal Revenue Service, IR-2003-48 (April 10,
2003). Secretary of the Treasury, ``A Report to Congress in Accordance
with sec. 361(b) of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (USA Patriot Act)'' (April 24, 2003).
\411\A penalty may be assessed before the end of the six-year
period beginning on the date of the transaction with respect to which
the penalty is assessed. 31 U.S.C. sec. 5321(b)(1). A civil action for
collection may be commenced within two years of the later of the date
of assessment and the date a judgment becomes final in any related
criminal action. 31 U.S.C. sec. 5321(b)(2).
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FBAR and awards to whistleblowers
Recent cases have considered FBAR penalties in connection
with IRS whistleblower awards.\412\ One case analyzed the
provision dealing with ``additional amounts in dispute'' and
linked that concept to amounts assessed and collected under the
Code which FBAR is not.\413\ The issue was whether FBAR
penalties constituted ``additional amounts'' for purposes of
determining whether ``additional amounts in dispute exceed
$2,000,000.'' The case was disposed on summary judgment on the
grounds that FBAR penalties are not assessed, collected or paid
in the same manner as taxes. As such, they are not additional
amounts in dispute and therefore the threshold was not
exceeded. Notably, the court suggested that the petitioner
present its policy arguments to Congress based on the fact that
the connection between FBAR and tax enforcement justified the
Secretary to redelegate FBAR administrative authority to the
IRS.\414\
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\412\Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 (March
14, 2016); and Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4
(August 3, 2016).
\413\Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 (March
14, 2016).
\414\Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 at 26-
27.
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Another case dealt with the provision ``collected
proceeds'' and held that the term is not limited to amounts
assessed and collected under Title 26.\415\ The issue in the
case was whether payments of a criminal fine and civil
forfeitures constitute collected proceeds.
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\415\Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4
(August 3, 2016).
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The criminal fine was imposed under Title 18 as a result
of guilty plea to conspiring to defraud the IRS, file false
Federal income tax returns, and evade Federal income taxes. The
money was forfeited pursuant to Title 18. The IRS argued that
criminal fines and forfeitures are not collected proceeds
because only amounts assessed and collected under Title 26 can
be used to pay a whistleblower award. The IRS also argued that
a criminal fine collected by the Government cannot be
considered collected proceeds because (1) pursuant to 42 U.S.C.
sec. 10601 all criminal fines collected from persons convicted
of offenses against the United States are to be deposited in
the Crime Victims Fund; (2) criminal fines are paid by the
taxpayer directly to the imposing court, which in turn deposits
them into the Crime Victims Fund; and (3) at no time are
criminal fines available to the Secretary. The court said that
the Code did not refer to, or require, the availability of
funds to be used in making an award.\416\
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\416\Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 at 28-
29.
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Petitioners said the payment resulted from action taken
by Secretary and relates to acts committed by taxpayer in
violation of Title 26 provisions. The court agreed and held
that collected proceeds are not limited to amounts assessed and
collected under Title 26. In reaching its holding it referenced
Whistleblower 22716-13W v. Commissioner, discussed above and
noted there is no inconsistency because the issue there was
about whether the threshold of $2,000,000 was exceeded. It is
not clear whether FBAR penalties would be included under their
holding because in the case, the taxpayer did violate Title 26
(even if the penalties were imposed under Title 18).
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, collected proceeds eligible for
awards under the Code are defined to include: (1) penalties,
interest, additions to tax, and additional amounts and (2) any
proceeds under enforcement programs that the Treasury has
delegated to the IRS the authority to administer, enforce, or
investigate, including criminal fines and civil forfeitures,
and violations of reporting requirements. This definition is
also used to determine eligibility for the enhanced reward
program under which proceeds and additional amounts in dispute
exceed $2,000,000.
The collected proceeds amounts are determined without
regard to whether such proceeds are available to the Secretary.
Effective date.--The provision is effective for
information provided before, on, or after date of enactment
with respect to which a final determination has not been made
before such date.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
8. Exclusion from gross income of certain amounts received by wrongly
incarcerated individuals (sec. 11027 of the Senate amendment
and sec. 139F of the Code)
PRESENT LAW
Under a provision added in the PATH Act,\417\ with
respect to any wrongfully incarcerated individual, gross income
does not include any civil damages, restitution, or other
monetary award (including compensatory or statutory damages and
restitution imposed in a criminal matter) relating to the
incarceration of such individual for the covered offense for
which such individual was convicted.\418\
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\417\Pub. L. No. 114-113 (2015), Division Q (Protecting Americans
from Tax Hikes Act of 2015), sec. 304.
\418\Sec. 139F.
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A wrongfully incarcerated individual means an individual:
(1) who was convicted of a covered offense;
(2) who served all or part of a sentence of
imprisonment relating to that covered offense; and
(3) (i) was pardoned, granted clemency, or granted
amnesty for such offense because the individual was
innocent, or
(ii) for whom the judgment of conviction for the
offense was reversed or vacated, and whom the
indictment, information, or other accusatory instrument
for that covered offense was dismissed or who was found
not guilty at a new trial after the judgment of
conviction for that covered offense was reversed or
vacated.
For these purposes, a covered offense is any criminal
offense under Federal or State law, and includes any criminal
offense arising from the same course of conduct as that
criminal offense.
The Code contains a special rule allowing individuals to
make a claim for credit or refund of any overpayment of tax
resulting from the exclusion, even if such claim would be
disallowed under the Code or by operation of any law or rule of
law (including res judicata), if the claim for credit or refund
is filed before the close of the one-year period beginning on
the date of enactment of the PATH Act (December 18, 2015).\419\
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\419\Sec. 139F.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment would extend the waiver on the
statute of limitations with respect to filing a claim for a
credit or refund of an overpayment of tax resulting from the
exclusion described above for an additional year. Thus, under
the provision, such claim for credit or refund must be filed
before December 18, 2017.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
BUSINESS TAX REFORM
A. Tax Rates
1. Reduction in corporate tax rate (sec. 3001 of the House bill, secs.
13001 and 13002 of the Senate amendment, and secs. 11 and 243
of the Code)
PRESENT LAW
In general
Corporate taxable income is subject to tax under a four-
step graduated rate structure.\420\ 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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\420\Sec. 11(a) and (b)(1).
------------------------------------------------------------------------
Taxable Income Tax rate (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.\421\
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\421\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.\422\
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\422\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.\423\ The amount of the deduction is generally
equal to 70 percent of the dividend received.
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\423\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.\424\ 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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\424\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.\425\
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\425\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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HOUSE BILL
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.\426\
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\426\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.
SENATE AMENDMENT
The Senate amendment follows the House bill, but does not
provide a special rate for personal service corporations.
Effective date.--The provision applies to taxable years
beginning after December 31, 2018.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
but provides for a 21-percent corporate rate effective for
taxable years beginning after December 31, 2017.
In addition, for taxpayers subject to the normalization
method of accounting (e.g., regulated public utilities), the
conference agreement clarifies the normalization of excess 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
corporate rate reduction takes effect).
The excess tax reserve is the reserve for deferred taxes
as of the day before the corporate rate reduction takes effect
over what the reserve for deferred taxes would be if the
corporate rate reduction had been in effect for all prior
periods. If an excess tax reserve is reduced more rapidly or to
a greater extent than such reserve would be reduced under the
average rate assumption method, the taxpayer will not be
treated as using a normalization method with respect to the
corporate rate reduction. If the taxpayer does not use a
normalization method of accounting for the corporate rate
reduction, 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 and the taxpayer will not be treated as
using a normalization method of accounting for purposes of
section 168(f)(2) and (i)(9)(C).\427\
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\427\Section 168(f)(2) and (i)(9)(C) provide that if a taxpayer is
required to use a normalization method of accounting with respect to
public utility property and does not do so, such taxpayer must compute
its depreciation allowances for Federal income tax purposes using the
depreciation method, useful life determination, averaging convention,
and salvage value limitation used for purposes of setting rates and
reflecting operating results in its regulated books of account.
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The average rate assumption method\428\ reduces the
excess tax reserve over the remaining regulatory lives of the
property that gave rise to the reserve for deferred taxes
during the years in which the deferred tax reserve related to
such property is reversing. Under this method, the excess tax
reserve is reduced as the timing differences (i.e., differences
between tax depreciation and regulatory depreciation with
respect to the property) reverse over the remaining life of the
asset. The reversal of timing differences generally occurs when
the amount of the tax depreciation taken with respect to an
asset is less than the amount of the regulatory depreciation
taken with respect to the asset. To ensure that the deferred
tax reserve, including the excess tax reserve, is reduced to
zero at the end of the regulatory life of the asset that
generated the reserve, the amount of the timing difference
which reverses during a taxable year is multiplied by the ratio
of (1) the aggregate deferred taxes as of the beginning of the
period in question to (2) the aggregate timing differences for
the property as of the beginning of the period in question.
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\428\See section 2.04 of Rev. Proc. 88-12, 1988-1 C.B. 637.
---------------------------------------------------------------------------
The following example illustrates the application of the
average rate assumption method. A calendar year regulated
utility placed property costing $100 million in service in
2016. For regulatory (book) purposes, the property is
depreciated over 10 years on a straight line basis with a full
year's allowance in the first year. For tax purposes, the
property is depreciated over 5 years using the 200 percent
declining balance method and a half-year placed in service
convention.\429\
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\429\The 5-year tax and 10-year book lives are used for
illustration purposes only. In general, public utility property may be
depreciated over various periods ranging from 5 to 20 years under
MACRS. For regulatory purposes, public utility property may, in certain
cases, have a useful life of 30 years or more.
NORMALIZATION CALCULATION FOR CORPORATE RATE REDUCTION
(Millions of dollars--Years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax expense........................ 20 32 19.2 11.52 11.52 5.76 0 0 0 0 100
Book depreciation.................. 10 10 10 10 10 10 10 10 10 10 100
Timing difference.................. 10 22 9.2 1.52 1.52 (4.24) (10) (10) (10) (10) 0
Tax rate........................... 35% 35% 21% 21% 21% 31.1% 31.1% 31.1% 31.1% 31.1%
Annual adjustment to reserve....... 3.5 7.7 1.9 0.3 0.3 (1.3) (3.1) (3.1) (3.1) (3.1) 0
Cumulative deferred tax reserve.... 3.5 11.2 13.1 13.5 13.8 12.5 9.3 6.2 3.1 (0.0) 0
Annual adjustment at 21%........... (0.9) (2.1) (2.1) (2.1) (2.1) (9.3)
Annual adjustment at average rate.. (1.3) (3.1) (3.1) (3.1) (3.1) (13.8)
Excess tax reserve................. 0.4 1.0 1.0 1.0 1.0 4.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
The excess tax reserve as of December 31, 2017, the day
before the corporate rate reduction takes effect, is $4.5
million.\430\ The taxpayer will begin taking the excess tax
reserve into account in the 2021 taxable year, which is the
first year in which the tax depreciation taken with respect to
the property is less than the depreciation reflected in the
regulated books of account. The annual adjustment to the
deferred tax reserve for the 2021 through 2025 taxable years is
multiplied by 31.1 percent which is the ratio of the aggregate
deferred taxes as of the beginning of 2021 ($13.8 million) to
the aggregate timing differences for the property as of the
beginning of 2021 ($44.2 million).
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\430\The excess tax reserve of $4.5 million is equal to the
cumulative deferred tax reserve as of December 31, 2017 ($11.2 million)
minus the cumulative timing difference as of December 31, 2017 ($32
million) multiplied by 21 percent.
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Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
B. Cost Recovery
1. Increased expensing (sec. 3101 of the House bill, secs. 13201 and
13311 of the Senate amendment, 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.\431\
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\431\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.
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Tangible property
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,\432\ and convention.\433\
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\432\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.
\433\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\434\
and certain aircraft\435\).\436\ 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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\434\As defined in section 168(k)(2)(B).
\435\As defined in section 168(k)(2)(C).
\436\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\437\
2019............................ 30 percent........ 40 percent
2020............................ None.............. 30 percent\438\
------------------------------------------------------------------------
The additional first-year depreciation deduction is
allowed for both the regular tax and the alternative minimum
tax (``AMT''),\439\ but is not allowed in computing earnings
and profits.\440\ 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.\441\ The amount of the additional
first-year depreciation deduction is not affected by a short
taxable year.\442\ The taxpayer may elect out of the additional
first-year depreciation for any class of property for any
taxable year.\443\
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\437\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.
\438\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.
\439\Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
\440\Sec. 312(k)(3) and Treas. Reg. sec. 1.168(k)-1(f)(7).
\441\Sec. 168(k)(1)(B).
\442\Ibid.
\443\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.\444\ 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. Thus, $1,000 also is allowed
as a depreciation deduction in 2017.\445\ 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.
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\444\Assume that the cost of the property is not eligible for
expensing under section 179 or Treas. Reg. sec. 1.263(a)-1(f).
\445\$1,000 results from the application of the half-year
convention and the 200 percent declining balance method to the
remaining $5,000.
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Qualified property
Property qualifying for the additional first-year
depreciation deduction must meet all of the following
requirements.\446\ 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;\447\ (3) computer
software other than computer software covered by section 197;
or (4) qualified improvement property.\448\ Second, the
original use\449\ of the property must commence with the
taxpayer.\450\ 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.\451\
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\446\Requirements relating to actions taken before 2008 are not
described herein since they have little (if any) remaining effect.
\447\As defined in section 168(e)(5).
\448\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).
\449\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).
\450\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).
\451\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-in-service 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.
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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.\452\ 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.\453\
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.\454\
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\452\Sec. 168(k)(2)(E)(i).
\453\Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
\454\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.\455\ 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.
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\455\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.\456\ 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.\457\
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\456\Sec. 168(k)(4).
\457\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.\458\ 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.
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\458\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.
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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.\459\
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\459\Sec. 168(k)(4)(B)(iii).
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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.\460\
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\460\Sec. 168(k)(4)(D)(ii).
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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.\461\
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\461\Sec. 168(k)(4)(D)(iii).
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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).\462\ 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,\463\ 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.
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\462\Sec. 168(k)(2)(F).
\463\Sec. 280F(d)(7).
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Certain plants bearing fruits and nuts
A special election is provided for certain plants bearing
fruits and nuts.\464\ 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.\465\ 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.\466\ 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.
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\464\See sec. 168(k)(5).
\465\Any amount deducted under this election is not subject to
capitalization under section 263A.
\466\A specified plant does not include any property that is
planted or grafted outside the United States.
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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.\467\ 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).\468\
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\467\Sec. 460.
\468\Sec. 460(c)(6). Other dates involving prior years are not
described herein.
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Intangible property
MACRS does not apply to certain property, including any
motion picture film, video tape, or sound recording, or to any
other property if the taxpayer elects to exclude such property
from MACRS and the taxpayer properly applies a unit-of-
production method or other method of depreciation not expressed
in a term of years.\469\ Section 197 (amortization of goodwill
and certain other intangibles) does not apply to certain
intangible property, including certain property produced by the
taxpayer or any interest in a film, sound recording, video
tape, book or similar property not acquired in a transaction
(or a series of related transactions) involving the acquisition
of assets constituting a trade or business or substantial
portion thereof.\470\ Thus, the recovery of the cost of a film,
video tape, or similar property that is produced by the
taxpayer or is acquired on a ``stand-alone'' basis by the
taxpayer may not be determined under either the MACRS
depreciation provisions or under the section 197 amortization
provisions. The cost recovery of such property may be
determined under section 167, which allows a depreciation
deduction for the reasonable allowance for the exhaustion, wear
and tear, or obsolescence of the property if it is used in a
trade or business or held for the production of income. In
addition, the costs of motion picture films, video tapes, sound
recordings, copyrights, books, and patents are eligible to be
recovered using the income forecast method of
depreciation.\471\
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\469\Sec. 168(f)(1), (3) and (4).
\470\Sec. 197(c)(2) and (e)(4)(A). If section 197 applies to the
acquisition of intangible assets held in connection with a trade or
business, any value properly attributable to a ``section 197
intangible'' is amortizable on a straight-line basis over 15 years.
Sec. 197(a) and (c).
\471\Sec. 167(g)(6). Under the income forecast method, a property's
depreciation deduction for a taxable year is determined by multiplying
the adjusted basis of the property by a fraction, the numerator of
which is the gross income generated by the property during the year,
and the denominator of which is the total forecasted or estimated gross
income expected to be generated prior to the close of the tenth taxable
year after the year the property is placed in service. Any costs that
are not recovered by the end of the tenth taxable year after the
property is placed in service may be taken into account as depreciation
in that year. Sec. 167(g)(1).
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Expensing of certain qualified film, television and live
theatrical productions
Under section 181, a taxpayer may elect\472\ to deduct
the cost of any qualifying film, television and live theatrical
production, commencing prior to January 1, 2017, in the year
the expenditure is incurred in lieu of capitalizing the cost
and recovering it through depreciation allowances.\473\ A
taxpayer may elect to deduct up to $15 million of the aggregate
cost of the film or television production under this
section.\474\ The threshold is increased to $20 million if a
significant amount of the production expenditures are incurred
in areas eligible for designation as a low-income community or
eligible for designation by the Delta Regional Authority as a
distressed county or isolated area of distress.\475\
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\472\See Treas. Reg. sec. 1.181-2 for rules on making an election
under this section.
\473\For this purpose, a qualified film or television production is
treated as commencing on the first date of principal photography. The
date on which a qualified live theatrical production commences is the
date of the first public performance of such production for a paying
audience.
\474\Sec. 181(a)(2)(A). See Treas. Reg. sec. 1.181-1 for rules on
determining eligible production costs.
\475\Sec. 181(a)(2)(B).
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A qualified film, television or live theatrical
production means any production of a motion picture (whether
released theatrically or directly to video cassette or any
other format), television program or live staged play if at
least 75 percent of the total compensation expended on the
production is for services performed in the United States by
actors, directors, producers, and other relevant production
personnel.\476\ The term ``compensation'' does not include
participations and residuals (as defined in section
167(g)(7)(B)).\477\
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\476\Sec. 181(d)(3)(A).
\477\Sec. 181(d)(3)(B).
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Each episode of a television series is treated as a
separate production, and only the first 44 episodes of a
particular series qualify under the provision.\478\ Qualified
productions do not include sexually explicit productions as
referenced by section 2257 of title 18 of the U.S. Code.\479\
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\478\Sec. 181(d)(2)(B).
\479\Sec. 181(d)(2)(C).
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A qualified live theatrical production is defined as a
live staged production of a play (with or without music) which
is derived from a written book or script and is produced or
presented by a commercial entity in any venue which has an
audience capacity of not more than 3,000, or a series of venues
the majority of which have an audience capacity of not more
than 3,000.\480\ In addition, qualified live theatrical
productions include any live staged production which is
produced or presented by a taxable entity no more than 10 weeks
annually in any venue which has an audience capacity of not
more than 6,500.\481\ In general, in the case of multiple live-
staged productions, each such live-staged production is treated
as a separate production. Similar to the exclusion for sexually
explicit productions from the definition of qualified film or
television productions, qualified live theatrical productions
do not include stage performances that would be excluded by
section 2257(h)(1) of title 18 of the U.S. Code, if such
provision were extended to live stage performances.\482\
---------------------------------------------------------------------------
\480\Sec. 181(e)(2)(A).
\481\Sec. 181(e)(2)(D).
\482\Sec. 181(e)(2)(E).
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For purposes of recapture under section 1245, any
deduction allowed under section 181 is treated as if it were a
deduction allowable for amortization.\483\
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\483\Sec. 1245(a)(2)(C).
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HOUSE BILL
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.\484\ 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.\485\ 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.\486\ 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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\484\By reference to section 179(d)(2)(C). See also Treas. Reg.
sec. 1.179-4(c)(1)(iv).
\485\By reference to section 179(d)(3). See also Treas. Reg. sec.
1.179-4(d).
\486\By reference to section 179(d)(2)(A) and (B). See also Treas.
Reg. sec. 1.179-4(c).
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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.\487\
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\487\As defined in section 3301 of the House 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.\488\
---------------------------------------------------------------------------
\488\As defined in section 3301 of the House bill (Interest).
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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,\489\ 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).
---------------------------------------------------------------------------
\489\As defined in section 3301 of the House bill (Interest).
---------------------------------------------------------------------------
Election to accelerate AMT credits in lieu of bonus depreciation
As a conforming amendment to the repeal of AMT,\490\ the
provision repeals the election to accelerate AMT credits in
lieu of bonus depreciation.
---------------------------------------------------------------------------
\490\See section 2001 of the House 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
---------------------------------------
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
2019............................ 30 percent........ 40 percent
2020............................ None.............. 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\491\ and placed in service after September
27, 2017, and to specified plants planted or grafted after such
date.
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\491\Property is not treated as acquired after the date on which a
written binding contract is entered into for such acquisition.
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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.\492\
---------------------------------------------------------------------------
\492\See section 3302 of the House bill (Modification of net
operating loss deduction).
---------------------------------------------------------------------------
SENATE AMENDMENT
In general
The provision extends and modifies the additional first-
year depreciation deduction through 2026 (through 2027 for
longer production period property and certain aircraft). The
50-percent allowance is increased to 100 percent for property
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. Thus, the provision repeals the phase-down of the 50-
percent allowance for property placed in service after December
31, 2017, and for specified plants planted or grafted after
such date. The 100-percent allowance is phased down by 20
percent per calendar year for property placed in service, and
specified plants planted or grafted, in taxable years beginning
after 2022 (after 2023 for longer production period property
and certain aircraft). Under the provision, the bonus
depreciation percentage rates are as follows.
------------------------------------------------------------------------
Bonus Depreciation Percentage
---------------------------------------
Longer Production
Placed in Service Year\493\ Qualified Property Period Property
in General and Certain
Aircraft
------------------------------------------------------------------------
2023............................ 80 percent........ 100 percent
2024............................ 60 percent........ 80 percent
2025............................ 40 percent........ 60 percent
2026............................ 20 percent........ 40 percent
2027............................ None.............. 20 percent\494\
------------------------------------------------------------------------
Special rules
The provision maintains the section 280F increase amount
of $8,000 for passenger automobiles placed in service after
December 31, 2017.
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\493\In the case of specified plants, this is the year of planting
or grafting.
\494\Twenty percent applies to the adjusted basis attributable to
manufacture, construction, or production before January 1, 2027, and
the remaining adjusted basis does not qualify for bonus depreciation.
Twenty percent applies to the entire adjusted basis of certain aircraft
described in section 168(k)(2)(C) and placed in service in 2027.
---------------------------------------------------------------------------
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, 2027 (January 1, 2028, in the case of
longer production period property).
Application to qualified film, television and live theatrical
productions
The provision expands the definition of qualified
property eligible for the additional first-year depreciation
allowance to include qualified film, television and live
theatrical productions\495\ placed in service after September
27, 2017, and before January 1, 2027, for which a deduction
otherwise would have been allowable under section 181 without
regard to the dollar limitation or termination of such section.
For purposes of this provision, a production is considered
placed in service at the time of initial release, broadcast, or
live staged performance (i.e., at the time of the first
commercial exhibition, broadcast, or live staged performance of
a production to an audience).
---------------------------------------------------------------------------
\495\As defined in section 181(d) and (e).
---------------------------------------------------------------------------
Exception for certain businesses not subject to limitation on interest
expense
The provision excludes from the definition of qualified
property any property which is primarily used in the trade or
business of the furnishing\496\ 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, by a public service or
public utility commission or other similar body of any State or
political subdivision thereof, or by the governing or
ratemaking body of an electric cooperative.\497\
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\496\The term ``furnishing'' includes generation, transmission, and
distribution activities.
\497\See sec. 13301 of the Senate amendment (Limitation on
deduction for 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,\498\ 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 13301 of the Senate
amendment by meeting the small business gross receipts test of
section 448(c).
---------------------------------------------------------------------------
\498\As defined in section 13311 of the Senate amendment (Floor
plan financing).
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Effective date.--The provision generally applies to
property placed in service after September 27, 2017, in taxable
years ending after such date, and to specified plants planted
or grafted after such date.
A transition rule provides that, for a taxpayer's first
taxable year ending after September 27, 2017, the taxpayer may
elect to apply a 50-percent allowance instead of the 100-
percent allowance.\499\
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\499\Such election shall be made at such time and in such form and
manner as prescribed by the Secretary.
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CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment but
also includes the House bill's removal of the requirement that
the original use of qualified property must commence with the
taxpayer (i.e., it allows the additional first-year
depreciation deduction for new and used property).
In addition, the conference agreement also follows the
House bill's application of the present-law phase-down of bonus
depreciation to property acquired before September 28, 2017,
and placed in service after September 27, 2017, as well as the
present-law phase-down of 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. Under the conference agreement, the bonus depreciation
rates are as follows.
------------------------------------------------------------------------
Bonus Depreciation Percentage
---------------------------------------
Longer Production
Placed in Service Year\500\ Qualified Property Period Property
in General/ and Certain
Specified Plants Aircraft
------------------------------------------------------------------------
Portion of Basis of Qualified Property Acquired before Sept. 28, 2017
Sept. 28, 2017-Dec. 31, 2017.... 50 percent........ 50 percent
2018............................ 40 percent........ 50 percent
2019............................ 30 percent........ 40 percent
2020............................ None.............. 30 percent\501\
2021 and thereafter............. None.............. None
------------------------------------------------------------------------
Portion of Basis of Qualified Property Acquired after Sept. 27, 2017
Sept. 28, 2017-Dec. 31, 2022.... 100 percent....... 100 percent
2023............................ 80 percent........ 100 percent
2024............................ 60 percent........ 80 percent
2025............................ 40 percent........ 60 percent
2026............................ 20 percent........ 40 percent
2027............................ None.............. 20 percent\502\
2028 and thereafter............. None.............. None
------------------------------------------------------------------------
As a conforming amendment to the repeal of corporate AMT,
the conference agreement repeals the election to accelerate AMT
credits in lieu of bonus depreciation.
---------------------------------------------------------------------------
\500\In the case of specified plants, this is the year of planting
or grafting.
\501\Thirty 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.
\502\Twenty percent applies to the adjusted basis attributable to
manufacture, construction, or production before January 1, 2027, and
the remaining adjusted basis does not qualify for bonus depreciation.
Twenty percent applies to the entire adjusted basis of certain aircraft
described in section 168(k)(2)(C) and placed in service in 2027.
---------------------------------------------------------------------------
Effective date.--The provision generally applies to
property acquired and placed in service after September 27,
2017, and to specified plants planted or grafted after such
date.
A transition rule provides that, for a taxpayer's first
taxable year ending after September 27, 2017, the taxpayer may
elect to apply a 50-percent allowance instead of the 100-
percent allowance.
2. Modifications to depreciation limitations on luxury automobiles and
personal use property (sec. 13202 of the Senate amendment and
sec. 280F of the Code)
PRESENT LAW
Section 280F(a) limits the annual cost recovery deduction
with respect to certain passenger automobiles. This limitation
is commonly referred to as the ``luxury automobile depreciation
limitation.'' For passenger automobiles placed in service in
2017, and for which the additional first-year depreciation
deduction under section 168(k) is not claimed, the maximum
amount of allowable depreciation is $3,160 for the year in
which the vehicle is placed in service, $5,100 for the second
year, $3,050 for the third year, and $1,875 for the fourth and
later years in the recovery period.\503\ This limitation is
indexed for inflation and applies to the aggregate deduction
provided under present law for depreciation and section 179
expensing. Hence, passenger automobiles subject to section 280F
are eligible for section 179 expensing only to the extent of
the applicable limits contained in section 280F. For passenger
automobiles eligible for the additional first-year depreciation
allowance in 2017, the first-year limitation is increased by an
additional $8,000.\504\
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\503\Rev. Proc. 2017-29, Table 3, 2017-14 I.R.B. 1065.
\504\Sec. 168(k)(2)(F). For proposed changes to section 168(k), see
section II.B.1. of this document (Increased expensing).
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For purposes of the depreciation limitation, passenger
automobiles are defined broadly to include any four-wheeled
vehicles that are manufactured primarily for use on public
streets, roads, and highways and which are rated at 6,000
pounds unloaded gross vehicle weight or less.\505\ In the case
of a truck or a van, the depreciation limitation applies to
vehicles that are rated at 6,000 pounds gross vehicle weight or
less. Sport utility vehicles are treated as a truck for the
purpose of applying the section 280F limitation.
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\505\Sec. 280F(d)(5). Exceptions are provided for any ambulance,
hearse, or combination ambulance-hearse used by the taxpayer directly
in a trade or business, or any vehicle used by the taxpayer directly in
the trade or business of transporting persons or property for
compensation or hire.
---------------------------------------------------------------------------
Basis not recovered in the recovery period of a passenger
automobile is allowable as an expense in subsequent taxable
years.\506\ The expensed amount is limited in each such
subsequent taxable year to the amount of the limitation in the
fourth year in the recovery period.
---------------------------------------------------------------------------
\506\Sec. 280F(a)(1)(B).
---------------------------------------------------------------------------
Listed property
In the case of certain listed property, special rules
apply. Listed property generally is defined as (1) any
passenger automobile; (2) any other property used as a means of
transportation;\507\ (3) any property of a type generally used
for purposes of entertainment, recreation, or amusement; (4)
any computer or peripheral equipment;\508\ and (5) any other
property of a type specified in Treasury regulations.\509\
---------------------------------------------------------------------------
\507\Property substantially all of the use of which is in a trade
or business of providing transportation to unrelated persons for hire
is not considered other property used as a means of transportation.
Sec. 280F(d)(4)(C).
\508\Computer or peripheral equipment used exclusively at a regular
business establishment and owned or leased by the person operating such
establishment, however, is not listed property. Sec. 280F(d)(4)(B).
\509\Sec. 280F(d)(4)(A).
---------------------------------------------------------------------------
First, if for the taxable year in which the property is
placed in service, the use of the property for trade or
business purposes does not exceed 50 percent of the total use
of the property, then the depreciation deduction with respect
to such property is determined under the alternative
depreciation system.\510\ The alternative depreciation system
generally requires the use of the straight-line method and a
recovery period equal to the class life of the property.\511\
Second, if an individual owns or leases listed property that is
used by the individual in connection with the performance of
services as an employee, no depreciation deduction, expensing
allowance, or deduction for lease payments is available with
respect to such use unless the use of the property is for the
convenience of the employer and required as a condition of
employment.\512\ Both limitations apply for purposes of section
179 expensing.
---------------------------------------------------------------------------
\510\Sec. 280F(b)(1). If for any taxable year after the year in
which the property is placed in service the use of the property for
trade or business purposes decreases to 50 percent or less of the total
use of the property, then the amount of depreciation allowed in prior
years in excess of the amount of depreciation that would have been
allowed for such prior years under the alternative depreciation system
is recaptured (i.e., included in gross income) for such taxable year.
\511\Sec. 168(g).
\512\Sec. 280F(d)(3).
---------------------------------------------------------------------------
For listed property, no deduction is allowed unless the
taxpayer adequately substantiates the expense and business
usage of the property.\513\ A taxpayer must substantiate the
elements of each expenditure or use of listed property,
including (1) the amount (e.g., cost) of each separate
expenditure and the amount of business or investment use, based
on the appropriate measure (e.g., mileage for automobiles), and
the total use of the property for the taxable period, (2) the
date of the expenditure or use, and (3) the business purposes
for the expenditure or use.\514\ The level of substantiation
for business or investment use of listed property varies
depending on the facts and circumstances. In general, the
substantiation must contain sufficient information as to each
element of every business or investment use.\515\
---------------------------------------------------------------------------
\513\Sec. 274(d)(4).
\514\Temp. Reg. sec. 1.274-5T(b)(6).
\515\Temp. Reg. sec. 1.274-5T(c)(2)(ii)(C).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision increases the depreciation limitations
under section 280F that apply to listed property. For passenger
automobiles placed in service after December 31, 2017, and for
which the additional first-year depreciation deduction under
section 168(k) is not claimed, the maximum amount of allowable
depreciation is $10,000 for the year in which the vehicle is
placed in service, $16,000 for the second year, $9,600 for the
third year, and $5,760 for the fourth and later years in the
recovery period.\516\ The limitations are indexed for inflation
for passenger automobiles placed in service after 2018.
---------------------------------------------------------------------------
\516\Rev. Proc. 2017-29, Table 3, 2017-14 I.R.B. 1065.
---------------------------------------------------------------------------
The provision removes computer or peripheral equipment
from the definition of listed property. Such property is
therefore not subject to the heightened substantiation
requirements that apply to listed property.
Effective date.--The provision is effective for property
placed in service after December 31, 2017, in taxable years
ending after such date.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
3. Modifications of treatment of certain farm property (sec. 13203 of
the Senate amendment and sec. 168 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.\517\ 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, and
convention.\518\
---------------------------------------------------------------------------
\517\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.
\518\Sec. 168.
---------------------------------------------------------------------------
The applicable recovery period for an asset is determined
in part by statute and in part by historical Treasury
guidance.\519\ The ``type of property'' of an asset is used to
determine the ``class life'' of the asset, which in turn
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
\519\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.
---------------------------------------------------------------------------
The MACRS recovery periods applicable to most tangible
personal property range from three to 20 years. The
depreciation methods generally applicable to tangible personal
property are the 200-percent and 150-percent declining balance
methods,\520\ switching to the straight line method for the
first taxable year where using the straight line method with
respect to the adjusted basis as of the beginning of that year
yields a larger depreciation allowance. The recovery periods
for most real property are 39 years for nonresidential real
property and 27.5 years for residential rental property. The
straight line depreciation method is required for the
aforementioned real property.
---------------------------------------------------------------------------
\520\Under the declining balance method the depreciation rate is
determined by dividing the appropriate percentage (here 150 or 200) by
the appropriate recovery period. This leads to accelerated depreciation
when the declining balance percentage is greater than 100. The table
below illustrates depreciation for an asset with a cost of $1,000 and a
seven-year recovery period under the 200-percent declining balance
method, the 150-percent declining balance method, and the straight line
method. (see endnote for table)
---------------------------------------------------------------------------
Property used in a farming business is assigned various
recovery periods in the same manner as other business property.
For example, depreciable assets used in agriculture activities
that are assigned a recovery period of 7 years include
machinery and equipment, grain bins, and fences (but no other
land improvements), that are used in the production of crops or
plants, vines, and trees; livestock; the operation of farm
dairies, nurseries, greenhouses, sod farms, mushrooms cellars,
cranberry bogs, apiaries, and fur farms; and the performance of
agriculture, animal husbandry, and horticultural services.\521\
Cotton ginning assets are also assigned a recovery period of 7
years.\522\ Any single purpose agricultural or horticultural
structure,\523\ and any tree or vine bearing fruit or nuts are
assigned a recovery period of 10 years.\524\ Land improvements
such as drainage facilities, paved lots, and water wells are
assigned a recovery period of 15 years.\525\
---------------------------------------------------------------------------
\521\Rev. Proc. 87-56, Asset class 01.1, Agriculture.
\522\Rev. Proc. 87-56, Asset class 01.11, Cotton ginning assets.
\523\Within the meaning of section 168(i)(13). See also Rev. Proc.
87-56, Asset class 01.4, Single purpose agricultural or horticultural
structures. Farm buildings that do not meet the definition of a single
purpose agricultural or horticultural structure are assigned a recovery
period of 20 years. Rev. Proc. 87-56, Asset class 01.3, Farm buildings
except structures included in asset class 01.4.
\524\Sec. 168(e)(3)(D)(i) and (ii).
\525\Rev. Proc. 87-56, Asset class 00.3, Land improvements. See
also, IRS Publication 225, Farmer's Tax Guide (2017).
---------------------------------------------------------------------------
A 5-year recovery period was assigned to new farm
machinery or equipment (other than any grain bin, cotton
ginning asset, fence, or other land improvement) which was used
in a farming business,\526\ the original use of which commenced
with the taxpayer after December 31, 2008, and which was placed
in service before January 1, 2010.\527\
---------------------------------------------------------------------------
\526\As defined in section 263A(e)(4). See also Treas. Reg. sec.
1.263A-4(a)(4).
\527\Sec. 168(e)(3)(B)(vii).
---------------------------------------------------------------------------
Any property (other than nonresidential real
property,\528\ residential rental property,\529\ and trees or
vines bearing fruits or nuts\530\) used in a farming
business\531\ is subject to the 150-percent declining balance
method.\532\
---------------------------------------------------------------------------
\528\Sec. 168(b)(3)(A).
\529\Sec. 168(b)(3)(B).
\530\Sec. 168(b)(3)(E).
\531\Within the meaning of section 263A(e)(4). See also Treas. Reg.
sec. 1.263A-4(a)(4).
\532\Sec. 168(b)(2)(B).
---------------------------------------------------------------------------
Under a special accounting rule, certain taxpayers
engaged in the business of farming who elect to deduct
preproductive period expenditures are required to depreciate
all farming assets using the alternative depreciation system
(i.e., using longer recovery periods and the straight line
method).\533\
---------------------------------------------------------------------------
\533\Sec. 263A(d)(3) and (e)(2)
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision shortens the recovery period from 7 to 5
years for any machinery or equipment (other than any grain bin,
cotton ginning asset, fence, or other land improvement) used in
a farming business, the original use of which commences with
the taxpayer and is placed in service after December 31, 2017.
The provision also repeals the required use of the 150-
percent declining balance method for property used in a farming
business (i.e., for 3-, 5-, 7-, and 10-year property). The 150-
percent declining balance method will continue to apply to any
15-year or 20-year property used in the farming business to
which the straight line method does not apply, or to property
for which the taxpayer elects the use of the 150-percent
declining balance method.
For these purposes, the term ``farming business'' means a
farming business as defined in section 263A(e)(4). Thus, the
term ``farming business'' means a trade or business involving
the cultivation of land or the raising or harvesting of any
agricultural or horticultural commodity (e.g., the trade or
business of operating a nursery or sod farm; the raising or
harvesting of trees bearing fruit, nuts, or other crops; the
raising of ornamental trees (other than evergreen trees that
are more than six years old at the time they are severed from
their roots); and the raising, shearing, feeding, caring for,
training, and management of animals).\534\ A farming business
includes processing activities that are normally incident to
the growing, raising, or harvesting of agricultural or
horticultural products.\535\ A farming business does not
include contract harvesting of an agricultural or horticultural
commodity grown or raised by another taxpayer, or merely buying
and reselling plants or animals grown or raised by another
taxpayer.\536\
---------------------------------------------------------------------------
\534\Treas. Reg. sec. 1.263A-4(a)(4)(i).
\535\Treas. Reg. sec. 1.263A-4(a)(4)(ii).
\536\Treas. Reg. sec. 1.263A-4(a)(4)(i).
---------------------------------------------------------------------------
Effective date.--The provision is effective for property
placed in service after December 31, 2017, in taxable years
ending after such date.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
4. Applicable recovery period for real property (sec. 13204 of the
Senate amendment and sec. 168 of the Code)
PRESENT LAW
In general
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.\537\ 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, and
convention.\538\
---------------------------------------------------------------------------
\537\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.
\538\Sec. 168.
---------------------------------------------------------------------------
Recovery periods and depreciation methods
The applicable recovery period for an asset is determined
in part by statute and in part by historic Treasury
guidance.\539\ The ``type of property'' of an asset is used to
determine the ``class life'' of the asset, which in turn
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
\539\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.
---------------------------------------------------------------------------
The MACRS recovery periods applicable to most tangible
personal property range from three to 20 years. The
depreciation methods generally applicable to tangible personal
property are the 200-percent and 150-percent declining balance
methods,\540\ switching to the straight line method for the
first taxable year where using the straight line method with
respect to the adjusted basis as of the beginning of that year
yields a larger depreciation allowance. The recovery periods
for most real property are 39 years for nonresidential real
property and 27.5 years for residential rental property. The
straight line depreciation method is required for the
aforementioned real property.
---------------------------------------------------------------------------
\540\Under the declining balance method the depreciation rate is
determined by dividing the appropriate percentage (here 150 or 200) by
the appropriate recovery period. This leads to accelerated depreciation
when the declining balance percentage is greater than 100. The table
below illustrates depreciation for an asset with a cost of $1,000 and a
seven-year recovery period under the 200-percent declining balance
method, the 150-percent declining balance method, and the straight line
method. (see endnote for table)
---------------------------------------------------------------------------
Placed-in-service conventions
Depreciation of an asset begins when the asset is deemed
to be placed in service under the applicable convention.\541\
Under MACRS, nonresidential real property, residential rental
property, and any railroad grading or tunnel bore generally are
subject to the mid-month convention, which treats all property
placed in service during any month (or disposed of during any
month) as placed in service (or disposed of) on the mid-point
of such month.\542\ All other property generally is subject to
the half-year convention, which treats all property placed in
service during any taxable year (or disposed of during any
taxable year) as placed in service (or disposed of) on the mid-
point of such taxable year to reflect the assumption that
assets are placed in service ratably throughout the year.\543\
However, if substantial property is placed in service during
the last three months of a taxable year, a special rule
requires use of the mid-quarter convention,\544\ designed to
prevent the recognition of disproportionately large amounts of
first-year depreciation under the half-year convention.
---------------------------------------------------------------------------
\541\Treas. Reg. sec. 1.167(a)-10(b).
\542\Sec. 168(d)(2) and (d)(4)(B).
\543\Sec. 168(d)(1) and (d)(4)(A).
\544\The mid-quarter convention treats all property placed in
service (or disposed of) during any quarter as placed in service (or
disposed of) on the mid-point of such quarter. Sec. 168(d)(3) and
(d)(4)(C).
---------------------------------------------------------------------------
Depreciation of additions or improvements to property
The recovery period for any addition or improvement to
real or personal property begins on the later of (1) the date
on which the addition or improvement is placed in service, or
(2) the date on which the property with respect to which such
addition or improvement is made is placed in service.\545\ Any
MACRS deduction for an addition or improvement to any property
is to be computed in the same manner as the deduction for the
underlying property would be if such property were placed in
service at the same time as such addition or improvement. Thus,
for example, the cost of an improvement to a building that
constitutes nonresidential real property is recovered over 39
years using the straight line method and mid-month convention.
Certain improvements to nonresidential real property are
eligible for the additional first-year depreciation deduction
if the other requirements of section 168(k) are met (i.e.,
improvements that constitute ``qualified improvement
property'').\546\
---------------------------------------------------------------------------
\545\Sec. 168(i)(6).
\546\Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See also section 13201 of
the bill (Temporary 100-percent expensing for certain business assets).
---------------------------------------------------------------------------
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.\547\ 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.
---------------------------------------------------------------------------
\547\Sec. 168(k)(3).
---------------------------------------------------------------------------
Depreciation of leasehold improvements
Generally, depreciation allowances for improvements made
on leased property are determined under MACRS, even if the
MACRS recovery period assigned to the property is longer than
the term of the lease.\548\ This rule applies regardless of
whether the lessor or the lessee places the leasehold
improvements in service. If a leasehold improvement constitutes
an addition or improvement to nonresidential real property
already placed in service, the improvement generally is
depreciated using the straight-line method over a 39-year
recovery period, beginning in the month the addition or
improvement was placed in service. However, exceptions to the
39-year recovery period exist for certain qualified leasehold
improvements, qualified restaurant property, and qualified
retail improvement property.
---------------------------------------------------------------------------
\548\Sec. 168(i)(8).
---------------------------------------------------------------------------
Qualified leasehold improvement property
Section 168(e)(3)(E)(iv) provides a statutory 15-year
recovery period for qualified leasehold improvement property.
Qualified leasehold improvement property is any improvement to
an interior portion of a building that is nonresidential real
property, provided certain requirements are met.\549\ The
improvement must be made under or pursuant to a lease either by
the lessee (or sublessee), or by the lessor, of that portion of
the building to be occupied exclusively by the lessee (or
sublessee). The improvement must be placed in service more than
three years after the date the building was first placed in
service. Qualified leasehold improvement property does not
include any improvement for which the expenditure is
attributable to the enlargement of the building, any elevator
or escalator, any structural component benefiting a common
area, or the internal structural framework of the building. If
a lessor makes an improvement that qualifies as qualified
leasehold improvement property, such improvement does not
qualify as qualified leasehold improvement property to any
subsequent owner of such improvement. An exception to the rule
applies in the case of death and certain transfers of property
that qualify for non-recognition treatment.
---------------------------------------------------------------------------
\549\Sec. 168(e)(6).
---------------------------------------------------------------------------
Qualified leasehold improvement property is generally
recovered using the straight-line method and a half-year
convention,\550\ and is eligible for the additional first-year
depreciation deduction if the other requirements of section
168(k) are met.\551\
---------------------------------------------------------------------------
\550\Sec. 168(b)(3)(G) and (d).
\551\Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See section 13201 of the
bill (Temporary 100-percent expensing for certain business assets).
---------------------------------------------------------------------------
Qualified restaurant property
Section 168(e)(3)(E)(v) provides a statutory 15-year
recovery period for qualified restaurant property. Qualified
restaurant property is any section 1250 property that is a
building or an improvement to a building, if more than 50
percent of the building's square footage is devoted to the
preparation of, and seating for on-premises consumption of,
prepared meals.\552\ Qualified restaurant property is recovered
using the straight-line method and a half-year convention.\553\
Additionally, qualified restaurant property is not eligible for
the additional first-year depreciation deduction unless it also
satisfies the definition of qualified improvement
property.\554\
---------------------------------------------------------------------------
\552\Sec. 168(e)(7).
\553\Sec. 168(b)(3)(H) and (d).
\554\Sec. 168(e)(7)(B).
---------------------------------------------------------------------------
Qualified retail improvement property
Section 168(e)(3)(E)(ix) provides a statutory 15-year
recovery period for qualified retail improvement property.
Qualified retail improvement property is any improvement to an
interior portion of a building which is nonresidential real
property if such portion is open to the general public\555\ and
is used in the retail trade or business of selling tangible
personal property to the general public, and such improvement
is placed in service more than three years after the date the
building was first placed in service.\556\ Qualified retail
improvement property does not include any improvement for which
the expenditure is attributable to the enlargement of the
building, any elevator or escalator, any structural component
benefiting a common area, or the internal structural framework
of the building.\557\ In the case of an improvement made by the
owner of such improvement, the improvement is a qualified
retail improvement only so long as the improvement is held by
such owner.\558\
---------------------------------------------------------------------------
\555\Improvements to portions of a building not open to the general
public (e.g., stock room in back of retail space) do not qualify under
the provision.
\556\Sec. 168(e)(8).
\557\Sec. 168(e)(8)(C).
\558\Sec. 168(e)(8)(B). Rules similar to section 168(e)(6)(B) apply
in the case of death and certain transfers of property that qualify for
non-recognition treatment.
---------------------------------------------------------------------------
Retail establishments that qualify for the 15-year
recovery period include those primarily engaged in the sale of
goods. Examples of these retail establishments include, but are
not limited to, grocery stores, clothing stores, hardware
stores, and convenience stores. Establishments primarily
engaged in providing services, such as professional services,
financial services, personal services, health services, and
entertainment, do not qualify. Generally, it is intended that
businesses defined as a store retailer under the current North
American Industry Classification System (industry sub-sectors
441 through 453) qualify while those in other industry classes
do not qualify.\559\
---------------------------------------------------------------------------
\559\Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in the 110th Congress (JCS-1-09), March 2009, p.
402.
---------------------------------------------------------------------------
Qualified retail improvement property is recovered using
the straight-line method and a half-year convention,\560\ and
is eligible for the additional first-year depreciation
deduction if the other requirements of section 168(k) are
met.\561\
---------------------------------------------------------------------------
\560\Sec. 168(b)(3)(I) and (d).
\561\Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See section 13301 of the
bill (Temporary 100-percent expensing for certain business assets).
---------------------------------------------------------------------------
Alternative depreciation system
The alternative depreciation system (``ADS'') is required
to be used for tangible property used predominantly outside the
United States, certain tax-exempt use property, tax-exempt bond
financed property, and certain imported property covered by an
Executive order.\562\ An election to use ADS is available to
taxpayers for any class of property for any taxable year.\563\
Under ADS, all property is depreciated using the straight line
method over recovery periods which generally are equal to the
class life of the property, with certain exceptions.\564\ For
example nonresidential real and residential rental property
have a 40-year ADS recovery period, while qualified leasehold
improvement property, qualified restaurant property, and
qualified retail improvement property have a 39-year ADS
recovery period.\565\
---------------------------------------------------------------------------
\562\Sec. 168(g).
\563\Sec. 168(g)(7).
\564\Sec. 168(g)(2) and (3).
\565\Sec. 168(g)(3).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision shortens the recovery period for
determining the depreciation deduction with respect to
nonresidential real and residential rental property to 25
years. As a conforming amendment, the provision changes the
statutory recovery period for nonresidential real and
residential rental property to 25 years for purposes of
determining whether a rental agreement is a long-term agreement
under the section 467 rules applicable to certain payments for
the use of property or services.\566\ The provision also
shortens the ADS recovery period for residential rental
property from 40 years to 30 years.
---------------------------------------------------------------------------
\566\A long-term section 467 rental agreement is a lease of
property for a term in excess of 75 percent of the property's statutory
recovery period. Sec. 467(b)(4)(A) and (e)(3)(A). A disqualified long-
term agreement is one that has as one of its principal purposes the
avoidance of taxes. Sec. 467(b)(4)(B).
---------------------------------------------------------------------------
The provision eliminates the separate definitions of
qualified leasehold improvement, qualified restaurant, and
qualified retail improvement property, and provides a general
10-year recovery period for qualified improvement
property,\567\ and a 20-year ADS recovery period for such
property. Thus, for example, qualified improvement property
placed in service after December 31, 2017, is generally
depreciable over 10 years using the straight line method and
half-year convention, without regard to whether the
improvements are property subject to a lease, placed in service
more than three years after the date the building was first
placed in service, or made to a restaurant building. Restaurant
building property placed in service after December 31, 2017,
that does not meet the definition of qualified improvement
property is depreciable over 25 years as nonresidential real
property, using the straight line method and the mid-month
convention.
---------------------------------------------------------------------------
\567\Described in present law section 168(k)(3).
---------------------------------------------------------------------------
As a conforming amendment, the provision replaces the
references in section 179(f) to qualified leasehold improvement
property, qualified restaurant property, and qualified retail
improvement property with a reference to qualified improvement
property.\568\ Thus, for example, the provision allows section
179 expensing for improvement property without regard to
whether the improvements are property subject to a lease,
placed in service more than three years after the date the
building was first placed in service, or made to a restaurant
building. Restaurant building property placed in service after
December 31, 2017, that does not meet the definition of
qualified improvement property is not eligible for section 179
expensing.
---------------------------------------------------------------------------
\568\For additional changes to section 179, see section 13101 of
the Senate amendment (Modifications of rules for expensing depreciable
business assets).
---------------------------------------------------------------------------
The provision also requires a real property trade or
business\569\ electing out of the limitation on the deduction
for interest to use ADS to depreciate any of its nonresidential
real property, residential rental property, and qualified
improvement property.
---------------------------------------------------------------------------
\569\As defined in section 13301 of the Senate amendment
(Limitation on deduction for interest), by cross reference to section
469(c)(7)(C) (i.e., any real property development, redevelopment,
construction, reconstruction, acquisition, conversion, rental,
operation, management, leasing, or brokerage trade or business). 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).
---------------------------------------------------------------------------
Effective date.--The provision is effective for property
placed in service after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
except that it maintains the present law general MACRS recovery
periods of 39 and 27.5 years for nonresidential real and
residential rental property, respectively. In addition, the
conference agreement provides a general 15-year MACRS recovery
period for qualified improvement property.
5. Use of alternative depreciation system for electing farming
businesses (sec. 13205 of the Senate amendment and sec. 168 of
the Code)
PRESENT LAW
In general
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.\570\ 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, and
convention.\571\
---------------------------------------------------------------------------
\570\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.
\571\Sec. 168.
---------------------------------------------------------------------------
The applicable recovery period for an asset is determined
in part by statute and in part by historic Treasury
guidance.\572\ The ``type of property'' of an asset is used to
determine the ``class life'' of the asset, which in turn
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
\572\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.
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The MACRS recovery periods applicable to most tangible
personal property range from three to 20 years. The
depreciation methods generally applicable to tangible personal
property are the 200-percent and 150-percent declining balance
methods,\573\ switching to the straight line method for the
first taxable year where using the straight line method with
respect to the adjusted basis as of the beginning of that year
yields a larger depreciation allowance. The recovery periods
for most real property are 39 years for nonresidential real
property and 27.5 years for residential rental property.\574\
The straight line depreciation method is required for the
aforementioned real property.
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\573\Under the declining balance method the depreciation rate is
determined by dividing the appropriate percentage (here 150 or 200) by
the appropriate recovery period. This leads to accelerated depreciation
when the declining balance percentage is greater than 100. The table
below illustrates depreciation for an asset with a cost of $1,000 and a
seven-year recovery period under the 200-percent declining balance
method, the 150-percent declining balance method, and the straight line
method. (see endnote for table)
\574\However, section 13204 of the bill (Applicable recovery period
for real property) reduces the recovery period to 25 years for both
nonresidential real property and residential rental property.
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Property used in a farming business is assigned various
recovery periods in the same manner as other business property.
For example, depreciable assets used in agriculture activities
that are assigned a recovery period of 7 years include
machinery and equipment, grain bins, and fences (but no other
land improvements), that are used in the production of crops or
plants, vines, and trees; livestock; the operation of farm
dairies, nurseries, greenhouses, sod farms, mushrooms cellars,
cranberry bogs, apiaries, and fur farms; and the performance of
agriculture, animal husbandry, and horticultural services.\575\
Cotton ginning assets are also assigned a recovery period of 7
years.\576\ Any single purpose agricultural or horticultural
structure,\577\ and any tree or vine bearing fruit or nuts are
assigned a recovery period of 10 years.\578\ Land improvements
such as drainage facilities, paved lots, and water wells are
assigned a recovery period of 15 years.\579\
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\575\Rev. Proc. 87-56, Asset class 01.1, Agriculture.
\576\Rev. Proc. 87-56, Asset class 01.11, Cotton ginning assets.
\577\Within the meaning of section 168(i)(13). See also Rev. Proc.
87-56, Asset class 01.4, Single purpose agricultural or horticultural
structures. Farm buildings that do not meet the definition of a single
purpose agricultural or horticultural structure are assigned a recovery
period of 20 years. Rev. Proc. 87-56, Asset class 01.3, Farm buildings
except structures included in asset class 01.4.
\578\Sec. 168(e)(3)(D)(i) and (ii).
\579\Rev. Proc. 87-56, Asset class 00.3, Land improvements. See
also, IRS Publication 225, Farmer's Tax Guide (2017).
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A 5-year recovery period was assigned to new farm
machinery or equipment (other than any grain bin, cotton
ginning asset, fence, or other land improvement) which was used
in a farming business,\580\ the original use of which commenced
with the taxpayer after December 31, 2008, and which was placed
in service before January 1, 2010.\581\
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\580\As defined in section 263A(e)(4).
\581\Sec. 168(e)(3)(B)(vii). However, section 13203 of the bill
(Modifications of treatment of certain farm property) also shortens the
recovery period from 7 to 5 years for any machinery or equipment (other
than any grain bin, cotton ginning asset, fence, or other land
improvement) which is used in a farming business, the original use of
which commences with the taxpayer and is placed in service after
December 31, 2017.
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Any property (other than nonresidential real
property,\582\ residential rental property,\583\ and trees or
vines bearing fruits or nuts\584\) used in a farming
business\585\ is subject to the 150-percent declining balance
method.\586\
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\582\Sec. 168(b)(3)(A).
\583\Sec. 168(b)(3)(B).
\584\Sec. 168(b)(3)(E).
\585\Within the meaning of section 263A(e)(4).
\586\Sec. 168(b)(2)(B). However, section 13203 of the bill
(Modifications of treatment of certain farm property) repeals the
required use of the 150-percent declining balance method for property
used in a farming business (i.e., for 3-, 5-, 7-, and 10-year
property). The 150-percent declining balance method will continue to
apply to any 15-year or 20-year property used in the farming business
to which the straight line method does not apply, or to property for
which the taxpayer elects the use of the 150-percent declining balance
method.
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Alternative depreciation system
The alternative depreciation system (``ADS'') is required
to be used for tangible property used predominantly outside the
United States, certain tax-exempt use property, tax-exempt bond
financed property, and certain imported property covered by an
Executive order.\587\ An election to use ADS is available to
taxpayers for any class of property for any taxable year.\588\
Under ADS, all property is depreciated using the straight line
method over recovery periods which generally are equal to the
class life of the property, with certain exceptions.\589\ For
example, any single purpose agricultural or horticultural
structure has a 15-year ADS recovery period,\590\ while any
tree or vine bearing fruit or nuts has a 20-year ADS recovery
period.\591\ Similarly, land improvements such as drainage
facilities, paved lots, and water wells have an ADS recovery
period of 20 years.\592\
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\587\Sec. 168(g).
\588\Sec. 168(g)(7).
\589\Sec. 168(g)(2) and (3).
\590\Sec. 168(g)(3)(B). Farm buildings that do not meet the
definition of a single purpose agricultural or horticultural structure
have an ADS recovery period of 25 years. Rev. Proc. 87-56, Asset class
01.3, Farm buildings except structures included in asset class 01.4.
\591\Sec. 168(g)(3)(B).
\592\Rev. Proc. 87-56, Asset class 00.3, Land improvements.
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Under a special accounting rule, certain taxpayers
engaged in the business of farming who elect to deduct
preproductive period expenditures under the uniform
capitalization rules are required to depreciate all farming
assets using ADS.\593\
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\593\Sec. 263A(d)(3) and (e)(2).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision requires an electing farming business,\594\
i.e., a farming business electing out of the limitation on the
deduction for interest,\595\ to use ADS to depreciate any
property with a recovery period of 10 years or more (e.g.,
property such as single purpose agricultural or horticultural
structures, trees or vines bearing fruit or nuts, farm
buildings, and certain land improvements).
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\594\As defined in section 13301 of the Senate amendment
(Limitation on deduction for interest), by cross reference to section
263A(e)(4) (i.e., farming business means the trade or business of
farming and includes the trade or business of operating a nursery or
sod farm, or the raising or harvesting of trees bearing fruit, nuts, or
other crops, or ornamental trees (other than evergreen trees that are
more than six years old at the time they are severed from their
roots)). Treas. Reg. sec. 1.263A-4(a)(4) further defines a farming
business as a trade or business involving the cultivation of land or
the raising or harvesting of any agricultural or horticultural
commodity. Examples of a farming business include the trade or business
of operating a nursery or sod farm; the raising or harvesting of trees
bearing fruit, nuts, or other crops; the raising of ornamental trees
(other than evergreen trees that are more than six years old at the
time they are severed from their roots); and the raising, shearing,
feeding, caring for, training, and management of animals. A farming
business also includes processing activities that are normally incident
to the growing, raising, or harvesting of agricultural or horticultural
products. See Treas. Reg. sec. 1.263A-4(a)(4)(i) and (ii). A farming
business does not include contract harvesting of an agricultural or
horticultural commodity grown or raised by another taxpayer, or merely
buying and reselling plants or animals grown or raised by another
taxpayer. See Treas. Reg. sec. 1.263A-4(a)(4)(i).
\595\See section 13301 of the Senate amendment (Limitation on
deduction for interest). Section 13301 of the Senate amendment also
includes an exception from the limitation on the deduction for interest
for taxpayers meeting the $15 million gross receipts test.
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Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
6. Expensing of certain costs of replanting citrus plants lost by
reason of casualty (sec. 13207 of the Senate amendment and sec.
263A of the Code)
PRESENT LAW
In general
The uniform capitalization (``UNICAP'') rules, which were
enacted as part of the Tax Reform Act of 1986,\596\ require
certain direct and indirect costs allocable to real or tangible
personal property produced by the taxpayer to be either
capitalized into the basis of such property or included in
inventory, as applicable.\597\ 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 either capitalized into the basis of such
property or included in inventory, as applicable.
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\596\Sec. 803(a) of Pub. L. No. 99-514 (1986).
\597\Sec. 263A.
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Section 263A generally requires the capitalization of the
direct and indirect costs allocable to the production of any
property in a farming business, including animals and plants
without regard to the length of their preproductive
period.\598\ The costs of a plant generally required to be
capitalized under section 263(a) include preparatory costs
incurred so that the plant's growing process may begin, such as
the acquisition costs of the seed, seedling, or plant. Under
section 263A, the costs of producing a plant generally required
to be capitalized also include the preproductive period costs
of planting, cultivating, maintaining, and developing the plant
during the preproductive period.\599\ Preproductive period
costs may include management, irrigation, pruning, soil and
water conservation, fertilizing, frost protection, spraying,
harvesting, storage and handling, upkeep, electricity, tax
depreciation and repairs on buildings and equipment used in
raising the plants, farm overhead, taxes, and interest, as
applicable.\600\
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\598\Treas. Reg. sec. 1.263A-4(b)(1).
\599\Treas. Reg. sec. 1.263A-4(b)(1)(i).
\600\Ibid.
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Special rules for plant farmers
Section 263A provides an exception to the general
capitalization requirements for taxpayers who raise, harvest,
or grow trees.\601\ 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 UNICAP rules do not apply to any plant having a
preproductive period of two years or less, 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)).\602\ Hence, in general, the UNICAP rules
apply to the production of plants that have a preproductive
period of more than two years, and to taxpayers required to use
an accrual method of accounting.
---------------------------------------------------------------------------
\601\Sec. 263A(c)(5).
\602\Sec. 263A(d).
---------------------------------------------------------------------------
Plant farmers otherwise required to capitalize
preproductive period costs may elect to deduct such costs
currently, provided the alternative depreciation system
described in section 168(g)(2) is used on all farm assets and
the preproductive period costs are recaptured upon disposition
of the product.\603\ The election is not available to taxpayers
required to use the accrual method of accounting. Moreover, the
election is not available with respect to certain costs
attributable to planting, cultivating, maintaining, or
developing citrus or almond groves.
---------------------------------------------------------------------------
\603\Sec. 263A(d)(3), (e)(1), and (e)(2).
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Section 263A does not apply to costs incurred in
replanting edible crops for human consumption following loss or
damage due to freezing temperatures, disease, drought, pests,
or casualty.\604\ The same type of crop as the lost or damaged
crop must be replanted. However, the exception to
capitalization still applies if the replanting occurs on a
parcel of land other than the land on which the damage occurred
provided the acreage of the new land does not exceed that of
the land to which the damage occurred and the new land is
located in the United States. This exception may also apply to
costs incurred by persons other than the taxpayer who incurred
the loss or damage, provided (1) the taxpayer who incurred the
loss or damage retains an equity interest of more than 50
percent in the property on which the loss or damage occurred at
all times during the taxable year in which the replanting costs
are paid or incurred, and (2) the person holding a minority
equity interest and claiming the deduction materially
participates in the planting, maintenance, cultivation, or
development of the property during the taxable year in which
the replanting costs are paid or incurred.\605\
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\604\Sec. 263A(d)(2). Such replanting costs generally include costs
attributable to the replanting, cultivating, maintaining, and
developing of the plants that were lost or damaged that are incurred
during the preproductive period. Treas. Reg. sec. 1.263A-4(e)(1). The
acquisition costs of the replacement trees or seedlings must still be
capitalized under section 263(a) (see, e.g., T.D. 8897, 65 FR 50638,
Treas. Reg. sec. 1.263A-4(e)(3), Examples 1-3, and TAM 9547002 (July
18, 1995)), potentially subject to the special bonus depreciation
deduction in the year of planting under section 168(k)(5).
\605\Sec. 263A(d)(2)(B). Material participation for this purpose is
determined in a similar manner as under section 2032A(e)(6) (relating
to qualified use valuation of farm property upon death of the
taxpayer).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies the special rule for costs
incurred by persons other than the taxpayer in connection with
replanting an edible crop for human consumption following loss
or damage due to casualty. Under the provision, with respect to
replanting costs paid or incurred after the date of enactment,
but no later than a date which is ten years after such date of
enactment, for citrus plants lost or damaged due to casualty,
such replanting costs may also be deducted by a person other
than the taxpayer if (1) the taxpayer has an equity interest of
not less than 50 percent in the replanted citrus plants at all
times during the taxable year in which the replanting costs are
paid or incurred and such other person holds any part of the
remaining equity interest, or (2) such other person acquires
all of the taxpayer's equity interest in the land on which the
lost or damaged citrus plants were located at the time of such
loss or damage, and the replanting is on such land.
Effective date.--The provision is effective for costs
paid or incurred after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
C. Small Business Reforms
1. Expansion of section 179 expensing (sec. 3201 of the House bill,
sec. 13101 of the Senate amendment, 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.\606\ 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,\607\
and convention.\608\
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\606\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.
\607\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.
\608\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.\609\ 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.\610\ The $500,000 and $2,000,000 amounts are
indexed for inflation for taxable years beginning after
2015.\611\
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\609\Sec. 179(b)(1).
\610\Sec. 179(b)(2).
\611\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. 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).\612\ Qualifying property excludes any property
described in section 50(b) (i.e., certain property not eligible
for the investment tax credit).\613\
---------------------------------------------------------------------------
\612\Sec. 179(d)(1)(A)(ii) and (f).
\613\Sec. 179(d)(1) flush language. Property described in section
50(b) is generally property used outside the United States, certain
property used for lodging, property used by certain tax exempt
organizations, and property used by governmental units and foreign
persons or entities.
---------------------------------------------------------------------------
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 and not
more than the 14,000 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
(the ``sport utility vehicle limitation'').\614\
---------------------------------------------------------------------------
\614\Sec. 179(b)(5). For this purpose, a sport utility vehicle is
defined to exclude any vehicle that: (1) is designed for more than nine
individuals in seating rearward of the driver's seat; (2) is equipped
with an open cargo area, or a covered box not readily accessible from
the passenger compartment, of at least six feet in interior length; or
(3) has an integral enclosure, fully enclosing the driver compartment
and load carrying device, does not have seating rearward of the
driver's seat, and has no body section protruding more than 30 inches
ahead of the leading edge of the windshield.
---------------------------------------------------------------------------
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).\615\ 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).
---------------------------------------------------------------------------
\615\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.\616\ 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.\617\
---------------------------------------------------------------------------
\616\Sec. 179(d)(9).
\617\Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
An expensing election is made under rules prescribed by
the Secretary.\618\ 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.
---------------------------------------------------------------------------
\618\Sec. 179(c)(1).
---------------------------------------------------------------------------
HOUSE BILL
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\619\ and placed in
service after November 2, 2017.
---------------------------------------------------------------------------
\619\Property is not treated as acquired after the date on which a
written binding contract is entered into for such acquisition.
---------------------------------------------------------------------------
SENATE AMENDMENT
The provision increases the maximum amount a taxpayer may
expense under section 179 to $1,000,000, and increases the
phase-out threshold amount to $2,500,000. Thus, the provision
provides that the maximum amount a taxpayer may expense, for
taxable years beginning after 2017, is $1,000,000 of the cost
of qualifying property placed in service for the taxable year.
The $1,000,000 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 $2,500,000. The
$1,000,000 and $2,500,000 amounts, as well as the $25,000 sport
utility vehicle limitation, are indexed for inflation for
taxable years beginning after 2018.
The provision expands the definition of section 179
property to include certain depreciable tangible personal
property used predominantly to furnish lodging or in connection
with furnishing lodging.\620\
---------------------------------------------------------------------------
\620\As defined in section 50(b)(2). Property used predominantly to
furnish lodging or in connection with furnishing lodging generally
includes, e.g., beds and other furniture, refrigerators, ranges, and
other equipment used in the living quarters of a lodging facility such
as an apartment house, dormitory, or any other facility (or part of a
facility) where sleeping accommodations are provided and let. See
Treas. Reg. sec. 1.48-1(h).
---------------------------------------------------------------------------
The provision also expands the definition of qualified
real property eligible for section 179 expensing to include any
of the following improvements to nonresidential real property
placed in service after the date such property was first placed
in service: roofs; heating, ventilation, and air-conditioning
property; fire protection and alarm systems; and security
systems.
Effective date.--The provision applies to property placed
in service in taxable years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
2. Small business accounting method reform and simplification (sec.
3202 of the House bill, secs. 13102 through 13105 of the Senate
amendment, 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.\621\ 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.\622\ Examples of any
one item for which an accounting method may be adopted include
cost recovery,\623\ revenue recognition,\624\ and timing of
deductions.\625\ For each separate trade or business, a
taxpayer is entitled to adopt any permissible method, subject
to certain restrictions.\626\
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\621\Treas. Reg. sec. 1.446-1(a)(1).
\622\Sec. 446(c).
\623\See, e.g., secs. 167 and 168.
\624\See, e.g., secs. 451 and 460.
\625\See, e.g., secs. 461 and 467.
\626\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.\627\ 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.\628\
---------------------------------------------------------------------------
\627\Treas. Reg. sec. 1.446-1(e)(1).
\628\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.\629\ 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.\630\ 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.
---------------------------------------------------------------------------
\629\See, e.g., sec. 451.
\630\See, e.g., sec. 461.
---------------------------------------------------------------------------
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.\631\ In addition, the cash method generally may not be
used if the purchase, production, or sale of merchandise is an
income producing factor.\632\ Such taxpayers generally are
required to keep inventories and use an accrual method with
respect to inventory items.\633\
---------------------------------------------------------------------------
\631\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.
\632\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
\633\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.\634\ 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.
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\634\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.\635\
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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\635\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.\636\ 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.\637\ However, an exception is provided for
taxpayers whose average annual gross receipts do not exceed $1
million.\638\ 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.\639\ Such taxpayers
may account for inventory as materials and supplies that are
not incidental (i.e., ``non-incidental materials and
supplies'').\640\
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\636\Sec. 471(a) and Treas. Reg. sec. 1.471-1.
\637\Treas. Reg. sec. 1.446-1(c)(2).
\638\Rev. Proc. 2001-10, 2001-1 C.B. 272.
\639\Rev. Proc. 2002-28, 2002-1 C.B. 815.
\640\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.\641\ 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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\641\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;\642\ such taxpayers are not required to include
additional section 263A costs in inventory. Another exception
exists for taxpayers who raise, harvest, or grow trees.\643\
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)).\644\ Freelance authors,
photographers, and artists also are exempt from section 263A
for any qualified creative expenses.\645\
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\642\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).
\643\Sec. 263A(c)(5).
\644\Sec. 263A(d).
\645\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.\646\ 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.\647\ 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.\648\ 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.\649\ The allocation
of costs to a contract is made in accordance with
regulations.\650\ 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.\651\
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\646\Sec. 460(a).
\647\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.
\648\Sec. 460(b)(1).
\649\Sec. 460(c).
\650\Treas. Reg. sec. 1.460-5.
\651\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.\652\
Thus, long-term contract income from small construction
contracts must be reported consistently using the taxpayer's
exempt contract method.\653\ 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.\654\
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\652\Secs. 460(e)(1)(B) and (4).
\653\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.
\654\Treas. Reg. sec. 1.460-4(c)(1).
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HOUSE BILL
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.\655\
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\655\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\656\, but
rather may use a method of accounting for inventories that
either (1) treats inventories as non-incidental materials and
supplies\657\, or (2) conforms to the taxpayer's financial
accounting treatment of inventories.\658\
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\656\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.
\657\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).
\658\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 House 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.\659\ The
provision retains the exemptions from the uniform
capitalization rules that are not based on a taxpayer's gross
receipts.
---------------------------------------------------------------------------
\659\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.
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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.\660\
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\660\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.
Application of the provisions to expand the universe of
taxpayers eligible to use the cash method, exempt certain
taxpayers from the requirement to keep inventories, and expand
the exception from the uniform capitalization rules 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).
Effective date.--The provisions to expand the universe of
taxpayers 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. 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill with
the following modifications. The Senate amendment modifies the
$25 million gross receipts test to be a $15 million gross
receipts test which is met if a taxpayer's annual average gross
receipts do not exceed $15 million for the three prior taxable-
year period. The Senate amendment retains the present law $25
million gross receipts limit for family farming corporations
and applies such limit consistent with present law.
Effective date.--The provisions to expand the universe of
taxpayers 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. 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.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
3. Modification of treatment of S corporation conversions to C
corporations (sec. 3204 of the House bill, sec. 13543 of the Senate
amendment, 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.\661\ 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.\662\ 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.
---------------------------------------------------------------------------
\661\See, e.g., sec. 451.
\662\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,\663\
qualified personal service corporations,\664\ 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'').\665\ The cash method may
not be used by any tax shelter.\666\ In addition, the cash
method generally may not be used if the purchase, production,
or sale of merchandise is an income producing factor.\667\ Such
taxpayers generally are required to keep inventories and use an
accrual method with respect to inventory items.\668\
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\663\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).
\664\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).
\665\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).
\666\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.
\667\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
\668\Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
However, section 3202 of the House 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.
---------------------------------------------------------------------------
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.\669\ 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.\670\
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\669\Treas. Reg. sec. 1.446-1(e)(1).
\670\Treas. Reg. sec. 1.446-1(e).
---------------------------------------------------------------------------
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.\671\ 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.\672\
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.\673\ 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.\674\
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\671\Sec. 481(a)(2) and Treas. Reg. sec. 1.481-1(a)(1).
\672\Treas. Reg. sec. 1.481-1(a)(1).
\673\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).
\674\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.\675\
The post-termination transition period is generally the one-
year period after the S corporation election terminates.\676\
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\675\Sec. 1371(e)(1).
\676\Sec. 1377(b).
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HOUSE BILL
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.\677\ 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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\677\Section 3202 of the House 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.
SENATE AMENDMENT
The Senate amendment generally is the same as the House
bill, except that any increase in tax due to the section 481(a)
adjustment, rather than the section 481(a) adjustment itself,
is taken into account ratably during the six-taxable-year
period beginning with the year of change.
Effective date.--The provision is effective for
distributions after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
D. Reform of Business Related Exclusions, Deductions, etc.
1. Interest (secs. 3203 and 3301 of the House bill, secs. 13301 and
13311 of the Senate amendment, 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.\678\
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\678\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).
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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.\679\ 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.
---------------------------------------------------------------------------
\679\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.\680\ Disallowed investment interest is carried forward to
the next taxable year.
---------------------------------------------------------------------------
\680\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.
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'').\681\ Miscellaneous itemized deductions\682\
that are not investment expenses are disallowed first before
any investment expenses are disallowed.\683\
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\681\Sec. 67(a).
\682\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.
\683\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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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;\684\ (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.\685\ Interest amounts disallowed under these
rules can be carried forward indefinitely.\686\ 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.\687\
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\684\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).
\685\Sec. 163(j)(3).
\686\Sec. 163(j)(1)(B).
\687\Sec. 163(j)(2)(B)(ii).
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HOUSE BILL
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).\688\
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\688\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.\689\ The Secretary may provide
other adjustments to the computation of adjusted taxable
income.
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\689\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.\690\ 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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\690\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.\691\ 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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\691\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.\692\ 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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\692\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.
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\693\ 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. 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.
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\693\The term ``State'' includes the District of Columbia. See sec.
7701(a)(10) (``The term `State' shall be construed to include the
District of Columbia where such construction is necessary to carry out
provisions of this title'').
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Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill, with
the following modifications.
In general
The Senate amendment makes several changes to the
definition of adjusted taxable income. Specifically, the Senate
amendment does not add back deductions allowable for
depreciation, amortization, or depletion, but does add back any
deduction under section 199,\694\ and any deduction under
section 199A with respect to qualified business income of a
passthrough entity.\695\
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\694\The deduction for income attributable to domestic production
activities is repealed effective for taxable years beginning after
December 31, 2018. See section 13305 of the Senate amendment (Repeal of
deduction for income attributable to domestic production activities).
\695\See section 11011 of the Senate amendment (Deduction for
qualified business income).
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The Senate amendment also modifies the definition of
floor plan financing. Specifically, the Senate amendment
permits interest on indebtedness used to finance acquisition of
motor vehicles for sale or lease (i.e., not just for sale, as
in the House bill) to qualify as floor plan financing interest.
The Senate amendment also includes self-propelled vehicles in
the definition of motor vehicle, but removes construction
machinery and equipment from the definition.
Carryforward of disallowed business interest
The Senate amendment permits interest deductions to be
carried forward indefinitely, subject to certain restrictions
applicable to partnerships, described below.
Application to passthrough entities
The Senate amendment requires a partner in a partnership
to ignore the partner's distributive share of all items of
income, gain, deduction, or loss of the partnership when
calculating adjusted taxable income (rather than merely
ignoring the nonseparately stated income or loss, as in the
House bill).
The Senate amendment takes a different mathematical
approach from the House bill to calculating a partner's
interest limitation, though both provisions have the same
practical effect. In the Senate amendment, 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 taxable income. The excess taxable income
with respect to any partnership is the amount which bears the
same ratio to the partnership's adjusted taxable income as 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 bears to 30 percent of the adjusted taxable income
of the partnership. This allows a partner of a partnership to
deduct additional interest expense the partner may have paid or
incurred to the extent the partnership could have deducted more
business interest. The Senate amendment requires that excess
taxable income be allocated in the same manner as nonseparately
stated income and loss. As in the House bill, rules similar to
these rules also apply to S corporations.
The Senate amendment provides a special rule for
carryforward of disallowed partnership interest. In the case of
a partnership, the general carryforward rule described in the
discussion of the House bill does not apply. Instead, any
business interest that is not allowed as a deduction to the
partnership for the taxable year is allocated to each partner
in the same manner as nonseparately stated taxable income or
loss of the partnership. The partner may deduct its share of
the partnership's excess business interest in any future year,
but only against excess taxable income attributed to the
partner by the partnership the activities of which gave rise to
the excess business interest carryforward. Any such deduction
requires a corresponding reduction in excess taxable income.
Additionally, when excess business interest is allocated to a
partner, the partner's basis in its partnership interest is
reduced (but not below zero) by the amount of such allocation,
even though the carryforward does not give rise to a partner
deduction in the year of the basis reduction. However, the
partner's deduction in a future year for interest carried
forward does not reduce the partner's basis in the partnership
interest. In the event the partner disposes of a partnership
interest the basis of which has been so reduced, the partner's
basis in such interest shall be increased, immediately before
such disposition, by the amount that any such basis reductions
exceed any amount of excess interest expense that has been
treated as paid by the partner (i.e., excess interest expense
that has been deducted by the partner against excess taxable
income of the same partnership). This special rule does not
apply to S corporations and their shareholders.
Exceptions
The Senate amendment exempts certain categories of
taxpayers or trades or businesses from the interest limitation.
First, any taxpayer that meets the $15 million gross receipts
test of section 448(c) is exempt from the interest
limitation.\696\ Second, the Senate amendment expands the
regulated public utilities exception in the House bill to
include utilities where the rates for such furnishing or sale,
as the case may be, have been established by the governing or
ratemaking body of an electric cooperative.
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\696\See section 13102 of the Senate amendment (Modifications of
gross receipts test for use of cash method of accounting by
corporations and partnerships). In the case of a sole proprietorship,
the $15 million gross receipts test is applied as if the sole
proprietorship were a corporation or partnership.
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In the Senate amendment, at the taxpayer's election, 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,
and therefore the limitation does not apply to such trades or
businesses.\697\ Similarly, at the taxpayer's election, any
farming business,\698\ as well as any business engaged in the
trade or business of a specified agricultural or horticultural
cooperative,\699\ are not treated as trades or businesses for
purposes of the limitation, and therefore the limitation does
not apply to such trades or businesses.
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\697\It is intended that any such real property trade or business,
including such a trade or business conducted by a corporation or real
estate investment trust, be included. Because this description of a
real property trade or business refers only to the section 469(c)(7)(C)
description, and not to other rules of section 469 (such as the rule of
section 469(c)(2) that passive activities include rental activities or
the rule of section 469(a) that a passive activity loss is limited
under section 469), the other rules of section 469 are not made
applicable by this reference. It is further intended that a real
property operation or a real property management trade or business
includes the operation or management of a lodging facility.
\698\As defined in section 263A(e)(4) (i.e., farming business means
the trade or business of farming and includes the trade or business of
operating a nursery or sod farm, or the raising or harvesting of trees
bearing fruit, nuts, or other crops, or ornamental trees (other than
evergreen trees that are more than six years old at the time they are
severed from their roots)). Treas. Reg. sec. 1.263A-4(a)(4) further
defines a farming business as a trade or business involving the
cultivation of land or the raising or harvesting of any agricultural or
horticultural commodity. Examples of a farming business include the
trade or business of operating a nursery or sod farm; the raising or
harvesting of trees bearing fruit, nuts, or other crops; the raising of
ornamental trees (other than evergreen trees that are more than six
years old at the time they are severed from their roots); and the
raising, shearing, feeding, caring for, training, and management of
animals. A farming business also includes processing activities that
are normally incident to the growing, raising, or harvesting of
agricultural or horticultural products. See Treas. Reg. sec. 1.263A-
4(a)(4)(i) and (ii). A farming business does not include contract
harvesting of an agricultural or horticultural commodity grown or
raised by another taxpayer, or merely buying and reselling plants or
animals grown or raised by another taxpayer. See Treas. Reg. sec.
1.263A-4(a)(4)(i).
\699\As defined in new section 199A(g)(2) under the Senate
amendment. See section 11011 of the Senate amendment (Deduction for
qualified business income).
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CONFERENCE AGREEMENT
The conference agreement generally follows the Senate
amendment, with the following modifications. Under the
conference agreement, for taxable years beginning after
December 31, 2017 and before January 1, 2022, adjusted taxable
income is computed without regard to deductions allowable for
depreciation, amortization, or depletion. Additionally, because
the conference agreement repeals section 199 effective December
31, 2017, adjusted taxable income is computed without regard to
such deduction. The conference agreement follows the House in
exempting from the limitation taxpayers with average annual
gross receipts for the three-taxable-year period ending with
the prior taxable year that do not exceed $25 million. In
addition, for purposes of defining floor plan financing, the
conference agreement modifies the definition of motor vehicle
by deleting the specific references to an automobile, a truck,
a recreational vehicle, and a motorcycle because those terms
are encompassed in the phrase, ``any self-propelled vehicle
designed for transporting persons or property on a public
street, highway, or road,'' which was also part of the
definition in the Senate amendment.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
2. Modification of net operating loss deduction (sec. 3302 of the House
bill, sec. 13302 of the Senate amendment, 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.\700\ In general, an NOL may be carried back two years
and carried over 20 years to offset taxable income in such
years.\701\ NOLs offset taxable income in the order of the
taxable years to which the NOL may be carried.\702\
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\700\Sec. 172(c).
\701\Sec. 172(b)(1)(A).
\702\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.\703\ Limitations are
placed on the carryback of excess interest losses attributable
to corporate equity reduction transactions.\704\
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\703\Sec. 172(b)(1)(C) and (E).
\704\Sec. 172(b)(1)(D).
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HOUSE BILL
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.\705\ 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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\705\Notwithstanding the amendments made by the provision and
section 1304 of the House 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.\706\
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\706\See section 3101 of the House 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.
SENATE AMENDMENT
The Senate amendment follows the House bill, with the
following modifications. First, provision limits the NOL
deduction to 80 percent of taxable income (determined without
regard to the deduction), for losses arising in taxable years
beginning after December 31, 2022. The limitation does not
apply to a property and casualty insurance company.
The provision repeals the two-year carryback and the
special carryback provisions, but provides a two-year carryback
in the case of certain losses incurred in the trade or business
of farming. In addition, the Senate amendment provides a two-
year carryback and 20-year carryforward for NOLs of a property
and casualty insurance company (defined in section 816(a)) as
an insurance company other than a life insurance company).
The provision does not increase NOL carryovers.
Effective date.--The provision allowing indefinite
carryovers and modifying carrybacks applies to losses arising
in taxable years beginning after December 31, 2017.
The provision limiting the NOL deduction applies to
losses arising in taxable years beginning after December 31,
2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except that the provision limits the NOL deduction to 80
percent of taxable income (determined without regard to the
deduction) for losses arising in taxable years beginning after
December 31, 2017.
3. Like-kind exchanges of real property (sec. 3303 of the House bill,
and sec. 13303 of the Senate amendment, 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.\707\ 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.\708\ Section 1031 also does not
apply to certain exchanges involving livestock\709\ or foreign
property.\710\
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\707\Sec. 1031(a)(1).
\708\Sec. 1031(a)(2). A chose in action is a right that can be
enforced by legal action.
\709\Sec. 1031(e).
\710\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).\711\ The different classes of
property are: (1) depreciable tangible personal property;\712\
(2) intangible or nondepreciable personal property;\713\ and
(3) real property.\714\ 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,\715\ while depreciable tangible personal properties
must be either within the same General Asset Class\716\ or
within the same Product Class.\717\
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\711\Treas. Reg. sec. 1.1031(a)-1(b).
\712\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).
\713\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.
\714\Treas. Reg. sec. 1.1031(a)-1(b) and (c).
\715\Treas. Reg. sec. 1.1031(a)-1(b).
\716\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).
\717\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.\718\ 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.\719\ No losses may be recognized from a
like-kind exchange.\720\
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\718\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.
\719\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.
\720\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.\721\ 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.\722\
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\721\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).
\722\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.\723\
---------------------------------------------------------------------------
\723\Sec. 1031(a)(3).
---------------------------------------------------------------------------
The Treasury Department has issued regulations\724\ and
revenue procedures\725\ providing guidance and safe harbors for
taxpayers engaging in deferred like-kind exchanges.
---------------------------------------------------------------------------
\724\Treas. Reg. sec. 1.1031(k)-1(a) through (o).
\725\See Rev. Proc. 2000-37, 2000-40 I.R.B. 308, as modified by
Rev. Proc. 2004-51, 2004-33 I.R.B. 294.
---------------------------------------------------------------------------
HOUSE BILL
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.\726\
---------------------------------------------------------------------------
\726\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.
SENATE AMENDMENT
The Senate amendment follows the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
4. Revision of treatment of contributions to capital (sec. 3304 of the
House bill and sec. 118 of the Code)
PRESENT LAW
The gross income of a corporation does not include any
contribution to its capital.\727\ 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.\728\ 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.\729\ 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.\730\
---------------------------------------------------------------------------
\727\Sec. 118(a).
\728\Sec. 118(b).
\729\Sec. 118(c)(1).
\730\Sec. 118(c)(4).
---------------------------------------------------------------------------
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.\731\ 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.\732\
Similarly, the adjusted basis of any property acquired by a
utility with a contribution in aid of construction is
zero.\733\
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\731\Sec. 362(c)(1).
\732\Sec. 362(c)(2). See also Treas. Reg. sec. 1.362-2.
\733\Sec. 118(c)(4).
---------------------------------------------------------------------------
HOUSE BILL
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.\734\ 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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\734\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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the policy of the House
bill but takes a different approach. The conference agreement
does not repeal the provision of the Internal Revenue Code
under which, generally, a corporation's gross income does not
include contributions to capital. Rather, it preserves that
provision, but provides that the term ``contributions to
capital'' does not include (1) any contribution in aid of
construction or any other contribution as a customer or
potential customer, and (2) any contribution by any
governmental entity or civic group (other than a contribution
made by a shareholder as such). The conferees intend that
section 118, as modified, continue to apply only to
corporations.
Effective date.--The provision applies to contributions
made after the date of enactment. However, the provision shall
not apply to any contribution made after the date of enactment
by a governmental entity pursuant to a master development plan
that has been approved prior to such date by a governmental
entity.
5. Repeal of deduction for local lobbying expenses (sec. 3305 of the
House bill, sec. 13308 of the Senate amendment, 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.\735\ However, section 162(e) denies a
deduction for amounts paid or incurred in connection with (1)
influencing legislation,\736\ (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\737\ 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.\738\
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\735\Sec. 162(a).
\736\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).
\737\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).
\738\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'').\739\ 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.\740\
---------------------------------------------------------------------------
\739\Sec. 162(e)(2)(A).
\740\Sec. 162(e)(2)(B).
---------------------------------------------------------------------------
For purposes of this exception, legislation of an Indian
tribal government is treated in the same manner as local
legislation.\741\
---------------------------------------------------------------------------
\741\Sec. 162(e)(7).
---------------------------------------------------------------------------
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.\742\
---------------------------------------------------------------------------
\742\Sec. 162(e)(5)(B).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment follows the House bill other than to
change the effective date so that the provision applies to
amounts paid or incurred on or after the date of enactment.
Effective date.--The provision applies to amounts paid or
incurred on or after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
6. Repeal of deduction for income attributable to domestic production
activities (sec. 3306 of the House bill, sec. 13305 of the
Senate amendment, and sec. 199 of the Code)
PRESENT LAW
In general
Section 199 provides a deduction from taxable income (or,
in the case of an individual, adjusted gross income\743\) 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.\744\ 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.\745\ A similar reduction applies to the graduated rates
applicable to individuals with qualifying domestic production
activities income.
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\743\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).
\744\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).
\745\This example assumes the deduction does not exceed the wage
limitation discussed below.
---------------------------------------------------------------------------
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.\746\
---------------------------------------------------------------------------
\746\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.
---------------------------------------------------------------------------
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\747\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States;\748\ (2)
any sale, exchange, or other disposition, or any lease, rental,
or license, of qualified film\749\ 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.\750\
---------------------------------------------------------------------------
\747\Qualifying production property generally includes any tangible
personal property, computer software, and sound recordings. Sec.
199(c)(5).
\748\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, 2017, 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). 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).
\749\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).
\750\Sec. 199(c)(4)(A).
---------------------------------------------------------------------------
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.\751\
---------------------------------------------------------------------------
\751\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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Agricultural and horticultural cooperatives
With regard to member-owned agricultural and
horticultural cooperatives formed under Subchapter T of the
Code, section 199 provides the same treatment of qualified
production activities income derived from agricultural or
horticultural products that are manufactured, produced, grown,
or extracted by cooperatives,\752\ or that are marketed through
cooperatives, as it provides for qualified production
activities income of other taxpayers (i.e., the cooperative may
claim a deduction from qualified production activities income).
---------------------------------------------------------------------------
\752\For this purpose, agricultural or horticultural products also
include fertilizer, diesel fuel and other supplies used in agricultural
or horticultural production that are manufactured, produced, grown, or
extracted by the cooperative.
---------------------------------------------------------------------------
In addition, section 199(d)(3)(A) provides that the
amount of any patronage dividends or per-unit retain
allocations paid to a member of an agricultural or
horticultural cooperative (to which Part I of Subchapter T
applies), which is allocable to the portion of qualified
production activities income of the cooperative that is
deductible under the provision, is deductible from the gross
income of the member. In order to qualify, such amount must be
designated by the organization as allocable to the deductible
portion of qualified production activities income in a written
notice mailed to its patrons not later than the payment period
described in section 1382(d). In addition, section 199(d)(3)(B)
provides that the cooperative cannot reduce its income under
section 1382 (e.g., cannot claim a dividends-paid deduction)
for such amounts.
HOUSE BILL
The provision repeals the deduction for income
attributable to domestic production activities.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
Effective date.--The provision is effective for non-
corporate taxpayers and for certain rules applicable to
agricultural and horticultural cooperates provided in section
199(d)(3)(A) and (B) for taxable years beginning after December
31, 2017. The provision is effective for C corporations for
taxable years beginning after December 31, 2018.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
7. Entertainment, etc. expenses (sec. 3307 of the House bill, sec.
13304 of the Senate amendment, 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.\753\ 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.\754\ Similarly, a deduction for any
expense for food or beverages generally is limited to 50
percent of the amount otherwise deductible.\755\ In addition,
no deduction is allowed for membership dues with respect to any
club organized for business, pleasure, recreation, or other
social purpose.\756\
---------------------------------------------------------------------------
\753\Sec. 274(a)(1).
\754\Sec. 274(n)(1)(B).
\755\Sec. 274(n)(1)(A).
\756\Sec. 274(a)(3).
---------------------------------------------------------------------------
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.\757\ 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.\758\
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.\759\
---------------------------------------------------------------------------
\757\Sec. 274(e)(2)(A). See below for a discussion of the recent
modification of this rule for certain individuals.
\758\Sec. 274(e)(9).
\759\Treas. Reg. sec. 1.162-25T(a).
---------------------------------------------------------------------------
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.\760\ 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.\761\ 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.\762\
---------------------------------------------------------------------------
\760\Sec. 274(e)(3).
\761\Sec. 274(e)(4).
\762\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.\763\ 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.\764\
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.''\765\ 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.\766\
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\763\Sec. 61(a)(1).
\764\Treas. Reg. sec. 1.61-21(b)(1).
\765\Treas. Reg. sec. 1.61-21(g)(5).
\766\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.\767\ 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.
---------------------------------------------------------------------------
\767\Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C.
197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001).
---------------------------------------------------------------------------
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.\768\ 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).\769\
---------------------------------------------------------------------------
\768\Sec. 274(e)(2)(B)(i). See also Treas. Reg. sec. 1.274-9(a).
\769\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.\770\
---------------------------------------------------------------------------
\770\See Treas. Reg. sec. 1.274-10(a)(2).
---------------------------------------------------------------------------
Excludable fringe benefits
Certain employer-provided fringe benefits are excluded
from an employee's gross income and wages for employment tax
purposes, including, but not limited to, de minimis fringes,
qualified transportation fringes, on-premises athletic
facilities, and meals provided for the ``convenience of the
employer.''\771\
---------------------------------------------------------------------------
\771\Secs. 132(a), 119(a), 3121(a)(19) and (20), 3231(e)(5) and
(9), 3306(b)(14) and (16), and 3401(a)(19).
---------------------------------------------------------------------------
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,\772\ and also includes food and
beverages provided to employees through an eating facility
operated by the employer that is located on or near the
employer's business premises and meets certain
requirements.\773\
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\772\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).
\773\Sec. 132(e)(2). Revenue derived from such a facility must
normally equal or exceed the direct operating costs of the facility.
Employees who are entitled, under Section 119, to exclude the value of
a meal provided at such a facility are treated as having paid an amount
for the meal equal to the direct operating costs of the facility
attributable to such meal.
---------------------------------------------------------------------------
Qualified transportation fringes include qualified
parking (parking 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.\774\
---------------------------------------------------------------------------
\774\Sec. 132(f)(1), (5). The qualified transportation fringe
exclusions are subject to monthly limits. Sec. 132(f)(2).
---------------------------------------------------------------------------
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.\775\
---------------------------------------------------------------------------
\775\Sec. 132(j)(4).
---------------------------------------------------------------------------
The value of meals furnished to an employee or the
employee's spouse or dependents by or on behalf of an employer
for the convenience of the employer is excludible from the
employee's gross income, but only if such meals are provided on
the employer's business premises.\776\
---------------------------------------------------------------------------
\776\Sec. 119(a).
---------------------------------------------------------------------------
HOUSE BILL
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
employer) under a reimbursement or other expense allowance
arrangement if the person for whom the services are performed
is a tax-exempt entity\777\ or the arrangement is designated by
the Secretary as having the effect of avoiding the 50 percent
deduction disallowance.
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\777\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.
SENATE AMENDMENT
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, or (3) a facility or
portion thereof used in connection with any of the above items.
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).
In addition, the provision disallows a deduction for
expenses associated with providing any qualified transportation
fringe to employees of the taxpayer, and except as necessary
for ensuring the safety of an employee, any expense incurred
for providing transportation (or any payment or reimbursement)
for commuting between the employee's residence and place of
employment.
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). For amounts incurred and paid after December 31, 2017
and until December 31, 2025, the provision expands this 50
percent limitation to expenses of the employer associated with
providing food and beverages to employees through an eating
facility that meets requirements for de minimis fringes and for
the convenience of the employer. Such amounts incurred and paid
after December 31, 2025 are not deductible.
Effective date.--The provision generally applies to
amounts paid or incurred after December 31, 2017. However, for
expenses of the employer associated with providing food and
beverages to employees through an eating facility that meets
requirements for de minimis fringes and for the convenience of
the employer, amounts paid or incurred after December 31, 2025
are not deductible.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
8. Repeal of exclusion, etc., for employee achievement awards (sec.
1403 of the House bill, sec. 13310 of the Senate amendment, 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.\778\ 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.\779\ 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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\778\Sec. 274(j).
\779\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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment adds a definition of ``tangible
personal property'' that may be considered a deductible
employee achievement award. It provides that tangible personal
property shall not include cash, cash equivalents, gift cards,
gift coupons or gift certificates (other than arrangements
conferring only the right to select and receive tangible
personal property from a limited array of such items pre-
selected or pre-approved by the employer), or vacations, meals,
lodging, tickets to theater or sporting events, stocks, bonds,
other securities, and other similar items. No inference is
intended that this is a change from present law and guidance.
Effective date.--The provision applies to amounts paid or
incurred after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
9. Unrelated business taxable income increased by amount of certain
fringe benefit expenses for which deduction is disallowed (sec.
3308 of the House 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.\780\ 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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\780\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.\781\ Therefore, the unrelated trade or
business activity of a section 501(c)(3) organization must be
insubstantial.
---------------------------------------------------------------------------
\781\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.\782\ 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.\783\ 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.
---------------------------------------------------------------------------
\782\Sec. 512(a).
\783\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.\784\
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\784\Sec. 511(a)(2).
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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,\785\ unless derived from debt-
financed property or from certain 50-percent controlled
subsidiaries.\786\ 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.
---------------------------------------------------------------------------
\785\Secs. 511-514.
\786\Sec. 512(b)(13).
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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
10. Limitation on deduction for FDIC premiums (sec. 3309 of the House
bill, sec. 13531 of the Senate amendment, 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\787\ 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.\788\
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\787\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.
\788\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.\789\ 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.\790\
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\789\Sec. 581. See also Treas. Reg. sec. 1.581-1(a).
\790\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).
---------------------------------------------------------------------------
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.\791\
---------------------------------------------------------------------------
\791\Sec. 1361(b)(2)(A).
---------------------------------------------------------------------------
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\792\ 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.\793\
---------------------------------------------------------------------------
\792\Tax Reform Act of 1986, Pub. L. No. 99-514.
\793\Sec. 585(b)(2).
---------------------------------------------------------------------------
Credit unions
Credit unions are exempt from Federal income
taxation.\794\ 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.\795\
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.\796\
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\794\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.
\795\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.
\796\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.\797\
---------------------------------------------------------------------------
\797\Technical Advice Memorandum 199924060, March 5, 1999, and Rev.
Rul. 80-230, 1980-2 C.B. 169, 1980.
---------------------------------------------------------------------------
HOUSE BILL
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.\798\ 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.\799\
---------------------------------------------------------------------------
\798\12 U.S.C. sec. 1817(b).
\799\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.
SENATE AMENDMENT
The Senate amendment follows the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
11. Repeal of rollover of publicly traded securities gain into
specialized small business investment companies (sec. 3310 of
the House 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.\800\
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.\801\ For corporations, these limits are
$250,000 and $1 million, respectively.\802\
---------------------------------------------------------------------------
\800\Sec. 1044(a).
\801\Sec. 1044(b)(1).
\802\Sec. 1044(b)(2).
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
12. Certain self-created property not treated as a capital asset (sec.
3311 of the House 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.\803\ 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),\804\ 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.\805\
---------------------------------------------------------------------------
\803\Sec. 1221(a).
\804\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).
\805\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.\806\ 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.\807\ However, a
taxpayer may elect to treat musical compositions and copyrights
in musical works as capital assets.\808\
---------------------------------------------------------------------------
\806\Sec. 1221(a)(3)(A) and (B).
\807\Sec. 1221(a)(3)(C).
\808\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.\809\
---------------------------------------------------------------------------
\809\Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 52
(1955).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
13. Repeal of special rule for sale or exchange of patents (sec. 3312
of the House bill and sec. 1235 of the Code))
PRESENT LAW
Section 1235 provides that a transfer\810\ 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.\811\
---------------------------------------------------------------------------
\810\A transfer by gift, inheritance, or devise is not included.
\811\Sec. 1235(a).
---------------------------------------------------------------------------
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.\812\
---------------------------------------------------------------------------
\812\Sec. 1235(b).
---------------------------------------------------------------------------
HOUSE BILL
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.\813\
---------------------------------------------------------------------------
\813\See also section 3311 of the House bill (Certain self-created
property not treated as a capital asset).
---------------------------------------------------------------------------
Effective date.--The provision applies to dispositions
after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
14. Repeal of technical termination of partnerships (sec. 3313 of the
House bill and sec. 708(b) of the Code)
PRESENT LAW
A partnership is considered as terminated under specified
circumstances.\814\ Special rules apply in the case of the
merger, consolidation, or division of a partnership.\815\
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\814\Sec. 708(b)(1).
\815\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).
---------------------------------------------------------------------------
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.\816\
---------------------------------------------------------------------------
\816\Sec. 708(b)(1)(A).
---------------------------------------------------------------------------
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.\817\ 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.\818\
---------------------------------------------------------------------------
\817\Sec. 708(b)(1)(B).
\818\Treas. Reg. sec. 1.708-1(b)(4).
---------------------------------------------------------------------------
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.\819\ Partnership-level
elections generally cease to apply following a technical
termination.\820\ A technical termination generally results in
the restart of partnership depreciation recovery periods.
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\819\Sec. 706(c)(1); Treas. Reg. sec. 1.708-1(b)(3).
\820\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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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
15. Recharacterization of certain gains in the case of partnership
profits interests held in connection with performance of
investment services (sec. 3314 of the House bill, sec. 13310 of
the Senate amendment, and secs. 1061 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.\821\
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\821\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.\822\ 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\823\ 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.\824\
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\822\Rev. Proc. 93-27 (1993-2 C.B. 343), citing the Diamond and
Campbell cases, supra.
\823\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.
\824\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.\825\ 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.\826\
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\825\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).
\826\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).\827\ 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.\828\ 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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\827\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.
\828\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.\829\ Thus, for example, long-term capital gain of the
partnership is treated as long-term capital gain in the hands
of the partners.
---------------------------------------------------------------------------
\829\Sec. 702.
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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.\830\
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\830\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.
---------------------------------------------------------------------------
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,\831\ any gain generally is included in income.
---------------------------------------------------------------------------
\831\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.
---------------------------------------------------------------------------
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.\832\
---------------------------------------------------------------------------
\832\Sec. 163(d).
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HOUSE BILL
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\833\) 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.
---------------------------------------------------------------------------
\833\Sec. 318(a)(1).
---------------------------------------------------------------------------
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\834\) 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.
---------------------------------------------------------------------------
\834\Sec. 318(a)(1).
---------------------------------------------------------------------------
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.
SENATE AMENDMENT
The Senate amendment is generally the same as the House
bill, except with respect to the nonapplicability of section
83. Under the Senate amendment, the provision provides 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, notwithstanding the rules of
section 83 or any election in effect under section 83(b).
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
The conferees wish to clarify the interaction of section 83
with the provision's three-year holding requirement, which
applies notwithstanding the rules of section 83 or any election
in effect under section 83(b). Under the provision, the fact
that an individual may have included an amount in income upon
acquisition of the applicable partnership interest, or that an
individual may have made a section 83(b) election with respect
to an applicable partnership interest, does not change the
three-year holding period requirement for long-term capital
gain treatment with respect to the applicable partnership
interest. Thus, 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.
16. Amortization of research and experimental expenditures (sec. 3315
of the House bill, sec. 13206 of the Senate amendment, 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.\835\ 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.\836\ 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.\837\
Taxpayers, alternatively, may elect to amortize their research
expenditures over a period of 10 years.\838\ Research and
experimental expenditures deductible under section 174 are not
subject to capitalization under either section 263(a)\839\ or
section 263A.\840\
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\835\Secs. 167 and 263(a).
\836\Secs. 174(a) and (e).
\837\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.
\838\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.
\839\Sec. 263(a)(1)(B).
\840\Sec. 263A(c)(2).
---------------------------------------------------------------------------
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.\841\ 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.\842\ 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.\843\ 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).\844\ In addition, under administrative guidance, the
costs of developing computer software have been accorded
treatment similar to research expenditures.\845\
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\841\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.
\842\Treas. Reg. sec. 1.174-2(a)(1).
\843\Ibid.
\844\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).
\845\Rev. Proc. 2000-50, 2000-2 C.B. 601.
---------------------------------------------------------------------------
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.\846\ 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.\847\
---------------------------------------------------------------------------
\846\Treas. Reg. sec. 1.174-2(a)(6).
\847\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.\848\ 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.\849\
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\848\Sec. 174(c).
\849\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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HOUSE BILL
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\850\ 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.
---------------------------------------------------------------------------
\850\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.\851\
---------------------------------------------------------------------------
\851\See section 2001 of the House bill (Repeal of alternative
minimum tax).
---------------------------------------------------------------------------
Effective date.--The provision applies to amounts paid or
incurred in taxable years beginning after December 31, 2022.
SENATE AMENDMENT
The Senate amendment follows the House bill, except with
the following modifications. The application of the Senate
amendment is 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. The
Senate amendment is applied on a cutoff basis to research or
experimental expenditures paid or incurred in taxable years
beginning after December 31, 2025 (hence there is no adjustment
under section 481(a) for research or experimental expenditures
paid or incurred in taxable years beginning before January 1,
2026). In addition, the Senate amendment makes conforming
changes to sections 41 and 280C.
Effective date.--The provision applies to amounts paid or
incurred in taxable years beginning after December 31, 2025.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Effective date.--The provision applies to amounts paid or
incurred in taxable years beginning after December 31, 2021.
17. Certain special rules for taxable year of inclusion (sec. 13221 of
the Senate amendment and sec. 451 of the Code)
PRESENT LAW
In general
Under section 61(a), gross income generally includes all
income from whatever source derived, except as otherwise
provided in Subtitle A of the Code. Thus, gross income
generally includes income realized in any from, whether in
money, property, or services, except to the extent provided in
other sections of the Code.\852\ Once it is determined that an
item of gross income is clearly realized for Federal income tax
purposes, section 451 and the regulations thereunder provide
the general rules as to the timing of when such item is to be
included in gross income.\853\
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\852\Treas. Reg. sec. 1.61-1.
\853\Treas. Reg. sec. 1.61-1(b)(3).
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A taxpayer generally is required to include an item in
gross income no later than the time of its actual or
constructive receipt, unless the item properly is accounted for
in a different period under the taxpayer's method of
accounting.\854\ If a taxpayer has an unrestricted right to
demand the payment of an amount, the taxpayer is in
constructive receipt of that amount whether or not the taxpayer
makes the demand and actually receives the payment.\855\
---------------------------------------------------------------------------
\854\Sec. 451(a).
\855\See Treas. Reg. sec. 1.451-2.
---------------------------------------------------------------------------
In general, for a cash basis taxpayer, an amount is
included in gross income when actually or constructively
received. For an accrual basis taxpayer, an amount is included
in gross income when all the events have occurred that fix the
right to receive such income and the amount thereof can be
determined with reasonable accuracy (i.e., when the ``all
events test'' is met), unless an exception permits deferral or
exclusion, or a special method of accounting applies.\856\
---------------------------------------------------------------------------
\856\See Treas. Reg. secs. 1.446-1(c)(1)(ii) and 1.451-1(a).
---------------------------------------------------------------------------
A number of exceptions that exist to permit deferral of
gross income relate to advance payments. An advance payment is
when a taxpayer receives payment before the taxpayer provides
goods or services to its customer. The exceptions often allow
tax deferral to mirror financial accounting deferral (e.g.,
income is recognized as the goods are provided or the services
are performed).\857\
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\857\For examples of provisions permitting deferral of advance
payments, see Treas. Reg. sec. 1.451-5 and Rev. Proc. 2004-34, 2004-1
C.B. 991, as modified and clarified by Rev. Proc. 2011-18, 2011-5
I.R.B. 443, and Rev. Proc. 2013-29, 2013-33 I.R.B. 141.
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Interest income
A taxpayer generally must include in gross income the
amount of interest received or accrued within the taxable year
on indebtedness held by the taxpayer.\858\
---------------------------------------------------------------------------
\858\Secs. 61(a)(4) and 451.
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Original issue discount
The holder of a debt instrument with original issue
discount (``OID'') generally accrues and includes the OID in
gross income as interest over the term of the instrument,
regardless of when the stated interest (if any) is paid.\859\
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\859\Sec. 1272.
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The amount of OID with respect to a debt instrument is
the excess of the stated redemption price at maturity over the
issue price of the debt instrument.\860\ The stated redemption
price at maturity is the sum of all payments provided by the
debt instrument other than qualified stated interest
payments.\861\ The holder includes in gross income an amount
equal to the sum of the daily portions of the OID for each day
during the taxable year the holder held such debt instrument.
The daily portion is determined by allocating to each day in
any accrual period its ratable portion of the increase during
such accrual period in the adjusted issue price of the debt
instrument.\862\ The adjustment to the issue price is
determined by multiplying the adjusted issue price (i.e., the
issue price increased by adjustments prior to the accrual
period) by the instrument's yield to maturity, and then
subtracting the interest payable during the accrual period.
Thus, to compute the amount of OID and the portion of OID
allocable to a period, the stated redemption price at maturity
and the term must be known. Issuers of OID instruments accrue
and deduct the amount of OID as interest expense in the same
manner as the holder.\863\
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\860\Sec. 1273(a)(1).
\861\Sec. 1273(a)(2) and Treas. Reg. sec. 1.1273-1(b).
\862\Sec. 1272(a)(1) and (3).
\863\Sec. 163(e).
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Debt instruments subject to acceleration
Special rules for determining the amount of OID allocated
to a period apply to certain instruments that may be subject to
prepayment. If a borrower can reduce the yield on a debt by
exercising a prepayment option, the OID rules assume that the
borrower will prepay the debt.\864\ In addition, in the case of
(1) any regular interest in a real estate mortgage investment
conduit (``REMIC'') or qualified mortgages held by a REMIC or
(2) any other debt instrument if payments under the instrument
may be accelerated by reason of prepayments of other
obligations securing the instrument, the daily portions of the
OID on such debt instruments are determined by taking into
account an assumption regarding the prepayment of principal for
such instruments.\865\
---------------------------------------------------------------------------
\864\Treas. Reg. sec. 1.1272-1(c)(5).
\865\Sec. 1272(a)(6).
---------------------------------------------------------------------------
The Taxpayer Relief Act of 1997\866\ extended these rules
to any pool of debt instruments the payments on which may be
accelerated by reason of prepayments.\867\ Thus, if a taxpayer
holds a pool of credit card receivables that require interest
to be paid only if the borrowers do not pay their accounts by a
specified date (``grace-period interest''), the taxpayer is
required to accrue interest or OID on such pool based upon a
reasonable assumption regarding the timing of the payments of
the accounts in the pool. Under these rules, certain amounts
(other than grace-period interest) related to credit card
transactions, such as late-payment fees,\868\ cash-advance
fees,\869\ and interchange fees,\870\ have been determined to
create OID or increase the amount of OID on the pool of credit
card receivables to which the amounts relate.\871\
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\866\Pub. L. No. 105-34, sec. 1004(a).
\867\Sec. 1272(a)(6)(C)(iii).
\868\Rev. Proc. 2004-33, 2004-1 C.B. 989.
\869\Rev. Proc. 2005-47, 2005-2 C.B. 269.
\870\Capital One Financial Corp. and Subsidiaries v. Commissioner,
133 T.C. No. 8 (2009); IRS Chief Counsel Notice CC-2010-018, September
27, 2010.
\871\See also Rev. Proc. 2013-26, 2013-22 I.R.B. 1160, for a safe
harbor method of accounting for OID on a pool of credit card
receivables for purposes of section 1272(a)(6).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision revises the rules associated with the
timing of the recognition of income.\872\ Specifically, the
provision requires an accrual method taxpayer subject to the
all events test for an item of gross income to recognize such
income no later than the taxable year in which such income is
taken into account as revenue in an applicable financial
statement\873\ or another financial statement under rules
specified by the Secretary, but provides an exception for
taxpayers without an applicable or other specified financial
statement.\874\ In the case of a contract which contains
multiple performance obligations, the provision allows the
taxpayer to allocate the transaction price in accordance with
the allocation made in the taxpayer's applicable financial
statement.
---------------------------------------------------------------------------
\872\The provision does not revise the rules associated with when
an item is realized for Federal income tax purposes and, accordingly,
does not require the recognition of income in situations where the
Federal income tax realization event has not yet occurred. For example,
the provision does not require the recharacterization of a transaction
from sale to lease, or vice versa, to conform to how the transaction is
reported in the taxpayer's applicable financial statement. Similarly,
the provision does not require the recognition of gain or loss from
securities that are marked to market for financial reporting purposes
if the gain or loss from such investments is not realized for Federal
income tax purposes until such time that the taxpayer sells or
otherwise disposes of the investment. As a further example, income from
investments in corporations or partnerships that are accounted for
under the equity method for financial reporting purposes will not
result in the recognition of income for Federal income tax purposes
until such time that the Federal income tax realization even has
occurred (e.g., when the taxpayer receives a dividend from the
corporation in which it owns less than a controlling interest or when
the taxpayer receives its allocable share of income, deductions, gains,
and losses on its Schedule K-1 from the partnership).
\873\For purposes of the provision, 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 (``SEC''), (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
agency for purposes other than Federal tax purposes, but only if there
is no statement of the taxpayer described in clause (i) or (ii); (B) a
financial statement which is made on the basis of international
financial reporting standards and is filed by the taxpayer with an
agency of a foreign government which is equivalent to the SEC and which
has reporting standards not less stringent than the standards required
by such Commission, but only if there is no statement of the taxpayer
described in subparagraph (A); or (C) a financial statement filed by
the taxpayer with any other regulatory or governmental body specified
by the Secretary, but only if there is no statement of the taxpayer
described in subparagraph (A) or (B). If the financial results of a
taxpayer are reported on the applicable financial statement for a group
of entities, such statement is treated as the applicable financial
statement of the taxpayer.
\874\The Committee intends that the provision apply to items of
gross income for which the timing of income inclusion is determined
using the all events test under present law. Under the provision, an
accrual method taxpayer with an applicable financial statement will
include an item in income under section 451 upon the earlier of when
the all events test is met or when the taxpayer includes such item in
revenue in an applicable financial statement. For example, under the
provision, any unbilled receivables for partially performed services
must be recognized to the extent the amounts are taken into income for
financial statement purposes. However, accrual method taxpayers without
an applicable or other specified financial statement will continue to
determine income inclusion under the all events test, unless an
exception permits deferral or exclusion. See sec. 451(a) and Treas.
Reg. sec. 1.451-1(a). The Committee intends that the financial
statement conformity requirement added to section 451 not be construed
as preventing the use of special methods of accounting provided
elsewhere in the Code, other than part V of subchapter P (special rules
for bonds and other debt instruments) excluding items of gross income
in connection with a mortgage servicing contract. For example, it does
not preclude the use of the installment method under section 453 or the
use of long-term contract methods under section 460. See Treas. Reg.
sec. 1.446-1(c)(1)(iii).
---------------------------------------------------------------------------
In addition, the provision directs accrual method
taxpayers with an applicable financial statement to apply the
income recognition rules under section 451 before applying the
special rules under part V of subchapter P, which, in addition
to the OID rules, also includes rules regarding the treatment
of market discount on bonds, discounts on short-term
obligations, OID on tax-exempt bonds, and stripped bonds and
stripped coupons.\875\ Thus, for example, to the extent amounts
are included in revenue for financial statement purposes when
received (e.g., late-payment fees, cash-advance fees, or
interchange fees), such amounts generally are includable in
income at such time in accordance with the general recognition
principles under section 451. The provision provides an
exception for any item of gross income in connection with a
mortgage servicing contract. Thus, under the provision, income
from mortgage servicing rights will continue to be recognized
in accordance with the present law rules for such items of
gross income (i.e., ``normal'' mortgage servicing rights will
be included in income upon the earlier of earned or received
under the all events test of section 451 (i.e., not averaged
over the life of the mortgage),\876\ and ``excess'' mortgage
servicing rights will be treated as stripped coupons under
section 1286 and therefore subject to the original issue
discount rules\877\).
---------------------------------------------------------------------------
\875\Secs. 1271-1288.
\876\See Rev. Rul. 70-142, 1970-2 C.B. 115.
\877\See Rev. Rul. 91-46, 1991-2, C.B. 358, and Rev. Proc. 91-50,
1991-2 C.B. 778.
---------------------------------------------------------------------------
The provision also codifies the current deferral method
of accounting for advance payments for goods, services, and
other specified items provided by the IRS under Revenue
Procedure 2004-34.\878\ That is, the provision allows accrual
method taxpayers to elect\879\ to defer the inclusion of income
associated with certain advance payments to the end of the tax
year following the tax year of receipt if such income also is
deferred for financial statement purposes.\880\ In the case of
advance payments received for a combination of services, goods,
or other specified items, the provision allows the taxpayer to
allocate the transaction price in accordance with the
allocation made in the taxpayer's applicable financial
statement. The provision requires the inclusion in gross income
of a deferred advance payment if the taxpayer ceases to exist.
---------------------------------------------------------------------------
\878\2004-1 C.B. 991, as modified and clarified by Rev. Proc. 2011-
18, 2011-5 I.R.B. 443, and Rev. Proc. 2013-29, 2013-33 I.R.B. 141.
\879\The election shall be made at such time, in such form and
manner, and with respect to such categories of advance payments as the
Secretary may provide. For these purposes, the recognition of income
under such election is treated as a method of accounting.
\880\Thus, the provision is intended to override any deferral
method provided by Treasury Regulation section 1.451-5 for advance
payments received for goods.
---------------------------------------------------------------------------
The application of these rules is a change in the
taxpayer's method of accounting for purposes of section 481. In
the case of any taxpayer required by this provision to change
its method of accounting for its first taxable year beginning
after December 31, 2017, such change is treated as initiated by
the taxpayer and made with the consent of the Secretary. In the
case of income from a debt instrument having OID, the related
section 481(a) adjustment is taken into account over six
taxable years.
Effective date.--The provision generally applies to
taxable years beginning after December 31, 2017. In the case of
income from a debt instrument having OID, the provision applies
to taxable years beginning after December 31, 2018.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
18. Denial of deduction for certain fines, penalties, and other amounts
(sec. 13306 of the Senate amendment and sec. 162(f) and new
sec. 6050X of the Code)
PRESENT LAW
The Code denies a deduction for fines or penalties paid
to a government for the violation of any law.\881\
---------------------------------------------------------------------------
\881\Sec. 162(f).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision denies deductibility for any otherwise
deductible amount paid or incurred (whether by suit, agreement,
or otherwise) to or at the direction of a government or
specified nongovernmental entity in relation to the violation
of any law or the investigation or inquiry by such government
or entity into the potential violation of any law. An exception
applies to payments that the taxpayer establishes are either
restitution (including remediation of property) or amounts
required to come into compliance with any law that was violated
or involved in the investigation or inquiry, that are
identified in the court order or settlement agreement as
restitution, remediation, or required to come into compliance.
In the case of any amount of restitution for failure to pay any
tax and assessed as restitution under the Code, such
restitution is deductible only to the extent it would have been
allowed as a deduction if it had been timely paid. The IRS
remains free to challenge the characterization of an amount so
identified; however, no deduction is allowed unless the
identification is made. Restitution or included remediation of
property does not include reimbursement of government
investigative or litigation costs.
The provision applies only where a government (or other
entity treated in a manner similar to a government under the
provision) is a complainant or investigator with respect to the
violation or potential violation of any law.\882\ An exception
also applies to any amount paid or incurred as taxes due.
---------------------------------------------------------------------------
\882\Thus, for example, the provision does not apply to payments
made by one private party to another in a lawsuit between private
parties, merely because a judge or jury acting in the capacity as a
court directs the payment to be made. The mere fact that a court enters
a judgment or directs a result in a private dispute does not cause the
payment to be made ``at the direction of a government'' for purposes of
the provision.
---------------------------------------------------------------------------
The provision requires government agencies (or entities
treated as such agencies under the provision) to report to the
IRS and to the taxpayer the amount of each settlement agreement
or order entered into where the aggregate amount required to be
paid or incurred to or at the direction of the government is at
least $600 (or such other amount as may be specified by the
Secretary of the Treasury as necessary to ensure the efficient
administration of the Internal Revenue laws). The report must
separately identify any amounts that are for restitution or
remediation of property, or correction of noncompliance. The
report must be made at the time the agreement is entered into,
as determined by the Secretary of the Treasury.
Effective date.--The provision denying the deduction and
the reporting provision are effective for amounts paid or
incurred on or after the date of enactment, except that it
would not apply to amounts paid or incurred under any binding
order or agreement entered into before such date. Such
exception does not apply to an order or agreement requiring
court approval unless the approval was obtained before such
date.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
19. Denial of deduction for settlements subject to nondisclosure
agreements paid in connection with sexual harassment or sexual
abuse (sec. 13307 of the Senate amendment and new sec. 162(q)
of the Code)
PRESENT LAW
A taxpayer generally is allowed a deduction for ordinary
and necessary expenses paid or incurred in carrying on any
trade or business.\883\ 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.
---------------------------------------------------------------------------
\883\Sec. 162(a).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, no deduction is allowed for any
settlement, payout, or attorney fees related to sexual
harassment or sexual abuse if such payments are subject to a
nondisclosure agreement.
Effective date.--The provision is effective for amounts
paid or incurred after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
20. Uniform treatment of expenses in contingency fee cases (sec. 3316
of the House 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.\884\
---------------------------------------------------------------------------
\884\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,\885\ others have allowed the current deduction because
the right of reimbursement was uncertain,\886\ and other cases
have denied the current deduction if the taxpayer's right to
reimbursement was subject to a contingency.
---------------------------------------------------------------------------
\885\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).
\886\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.\887\ 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.\888\
---------------------------------------------------------------------------
\887\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.
\888\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.\889\ 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.\890\
---------------------------------------------------------------------------
\889\Boccardo v. Commissioner, 56 F.3d 1016 (9th Cir. 1995), rev'g
65 T.C.M. 2739 (1993).
\890\1997 FSA LEXIS 442 (June 2, 1997).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
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 House bill, sec.
13401 of the Senate amendment, 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.\891\ 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.\892\
---------------------------------------------------------------------------
\891\Sec. 45C(b).
\892\Sec. 45C(d).
---------------------------------------------------------------------------
Amounts included in computing the credit under this
section are excluded from the computation of the research
credit under section 41.\893\
---------------------------------------------------------------------------
\893\Sec. 45C(c).
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
The Senate amendment reduces the credit rate to 27.5
percent of qualified clinical testing expenses.
Effective date.--The provision applies to amounts paid or
incurred in taxable years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
but reduces the credit rate to 25 percent of qualified clinical
testing expenses.
2. Repeal of employer-provided child care credit (sec. 3402 of the
House bill and sec. 42F 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.\894\
---------------------------------------------------------------------------
\894\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;\895\ (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.
---------------------------------------------------------------------------
\895\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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The Conference agreement does not follow the House bill
provision.
3. Rehabilitation credit (sec. 3403 of the House bill, sec. 13402 of
the Senate amendment, 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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
The Senate amendment repeals the 10-percent credit for
pre-1936 buildings. The provision retains the 20-percent credit
for qualified rehabilitation expenditures with respect to a
certified historic structure, with a modification. Under the
provision, the credit allowable for a taxable year during the
five-year period beginning in the taxable year in which the
qualified rehabilitated building is placed in service is an
amount equal to the ratable share. The ratable share for a
taxable year during the five-year period is amount equal to 20
percent of the qualified rehabilitation expenditures for the
building, as allocated ratably to each taxable year during the
five-year period. It is intended that the sum of the ratable
shares for the taxable years during the five-year period does
not exceed 100 percent of the credit for qualified
rehabilitation expenditures for the qualified rehabilitated
building.
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 (for
a pre-1936 building) with respect to any building owned or
leased (as provided under present law) 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.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with a modification to the transition rule under the effective
date relating to qualified rehabilitation expenditures under
certain phased rehabilitations for which the taxpayer may
select a 60-month period.
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 (for
either a certified historic structure or a pre-1936 building),
with respect to any building owned or leased (as provided under
present law) by the taxpayer at all times on and after January
1, 2018, the 24-month period selected by the taxpayer (section
47(c)(1)(C)(i)), or the 60-month period selected by the
taxpayer under the rule for phased rehabilitation (section
47(c)(1)(C)(ii)), 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 or 60-month period ends.
4. Repeal of work opportunity tax credit (sec. 3404 of the House 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
5. Repeal of deduction for certain unused business credits (sec. 3405
of the House bill, sec. 13403 of the Senate amendment, 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.\896\ 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.\897\
---------------------------------------------------------------------------
\896\Sec. 38.
\897\Sec. 39.
---------------------------------------------------------------------------
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.\898\
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\898\Sec. 196(d).
---------------------------------------------------------------------------
HOUSE BILL
This provision repeals the deduction for certain unused
business credits.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment follows the House bill.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
6. Termination of new markets tax credit (sec. 3406 of the House 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'').\899\ 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.\900\ 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.\901\ 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.\902\
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\899\Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
\900\Sec. 45D(a)(2).
\901\Sec. 45D(a)(3).
\902\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.\903\ 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.\904\ 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.\905\
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\903\Sec. 45D(c).
\904\Sec. 45D(b).
\905\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.\906\ 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.
---------------------------------------------------------------------------
\906\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.\907\ 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\908\ (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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\907\Sec. 45D(e)(2).
\908\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.\909\
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\909\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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
7. Repeal of credit for expenditures to provide access to disabled
individuals (sec. 3407 of the House 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.\910\
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\910\Sec. 38(b)(17).
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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.\911\ These expenditures\912\ include: (1) removal of
architectural, communication, physical or transportation
barriers which prevent a business from being usable or
accessible to individuals with disabilities;\913\ (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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\911\As in effect on November 5, 1990. Sec. 44(c)(1).
\912\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).
\913\Expenses related to this removal are not eligible in
connection with facilities placed in service after November 5, 1990.
Sec. 44(c)(4).
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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.\914\
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\914\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.
---------------------------------------------------------------------------
HOUSE BILL
The House bill repeals the credit for eligible access
expenditures.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
8. Modification of credit for portion of employer social security taxes
paid with respect to employee tips (sec. 3408 of the House 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'')\915\ 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.\916\ 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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\915\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.
\916\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.\917\ Certain large\918\ 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.\919\ Employee tip income that is reported by
employees is treated as employer-provided wages subject to
FICA.
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\917\Sec. 6053(a).
\918\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.
\919\Sec. 6053(c).
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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
9. Employer credit for paid family and medical leave (sec. 13403 of the
Senate amendment, and new sec. 45S of the Code)
PRESENT LAW
Present law does not provide a credit to employers for
compensation paid to employees while on leave.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision allows eligible employers to claim a
general business credit equal to 12.5 percent of the amount of
wages paid to qualifying employees during any period in which
such employees are on family and medical leave if the rate of
payment under the program is 50 percent of the wages normally
paid to an employee. The credit is increased by 0.25 percentage
points (but not above 25 percent) for each percentage point by
which the rate of payment exceeds 50 percent. The maximum
amount of family and medical leave that may be taken into
account with respect to any employee for any taxable year is 12
weeks.
An eligible employer is one who has in place a written
policy that allows all qualifying full-time employees not less
than two weeks of annual paid family and medical leave, and who
allows all less-than-full-time qualifying employees a
commensurate amount of leave on a pro rata basis. For purposes
of this requirement, leave paid for by a State or local
government is not taken into account. A ``qualifying employee''
means any employee as defined in section 3(e) of the Fair Labor
Standards Act of 1938 who has been employed by the employer for
one year or more, and who for the preceding year, had
compensation not in excess of 60 percent of the compensation
threshold for highly compensated employees.\920\ The Secretary
will make determinations as to whether an employer or an
employee satisfies the applicable requirements for an eligible
employer or qualifying employee, based on information provided
by the employer.
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\920\Sec. 414(g)(1)(B) ($120,000 for 2017).
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``Family and medical leave'' is defined as leave
described under sections 102(a)(1)(a)-(e) or 102(a)(3) of the
Family and Medical Leave Act of 1993.\921\ If an employer
provides paid leave as vacation leave, personal leave, or other
medical or sick leave, this paid leave would not be considered
to be family and medical leave.
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\921\In order to be an eligible employer, an employer must provide
certain protections applicable under the Family and Medical Leave Act
of 1993, regardless of whether they otherwise apply. Specifically, the
employer must provide paid family and medical leave in compliance with
a policy which ensures that the employer will not interfere with,
restrain, or deny the exercise of or the attempt to exercise, any right
provided under the policy and will not discharge or in any other manner
discriminate against any individual for opposing any practice
prohibited by the policy.
---------------------------------------------------------------------------
This proposal would not apply to wages paid in taxable
years beginning after December 31, 2019.
Effective date.--The provision is generally effective for
wages paid in taxable years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
F. Energy Credits
1. Modifications to credit for electricity produced from certain
renewable resources (sec. 3501 of the House 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'').\922\ 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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\922\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 for
Eligible electricity production 2017 (cents per Expiration\1\
activity (sec. 45) 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
------------------------------------------------------------------------
\1\Expires 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.\923\ In general, the credit is
available for electricity produced during the first 10 years
after a facility has been placed in service. Taxpayers may also
elect to get a 30-percent investment tax credit in lieu of this
production tax credit.\924\
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\923\The most recent inflation adjustment factors can be in IRS
Notice 2017-33, I.R.B. 2017-22, May 30, 2017.
\924\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'').\925\
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'').\926\ Both methods require that a
taxpayer make continuous progress towards completion once
construction has begun.\927\ 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.\928\ Collectively, these two tests are referred to as
the ``continuity requirement.''\929\
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\925\IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 2013.
\926\Ibid.
\927\Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, May 5,
2016.
\928\Ibid.
\929\Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
2. Modification of the energy investment tax credit (sec. 3502 of the
House bill and sec. 48 of the Code)
PRESENT LAW
In general
A permanent, nonrefundable, 10-percent business energy
credit\930\ 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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\930\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.\931\ An unused general business credit generally may be
carried back one year and carried forward 20 years.\932\ 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.
---------------------------------------------------------------------------
\931\Sec. 38(b)(1).
\932\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. In the case of non-wind
facilities, to make this election, construction must begin
before January 1, 2017. For wind facilities, the 30-percent
credit rate is reduced by 20 percent in the case of any wind
facility the construction of which begins in calendar year
2017, by 40 percent in the case of any wind facility the
construction of which begins in calendar year 2018, and by 60
percent in the case of any wind facility the construction of
which begins in calendar year 2019. The credit for wind
facilities expires for facilities the construction of which
begins after calendar year 2019.
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'').\933\
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'').\934\ Both methods require that a
taxpayer make continuous progress towards completion once
construction has begun.\935\ 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 taxpayers relying on the five percent safe
harbor must show ``continuous effort'' to complete the
project.\936\ Collectively, these two tests are referred to as
the ``continuity requirement.''\937\
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\933\IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 2013.
\934\Ibid.
\935\Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, May 5,
2016.
\936\Ibid.
\937\Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
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HOUSE BILL
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 includes a special rule for determining the
beginning of construction, which is intended to adopt 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 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
3. Extension and phaseout of residential energy efficient property
credit (sec. 3503 of the House 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
4. Repeal of enhanced oil recovery credit (sec. 3504 of the House 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.
HOUSE BILL
The provision repeals the enhanced oil recovery credit.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
5. Repeal of credit for producing oil and gas from marginal wells (sec.
3505 of the House 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
6. Modification of credit for production from advanced nuclear power
facilities (sec. 3506 of the House 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.\938\
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.
---------------------------------------------------------------------------
\938\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).
---------------------------------------------------------------------------
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.\939\
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\939\I.R.S. Notice 2013-68.
---------------------------------------------------------------------------
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.
HOUSE BILL
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.\940\ 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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\940\7 U.S.C. sec. 901 et seq.
---------------------------------------------------------------------------
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include in the House
bill.
G. Bond Reforms
1. Termination of private activity bonds (sec. 3601 of the House 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.\941\ 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'').
---------------------------------------------------------------------------
\941\Sec. 103.
---------------------------------------------------------------------------
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).\942\
---------------------------------------------------------------------------
\942\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.\943\
---------------------------------------------------------------------------
\943\Sec. 141(b)(5).
---------------------------------------------------------------------------
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.\944\ 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.\945\
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\944\Sec. 141(e).
\945\Sec. 142(a).
---------------------------------------------------------------------------
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.\946\
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\946\Sec. 3.20 of Rev. Proc. 2016-55, 2016-2 C.B. 707.
---------------------------------------------------------------------------
HOUSE BILL
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.\947\
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\947\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).
---------------------------------------------------------------------------
Effective date.--The provision applies to bonds issued
after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
2. Repeal of advance refunding bonds (sec. 3602 of the House bill, sec.
13532 of the Senate amendment, 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).\948\ 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.
---------------------------------------------------------------------------
\948\Sec. 141.
---------------------------------------------------------------------------
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.\949\ 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.
---------------------------------------------------------------------------
\949\Sec. 149(d)(5).
---------------------------------------------------------------------------
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.\950\ Private activity bonds, other than qualified
501(c)(3) bonds, may not be advance refunded at all.\951\
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.\952\
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\950\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.
\951\Sec. 149(d)(2).
\952\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.
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment follows the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
3. Repeal of tax credit bonds (sec. 3603 of the House 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.\953\
---------------------------------------------------------------------------
\953\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.
---------------------------------------------------------------------------
Qualified tax-credit bonds
General rules applicable to qualified tax-credit bonds\954\
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.\955\ 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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\954\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'').
\955\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.\956\ 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.
---------------------------------------------------------------------------
\956\Sec. 54C.
---------------------------------------------------------------------------
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.\957\
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\957\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.
---------------------------------------------------------------------------
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;\958\ (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);
---------------------------------------------------------------------------
\958\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.
---------------------------------------------------------------------------
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.\959\
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\959\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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
4. No tax-exempt bonds for professional stadiums (sec. 3604 of the
House 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.''\960\
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\960\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:
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
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'').\961\
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\961\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.\962\
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\962\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.\963\ 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.
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\963\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.\964\
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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\964\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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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
H. Insurance
1. Net operating losses of life insurance companies (sec. 3701 of the
House bill, sec. 13511 of the Senate amendment, 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.\965\
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\965\Sec. 172(b)(2).
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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.\966\
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\966\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.\967\ 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.\968\
---------------------------------------------------------------------------
\967\Secs. 810, 805(a)(5).
\968\Sec. 810(b)(1).
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HOUSE BILL
The provision repeals the operations loss deduction for
life insurance companies and allows the NOL deduction under
section 172.
Effective date.--The provision applies to losses arising
in taxable years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
2. Repeal of small life insurance company deduction (sec. 3702 of the
House bill, sec. 13512 of the Senate amendment, 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.
HOUSE BILL
The provision repeals the small life insurance company
deduction.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
3. Surtax on life insurance company taxable income (sec. 3703 of the
House 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.
HOUSE BILL
The provision imposes an additional eight-percent income
tax on life insurance company taxable income.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
provision.
4. Adjustment for change in computing reserves (sec. 3704 of the House
bill, sec. 13513 of the Senate amendment, 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.\969\
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\969\See, e.g., Rev. Proc. 2015-13, 2015-5 I.R.B. 419, and Rev.
Proc. 2017-30, 2017-18 I.R.B. 1131.
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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.\970\ 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.
---------------------------------------------------------------------------
\970\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.\971\ 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.
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\971\Sec. 807(f).
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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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
5. Repeal of special rule for distributions to shareholders from pre-
1984 policyholders surplus account (sec. 3705 of the House
bill, sec. 13514 of the Senate amendment, 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\972\ 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.\973\
---------------------------------------------------------------------------
\972\Pub. L. No. 98-369.
\973\Sec. 815.
---------------------------------------------------------------------------
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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
6. Modification of proration rules for property and casualty insurance
companies (sec. 3706 of the House bill, sec. 13515 of the
Senate amendment, 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.\974\ 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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\974\Sec. 832(b)(5).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
The provision replaces the 15-percent reduction under
present law with a reduction equal to 5.25 percent divided by
the top corporate tax rate. For 2018, the top corporate tax
rate is 35 percent, and the percentage reduction is 15 percent.
For 2019 and thereafter, the corporate tax rate is 20 percent,
and the percentage reduction is 26.25 percent under the
proration rule for property and casualty insurance companies.
The proration percentage will be automatically adjusted in the
future if the top corporate tax rate is changed, so that the
product of the proration percentage and the top corporate tax
rate always equals 5.25 percent.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
The top corporate tax rate is 21 percent for 2018 and
thereafter,\975\ so the percentage reduction is 25 percent
under the proration rule for property and casualty insurance
companies.
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\975\See Part II.A.1 (Reduction in corporate tax rate).
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7. Modification of discounting rules for property and casualty
insurance companies (sec. 3707 of the House bill and sec. 832
of the Code)
PRESENT LAW
A property and casualty insurance company generally is
subject to tax on its taxable income.\976\ 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.\977\ Among the items that are deductible in
calculating underwriting income are additions to reserves for
losses incurred and expenses incurred.
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\976\Sec. 831(a).
\977\Sec. 832.
---------------------------------------------------------------------------
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.\978\ 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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\978\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.
---------------------------------------------------------------------------
HOUSE BILL
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.\979\ 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.
---------------------------------------------------------------------------
\979\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.
---------------------------------------------------------------------------
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with
modifications. The corporate bond yield curve means, with
respect to any month, a yield curve that reflects the average,
for the preceding 60-month period (not 24-month period), of
monthly yields on investment grade corporate bonds with varying
maturities and that are in the top three quality levels
available. The present-law three-year period for discounting
certain lines of business other than long-tail lines of
business is not modified under the conference agreement. The
present-law 10-year period for certain long tail lines of
business is extended for a maximum of 14 more years (instead of
15 more years as under the House bill). The present-law
election permitting a taxpayer to use its own (rather than an
aggregate industry-experience-based) historical loss payment
pattern is repealed.
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 House
bill, sec. 13516 of the Senate amendment, 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.\980\ 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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\980\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\981\ 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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\981\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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
9. Computation of life insurance tax reserves (sec. 13517 of the Senate
amendment and sec. 807 of the Code)
PRESENT LAW
In general
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.\982\ 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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\982\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.
Interest rate
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. The applicable Federal interest rate is the annual rate
determined by the Secretary under the discounting rules for
property and casualty reserves for the calendar year in which
the contract is issued. The prevailing State assumed interest
rate is generally the highest assumed interest rate permitted
to be used in at least 26 States in computing life insurance
reserves for insurance or annuity contracts of that type as of
the beginning the calendar year in which the contract is
issued. In determining the highest assumed rates permitted in
at least 26 States, each State is treated as permitting the use
of every rate below its highest rate.
A one-time election is permitted (revocable only with the
consent of the Secretary) to apply an updated applicable
Federal interest rate every five years in calculating life
insurance reserves. The election is provided to take account of
the fluctuations in market rates of return that companies
experience with respect to life insurance contracts of long
duration. The use of the updated applicable Federal interest
rate under the election does not cause the recalculation of
life insurance reserves for any prior year. Under the election
no change is made to the interest rate used in determining life
insurance reserves if the updated applicable Federal interest
rate is less than one-half of one percentage point different
from the rate used by the company in calculating life insurance
reserves during the preceding five years.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides that for purposes of determining
the deduction for increases in certain reserves of a life
insurance company, the amount of the life insurance reserves
for any contract (other than certain variable contracts) is the
greater of (1) the net surrender value of the contract (if
any), or (2) 92.87 percent of the amount determined using the
tax reserve method otherwise applicable to the contract as of
the date the reserve is determined. In the case of a variable
contract, the amount of life insurance reserves for the
contract is the sum of (1) the greater of (a) the net surrender
value of the contract, or (b) the separate-account reserve
amount under section 817 for the contract, plus (2) 92.87
percent of the excess (if any) of the amount determined using
the tax reserve method otherwise applicable to the contract as
of the date the reserve is determined over the amount
determined in (1). In no event shall the reserves exceed the
amount which would be taken into account in determining
statutory reserves. No amount or item shall be taken into
account more than once in determining any reserve. As under
present law, no deduction for asset adequacy or deficiency
reserves is allowed. The amount of life insurance reserves may
not exceed the annual statement reserves. The provision
provides reserve rules for supplemental benefits and retains
present-law rules regarding certain contracts issued by foreign
branches of domestic life insurance companies.
Effective date.--The proposal applies to taxable years
beginning after December 31, 2017. For the first taxable year
beginning after December 31, 2017, the difference in the amount
of the reserve with respect to any contract at the end of the
preceding taxable year and the amount of such reserve
determined as if the proposal had applied for that year is
taken into account for each of the eight taxable years
following that preceding year, one-eighth per year.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
except that, instead of 92.87 percent, the percentage relating
to the statutory reserve is 92.81 percent. More specifically,
the provision provides that for purposes of determining the
deduction for increases in certain reserves of a life insurance
company, the amount of the life insurance reserves for any
contract (other than certain variable contracts) is the greater
of (1) the net surrender value of the contract (if any), or (2)
92.81 percent of the amount determined using the tax reserve
method otherwise applicable to the contract as of the date the
reserve is determined. In the case of a variable contract, the
amount of life insurance reserves for the contract is the sum
of (1) the greater of (a) the net surrender value of the
contract, or (b) the separate-account reserve amount under
section 817 for the contract, plus (2) 92.81 percent of the
excess (if any) of the amount determined using the tax reserve
method otherwise applicable to the contract as of the date the
reserve is determined over the amount determined in (1). In no
event shall the reserves exceed the amount which would be taken
into account in determining statutory reserves. As under
present law, no deduction for asset adequacy or deficiency
reserves is allowed.
The amount of life insurance reserves may not exceed the
annual statement reserves. A no-double-counting rule provides
that no amount or item is taken into account more than once in
determining any reserve under subchapter L of the Code. For
example, an amount taken into account in determining a loss
reserve under section 807 may not be taken into account again
in determining a loss reserve under section 832. Similarly, a
loss reserve determined under the tax reserve method (whether
the Commissioners Reserve Valuation Method, the Commissioner's
Annuity Reserve Valuation Method, a principles-based reserve
method, or another method developed in the future, that is
prescribed for a type of contract by the National Association
of Insurance Commissioners) may not again be taken into account
in determining the portion of the reserve that is separately
accounted for under section 817 or be included also in
determining the net surrender value of a contract.
The provision provides reserve rules for supplemental
benefits and retains present-law rules regarding certain
contracts issued by foreign branches of domestic life insurance
companies. The provision requires the Secretary to provide for
reporting (at such time and in such manner as the Secretary
shall prescribe) with respect to the opening balance and
closing balance or reserves and with respect to the method of
computing reserves for purposes of determining income. For this
purpose, the Secretary may require that a life insurance
company (including an affiliated group filing a consolidated
return that includes a life insurance company) is required to
report each of the line item elements of each separate account
by combining them with each such item from all other separate
accounts and the general account, and to report the combined
amounts on a line-by-line basis on the taxpayer's return.
Similarly, the Secretary may in such guidance provide that
reporting on a separate account by separate account basis is
generally not permitted. Under existing regulatory authority,
if the Secretary determines it is necessary in order to carry
out and enforce this provision, the Secretary may require e-
filing or comparable filing of the return on magnetic medial or
other machine readable form, and may require that the taxpayer
provide its annual statement via a link, electronic copy, or
other similar means.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017. For the first taxable year
beginning after December 31, 2017, the difference in the amount
of the reserve with respect to any contract at the end of the
preceding taxable year and the amount of such reserve
determined as if the proposal had applied for that year is
taken into account for each of the eight taxable years
following that preceding year, one-eighth per year.
10. Modification of rules for life insurance proration for purposes of
determining the dividends received deduction (sec. 13518 of the
Senate amendment and sec. 812 of the Code)
PRESENT LAW
Reduction of reserve deduction and dividends received deduction to
reflect untaxed income
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.\983\
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\983\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,\984\ 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.
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\984\Secs. 805(a)(4), 812.
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Company's share and policyholder's share
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.\985\ 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.\986\
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\985\Sec. 812(a).
\986\Sec. 812(c).
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Gross investment income includes specified items.\987\
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.
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\987\Sec. 812(d).
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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.\988\ 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.\989\
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\988\Sec. 812(b)(1). This portion is defined as gross investment
income's share of policyholder dividends.
\989\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,
December 31, 1984, p. 622, stating, ``[u]nder the Act, the formula used
for purposes of determining the policyholders' share is 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 200339049.
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In 2007, the IRS issued Rev. Rul. 2007-54,\990\
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.\991\ No regulations
have been issued to date.
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\990\2007-38 I.R.B. 604.
\991\2007-42 I.R.B. 799.
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General account and separate accounts
A variable contract is generally a life insurance (or
annuity) contract whose death benefit (or annuity payout)
depends explicitly on the investment return and market value of
underlying assets.\992\ The investment risk is generally that
of the policyholder, not the insurer. The assets underlying
variable contracts are maintained in separate accounts held by
life insurers. These separate accounts are distinct from the
insurer's general account in which it maintains assets
supporting products other than variable contracts.
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\992\Section 817(d) provides a more detailed definition of a
variable contract.
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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.\993\ 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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\993\Sec. 807.
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For purposes of determining the amount of the tax
reserves for variable contracts, however, a special rule
eliminates gains and losses. Under this rule,\994\ in
determining reserves for variable contracts, realized and
unrealized gains are subtracted, and realized and unrealized
losses are added, whether or not the assets have been disposed
of. The basis of assets in the separate account is increased to
reflect appreciation, and reduced to reflect depreciation in
value, that are taken into account in computing reserves for
such contracts.
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\994\Sec. 817.
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Dividends received deduction
A corporate taxpayer may partially or fully deduct
dividends received.\995\ The percentage of the allowable
dividends received deduction depends on the percentage of the
stock of the distributing corporation that the recipient
corporation owns.
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\995\Sec. 243 et seq. Conceptually, dividends received by a
corporation are retained in corporate solution; these amounts are taxed
when distributed to noncorporate shareholders.
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Limitation on dividends received deduction under section
246(c)(4)
The dividends received deduction is not allowed with
respect to stock either (1) held for 45 days or less during a
91-day period beginning 45 days before the ex-dividend date, or
(2) to the extent the taxpayer is under an obligation to make
related payments with respect to positions in substantially
similar or related property.\996\ The taxpayer's holding period
is reduced for periods during which its risk of loss is
reduced.\997\
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\996\Sec. 246(c).
\997\Sec. 246(c)(4). For this purpose, the holding period is
reduced for periods in which (1) the taxpayer has an obligation to sell
or has shorted substantially similar stock; (2) the taxpayer has
granted an option to buy substantially similar stock; or (3) under
Treasury regulations, the taxpayer has diminished its risk of loss by
holding other positions with respect to substantially similar or
related property.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies the life insurance company
proration rule for reducing dividends received deductions and
reserve deductions with respect to untaxed income. For purposes
of the life insurance proration rule of section 805(a)(4), the
company's share is 70 percent. The policyholder's share is 30
percent.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
11. Capitalization of certain policy acquisition expenses (sec. 13519
of the Senate amendment and sec. 848 of the Code)
PRESENT LAW
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.\998\
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\998\Sec. 848.
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A special rule provides for 60-month amortization of the
first $5 million of specified policy acquisition expenses with
a phase-out. The phase-out reduces the amount amortized over 60
months by the excess of the insurance company's specified
policy acquisition expenses for the taxable year over $10
million.
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.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision extends the amortization period for
specified policy acquisition expenses from a 120-month period
to the 180-month period beginning with the first month in the
second half of the taxable year. The provision does not change
the special rule providing for 60-month amortization of the
first $5 million of specified policy acquisition expenses (with
phaseout). The provision provides that for annuity contracts,
the percentage is 2.1 percent; for group life insurance
contracts, the percentage is 2.46 percent; and for all other
specified insurance contracts, the percentage is 9.24 percent.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications. Under the conference agreement, the
amortization period is 180 months. For annuity contracts, the
percentage is 2.09 percent; for group life insurance contracts,
the percentage is 2.45 percent; and for all other specified
insurance contracts, the percentage is 9.20 percent.
12. Tax reporting for life settlement transactions, clarification of
tax basis of life insurance contracts, and exception to
transfer for valuable consideration rules (secs. 13518 through
13520 of the Senate amendment and secs. 101, 1016, and 6050X of
the Code)
PRESENT LAW
An exclusion from Federal income tax is provided for
amounts received under a life insurance contract paid by reason
of the death of the insured.\999\
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\999\Sec. 101(a)(1). In the case of certain accelerated death
benefits and viatical settlements, special rules treat certain amounts
as amounts paid by reason of the death of an insured (that is,
generally, excludable from income). Sec. 101(g). The rules relating to
accelerated death benefits provide that amounts treated as paid by
reason of the death of the insured include any amount received under a
life insurance contract on the life of an insured who is a terminally
ill individual, or who is a chronically ill individual (provided
certain requirements are met). For this purpose, a terminally ill
individual is one who has been certified by a physician as having an
illness or physical condition which can reasonably be expected to
result in death in 24 months or less after the date of the
certification. A chronically ill individual is one who has been
certified by a licensed health care practitioner within the preceding
12-month period as meeting certain ability-related requirements. In the
case of a viatical settlement, if any portion of the death benefit
under a life insurance contract on the life of an insured who is
terminally ill or chronically ill is sold to a viatical settlement
provider, the amount paid for the sale or assignment of that portion is
treated as an amount paid under the life insurance contract by reason
of the death of the insured (that is, generally, excludable from
income). For this purpose, a viatical settlement provider is a person
regularly engaged in the trade or business of purchasing, or taking
assignments of, life insurance contracts on the lives of terminally ill
or chronically ill individuals (provided certain requirements are met).
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Under rules known as the transfer for value rules, if a
life insurance contract is sold or otherwise transferred for
valuable consideration, the amount paid by reason of the death
of the insured that is excludable generally is limited.\1000\
Under the limitation, the excludable amount may not exceed the
sum of (1) the actual value of the consideration, and (2) the
premiums or other amounts subsequently paid by the transferee
of the contract. Thus, for example, if a person buys a life
insurance contract, and the consideration he pays combined with
his subsequent premium payments on the contract are less than
the amount of the death benefit he later receives under the
contract, then the difference is includable in the buyer's
income.
---------------------------------------------------------------------------
\1000\Sec. 101(a)(2).
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Exceptions are provided to the limitation on the
excludable amount. The limitation on the excludable amount does
not apply if (1) the transferee's basis in the contract is
determined in whole or in part by reference to the transferor's
basis in the contract,\1001\ or (2) the transfer is to the
insured, to a partner of the insured, to a partnership in which
the insured is a partner, or to a corporation in which the
insured is a shareholder or officer.\1002\
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\1001\Sec. 101(a)(2)(A).
\1002\Sec. 101(a)(2)(B).
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IRS guidance sets forth more details of the tax treatment
of a life insurance policyholder who sells or surrenders the
life insurance contract and the tax treatment of other sellers
and of buyers of life insurance contracts. The guidance relates
to the character of taxable amounts (ordinary or capital) and
to the taxpayer's basis in the life insurance contract.
In Revenue Ruling 2009-13,\1003\ the IRS ruled that
income recognized under section 72(e) on surrender to the life
insurance company of a life insurance contract with cash value
is ordinary income. In the case of sale of a cash value life
insurance contract, the IRS ruled that the insured's (seller's)
basis is reduced by the cost of insurance, and the gain on sale
of the contract is ordinary income to the extent of the amount
that would be recognized as ordinary income if the contract
were surrendered (the ``inside buildup''), and any excess is
long-term capital gain. Gain on the sale of a term life
insurance contract (without cash surrender value) is long-term
capital gain under the ruling.
---------------------------------------------------------------------------
\1003\2009-21 I.R.B. 1029.
---------------------------------------------------------------------------
In Revenue Ruling 2009-14,\1004\ the IRS ruled that under
the transfer for value rules, a portion of the death benefit
received by a buyer of a life insurance contract on the death
of the insured is includable as ordinary income. The portion is
the excess of the death benefit over the consideration and
other amounts (e.g., premiums) paid for the contract. Upon sale
of the contract by the purchaser of the contract, the gain is
long-term capital gain, and in determining the gain, the basis
of the contract is not reduced by the cost of insurance.
---------------------------------------------------------------------------
\1004\2009-21 I.R.B. 1031.
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HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The provision imposes reporting requirements in the case
of the purchase of an existing life insurance contract in a
reportable policy sale and imposes reporting requirements on
the payor in the case of the payment of reportable death
benefits. The provision sets forth rules for determining the
basis of a life insurance or annuity contract. Lastly, the
provision modifies the transfer for value rules in a transfer
of an interest in a life insurance contract in a reportable
policy sale.
Reporting requirements for acquisitions of life insurance contracts
Reporting upon acquisition of life insurance contract
The reporting requirement applies to every person who
acquires a life insurance contract, or any interest in a life
insurance contract, in a reportable policy sale during the
taxable year. A reportable policy sale means the acquisition of
an interest in a life insurance contract, directly or
indirectly, if the acquirer has no substantial family,
business, or financial relationship with the insured (apart
from the acquirer's interest in the life insurance contract).
An indirect acquisition includes the acquisition of an interest
in a partnership, trust, or other entity that holds an interest
in the life insurance contract.
Under the reporting requirement, the buyer reports
information about the purchase to the IRS, to the insurance
company that issued the contract, and to the seller. The
information reported by the buyer about the purchase is (1) the
buyer's name, address, and taxpayer identification number
(``TIN''), (2) the name, address, and TIN of each recipient of
payment in the reportable policy sale, (3) the date of the
sale, (4) the name of the issuer, and (5) the amount of each
payment. The statement the buyer provides to any issuer of a
life insurance contract is not required to include the amount
of the payment or payments for the purchase of the contract.
Reporting of seller's basis in the life insurance contract
On receipt of a report described above, or on any notice
of the transfer of a life insurance contract to a foreign
person, the issuer is required to report to the IRS and to the
seller (1)) the name, address, and TIN of the seller or the
transferor to a foreign person, (2) the basis of the contract
(i.e., the investment in the contract within the meaning of
section 72(e)(6)), and (3) the policy number of the contract.
Notice of the transfer of a life insurance contract to a
foreign person is intended to include any sort of notice,
including information provided for nontax purposes such as
change of address notices for purposes of sending statements or
for other purposes, or information relating to loans, premiums,
or death benefits with respect to the contract.
Reporting with respect to reportable death benefits
When a reportable death benefit is paid under a life
insurance contract, the payor insurance company is required to
report information about the payment to the IRS and to the
payee. Under this reporting requirement, the payor reports (1)
the name, address and TIN of the person making the payment, (2)
the name, address, and TIN of each recipient of a payment, (3)
the date of each such payment, (4) the gross amount of the
payment (5) the payor's estimate of the buyer's basis in the
contract. A reportable death benefit means an amount paid by
reason of the death of the insured under a life insurance
contract that has been transferred in a reportable policy sale.
For purposes of these reporting requirements, a payment
means the amount of cash and the fair market value of any
consideration transferred in a reportable policy sale.
Determination of basis
The provision provides that in determining the basis of a
life insurance or annuity contract, no adjustment is made for
mortality, expense, or other reasonable charges incurred under
the contract (known as ``cost of insurance''). This reverses
the position of the IRS in Revenue Ruling 2009-13 that on sale
of a cash value life insurance contract, the insured's
(seller's) basis is reduced by the cost of insurance.
Scope of transfer for value rules
The provision provides that the exceptions to the
transfer for value rules do not apply in the case of a transfer
of a life insurance contract, or any interest in a life
insurance contract, in a reportable policy sale. Thus, some
portion of the death benefit ultimately payable under such a
contract may be includable in income.
Effective date.--Under the provision, the reporting
requirement is effective for reportable policy sales occurring
after December 31, 2017, and reportable death benefits paid
after December 31, 2017. The clarification of the basis rules
for life insurance and annuity contracts is effective for
transactions entered into after August 25, 2009. The
modification of exception to the transfer for value rules is
effective for transfers occurring after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
I. Compensation\1005\
1. Modification of limitation on excessive employee remuneration (sec.
3801 of the House bill, sec. 13601 of the Senate amendment, 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\1006\ is limited to no more than $1
million per year.\1007\ The deduction limitation applies when
the deduction attributable to the compensation would otherwise
be taken.
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\1005\Provisions relating to retirement plans are discussed in Part
I.E.
\1006\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).
\1007\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).\1008\
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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\1008\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).\1009\ 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\1010\ 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.\1011\
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\1009\Notice 2007-49, 2007-25 I.R.B. 1429.
\1010\By reason of being among the officers whose total
compensation is required to be reported to shareholders under the
Securities Exchange Act of 1934.
\1011\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.\1012\ 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 the 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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\1012\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.\1013\
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\1013\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\1014\; (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'')\1015\; (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\1016\); 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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\1014\Sec. 162(m)(4)(B).
\1015\Sec. 162(m)(4)(C).
\1016\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,\1017\ (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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\1017\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.
HOUSE BILL
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 is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment follows the House bill, except that
it adds a transition rule for remuneration which is provided
pursuant to a written binding contract which was in effect on
November 2, 2017 and which was not modified in any material
respect on or after such date.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017. A transition rule applies to
remuneration which is provided pursuant to a written binding
contract which was in effect on November 2, 2017 and which was
not modified in any material respect on or after such date.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
For purposes of the transition rule, compensation paid pursuant
to a plan qualifies for this exception provided that the right
to participate in the plan is part of a written binding
contract with the covered employee in effect on November 2,
2017. For example, suppose a covered employee was hired by XYZ
Corporation on October 2, 2017 and one of the terms of the
written employment contract is that the executive is eligible
to participate in the `XYZ Corporation Executive Deferred
Compensation Plan' in accordance with the terms of the plan.
Assume further that the terms of the plan provide for
participation after 6 months of employment, amounts payable
under the plan are not subject to discretion, and the
corporation does not have the right to amend materially the
plan or terminate the plan (except on a prospective basis
before any services are performed with respect to the
applicable period for which such compensation is to be paid).
Provided that the other conditions of the binding contract
exception are met (e.g., the plan itself is in writing),
payments under the plan are grandfathered, even though the
employee was not actually a participant in the plan on November
2, 2017.\1018\
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\1018\As discussed in the text below, the grandfather ceases to
apply if the plan is materially amended.
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The fact that a plan was in existence on November 2, 2017
is not by itself sufficient to qualify the plan for the
exception for binding written contracts.
The exception for remuneration paid pursuant to a binding
written contract ceases to apply to amounts paid after there
has been a material modification to the terms of the contract.
The exception does not apply to new contracts entered into or
renewed after November 2, 2017. For purposes of this rule, any
contract that is entered into on or before November 2, 2017 and
that is renewed after such date is treated as a new contract
entered into on the day the renewal takes effect. A contract
that is terminable or cancelable unconditionally at will by
either party to the contract without the consent of the other,
or by both parties to the contract, is treated as a new
contract entered into on the date any such termination or
cancellation, if made, would be effective. However, a contract
is not treated as so terminable or cancelable if it can be
terminated or cancelled only by terminating the employment
relationship of the covered employee.
2. Excise tax on excess tax-exempt organization executive compensation
(sec. 3802 of the House bill, sec. 13602 of the Senate
amendment, and sec. 4960 of the Code)
PRESENT LAW
Taxable employers and other service recipients generally
may deduct reasonable compensation expenses.\1019\ However, in
some cases, compensation in excess of specific levels is not
deductible.
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\1019\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.''\1020\ 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).\1021\
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\1020\Sec. 162(m)(1). Under section 162(m)(6), limits apply to
deductions for compensation of individuals performing services for
certain health insurance providers.
\1021\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.''\1022\ 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.\1023\ 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.\1024\ Certain
amounts are not considered parachute payments, including
payments under a qualified retirement plan, a simplified
employee pension plan, or a simple retirement account.\1025\
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\1022\Sec. 280G(a) and (b)(1).
\1023\Sec. 280G(b)(2) and (c).
\1024\Sec. 280G(b)(3).
\1025\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.
HOUSE BILL
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,\1026\ a Federal, State or local
governmental entity with excludable income,\1027\ or a
political organization.\1028\
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\1026\Sec. 521(b).
\1027\Sec. 115(1).
\1028\Sec. 527(e)(1).
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Remuneration means wages as defined for income tax
withholding purposes,\1029\ but does not include any designated
Roth contribution.\1030\ 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\1031\ during the
taxable year with respect to the organization, (4) is a
supporting organization\1032\ during the taxable year with
respect to the organization, or (5) in the case of a voluntary
employees' beneficiary association (``VEBA''),\1033\
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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\1029\Sec. 3401(a).
\1030\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.
\1031\Sec. 509(f)(3).
\1032\Sec. 509(a)(3).
\1033\Sec. 501(c)(9).
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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,\1034\ or an eligible deferred
compensation plan of a State or local government
employer.\1035\
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\1034\Sec. 403(b).
\1035\Sec. 457(b).
---------------------------------------------------------------------------
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 is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except that remuneration is treated as paid when there is no
substantial risk of forfeiture of the rights to such
remuneration. In addition, the definition of remuneration for
this purpose includes amounts required to be included in gross
income under section 457(f).\1036\
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\1036\Sec. 457(f) applies to an ``ineligible'' deferred
compensation plan of a State or local government or a tax-exempt
employer (that is, a plan that does not meet the requirements to be an
eligible plan under section 457(b)). Under an ineligible plan, deferred
amounts are treated as nonqualified deferred compensation and
includible in income for the first taxable year in which there is no
substantial risk of forfeiture of the rights to such compensation. For
this purpose, a person's rights to compensation are subject to a
substantial risk of forfeiture if the rights are conditioned on the
future performance of substantial services by any individual. Earnings
post-vesting are generally taxed when paid.
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CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications. Under the conference agreement, the tax
rate is equal to corporate tax rate, which is 21 percent under
the conference agreement. In addition, for purposes of the
requirement to treat remuneration as paid when the rights to
the remuneration are no longer subject to a substantial risk of
forfeiture, the conference agreement clarifies that
``substantial risk of forfeiture'' is based on the definition
under section 457(f)(3)(B) which applies to ineligible deferred
compensation subject to section 457(f). Accordingly, the tax
imposed by this provision can apply to the value of
remuneration that is vested (and any increases in such value or
vested remuneration) under this definition, even if it is not
yet received.
The conference agreement exempts compensation paid to
employees who are not highly compensated employees (within the
meaning of section 414(q)) from the definition of parachute
payment, and also exempts compensation attributable to medical
services of certain qualified medical professionals from the
definitions of remuneration and parachute payment. For purposes
of determining a covered employee, remuneration paid to a
licensed medical professional which is directly related to the
performance of medical or veterinary services by such
professional is not taken into account, whereas remuneration
paid to such a professional in any other capacity is taken into
account. A medical professional for this purpose includes a
doctor, nurse, or veterinarian.
3. Treatment of qualified equity grants (sec. 3803 of the House bill,
sec. 13603 of the Senate amendment, 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.\1037\ 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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\1037\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.\1038\ 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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\1038\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.\1039\ 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.\1040\ 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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\1039\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the
definition of substantial risk of forfeiture.
\1040\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.\1041\ 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.\1042\
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\1041\Sec. 83(h).
\1042\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.\1043\ 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.\1044\
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\1043\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.
\1044\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'').\1045\ Unless an
exception applies under the applicable rules, compensation
provided to an employee constitutes wages subject to these
taxes.
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\1045\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.\1046\
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\1046\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.\1047\
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.\1048\
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\1047\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.
\1048\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'').\1049\ 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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\1049\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.\1050\ 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.\1051\
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\1050\Secs. 6041 and 6051.
\1051\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'').\1052\ 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.\1053\ 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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\1052\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.
\1053\ 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.\1054\ However, certain special
reporting requirements apply.
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\1054\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,\1055\ 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\1056\), even if
payment will not occur until a later year.\1057\ 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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\1055\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.
\1056\Treas. Reg. sec. 1.409A-1(d).
\1057\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 a potential interest
factor tax (``409A taxes''). Section 409A and the additional 409A taxes
apply 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.\1058\ Nonqualified
options are not automatically exempt from section 409A, but may
be structured so as not to be considered nonqualified deferred
compensation.\1059\ 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.\1060\
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\1058\Treas. Reg. sec. 1.409A-1(b)(6).
\1059\Treas. Reg. sec. 1.409A-1(b)(5). In addition, statutory
option arrangements are not nonqualified deferred compensation
arrangements.
\1060\Sec. 404(a)(5).
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HOUSE BILL
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;1A\1061\
(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;\1062\ (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.\1063\
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\1061\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).
\1062\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.
\1063\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.\1064\ 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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\1064\Thus, as in the case of a section 83(b) election under
present law, the employee must file with the IRS the inclusion deferral
election and provide the employer with a copy.
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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.\1065\ 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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\1065\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.\1066\ 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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\1066\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,\1067\ (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),\1068\ or (4) who has been one of the four highest
compensated officers of the corporation for any of the 10
preceding taxable years.\1069\
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\1067\One-percent owner status is determined under the top-heavy
rules for qualified retirement plans, that is, section
416(i)(1)(B)(ii).
\1068\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.
\1069\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,\1070\ 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'').\1071\ 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.\1072\
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.\1073\
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\1070\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.
\1071\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.
\1072\Sec. 423(b)(5).
\1073\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.
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For purposes of the provision, corporations that are
members of the same controlled group\1074\ are treated as one
corporation.
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\1074\As defined in sec. 1563(a).
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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.\1075\ 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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\1075\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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except that, for purposes of determining corporations that are
members of the same controlled group and treated as one
corporation, the definition of controlled group under section
414(b) applies.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications. The conference agreement clarifies that (1)
when an inclusion deferral election is made with respect to
stock transferred under an ESPP, the option is not considered
an ESPP, such that when an inclusion deferral election is made
in connection with the exercise of both ESPPs and ISOs, the
options are not treated as statutory options but rather as
nonqualified stock options for FICA purposes (in addition to
being subject to section 83(i) for income tax purposes), (2) an
excluded employee includes an individual who first becomes a 1
percent owner or one of the 4 highest compensated officers in a
taxable year, notwithstanding that such individual may not have
been among such categories for the 10 preceding taxable years,
(3) the requirement that 80 percent of all applicable employees
be granted stock options or restricted stock units with the
same rights and privileges cannot be satisfied in a taxable
year by granting a combination of stock options and RSUs, and
instead all such employees must either be granted stock options
or be granted restricted stock units for that year, and (4) the
exception from treatment as a nonqualified deferred
compensation plan for purposes of section 409A applies solely
with respect to an employee who may receive qualified stock. It
is intended that the requirement that 80 percent of all
applicable employees be granted stock options or be granted
restricted stock units apply consistently to eligible
employees, whether they are new hires or existing employees.
Additionally, it is intended that the limited circumstances
outlined in section 83(c)(3) and applicable regulations apply
with respect to the determination of when stock first becomes
transferrable or is no longer subject to a substantial risk of
forfeiture. For example, income inclusion cannot be delayed due
to a lock-up period as a result of an initial public offering.
Finally, it is intended that the transition rule provided with
respect to compliance with the 80-percent and employer notice
requirements not be expanded beyond these specific items.
4. Increase in excise tax rate for stock compensation of insiders in
expatriated corporations (sec. 13604 of the Senate amendment
and sec. 4985 of the Code)
PRESENT LAW
Income tax treatment of employee stock compensation
In general
Employers may grant various forms of stock compensation
to employees,\1076\ including nonstatutory and statutory stock
options, restricted stock, restricted stock units, and stock
appreciation rights. The tax treatment of these various forms
of stock compensation depends on the specific terms and
conditions of the arrangement and applicable rules.
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\1076\The terms ``employer'' and ``employee'' are used, although
the provision herein also applies to individuals who are not employees
and the service recipients of such non-employee individuals.
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Stock compensation treated as property transferred in connection with
the performance of services
Section 83 generally governs the taxation of transfers of
any property in connection with the performance of services by
any service provider. Typically, this encompasses the transfer
of stock to an employee which is subject to conditions that
amount to a substantial risk of forfeiture, called ``restricted
stock.'' Section 83 also generally governs the taxation of
nonstatutory (or nonqualified) stock options. 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.\1077\
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\1077\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the
definition of substantial risk of forfeiture.
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Generally, an employee 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).\1078\
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\1078\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. 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).
---------------------------------------------------------------------------
These rules do not apply to the grant of a nonqualified
option unless the option has a readily ascertainable fair
market value.\1079\ Instead, these rules generally 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.
---------------------------------------------------------------------------
\1079\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.
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Statutory stock 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'').\1080\ Stock received pursuant to a statutory option
is subject to special rules, rather than the rules for
nonqualified options, discussed above. Unlike nonqualified
options, statutory options may only be considered as such if
granted to employees.\1081\ No amount is includible in an
employee's income on the grant, vesting, or exercise of a
statutory option.
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\1080\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.
\1081\Secs. 422(a)(2) and 423(a)(2).
---------------------------------------------------------------------------
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. 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.
Stock compensation treated as deferred compensation
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. An arrangement providing RSUs is
generally considered a nonqualified deferred compensation plan
and is subject to the rules, including the limits, of section
409A,\1082\ unless it meets an exemption from section 409A. If
the RSU either is exempt from or complies with section 409A,
the employee is subject to income taxation on receipt of cash
or the transfer of shares attributable to the RSU.
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\1082\Section 409A and the regulations thereunder provide rules for
nonqualified deferred compensation. Unless an 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),
even if payment will not occur until a later year. 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. Compensation that fails to meet
the requirements of section 409A is also subject to an additional
income tax of 20 percent on amounts includible in income and a
potential interest factor tax (``409A taxes''). Section 409A and the
additional 409A taxes apply to increases in the value of the failed
compensation each year until it is paid.
---------------------------------------------------------------------------
A stock appreciation right (``SAR'') is an arrangement
under which an employee has the right to receive an amount (in
the form of cash or stock) determined by reference to the
appreciation in value of one or more shares of employer stock,
based on the difference in the stock's value when the employee
chooses to exercise the right and the value of the stock on the
date of grant of the SAR. An SAR is generally taxable at the
time of exercise on the amount of cash or value of stock
transferred at the time of exercise of the SAR.\1083\
---------------------------------------------------------------------------
\1083\Rev. Rul. 80-300, 1980-2 C.B. 165.
---------------------------------------------------------------------------
Various exemptions from section 409A apply, including
transfers of property subject to section 83, such as restricted
stock.\1084\ Nonqualified options and SARs are not
automatically exempt from section 409A, but may be structured
so as not to be considered nonqualified deferred
compensation.\1085\ In addition, ISOs and ESPPs are exempt from
section 409A.\1086\
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\1084\Treas. Reg. sec. 1.409A-1(b)(6).
\1085\Treas. Reg. sec. 1.409A-1(b)(5).
\1086\Treas. Reg. sec. 1.409A-1(b)(5)(ii).
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Section 4985 excise tax on stock compensation of insiders of
expatriated corporations
Under section 4985, certain holders of stock options and
other stock-based compensation are subject to an excise tax
upon certain transactions that result in an expatriated
corporation\1087\ (also referred to as corporate
inversions).\1088\ The provision imposes an excise tax,
currently at the rate of 15 percent, on the value of specified
stock compensation held (directly or indirectly) by or for the
benefit of a disqualified individual, or a member of such
individual's family, at any time during the 12-month period
beginning six months before the corporation's expatriation
date. Specified stock compensation is treated as held for the
benefit of a disqualified individual if such compensation is
held by an entity, e.g., a partnership or trust, in which the
individual, or a member of the individual's family, has an
ownership interest.
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\1087\Sec. 7874(a)(2).
\1088\For further discussion of the tax treatment of expatriated
entities before the effective date of section 7874 and concerns that
led to the enactment of sections 7874 and 4985, see Joint Committee on
Taxation, General Explanation of Tax Legislation Enacted in the 108th
Congress (JCS-5-05), May 2005.
---------------------------------------------------------------------------
A disqualified individual is any individual who, with
respect to a corporation, is, at any time during the 12-month
period beginning on the date which is six months before the
expatriation date, subject to the requirements of section 16(a)
of the Securities and Exchange Act of 1934 with respect to the
corporation, or any member of the corporation's expanded
affiliated group,\1089\ or would be subject to such
requirements if the corporation (or member) were an issuer of
equity securities referred to in section 16(a). Disqualified
individuals generally include officers (as defined by section
16(a)),\1090\ directors, and 10-percent owners of private and
publicly-held corporations.
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\1089\An expanded affiliated group is an affiliated group (under
section 1504) except that such group is determined without regard to
the exceptions for certain corporations and is determined by
substituting ``more than 50 percent'' for ``at least 80 percent.''
\1090\An officer is defined as the president, principal financial
officer, principal accounting officer (or, if there is no such
accounting officer, the controller), any vice-president in charge of a
principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making
functions.
---------------------------------------------------------------------------
The excise tax is imposed on a disqualified individual of
an expatriated corporation (as defined for this purpose) only
if gain is recognized in whole or part by any shareholder by
reason of the acquisition resulting in the corporate
inversion.\1091\
---------------------------------------------------------------------------
\1091\As referred to in section 7874(a)(2)(B)(i).
---------------------------------------------------------------------------
Specified stock compensation subject to the excise tax
includes any payment (or right to payment)\1092\ granted by the
expatriated corporation (or any member of the corporation's
expanded affiliated group) to any person in connection with the
performance of services by a disqualified individual for such
corporation (or member of the corporation's expanded affiliated
group) if the value of the payment or right is based on, or
determined by reference to, the value or change in value of
stock of such corporation (or any member of the corporation's
expanded affiliated group). In determining whether such
compensation exists and valuing such compensation, all
restrictions, other than non-lapse restrictions, are ignored.
Thus, the excise tax applies, and the value subject to the tax
is determined, without regard to whether such specified stock
compensation is subject to a substantial risk of forfeiture or
is exercisable at the time of the corporate inversion.
Specified stock compensation includes compensatory stock and
restricted stock grants, compensatory stock options, and other
forms of stock-based compensation, including stock appreciation
rights, restricted stock units, phantom stock, and phantom
stock options. Specified stock compensation also includes
nonqualified deferred compensation that is treated as though it
were invested in stock or stock options of the expatriating
corporation (or member). For example, the provision applies to
a disqualified individual's nonqualified deferred compensation
if company stock is one of the actual or deemed investment
options under the nonqualified deferred compensation plan.
---------------------------------------------------------------------------
\1092\Under the provision, any transfer of property is treated as a
payment and any right to a transfer of property is treated as a right
to a payment.
---------------------------------------------------------------------------
Specified stock compensation includes a compensation
arrangement that gives the disqualified individual an economic
stake substantially similar to that of a corporate shareholder.
A payment directly tied to the value of the stock is specified
stock compensation.
The excise tax applies to any such specified stock
compensation previously granted to a disqualified individual
but cancelled or cashed-out within the six-month period ending
with the expatriation date, and to any specified stock
compensation awarded in the six-month period beginning with the
expatriation date. As a result, for example, if a corporation
cancels outstanding options three months before the transaction
and then reissues comparable options three months after the
transaction, the tax applies both to the cancelled options and
the newly granted options.
Specified stock compensation subject to the tax does not
include a statutory stock option or any payment or right from a
qualified retirement plan or annuity, a tax-sheltered annuity,
a simplified employee pension, or a simple retirement account.
In addition, under the provision, the excise tax does not apply
to any stock option that is exercised during the six-month
period before the expatriation date or to any stock acquired
pursuant to such exercise, if income is recognized under
section 83 on or before the expatriation date with respect to
the stock acquired pursuant to such exercise. The excise tax
also does not apply to any specified stock compensation that is
exercised, sold, exchanged, distributed, cashed out, or
otherwise paid during such period in a transaction in which
income, gain, or loss is recognized in full.
For specified stock compensation held on the expatriation
date, the amount of the tax is determined based on the value of
the compensation on such date. The tax imposed on specified
stock compensation cancelled during the six-month period before
the expatriation date is determined based on the value of the
compensation on the day before such cancellation, while
specified stock compensation granted after the expatriation
date is valued on the date granted. Under the provision, the
cancellation of a non-lapse restriction is treated as a grant.
The value of the specified stock compensation on which
the excise tax is imposed is the fair value in the case of
stock options (including warrants and other similar rights to
acquire stock) and stock appreciation rights and the fair
market value for all other forms of compensation. For purposes
of the tax, the fair value of an option (or a warrant or other
similar right to acquire stock) or a stock appreciation right
is determined using an appropriate option-pricing model, as
specified or permitted by the Treasury Secretary, that takes
into account the stock price at the valuation date; the
exercise price under the option; the remaining term of the
option; the volatility of the underlying stock and the expected
dividends on it; and the risk-free interest rate over the
remaining term of the option. Options that have no intrinsic
value (or ``spread'') because the exercise price under the
option equals or exceeds the fair market value of the stock at
valuation nevertheless have a fair value and are subject to tax
under the provision. The value of other forms of compensation,
such as phantom stock or restricted stock, is the fair market
value of the stock as of the date of the expatriation
transaction. The value of any deferred compensation that can be
valued by reference to stock is the amount that the
disqualified individual would receive if the plan were to
distribute all such deferred compensation in a single sum on
the date of the expatriation transaction (or the date of
cancellation or grant, if applicable).
The excise tax also applies to any payment by the
expatriated corporation or any member of the expanded
affiliated group made to an individual, directly or indirectly,
in respect of the tax. Whether a payment is made in respect of
the tax is determined under all of the facts and circumstances.
Any payment made to keep the individual in the same after-tax
position that the individual would have been in had the tax not
applied is a payment made in respect of the tax. This includes
direct payments of the tax and payments to reimburse the
individual for payment of the tax. Any payment made in respect
of the tax is includible in the income of the individual, but
is not deductible by the corporation.
To the extent that a disqualified individual is also a
covered employee under section 162(m), the limit on the
deduction allowed for employee remuneration for such employee
is reduced by the amount of any payment (including
reimbursements) made in respect of the tax under the provision.
As discussed above, this includes direct payments of the tax
and payments to reimburse the individual for payment of the
tax.
The payment of the excise tax has no effect on the
subsequent tax treatment of any specified stock compensation.
Thus, the payment of the tax has no effect on the individual's
basis in any specified stock compensation and no effect on the
tax treatment for the individual at the time of exercise of an
option or payment of any specified stock compensation, or at
the time of any lapse or forfeiture of such specified stock
compensation. The payment of the tax is not deductible and has
no effect on any deduction that might be allowed at the time of
any future exercise or payment.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision increases the 15 percent rate of excise
tax, imposed on the value of stock compensation held by
insiders of an expatriated corporation, to 20 percent.
Effective date.--The provision applies to corporations
first becoming expatriated corporations after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
J. Other Provisions
1. Treatment of gain or loss of foreign persons from sale or exchange
of interests in partnerships engaged in trade or business
within the United States (sec. 13501 of the Senate amendment
and secs. 864(c) and 1446 of the Code)
PRESENT LAW
In general
A partnership generally is not treated as a taxable
entity, but rather, income of the partnership is taken into
account on the tax returns of the partners. The character (as
capital or ordinary) of partnership items passes through to the
partners as if the items were realized directly by the
partners.\1093\ 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, and
deducts its distributive share of partnership items of
deduction and loss. A partner's basis in the partnership
interest is increased by any amount of gain and decreased by
any amount of losses thus included. These basis adjustments
prevent double taxation of partnership income to the partner.
Money distributed to the partner by the partnership is taxed to
the extent the amount exceeds the partner's basis in the
partnership interest.
---------------------------------------------------------------------------
\1093\Sec. 702.
---------------------------------------------------------------------------
Gain or loss from the sale or exchange of a partnership
interest generally is treated as gain or loss from the sale or
exchange of a capital asset.\1094\ However, the amount of money
and the fair market value of property received in the exchange
that represent the partner's share of certain ordinary income-
producing assets of the partnership give rise to ordinary
income rather than capital gain.\1095\ In general, a
partnership does not adjust the basis of partnership property
following the transfer of a partnership interest unless either
the partnership has made a one-time election to do so,\1096\ or
the partnership has a substantial built-in loss immediately
after the transfer.\1097\ If an election is in effect or the
partnership has a substantial built-in loss immediately after
the transfer, adjustments are made with respect to the
transferee partner. These adjustments are to account for the
difference between the transferee partner's proportionate share
of the adjusted basis of the partnership property and the
transferee partner's basis in its partnership interest.\1098\
The effect of the adjustments on the basis of partnership
property is to approximate the result of a direct purchase of
the property by the transferee partner.
---------------------------------------------------------------------------
\1094\Sec. 741; Pollack v. Commissioner, 69 T.C. 142 (1977).
\1095\Sec. 751(a). These ordinary income-producing assets are
unrealized receivables of the partnership or inventory items of the
partnership (``751 assets'').
\1096\Sec. 754.
\1097\Sec. 743(a).
\1098\Sec. 743(b).
---------------------------------------------------------------------------
Source of gain or loss on transfer of a partnership interest
A foreign person that is engaged in a trade or business
in the United States is taxed on income that is ``effectively
connected'' with the conduct of that trade or business
(``effectively connected gain or loss'').\1099\ Partners in a
partnership are treated as engaged in the conduct of a trade or
business within the United States if the partnership is so
engaged.\1100\ 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.\1101\
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\1099\Secs. 871(b), 864(c), 882.
\1100\Sec. 875.
\1101\Secs. 871(b)(2), and 882(a)(2). 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, and is collected by withholding at
the source of the payment. The income of non-resident aliens or foreign
corporations that is subject to tax at a rate of 30-percent is fixed,
determinable, annual or periodical income that is not effectively
connected with the conduct of a U.S. trade or business.
---------------------------------------------------------------------------
Among the factors taken into account in determining
whether income, gain, or loss is effectively connected gain or
loss are the extent to which the income, gain, or loss 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 income, gain, or loss (the ``asset use'' and ``business
activities'' tests).\1102\ In determining whether the asset use
or business activities tests are met, due regard is given to
whether such assets or such income, gain, or loss were
accounted for through such trade or business. Thus,
notwithstanding the general rule that source of gain or loss
from the sale or exchange of personal property is generally
determined by the residence of the seller,\1103\ a foreign
partner may have effectively connected income by reason of the
asset use or business activities of the partnership in which he
is an investor.
---------------------------------------------------------------------------
\1102\Sec. 864(c)(2).
\1103\Sec. 865(a).
---------------------------------------------------------------------------
Special rules apply to treat gain or loss from
disposition of U.S. real property interests as effectively
connected with the conduct of a U.S. trade or business.\1104\
To the extent that consideration received by the nonresident
alien or foreign corporation for all or part of its interest in
a partnership is attributable to a U.S. real property interest,
that consideration is considered to be received from the sale
or exchange in the United States of such property.\1105\ In
certain circumstances, gain attributable to sales of U.S. real
property interests may be subject to withholding tax of ten
percent of the amount realized on the transfer.\1106\
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\1104\Sec. 897(a), (g).
\1105\Sec. 897(g).
\1106\Sec. 1445(e)(5). Temp. Treas. Reg. sec. 1.1445-11T(b),(d).
---------------------------------------------------------------------------
Under a 1991 revenue ruling, in determining the source of
gain or loss from the sale or exchange of an interest in a
foreign partnership, the IRS applied the asset-use test and
business activities test at the partnership level to determine
the extent to which income derived from the sale or exchange is
effectively connected with that U.S. business.\1107\ Under the
ruling, if there is unrealized gain or loss in partnership
assets that would be treated as effectively connected with the
conduct of a U.S. trade or business if those assets were sold
by the partnership, some or all of the foreign person's gain or
loss from the sale or exchange of a partnership interest may be
treated as effectively connected with the conduct of a U.S.
trade or business. However, a 2017 Tax Court case rejects the
logic of the ruling and instead holds that, generally, gain or
loss on sale or exchange by a foreign person of an interest in
a partnership that is engaged in a U.S. trade or business is
foreign-source.\1108\
---------------------------------------------------------------------------
\1107\Rev. Rul. 91-32, 1991-1 C.B. 107.
\1108\See Grecian Magnesite Mining v. Commissioner, 149 T.C. No. 3
(July 13, 2017).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, gain or loss from the sale or
exchange of a partnership interest is effectively connected
with a U.S. trade or business to the extent that the transferor
would have had effectively connected gain or loss had the
partnership sold all of its assets at fair market value as of
the date of the sale or exchange. The provision requires that
any gain or loss from the hypothetical asset sale by the
partnership be allocated to interests in the partnership in the
same manner as nonseparately stated income and loss.
The provision also requires the transferee of a
partnership interest to withhold 10 percent of the amount
realized on the sale or exchange of a partnership interest
unless the transferor certifies that the transferor is not a
nonresident alien individual or foreign corporation. If the
transferee fails to withhold the correct amount, the
partnership is required to deduct and withhold from
distributions to the transferee partner an amount equal to the
amount the transferee failed to withhold.
The provision provides the Secretary of the Treasury with
specific regulatory authority to address coordination with the
nonrecognition provisions of the Code.
Effective date.--The provision is effective for sales and
exchanges on or after November 27, 2017.
CONFERENCE AGREEMENT
The conference agreement generally follows the Senate
amendment. The conference agreement modifies the grant of
authority to the Secretary of the Treasury to make clear that
the Secretary shall issues such regulations as the Secretary
determines appropriate for the application of the paragraph,
including in exchanges described in sections 332, 351, 354,
355, 356, or 361. The conference agreement also provides that
the provisions related to withholding are effective for sales
and exchanges after December 31, 2017. Additionally, the
conferees intend that, under regulatory authority provided by
the Senate amendment to carry out withholding requirements of
the provision, the Secretary may provide guidance permitting a
broker, as agent of the transferee, to deduct and withhold the
tax equal to 10 percent of the amount realized on the
disposition of a partnership interest to which the provision
applies. For example, such guidance may provide that if an
interest in a publicly traded partnership is sold by a foreign
partner through a broker, the broker may deduct and withhold
the 10-percent tax on behalf of the transferee.
Effective date.--The portion of the provision treating
gain or loss on sale of a partnership interest as effectively
connected income is effective for sales, exchanges, and
dispositions on or after November 27, 2017. The portion of the
provision requiring withholding on sales or exchanges of
partnership interests is effective for sales, exchanges, and
dispositions after December 31, 2017.
2. Modification of the definition of substantial built-in loss in the
case of transfer of partnership interest (sec. 13502 of the
Senate amendment and sec. 743 of the Code)
PRESENT LAW
In general, a partnership does not adjust the basis of
partnership property following the transfer of a partnership
interest unless either the partnership has made a one-time
election under section 754 to make basis adjustments, or the
partnership has a substantial built-in loss immediately after
the transfer.\1109\
---------------------------------------------------------------------------
\1109\Sec. 743(a).
---------------------------------------------------------------------------
If an election is in effect, or if the partnership has a
substantial built-in loss immediately after the transfer,
adjustments are made with respect to the transferee partner.
These adjustments are to account for the difference between the
transferee partner's proportionate share of the adjusted basis
of the partnership property and the transferee's basis in its
partnership interest.\1110\ The adjustments are intended to
adjust the basis of partnership property to approximate the
result of a direct purchase of the property by the transferee
partner.
---------------------------------------------------------------------------
\1110\Sec. 743(b).
---------------------------------------------------------------------------
Under the provision, a substantial built-in loss exists
if the partnership's adjusted basis in its property exceeds by
more than $250,000 the fair market value of the partnership
property.\1111\ Certain securitization partnerships and
electing investment partnerships are not treated as having a
substantial built-in loss in certain instances, and thus are
not required to make basis adjustments to partnership
property.\1112\ For electing investment partnerships, in lieu
of the partnership basis adjustments, a partner-level loss
limitation rule applies.\1113\
---------------------------------------------------------------------------
\1111\Sec. 743(d).
\1112\See sec. 743(e) (alternative rules for electing investment
partnerships) and sec. 743(f) (exception for securitization
partnerships).
\1113\Unlike in the case of an electing investment partnership, the
partner-level loss limitation rule does not apply for a securitization
partnership.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies the definition of a substantial
built-in loss for purposes of section 743(d), affecting
transfers of partnership interests. Under the provision, in
addition to the present-law definition, a substantial built-in
loss also exists if the transferee would be allocated a net
loss in excess of $250,000 upon a hypothetical disposition by
the partnership of all partnership's assets in a fully taxable
transaction for cash equal to the assets' fair market value,
immediately after the transfer of the partnership interest.
For example, a partnership of three taxable partners
(partners A, B, and C) has not made an election pursuant to
section 754. The partnership has two assets, one of which,
Asset X, has a built-in gain of $1 million, while the other
asset, Asset Y, has a built-in loss of $900,000. Pursuant to
the partnership agreement, any gain on sale or exchange of
Asset X is specially allocated to partner A. The three partners
share equally in all other partnership items, including in the
built-in loss in Asset Y. In this case, each of partner B and
partner C has a net built-in loss of $300,000 (one third of the
loss attributable to asset Y) allocable to his partnership
interest. Nevertheless, the partnership does not have an
overall built-in loss, but a net built-in gain of $100,000 ($1
million minus $900,000). Partner C sells his partnership
interest to another person, D, for $33,333. Under the
provision, the test for a substantial built-in loss applies
both at the partnership level and at the transferee partner
level. If the partnership were to sell all its assets for cash
at their fair market value immediately after the transfer to D,
D would be allocated a loss of $300,000 (one third of the
built-in loss of $900,000 in Asset Y). A substantial built-in
loss exists under the partner-level test added by the
provision, and the partnership adjusts the basis of its assets
accordingly with respect to D.
Effective date.--The provision applies to transfers of
partnership interests after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Effective date.--The provision applies to transfers of
partnership interests after December 31, 2017.
3. Charitable contributions and foreign taxes taken into account in
determining limitation on allowance of partner's share of loss
(sec. 13503 of the Senate amendment and sec. 704 of the Code)
PRESENT LAW
A partner's distributive share of partnership loss
(including capital loss) is allowed only to the extent of the
adjusted basis (before reduction by current year's losses) of
the partner's interest in the partnership at the end of the
partnership taxable year in which the loss occurred. Any
disallowed loss is allowable as a deduction at the end of the
first succeeding partnership taxable year, and subsequent
taxable years, to the extent that the partner's adjusted basis
for its partnership interest at the end of any such year
exceeds zero (before reduction by the loss for the year).\1114\
---------------------------------------------------------------------------
\1114\Sec. 704(d) and Treas. Reg. sec. 1.704-1(d)(1).
---------------------------------------------------------------------------
A partner's basis in its partnership interest is
increased by its distributive share of income (including tax
exempt income). A partner's basis in its partnership interest
is decreased (but not below zero) by distributions by the
partnership and its distributive share of partnership losses
and expenditures of the partnership not deductible in computing
partnership taxable income and not properly chargeable to
capital account.\1115\ In the case of a charitable
contribution, a partner's basis is reduced by the partner's
distributive share of the adjusted basis of the contributed
property.\1116\
---------------------------------------------------------------------------
\1115\Sec. 705(a).
\1116\Rev. Rul. 96-11, 1996-1 C. B. 140.
---------------------------------------------------------------------------
A partnership computes its taxable income in the same
manner as an individual with certain exceptions. The exceptions
provide, in part, that the deductions for foreign taxes and
charitable contributions are not allowed to the
partnership.\1117\ Instead, a partner takes into account its
distributive share of the foreign taxes paid by the partnership
and the charitable contributions made by the partnership for
the taxable year.\1118\
---------------------------------------------------------------------------
\1117\Sec. 703(a)(2)(B) and (C). In addition, section 703(a)(2)
provides that other deductions are not allowed to the partnership,
notwithstanding that the partnership's taxable income is computed in
the same manner as an individual's taxable income, specifically:
personal exemptions, net operating loss deductions, certain itemized
deductions for individuals, or depletion.
\1118\Sec. 702.
---------------------------------------------------------------------------
However, in applying the basis limitation on partner
losses, Treasury regulations do not take into account the
partner's share of partnership charitable contributions and
foreign taxes paid or accrued.\1119\ The IRS has taken the
position in a private letter ruling that the basis limitation
on partner losses does not apply to limit the partner's
deduction for its share of the partnership's charitable
contributions.\1120\ While the regulations relating to the loss
limitation do not mention the foreign tax credit, a taxpayer
may choose the foreign tax credit in lieu of deducting foreign
taxes.\1121\
---------------------------------------------------------------------------
\1119\The regulation provides that ``[i]f the partner's
distributive share of the aggregate of items of loss specified in
section 702(a)(1), (2), (3), (8) [now (7)], and (9) [now (8)] exceeds
the basis of the partner's interest computed under the preceding
sentence, the limitation on losses under section 704(d) must be
allocated to his distributive share of each such loss.'' The regulation
does not refer to section 702(a)(4) (charitable contributions) and
702(a)(6) (foreign taxes paid or accrued). Treas. Reg. sec. 1.704-
1(d)(2).
\1120\Priv. Ltr. Rul. 8405084. And see William S. McKee, William F.
Nelson and Robert L. Whitmire, Federal Taxation of Partnerships and
Partners, WG&L, 4th Edition (2011), paragraph 11.05[1][b], pp. 11-214
(noting that the ``failure to include charitable contributions in the
Sec. 704(d) limitation is an apparent technical flaw in the statute.
Because of it, a zero-basis partner may reap the benefits of a
partnership charitable contribution without an offsetting decrease in
the basis of his interest, whereas a fellow partner who happens to have
a positive basis may do so only at the cost of a basis decrease.'').
\1121\Sec. 901.
---------------------------------------------------------------------------
By contrast, under S corporation rules limiting the
losses and deductions which may be taken into account by a
shareholder of an S corporation to the shareholder's basis in
stock and debt of the corporation, the shareholder's pro rata
share of charitable contributions and foreign taxes are taken
into account.\1122\ In the case of charitable contributions, a
special rule is provided prorating the amount of appreciation
not subject to the limitation in the case of charitable
contributions of appreciated property by the S
corporation.\1123\
---------------------------------------------------------------------------
\1122\Sec. 1366(d) and sec. 1366(a)(1). Under a related rule, the
shareholder's basis in his interest is decreased by the basis (rather
than the fair market value) of appreciated property by reason of a
charitable contribution of the property by the S corporation (sec.
1367(a)(2)).
\1123\Sec. 1366(d)(4).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies the basis limitation on partner
losses to provide that the limitation takes into account a
partner's distributive share of partnership charitable
contributions (as defined in section 170(c)) and taxes
(described in section 901) paid or accrued to foreign countries
and to possessions of the United States. Thus, the amount of
the basis limitation on partner losses is decreased to reflect
these items. In the case of a charitable contribution by the
partnership, the amount of the basis limitation on partner
losses is decreased by the partner's distributive share of the
adjusted basis of the contributed property. In the case of a
charitable contribution by the partnership of property whose
fair market value exceeds its adjusted basis, a special rule
provides that the basis limitation on partner losses does not
apply to the extent of the partner's distributive share of the
excess.
Effective date.--The provision applies to partnership
taxable years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Effective date.--The provision applies to partnership
taxable years beginning after December 31, 2017.
4. Cost basis of specified securities determined without regard to
identification (sec. 13533 of the Senate amendment and sec.
1012 of the Code)
PRESENT LAW
In general
Gain or loss generally is recognized for Federal income
tax purposes on realization of that gain or loss (for example,
as the result of sale of property). The taxpayer's gain or loss
on a disposition of property is the difference between the
amount realized on the sale and the taxpayer's adjusted basis
in the property disposed of.\1124\
---------------------------------------------------------------------------
\1124\Sec. 1001.
---------------------------------------------------------------------------
To compute adjusted basis, a taxpayer must first
determine the property's unadjusted or original basis and then
make adjustments prescribed by the Code.\1125\ The original
basis of property is its cost, except as otherwise prescribed
by the Code (for example, in the case of property acquired by
gift or bequest or in a tax-free exchange). Once determined,
the taxpayer's original basis generally is adjusted downward to
take account of depreciation or amortization, and generally is
adjusted upward to reflect income and gain inclusions or
capital improvements with respect to the property.
---------------------------------------------------------------------------
\1125\Sec. 1016.
---------------------------------------------------------------------------
Basis computation rules
If a taxpayer has acquired stock in a corporation on
different dates or at different prices and sells or transfers
some of the shares of that stock, and the lot from which the
stock is sold or transferred is not adequately identified, the
shares sold are deemed to be drawn from the earliest acquired
shares (the ``first-in-first-out rule'').\1126\ However, if a
taxpayer makes an adequate identification (``specific
identification'') of shares of stock that it sells, the shares
of stock treated as sold are the shares that have been
identified.\1127\ A taxpayer who owns shares in a regulated
investment company (``RIC'') generally is permitted to elect,
in lieu of the specific identification or first-in-first-out
methods, to determine the basis of RIC shares sold under one of
two average-cost-basis methods described in Treasury
regulations (together, the ``average basis method'').\1128\
---------------------------------------------------------------------------
\1126\Treas. Reg. sec. 1.1012-1(c)(1).
\1127\Treas. Reg. sec. 1.1012-1(c)(2).
\1128\Treas. Reg. sec. 1.1012-1(e).
---------------------------------------------------------------------------
In the case of the sale, exchange, or other disposition
of a specified security (defined below) to which the basis
reporting requirement described below applies, the first-in-
first-out rule, specific identification, and average basis
method conventions are applied on an account by account
basis.\1129\ To facilitate the determination of the cost of RIC
stock under the average basis method, RIC stock acquired before
January 1, 2012, generally is treated as a separate account
from RIC stock acquired on or after that date unless the RIC
(or a broker holding the stock as a nominee) elects otherwise
with respect to one or more of its stockholders, in which case
all the RIC stock with respect to which the election is made is
treated as a single account and the basis reporting requirement
described below applies to all that stock.\1130\
---------------------------------------------------------------------------
\1129\Sec. 1012(c)(1).
\1130\Sec. 1012(c)(2).
---------------------------------------------------------------------------
The basis of stock acquired after December 31, 2010, in
connection with a dividend reinvestment plan (``DRP'') is
determined under the average basis method for as long as the
stock is held as part of that plan.\1131\
---------------------------------------------------------------------------
\1131\Sec. 1012(d)(1). Other special rules apply to DRP stock. See
sec. 1012(d)(2) and (3).
---------------------------------------------------------------------------
Basis reporting
A broker is required to report to the IRS a customer's
adjusted basis in a covered security that the customer has sold
and whether any gain or loss from the sale is long-term or
short-term.\1132\
---------------------------------------------------------------------------
\1132\Sec. 6045(g); Treas. Reg. sec. 1.6045-1(d).
---------------------------------------------------------------------------
A covered security is, in general, any specified security
acquired after an applicable date specified in the basis
reporting rules. A specified security is any share of stock of
a corporation (including stock of a RIC); any note, bond,
debenture, or other evidence of indebtedness; any commodity, or
contract or derivative with respect to such commodity, if the
Treasury Secretary determines that adjusted basis reporting is
appropriate; and any other financial instrument with respect to
which the Treasury Secretary determines that adjusted basis
reporting is appropriate.
For purposes of satisfying the basis reporting
requirements, a broker must determine a customer's adjusted
basis in accordance with rules intended to ensure that the
broker's reported adjusted basis numbers are the same numbers
that customers must use in filing their tax returns.\1133\
---------------------------------------------------------------------------
\1133\See sec. 6045(g)(2).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision requires that the cost of any specified
security sold, exchanged, or otherwise disposed of on or after
January 1, 2018, be determined on a first-in first-out basis
except to the extent the average basis method is otherwise
allowed (as in the case of a taxpayer holding shares in a RIC).
The provision does not apply to sales, exchanges, or other
dispositions of specified securities by RICs.
The provision includes several conforming amendments,
including a rule restricting a broker's basis reporting method
to the first-in first-out method in the case of the sale of any
stock for which the average basis method is not permitted.
Effective date.--The provision applies to sales,
exchanges, and other dispositions after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
5. Expansion of qualifying beneficiaries of an electing small business
trust (sec. 13541 of the Senate amendment and sec. 1361 of the
Code)
PRESENT LAW
An electing small business trust (``ESBT'') may be a
shareholder of an S corporation.\1134\ Generally, the eligible
beneficiaries of an ESBT include individuals, estates, and
certain charitable organizations eligible to hold S corporation
stock directly. A nonresident alien individual may not be a
shareholder of an S corporation and may not be a potential
current beneficiary of an ESBT.\1135\
---------------------------------------------------------------------------
\1134\Sec. 1361(c)(2)(A)(v).
\1135\Sec. 1361(b)(1)(C) and (c)(2)(B)(v).
---------------------------------------------------------------------------
The portion of an ESBT which consists of the stock of an
S corporation is treated as a separate trust and generally is
taxed on its share of the S corporation's income at the highest
rate of tax imposed on individual taxpayers. This income
(whether or not distributed by the ESBT) is not taxed to the
beneficiaries of the ESBT.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment allows a nonresident alien
individual to be a potential current beneficiary of an ESBT.
Effective date.--The provision takes effect on January 1,
2018.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
6. Charitable contribution deduction for electing small business trusts
(sec. 13542 of the Senate amendment and sec. 642(c) of the
Code)
PRESENT LAW
An electing small business trust (``ESBT'') may be a
shareholder of an S corporation.\1136\ The portion of an ESBT
that consists of the stock of an S corporation is treated as a
separate trust and generally is taxed on its share of the S
corporation's income at the highest rate of tax imposed on
individual taxpayers. This income (whether or not distributed
by the ESBT) is not taxed to the beneficiaries of the ESBT. In
addition to nonseparately computed income or loss, an S
corporation reports to its shareholders their pro rata share of
certain separately stated items of income, loss, deduction, and
credit.\1137\ For this purpose, charitable contributions (as
defined in section 170(c)) of an S corporation are separately
stated and taken by the shareholder.
---------------------------------------------------------------------------
\1136\Sec. 1361(c)(2)(A)(v).
\1137\Sec. 1366(a)(1).
---------------------------------------------------------------------------
The treatment of a charitable contribution passed through
by an S corporation depends on the shareholder. Because an ESBT
is a trust, the deduction for charitable contributions
applicable to trusts,\1138\ rather than the deduction
applicable to individuals,\1139\ applies to the trust.
Generally, a trust is allowed a charitable contribution
deduction for amounts of gross income, without limitation,
which pursuant to the terms of the governing instrument are
paid for a charitable purpose. No carryover of excess
contributions is allowed. An individual is allowed a charitable
contribution deduction limited to certain percentages of
adjusted gross income generally with a five-year carryforward
of amounts in excess of this limitation.
---------------------------------------------------------------------------
\1138\Sec. 642(c).
\1139\Sec. 170.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that the charitable
contribution deduction of an ESBT is not determined by the
rules generally applicable to trusts but rather by the rules
applicable to individuals. Thus, the percentage limitations and
carryforward provisions applicable to individuals apply to
charitable contributions made by the portion of an ESBT holding
S corporation stock.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
7. Production period for beer, wine, and distilled spirits (sec. 13801
of the Senate amendment and sec. 263A of the Code)
PRESENT LAW
In general
The uniform capitalization (``UNICAP'') rules, which were
enacted as part of the Tax Reform Act of 1986,\1140\ 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.\1141\ 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.
---------------------------------------------------------------------------
\1140\Sec. 803(a) of Pub. L. No. 99-514 (1986).
\1141\Sec. 263A.
---------------------------------------------------------------------------
In the case of interest expense, the UNICAP rules apply
only to interest paid or incurred during the property's
production period\1142\ and that is allocable to property
produced by the taxpayer or acquired for resale which (1) is
either real property or property with a class life of at least
20 years, (2) has an estimated production period exceeding two
years, or (3) has an estimated production period exceeding one
year and a cost exceeding $1,000,000.\1143\ The production
period with respect to any property is the period beginning on
the date on which production of the property begins, and ending
on the date on which the property is ready to be placed in
service or held for sale.\1144\ In the case of property that is
customarily aged (e.g., tobacco, wine, and whiskey) before it
is sold, the production period includes the aging period.\1145\
---------------------------------------------------------------------------
\1142\See Treas. Reg. sec. 1.263A-12.
\1143\Sec. 263A(f).
\1144\Sec. 263A(f)(4)(B).
\1145\See Treas. Reg. sec. 1.263A-12(d)(1). See also TAM 9327007
(Mar. 31, 1993) (holding that producers of wine must include the time
that wine ages in bottles as part of the production period, which
concludes when the wine vintage is officially released to the
distribution chain).
---------------------------------------------------------------------------
Exceptions from UNICAP
Section 263A provides a number of exceptions to the
general 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 for
the preceding three-taxable year period;\1146\ such taxpayers
are not required to include additional section 263A costs in
inventory.
---------------------------------------------------------------------------
\1146\Sec. 263A(b)(2)(B). No statutory exception is available for
small taxpayers who produce property subject to section 263A. However,
a de minimis rule under Treasury regulations treats producers that use
the simplified production method and incur total indirect costs of
$200,000 or less in a taxable year as having no additional indirect
costs beyond those normally capitalized for financial accounting
purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv). However, the Chairman's
Mark of the ``Tax Cuts and Jobs Act'' proposes to expand the exception
for small taxpayers from the uniform capitalization rules. Under the
provision, any producer or reseller that meets the $15 million gross
receipts test is exempted from the application of section 263A. See
section III.B.4 of Description of the Chairman's Mark of the ``Tax Cuts
and Jobs Act'' (JCX-51-17), November 9, 2017.
---------------------------------------------------------------------------
Another exception exists for taxpayers who raise,
harvest, or grow trees.\1147\ 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 UNICAP rules do not apply to any animal
or plant having a reproductive period of two years or less,
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)).\1148\
---------------------------------------------------------------------------
\1147\Sec. 263A(c)(5).
\1148\Sec. 263A(d). See also section III.B.3 of Description of the
Chairman's Mark of the ``Tax Cuts and Jobs Act'' (JCX-51-17), November
9, 2017, which expands the universe of farming C corporations that may
use the cash method to include any farming C corporation that meets the
$15 million gross receipts test.
---------------------------------------------------------------------------
Freelance authors, photographers, and artists also are
exempt from section 263A for any qualified creative
expenses.\1149\ 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.
---------------------------------------------------------------------------
\1149\Sec. 263A(h).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment would exclude the aging periods for
beer, wine, and distilled spirits from the production period
for purposes of the UNICAP interest capitalization rules. Thus,
under the provision, producers of beer, wine and distilled
spirits are able to deduct interest expenses (subject to any
other applicable limitation) attributable to a shorter
production period.
The provision does not apply to interest costs paid or
accrued after December 31, 2019.
Effective date.--The provision is effective for interest
costs paid or accrued after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
8. Reduced rate of excise tax on beer (sec. 13802 of the Senate
amendment and sec. 5051 of the Code)
PRESENT LAW
Federal excise taxes are imposed at different rates on
distilled spirits, wine, and beer and are imposed on these
products when produced or imported. Generally, these excise
taxes are administered and enforced by the TTB, except the
taxes on imported bottled distilled spirits, wine, and beer are
collected by the Customs and Border Protection Bureau (the
``CBP'') of the Department of Homeland Security (under
delegation by the Secretary of the Treasury).
Liability for the excise tax on beer also come into
existence when the alcohol is produced but is not payable until
the beer is removed from the brewery for consumption or sale.
Generally, beer may be transferred between commonly owned
breweries without payment of tax; however, tax liability
follows these products. Imported bulk beer may be released from
customs custody without payment of tax and transferred in bond
to a brewery. Beer may be exported without payment of tax and
may be withdrawn without payment of tax or free of tax from the
production facility for certain authorized uses, including
industrial uses and non-beverage uses.
The rate of tax on beer is $18 per barrel (31
gallons).\1150\ Small brewers are subject to a reduced tax rate
of $7 per barrel on the first 60,000 barrels of beer
domestically produced and removed each year.\1151\ Small
brewers are defined as brewers producing fewer than two million
barrels of beer during a calendar year. The credit reduces the
effective per-gallon tax rate from approximately 58 cents per
gallon to approximately 22.6 cents per gallon for this beer.
---------------------------------------------------------------------------
\1150\Sec. 5051.
\1151\Sec. 5051(a)(2).
---------------------------------------------------------------------------
In the case of a controlled group, the two million barrel
limitation for small brewers is applied to the controlled
group, and the 60,000 barrels eligible for the reduced rate of
tax, are apportioned among the brewers who are component
members of such group. The term ``controlled group'' has the
meaning assigned to it by sec. 1563(a), except that the phrase
``more than 50 percent'' is substituted for the phrase ``at
least 80 percent'' in each place it appears in sec. 1563(a).
Individuals may produce limited quantities of beer for
personal or family use without payment of tax during each
calendar year. The limit is 200 gallons per calendar year for
households of two or more adults and 100 gallons per calendar
year for single-adult households.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment lowers the rate of tax on beer to
$16 per barrel on the first six million barrels brewed by the
brewer or imported by the importer. In general, in the case of
a controlled group of brewers, the six million barrel
limitation is applied and apportioned at the level of the
controlled group. Beer brewed or imported in excess of the six
million barrel limit would continue to be taxed at $18 per
barrel. In the case of small brewers, such brewers would be
taxed at a rate of $3.50 per barrel on the first 60,000 barrels
domestically produced, and $16 per barrel on any further
barrels produced. The same rules applicable to controlled
groups under present law apply with respect to this limitation.
For barrels of beer that have been brewed or produced
outside of the United States and imported into the United
States, the reduced tax rate may be assigned by the brewer to
any importer of such barrels pursuant to requirements set forth
by the Secretary of the Treasury in consultation with the
Secretary of Health and Human Services and the Secretary of the
Department of Homeland Security. These requirements are to
include: (1) a limitation to ensure that the number of barrels
of beer for which the reduced tax rate has been assigned by a
brewer to any importer does not exceed the number of barrels of
beer brewed or produced by such brewer during the calendar year
which were imported into the United States by such importer;
(2) procedures that allow a brewer and an importer to elect
whether to receive the reduced tax rate; (3) requirements that
the brewer provide any information as the Secretary of the
Treasury determines necessary and appropriate for purposes of
assignment of the reduced tax rate; and (4) procedures that
allow for revocation of eligibility of the brewer and the
importer for the reduced tax rate in the case of erroneous or
fraudulent information provided in (3) which the Secretary of
the Treasury deems to be material for qualifying for the
reduced tax rate.
Any importer making an election to receive the reduced
tax rate shall be deemed to be a member of the controlled group
of the brewer, within the meaning of sec. 1563(a), except that
the phrase ``more than 50 percent'' is substituted for the
phrase ``at least 80 percent'' in each place it appears in sec
1563(a).\1152\
---------------------------------------------------------------------------
\1152\Members of the controlled group may include foreign
corporations.
---------------------------------------------------------------------------
Under rules issued by the Secretary of the Treasury, two
or more entities (whether or not under common control) that
produce beer marketed under a similar brand, license,
franchise, or other arrangement shall be treated as a single
taxpayer for purposes of the excise tax on beer.
The provision does not apply for beer removed after
December 31, 2019.
Effective date.--The provision is effective for beer
removed after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
9. Transfer of beer between bonded facilities (sec. 13803 of the Senate
amendment and sec. 5414 of the Code)
PRESENT LAW
Federal excise taxes are imposed at different rates on
distilled spirits, wine, and beer and are imposed on these
products when produced or imported. Generally, these excise
taxes are administered and enforced by the TTB, except the
taxes on imported bottled distilled spirits, wine, and beer are
collected by the Customs and Border Protection Bureau (the
``CBP'') of the Department of Homeland Security (under
delegation by the Secretary of the Treasury). The rate of tax
on beer is $18 per barrel (31 gallons).\1153\
---------------------------------------------------------------------------
\1153\Sec. 5051.
---------------------------------------------------------------------------
Liability for the excise tax on beer also come into
existence when the alcohol is produced but is not payable until
the beer is removed from the brewery for consumption or sale.
Generally, beer may be transferred between commonly owned
breweries without payment of tax; however, tax liability
follows these products. Imported bulk beer may be released from
customs custody without payment of tax and transferred in bond
to a brewery. Beer may be exported without payment of tax and
may be withdrawn without payment of tax or free of tax from the
production facility for certain authorized uses, including
industrial uses and non-beverage uses.
Small domestic brewers are subject to a reduced tax rate
of $7 per barrel on the first 60,000 barrels of beer removed
each year.\1154\ Small brewers are defined as brewers producing
fewer than two million barrels of beer during a calendar year.
The credit reduces the effective per-gallon tax rate from
approximately 58 cents per gallon to approximately 22.6 cents
per gallon for this beer.
---------------------------------------------------------------------------
\1154\Sec. 5051(a)(2).
---------------------------------------------------------------------------
Individuals may produce limited quantities of beer for
personal or family use without payment of tax during each
calendar year. The limit is 200 gallons per calendar year for
households of two or more adults and 100 gallons per calendar
year for single-adult households.
Transfer rules and removals without tax
Certain removals or transfers of beer are exempt from
tax. Beer may be transferred without payment of the tax between
bonded premises under certain conditions specified in the
regulations.\1155\ The tax liability accompanies the beer that
is transferred in bond. However, beer may only be transferred
free of tax between breweries if both breweries are owned by
the same brewer.
---------------------------------------------------------------------------
\1155\Sec. 5414.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment relaxes the shared ownership
requirement of section 5414. Thus, under the provision, a
brewer may transfer beer from one brewery to another without
incurring tax, provided that: (i) the breweries are owned by
the same person; (ii) one brewery owns a controlling interest
in the other; (iii) the same person or persons have a
controlling interest in both breweries; or (iv) the proprietors
of the transferring and receiving premises are independent of
each other, and the transferor has divested itself of all
interest in the beer so transferred, and the transferee has
accepted responsibility for payment of the tax.
For purposes of transferring the tax liability pursuant
to (iv) above, such relief from liability shall be effective
from the time of removal from the transferor's bonded premises,
or from the time of divestment, whichever is later.
The provision does not apply for calendar quarters
beginning after December 31, 2019.
Effective date.--The provision applies to any calendar
quarters beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
10. Reduced rate of excise tax on certain wine (sec. 13804 of the
Senate amendment and sec. 5041 of the Code)
PRESENT LAW
In general
Under present law, excise taxes are imposed at different
rates on wine, depending on the wine's alcohol content and
carbonation levels. The following table outlines the present
rates of tax on wine.
---------------------------------------------------------------------------
\1156\A ``still wine'' is a non-sparkling wine. Most common table
wines are still wines.
\1157\A wine gallon is a U.S. liquid gallon.
------------------------------------------------------------------------
Tax (and Code Section) Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
``Still wines''\1156\ not more than 14 $1.07 per wine gallon\1157\
percent alcohol.
``Still wines'' more than 14 percent, $1.57 per wine gallon
but not more than 21 percent, alcohol.
``Still wines'' more than 21 percent, $3.15 per wine gallon
but not more than 24 percent, alcohol.
``Still wines'' more than 24 percent $13.50 per proof gallon
alcohol. (taxed as distilled
spirits)
Champagne and other sparkling wines... $3.40 per wine gallon
Artificially carbonated wines......... $3.30 per wine gallon
------------------------------------------------------------------------
Liability for the excise taxes on wine come into
existence when the wine is produced but is not payable until
the wine is removed from the bonded wine cellar or winery for
consumption or sale. Generally, bulk and bottled wine may be
transferred in bond between bonded premises; however, tax
liability follows these products. Bulk natural wine may be
released from customs custody without payment of tax and
transferred in bond to a winery. Wine may be exported without
payment of tax and may be withdrawn without payment of tax or
free of tax from the production facility for certain authorized
uses, including industrial uses and non-beverage uses.
Reduced rates and exemptions for certain wine producers
Wineries having aggregate annual production not exceeding
250,000 gallons (``small domestic producers'') receive a credit
against the wine excise tax equal to 90 cents per gallon (the
amount of a wine tax increase enacted in 1990) on the first
100,000 gallons of wine domestically produced and removed
during a calendar year.\1158\ The credit is reduced (but not
below zero) by one percent for each 1,000 gallons produced in
excess of 150,000 gallons; the credit does not apply to
sparkling wines. In the case of a controlled group, the 250,000
gallon limitation for wineries is applied to the controlled
group, and the 100,000 gallons eligible for the credit, are
apportioned among the wineries who are component members of
such group. The term ``controlled group'' has the meaning
assigned to it by sec. 1563(a), except that the phrase ``more
than 50 percent'' is substituted for the phrase ``at least 80
percent'' in each place it appears in sec 1563(a).
---------------------------------------------------------------------------
\1158\Sec. 5041(c).
---------------------------------------------------------------------------
Individuals may produce limited quantities of wine for
personal or family use without payment of tax during each
calendar year. The limit is 200 gallons per calendar year for
households of two or more adults and 100 gallons per calendar
year for single-adult households.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the credit against the wine
excise tax for small domestic producers, by removing the
250,000 wine gallon domestic production limitation (and thus
making the credit available for all wine producers and
importers). Additionally, under the provision, sparkling wine
producers and importers are now eligible for the credit. With
respect to wine produced in, or imported into, the United
States during a calendar year, the credit amount is (1) $1.00
per wine gallon for the first 30,000 wine gallons of wine,
plus; (2) 90 cents per wine gallon on the next 100,000 wine
gallons of wine, plus; (3) 53.5 cents per wine gallon on the
next 620,000 wine gallons of wine.\1159\ There is no phaseout
of the credit.
---------------------------------------------------------------------------
\1159\The credit rate for hard cider is tiered at the same level of
production or importation, but is equal to 6.2 cents, 5.6 cents and 3.3
cents, respectively.
---------------------------------------------------------------------------
In the case of any wine gallons of wine that have been
produced outside of the United States and imported into the
United States, the tax credit allowable may be assigned by the
person who produced such wine (the ``foreign producer'') to any
electing importer of such wine gallons pursuant to requirements
established by the Secretary of the Treasury, in consultation
with the Secretary of Health and Human Services and the
Secretary of the Department of Homeland Security. These
requirements are to include: (1) a limitation to ensure that
the number of wine gallons of wine for which the tax credit has
been assigned by a foreign producer to any importer does not
exceed the number of wine gallons of wine produced by such
foreign producer, during the calendar year, which were imported
into the United States by such importer; (2) procedures that
allow the election of a foreign producer to assign, and an
importer to receive, the tax credit; (3) requirements that the
foreign producer provide any information that the Secretary of
the Treasury determines to be necessary and appropriate for
purposes of assigning the tax credit; and (4) procedures that
allow for revocation of eligibility of the foreign producer and
the importer for the tax credit in the case of erroneous or
fraudulent information provided in (3) which the Secretary of
the Treasury deems to be material for qualifying for the
reduced tax rate.
Any importer making an election to receive the reduced
tax rate shall be deemed to be a member of the controlled group
of the winemaker, within the meaning of sec. 1563(a), except
that the phrase ``more than 50 percent'' is substitute for the
phrase ``at least 80 percent'' in each place it appears in sec
1563(a).\1160\
---------------------------------------------------------------------------
\1160\Members of the controlled group may include foreign
corporations.
---------------------------------------------------------------------------
The provision does not apply for wine removed in calendar
quarters beginning after December 31, 2019.
Effective date.--The provision applies to wine removed
after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
11. Adjustment of alcohol content level for application of excise tax
rates (sec. 13805 of the Senate amendment and sec. 5041 of the
Code)
PRESENT LAW
In general
Under present law, excise taxes are imposed at different
rates on wine, depending on the wine's alcohol content and
carbonation levels. The following table outlines the present
rates of tax on wine.
---------------------------------------------------------------------------
\1161\A ``still wine'' is a non-sparkling wine. Most common table
wines are still wines.
\1162\A wine gallon is a U.S. liquid gallon.
------------------------------------------------------------------------
Tax (and Code Section) Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
``Still wines''\1161\ not more than 14 $1.07 per wine gallon\1162\
percent alcohol.
``Still wines'' more than 14 percent, $1.57 per wine gallon
but not more than 21 percent, alcohol.
``Still wines'' more than 21 percent, $3.15 per wine gallon
but not more than 24 percent, alcohol.
``Still wines'' more than 24 percent $13.50 per proof gallon
alcohol. (taxed as distilled
spirits)
Champagne and other sparkling wines... $3.40 per wine gallon
Artificially carbonated wines......... $3.30 per wine gallon
------------------------------------------------------------------------
Liability for the excise taxes on wine come into
existence when the wine is produced but is not payable until
the wine is removed from the bonded wine cellar or winery for
consumption or sale. Generally, bulk and bottled wine may be
transferred in bond between bonded premises; however, tax
liability follows these products. Bulk natural wine may be
released from customs custody without payment of tax and
transferred in bond to a winery. Wine may be exported without
payment of tax and may be withdrawn without payment of tax or
free of tax from the production facility for certain authorized
uses, including industrial uses and non-beverage uses.
Reduced rates and exemptions for certain wine producers
Wineries having aggregate annual production not exceeding
250,000 gallons (``small domestic producers'') receive a credit
against the wine excise tax equal to 90 cents per gallon (the
amount of a wine tax increase enacted in 1990) on the first
100,000 gallons of wine domestically produced and removed
during a calendar year.\1163\ The credit is reduced (but not
below zero) by one percent for each 1,000 gallons produced in
excess of 150,000 gallons; the credit does not apply to
sparkling wines. In the case of a controlled group, the 250,000
gallon limitation for wineries is applied to the controlled
group, and the 100,000 gallons eligible for the credit, are
apportioned among the wineries who are component members of
such group. The term ``controlled group'' has the meaning
assigned to it by sec. 1563(a), except that the phrase ``more
than 50 percent'' is substituted for the phrase ``at least 80
percent'' in each place it appears in sec. 1563(a).
---------------------------------------------------------------------------
\1163\Sec. 5041(c).
---------------------------------------------------------------------------
Individuals may produce limited quantities of wine for
personal or family use without payment of tax during each
calendar year. The limit is 200 gallons per calendar year for
households of two or more adults and 100 gallons per calendar
year for single-adult households.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies alcohol-by-volume levels of
the first two tiers of the excise tax on wine, by changing 14
percent to 16 percent. Thus, under the provision, a wine
producer or importer may produce or import ``still wine'' that
has an alcohol-by-volume level of up to 16 percent, and remain
subject to the lowest rate of $1.07 per wine gallon.
The provision does not apply to wine removed after
December 31, 2019.
Effective date.--The provision applies to wine removed
after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
12. Definition of mead and low alcohol by volume wine (sec. 13806 of
the Senate amendment and sec. 5041 of the Code)
PRESENT LAW
In general
Under present law, excise taxes are imposed at different
rates on wine, depending on the wine's alcohol content and
carbonation levels. The following table outlines the present
rates of tax on wine.
---------------------------------------------------------------------------
\1164\A ``still wine'' is a non-sparkling wine. Most common table
wines are still wines.
\1165\A wine gallon is a U.S. liquid gallon.
------------------------------------------------------------------------
Tax (and Code Section) Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
``Still wines''\1164\ not more than 14 $1.07 per wine gallon\1165\
percent alcohol.
``Still wines'' more than 14 percent, $1.57 per wine gallon
but not more than 21 percent, alcohol.
``Still wines'' more than 21 percent, $3.15 per wine gallon
but not more than 24 percent, alcohol.
``Still wines'' more than 24 percent $13.50 per proof gallon
alcohol. (taxed as distilled
spirits)
Champagne and other sparkling wines... $3.40 per wine gallon
Artificially carbonated wines......... $3.30 per wine gallon
------------------------------------------------------------------------
Liability for the excise taxes on wine come into
existence when the wine is produced but is not payable until
the wine is removed from the bonded wine cellar or winery for
consumption or sale. Generally, bulk and bottled wine may be
transferred in bond between bonded premises; however, tax
liability follows these products. Bulk natural wine may be
released from customs custody without payment of tax and
transferred in bond to a winery. Wine may be exported without
payment of tax and may be withdrawn without payment of tax or
free of tax from the production facility for certain authorized
uses, including industrial uses and non-beverage uses.
Reduced rates and exemptions for certain wine producers
Wineries having aggregate annual production not exceeding
250,000 gallons (``small domestic producers'') receive a credit
against the wine excise tax equal to 90 cents per gallon (the
amount of a wine tax increase enacted in 1990) on the first
100,000 gallons of wine domestically produced and removed
during a calendar year.\1166\ The credit is reduced (but not
below zero) by one percent for each 1,000 gallons produced in
excess of 150,000 gallons; the credit does not apply to
sparkling wines. In the case of a controlled group, the 250,000
gallon limitation for wineries is applied to the controlled
group, and the 100,000 gallons eligible for the credit, are
apportioned among the wineries who are component members of
such group. The term ``controlled group'' has the meaning
assigned to it by sec. 1563(a), except that the phrase ``more
than 50 percent'' is substituted for the phrase ``at least 80
percent'' in each place it appears in sec 1563(a).
---------------------------------------------------------------------------
\1166\Sec. 5041(c).
---------------------------------------------------------------------------
Individuals may produce limited quantities of wine for
personal or family use without payment of tax during each
calendar year. The limit is 200 gallons per calendar year for
households of two or more adults and 100 gallons per calendar
year for single-adult households.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment designates mead and certain
sparkling wines to be taxed at the lowest rate applicable to
``still wine,'' of $1.07 per wine gallon of wine. Mead is
defined as a wine that contains not more than 0.64 grams of
carbon dioxide per hundred milliliters of wine,\1167\ which is
derived solely from honey and water, contains no fruit product
or fruit flavoring, and contains less than 8.5 percent alcohol-
by-volume. The sparkling wines eligible to be taxed at the
lowest rate are those wines that contain not more than 0.64
grams of carbon dioxide per hundred milliliters of wine,\1168\
which are derived primarily from grapes or grape juice
concentrate and water, which contain no fruit flavoring other
than grape, and which contain less than 8.5 percent alcohol by
volume.
---------------------------------------------------------------------------
\1167\The Secretary is authorized to prescribe tolerances to this
limitation as may be reasonably necessary in good commercial practice.
\1168\The Secretary is authorized to prescribe tolerances to this
limitation as may be reasonably necessary in good commercial practice.
---------------------------------------------------------------------------
The provision does not apply to wine removed after
December 31, 2019.
Effective date.--The provision applies to wine removed
after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
13. Reduced rate of excise tax on certain distilled spirits (sec. 13807
of the Senate amendment and sec. 5001 of the Code)
PRESENT LAW
An excise tax is imposed on all distilled spirits
produced in, or imported into, the United States.\1169\ The tax
liability legally comes into existence the moment the alcohol
is produced or imported but payment of the tax is not required
until a subsequent withdrawal or removal from the distillery,
or, in the case of an imported product, from customs custody or
bond.\1170\
---------------------------------------------------------------------------
\1169\Secs. 5001.
\1170\Secs. 5006, 5043, and 5054. In general, proprietors of
distilled spirit plants, proprietors of bonded wine cellars, brewers,
and importers are liable for the tax.
---------------------------------------------------------------------------
Distilled spirits are taxed at a rate of $13.50 per proof
gallon.\1171\ Liability for the excise tax on distilled spirits
comes into existence when the alcohol is produced but is not
determined and payable until bottled distilled spirits are
removed from the bonded premises of the distilled spirits plant
where they are produced. Generally, bulk distilled spirits may
be transferred in bond between bonded premises; however, tax
liability follows these products. Imported bulk distilled
spirits may be released from customs custody without payment of
tax and transferred in bond to a distillery. Distilled spirits
be exported without payment of tax and may be withdrawn without
payment of tax or free of tax from the production facility for
certain authorized uses, including industrial uses and non-
beverage uses.
---------------------------------------------------------------------------
\1171\A ``proof gallon'' is a U.S. liquid gallon of proof spirits,
or the alcoholic equivalent thereof. Generally a proof gallon is a U.S.
liquid gallon consisting of 50 percent alcohol. On lesser quantities,
the tax is paid proportionately. Credits are allowed for wine content
and flavors content of distilled spirits. Sec. 5010.
---------------------------------------------------------------------------
A portion of the revenues from the distilled spirits
excise tax imposed on rum imported or brought into\1172\ the
United States (less certain administrative costs) is
transferred (``covered over'') to Puerto Rico and the U.S.
Virgin Islands.\1173\ The amount covered over is $10.50 per
proof gallon ($13.25 per proof gallon during the period from
July 1, 1999, through December 31, 2016).
---------------------------------------------------------------------------
\1172\Because Puerto Rico is inside U.S. customs territory,
articles entering the United States from that commonwealth are
``brought into'' rather than ``imported into'' the U.S.
\1173\Sec. 7652.
---------------------------------------------------------------------------
Eligible distilled spirits wholesale distributors and
distillers receive an income tax credit for the average cost of
carrying previously imposed excise tax on beverages stored in
their warehouses.\1174\
---------------------------------------------------------------------------
\1174\Sec. 5011. Section 5011 is administered and enforced by the
IRS.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment institutes a tiered rate for
distilled spirits. The rate of tax is lowered to $2.70 per
proof gallon on the first 100,000 proof gallons of distilled
spirits, $13.34 for all proof gallons in excess of that amount
but below 22,130,000 proof gallons, and $13.50 for amounts
thereafter. The provision contains rules so as to prevent
members of the same controlled group from receiving the lower
rate on more than 100,000 proof gallons of distilled spirits.
Importers of distilled spirits are eligible for the lower
rates.
The provision does not apply to distilled spirits removed
after December 31, 2019.
Effective date.--The provision applies to distilled
spirits removed after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
14. Bulk distilled spirits (sec. 13808 of the Senate amendment and sec.
5212 of the Code)
PRESENT LAW
An excise tax is imposed on all distilled spirits
produced in, or imported into, the United States.\1175\ The tax
liability legally comes into existence the moment the alcohol
is produced or imported but payment of the tax is not required
until a subsequent withdrawal or removal from the distillery,
or, in the case of an imported product, from customs custody or
bond.\1176\
---------------------------------------------------------------------------
\1175\Secs. 5001.
\1176\Secs. 5006, 5043, and 5054. In general, proprietors of
distilled spirit plants, proprietors of bonded wine cellars, brewers,
and importers are liable for the tax.
---------------------------------------------------------------------------
Distilled spirits are taxed at a rate of $13.50 per proof
gallon.\1177\ Liability for the excise tax on distilled spirits
comes into existence when the alcohol is produced but is not
determined and payable until bottled distilled spirits are
removed from the bonded premises of the distilled spirits plant
where they are produced. Generally, bulk distilled spirits may
be transferred in bond between bonded premises; however, tax
liability follows these products. Additionally, in order to
transfer such spirits in bond without payment of tax, such
spirits may not be transferred in containers smaller than one
gallon.\1178\ Imported bulk distilled spirits may be released
from customs custody without payment of tax and transferred in
bond to a distillery. Distilled spirits be exported without
payment of tax and may be withdrawn without payment of tax or
free of tax from the production facility for certain authorized
uses, including industrial uses and non-beverage uses.
---------------------------------------------------------------------------
\1177\A ``proof gallon'' is a U.S. liquid gallon of proof spirits,
or the alcoholic equivalent thereof. Generally a proof gallon is a U.S.
liquid gallon consisting of 50 percent alcohol. On lesser quantities,
the tax is paid proportionately. Credits are allowed for wine content
and flavors content of distilled spirits. Sec. 5010.
\1178\Sec. 5212.
---------------------------------------------------------------------------
A portion of the revenues from the distilled spirits
excise tax imposed on rum imported or brought into\1179\ the
United States (less certain administrative costs) is
transferred (``covered over'') to Puerto Rico and the U.S.
Virgin Islands.\1180\ The amount covered over is $10.50 per
proof gallon ($13.25 per proof gallon during the period from
July 1, 1999, through December 31, 2016).
---------------------------------------------------------------------------
\1179\Because Puerto Rico is inside U.S. customs territory,
articles entering the United States from that commonwealth are
``brought into'' rather than ``imported into'' the U.S.
\1180\Sec. 7652.
---------------------------------------------------------------------------
Eligible distilled spirits wholesale distributors and
distillers receive an income tax credit for the average cost of
carrying previously imposed excise tax on beverages stored in
their warehouses.\1181\
---------------------------------------------------------------------------
\1181\Sec. 5011. Section 5011 is administered and enforced by the
IRS.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment allows distillers to transfer
spirits in approved containers other than bulk containers in
bond without payment of tax.
The provision does not apply to distilled spirits
transferred in bond after December 31, 2019.
Effective date.--The provision applies to distilled
spirits transferred in bond after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
15. Modification of tax treatment of Alaska Native Corporations and
Settlement Trusts (sec. 13821 of the Senate amendment and sec.
6039H and new secs. 139G and 247 of the Code)
PRESENT LAW
The Alaska Native Claims Settlement Act (``ANCSA'')\1182\
established Native Corporations\1183\ to hold property for
Alaska Natives. Alaska Natives are generally the only permitted
common shareholders of those corporations under section 7(h) of
ANCSA, unless a Native Corporation specifically allows other
shareholders under specified procedures.
---------------------------------------------------------------------------
\1182\43 U.S.C. 1601 et seq.
\1183\Defined at 43 U.S.C. 1602(m).
---------------------------------------------------------------------------
ANCSA permits a Native Corporation to transfer money or
other property to an Alaska Native Settlement Trust
(``Settlement Trust'') for the benefit of beneficiaries who
constitute all or a class of the shareholders of the Native
Corporation, to promote the health, education and welfare of
beneficiaries and to preserve the heritage and culture of
Alaska Natives.\1184\
---------------------------------------------------------------------------
\1184\With certain exceptions, once an Alaska Native Corporation
has made a conveyance to a Settlement Trust, the assets conveyed shall
not be subject to attachment, distraint, or sale or execution of
judgment, except with respect to the lawful debts and obligations of
the Settlement Trust.
---------------------------------------------------------------------------
Native Corporations and Settlement Trusts, as well as
their shareholders and beneficiaries, are generally subject to
tax under the same rules and in the same manner as other
taxpayers that are corporations, trusts, shareholders, or
beneficiaries.
Special tax rules enacted in 2001 allow an election to
use a more favorable tax regime for transfers of property by a
Native Corporation to a Settlement Trust and for income
taxation of the Settlement Trust. There is also simplified
reporting to beneficiaries.
Under the special tax rules, a Settlement Trust may make
an irrevocable election to pay tax on taxable income at the
lowest rate specified for individuals, (rather than the highest
rate that is generally applicable to trusts) and to pay tax on
capital gains at a rate consistent with being subject to such
lowest rate of tax. As described further below, beneficiaries
may generally thereafter exclude from gross income
distributions from a trust that has made this election. Also,
contributions from a Native Corporation to an electing
Settlement Trust generally will not result in the recognition
of gross income by beneficiaries on account of the
contribution. An electing Settlement Trust remains subject to
generally applicable requirements for classification and
taxation as a trust.
A Settlement Trust distribution is excludable from the
gross income of beneficiaries to the extent of the taxable
income of the Settlement Trust for the taxable year and all
prior taxable years for which an election was in effect,
decreased by income tax paid by the Trust, plus tax-exempt
interest from State and local bonds for the same period.
Amounts distributed in excess of the amount excludable is taxed
to the beneficiaries as if distributed by the sponsoring Native
Corporation in the year of distribution by the Trust, which
means that the beneficiaries must include in gross income as
dividends the amount of the distribution, up to the current and
accumulated earnings and profits of the Native Corporation.
Amounts distributed in excess of the current and accumulated
earnings and profits are not included in gross income by the
beneficiaries.
A special loss disallowance rule reduces (but not below
zero) any loss that would otherwise be recognized upon
disposition of stock of a sponsoring Native Corporation by a
proportion, determined on a per share basis, of all
contributions to all electing Settlement Trusts by the
sponsoring Native Corporation. This rule prevents a stockholder
from being able to take advantage of a decrease in value of a
Native Corporation that is caused by a transfer of assets from
the Native Corporation to a Settlement Trust.
The fiduciary of an electing Settlement Trust is
obligated to provide certain information relating to
distributions from the trust in lieu of reporting requirements
under Section 6034A.
The election to pay tax at the lowest rate is not
available in certain disqualifying cases where transfer
restrictions have been modified to allow a transfer of either:
(a) a beneficial interest that would not be permitted by
section 7(h) of the Alaska Native Claims Settlement Act if the
interest were Settlement common stock, or (b) any stock in an
Alaska Native Corporation that would not be permitted by
section 7(h) if it were Settlement common stock and the Native
Corporation thereafter makes a transfer to the Trust. Where an
election is already in effect at the time of such disqualifying
transfers, the special rules applicable to an electing trust
cease to apply and rules generally applicable to trusts apply.
In addition, the distributable net income of the trust is
increased by undistributed current and accumulated earnings and
profits of the trust, limited by the fair market value of trust
assets at the date the trust becomes so disposable. The effect
is to cause the trust to be taxed at regular trust rates on the
amount of recomputed distributable net income not distributed
to beneficiaries, and to cause the beneficiaries to be taxed on
the amount of any distributions received consistent with the
applicable tax rate bracket.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision comprises three separate but related
sections. The first section allows a Native Corporation to
assign certain payments described in ANCSA to a Settlement
Trust without having to recognize gross income from those
payments, provided the assignment is in writing and the Native
Corporation has not received the payment prior to assignment.
The Settlement Trust is required to include the assigned
payment in gross income when received.
The second section allows a Native Corporation to elect
annually to deduct contributions made to a Settlement Trust. If
the contribution is in cash, the deduction is in the amount of
cash contributed. If the contribution is property other than
cash, the deduction is the amount of the Native Corporation's
basis in the contributed property (or the fair market value of
such property, if less than the Native Corporation's basis),
and no gain or loss can be recognized on the contribution. The
Native Corporation's deduction is limited to the amount of its
taxable income for that year, and any unused deduction may be
carried forward 15 additional years. The Native Corporation's
earnings and profits for the taxable year are reduced by the
amount of any deduction claimed for that year.
Generally, the Settlement Trust must include income equal
to the deduction by the Native Corporation. For contributions
of property other than cash, the Settlement Trust takes a basis
in the property equal to its basis in the hands of the Native
Corporation immediately before the contribution (or the fair
market value of such property, if less than the Native
Corporation's basis), and may elect to defer recognition of
income associated with such property until the Settlement Trust
sells or disposes of the property. In that case, any income
that is deferred (i.e., the amount of income that would have
been included upon contribution absent the election to defer)
is treated as ordinary income, while any gain in excess of the
amount that is deferred takes the same character as if the
election had not been made. If property subject to this
election is disposed of within the first taxable year
subsequent to the taxable year in which the property was
contributed to the Settlement Trust, the election is voided
with respect to the property, and the Settlement Trust is
required to pay any tax applicable to the disposition of the
property, including interest, as well as a penalty of 10
percent of the amount of the tax. The provision provides for a
four year assessment period in which to assess the tax,
interest, and penalty amounts. The provision permits the
amendment of the terms of any Settlement Trust agreement to
allow this election within one year of the enactment of the
provision, with certain restrictions.
The third section of the provision requires any Native
Corporation which has made an election to deduct contributions
to a Settlement Trust as described above to furnish a statement
to the Settlement Trust containing: (1) the total amount of
contributions; (2) whether such contribution was in cash; (3)
for non-cash contributions, the date that such property was
acquired by the Native Corporation and the adjusted basis of
such property on the contribution date; (4) the date on which
each contribution was made to the Settlement Trust; and (5)
such information as the Secretary determines is necessary for
the accurate reporting of income relating to such
contributions.
Effective date.--The provision relating to the exclusion
for ANCSA payments assigned to Settlement Trusts is effective
to taxable years beginning after December 31, 2016.
The provision relating to the deduction of contributions
is effective for taxable years for which the Native
Corporation's refund statute of limitations period has not
expired, and the provision provides a one-year waiver of the
refund statute of limitations period in the event that the
limitation period expires before the end of the one-year period
beginning on the date of enactment.
The provision relating to the reporting requirement
applies to taxable years beginning after December 31, 2016.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
16. Amounts paid for aircraft management services (sec. 13822 of the
Senate amendment and sec. 4261 of the Code)
PRESENT LAW
Excise tax on taxable transportation by air
For domestic passenger transportation, section 4261
imposes an excise tax on amounts paid for taxable
transportation. In general, for domestic flights, the tax
consists of two parts: a 7.5 percent ad valorem tax applied to
the amount paid and a flat dollar amount for each flight
segment (consisting of one takeoff and one landing). ``Taxable
transportation'' generally means transportation by air which
begins and ends in the United States. The tax is paid by the
person making the payment subject to tax and the tax is
collected by the person receiving the payment. For commercial
freight aviation, the ad valorem tax is 6.25 percent of the
amount paid for transportation.
In determining whether a flight constitutes taxable
transportation and whether the amounts paid for such
transportation are subject to tax, the Internal Revenue Service
(``IRS'') has looked at who has ``possession, command, and
control'' of the aircraft based on the relevant facts and
circumstances.\1185\
---------------------------------------------------------------------------
\1185\See, e.g., Rev. Rul. 60-311, 1960-2 C.B. 341, which held
that, since the company in question retains the elements of possession,
command, and control of the aircraft and performs all services in
connection with the operation of the aircraft, the company is, in fact,
furnishing taxable transportation to the lessee; and the tax on the
transportation of persons applies to the portion of the total payment
which is allocable to the transportation of persons, provided such
allocation is made on a fair and reasonable basis. If no allocation is
made, the tax applies to the total payment for the lease of the
aircraft.
---------------------------------------------------------------------------
Applicability to aircraft management services
Generally, an aircraft management services company
(``management company'') has as its business purpose the
management of aircraft owned by other corporations or
individuals (``aircraft owners''). In this function, management
companies provide aircraft owners, among other things, with
administrative and support services (such as scheduling, flight
planning, and weather forecasting), aircraft maintenance
services, the provision of pilots and crew, and compliance with
regulatory standards. Although the arrangement between
management companies and aircraft owners may vary, it is our
understanding that aircraft owners generally pay management
companies a monthly fee to cover the fixed expenses of
maintaining the aircraft (such as insurance, maintenance, and
recordkeeping) and a variable fee to cover the cost of using
the aircraft (such as the provision of pilots, crew, and fuel).
In March 2012, the IRS issued a Chief Counsel Advice
determining that a management company provided all of the
essential elements necessary for providing transportation by
air and the owner relinquished possession, command and control
to the management company.\1186\ Thus, the management company
was determined to be providing taxable transportation to the
owner and was required to collect the appropriate federal
excise tax from the aircraft owner and remit it to the IRS. The
Chief Counsel Advice resulted in increased audit activity by
the IRS on aircraft management companies.
---------------------------------------------------------------------------
\1186\CCA 2012-10026 (March, 2012).
---------------------------------------------------------------------------
In May 2013, the IRS suspended assessment of the federal
excise tax with respect to aircraft management services while
it developed guidance on the tax treatment of aircraft
management issues. In a 2015 opinion,\1187\ an Ohio district
court held that the existing revenue rulings (in effect for the
tax period April 1, 2005, through June 30, 2009, the period
that was the subject of the litigation) regarding the
possession, command and control test, failed to provide precise
and not speculative notice of a collection obligation as it
related to whole-aircraft management contracts.\1188\ As a
result, the court ruled as a matter of law that because precise
and not speculative notice was not received, the aircraft
management company plaintiff did not have a collection
obligation with respect to the Federal excise tax on payments
received for whole-aircraft management services.
---------------------------------------------------------------------------
\1187\Netjets Large Aircraft Inc. v. United States, 116 A.F.T.R.
2d. 2015-6776 (S.D. Ohio, 2015).
\1188\The district court held that such notice is required to
persons having a deputy tax collection obligation under the rationale
of the Supreme Court's holding in Central Illinois Public Service
Company v. United States, 435 U.S. 21 (1978).
---------------------------------------------------------------------------
In 2017, the IRS decided not to pursue examination of the
issue of whether amounts paid to aircraft companies by the
owners or lessors of the aircraft are taxable until further
guidance is made available. According to the IRS, for any exam
in suspense the aircraft management fee issue was conceded and
the taxpayers were notified accordingly.\1189\ The IRS has not
issued further guidance on this issue.
---------------------------------------------------------------------------
\1189\See also, Kerry Lynch, IRS To Shelve Pending Audits on
Aircraft Management Fees, AINonline (July 17, 2017) http://
www.ainonline.com/aviation-news/business-aviation/2017-07-17/irs-
shelve-pending-audits-aircraft-management-fees.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment exempts certain payments related to
the management of private aircraft from the excise taxes
imposed on taxable transportation by air. Exempt payments are
those amounts paid by an aircraft owner for management services
related to maintenance and support of the owner's aircraft or
flights on the owner's aircraft. Applicable services include
support activities related to the aircraft itself, such as its
storage, maintenance, and fueling, and those related to its
operation, such as the hiring and training of pilots and crew,
as well as administrative services such as scheduling, flight
planning, weather forecasting, obtaining insurance, and
establishing and complying with safety standards. Aircraft
management services also include such other services as are
necessary to support flights operated by an aircraft owner.
Payments for flight services are exempt only to the
extent that they are attributable to flights on an aircraft
owner's own aircraft.\1190\ Thus, if an aircraft owner makes a
payment to a management company for the provision of a pilot
and the pilot provides his services on the aircraft owner's
aircraft, such payment is not subject to Federal excise tax.
However, if the pilot provides his services to the aircraft
owner on an aircraft other than the aircraft owner's (for
instance, on an aircraft that is part of a fleet of aircraft
available for third-party charter services), then such payment
is subject to Federal excise tax.
---------------------------------------------------------------------------
\1190\Examples of arrangements that cannot qualify a person as an
``aircraft owner'' include ownership of stock in a commercial airline
and participation in a fractional ownership aircraft program. Ownership
of stock in a commercial airline cannot qualify an individual as an
``aircraft owner'' of a commercial airline's aircraft, and amounts paid
for transportation on such flights remain subject to the tax under
section 4261. Similarly, participation in a fractional ownership
aircraft program does not constitute ``aircraft ownership'' for
purposes of this standard. Amounts paid to a fractional ownership
aircraft program for transportation under such a program are exempt
from the ticket tax under section 4261(j) if the aircraft is operating
under subpart K of part 91 of title 14 of the Code of Federal
Regulations (``subpart K''), and flights under such program are subject
to both the fuel tax levied on non-commercial aviation an additional
fuel surtax under section 4043 of the Code. A business arrangement
seeking to circumvent that surtax by operating outside of subpart K,
allowing an aircraft owner the right to use any of a fleet of aircraft,
be it through an aircraft interchange agreement, through holding
nominal shares in a fleet of aircraft, or any other arrangement that
does not reflect true tax ownership of the aircraft being flown upon,
is not considered ownership for purposes of the provision.
---------------------------------------------------------------------------
The provision provides a pro rata allocation rule in the
event that a monthly payment made to a management company is
allocated in part to exempt services and flights on the
aircraft owner's aircraft, and in part to flights on aircraft
other than the aircraft owner's. In such a circumstance,
Federal excise tax must be collected on that portion of the
payment attributable to flights on aircraft not owned by the
aircraft owner.
Under the provision, a lessee of an aircraft is
considered an aircraft owner provided that the lease is not a
``disqualified lease.'' A disqualified lease is any lease of an
aircraft from a management company (or a related party) for a
term of 31 days or less.
Effective date.--The provision is effective for amounts
paid after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Effective date.--The provision is effective for amounts
paid after the date of enactment.
17. Opportunity zones (sec. 13823 of the Senate amendment and new secs.
1400Z-1 and 1400Z-2 of the Code)
PRESENT LAW
The Code occasionally has provided several incentives
aimed at encouraging economic growth and investment in
distressed communities by providing Federal tax benefits to
businesses located within designated boundaries.\1191\
---------------------------------------------------------------------------
\1191\Such designated areas were referred to as empowerment zones,
the District of Columbia Enterprise (``DC'') Zone, and the Gulf
Opportunity (``GO'') Zone, and each of these designations and attendant
tax incentives have expired. The designations and tax incentives for
the DC Zone, and the GO Zone generally expired after December 31, 2011.
1400(f), 1400N(h), 1400N(c)(5), 1400N(a)(2)(D), 1400N(a)(7)(C),
1400N(d). The empowerment zones program and attendant tax incentives
expired as of December 31, 2016. Secs. 1391(d)(1). There are also areas
that were designated as renewal communities under section 1400E which
received tax benefits that all expired as of December 31, 2009, except
that a zero-percent capital gains rate applies with respect to gain
from the sale through December 31, 2014 of a qualified community asset
acquired after December 31, 2001, and before January 1, 2010 and held
for more than five years. For more information on these programs and
attendant tax incentives, see Joint Committee on Taxation, Incentives
for Distressed Communities: Empowerment Zones and Renewal Communities
(JCX-38-09), October 5, 2009.
---------------------------------------------------------------------------
One of these incentives is a federal income tax credit
that is allowed in the aggregate amount of 39 percent of a
taxpayer investment in a qualified community development entity
(CDE).\1192\ In general, the credit is allowed to a taxpayer
who makes a ``qualified equity investment'' in a CDE which
further invests in a ``qualified active low-income community
business.'' CDEs are required to make investments in low income
communities (generally communities with 20 percent or greater
poverty rate or median family income less than 80 percent of
statewide median). The credit is allowed over seven years, five
percent in each of the first three years and six percent in
each of the next four years. 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.
The Department of Treasury's Community Development Financial
Institutions Fund (``CDFI'') allocates the new markets tax
credits.
---------------------------------------------------------------------------
\1192\Sec. 45D.
---------------------------------------------------------------------------
The maximum annual amount of qualified equity investments
is $3.5 billion for calendar years 2010 through 2019. The new
markets tax credit is set to expire on December 31, 2019. No
amount of unused allocation limitation may be carried to any
calendar year after 2024.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides for the temporary deferral of
inclusion in gross income for capital gains reinvested in a
qualified opportunity fund and the permanent exclusion of
capital gains from the sale or exchange of an investment in the
qualified opportunity fund.
The provision allows for the designation of certain low-
income community population census tracts as qualified
opportunity zones, where low-income communities are defined in
Section 45D(e). The designation of a population census tract as
a qualified opportunity zone remains in effect for the period
beginning on the date of the designation and ending at the
close of the tenth calendar year beginning on or after the date
of designation.
Governors may submit nominations for a limited number of
opportunity zones to the Secretary for certification and
designation. If the number of low-income communities in a State
is less than 100, the Governor may designate up to 25 tracts,
otherwise the Governor may designate tracts not exceeding 25
percent of the number of low-income communities in the State.
Governors are required to provide particular consideration to
areas that: (1) are currently the focus of mutually reinforcing
state, local, or private economic development initiatives to
attract investment and foster startup activity; (2) have
demonstrated success in geographically targeted development
programs such as promise zones, the new markets tax credit,
empowerment zones, and renewal communities; and (3) have
recently experienced significant layoffs due to business
closures or relocations.
The provision provides two main tax incentives to
encourage investment in qualified opportunity zones. First, it
allows for the temporary deferral of inclusion in gross income
for capital gains that are reinvested in a qualified
opportunity fund. A qualified opportunity fund is an investment
vehicle organized as a corporation or a partnership for the
purpose of investing in qualified opportunity zone property
(other than another qualified opportunity fund) that holds at
least 90 percent of its assets in qualified opportunity zone
property. The provision intends that the certification process
for a qualified opportunity fund will be done in a manner
similar to the process for allocating the new markets tax
credit. The provision provides the Secretary authority to carry
out the process.
If a qualified opportunity fund fails to meet the 90
percent requirement and unless the fund establishes reasonable
cause, the fund is required to pay a monthly penalty of the
excess of the amount equal to 90 percent of its aggregate
assets, over the aggregate amount of qualified opportunity zone
property held by the fund multiplied by the underpayment rate
in the Code. If the fund is a partnership, the penalty is taken
into account proportionately as part of each partner's
distributive share.
Qualified opportunity zone property includes: any
qualified opportunity zone stock, any qualified opportunity
zone partnership interest, and any qualified opportunity zone
business property.
The maximum amount of the deferred gain is equal to the
amount invested in a qualified opportunity fund by the taxpayer
during the 180-day period beginning on the date of sale of the
asset to which the deferral pertains. For amounts of the
capital gains that exceed the maximum deferral amount, the
capital gains must be recognized and included in gross income
as under present law.
If the investment in the qualified opportunity zone fund
is held by the taxpayer for at least five years, the basis on
the original gain is increased by 10 percent of the original
gain. If the opportunity zone asset or investment is held by
the taxpayer for at least seven years, the basis on the
original gain is increased by an additional 5 percent of the
original gain. The deferred gain is recognized on the earlier
of the date on which the qualified opportunity zone investment
is disposed of or December 31, 2026. Only taxpayers who
rollover capital gains of non-zone assets before December 31,
2026, will be able to take advantage of the special treatment
of capital gains for non-zone and zone realizations under the
provision.
The basis of an investment in a qualified opportunity
zone fund immediately after its acquisition is zero. If the
investment is held by the taxpayer for at least five years, the
basis on the investment is increased by 10 percent of the
deferred gain. If the investment is held by the taxpayer for at
least seven years, the basis on the investment is increased by
an additional five percent of the deferred gain. If the
investment is held by the taxpayer until at least December 31,
2026, the basis in the investment increases by the remaining 85
percent of the deferred gain.
The second main tax incentive in the bill excludes from
gross income the post-acquisition capital gains on investments
in opportunity zone funds that are held for at least 10 years.
Specifically, in the case of the sale or exchange of an
investment in a qualified opportunity zone fund held for more
than 10 years, at the election of the taxpayer the basis of
such investment in the hands of the taxpayer shall be the fair
market value of the investment at the date of such sale or
exchange. Taxpayers can continue to recognize losses associated
with investments in qualified opportunity zone funds as under
current law.
The Secretary or the Secretary's delegate is required to
report annually to Congress on the opportunity zone incentives
beginning 5 years after the date of enactment. The report is to
include an assessment of investments held by the qualified
opportunity fund nationally and at the State level. To the
extent the information is available, the report is to include
the number of qualified opportunity funds, the amount of assets
held in qualified opportunity funds, the composition of
qualified opportunity fund investments by asset class, and the
percentage of qualified opportunity zone census tracts
designated under the provision that have received qualified
opportunity fund investments. The report is also to include an
assessment of the impacts and outcomes of the investments in
those areas on economic indicators including job creation,
poverty reduction and new business starts, and other metrics as
determined by the Secretary.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement generally follows the Senate
amendment with the following modifications. First, the
provision provides that each population census tract in each
U.S. possession that is a low-income community is deemed
certified and designated as a qualified opportunity zone
effective on the date of enactment. Second, the provision
clarifies that chief executive officer of the State (which
includes the District of Columbia) may submit nominations for a
limited number of opportunity zones to the Secretary for
certification and designation. This change clarifies that the
mayor of the District of Columbia may also submit nominations.
Third, the provision clarifies that there is no gain deferral
available with respect to any sale or exchange made after
December 31, 2026, and there is no exclusion available for
investments in qualified opportunity zones made after December
31, 2026. The agreement also makes some technical changes to
the Senate amendment to make it clear which taxpayer may claim
the tax benefits.
18. Provisions relating to the low-income housing credit (secs. 13411
and 13412 of the Senate amendment and sec. 42 of the Code)
PRESENT LAW
In general
The low-income housing credit may be claimed over a 10-
year period for the cost of building rental housing a
sufficient portion of which is rent restricted and occupied by
tenants having incomes below specified levels.\1193\ Qualified
basis is the low-income portion of the building times the
eligible basis. The amount of the credit for any taxable year
in the credit period is the applicable percentage of the
qualified basis of each qualified low-income building. The
applicable percentage for new buildings that are not Federally
subsidized, is computed to yield a present value of 70 percent
of the qualified basis over a 10-year period. For other
buildings the applicable percentage is calculated to yield 30
percent. Rehabilitation expenses are treated as a separate new
building.
---------------------------------------------------------------------------
\1193\Sec. 42.
---------------------------------------------------------------------------
Increase in credit for certain high cost areas
In the case of a building located in a qualified census
tract or difficult development area, the eligible basis of a
building is 130 percent of eligible basis. This ``basis boost
also applies to rehabilitation expenditures that are treated as
a separate new building.
A ``difficult development area'' is an area designated by
the Secretary of Housing and Urban Development (``HUD'') as
having high construction, land, and utility costs relative to
the area's median income. The portions of metropolitan
statistical areas that may be designated for this purpose
cannot exceed an aggregate area having 20 percent of the
population of such metropolitan statistical areas. A comparable
rule applies to nonmetropolitan areas.
A ``qualified census tract'' means any census tract which
is designated by HUD in which either: (1) 50 percent or more of
the households have an income which is less than 60 percent of
the area median income for the year; or (2) the poverty rate in
that tract is 25 percent. The portion of a metropolitan
statistical area that may be designated for this purpose cannot
exceed an area having 20 percent of the population of such
metropolitan statistical area. Each metropolitan statistical
area is treated as a separate area and all nonmetropolitan
areas in a State are treated as one area.
In addition, a building which is designated by a State
housing credit agency as requiring an increase in credit to be
financially feasible is treated as located in a HUD-designated
difficult development area. This rule does not apply to a
building if any portion of the eligible basis is financed with
tax-exempt bonds.
General public use
In order to be eligible for the low-income housing
credit, the residential units in a qualified low-income housing
project must be available for use by the general public. A
project is available for general public use if the project
complies with housing non-discrimination policies including
those set forth in the Fair Housing Act (42 U.S.C. sec. 3601)
and (2) the project does not restrict occupancy based on
membership in a social organization or employment by specific
employers. In addition, any residential unit that is part of a
hospital, nursing home, sanitarium, lifecare facility, trailer
park, or intermediate care facility for the mentally or
physically handicapped is not available for use by the general
public.
However, a project that otherwise meets the general
public use requirements above shall not fail to meet the
general public use requirement solely because of occupancy
restrictions or preferences that favor tenants with (1) special
needs; (2) who are members of a specified group under a Federal
program or State program or policy that supports housing for
such specified group; or (3) who are involved in artistic or
literary activities.
HOUSE BILL
No provision.
SENATE AMENDMENT
Treatment of veterans' preference as not violating general public use
requirements
The provision replaces the exception to the general
public use requirement for tenants engaged in artistic and
literary activities with an exception for veterans.
Increase in credit for certain rural housing
For buildings eligible for the 70 percent present-value
credit, the provision makes two changes. First, the provision
treats such buildings located in rural areas (as defined in
section 520 of the Fair Housing Act of 1949) as located in a
HUD-designated difficult development area. Second, the
provision reduces the eligible basis for difficult to develop
areas and qualified census tracts from 130 percent to 125
percent.\1194\
---------------------------------------------------------------------------
\1194\A correction to the language is needed to conform to the
intent that the change be limited to buildings eligible for the 70
percent credit only.
---------------------------------------------------------------------------
Effective date.--The provisions generally apply to
buildings placed in service after the date of enactment. The
changes related to the treatment of a veterans preference as
not violating general public use requirements applies to
buildings placed in service before, on, or after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not follow the Senate
amendment provisions.
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 House
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.\1195\
---------------------------------------------------------------------------
\1195\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).
---------------------------------------------------------------------------
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.\1196\ 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).
---------------------------------------------------------------------------
\1196\Secs. 511-514.
---------------------------------------------------------------------------
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.\1197\ Therefore, the unrelated trade or
business activity of a section 501(c)(3) organization must be
insubstantial.
---------------------------------------------------------------------------
\1197\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
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);\1198\ (2)
qualified pension, profit-sharing, and stock bonus plans
described in section 401(a);\1199\ and (3) certain State
colleges and universities.\1200\
---------------------------------------------------------------------------
\1198\Sec. 511(a)(2)(A).
\1199\Sec. 511(a)(2)(A).
\1200\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
2. Exclusion of research income from unrelated business taxable income
limited to publicly available research (sec. 5002 of the House
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.\1201\ 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).
---------------------------------------------------------------------------
\1201\Secs. 511-514.
---------------------------------------------------------------------------
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.\1202\ Therefore, the unrelated trade or
business activity of a section 501(c)(3) organization must be
insubstantial.
---------------------------------------------------------------------------
\1202\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
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);\1203\ (2)
qualified pension, profit-sharing, and stock bonus plans
described in section 401(a);\1204\ and (3) certain State
colleges and universities.\1205\
---------------------------------------------------------------------------
\1203\Sec. 511(a)(2)(A).
\1204\Sec. 511(a)(2)(A).
\1205\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------
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,\1206\ unless derived from debt-
financed property or from certain 50-percent controlled
subsidiaries.\1207\ 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.
---------------------------------------------------------------------------
\1206\Secs. 511-514.
\1207\Sec. 512(b)(13).
---------------------------------------------------------------------------
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.\1208\ Income from research performed
by a college, university, or hospital for any person also is
excluded.\1209\ 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.\1210\
---------------------------------------------------------------------------
\1208\Sec. 512(b)(7).
\1209\Sec. 512(b)(8).
\1210\Sec. 512(b)(9).
---------------------------------------------------------------------------
HOUSE BILL
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 provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
3. Unrelated business taxable income separately computed for each trade
or business activity (sec. 13703 of the Senate amendment and
sec. 512(a) 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
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.\1211\
---------------------------------------------------------------------------
\1211\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).
---------------------------------------------------------------------------
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.\1212\ 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).
---------------------------------------------------------------------------
\1212\Secs. 511-514.
---------------------------------------------------------------------------
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.\1213\ Therefore, the unrelated trade or
business activity of a section 501(c)(3) organization must be
insubstantial.
---------------------------------------------------------------------------
\1213\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
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);\1214\ (2)
qualified pension, profit-sharing, and stock bonus plans
described in section 401(a);\1215\ and (3) certain State
colleges and universities.\1216\
---------------------------------------------------------------------------
\1214\Sec. 511(a)(2)(A).
\1215\Sec. 511(a)(2)(A).
\1216\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------
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,\1217\ unless derived from debt-
financed property or from certain 50-percent controlled
subsidiaries.\1218\ 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.
---------------------------------------------------------------------------
\1217\Secs. 511-514.
\1218\Sec. 512(b)(13).
---------------------------------------------------------------------------
Specific deduction against unrelated business taxable income
In computing unrelated business taxable income, an exempt
organization may take a specific deduction of $1,000. This
specific deduction may not be used to create a net operating
loss that will be carried back or forward to another
year.\1219\
---------------------------------------------------------------------------
\1219\Sec. 512(b)(12).
---------------------------------------------------------------------------
In the case of a diocese, province or religious order, or
a convention or association of churches, a specific deduction
is allowed with respect to each parish, individual church,
district, or other local unit. The specific deduction is equal
to the lower of $1,000 or the gross income derived from any
unrelated trade or business regularly carried on by the local
unit.\1220\
---------------------------------------------------------------------------
\1220\Ibid.
---------------------------------------------------------------------------
Operation of multiple unrelated trades or businesses
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.\1221\ 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.\1222\ As a result, an organization may
use a deduction from one unrelated trade or business to offset
income from another, thereby reducing total unrelated business
taxable income.
---------------------------------------------------------------------------
\1221\Sec. 512(a).
\1222\Treas. Reg. sec. 1.512(a)-1(a).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
For an organization with more than one unrelated trade or
business, the provision requires that unrelated business
taxable income first be computed separately with respect to
each trade or business and without regard to the specific
deduction generally allowed under section 512(b)(12). The
organization's unrelated business taxable income for a taxable
year is the sum of the amounts (not less than zero) computed
for each separate unrelated trade or business, less the
specific deduction allowed under section 512(b)(12). A net
operating loss deduction is allowed only with respect to a
trade or business from which the loss arose.
The result of the provision is that a deduction from one
trade or business for a taxable year may not be used to offset
income from a different unrelated trade or business for the
same taxable year. The provision generally does not, however,
prevent an organization from using a deduction from one taxable
year to offset income from the same unrelated trade or business
activity in another taxable year, where appropriate.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017. Under a special
transition rule, net operating losses arising in a taxable year
beginning before January 1, 2018, that are carried forward to a
taxable year beginning on or after such date are not subject to
the rule of the provision.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
B. Excise Taxes
1. Simplification of excise tax on private foundation investment income
(sec. 5101 of the House 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\1223\) 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)\1224\ 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.\1225\ 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.
---------------------------------------------------------------------------
\1223\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).
\1224\Sec. 4942(g).
\1225\Sec. 4940(e).
---------------------------------------------------------------------------
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.\1226\
---------------------------------------------------------------------------
\1226\Sec. 4942(d)(2).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
2. Private operating foundation requirements relating to operation of
an art museum (sec. 5102 of the House 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.\1227\ 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.\1228\ 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.\1229\ 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.\1230\ 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.\1231\
---------------------------------------------------------------------------
\1227\The Code does not expressly define the term ``public
charity,'' but rather provides exceptions to those entities that are
treated as private foundations.
\1228\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\1229\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).
\1230\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).
\1231\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.
---------------------------------------------------------------------------
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.\1232\
---------------------------------------------------------------------------
\1232\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.
---------------------------------------------------------------------------
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.\1233\
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.\1234\ 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.\1235\ 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.\1236\
---------------------------------------------------------------------------
\1233\Sec. 4942.
\1234\Sec. 4942(g)(1)(A).
\1235\Sec. 4942(a) and (b). Taxes imposed may be abated if certain
conditions are met. Secs. 4961 and 4962.
\1236\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).
---------------------------------------------------------------------------
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.\1237\
Private operating foundations generally operate their own
charitable programs directly, rather than serving primarily as
a grantmaking entity.
---------------------------------------------------------------------------
\1237\Sec. 4942(a)(1).
---------------------------------------------------------------------------
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.\1238\ 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.\1239\
---------------------------------------------------------------------------
\1238\Sec. 4942(j)(3)(A); Treas. Reg. sec. 53.4942(b)-1(c).
\1239\Sec. 4942(j)(3)(B).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
3. Excise tax based on investment income of private colleges and
universities (sec. 5103 of the House bill, sec. 13701 of the
Senate amendment, and new sec. 4968 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.\1240\ 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.\1241\ 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.\1242\ 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.\1243\ 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.\1244\
---------------------------------------------------------------------------
\1240\The Code does not expressly define the term ``public
charity,'' but rather provides exceptions to those entities that are
treated as private foundations.
\1241\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\1242\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).
\1243\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).
\1244\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.
---------------------------------------------------------------------------
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.\1245\
---------------------------------------------------------------------------
\1245\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.
---------------------------------------------------------------------------
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)\1246\ 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)\1247\ 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.\1248\ 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.
---------------------------------------------------------------------------
\1246\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).
\1247\Sec. 4942(g).
\1248\Sec. 4940(e).
---------------------------------------------------------------------------
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.\1249\
---------------------------------------------------------------------------
\1249\Sec. 4942(d)(2).
---------------------------------------------------------------------------
Private colleges and universities
Private colleges and universities generally are treated
as public charities rather than private foundations\1250\ and
thus are not subject to the private foundation excise tax on
net investment income.
---------------------------------------------------------------------------
\1250\Secs. 509(a)(1) and 170(b)(1)(A)(ii).
---------------------------------------------------------------------------
HOUSE BILL
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;\1251\ (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\1252\) 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.
---------------------------------------------------------------------------
\1251\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.
\1252\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.
---------------------------------------------------------------------------
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\1253\ or a supporting organization\1254\
during the taxable year with respect to the institution.
---------------------------------------------------------------------------
\1253\Secs. 509(f)(3).
\1254\Secs. 509(a)(3).
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
The Senate amendment follows the House bill with the
following modifications. First, the definition of applicable
educational institution is modified in two ways: (1) it
requires that the educational institution have at least 500
tuition paying students; and (2) it increases the asset-per-
student threshold from $250,000 to $500,000.
Second, the Senate amendment clarifies the operation of
the related-party rules of the provision. For purposes of
determining whether an educational institution meets the asset-
per-student threshold and for purposes of determining net
investment income, assets and net investment income of a
related organization with respect to the educational
institution are treated as assets and net investment income,
respectively, of the educational institution, except that:
1. No such amount is taken into account with
respect to more than one educational institution; and
2. Unless the related organization is controlled by
the educational institution or is a supporting
organization (described in section 509(a)(3)) with
respect to the institution for the taxable year, assets
and investment income that are not intended or
available for the use or benefit of the educational
institution are not taken into account. For example,
assets of a related organization that are earmarked or
restricted for (or fairly attributable to) the
educational institution would be treated as assets of
the educational institution, whereas assets of a
related organization that are held for unrelated
purposes (and are not fairly attributable to the
educational institution) would be disregarded.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with the following modification. The provision modifies the
definition of ``applicable educational institution'' to include
only institutions more than 50 percent of the tuition paying
students of which are located in the United States. For this
purpose, the number of students at a location 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.
It is intended that the Secretary promulgate regulations
to carry out the intent of the provision, including regulations
that describe: (1) assets that are used directly in carrying
out the educational institution's exempt purpose; (2) the
computation of net investment income; and (3) assets that are
intended or available for the use or benefit of the educational
institution.
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 House 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.\1255\ 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.\1256\ 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.\1257\
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.\1258\ 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.\1259\
---------------------------------------------------------------------------
\1255\The Code does not expressly define the term ``public
charity,'' but rather provides exceptions to those entities that are
treated as private foundations.
\1256\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\1257\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).
\1258\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).
\1259\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.
---------------------------------------------------------------------------
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.\1260\
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\1260\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.
---------------------------------------------------------------------------
Excess business holdings of private foundations
Private foundations are subject to tax on excess business
holdings.\1261\ 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.\1262\ This five-year
period may be extended an additional five years in limited
circumstances.\1263\ 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.\1264\
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\1261\Sec. 4943. Taxes imposed may be abated if certain conditions
are met. Secs. 4961 and 4962.
\1262\Sec. 4943(c)(6).
\1263\Sec. 4943(c)(7).
\1264\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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
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 House 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.\1265\ 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.\1266\ 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;\1267\ (3) it may not be operated primarily to conduct
an unrelated trade or business;\1268\ (4) it may not engage in
substantial legislative lobbying; and (5) it may not
participate or intervene in any political campaign.
---------------------------------------------------------------------------
\1265\Treas. Reg. sec. 1.501(c)(3)-1(c)(1).
\1266\Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
\1267\Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
\1268\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.''\1269\ 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.
---------------------------------------------------------------------------
\1269\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.\1270\
Public charities also have certain advantages over private
foundations regarding the deductibility of contributions.
---------------------------------------------------------------------------
\1270\Secs. 4940-4945.
---------------------------------------------------------------------------
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.\1271\ 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.''\1272\ 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.
---------------------------------------------------------------------------
\1271\Sec. 501(c)(3).
\1272\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,\1273\ termination
assessment of all taxes due,\1274\ and an injunction against
further political expenditures.\1275\
---------------------------------------------------------------------------
\1273\Sec. 4955.
\1274\Sec. 6852(a)(1).
\1275\Sec. 7409.
---------------------------------------------------------------------------
HOUSE BILL
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,\1276\ gift,\1277\ and
estate tax\1278\ purposes; and (3) application of the excise
tax on political expenditures by section 501(c)(3)
organizations.\1279\
---------------------------------------------------------------------------
\1276\Sec. 170(c)(2).
\1277\Sec. 2522.
\1278\Secs. 2055 and 2106.
\1279\Sec. 4955.
---------------------------------------------------------------------------
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
2. Additional reporting requirements for donor advised fund sponsoring
organizations (sec. 5202 of the House 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.\1280\ 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.
---------------------------------------------------------------------------
\1280\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.\1281\
---------------------------------------------------------------------------
\1281\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)\1282\ (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);\1283\ (2) is not a private foundation (as
defined in section 509(a)); and (3) maintains one or more donor
advised funds.\1284\
---------------------------------------------------------------------------
\1282\Section 170(c) describes organizations to which charitable
contributions that are deductible for income tax purposes can be made.
\1283\See sec. 170(c)(2)(A).
\1284\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.\1285\ In addition, when seeking recognition of
its tax-exempt status, a sponsoring organization must disclose
whether it intends to maintain donor advised funds.\1286\
---------------------------------------------------------------------------
\1285\Sec. 6033(k).
\1286\Sec. 508(f).
---------------------------------------------------------------------------
HOUSE BILL
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 taxable
years beginning after December 31, 2017.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
INTERNATIONAL TAX PROVISIONS
PRESENT LAW
The following discussion 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 in the bill.
A. General Overview of International Principles of Taxation
International law generally recognizes the right of each
sovereign nation to prescribe rules to regulate conduct with a
sufficient nexus to the sovereign nation. The nexus may be
based on nationality of the actor, i.e., a nexus between said
conduct and a person (whether natural or juridical) with a
connection to the sovereign nation, or it may be territorial,
i.e., a nexus between the conduct to be regulated and the
territory where the conduct occurs.\1287\ For example, most
legal systems respect limits on the extent to which their
measures may be given extraterritorial effect. The broad
acceptance of such norms extends to authority to regulate
cross-border trade and economic dealings, including taxation.
---------------------------------------------------------------------------
\1287\American Law Institute, Restatement (Third) of Foreign
Relations Law of the United States, secs. 402 and 403, (1987).
---------------------------------------------------------------------------
The exercise of sovereign jurisdiction is usually based
on either nationality of the person whose conduct is regulated
or the territory in which the conduct or activity occurs. These
concepts have been refined and, in varying combinations,
adapted to form the principles for determining whether
sufficient nexus with a jurisdiction exists to conclude that
the jurisdiction may enforce its right to impose a tax. The
elements of nexus and the nomenclature of the principles may
differ based on the type of tax in question. Taxes are
categorized as either direct taxes or indirect taxes. The
former category generally refers to those taxes that are
imposed directly on a person (``capitation tax''), property, or
income from property and that cannot be shifted to another
person by the taxpayer. In contrast, indirect taxes are taxes
on consumption or production of goods or services, for which a
taxpayer may shift responsibility to another person. Such taxes
include sales or use taxes, value-added taxes, or customs
duties.\1288\
---------------------------------------------------------------------------
\1288\Maria S. Cox, Fritz Neumark, et al., ``Taxation''
Encyclopedia Britannica, https://www.britannica.com/topic/taxation/
Classes-of-taxes, accessed May 16, 2017. Whether a tax is considered a
direct tax or indirect tax has varied over time, and no single
definition is used. For a review of the significance of these terms in
Federal tax history, see Alan O. Dixler, ``Direct Taxes Under the
Constitution: A Review of the Precedents,'' Tax History Project, Tax
Analysts, available at http://www.taxhistory.org/thp/readings.nsf/
ArtWeb/2B34C7FBDA41D9DA8525730800067017?OpenDocument, accessed May 17,
2017.
---------------------------------------------------------------------------
Although governments have imposed direct taxes on
property and indirect taxes and duties on specific transactions
since ancient times, the history of direct taxes in the form of
an income tax is relatively recent.\1289\ When determining how
to allocate the right to tax a particular item of income, most
jurisdictions consider principles based on either source
(territory or situs of the income) or residence (nationality of
the taxpayer).\1290\ By contrast, when the authority to collect
indirect taxes in the form of sales taxes or value added taxes
is under consideration, jurisdictions analyze the taxing rights
in terms of the origin principle or destination principle. The
balance of this Part I.A describes the principles in more
detail and how jurisdictions resolve claims of overlapping
jurisdiction.
---------------------------------------------------------------------------
\1289\The earliest western income tax system is traceable to the
British Tax Act of 1798, enacted in 1799 to raise funds needed to
prosecute the Napoleonic Wars, and rescinded in 1816. See, A.M.
Bardopoulos, eCommerce and the Effects of Technology on Taxation, Law,
Governance and Technology Series 22, DOI 10.1007/978-3-319-15449-7_2,
(Springer 2015), at Section 2.2. ``History of Tax,'' pp. 23-24. See
also, http://www.parliament.uk/about/living-heritage/
transformingsociety/private-lives/taxation/overview/incometax/.
\1290\Reuven Avi-Yonah, ``International Tax as International Law,''
57 Tax Law Review 483 (2003-2004).
---------------------------------------------------------------------------
1. Origin and destination principles
Indirect taxes that are imposed based on the place where
production of goods or services occur, irrespective of the
location of the persons who own the means of production, and
where the goods and services go after being produced, are
examples of origin-based taxes. If, instead, authority to tax a
transaction or service is dependent on the location of use or
consumption of the goods or services, the tax system is an
example of a destination-based tax. The most common form of a
destination-based tax is the destination-based value-added tax
(``VAT''). Over 160 countries have adopted a VAT,\1291\ which
is generally a tax imposed and collected on the ``value added''
at every stage in the production and distribution of a good or
service. Although there are several ways to compute the taxable
base for a VAT, the amount of value added can generally be
thought of as the difference between the value of sales
(outputs) and purchases (inputs) of a business.\1292\ The
United States does not have a VAT, nor is there a Federal sales
or use tax. However, the majority of the States have enacted
sales or use taxes, including both origin-based taxes and
destination-based taxes.\1293\
---------------------------------------------------------------------------
\1291\Alan Schenk, Victor Thuronyi, and Wei Cui, Value Added Tax: A
Comparative Approach, Cambridge University Press, 2015. Consistent with
the OECD International VAT/GST Guidelines, supra, the term VAT is used
to refer to all broad-based final consumption taxes, regardless of the
acronym used to identify. Thus, many countries that denominate their
national consumption tax as a GST (general sales tax) are included in
the estimate of the number of countries with a VAT.
\1292\Nearly all countries use the credit-invoice method of
calculating value added to determine VAT liability. Under the credit-
invoice method, a tax is imposed on the seller for all of its sales.
The tax is calculated by applying the tax rate to the sales price of
the good or service, and the amount of tax is generally disclosed on
the sales invoice. A business credit is provided for all VAT levied on
purchases of taxable goods and services (i.e., ``inputs'') used in the
seller's business. The ultimate consumer (i.e., a non-business
purchaser), however, does not receive a credit with respect to his or
her purchases. The VAT credit for inputs prevents the imposition of
multiple layers of tax with respect to the total final purchase price
(i.e., a ``cascading'' of the VAT). As a result, the net tax paid at a
particular stage of production or distribution is based on the value
added by that taxpayer at that stage of production or distribution. In
theory, the total amount of tax paid with respect to a good or service
from all levels of production and distribution should equal the sales
price of the good or service to the ultimate consumer multiplied by the
VAT rate.
In order to receive an input credit with respect to any purchase, a
business purchaser is generally required to possess an invoice from a
seller that contains the name of the purchaser and indicates the amount
of tax collected by the seller on the sale of the input to the
purchaser. At the end of a reporting period, a taxpayer may calculate
its tax liability by subtracting the cumulative amount of tax stated on
its purchase invoices from the cumulative amount of tax stated on its
sales invoices.
\1293\EY, Worldwide VAT, GST and Sales Tax Guide 2015, p. 1021,
available at http://www.ey.com/Publication/ vwLUAssets/ Worldwide-VAT-
GST- and-sales-tax-guide-2015/$FILE/ Worldwide%20VAT,%20GST%20
and%20Sales%20Tax%20 Guide%202015.pdf.renee
---------------------------------------------------------------------------
With respect to cross-border transactions, the OECD has
recommended that the destination principle be adopted for all
indirect taxes, in part to conform to the treatment of such
transactions for purposes of customs duties. The OECD defines
the destination principle as ``the principle whereby, for
consumption tax purposes, internationally traded services and
intangibles should be taxed according to the rules of the
jurisdiction of consumption.''\1294\ A jurisdiction may
determine the place of use or consumption by adopting the
convention that the place of business or residence of a
customer is the place of consumption. Use of such proxies are
needed to determine the location of businesses that are
juridical entities, which are more able than natural persons to
move the location of use of goods, services or intangibles in
response to imposition of tax.
---------------------------------------------------------------------------
\1294\See, OECD, ``Recommendation of the Council on the application
of value added tax/goods and services tax to the international trade in
services and intangibles as approved on September 27, 2016,''
[C(2016)120], appendix, page 3, reproduced in the appendix, OECD,
International VAT/GST Guidelines, OECD Publishing, 2017.
---------------------------------------------------------------------------
2. Source and residence principles
Exercise of taxing authority based on a person's
residence may be based on status as a national, resident, or
domiciliary of a jurisdiction and may reach worldwide
activities of such persons. As such, it is the broadest
assertion of taxing authority. For individuals, the test for
residence may depend upon nationality, or a physical presence
test, or some combination of the two. For all other persons,
determining residency may require more complex consideration of
the level of activities within a jurisdiction, management,
control or place of incorporation. Such rules generally reflect
a policy decision about the requisite level of activity within,
or contact with, a jurisdiction by a person that is sufficient
to warrant assertion of taxing jurisdiction.
Source-based exercise of taxing authority taxes income
from activities that occur, or property that is located, within
the territory of the taxing jurisdiction. If a person conducts
business or owns property in a jurisdiction, or if a
transaction occurs in whole or in part in a jurisdiction, the
resulting taxation may require allocation and apportionment of
expenses attributable to the activity in order to ensure that
only the portion of profits that have the required nexus with
the territory are subject to tax. Most jurisdictions, including
the United States, have rules for determining the source of
items of income and expense in a broad range of categories such
as compensation for services, dividends, interest, royalties
and gains.
Regardless of which of these two bases of taxing
authority is chosen by a jurisdiction, a jurisdiction's
determination of whether a transaction, activity or person is
subject to tax requires that the jurisdiction establish the
limits on its assertion of authority to tax.
3. Resolving overlapping or conflicting jurisdiction to tax
Countries have developed norms about what constitutes a
reasonable regulatory action by a sovereign state that will be
respected by other sovereign states. Consensus on what
constitutes a reasonable limit on the extent of one state's
jurisdiction helps to minimize the risk of conflicts arising as
a result of extraterritorial action by a state or overlapping
exercise of authority by states. Mechanisms to eliminate double
taxation have developed to address those situations in which
the source and residency determinations of the respective
jurisdictions result in duplicative assertion of taxing
authority. For example, asymmetry between different standards
adopted in two countries for determining residency of persons,
source of income, or other basis for taxation may result in
income that is subject to taxation in both jurisdictions.
When the rules of two or more countries overlap,
potential double taxation is usually mitigated by operation of
bilateral tax treaties or by legislative measures permitting
credit for taxes paid to another jurisdiction. The United
States is a partner in numerous bilateral agreements that have
as their objective the avoidance of international double
taxation and the prevention of tax avoidance and evasion.
Another related objective of U.S. tax treaties is the removal
of the barriers to trade, capital flows, and commercial travel
that may be caused by overlapping tax jurisdictions and by the
burdens of complying with the tax laws of a jurisdiction when a
person's contacts with, and income derived from, that
jurisdiction are minimal. The United States Model Income Tax
Convention (``U.S. Model Treaty of 2016'') with an accompanying
Preamble by the Department of Treasury, reflects the most
recent comprehensive statement of U.S. negotiating position
with respect to tax treaties.\1295\ Bilateral agreements are
also used to permit limited mutual administrative assistance
between jurisdictions.\1296\
---------------------------------------------------------------------------
\1295\The current U.S. Model treaty was published February 17,
2016, and is available at https://www.treasury.gov/ resource-center/
tax-policy/ treaties/ Documents/Treaty-US%20Model-2016.pdf; the
Preamble is available at https://www.treasury.gov/resource-center/tax-
policy/treaties/Documents/Preamble-US%20Model-2016.pdf. The U.S. Model
treaty is updated periodically to reflect developments in the
negotiating position of the United States. Such changes include
provisions that were successfully included in bilateral treaties
concluded by the United States, as well as new proposed measures not
yet included in a bilateral agreement.
\1296\Although U.S. courts extend comity to foreign judgments in
some instances, they are not required to recognize or assist in
enforcement of foreign judgments for collection of taxes, consistent
with the common law ``revenue rule'' in Holman v. Johnson, 1 Cowp. 341,
98 Eng. Rep. 1120 (K.B.1775). American Law Institute, Restatement
(Third) of Foreign Relations Law of the United States, sec. 483,
(1987). The rule retains vitality in U.S. case law. Pasquantino v.
United States, 544 U.S. 349; 125 S. Ct. 1766; 161 L. Ed. 2d 619 (2005)
(a conviction for criminal wire fraud arising from an intent to defraud
Canadian tax authorities was found not to conflict ``with any well-
established revenue rule principle[,]'' and thus was not in derogation
of the revenue rule). To the extent it is abrogated, it is done so in
bilateral treaties, to ensure reciprocity. At present, the United
States has such agreements in force with five jurisdictions: Canada;
Denmark; France; Netherlands; and Sweden.
---------------------------------------------------------------------------
In addition to entering into bilateral treaties,
countries have worked in multilateral organizations to develop
common principles to alleviate double taxation. Those
principles are generally reflected in the provisions of the
Model Tax Convention on Income and on Capital of the
Organization for Economic Cooperation and Development (the
``OECD Model treaty''),\1297\ a precursor of which was first
developed by a predecessor organization in 1958, which in turn
has antecedents from work by the League of Nations in the
1920s.\1298\ As a consensus document, the OECD Model treaty is
intended to serve as a model for countries to use in
negotiating a bilateral treaty that would settle issues of
double taxation as well as to avoid inappropriate double
nontaxation. The provisions have developed over time as
practice with actual bilateral treaties leads to unexpected
results and new issues are raised by parties to the
treaties.\1299\
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\1297\OECD (2014), Model Tax Convention on Income and on Capital:
Condensed Version 2014, OECD Publishing, 2014, available at http://
dx.doi.org/10.1787//mtc_cond-2014-en. The multinational organization
was first established in 1961 by the United States, Canada and 18
European countries, dedicated to global development, and has since
expanded to 35 members.
\1298\``Report by the Experts on Double Taxation,'' League of
Nation Document E.F.S. 73/F19 (1923), a report commissioned by the
League at its second assembly. See also, Lara Friedlander and Scott
Wilkie, ``Policy Forum: The History of Tax Treaty Provisions--And Why
It Is Important to Know About It,'' 54 Canadian Tax Journal No. 4
(2006).
\1299\For example, the OECD initiated a multi-year study on base-
erosion and profit shifting in response to concerns of multiple
members. For an overview of that project, see Joint Committee on
Taxation, Background, Summary, and Implications of the OECD/G20 Base
Erosion and Profit Shifting Project (JCX-139-15), November 30, 2015.
This document can also be found on the Joint Committee on Taxation
website at www.jct.gov.
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4. International principles as applied in the U.S. system
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.
B. 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.\1300\
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.\1301\
---------------------------------------------------------------------------
\1300\Sec. 7701(a)(30).
\1301\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.\1302\ All other
partnerships and corporations (that is, those organized under
the laws of foreign countries) are treated as foreign.\1303\ 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.\1304\ 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.
---------------------------------------------------------------------------
\1302\Sec. 7701(a)(4).
\1303\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.
\1304\``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).
---------------------------------------------------------------------------
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, in
which case it continues to be treated as a domestic corporation
for ten years following such migration.\1305\ 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.\1306\
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\1305\Sec. 7874.
\1306\Section 7874(a). In addition, an excise tax may be imposed on
certain stock compensation of executives of companies that undertake
inversion transactions. Sec. 4985.
---------------------------------------------------------------------------
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,\1307\ 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 US-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.\1308\
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\1307\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.
\1308\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\1309\ that adopt, with few changes, the 2016
temporary and proposed regulations.
---------------------------------------------------------------------------
\1309\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.\1310\ 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.\1311\ 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.
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\1310\Treas. Reg. sec. 301.7701-1, et seq.
\1311\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.\1312\
---------------------------------------------------------------------------
\1312\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.\1313\ 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.\1314\ Interest paid by the
U.S. branch of a foreign corporation is also treated as U.S.-
source income.\1315\
---------------------------------------------------------------------------
\1313\Sec. 861(a)(1); Treas. Reg. sec. 1.861-2(a)(1).
\1314\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).
\1315\Sec. 884(f)(1).
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Dividends
Dividend income is generally sourced by reference to the
payor's place of incorporation.\1316\ 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.\1317\
---------------------------------------------------------------------------
\1316\Secs. 861(a)(2), 862(a)(2).
\1317\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.\1318\ 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.
---------------------------------------------------------------------------
\1318\Sec. 861(a)(4).
---------------------------------------------------------------------------
Royalties are sourced in the place of use of (or the
place of privilege to use) the property for which the royalties
are paid.\1319\ 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.
---------------------------------------------------------------------------
\1319\Ibid.
---------------------------------------------------------------------------
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.\1320\ 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,\1321\ 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.\1322\ As a result, nonresident
includes any foreign corporation.\1323\
---------------------------------------------------------------------------
\1320\Sec. 865(a).
\1321\Sec. 865(g)(1)(B).
\1322\Sec. 865(g)(1)(A).
\1323\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.\1324\ 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.\1325\
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.\1326\
---------------------------------------------------------------------------
\1324\Secs. 865(b), 861(a)(6), 862(a)(6); Treas. Reg. sec. 1.861-
7(c).
\1325\Sec. 865(e)(2).
\1326\ 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.\1327\
---------------------------------------------------------------------------
\1327\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.\1328\ 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.\1329\
---------------------------------------------------------------------------
\1328\Sec. 865(c).
\1329\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.\1330\ Compensation for services performed both within
and without the United States is allocated between U.S.-and
foreign-source.\1331\
---------------------------------------------------------------------------
\1330\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.
\1331\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.\1332\
---------------------------------------------------------------------------
\1332\Sec. 861(a)(7).
---------------------------------------------------------------------------
Transportation income
Transportation income is any income derived from, or in
connection with, the use (or hiring or leasing for use) of a
vessel or aircraft (or a container used in connection
therewith) or the performance of services directly related to
such use.\1333\ That definition does not encompass land
transport except to the extent that it is directly related to
shipping by vessel or aircraft, but regulations extend a
similar rule for determining the source of income from
transportation services other than shipping or aviation.
Sources rules generally provide that income from furnishing
transportation that both begins and ends in the United States
is U.S.-source income,\1334\ and 50-percent of income
attributable to transportation that either begins or the 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\1335\
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.\1336\
---------------------------------------------------------------------------
\1333\Sec. 863(c)(3).
\1334\Sec. 863(c).
\1335\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.
\1336\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.
---------------------------------------------------------------------------
A subcategory of transportation income, ``U.S. source
gross transportation income'' is subject to taxation on a gross
basis at the rate of four percent.\1337\ Income is within the
scope of this special tax if it is considered to be U.S. source
because travel begins or ends in the United States, is not
effectively connected, and is not of a kind to which the
exemption from tax applies.\1338\
---------------------------------------------------------------------------
\1337\Sec. 887(a). Special rules for determining whether
transportation income is effectively connected with the conduct of a
U.S. trade or business are also provided, and for coordinating the
application of sections 871, 882, and 887.
\1338\Sec. 887(b)(1).
---------------------------------------------------------------------------
An exemption from U.S. tax is provided for transportation
income of foreign persons from countries that extend reciprocal
relief to U.S. persons. A nonresident alien individual with
income from the international operation of a ship may qualify,
provided that the foreign country in which such individual is
resident grants an equivalent exemption to individual residents
of the United States.\1339\ A similar exemption from U.S. tax
is provided for gross income derived by a foreign corporation
from the international operation of an aircraft, provided that
the foreign country in which the corporation is organized
grants an equivalent exemption to corporations organized in the
United States.\1340\ To determine whether income from shipping
or aviation is eligible for an exemption under section 883, one
must examine the extent to which the foreign jurisdiction has
extended reciprocity for U.S. businesses; whether the party
claiming an exemption is eligible for the tax relief; and the
nature of the activities that give rise to the income.
---------------------------------------------------------------------------
\1339\Sec. 872(b)(1).
\1340\Sec. 883(a)(2).
---------------------------------------------------------------------------
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.\1341\ 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.\1342\ 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.
---------------------------------------------------------------------------
\1341\Sec. 863(d).
\1342\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.\1343\ 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.
---------------------------------------------------------------------------
\1343\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.\1344\ 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.
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\1344\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.
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Section 482 authorizes the Secretary of the Treasury to
allocate income, deductions, credits, or allowances among
related business entities\1345\ 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.\1346\ 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.\1347\
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\1345\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.''
\1346\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.
\1347\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.\1348\ 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 trade
or business is under consideration for cases with little
potential for abuse and administrative difficulties.\1349\
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\1348\Sec. 367(d).
\1349\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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C. 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\1350\ or a
bilateral income tax treaty.\1351\
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\1350\E.g., the portfolio interest exception in section 871(h)
(discussed below).
\1351\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.\1352\ 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.\1353\ 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.\1354\
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\1352\Secs. 871(a), 881. If the FDAP income is also ECI, it is
taxed on a net basis, at graduated rates.
\1353\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.
\1354\Commissioner 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,\1355\ 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.\1356\
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\1355\Sec. 887.
\1356\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.\1357\ 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\1358\
that are treated as income from U.S. sources are subject to
gross-basis taxation.\1359\ 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.\1360\
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\1357\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).
\1358\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).
\1359\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'').
\1360\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.\1361\ 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).\1362\ Similarly,
interest and original issue discount on certain short-term
obligations is also exempt from U.S. tax when paid to a foreign
person.\1363\ Additionally, there is generally no information
reporting required with respect to payments of such
amounts.\1364\
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\1361\Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441-
1(b)(4)(ii).
\1362\Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441-1(b)(4)(iii).
\1363\Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 1.1441-
1(b)(4)(iv).
\1364\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.\1365\ 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.\1366\ Portfolio interest, however, does not include
interest received by a 10-percent shareholder,\1367\ certain
contingent interest,\1368\ interest received by a controlled
foreign corporation from a related person,\1369\ 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.\1370\
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\1365\Sec. 871(h)(2).
\1366\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).
\1367\Sec. 871(h)(3).
\1368\Sec. 871(h)(4).
\1369\Sec. 881(c)(3)(C).
\1370\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.\1371\ Withholding on FDAP payments to
foreign payees is required unless the withholding agent,\1372\
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.\1373\
The principal statutory exemptions from the 30-percent tax
apply to interest on bank deposits, and portfolio interest,
described above.\1374\
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\1371\Secs. 1441, 1442.
\1372\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).
\1373\Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b).
\1374\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 30-percent 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.\1375\
The nonresident withholding rules apply broadly to any
financial institution or other payor, including foreign
financial institutions.\1376\
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\1375\Treas. Reg. sec. 1.1461-1(b), (c).
\1376\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.\1377\ 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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\1377\Sec. 1462.
---------------------------------------------------------------------------
Excise tax on foreign reinsurance premiums
An excise tax applies to premiums paid to foreign
insurers and reinsurers covering U.S. risks.\1378\ 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.
---------------------------------------------------------------------------
\1378\Secs. 4371-4374.
---------------------------------------------------------------------------
Many U.S. tax treaties provide an exemption from the
excise tax, including the treaties with Germany, Japan,
Switzerland, and the United Kingdom.\1379\ 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).\1380\
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\1379\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.
\1380\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.\1381\ 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.\1382\
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\1381\Secs. 871(b), 882.
\1382\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.\1383\
---------------------------------------------------------------------------
\1383\Sec. 875.
---------------------------------------------------------------------------
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.\1384\ 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.\1385\ Detailed rules
govern whether trading in stocks or securities or commodities
constitutes the conduct of a U.S. trade or business.\1386\ 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.
---------------------------------------------------------------------------
\1384\Sec. 864(b).
\1385\Sec. 864(b)(1).
\1386\Sec. 864(b)(2).
---------------------------------------------------------------------------
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.\1387\
---------------------------------------------------------------------------
\1387\Sec. 864(c).
---------------------------------------------------------------------------
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).\1388\ 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.\1389\
---------------------------------------------------------------------------
\1388\Sec. 864(c)(2).
\1389\Sec. 864(c)(3).
---------------------------------------------------------------------------
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.\1390\ Foreign-source income not
included in one of these categories (described next) generally
is exempt from U.S. tax.
---------------------------------------------------------------------------
\1390\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.\1391\ 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.\1392\
---------------------------------------------------------------------------
\1391\Sec. 864(c)(4)(B).
\1392\Sec. 864(c)(4)(D)(i).
---------------------------------------------------------------------------
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.\1393\
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.\1394\
---------------------------------------------------------------------------
\1393\Sec. 864(c)(5)(A).
\1394\Sec. 864(c)(5)(B).
---------------------------------------------------------------------------
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.\1395\
---------------------------------------------------------------------------
\1395\Sec. 864(c)(4)(C).
---------------------------------------------------------------------------
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.\1396\ 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.\1397\ 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.\1398\
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\1396\Sec. 864(c)(1)(B).
\1397\Sec. 864(c)(6).
\1398\Sec. 864(c)(7).
---------------------------------------------------------------------------
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.\1399\ 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;\1400\ whether the party
claiming an exemption is eligible for the tax relief;\1401\ and
the activities that give rise to the income qualify under
relevant regulations.
---------------------------------------------------------------------------
\1399\Sec. 887(b)(4).
\1400\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.
\1401\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.\1402\ 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).
---------------------------------------------------------------------------
\1402\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.\1403\ 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.
---------------------------------------------------------------------------
\1403\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.\1404\
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\1404\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.''\1405\ The dividend equivalent amount
generally is the earnings and profits of a U.S. branch of a
foreign corporation attributable to its ECI.\1406\ Limited
categories of earnings and profits attributable to a foreign
corporation's ECI are excluded in calculating the dividend
equivalent amount.\1407\
---------------------------------------------------------------------------
\1405\Sec. 884(a).
\1406\Sec. 884(b).
\1407\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).\1408\ 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.
---------------------------------------------------------------------------
\1408\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).\1409\ 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.\1410\ 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.
---------------------------------------------------------------------------
\1409\Sec. 884(f)(1)(A).
\1410\Sec. 884(f)(1)(B).
---------------------------------------------------------------------------
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 that involve 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.\1411\
Disqualified interest includes interest paid or accrued to
related parties when no Federal income tax is imposed with
respect to such interest;\1412\ 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.
---------------------------------------------------------------------------
\1411\Sec. 163(j).
\1412\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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D. 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,\1413\ 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\1414\ and the passive foreign investment
company (``PFIC'') rules.\1415\ 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.\1416\
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\1413\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.
\1414\Secs. 951-964.
\1415\Secs. 1291-1298.
\1416\Secs. 901, 902, 960, 1293(f).
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2. Anti-deferral regimes
Subpart F
Subpart F,\1417\ 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).\1418\
---------------------------------------------------------------------------
\1417\Secs. 951-964.
\1418\Secs. 951(b), 957, 958. The term ``United States
shareholder'' is used interchangeably herein with ``U.S. shareholder.''
---------------------------------------------------------------------------
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.\1419\ 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,\1420\
insurance income,\1421\ and certain income relating to
international boycotts and other violations of public
policy.\1422\
---------------------------------------------------------------------------
\1419\Sec. 951(a).
\1420\Sec. 954.
\1421\Sec. 953.
\1422\Sec. 952(a)(3)-(5).
---------------------------------------------------------------------------
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.\1423\
---------------------------------------------------------------------------
\1423\Sec. 954.
---------------------------------------------------------------------------
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\1424\ in order to address captive
insurance companies.\1425\ 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.
---------------------------------------------------------------------------
\1424\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.
\1425\Joint Committee on Taxation, General Explanation of the Tax
Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 968.
---------------------------------------------------------------------------
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.\1426\ 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.\1427\ 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.\1428\ 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.
---------------------------------------------------------------------------
\1426\Secs. 951(a)(1)(B), 956.
\1427\Sec. 956(c)(1).
\1428\Sec. 956(c)(2).
---------------------------------------------------------------------------
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.\1429\ 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).\1430\
---------------------------------------------------------------------------
\1429\Sec. 954(c)(3).
\1430\Sec. 954(b)(4).
---------------------------------------------------------------------------
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.\1431\ 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.\1432\
---------------------------------------------------------------------------
\1431\Sec. 954(c)(6).
\1432\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.\1433\ 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.
---------------------------------------------------------------------------
\1433\Sec. 954(h). See section 128 of the PATH Act of 2015, which
made the active financing exception permanent.
---------------------------------------------------------------------------
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.\1434\
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.
---------------------------------------------------------------------------
\1434\Sec. 954(c)(2)(C).
---------------------------------------------------------------------------
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.\1435\ 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.
---------------------------------------------------------------------------
\1435\Sec. 954(h)(3)(E).
---------------------------------------------------------------------------
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.\1436\
---------------------------------------------------------------------------
\1436\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.
---------------------------------------------------------------------------
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.\1437\ 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.\1438\ 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.\1439\
---------------------------------------------------------------------------
\1437\Sec. 959(a)(1).
\1438\Sec. 959(a)(2).
\1439\Sec. 959(c).
---------------------------------------------------------------------------
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.\1440\
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.\1441\
---------------------------------------------------------------------------
\1440\Sec. 961(a).
\1441\Sec. 961(b).
---------------------------------------------------------------------------
Passive foreign investment companies
The Tax Reform Act of 1986\1442\ 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.\1443\ 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.\1444\ 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.\1445\ 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.''\1446\
---------------------------------------------------------------------------
\1442\Pub. L. No. 99-514.
\1443\Sec. 1297.
\1444\Secs. 1293-1295.
\1445\Sec. 1291.
\1446\Sec. 1296.
---------------------------------------------------------------------------
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. 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.\1447\ 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.\1448\
---------------------------------------------------------------------------
\1447\Sec. 1297(b)(2)(B).
\1448\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.
---------------------------------------------------------------------------
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\1449\ and the personal holding company
rules.
---------------------------------------------------------------------------
\1449\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.\1450\
---------------------------------------------------------------------------
\1450\Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
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.\1451\ 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.\1452\
---------------------------------------------------------------------------
\1451\Secs. 901, 904.
\1452\Sec. 904(c).
---------------------------------------------------------------------------
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.\1453\
However, subject to certain exceptions, deductions for interest
expense and research and experimental expenses are apportioned
based on taxpayer ratios.\1454\ 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.\1455\
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\1453\Treas. Reg. sec. 1.861-8(b), Temp. Treas. Reg. sec. 1.861-
8T(c).
\1454\Temp. Treas. Reg. sec. 1.861-9T, Treas. Reg. sec. 1.861-17.
\1455\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.\1456\ These rules
exclude foreign corporations from an affiliated group.\1457\
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.\1458\ The effective date of the
modified rules has been delayed to January 1, 2021.\1459\ 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.
---------------------------------------------------------------------------
\1456\Secs. 864(e)(5), 1504.
\1457\Sec. 1504(b)(3).
\1458\Sec. 864(f); ``American Jobs Creation Act of 2004''
(``AJCA''), Pub. L. 108-357, sec. 401(a).
\1459\Hiring Incentives to Restore Employment Act, Pub. L. No. 111-
147, sec. 551(a).
---------------------------------------------------------------------------
The foreign tax credit limitation is applied separately
to passive category income and to general category
income.\1460\ 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.\1461\ 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.\1462\
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\1460\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).
\1461\Sec. 904(d)(3). The subpart F rules applicable to CFCs and
their 10-percent U.S. shareholders are described below.
\1462\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.\1463\ 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.\1464\
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\1463\Secs. 904(f), (g).
\1464\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.\1465\
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\1465\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'').\1466\ 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.\1467\ 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.\1468\
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\1466\Sec. 1503(d).
\1467\Treas. Reg. sec. 1.1503(d)-6(d).
\1468\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.\1469\
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\1469\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.\1470\ 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).\1471\
Deductions were disallowed for expenses that were directly
allocable to the deductible portion of any dividend.\1472\
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\1470\Sec. 965(d)(1).
\1471\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).
\1472\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.\1473\ In general, a DISC is not subject to corporate-
level tax and offers limited deferral of tax liability to its
shareholders.\1474\ 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.\1475\
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.\1476\ Gain on the
sale of DISC stock is treated as a dividend to the extent of
accumulated DISC income.\1477\ 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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\1473\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).
\1474\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).
\1475\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).
\1476\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).
\1477\Sec. 995(c).
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INTERNATIONAL TAX PROVISIONS
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 House bill, sec. 14101 of the
Senate amendment, and new sec. 245A of the Code)
HOUSE BILL
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'').\1478\
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\1478\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.\1479\
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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\1479\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.
---------------------------------------------------------------------------
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\1480\
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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\1480\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.\1481\ The determination of the foreign-
source portion of such a distribution is calculated in a
similar manner as for other types of dividends.
---------------------------------------------------------------------------
\1481\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.
---------------------------------------------------------------------------
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.
SENATE AMENDMENT
In general
The provision allows an exemption for certain 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)\1482\ (referred to here as ``DRD'').
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\1482\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 (other than a PFIC that is not also a CFC)
with respect to which any domestic corporation is a U.S.
shareholder.\1483\
---------------------------------------------------------------------------
\1483\Secs. 1297, 1298.
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Foreign-source portion of a dividend
The DRD is available only for the foreign-source portion
of dividends received by a domestic corporation 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 undistributed foreign earnings bears to
the total undistributed earnings of the foreign corporation.
Undistributed earnings are the amount of the earnings and
profits of a specified 10-percent owned foreign
corporation\1484\ as of the close of the taxable year of the
specified 10-percent owned foreign corporation in which the
dividend is distributed and not reduced by dividends\1485\
distributed during that taxable year. Undistributed foreign
earnings are the portion of the undistributed earnings
attributable to neither income described in section
245(a)(5)(A) nor section 245(a)(5)(B), without regard to
section 245(a)(12).
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\1484\Computed in accordance with secs. 964(a) and 986.
\1485\Pursuant to section 959(d), a distribution of previously
taxed income does not constitute a dividend even if it reduces earnings
and profits.
---------------------------------------------------------------------------
Hybrid Dividends
The DRD is not available for any dividend received by a
U.S. shareholder from a controlled foreign corporation if the
dividend is a hybrid dividend. A hybrid dividend is an amount
received from a controlled foreign corporation for which a
deduction would be allowed under this provision and for which
the specified 10-percent owned foreign corporation received a
deduction (or other tax benefit) from taxes imposed by a
foreign country.
If a controlled foreign corporation with respect to which
a domestic corporation is a U.S. shareholder receives a hybrid
dividend from any other controlled foreign corporation with
respect to which the domestic corporation is also a U.S.
shareholder, then the hybrid dividend is treated for purposes
of section 951(a)(1)(A) as subpart F income of the recipient
controlled foreign corporation for the taxable year of the
controlled foreign corporation in which the dividends was
received and the U.S. shareholder includes in gross income an
amount equal to the shareholder's pro rata share of the subpart
F income, determined in the same manner as section 951(a)(2).
Foreign tax credit disallowance
No foreign tax credit or deduction is allowed for any
taxes paid or accrued with respect to a dividend that qualifies
for the DRD.
For purposes of computing the section 904(a) foreign tax
credit limitation, a domestic corporation that is a U.S.
shareholder of a specified 10-percent owned foreign corporation
must compute its foreign-source taxable income by disregarding
the foreign-source portion of any dividend received from that
foreign corporation for which the DRD is taken, and any
deductions properly allocable or apportioned to that foreign-
source portion or the stock with respect to which it is paid.
Holding period requirement
A domestic corporation is not permitted a DRD in respect
of any dividend on any share of stock that is held by the
domestic corporation for 365 days or less during the 731-day
period beginning on the date that is 365 days before the date
on which the share becomes ex-dividend with respect to the
dividend. For this purpose, the holding period requirement is
treated as met only if the specified 10-percent owned foreign
corporation is a specified 10-percent owned foreign corporation
at all times during the period and the taxpayer is a U.S.
shareholder with respect to such specified 10-percent owned
foreign corporation at all times during the period.
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.
CONFERENCE AGREEMENT
In general
The provision in the conference agreement generally
follows the provision in the Senate amendment, with some
changes, as described below, and allows an exemption for
certain foreign income 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\1486\ that are United States shareholders of those
foreign corporations within the meaning of section 951(b)\1487\
(referred to here, as above, as ``DRD'').
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\1486\Including a controlled foreign corporation treated as a
domestic corporation for purposes of computing the taxable income
thereof. See Treas. Reg. sec. 1.952-2(b)(1). Therefore, a CFC receiving
a dividend from a 10-percent owned foreign corporation that constitutes
subpart F income may be eligible for the DRD with respect to such
income.
\1487\Under section 951(b) as revised by the Act, 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 vote or value of the foreign corporation.
---------------------------------------------------------------------------
A specified 10-percent owned foreign corporation is any
foreign corporation (other than a PFIC that is not also a CFC)
with respect to which any domestic corporation is a U.S.
shareholder.\1488\
---------------------------------------------------------------------------
\1488\Secs. 1297, 1298.
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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. For
example, if a domestic corporation indirectly owns stock of a
foreign corporation through a 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.
The DRD is available only to C corporations that are not
RICs or REITs.
Foreign-source portion of a dividend
The DRD is available only for the foreign-source portion
of dividends received by a domestic corporation 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 undistributed foreign earnings bears to
the total undistributed earnings of the foreign corporation.
Undistributed earnings are the amount of the earnings and
profits of a specified 10-percent owned foreign
corporation\1489\ as of the close of the taxable year of the
specified 10-percent owned foreign corporation in which the
dividend is distributed and not reduced by dividends\1490\
distributed during that taxable year. Undistributed foreign
earnings are the portion of the undistributed earnings
attributable to neither income described in section
245(a)(5)(A) nor section 245(a)(5)(B), without regard to
section 245(a)(12).
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\1489\Computed in accordance with secs. 964(a) and 986.
\1490\Pursuant to section 959(d), a distribution of previously
taxed income does not constitute a dividend even if it reduces earnings
and profits.
---------------------------------------------------------------------------
Hybrid dividends
The DRD is not available for any dividend received by a
U.S. shareholder from a controlled foreign corporation if the
dividend is a hybrid dividend. A hybrid dividend is an amount
received from a controlled foreign corporation for which a
deduction would be allowed under this provision and for which
the specified 10-percent owned foreign corporation received a
deduction (or other tax benefit) with respect to any income,
war profits, and excess profits taxes imposed by any foreign
country.
If a controlled foreign corporation with respect to which
a domestic corporation is a U.S. shareholder receives a hybrid
dividend from any other controlled foreign corporation with
respect to which the domestic corporation is also a U.S.
shareholder, then the hybrid dividend is treated for purposes
of section 951(a)(1)(A) as subpart F income of the recipient
controlled foreign corporation (notwithstanding section
954(c)(6)) for the taxable year of the controlled foreign
corporation in which the dividends was received and the U.S.
shareholder includes in gross income an amount equal to the
shareholder's pro rata share of the subpart F income,
determined in the same manner as section 951(a)(2).
Foreign tax credit disallowance
No foreign tax credit or deduction is allowed for any
taxes paid or accrued with respect to any portion of a
distribution treated as a dividend that qualifies for the DRD.
For purposes of computing the section 904(a) foreign tax
credit limitation, a domestic corporation that is a U.S.
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 DRD is taken, and any deductions properly allocable or
apportioned to that foreign-source portion or the stock with
respect to which it is paid.
Holding period requirement
A domestic corporation is not permitted a DRD in respect
of any dividend on any share of stock that is held by the
domestic corporation for 365 days or less during the 731-day
period beginning on the date that is 365 days before the date
on which the share becomes ex-dividend with respect to the
dividend. For this purpose, the holding period requirement is
treated as met only if the specified 10-percent owned foreign
corporation is a specified 10-percent owned foreign corporation
at all times during the period and the taxpayer is a U.S.
shareholder with respect to such specified 10-percent owned
foreign corporation at all times during the 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. Modification of subpart F inclusion for increased investments in
United States property (sec. 4002 of the House bill, sec. 14218
of the Senate amendment, and sec. 956 of the Code)
HOUSE BILL
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.
SENATE AMENDMENT
The provision excepts domestic corporations that are U.S.
shareholders in the CFC from the requirement that they
recognize income when the CFC increases its investment in U.S.
property.
Effective date.--The provision applies to taxable years
of foreign corporations beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement does not follow the House bill
or the Senate amendment.
3. Special rules relating to sales or transfers involving specified 10-
percent owned foreign corporations (sec. 4003 of the House
bill, sec. 14102 of the Senate Amendment and secs.
367(a)(3)(C), 961, 1248 and new sec. 91 of the Code)
HOUSE BILL
Reduction in basis of certain foreign stock
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.
SENATE AMENDMENT
Sales by United States persons of stock
In the case of the sale or exchange by a domestic
corporation of stock in a foreign corporation held for one year
or more, any amount received by the domestic corporation which
is treated as a dividend for purposes of section 1248, is
treated as a dividend for purposes of applying the provision.
Reduction in basis of certain foreign stock
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
this provision) 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 specified 10-percent owned
foreign corporation's stock has already been reduced pursuant
to section 1059.
Sale by a CFC of a lower-tier CFC
If for any taxable year of a CFC beginning after December
31, 2017, an amount is treated as a dividend under section
964(e)(1) because of a sale or exchange by the CFC of stock in
another foreign corporation held for a year or more, then: (i)
the foreign-source portion of the dividend is treated as
subpart F income of the selling CFC for purposes of section
951(a)(1)(A), (ii) a United States shareholder with respect to
the selling CFC includes in gross income for the taxable year
of the shareholder with or within the taxable year of the CFC
ends, an amount equal to the shareholder's pro rata share
(determined in the same manner as under section 951(a)(2)) of
the amount treated as subpart F income under (i), and (iii) the
deduction under section 245A(a) is allowable to the United
States shareholder with respect to the subpart F income
included in gross income under (ii) in the same manner as if
the subpart F income were a dividend received by the
shareholder from the selling CFC.
In the case of a sale or exchange by a CFC of stock in
another corporation in a taxable year of the selling CFC
beginning after December 31, 2017, to which this provision
applies if gain were recognized, rules similar to those in
section 961(d) apply.
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) as in effect before the date of
enactment of TCJA) to a specified 10-percent owned foreign
corporation with respect to which it is a U.S. shareholder
after the transfer, 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 (if any) of:
(1) losses incurred by the foreign branch after December 31,
2017, and before the transfer, for which a deduction was
allowed to the domestic corporation, over (2) the sum of
certain 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. The transferred loss amount is reduced by the
amount of gain recognized by the taxpayer (other than gain
recognized by reason of an overall foreign loss recapture) on
account of the transfer.
The amount of loss included in the gross income of the
taxpayer under the proposed rule above for any taxable year
cannot exceed the amount allowed as a deduction under new
section 245A for the taxable year (taking into account
dividends received from all specified 10-percent owned foreign
corporations with respect to which the taxpayer is a U.S.
shareholder). Any amount not included in gross income for a
taxable year because of this proposed rule is included in gross
income in the succeeding taxable year.
Amounts included in gross income by reason of the
provision are treated as derived from sources within the United
States. Consistent with regulations or guidance that the
Secretary of the Treasury may prescribe, proper adjustments are
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 provision.
Repeal of active trade or business exception
Section 367 is amended to provide that in connection with
any exchange described in section 332, 351, 354, 356, or 361,
if a U.S. person transfers property used in the active conduct
of a trade or business to a foreign corporation, such foreign
corporation shall not, for purposes of determining the extent
to which gain shall be recognized on such transfer, be
considered to be a corporation.
Effective date.--The provision relating to reduction of
basis in certain foreign stock for the purposes of determining
a loss is effective for dividends received in taxable years
beginning after December 31, 2017.
The provisions relating to transfer of loss amounts from
foreign branches to certain foreign corporations and to the
repeal of the active trade or business exception are effective
for transfers after December 31, 2017.
CONFERENCE AGREEMENT
The provision in the conference agreement retains
elements of both the House Bill and the Senate amendment, as
follows.
Sales by United States persons of stock
In the case of the sale or exchange by a domestic
corporation of stock in a foreign corporation held for one year
or more, any amount received by the domestic corporation which
is treated as a dividend for purposes of section 1248, is
treated as a dividend for purposes of applying the provision.
Reduction in basis of certain foreign stock
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
this provision) 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 specified 10-percent owned
foreign corporation's stock has already been reduced pursuant
to section 1059.
Sale by a CFC of a lower-tier CFC
If for any taxable year of a CFC beginning after December
31, 2017, an amount is treated as a dividend under section
964(e)(1) because of a sale or exchange by the CFC of stock in
another foreign corporation held for a year or more, then: (i)
the foreign-source portion of the dividend is treated as
subpart F income of the selling CFC for purposes of section
951(a)(1)(A), (ii) a United States shareholder with respect to
the selling CFC includes in gross income for the taxable year
of the shareholder with or within the taxable year of the CFC
ends, an amount equal to the shareholder's pro rata share
(determined in the same manner as under section 951(a)(2)) of
the amount treated as subpart F income under (i), and (iii) the
deduction under section 245A(a) is allowable to the United
States shareholder with respect to the subpart F income
included in gross income under (ii) in the same manner as if
the subpart F income were a dividend received by the
shareholder from the selling CFC.
In the case of a sale or exchange by a CFC of stock in
another corporation in a taxable year of the selling CFC
beginning after December 31, 2017, to which this provision
applies if gain were recognized, rules similar to section
961(d) apply.
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)) as in effect before the date
of enactment of TCJA) to a specified 10-percent owned foreign
corporation with respect to which it is a U.S. shareholder
after the transfer, 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 (if any) of:
(1) losses incurred by the foreign branch after December 31,
2017, and before the transfer, for which a deduction was
allowed to the domestic corporation, over (2) the sum of
certain 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. The transferred loss amount is reduced by the
amount of gain recognized by the taxpayer (other than gain
recognized by reason of an overall foreign loss recapture) on
account of the transfer.
Amounts included in gross income by reason of the
provision are treated as derived from sources within the United
States. Consistent with regulations or guidance that the
Secretary of the Treasury may prescribe, proper adjustments are
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 provision.
The amount of gain taken into account under this
provision is reduced by the amount of gain which would be
recognized under section 367(a)(3)(C) as in effect before the
date of enactment of TCJA\1491\ with respect to losses incurred
before January 1, 2018.
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\1491\Determined without regard to the rule providing for proper
adjustment of basis in the stock in the specified 10-percent owned
foreign corporation to which the transfer is made.
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Repeal of active trade or business exception
Section 367 is amended to provide that in connection with
any exchange described in section 332, 351, 354, 356, or 361,
if a U.S. person transfers property used in the active conduct
of a trade or business to a foreign corporation, such foreign
corporation shall not, for purposes of determining the extent
to which gain shall be recognized on such transfer, be
considered to be a corporation.
Effective date.--The provisions relating to sales or
exchanges of stock apply to sales or exchanges after December
31, 2017.
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 provisions relating to transfer of loss amounts from
foreign branches to certain foreign corporations and to the
repeal of the active trade or business are effective for
transfers after December 31, 2017.
4. Treatment of deferred foreign income upon transition to
participation exemption system of taxation and deemed
repatriation at two-tier rate (sec. 4004 of the House bill,
sec. 14103 of the Senate amendment, and secs. 78, 904, 907 and
965 of the Code)
HOUSE BILL
In general
The provision generally requires that, for the last
taxable year of a foreign corporation beginning before January
1, 2018, all 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 their pro
rata shares of the accumulated post-1986 deferred foreign
income that 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 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 all specified foreign
corporations is increased for the last taxable year\1492\ 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 rule
applies to all U.S. shareholders\1493\ 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.\1494\ 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.\1495\
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\1492\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.
\1493\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.
\1494\Taxation of income earned by PFICs remains subject to the
antideferral PFIC regime and are ineligible for the dividend received
deduction under new section 245A.
\1495\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 of the
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 that are (1) not 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, not 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
distributions during the taxable year to which section 965
applies. Such earnings are increased by the amount of qualified
deficits\1496\ 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.
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\1496\Sec. 952(c)(1)(B)(ii).
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The Secretary may prescribe appropriate rules 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.\1497\
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\1497\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.
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Reductions of amounts included in income of U.S. shareholder of foreign
corporations with deficits in earnings and profits
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 an ``E&P deficit foreign
corporation.'' 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
measured 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.\1498\
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\1498\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.
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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 earnings and profits deficits as of November 2, 2017,
and December 31, 2017:
Example
------------------------------------------------------------------------
Post-1986
Specified Foreign Corp. Percentage profit/ Pro Rata
Owned deficit USD Share
------------------------------------------------------------------------
A................................ 60% ($1,000) ($600)
B................................ 10% ($200) ($20)
C................................ 70% $2,000 $1,400
D................................ 100% $1,000 $1,000
------------------------------------------------------------------------
The aggregate foreign earnings and profits 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 earnings and profits
deficit allocable to Corporation C is ($362), that is, ($620)
1400/2400. The remainder of the aggregate foreign
earnings and profits deficit is allocable to Corporation D. The
U.S. shareholder has a net surplus of earnings and profits 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, a U.S. corporation may have two
domestic subsidiaries, X and Y, in 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 may be 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
domestic 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 sum 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 included.
Certain reductions from aggregate cash position are
specified in the provision. First, rules are provided to avoid
the double counting of cash position 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 that the earnings constitute blocked
income that could not be distributed by the corporation due to
local jurisdiction restrictions,\1499\ 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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\1499\Sec. 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 he determines had 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 is it 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.\1500\
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\1500\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\1501\ 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 the fraction, 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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\1501\Sec. 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 available 10 year 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
case or similar proceeding, 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.\1502\ 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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\1502\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 of 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.
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.
SENATE AMENDMENT
In general
The provision generally requires that, for the last
taxable year beginning before January 1, 2018, any U.S.
shareholder of a specified foreign corporation must include in
income its pro rata share of the accumulated post-1986 deferred
foreign income of the corporation. For purposes of this
provision, a specified foreign corporation is any foreign
corporation that has at least one U.S. shareholder. It excludes
PFICs that are not also CFCs. A portion of that pro rata share
of foreign earnings is deductible; the amount of the deductible
portion depends upon whether the deferred earnings are held in
cash or other assets. The deduction results in a reduced rate
of tax with respect to income from the required inclusion of
pre-effective date earnings. A corresponding portion of the
credit for foreign taxes is disallowed, thus limiting the
credit to the taxable portion of the included income. The
separate foreign tax credit limitation rules of present law
section 904 apply, with coordinating rules. The increased tax
liability generally may be paid over an eight-year period.
Special rules are provided for S corporations and real estate
investment trusts (``REITs'').
Subpart F
The mechanism for requiring an inclusion of pre-
effective-date foreign earnings is subpart F. The provision
provides that in the last taxable year of a deferred foreign
income corporation that begins before January 1, 2018, which is
that foreign corporation's last taxable year before the
transition to the new corporate tax regime elsewhere in the
bill goes into effect, the subpart F income of the foreign
corporation is increased by the greater of the accumulated
post-1986 deferred foreign income of the corporation,
determined as of November 9, 2017, or as of December 31, 2017
(``measurement date''). The amount so determined is includible
in gross income under section 951 (hereinafter, ``the section
951 inclusion'').
The transition rule applies to all U.S.
shareholders\1503\ of a deferred foreign income corporation.
``Deferred foreign income corporation'' is any specified
foreign corporation with accumulated post-1986 deferred income
that is greater than zero. A specified foreign corporation is
defined as any CFC as well as any section 902 corporation, as
defined in section 909(d)(5) prior to date of enactment of this
bill, i.e., any foreign corporation in which a U.S. person owns
10 percent of the voting stock. Consistent with the general
operation of subpart F, each U.S. shareholder of a deferred
foreign income corporation must include in income the
shareholder's pro rata share of the foreign corporation's
subpart F income attributable to its section 951
inclusion.\1504\
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\1503\Sec. 951(b) defines United States shareholder as any U.S.
person that owns 10 percent or more of combined voting classes of stock
of a foreign corporation.
\1504\For purposes of taking into account its subpart F income
under this rule, a noncontrolled section 902 corporation is treated as
a CFC.
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Accumulated post-1986 deferred foreign income
A specified foreign corporation's accumulated post-1986
deferred foreign income on the measurement date is based on all
post-1986 foreign earnings and profits (``E&P'') that are not
previously taxed and are neither (1) attributable to income
that is effectively connected with the conduct of a trade or
business in the United States and subject to U.S. income tax
nor (2) subpart F income (determined without regard to the
section 951 inclusion) included in the gross income of a U.S.
shareholder. The potential pool of includible earnings includes
all undistributed foreign earnings accumulated in taxable years
beginning after 1986, computed in accordance with sections
964(a) and 986, taking into account only periods when the
foreign corporation was a specified corporation. The pool of
post-1986 foreign earnings and profits is not reduced by
distributions during the taxable year to which section 965
applies.
Reductions of amounts included in income of U.S. shareholder of foreign
corporations with deficits in E&P
The pool of post-1986 earnings and profits taken into
consideration in computing the section 951 inclusion required
of a U.S. shareholder under this transition rule generally is
reduced by foreign earnings and profits deficits that are
properly allocated to that person. The U.S. shareholder must
determine its aggregate E&P deficit based on its interest in
each specified foreign corporation with a deficit in post-1986
foreign earnings and profits as of the measurement date (``E&P
deficit foreign corporation'').
The U.S. shareholder's aggregate E&P deficit is then
allocated among the deferred foreign income corporations 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 foreign income corporations
with respect to which the shareholder is a U.S. shareholder.
For the portion of aggregate E&P deficits that include
qualified deficits, the portion of the deficit that is
attributable to a qualified deficit, and the qualified
activity, must be identified. The provision does not permit
intragroup netting among U.S. shareholders within an affiliated
group.
In taxable years beginning after 2017, amounts by which
the section 951 inclusion was reduced by aggregate E&P deficits
are considered as amounts included in the gross income of the
U.S. shareholder. The shareholder's pro rata share of the E&P
of an E&P deficit foreign corporation that used qualified
deficits to reduce its section 951 inclusion is increased by
the amount of such deficit and attributed to the same activity
to which the income was attributed.
Deductions from section 951 inclusion
To determine the taxable portion of the section 951
inclusion, the U.S. shareholders with accumulated deferred
foreign income may deduct a portion of the section 951
inclusion in an amount that depends upon the proportion of
aggregate earnings and profits attributable to cash assets
rather than noncash assets, in the nature of a partial
dividends-received deduction. A U.S. shareholder may deduct
71.4 percent of the aggregate earnings and profits attributable
to cash assets, and 85.7 percent of the remainder of the
aggregate earnings and profits in the section 951
inclusion.\1505\
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\1505\Committee Print, Reconciliation Recommendations Pursuant to
H. Con. Res. 71, S. Prt. 115-20, (December 2017), as reprinted on the
website of the Senate Budget Committee, available at https://
www.budget.senate.gov/taxreform., at footnote 1198, indicated that the
income deducted was to be treated as exempt from tax, with the result
that the deducted income, if earned by a partnership, could give rise
to an increase in a partner's basis under section 705(a)(1)(B).
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A U.S. shareholder may elect, no later than with a timely
filed return for the taxable year, not to apply its net
operating loss deduction to the deemed repatriation. If so,
neither the section 951 inclusion nor any related deemed paid
foreign tax credits may be taken into account in computing the
net operating loss deduction for that year.
Cash position
The aggregate earnings and profits attributable to cash
assets for a U.S. shareholder is the greater of the pro rata
share of the cash position of all specified foreign
corporations as of the last day of the last taxable year
beginning before January 1, 2018, or the average of the cash
position determined on the last day of each of the two taxable
years ending immediately before November 9, 2017. 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 (other than stock in the specified foreign corporation)
government securities, certificates of deposit, commercial
paper, and short-term obligations.
To avoid double counting of cash assets, a U.S.
shareholder may disregard accounts receivable and short-term
obligations of a specified foreign corporation if that
shareholder can establish that the amounts were already taken
into account by that shareholder with respect to another
specified foreign corporation.
The Secretary may identify other assets that are
economically equivalent to the enumerated assets that are
treated as cash. 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 credit
A portion of foreign income tax that is deemed paid or
accrued with respect to the section 951 inclusion is not
creditable or deductible against the Federal income tax
attributable to the inclusion. The disallowed portion of
foreign tax credits is 71.4 percent of foreign taxes paid
attributable to the portion of the section 965 inclusion
attributable to the aggregate cash position, plus 85.7 percent
of foreign taxes paid attributable to the remaining portion of
the section 965 inclusion.\1506\ The provision coordinates the
disallowance of foreign tax credits with the requirement\1507\
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.
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\1506\Other foreign tax credits used by a taxpayer against tax
liability resulting from the deemed inclusion apply in full.
\1507\Sec. 78.
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Limitations on assessment extended
The provision also allows an exception to the otherwise
applicable limitations period for assessment of tax to ensure
that the period for assessment of underpayments in tax related
to the treatment of the pre-effective date foreign earnings
does not expire prior to six years from the date on which the
return initially reflecting the section 951 inclusion was
filed.
Installment payments
The Senate amendment follows the House provision in
allowing a U.S. shareholder to elect to pay the net tax
liability resulting from the section 951 inclusion in eight
installments. However, if installment payment is elected,
rather than requiring eight equal installments, the Senate
amendment requires that the payments for each of the first five
years equal 8 percent of the net tax liability, the sixth
installment equals 15 percent of the net tax liability,
increasing to 20 percent for the seventh installment and the
remaining balance of 25 percent in the eighth year.
Special rule for S corporations
The Senate amendment also includes the special rule of
the House provision that 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.\1508\ After a
triggering event occurs, a shareholder in the S corporation may
elect to pay the net tax liability in eight installments,
subject to rules similar to those generally applicable absent
deferral.
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\1508\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 no more 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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Special rules for REITs
To alleviate burden of compliance with this section by
REITs, special rules are provided if a U.S. shareholder is a
REIT. First, although it must determine its pro rata share of
the increase in subpart F income in accordance with the rules
described above, the REIT is not required to take into account
the section 951 inclusion for purposes of determining the
REIT's amount of qualified REIT gross income.\1509\ The section
951 inclusion is, however, taken into account for purposes of
determining the income potentially required to be included in
taxable income under section 857(b). Unlike a regular
subchapter C corporation, a REIT is able to deduct the portion
of its income that is distributed to its shareholders as a
dividend or qualifying liquidating distribution each
year.\1510\ The distributed income of the REIT is not taxed at
the entity level; instead, it is taxed once, at the investor
level. As a result, a required inclusion under this section may
trigger a requirement that the REIT distribute an amount equal
to 90 percent of that inclusion despite the fact that it
received no distribution from the deferred foreign income
corporation.
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\1509\To qualify as a REIT, an entity must meet certain income
requirements. A REIT is restricted to earning certain types of
generally passive income. Among other requirements, at least 75 percent
of the gross income of a REIT in each taxable year must consist of real
estate-related income. Sec. 856. In addition, a REIT is required to
distribute at least 90 percent of REIT income (other than net capital
gain) annually. Sec. 857. Even if a REIT meets the 90-percent income
distribution requirement for REIT qualification, more stringent
distribution requirements must be met in order to avoid an excise tax
under section 4981.
\1510\Liquidating distributions are covered to the extent of
earnings and profits, and are defined to include redemptions of stock
that are treated by shareholders as a sale of stock under section 302.
Secs. 857(b)(2)(B), 561, and 562(b).
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To avoid requiring that any distribution requirement be
satisfied in one year, an election to defer the section 951
inclusion is permitted. Under a timely election, a REIT may
instead take the amounts into income over a period of eight
years. It must include 8 percent in each of the five years
beginning with the initial year in which the section 951
inclusion is determined, 15 percent in the sixth year, 20
percent in the seventh year and 25 percent in the eighth year.
In each of those years, it may claim a partial dividends-
received deduction in the applicable percentages in proportion
to the amount included in each of the eight years. Neither the
REIT nor the recipient of the distribution may elect to use the
installment payment.
In the event that a REIT liquidates, ceases to operate
its business, or distributes substantially all its assets (or
any other similar event occurs), any portion of the required
inclusion not yet taken into income is accelerated and required
to be included as gross income as of the day before the event.
Recapture from expatriated entities
The provision denies any deduction claimed with respect
to the mandatory subpart F inclusion and imposes a 35-percent
tax on the entire inclusion if a U.S. shareholder becomes an
expatriated entity within the meaning of section 7874(a)(2) at
any point within the ten-year period following enactment of the
Tax Cuts and Jobs Act. An entity that becomes a surrogate
foreign corporation that is treated as a domestic corporation
under section 7874(b) is not within the scope of this recapture
provision. Although the amount due is computed by reference to
the year in which the deemed subpart F income was originally
reported, the additional tax arises and is assessed for the
taxable year in which the U.S. shareholder becomes an
expatriated entity. No foreign tax credits are permitted with
respect to the additional tax due as a result of the recapture
rule.
Regulatory authority
A specific grant of regulatory authority to carry out the
intent of this provision is included. For example, the
Secretary may identify instances in which it is appropriate to
grant relief from potential double-counting of earnings and
profits, which may occur due to different measurement dates
applicable to specified foreign corporations within an
affiliated group, or the timing of intragroup distributions. It
also specifies that the Secretary shall prescribe rules or
guidance in order to deter tax avoidance through use of entity
classification elections and accounting method changes, among
other possible strategies.
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.
CONFERENCE AGREEMENT
The conference agreement generally follows the Senate
amendment, with several modifications, including those
described below.
Scope of earnings and profits subject to the transition tax
The provision applies to all CFCs. It also applies to all
foreign corporations (other than PFICs), in which a U.S. person
owns a 10-percent voting interest, rather than only CFCs and
those corporations within the definition of section 902
corporation. However, in the case of a foreign corporation that
is not a CFC, there must be at least one U.S. shareholder that
is a domestic corporation in order for the foreign corporation
to be a specified foreign corporation. Such entities must
determine their deferred foreign income based on the greater of
the aggregate post-1986 accumulated foreign earnings and
profits as of November 2, 2017 or December 31, 2017, not
reduced by distributions during the taxable year ending with or
including the measurement date, unless such distributions were
made to another specified foreign corporation. The portion of
post-1986 earnings and profits subject to the transition tax
does not include earnings and profits that were accumulated by
a foreign company prior to attaining its status as a specified
foreign corporation.
Deferred earnings of a U.S. shareholder are reduced (but
not below zero) by the shareholder's share of deficits as of
November 2, 2017, from a specified foreign corporation that is
not a deferred foreign income corporations, including the pro
rata share of deficits of another U.S. shareholder in a
different U.S. ownership chain within the same U.S. affiliated
group. The deficits (including hovering deficits\1511\) of a
foreign subsidiary that accumulated while it was a specified
foreign corporation may be taken into account in determining
the aggregate foreign earnings and profits deficit of a U.S.
shareholder. Therefore, the amount of post-1986 earnings and
profits of a specified foreign corporation is the amount of
positive earnings and profits accumulated as of the measurement
date reduced by any deficit in earnings and profits of the
specified foreign corporation as of the measurement date,
without regard to the limitation category of the earnings or
deficit. In taxable years beginning with the year of the
section 951 inclusion, amounts by which the section 951
inclusion was reduced by aggregate E&P deficits are considered
as amounts included in the gross income of the U.S. shareholder
for purposes of applying section 959.
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\1511\See, Treas. Reg. sec. 1.367(b)-7(d)(2) (definition of
hovering deficit).
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For example, assume that a foreign corporation organized
after December 31, 1986 has $100 of accumulated earnings and
profits as of November 2, 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. Foreign income taxes related to the hovering deficit,
however, would not generally be deemed paid by the U.S.
shareholder recognizing an incremental income inclusion.
However, the conferees expect the Secretary may issue guidance
to provide that, solely for purposes of calculating the amount
of foreign income taxes deemed paid by the U.S. shareholder
with respect to an inclusion under section 965, a hovering
deficit may be absorbed by current year earnings and profits
and the foreign income taxes related to the hovering deficit
may be added to the specified foreign corporation's post-1986
foreign income taxes in that separate category on a pro rata
basis in the year of inclusion.\1512\
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\1512\Cf. Treas. Reg. sec. 1.367(b)-7(d)(2)(ii) and (iii).
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In order to avoid double-counting and double non-counting
of earnings, the Secretary may provide guidance to adjust the
amount of post-1986 earnings and profits of a specified foreign
corporation to ensure that a single item of a specified foreign
corporation is taken into account only once in determining the
income of a United States shareholder subject to this
provision. Such an adjustment may be necessary, for example,
when there is a deductible payment (e.g., interest or
royalties) from one specified foreign corporation to another
specified foreign corporation between measurement dates.
The conferees are also aware that certain taxpayers may
have engaged in tax strategies designed to reduce the amount of
post-1986 earnings and profits in order to decrease the amount
of the inclusion required under this provision. Such tax
strategies may include a change in entity classification,
accounting method, and taxable year, or intragroup transactions
such as distributions or liquidations. The conferees expect the
Secretary to prescribe rules to adjust the amount of post-1986
earnings and profits in such cases in order to prevent the
avoidance of the purposes of this section.
Furthermore, the conferees expect that the Secretary will
exercise his authority under the consolidated return provisions
to appropriately limit the netting across chains of ownership
within a group of related parties in the application of this
provision. However, nothing in this provision is intended to be
interpreted as limiting the Secretary's authority to use such
regulatory authority to prescribe regulations on proper
application of this section on a consolidated basis for
affiliated groups filing a consolidated return.
Application of participation exemption deduction and related foreign
tax credits
Instead of prescribing a fixed percentage of the section
951 inclusion resulting from section 965 for which a partial
dividends-received deduction is permitted, the conference
agreement adopts the rate equivalent percentage method used in
the House bill. As a result, the total deduction from the
amount of the section 951 inclusion is the amount necessary to
result in a 15.5-percent rate of tax on accumulated post-1986
foreign earnings held in the form of cash or cash equivalents,
and 8-percent rate of tax on all other earnings. The
calculation is based on the highest rate of tax applicable to
corporations in the taxable year of inclusion, even if the U.S.
shareholder is an individual.
The use of rate equivalent percentages is intended to
ensure that the rates of tax imposed on the deferred foreign
income is similar for all U.S. shareholders, regardless of the
year in which section 965 gives rise to an income inclusion.
Individual U.S. shareholders, and the investors in U.S.
shareholders that are pass-through entities generally can elect
application of corporate rates for the year of inclusion.\1513\
In addition, the increase in income that is not taxed by reason
of the partial dividends-received deduction allowed under this
provision is treated as income exempt from tax for purposes of
determining the basis in an interest in a partnership or
subchapter S corporation, but not as income exempt from tax for
purposes of determining the accumulated adjustments account of
a subchapter S corporation.\1514\ Similarly, the conferees
expect the Secretary to provide regulations or other guidance
that provide for similar treatment under section 986(c), such
that any gain or loss recognized thereunder with respect to
distributions of earnings previously taxed (or treated as
previously taxed) by reason of section 965(a) will be
diminished proportionately to the diminution of the net taxable
income resulting from section 965(a) by reason of the deduction
allowed under section 965(c).
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\1513\Sec. 962 allows individuals to make the election for a
specific taxable year, subject to regulations provided by the
Secretary.
\1514\Secs. 705(a)(1)(B), 1367(a)(1)(A) and 1368(e)(1)(A).
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To reflect the change in the applicable rates of
deduction, the amounts by which foreign tax credits are reduced
are also changed. In addition, the rules for coordination of
this provision with the limitations on foreign tax credits
follows the House provision. 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 the
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 the fraction, 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.
The conferees recognize that basis adjustments (increases
or decreases) may be necessary with respect to both the stock
of the deferred foreign income corporation and the E&P deficit
foreign corporation and authorizes the Secretary to provide for
such basis adjustments or other adjustments, as may be
appropriate. For example, with respect to the stock of the
deferred foreign income corporation, the Secretary may
determine that a basis increase is appropriate in the taxable
year of the section 951A inclusion or, alternatively, the
Secretary may modify the application of section 961(b)(1) with
respect to such stock. Moreover, with respect to the stock of
the E&P deficit corporation, the Secretary may require a
reduction in basis for the taxable year in which the U.S.
shareholder's pro rata share of the earnings of the E&P deficit
corporation are increased.
With respect to the denial of the partial dividend to any
U.S. shareholder that becomes an expatriated entity within the
meaning of section 7874(a)(2) at any point within the ten-year
period following enactment of the Tax Cuts and Jobs Act, the
conference agreement clarifies that U.S. shareholders acquired
by a surrogate corporation are within the scope of the
provision only if the surrogate corporation inverted post-
enactment.
Determination of cash position
The determination of assets to be considered in measuring
the cash position of an entity is modified in several ways.
First, cash holdings of a specified foreign corporation in the
form of publicly traded stock may be excluded to the extent
that a U.S. shareholder can demonstrate that the value of such
stock was taken into account as cash or cash equivalent by
another specified foreign corporation with respect to which
such shareholder is a U.S. shareholder.
The conference agreement also provides that the cash
position of a U.S. shareholder does not generally include the
cash attributable to a direct ownership interest in a
partnership, but preserves the rule that cash positions of
certain noncorporate foreign entities owned by a specified
foreign corporation are taken into account if such entities
would be specified foreign corporations with respect to the
U.S. shareholder if the entity were a foreign corporation. For
example, if a U.S. shareholder owns a five-percent interest in
a partnership, the balance of which is held by a specified
foreign corporation with respect to which such shareholder is a
U.S. shareholder, the partnership is treated as a specified
foreign corporation with respect to the U.S. shareholder, and
the cash or cash equivalents held by the partnership are
includible in the aggregate cash position of the U.S.
shareholder on a look-through basis. The conferees anticipate
that the Secretary will provide guidance for taking into
account only the specified foreign corporation's share of the
partnership's cash position, and not the five-percent interest
directly owned by the U.S. shareholder.
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.
5. Election to increase percentage of domestic taxable income offset by
overall domestic loss treated as foreign source (sec. 14305 of
the Senate amendment and sec. 904(g) of the Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies section 904(g) by providing an
election to increase the percentage (but not greater than 100
percent) of domestic taxable income offset by any pre-2018
unused overall domestic loss and recharacterized as foreign
source. The term ``pre-2018 unused overall domestic loss''
means any overall domestic loss which: (1) arises in a
qualified taxable year beginning before January 1, 2018, and
(2) has not been used under the general rule set forth in
section 904(g)(1). The term ``qualified taxable year'' means
any taxable year of the taxpayer beginning after December 31,
2017, and before January 1, 2028.
Effective date.--The provision shall apply to taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
B. Rules Related to Passive and Mobile Income
1. Deduction for foreign-derived intangible income and global
intangible low-taxed income (sec. 14202 of the Senate amendment
and new sec. 250 of the Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The provision provides domestic corporations with reduced
rates of U.S. tax on their foreign-derived intangible income
(``FDII'') and global intangible low-taxed income
(``GILTI'').\1515\ GILTI is defined in section 14201 of the
Senate amendment and new section 951A, while a domestic
corporation's FDII is the portion of its intangible income,
determined on a formulaic basis, that is derived from serving
foreign markets. For taxable years beginning after December 31,
2017, and before January 1, 2019, the effective tax rate on
FDII is 21.875 percent and the effective U.S. tax rate on GILTI
is 17.5 percent under the Senate amendment.\1516\ For taxable
years beginning after December 31, 2018, and before January 1,
2026, the effective tax rate on FDII is 12.5 percent and the
effective U.S. tax rate on GILTI is 10 percent. For taxable
years beginning after December 31, 2025, the effective tax rate
on FDII is 15.625 percent and the effective U.S. tax rate on
GILTI is 12.5 percent.
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\1515\The deduction for FDII and GILTI is only available to
domestic corporations. U.S. shareholders that are not domestic
corporations are subject to full U.S. tax on their GILTI.
\1516\Under sec. 13001 of the Senate amendment, the corporate tax
rate is reduced to 20 percent for taxable years beginning after
December 31, 2018.
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Deduction for FDII and GILTI
Deduction for FDII and GILTI and taxable income limitation
In the case of domestic corporations for taxable years
beginning after December 31, 2017, and before January 1, 2026,
the provision generally allows as a deduction an amount equal
to the sum of 37.5 percent of its FDII plus 50 percent of its
GILTI (if any). For taxable years beginning after December 31,
2025, the deduction for FDII is reduced to 21.875 percent and
the deduction for GILTI is lowered to 37.5 percent.\1517\
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\1517\The Committee intends that the deduction allowed by new Code
section 250 be treated as exempting the deducted income from tax. Thus,
for example, the deduction for global intangible low-taxed income could
give rise to an increase in a domestic corporate partner's basis in a
domestic partnership under section 705(a)(1)(B).
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If the sum of a domestic corporation's FDII and GILTI
amounts exceeds its taxable income determined without regard to
this provision, then the amount of FDII and GILTI for which a
deduction is allowed is reduced by an amount determined by such
excess. The reduction in FDII for which a deduction is allowed
equals such excess multiplied by a percentage equal to the
corporation's FDII divided by the sum of its FDII and GILTI.
The reduction in GILTI for which a deduction is allowed equals
the remainder of such excess.\1518\
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\1518\For example, consider a domestic corporation with $1,250 of
FDII, $750 of GILTI, and taxable income (determined without regard to
this provision) of $1,500. The sum of the corporation's FDII and GILTI
amounts is $2,000, which exceeds $1,500 by $500. For purposes of this
provision, the amount of FDII for which a deduction is allowed is
reduced by $500 multiplied by $1,250/$2,000, or $312.50. The amount of
GILTI for which a deduction is allowed is reduced by the remainder of
the excess, or $187.50 (= $500 $750/$2,000).
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FDII
The FDII of any domestic corporation is the amount which
bears the same ratio to the corporation's deemed intangible
income as its foreign-derived deduction eligible income bears
to its deduction eligible income. In other words, a domestic
corporation's FDII is its deemed intangible income multiplied
by the percentage of its deduction eligible income that is
foreign-derived. The calculation can also be expressed as the
following:
The Secretary is authorized to prescribe regulations or
other guidance as may be necessary or appropriate to carry out
this provision.
Deduction eligible income
Deduction eligible income means, with respect to any
domestic corporation, the excess (if any) of the gross income
of the corporation--determined without regard to certain
exceptions to deduction eligible income--over deductions
(including taxes) properly allocable to such gross income
(referred to in this document as ``deduction eligible gross
income''). The exceptions to deduction eligible income are: (1)
the subpart F income of the corporation determined under
section 951; (2) the GILTI of the corporation; (3) any
financial services income (as defined in section 904(d)(2)(D))
of the corporation; (4) any dividend received from a CFC with
respect to which the corporation is a U.S. shareholder; and (5)
any domestic oil and gas extraction income of the corporation;
and (6) any foreign branch income (as defined in section
904(d)(2)(J)) of the corporation.
The formula for deduction eligible income can generally
be written as follows:\1519\
---------------------------------------------------------------------------
\1519\This formula assumes that the excess described in the
preceding paragraph is positive. Otherwise there is no deduction
eligible income.
---------------------------------------------------------------------------
Deduction Eligible Income = Gross Income-Exceptions-Allocable
Deductions
where Exceptions refers to the exceptions to deduction eligible
income and Allocable Deductions encompass all deductions
(including taxes) property allocable to deduction eligible
gross income.
Deemed intangible income
The domestic corporation's deemed intangible income means
the excess (if any) of its deduction eligible income over its
deemed tangible income return. The deemed tangible income
return means, with respect to any corporation, an amount equal
to 10 percent of the corporation's qualified business asset
investment (``QBAI''). Deemed intangible income can be
calculated as follows:\1520\
---------------------------------------------------------------------------
\1520\If the quantity in this formula is negative, deemed
intangible income is zero.
---------------------------------------------------------------------------
Deemed Intangible Income = Deduction Eligible Income-(10%
QBAI)
For purposes of computing its FDII, a domestic
corporation's QBAI is the average of the aggregate of its
adjusted bases, determined as of the close of each quarter of
the taxable year, in specified tangible property used in its
trade or business and of a type with respect to which a
deduction is allowable under section 167. The adjusted basis in
any property must be determined using the alternative
depreciation system under section 168(g), notwithstanding any
provision of law (or any other section of the Senate amendment)
which is enacted after the date of enactment of this provision
(unless such later enacted law specifically and directly amends
this provision's definition).
Specified tangible property means any tangible property
used in the production of deduction eligible income. If such
property was used in the production of deduction eligible
income and income that is not deduction eligible income (i.e.,
dual-use property), the property is treated as specified
tangible property in the same proportion that the amount of
deduction eligible gross income produced with respect to the
property bears to the total amount of gross income produced
with respect to the property.\1521\ In other words, the
percentage of a domestic corporation's adjusted basis in dual-
use property that is included in QBAI equals the deduction
eligible gross income produced with respect to the property
divided by the total gross income produced with respect to the
property.
---------------------------------------------------------------------------
\1521\For example, if a building is used in the production of
$1,000 of total gross income for a taxable year, $250 of which was
domestic oil and gas extraction income and the remaining $750 of which
was deduction eligible gross income, then 75 percent of a domestic
corporation's average adjusted basis in the building is included in
QBAI for that taxable year.
---------------------------------------------------------------------------
Foreign-derived deduction eligible income
Foreign-derived deduction eligible income means, with
respect to a taxpayer for its taxable year, any deduction
eligible income of the taxpayer that is derived in connection
with (1) property that is sold by the taxpayer to any person
who is not a United States person and that the taxpayer
establishes to the satisfaction of the Secretary is for a
foreign use\1522\ or (2) services provided by the taxpayer that
the taxpayer establishes to the satisfaction of the Secretary
are provided to any person, or with respect to property, not
located within the United States. Foreign use means any use,
consumption, or disposition that is not within the United
States. Special rules for determining foreign use apply to
transactions that involve property or services provided to
domestic intermediaries or related parties.
---------------------------------------------------------------------------
\1522\If property is sold by a taxpayer to a person who is not a
U.S. person, and after such sale the property is subject to
manufacture, assembly, or other processing (including the incorporation
of such property, as a component, into a second product by means of
production, manufacture, or assembly) outside the United States by such
person, then the property is for a foreign use.
---------------------------------------------------------------------------
For purposes of the provision, the terms ``sold,''
``sells'', and ``sale'' include any lease, license, exchange,
or other disposition.
Property or services provided to domestic intermediaries
If a taxpayer sells property to another person (other
than a related party) for further manufacture or modification
within the United States, the property is generally not treated
as sold for a foreign use even if such other person
subsequently uses such property for foreign use. However, there
is an exception to this general rule for property (1) that is
ultimately sold by a related party, or used by a related party
in connection with property that is sold or the provision of
services, to another person who is an unrelated party who is
not a U.S. person and (2) that the taxpayer establishes to the
satisfaction of the Secretary is for a foreign use.\1523\
Deduction eligible income derived in connection with services
provided to another person (other than a related party) located
within the United States is not treated as foreign-derived
deduction eligible income, even if the other person uses the
services in providing services the income from which is
considered foreign-derived deduction eligible income.
---------------------------------------------------------------------------
\1523\In other words, the fact that a component is included in a
piece of property that is eventually sold for a foreign use is
insufficient for the sale of the component to be considered for a
foreign use.
---------------------------------------------------------------------------
Special rules with respect to related party transactions
If property is sold to a related foreign party, the sale
is not treated as for a foreign use unless the property is sold
by the related foreign party to another person who is unrelated
and is not a U.S. person and the taxpayer establishes to the
satisfaction of the Secretary that such property is for a
foreign use. Income derived in connection with services
provided to a related party who is not located in the United
States is not treated as foreign-derived deduction eligible
income unless the taxpayer establishes to the satisfaction of
the Secretary that such service is not substantially similar to
services provided by the related party to persons located
within the United States.
For purposes of applying these rules, a related party
means any member of 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 sections 1504(b)(2) and 1504(b)(3). Any person (other
than a corporation) is treated as a member of the affiliated
group if the person is controlled by members of the group
(including any entity treated as a member of the group by
reason of this sentence) or controls any member, with control
being determined under the rules of section 954(d)(3).
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
with clarifications and modifications that include the
following:
The deduction for FDII and GILTI is
available only to C corporations that are not RICs or
REITs.\1524\
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\1524\An S corporation's taxable income is computed in the same
manner as an individual (sec. 1363(b)) so that deductions allowable
only to corporations, such as FDII and GILTI, do not apply. See Report
by the House Committee on Ways and Means to accompany H.R. 6055,
Subchapter S Revision Act of 1982, H. Rep. No. 97-826, p. 14; and
Report by the Senate Committee on Finance to accompany H.R. 6055,
Subchapter S Revision Act of 1982, S. Rep. 97-640, p. 15.
The Code provides that deductions for corporations provided in
part VIII of subchapter B, which include the deduction for FDII and
GILTI, do not apply in computing investment company taxable income
(sec. 852(b)(2)(C)) or real estate investment trust taxable income
(sec. 857(b)(2)(A)). Therefore, the deduction for FDII and GILTI does
not apply to RICs or REITs.
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The deduction for GILTI applies to the
amount treated as a dividend received by a domestic
corporation under section 78 that is attributable to
the corporation's GILTI amount under new section 951A.
The exclusions from deduction eligible
income are clarified.
The definition of deemed tangible income
return is clarified.
Illustration of effective tax rates on FDII and GILTI
Under a 21-percent corporate tax rate, and as a result of
the deduction for FDII and GILTI, the effective tax rate on
FDII is 13.125 percent and the effective U.S. tax rate on GILTI
(with respect to domestic corporations) is 10.5 percent for
taxable years beginning after December 31, 2017, and before
January 1, 2026.\1525\ Since only a portion (80 percent) of
foreign tax credits are allowed to offset U.S. tax on GILTI,
the minimum foreign tax rate, with respect to GILTI, at which
no U.S. residual tax is owed by a domestic corporation is
13.125 percent.\1526\ If the foreign tax rate on GILTI is zero
percent, then the U.S. residual tax rate on GILTI is 10.5
percent. Therefore, as foreign tax rates on GILTI range between
zero percent and 13.125 percent, the total combined foreign and
U.S. tax rate on GILTI ranges between 10.5 percent and 13.125
percent. At foreign tax rates greater than or equal to 13.125
percent, there is no residual U.S. tax owed on GILTI, so that
the combined foreign and U.S. tax rate on GILTI equals the
foreign tax rate.
---------------------------------------------------------------------------
\1525\Due to the reduction in the effective U.S. tax rate resulting
from the deduction for FDII and GILTI, the conferees expect the
Secretary to provide, as appropriate, regulations or other guidance
similar to that under amended section 965 with respect to the
determination of basis adjustments under section 705(a)(1) and the
determination of gain or loss under section 986(c).
\1526\13.125 percent equals the effective GILTI rate of 10.5
percent divided by 80 percent. If the foreign tax rate on GILTI is
13.125 percent, and domestic corporations are allowed a credit equal to
80 percent of foreign taxes paid, then the post-credit foreign tax rate
on GILTI equals 10.5 percent (= 13.125 percent 80 percent),
which equals the effective GILTI rate of 10.5 percent. Therefore, no
U.S. residual tax is owed.
---------------------------------------------------------------------------
For domestic corporations in taxable years beginning
after December 31, 2025, the effective tax rate on FDII is
16.406 percent and the effective U.S. tax rate on GILTI is
13.125 percent. The minimum foreign tax rate, with respect to
GILTI, at which no U.S. residual tax is owed is 16.406
percent.\1527\
---------------------------------------------------------------------------
\1527\If the foreign tax rate on GILTI is zero percent, then the
U.S. residual tax rate on GILTI is 13.125 percent. Therefore, as
foreign tax rates on GILTI range between zero percent and 16.406
percent, the total combined foreign and U.S. tax rate on GILTI ranges
between 13.125 percent and 16.406 percent. At foreign tax rates greater
than or equal to 16.406 percent, there is no residual U.S. tax on
GILTI, and the combined foreign and U.S. tax rate on GILTI equals the
foreign tax rate.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
2. Special rules for transfers of intangible property from controlled
foreign corporations to United States shareholders (sec. 14203
of the Senate amendment and new sec. 966 of the Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
For certain distributions of intangible property held by
a CFC on the date of enactment of this provision, the fair
market value of the property on the date of the distribution is
treated as not exceeding the adjusted basis of the property
immediately before the distribution. If the distribution is not
a dividend, a U.S. shareholder's adjusted basis in the stock of
the CFC with respect to which the distribution is made is
increased by the amount (if any) of the distribution that
would, but for this provision, be includible in gross income.
The adjusted basis of the property in the hands of the U.S.
shareholder immediately after the distribution is the adjusted
basis immediately before the distribution, reduced by the
amount of the increase (if any) described previously.
For purposes of the provision, intangible property means
intangible property as described in section 936(h)(3)(B) and
computer software as described in section 197(e)(3)(B).
The provision applies to distributions that are (1)
received by a domestic corporation from a CFC with respect to
which it is a U.S. shareholder and (2) made by the CFC before
the last day of the third taxable year of the CFC beginning
after December 31, 2017.
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.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
C. 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
House bill, sec. 14301 of the Senate amendment, and secs. 902
and 960 of the Code)
HOUSE BILL
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 proposal 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 proposal 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 proposal to
provide regulations and other guidance as may be necessary and
appropriate to carry out the purposes of this proposal. 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.\1528\ 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.
---------------------------------------------------------------------------
\1528\See Treas. Reg. sec. 1.904-6(a).
---------------------------------------------------------------------------
In addition to the rules described in this section, the
proposal 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except with respect to certain conforming amendments.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with the
following modifications. The conference agreement applies the
existing language of section 78, which treats the gross-up as a
dividend to the domestic corporation, to foreign income taxes
deemed paid under section 960(a), (b), and (d) (without regard
to the phrase `80 percent of' in section 960(d)(1), except with
respect to section 245 and new section 245A (i.e., the deemed
dividend would not receive the benefit of the participation
exemption). The conference agreement further revises new
section 250(a)(1)(B) to apply the deduction with respect to
inclusions under new section 951A to the section 78 gross-up.
In addition, the conference agreement eliminates the
dividend reference in section 907(c)(3)(A) without disturbing
the application of section 907(c)(3)(A) to certain interest
payments. The conference agreement also amends section 1293(f)
to provide section 960(a) credits to an inclusion of income of
a qualified electing fund (as defined in section 1295)
consistent with present law.
The conference agreement makes certain conforming
amendments to sections 901(m), 904, 907, and 909, including
replacing the reference to section 960(b) in section 904(k) to
section 960(c), striking the reference to section 902 in
section 904(d)(2)(E), and preserving the current applicability
of sections 901(m) and 909 to all taxpayers who claim foreign
tax credits, including qualified electing funds.
Effective date.--The provision applies to taxable years
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.
2. Source of income from sales of inventory determined solely on basis
of production activities (sec. 4102 of the House bill, sec.
14304 of the Senate amendment, and sec. 863(b) of the Code)
HOUSE BILL
Under the 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.
SENATE AMENDMENT
The Senate amendment is identical to the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
3. Separate foreign tax credit limitation basket for foreign branch
income (sec. 14302 of the Senate amendment and sec. 904 of the
Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision requires foreign branch income to be
allocated to a specific foreign tax credit basket. Foreign
branch income is the business profits of a United States person
which are attributable to one or more QBUs in one or more
foreign countries.
Under this provision, business profits of a QBU shall be
determined under rules established by the Secretary. Business
profits of a QBU shall not, however, include any income which
is passive category income.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
4. Acceleration of election to allocate interest, etc., on a worldwide
basis (sec. 14303 of the Senate amendment and sec. 864 of the
Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
This provision accelerates the effective date of the
worldwide interest allocation rules to apply to taxable years
beginning after December 31, 2017, rather than to taxable years
beginning after December 31, 2020.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
D. Modification of Subpart F Provisions
1. Repeal of inclusion based on withdrawal of previously excluded
subpart F income from qualified investment (sec. 4201 of the
House bill, sec. 14213 of the Senate amendment, and sec. 955 of
the Code)
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment follows the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
2. Repeal of treatment of foreign base company oil related income as
subpart F income (sec. 4202 of the House bill, sec. 14211 of
the Senate amendment, and sec. 954(a) of the Code)
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
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 House bill, sec. 14212 of the
Senate amendment, and sec. 954(b)(3) of the Code)
HOUSE BILL
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 five 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
4. Look-thru rule for related controlled foreign corporations made
permanent (sec. 4204 of the House bill, sec. 14217 of the
Senate amendment, and sec. 954(c)(6) of the Code)
HOUSE BILL
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 proposal 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
Effective date.--The proposal 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.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
5. Modification of stock attribution rules for determining CFC status
(sec. 4205 of the House bill, sec. 14214 of the Senate
amendment, and secs. 318 and 958 of the Code)
HOUSE BILL
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.
It also conforms the reporting requirements of section
6038 to require that entities that are treated as CFCs by
reason of the rules on constructive ownership are within the
scope of the reporting requirements.
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 in which or
with which such taxable years of foreign corporations end.
SENATE AMENDMENT
The Senate amendment is similar to the House bill, except
that it does not adopt the change to the reporting requirements
of section 6038 and has a different effective date.
Furthermore, the Senate Finance Committee explanation states
that the provision is not intended to cause a foreign
corporation to be treated as a controlled foreign corporation
with respect to a U.S. shareholder as a result of attribution
of ownership under section 318(a)(3) to a U.S. person that is
not a related person (within the meaning of section 954(d)(3))
to such U.S. shareholder as a result of the repeal of section
958(b)(4).\1529\
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\1529\Committee Print, Reconciliation Recommendations Pursuant to
H. Con. Res. 71, S. Prt. 115-20, (December 2017), p. 378, as reprinted
on the website of the Senate Budget Committee, available at https://
www.budget.senate.gov/taxreform.
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Effective date.--The provision is effective for the last
taxable year of foreign corporations beginning before January
1, 2018 and each subsequent year of such foreign corporations
and for the taxable years of U.S. shareholders in which or with
which such taxable years of foreign corporations end.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment. In
adopting this provision, the conferees intend to render
ineffective certain transactions that are used to as a means of
avoiding the 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. Such a
transaction converts former CFCs to non-CFCs, despite
continuous ownership by U.S. shareholders.
Effective date.--The provision is effective for the last
taxable year of foreign corporations beginning before January
1, 2018 and each subsequent year of such foreign corporations
and for the taxable years of U.S. shareholders in which or with
which such taxable years of foreign corporations end.
6. Modification of definition of United States shareholder (sec. 14215
of the Senate amendment and sec. 951 of the Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision expands the definition of U.S. shareholder
under subpart F to include any U.S. person who owns 10 percent
or more of the total value of shares of all classes of stock of
a foreign corporation.
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.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
7. Elimination of requirement that corporation must be controlled for
30 days before subpart F inclusions apply (sec. 4206 of the
House bill, sec. 14216 of the Senate amendment, and sec.
951(a)(1) of the Code)
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
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.
8. Current year inclusion of foreign high return amounts or global
intangible low-taxed income by United States shareholders (sec.
4301 of the House bill, sec. 14201 of the Senate amendment, and
secs. 78 and 960 and new sec. 951A of the Code)
HOUSE BILL
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:\1530\
---------------------------------------------------------------------------
\1530\If the amount of interest expense exceeds [(7% + AFR)
QBAI], then the quantity in brackets in the formula equals
zero in the determination of FHRA.
FHRA = Net CFC Tested Income - [(7% + AFR) 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 certain exceptions to tested income, over deductions
(including taxes) properly allocable to such gross income. The
exceptions to tested income are: (1) the corporation's ECI if
the income is subject to tax;\1531\ (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.
---------------------------------------------------------------------------
\1531\ECI includes income that is subject to the election described
in section 4303 of the House bill and new sec. 4491. 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 sec. 4491, to
the extent that the sales are made to a related party.
---------------------------------------------------------------------------
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\1532\ and any foreign oil related income.\1533\
---------------------------------------------------------------------------
\1532\Sec. 907(c)(1).
\1533\Sec. 907(c)(2).
---------------------------------------------------------------------------
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 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 earns foreign sales income of $300 and has
deductions of $220 (= $20 of taxes plus $200 of operating
expenses) 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 earns foreign sales income of $2,000 and has
deductions of $385 (= $85 of taxes plus $300 of operating
expenses) 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]).\1534\ 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.
---------------------------------------------------------------------------
\1534\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.
Example 2: Variant of Example 1, With Tested Loss
Example 2 generally has the same facts as example 1,
except that CFC2 earns 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 6.25 percent (= FHRA/
Aggregate Tested Income = $5/$80). 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
6.25 percent $105 = $5.25.
US1 includes 50 percent of its FHRA in gross income and
50 percent of its section 78 gross-up in gross income, or $5.78
(= 50% [$5 + $6.56]).\1535\ 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 $5.78, or $1.16.
---------------------------------------------------------------------------
\1535\The section 78 gross-up amount = 100 percent 6.25
percent $105 = $6.56.
---------------------------------------------------------------------------
The residual U.S. tax paid by US1 on its FHRA is its
tentative U.S. tax of $1.16 less its deemed-paid credit of
$5.25, or $0. The amount of US1's deemed-paid credit that is
unused, $4.09, 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
consists of 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.
SENATE AMENDMENT
In general
Under the provision, a U.S. shareholder of any CFC must
include in gross income for a taxable year its global
intangible low-taxed income (``GILTI'') in a manner generally
similar to inclusions of subpart F income. GILTI means, with
respect to any U.S. shareholder for the shareholder's taxable
year, the excess (if any) of the shareholder's net CFC tested
income over the shareholder's net deemed tangible income
return. The shareholder's net deemed tangible income return is
an amount equal to 10 percent 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.
The formula for GILTI, which is calculated at the U.S.
shareholder level, is:
GILTI = Net CFC Tested Income - (10% QBAI)
Net CFC tested income
Net CFC tested income means, with respect to any U.S.
shareholder, the excess of the aggregate of the shareholder's
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 certain exceptions to tested income--over deductions
(including taxes) properly allocable to such gross income
(referred to in this document as ``tested gross income''). The
exceptions to tested income are: (1) the corporation's ECI
under section 952(b); (2) any gross income taken into account
in determining the corporation's subpart F income; (3) any
gross income excluded from foreign base company income or
insurance income by reason of the high-tax exception under
section 954(b)(4); (4) any dividend received from a related
person (as defined in section 954(d)(3)); and (5) any foreign
oil and gas extraction income (as defined in section
907(c)(1)).
The tested loss of a CFC means the excess (if any) of
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 average of the aggregate of its adjusted bases, determined
as of the close of each quarter of the taxable year, in
specified tangible property used in its trade or business and
of a type with respect to which a deduction is generally
allowable under section 167. The adjusted basis in any property
must be determined using the alternative depreciation system
under current section 168(g), notwithstanding any provision of
law (or any other section of the Senate amendment) which is
enacted after the date of enactment of this provision (unless
such later enacted law specifically and directly amends this
provision's definition).
Specified tangible property means any property used in
the production of tested income.\1536\ If such property was
used in the production of both tested income and income that is
not tested income (i.e., dual-use property), the property is
treated as specified tangible property in the same proportion
that the amount of tested gross income produced with respect to
the property bears to the total amount of gross income produced
with respect to the property.\1537\
---------------------------------------------------------------------------
\1536\Specified tangible property does not include property used in
the production of tested loss, so that a CFC that has a tested loss in
a taxable year does not have QBAI for the taxable year.
\1537\For example, if a building produces $1,000 of tested gross
income and $250 of subpart F income for a taxable year, then 80 percent
(= $1,000/$1,250) of a domestic corporation's average adjusted basis in
the building is included in QBAI for that taxable year.
---------------------------------------------------------------------------
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.
Coordination with subpart F
Although GILTI inclusions do not constitute subpart F
income, GILTI inclusions are generally treated similarly to
subpart F inclusions. Thus they are generally treated in the
same manner as amounts included under section 951(a)(1)(A) for
purposes of applying sections 168(h)(2)(B), 535(b)(10),
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).
However, the Secretary may provide rules for coordinating the
GILTI inclusion with provisions of law in which the
determination of subpart F income is required to be made at the
CFC level.
The provision requires that the amount of GILTI included
by a U.S. shareholder be allocated across each CFC with respect
to which it is a U.S. shareholder. The portion of GILTI treated
as being with respect to a CFC equals zero for a CFC with no
tested income and, for a CFC with tested income, the portion of
GILTI which bears the same ratio to the total amount of GILTI
as the U.S. shareholder's pro rata amount of tested income of
the CFC bears to the aggregate amount of the U.S. shareholder's
pro rata amount of the tested income of each CFC with respect
to which it is a U.S. shareholder. For a CFC with tested
income, the following formula expresses how to determine the
portion of GILTI treated as being with respect to the CFC:
where Share of CFC's Tested Income is the U.S. shareholder's
pro rata amount of the tested income of a CFC and Share of Agg.
CFC Tested Income is the aggregate amount of the U.S.
shareholder's pro rata amount of the tested income of each CFC
with respect to which it is a U.S. shareholder.
For purposes of the GILTI inclusion, a person is treated
as a U.S. shareholder of a CFC for any taxable year only if
such person owns (within the meaning of section 958(a)) stock
in the corporation on the last day, in such year, 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.
Deemed-paid credit for taxes properly attributable to tested income
For any amount of GILTI included in the gross income of a
domestic corporation, the corporation's deemed-paid credit
equals 80 percent of the product of the corporation's inclusion
percentage multiplied by the aggregate tested foreign income
taxes paid or accrued, with respect to tested income, by each
CFC with respect to which the domestic corporation is a U.S.
shareholder.
The inclusion percentage means, with respect to any
domestic corporation, the ratio (expressed as a percentage) of
such corporation's GILTI amount 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 (referred to as
``aggregate tested income'' in the formulas below). Tested
foreign income taxes means, with respect to any domestic
corporation that is a U.S. shareholder of a CFC, the foreign
income taxes paid or accrued by the CFC that are properly
attributable to the CFC's tested income.\1538\
---------------------------------------------------------------------------
\1538\Tested foreign income taxes do not include any foreign income
tax paid or accrued by a CFC that is properly attributable to the CFC's
tested loss (if any).
---------------------------------------------------------------------------
The deemed-paid credit with respect to the GILTI
inclusion can be expressed in the following formula:
The provision creates a separate foreign tax credit
basket for GILTI, with no carryforward or carryback available
for excess credits. For purposes of determining the foreign tax
credit limitation, GILTI is not general category income, and
income that is both GILTI and passive category income is
considered passive category income. As described in section
14301 of the Senate amendment and new section 78, the taxes
deemed to have been paid are treated as an increase in GILTI
for purposes of section 78, determined by taking into account
100 percent of the product of the inclusion percentage and
aggregate tested foreign income taxes (instead of 80 percent in
the determination of the deemed-paid credit). Therefore, the
section 78 gross-up can be expressed in the following formula:
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.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
provision, with clarifications and modifications that include
the following.
Net deemed tangible income return
The conference agreement modifies, along lines similar to
an approach taken in the House bill provision, the calculation
of net deemed tangible income return for purposes of
determining GILTI. Net deemed tangible income return is, with
respect to any U.S. shareholder for a taxable year, the excess
(if any) of 10 percent of the aggregate of its pro rata share
of the QBAI of each CFC with respect to which it is a U.S.
shareholder over the amount of interest expense taken into
account in determining its net CFC tested income for the
taxable year to the extent that the interest expense exceeds
the interest income properly allocable to the interest expense
that is taken into account in determining its net CFC tested
income. As a result, the formula for GILTI in the conference
agreement is generally:\1539\
---------------------------------------------------------------------------
\1539\If the amount of interest expense exceeds 10% QBAI,
then the quantity in brackets in the formula equals zero in the
determination of GILTI.
GILTI = Net CFC Tested Income - [(10% QBAI) -
---------------------------------------------------------------------------
Interest Expense]
where Interest Expense is defined and limited in the manner
described above.
Computation of tested income and tested loss
For purposes of computing deductions (including taxes)
properly allocable to gross income included in tested income or
tested loss with respect to a CFC, the deductions are allocated
to such gross income following rules similar to the rules of
section 954(b)(5) (or to which such deductions would be
allocable if there were such gross income).
Calculation of pro rata shares
For purposes of determining pro rata shares in the
computation of a U.S. shareholder's GILTI amount, a person is
treated as a U.S. shareholder of a CFC for any taxable year of
such person only if the person owns (within the meaning of
section 958(a)) stock in the foreign corporation on the last
day in the taxable year of the foreign corporation on which the
foreign corporation is a CFC.
Qualified business asset investment
For purposes of determining a CFC's QBAI and its adjusted
basis in specified tangible property, the adjusted basis is
determined by allocating the depreciation deduction with
respect to the property ratably to each day during the period
in the taxable year to which the depreciation relates. In
addition, if a CFC holds an interest in a partnership at the
close of the CFC's taxable year, the CFC 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 the 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 167, and is used in the
production of tested income (determined with respect to the
CFC's distributive share of income with respect to the
property). The CFC's distributive share of the adjusted basis
of any property is the CFC's distributive share of income with
respect to the property.
Regulatory authority to address abuse
The conferees intend that non-economic transactions
intended to affect tax attributes of CFCs and their U.S.
shareholders (including amounts of tested income and tested
loss, tested foreign income taxes, net deemed tangible income
return, and QBAI) to minimize tax under this provision be
disregarded. For example, the conferees expect the Secretary to
prescribe regulations to address transactions that occur after
the measurement date of post-1986 earnings and profits under
amended section 965, but before the first taxable year for
which new section 951A applies, if such transactions are
undertaken to increase a CFC's QBAI.
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.
9. Limitation on deduction of interest by domestic corporations which
are members of an international group (sec. 4302 of the House
bill, sec. 14221 of the Senate amendment, and new sec. 163(n)
of the Code)
HOUSE BILL
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,\1540\ 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.
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\1540\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.
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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.
SENATE AMENDMENT
For any domestic corporation that is a member of a
worldwide affiliated group (hereinafter referred to as the
``U.S. corporate members''), the provision reduces the
deduction for interest paid or accrued by the corporation by
the product of the net interest expense of the domestic
corporation multiplied by the debt-to-equity differential
percentage of the worldwide affiliated group. Net interest
expense means the excess (if any) of: (1) interest paid or
accrued by the taxpayer during the taxable year, over (2) the
amount of interest includible in the gross income of the
taxpayer for the taxable year.\1541\
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\1541\The Secretary is provided is regulatory authority to provide
for adjustments in determining the amount of net interest expense.
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A worldwide affiliated group is one or more chains of
corporations, connected through stock ownership with a common
parent that would qualify as an affiliated group under section
1504(a), with two differences. First, the ownership threshold
of section 1504(a)(2) is applied using 50 percent rather than
80 percent. Second, the restrictions on inclusion described in
sections 1504(b)(2), (b)(3) and (b)(4) are disregarded for
purposes of identifying the worldwide affiliated group.
The debt-to-equity differential percentage means, with
respect to any worldwide affiliated group, the excess domestic
indebtedness of the group divided by the total indebtedness of
the domestic corporations that are members of the group. All
U.S. corporate members of the worldwide affiliated group are
treated as one member when determining whether the group has
excess domestic indebtedness as a result of a debt-to-equity
differential. Excess domestic indebtedness is the amount by
which the total indebtedness of the U.S. corporate members
exceeds 110 percent of the total indebtedness those members
would hold if their total indebtedness to total equity ratio
equaled the ratio of total indebtedness to total equity for the
worldwide affiliated group. Total equity means, with respect to
one or more corporations, the excess (if any) of: (1) the money
and all other assets of such corporations, over (2) the total
indebtedness of such corporations. For purposes of this
computation, intragroup debt and equity interests are
disregarded, and assets of the U.S. corporate members of the
worldwide affiliated group exclude any interest held by any
U.S. corporate member in any foreign corporation that is a
member of the group.
The amount of any interest not allowed as a deduction for
any taxable year by reason of this provision or new section
163(j) (depending on whichever imposes the lower limitation
with respect to such taxable year) can be carried forward
indefinitely.
The Secretary is provided regulatory authority to provide
rules for: (1) the prevention of the avoidance of this
provision, (2) adjustments in the case of corporations which
are members of an affiliated group as may be appropriate to
carry out the purposes of the provision, (3) the coordination
of this provision with section 884, (4) the treatment of
partnership indebtedness, allocation of partnership debt,
interest, or distributive shares, and (5) the coordination of
this provision with new section 163(j).
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
E. Prevention of Base Erosion
1. Base erosion using deductible cross-border payments between
affiliated companies (sec. 4303 of the House bill and new secs.
4491 and 6038E of the Code; sec. 14401 of the Senate amendment
and secs. 6038A and 6038C and new secs. 59A and 59B of the
Code)
HOUSE BILL
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\1542\ 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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\1542\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 + 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 US to FS1, $112.50
would be deemed to be income effectively connected to a US
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.
SENATE AMENDMENT
In general
Under the provision, an applicable taxpayer is required
to pay a tax equal to the base erosion minimum tax amount for
the taxable year. The base erosion minimum tax amount is the
excess of 10 percent of the modified taxable income of the
taxpayer for the taxable year over an amount equal to the
regular tax liability (defined in section 26(b)) of the
taxpayer for the taxable year reduced (but not below zero) by
the excess of an amount equal to the credits allowed under
Chapter 1 less the credit allowed under section 38 (general
business credits) for the taxable year allocable to the
research credit under section 41(a). For taxable years
beginning after December 31, 2025, two changes are made, (A)
the 10-percent provided for above is changed to 12.5-percent,
and (B) the regular tax liability is reduced by the aggregate
amount of the credits allowed under Chapter 1 (and no other
adjustment is made).\1543\
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\1543\In the case of an applicable taxpayer that is a member of an
affiliated group (defined in section 1504(a)(1)) that includes a bank
as defined in section 581 or a registered securities dealer defined in
section 15(a) of the Securities Exchange Act of 1934, the rates are 11
percent instead of the abovementioned 10 percent and 13.5 percent
instead of the abovementioned 12.5 percent.
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To determine its modified taxable income, the applicable
taxpayer computes its taxable income for the year without
regard to any base erosion tax benefit of a base erosion
payment or base erosion percentage of any allowable net
operating loss deduction.
Base erosion payments
A base erosion payment generally includes any amount paid
or accrued by a taxpayer to a foreign person that is a related
party of the taxpayer and with respect to which a deduction is
allowable under Chapter 1. Such payments also include any
amount paid or accrued by the taxpayer to the related party in
connection with the acquisition by the taxpayer from the
related party of property of a character subject to the
allowance of depreciation (or amortization in lieu of
depreciation).
Base erosion payments do not include payments for cost of
goods sold (which is not a deduction but rather a reduction to
income). A base erosion payment includes any amount that
constitutes reductions in gross receipts of the taxpayer that
is paid or accrued by the taxpayer with respect to: (1) a
surrogate foreign corporation which is a related party of the
taxpayer, but only if such person first became a surrogate
foreign corporation after November 9, 2017, or (2) a foreign
person that is a member of the same expanded affiliated group
as the surrogate foreign corporation. A surrogate foreign
corporation has the meaning given in section 7874(a)(2), but
does not include a foreign corporation treated as a domestic
corporation under section 7874(b).
A base erosion payment does not apply to any amount paid
or accrued by a taxpayer for services if such services meet the
requirements for eligibility for use of the services cost
method under section 482,\1544\ determined without regard to
the requirement that the services not contribute significantly
to fundamental risks of business success or failure and such
amount constitutes the total services cost with no markup.
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\1544\Described in Treas. Reg. sec. 1.482-9(b).
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Any qualified derivative payment is not treated as a base
erosion payment. A qualified derivative payment means any
payment made by a taxpayer pursuant to a derivative with
respect to which the taxpayer: (i) recognizes gain or loss as
if such derivative were sold for its fair market value on the
last business day of the taxable year (and such additional
times as are required by this title or the taxpayer's method of
accounting), (ii) treats any gain or loss so recognized as
ordinary, and (iii) treats the character of all items of
income, deduction, gain or loss with respect to a payment
pursuant to the derivative as ordinary.
No payment is treated as a qualified derivative payment
unless the taxpayer includes in the information required to be
reported under section 6038B(b)(2) with respect to such taxable
year such information as is necessary to identify the payments
to be so treated and such other information as the Secretary of
the Treasury determines necessary to carry out the provision.
The rule for qualified derivative payments does not apply
if such payment would be treated as a base erosion payment if
it were not made pursuant to a derivative, including any
interest, royalty, or service payment, or in the case of a
contract which has derivative and nonderivative components, the
payment is properly allocable to the nonderivative component.
For these purposes, the term derivative means any
contract (including any option, forward contract, futures
contract, short position, swap, or similar contract) the value
of which, or any payment or other transfer with respect to
which, is (directly or indirectly) determined by reference to
one or more of the following: (i) any share of stock of a
corporation, (ii) any evidence of indebtedness, (iii) any
commodity which is actively traded, (iv) any currency, (v) any
rate, price, amount, index, formula, or algorithm. Except as
otherwise provided by the Secretary of the Treasury, American
depository receipts and similar instruments with respect to
shares of stock in foreign corporations are treated as shares
of stock in such foreign corporations.
A base erosion tax benefit means: (i) any deduction
allowed under Chapter 1 for the taxable year with respect to a
base erosion payment, (ii) in the case of a base erosion
payment with respect to the purchase of property of a character
subject to the allowance for depreciation (or amortization in
lieu of depreciation), any deduction allowed in Chapter 1 for
depreciation or amortization in lieu of depreciation with
respect to the property acquired with such payment, or (iii)
any reduction in gross receipts with respect to a payment
described above with respect to a surrogate foreign corporation
(as defined there) in computing gross income of the taxpayer
for the taxable year.
Any base erosion tax benefit attributable to any base
erosion payment on which tax is imposed by sections 871 or 881
and with respect to which tax has been deducted and withheld
under sections 1441 or 1442, is not taken into account in
computing modified taxable income as defined above. The amount
not taken into account in computing modified taxable income is
reduced under rules similar to the rules under section
163(j)(5)(B).\1545\
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\1545\As in effect before the date of enactment of Tax Cuts and
Jobs Act.
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The base erosion percentage means for any taxable year,
the percentage determined by dividing the aggregate amount of
base erosion tax benefits of the taxpayer for the taxable year
by the aggregate amount of the deductions allowable to the
taxpayer under Chapter 1 for the taxable year, taking into
account base erosion tax benefits described above and by not
taking into account any deduction allowed under sections 172,
245A or 250 for the taxable year.
Applicable taxpayers and related parties
Applicable taxpayer means with respect to any taxable
year, a taxpayer: (A) which is a corporation other than a
regulated investment company, a real estate investment trust,
or an S corporation; (B) the average annual gross receipts of
the corporation for the three-taxable-year period ending with
the preceding taxable year are at least $500 million, and (C)
the base erosion percentage (as defined above) of the
corporation for the taxable year is four percent or higher.
In the case of a foreign person the gross receipts of
which are taken into account for purposes of this provision,
only gross receipts which are taken into account in determining
income effectively connected with the conduct of a trade or
business within the United States is taken into account. If a
foreign person's gross receipts are aggregated with a U.S.
person's gross receipts for reasons described in the
aggregation rules below, the preceding sentence does not apply
to the gross receipts of any U.S. person which are aggregated
with the taxpayer's gross receipts.
All persons treated as a single employer under section
52(a) are treated as one person for purposes of this provision,
except that in applying section 1563 for purposes of section
52, the exception for foreign corporations under section
1563(b)(2)(C) is disregarded (called the ``aggregation
rules'').
For purposes of this provision, foreign person has the
meaning given in section 6038A(c)(3).
Related party means: (i) any 25-percent owner of the
taxpayer, (ii) any person who is related to the taxpayer or any
25-percent owner of the taxpayer, within the meaning of
sections 267(b) or 707(b)(1), and (iii) any other person
related to the taxpayer within the meaning of section 482. For
these purposes, section 318 regarding constructive ownership of
stock applies to these related party rules except that 10-
percent is substituted for 50-percent in section 318(a)(2)(C),
and for these purposes section 318(a)(3)(A), (B) and (C) do not
cause a United States person to own stock owned by a person who
is not a United States person.
The provision provides that the Secretary of the Treasury
is to prescribe such regulations or other guidance necessary or
appropriate, including regulations providing for such
adjustments to the application of this section necessary to
prevent avoidance of the provision, including through: (1) the
use of unrelated persons, conduit transactions, or other
intermediaries, or (2) transactions or arrangements designed in
whole or in part: (A) to characterize payments otherwise
subject to this provision as payments not subject to this
provision, or (B) to substitute payments not subject to this
provision for payments otherwise subject to this provision.
Information reporting requirements\1546\
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\1546\Section 15006 of the bill (and new section 6050Z) establishes
certain reporting requirements. These reporting requirements are
effective for taxable years beginning after December 31, 2024, and
continue to be required regardless of whether the revenue requirement
is met. Any taxpayer who makes a payment to a foreign person who is a
related party (as such term is defined in section 14401 of the bill and
new section 59A) of the taxpayer during the taxable year is required to
make a return, according to forms and regulations prescribed by the
Secretary, setting forth (1) the amount of such payments by type and
separately stated and (2) any amount paid that results in a reduction
of gross receipts to the taxpayer (e.g., cost of goods sold).
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The provision authorizes the Secretary of the Treasury to
prescribe additional reporting requirements under section 6038A
relating to: (A) the name, principal place of business, and
country or countries in which organized or resident of each
person which: (i) is a related party to the reporting
corporation, and (ii) had any transaction with the reporting
corporation during its taxable year, (B) the manner of relation
between the reporting corporation and the person referred to in
(A), and (C) transactions between the reporting corporation and
each related foreign person.
In addition, for purposes of information reporting under
sections 6038A and 6038C, if the reporting corporation or the
foreign corporation to which section 6038C applies is an
applicable taxpayer under this provision, the information that
may be required includes: (A) base erosion payments paid or
accrued during the taxable year by the taxpayer to a foreign
person which is a related party of the taxpayer, (B) such
information as the Secretary of the Treasury finds necessary to
determine the base erosion minimum amount of the taxpayer for
the taxable year, and (C) such other information as the
Secretary of the Treasury determines is necessary.
The penalties provided for under sections 6038A(D)(1) and
(2) are both increased to $25,000.
Effective date.--The provision applies to base erosion
payments paid or accrued in taxable years beginning after
December 31, 2017.
CONFERENCE AGREEMENT
The provision in the conference agreement follows the
Senate amendment with some changes, as follows.
In general
Under the provision, an applicable taxpayer is required
to pay a tax equal to the base erosion minimum tax amount for
the taxable year. The base erosion minimum tax amount is the
excess of 10 percent\1547\ of the modified taxable income of
the taxpayer for the taxable year over an amount equal to the
regular tax liability (defined in section 26(b)) of the
taxpayer for the taxable year reduced (but not below zero) by
the excess (if any) of the credits allowed under Chapter 1
against such regular tax liability over the sum of: (1) the
credit allowed under section 38 for the taxable year which is
properly allocable to the research credit determined under
section 41(a), plus (2) the portion of the applicable section
38 credits not in excess of 80 percent of the lesser of the
amount of such credits or the base erosion minimum tax amount
(determined without regard to this clause (2)). For taxable
years beginning after December 31, 2025, two changes are made,
(A) the 10-percent provided for above is changed to 12.5-
percent, and (B) the regular tax liability is reduced by the
aggregate amount of the credits allowed under Chapter 1 (and no
other adjustment is made).\1548\
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\1547\5 percent rate applies for one year for base erosion payments
paid or accrued in taxable years beginning after December 31, 2017.
\1548\In the case of a taxpayer that is a member of an affiliated
group (defined in section 1504(a)(1)) that includes a bank as defined
in section 581 or a registered securities dealer defined in section
15(a) of the Securities Exchange Act of 1934, the rates are 6 percent
instead of 5 percent, 11 percent instead of 10 percent and 13.5 percent
instead of 12.5 percent.
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Applicable section 38 credits means the credit allowed
under section 38 for the taxable year which is properly
allocable to: (A) the low-income housing credit determined
under section 42(a), (B) the renewable electricity production
credit determined under section 45(a), and (C) the investment
credit determined under section 46, but only to the extent
properly allocable to the energy credit determined under
section 48.
To determine its modified taxable income, the applicable
taxpayer computes its taxable income for the year without
regard to any base erosion tax benefit with respect to any base
erosion payment or the base erosion percentage of any allowable
net operating loss deduction allowed under section 172 for the
taxable year.
Base erosion payments
A base erosion payment means any amount paid or accrued
by a taxpayer to a foreign person that is a related party of
the taxpayer and with respect to which a deduction is allowable
under Chapter 1. Such payments include any amount paid or
accrued by the taxpayer to the related party in connection with
the acquisition by the taxpayer from the related party of
property of a character subject to the allowance of
depreciation (or amortization in lieu of depreciation). A base
erosion payment includes any premium or other consideration
paid or accrued by the taxpayer to a foreign person which is a
related party of the taxpayer for any reinsurance payments
taken into account under sections 803(a)(1)(B) or 832(b)(4)(A).
Base erosion payments do not include any amount that
constitutes reductions in gross receipts including payments for
costs of goods sold. However, base erosion payment includes any
amount that constitutes reductions in gross receipts of the
taxpayer that is paid or accrued by the taxpayer with respect
to: (1) a surrogate foreign corporation which is a related
party of the taxpayer, but only if such person first became a
surrogate foreign corporation after November 9, 2017, or (2) a
foreign person that is a member of the same expanded affiliated
group as the surrogate foreign corporation. A surrogate foreign
corporation has the meaning given in section 7874(a)(2), but
does not include a foreign corporation treated as a domestic
corporation under section 7874(b).
A base erosion payment does not include any amount paid
or accrued by a taxpayer for services if such services meet the
requirements for eligibility for use of the services cost
method described in Treas. Reg. sec. 1.482-9, as in effect as
of the date of enactment of TCJA, without regard to the
requirement that the services not contribute significantly to
fundamental risks of business success or failure and only if
the payments are made for services that have no markup
component.
Any qualified derivative payment is not treated as a base
erosion payment. A qualified derivative payment means any
payment made by a taxpayer pursuant to a derivative with
respect to which the taxpayer: (i) recognizes gain or loss as
if such derivative were sold for its fair market value on the
last business day of the taxable year (and such additional
times as are required by this title or the taxpayer's method of
accounting), (ii) treats any gain or loss so recognized as
ordinary, and (iii) treats the character of all items of
income, deduction, gain or loss with respect to a payment
pursuant to the derivative as ordinary.
No payment is treated as a qualified derivative payment
unless the taxpayer includes in the information required to be
reported under section 6038B(b)(2) with respect to such taxable
year such information as is necessary to identify the payments
to be so treated and such other information as the Secretary of
the Treasury determines necessary to carry out the provision.
The rule for qualified derivative payments does not apply
if a payment with respect to a derivative is in substance, or
is disguising, the kind of payment that would be treated as a
base erosion payment if it were not made pursuant to a
derivative, including any interest, royalty, or service
payment, (or any other payment subject to this provision) or in
the case of a contract which has derivative and nonderivative
components, the payment is properly allocable to the
nonderivative component.
For these purposes, the term derivative means any
contract (including any option, forward contract, futures
contract, short position, swap, or similar contract) the value
of which, or any payment or other transfer with respect to
which, is (directly or indirectly) determined by reference to
one or more of the following: (i) any share of stock of a
corporation, (ii) any evidence of indebtedness, (iii) any
commodity which is actively traded, (iv) any currency, (v) any
rate, price, amount, index, formula, or algorithm. Except as
otherwise provided by the Secretary of the Treasury, American
depository receipts and similar instruments with respect to
shares of stock in foreign corporations are treated as shares
of stock in such foreign corporations. The term derivative does
not include any item described in paragraphs (i) through (v)
above nor shall the term `derivative' include any insurance,
annuity, or endowment contract issued by an insurance company
to which subchapter L applies (or issued by any foreign
corporation to which such subchapter would apply if such
foreign corporation were a domestic corporation).
A base erosion tax benefit means: (i) any deduction
allowed under Chapter 1 for the taxable year with respect to a
base erosion payment, (ii) in the case of a base erosion
payment with respect to the purchase of property of a character
subject to the allowance for depreciation (or amortization in
lieu of depreciation), any deduction allowed in Chapter 1 for
depreciation or amortization in lieu of depreciation with
respect to the property acquired with such payment, or (iii)
any reduction in gross receipts with respect to a payment
described above with respect to a surrogate foreign corporation
(as defined there) in computing gross income of the taxpayer
for the taxable year.
Any base erosion tax benefit attributable to any base
erosion payment on which tax is imposed by sections 871 or 881
and with respect to which tax has been deducted and withheld
under sections 1441 or 1442, is not taken into account in
computing modified taxable income as defined above. The amount
not taken into account in computing modified taxable income is
reduced under rules similar to the rules under section
163(j)(5)(B).\1549\
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\1549\As in effect before the date of enactment of TCJA.
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The base erosion percentage means for any taxable year,
the percentage determined by dividing the aggregate amount of
base erosion tax benefits of the taxpayer for the taxable year
by the aggregate amount of the deductions allowable to the
taxpayer under Chapter 1 for the taxable year, taking into
account base erosion tax benefits described above and by not
taking into account any deduction allowed under sections 172,
245A or 250 for the taxable year, any deduction for amounts
paid or accrued for services to which the exception for the
services cost method (as described above) applies, and any
deduction for qualified derivative payments which are not
treated as a base erosion payment as described above.
Applicable taxpayers and related parties
Applicable taxpayer means with respect to any taxable
year, a taxpayer: (A) which is a corporation other than a
regulated investment company, a real estate investment trust,
or an S corporation; (B) the average annual gross receipts of
the corporation for the three-taxable-year period ending with
the preceding taxable year are at least $500 million, and (C)
the base erosion percentage (as defined above) of the
corporation for the taxable year is three percent or
higher.\1550\
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\1550\In the case of an applicable taxpayer that is a member of an
affiliated group (defined in section 1504(a)(1)) that includes a bank
as defined in section 581 or a registered securities dealer defined in
section 15(a) of the Securities Exchange Act of 1934, the base erosion
percentage of which is two percent or higher.
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In the case of a foreign person the gross receipts of
which are taken into account for purposes of this provision,
only gross receipts which are taken into account in determining
income effectively connected with the conduct of a trade or
business within the United States is taken into account. If a
foreign person's gross receipts are aggregated with a U.S.
person's gross receipts for reasons described in the
aggregation rules below, the preceding sentence does not apply
to the gross receipts of any U.S. person which are aggregated
with the taxpayer's gross receipts.
All persons treated as a single employer under section
52(a) are treated as one person for purposes of this provision,
except that in applying section 1563 for purposes of section
52, the exception for foreign corporations under section
1563(b)(2)(C) is disregarded (called the ``aggregation
rules'').
For purposes of this provision, foreign person has the
meaning given in section 6038A(c)(3).
Related party means: (i) any 25-percent owner of the
taxpayer, (ii) any person who is related to the taxpayer or any
25-percent owner of the taxpayer, within the meaning of
sections 267(b) or 707(b)(1), and (iii) any other person
related to the taxpayer within the meaning of section 482. For
these purposes, section 318 regarding constructive ownership of
stock applies to these related party rules except that 10-
percent is substituted for 50-percent in section 318(a)(2)(C),
and for these purposes section 318(a)(3)(A), (B) and (C) do not
cause a United States person to own stock owned by a person who
is not a United States person.
The provision provides that the Secretary of the Treasury
is to prescribe such regulations or other guidance necessary or
appropriate, including regulations providing for such
adjustments to the application of this section necessary to
prevent avoidance of the provision, including through: (1) the
use of unrelated persons, conduit transactions, or other
intermediaries, or (2) transactions or arrangements designed in
whole or in part: (A) to characterize payments otherwise
subject to this provision as payments not subject to this
provision, or (B) to substitute payments not subject to this
provision for payments otherwise subject to this provision.
Information reporting requirements\1551\
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\1551\Section 15006 of the bill (and new section 6050Z) establishes
certain reporting requirements. These reporting requirements are
effective for taxable years beginning after December 31, 2024, and
continue to be required regardless of whether the revenue requirement
is met. Any taxpayer who makes a payment to a foreign person who is a
related party (as such term is defined in section 14401 of the bill and
new section 59A) of the taxpayer during the taxable year is required to
make a return, according to forms and regulations prescribed by the
Secretary, setting forth (1) the amount of such payments by type and
separately stated and (2) any amount paid that results in a reduction
of gross receipts to the taxpayer (e.g., cost of goods sold).
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The provision authorizes the Secretary of the Treasury to
prescribe additional reporting requirements under section 6038A
relating to: (A) the name, principal place of business, and
country or countries in which organized or resident of each
person which: (i) is a related party to the reporting
corporation, and (ii) had any transaction with the reporting
corporation during its taxable year, (B) the manner of relation
between the reporting corporation and the person referred to in
(A), and (C) transactions between the reporting corporation and
each related foreign person.
In addition, for purposes of information reporting under
sections 6038A and 6038C, if the reporting corporation or the
foreign corporation to which section 6038C applies is an
applicable taxpayer under this provision, the information that
may be required includes: (A) base erosion payments paid or
accrued during the taxable year by the taxpayer to a foreign
person which is a related party of the taxpayer, (B) such
information as the Secretary of the Treasury finds necessary to
determine the base erosion minimum amount of the taxpayer for
the taxable year, and (C) such other information as the
Secretary of the Treasury determines is necessary.
The penalties provided for under sections 6038A(D)(1) and
(2) are both increased to $25,000.
Effective date.--The provision applies to base erosion
payments paid or accrued in taxable years beginning after
December 31, 2017.
2. Limitations on income shifting through intangible property transfers
(sec. 14222 of the bill and secs. 367, 482, and 936 of the
Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision addresses recurring definitional and
methodological issues that have arisen in controversies\1552\
in transfers of intangible property for purposes of sections
367(d) and 482, both of which use the statutory definition of
intangible property in section 936(h)(3)(B). The provision
revises that definition and confirms the authority to require
certain valuation methods. It does not modify the basic
approach of the existing transfer pricing rules with regard to
income from intangible property.
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\1552\Veritas v. Commissioner, 133 T.C. No. 14 (December 10, 2009),
non-acq., IRB 2010-49 (December 6, 2010). (stating that including
goodwill and going concern value within the definition would
``expand[]'' that definition, and that ``taxpayers are merely required
to be compliant, not prescient''); Amazon v. Commissioner, 148 T.C. No.
8 (2017) (holding that ``workforce in place, going concern value,
goodwill, and what trial witnesses described as `growth options' and
corporate `resources' or `opportunities''' all fell outside the
definition under present law).
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Under the provision, workforce in place, goodwill (both
foreign and domestic), and going concern value are intangible
property within the meaning of section 936(h)(3)(B), as is the
residual category of ``any similar item'' the value of which is
not attributable to tangible property or the services of an
individual. The flush language at the end of that subparagraph
is removed, to make clear that the source or amount of value is
not relevant to whether property that is one of the specified
types of intangible property is within the scope of the
definition.
The provision clarifies the authority of the Secretary to
specify the method to be used to determine the value of
intangible property, both with respect to outbound
restructurings of U.S. operations and to intercompany pricing
allocations,\1553\ by amending 482 as well as the grant of
regulatory authority under section 367 regarding the use of
aggregate basis valuation and the application of the realistic
alternative principle.
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\1553\Secs. 367(d) and 482.
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With respect to aggregate basis valuation, the provision
requires use of that method of valuation in the case of
transfers of multiple intangible properties in one or more
related transactions if the Secretary determines that an
aggregate basis achieves a more reliable result than an asset-
by-asset approach. The provision is consistent with the
position that the additional value that results from the
interrelation of intangible assets can be properly attributed
to the underlying intangible assets in the aggregate, where
doing so yields a more reliable result. This approach is also
consistent with Tax Court decisions in cases outside of the
section 482 context, where collections of multiple, related
intangible assets were viewed by the Tax Court in the
aggregate.\1554\ Finally, it is also consistent with the cost-
sharing regulations.\1555\
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\1554\See, e.g., Kraft Foods Co. v. Commissioner, 21 T.C. 513
(1954) (thirty-one related patents must be valued as a group and the
useful life for depreciation should be based on the average of the
patents' useful lives); Standard Conveyor Co. v. Commissioner, 25
B.T.A. 281, p. 283 (1932) (``[I]t is evident that it is impossible to
value these seven patents separately. Their value, as in the case of
many groups of patents representing improvements on the prior art,
appears largely to consist of their combination.''); Massey-Ferguson,
Inc. v. Commissioner, 59 T.C. 220 (1972) (taxpayer who abandoned a
distribution network of contracts with separate distributorships was
entitled to an abandonment loss for the entire network in the taxable
year during which the last of the contracts was terminated because that
was the year in which the entire intangible value was lost).
\1555\See Treas. Reg. sec. 1.482-7(g)(2)(iv) (if multiple
transactions in connection with a cost-sharing arrangement involve
platform, operating and other contributions of resources, capabilities
or rights that are reasonably anticipated to be interrelated, then
determination of the arm's-length charge for platform contribution
transactions and other transactions on an aggregate basis may provide
the most reliable measure of an arm's-length result).
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The provision codifies use of the realistic alternative
principles to determine valuation with respect to intangible
property transactions. The realistic alternative principle is
predicated on the notion that a taxpayer will only enter into a
particular transaction if none of its realistic alternatives is
economically preferable to the transaction under consideration.
For example, under the existing regulations provide the IRS
with the ability to determine an arm's-length price by
reference to a transaction (such as the owner of intangible
property using it to make a product itself) that is different
from the transaction that was actually completed (such as the
owner of that same intangible property licensing the
manufacturing rights and then buying the product from the
licensee).
Effective date.--The provision applies to transfers in
taxable years beginning after December 31, 2017. No inference
is intended with respect to application of section 936(h)(3)(B)
or the authority of the Secretary to provide by regulation for
such application with respect to taxable years beginning before
January 1, 2018.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
3. Certain related party amounts paid or accrued in hybrid transactions
or with hybrid entities (sec. 14223 of the Senate amendment and
sec. 267A of the Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision denies a deduction for any disqualified
related party amount paid or accrued pursuant to a hybrid
transaction or by, or to, a hybrid entity. A disqualified
related party amount is any interest or royalty paid or accrued
to a related party to the extent that: (1) there is no
corresponding inclusion to the related party under the tax law
of the country of which such related party is a resident for
tax purposes or is subject to tax, or (2) such related party is
allowed a deduction with respect to such amount under the tax
law of such country. A disqualified related party amount does
not include any payment to the extent such payment is included
in the gross income of a U.S. shareholder under section 951(a).
A related party for these purposes is determined under the
rules of section 954(d)(3), except that such section applies
with respect to the payor as opposed to the CFC otherwise
referred to in such section.
A hybrid transaction is any transaction, series of
transactions, agreement, or instrument one or more payments
with respect to which are treated as interest or royalties for
Federal income tax purposes and which are not so treated for
purposes of the tax law of the foreign country of which the
recipient of such payment is resident for tax purposes or is
subject to tax. A hybrid entity is any entity which is either:
(1) treated as fiscally transparent for Federal income tax
purposes but not so treated for purposes of the tax law of the
foreign country of which the entity is resident for tax
purposes or is subject to tax, or (2) treated as fiscally
transparent for purposes of the tax law of the foreign country
of which the entity is resident for tax purposes or is subject
to tax but not so treated for Federal income tax purposes.
The provision further provides that the Secretary shall
issue regulations or other guidance as may be necessary or
appropriate to carry out the purposes of the provision,
including regulations or other guidance providing rules for:
(1) denying deductions for conduit arrangements that involve a
hybrid transaction or a hybrid entity, (2) the application of
this provision to foreign branches, (3) applying this provision
to certain structured transactions, (4) denying all or a
portion of a deduction claimed for an interest or a royalty
payment that, as a result of the hybrid transaction or entity,
is included in the recipient's income under a preferential tax
regime of the country of residence of the recipient and has the
effect of reducing the country's generally applicable statutory
tax rate by at least 25 percent, (5) denying all of a deduction
claimed for an interest or a royalty payment if such amount is
subject to a participation exemption system or other system
which provides for the exclusion or deduction of a substantial
portion of such amount, (6) rules for determining the tax
residence of a foreign entity if the foreign entity is
otherwise considered a resident of more than one country or of
no country, (7) exceptions to the general rule set forth in the
provision, and (8) requirements for record keeping and
information in addition to any requirements imposed by section
6038A.
Effective date.--The provision shall apply to taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with the following modifications. The bill provides that the
Secretary shall issue regulations or other guidance as may be
necessary or appropriate to carry out the purposes of the
provision for branches (domestic or foreign) and domestic
entities, even if such branches or entities do not meet the
statutory definition of a hybrid entity.
4. Shareholders of surrogate foreign corporations not eligible not
eligible for reduced rate on dividends (sec. 14225 of the
Senate amendment and sec. 1 of the Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
Any individual shareholder who receives a dividend from a
corporation which is a surrogate foreign corporation as defined
in section 7874(a)(2)(B), other than a foreign corporation
which is treated as a domestic corporation under section
7874(b), is not entitled to the lower rates on qualified
dividends provided for in section 1(h).
Effective date.--The provision is effective for dividends
paid in taxable years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with a modification. The modification is that the provision
applies to dividends received from foreign corporations that
first become surrogate foreign corporations after date of
enactment.
Effective date.--The provision is effective for dividends
received after date of enactment.
F. Provisions Related to the 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 House 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\1556\ 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\1557\ 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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\1556\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
\1557\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.\1558\ 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.\1559\
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\1558\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.
\1559\ Section 3401(a)(8)(C) excludes wages paid to U.S. 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.\1560\ 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.\1561\ 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.\1562\
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\1560\Sec. 7701(a)(9).
\1561\ Sec. 199(d)(8)(A).
\1562\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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
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
House bill and sec. 7652(f) of the Code)
PRESENT LAW
A $13.50 per proof gallon\1563\ excise tax is imposed on
distilled spirits produced in or imported into the United
States.\1564\ 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 U.S.
Virgin Islands).\1565\
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\1563\A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See secs. 5002(a)(10) and (11).
\1564\Sec. 5001(a)(1).
\1565\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 U.S. Virgin Islands of the excise tax imposed on rum
imported (or brought) into the United States, without regard to
the country of origin.\1566\ The amount of the cover over is
limited under section 7652(f) to the lesser of (1) $10.50 per
proof gallon ($13.25 per proof gallon before January 1, 2017)
or (2) the excise tax imposed under section 5001(a)(1) on each
proof gallon.
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\1566\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 U.S. Virgin Islands is retained by the United
States under section 7652(b)(3).
---------------------------------------------------------------------------
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 U.S. Virgin Islands are
covered over to the U.S. Virgin Islands. Tax amounts
attributable to shipments to the United States of rum produced
in neither Puerto Rico nor the U.S. Virgin Islands are divided
and covered over to the two possessions under a formula.\1567\
Amounts covered over to Puerto Rico and the U.S. Virgin Islands
are deposited into the treasuries of the two possessions for
use as those possessions determine.\1568\ All of the amounts
covered over are subject to the limitation.
---------------------------------------------------------------------------
\1567\Secs. 7652(e)(2).
\1568\Secs. 7652(a)(3), (b)(3), and (e)(1).
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HOUSE BILL
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 U.S. 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
3. Extension of American Samoa economic development credit (sec. 4403
of the House 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\1569\ in an election in
effect for its taxable year that included October 13,
1995.\1570\ 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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\1569\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.
\1570\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.
HOUSE BILL
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\1571\
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 the House bill.
---------------------------------------------------------------------------
\1571\Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432,
sec. 119.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2016.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
G. Other International Reforms
1. Restriction on insurance business exception to the passive foreign
investment company rules (sec. 4501 of the House bill, sec.
14502 of the Senate amendment, and sec. 1297 of the Code)
PRESENT LAW
Passive foreign investment companies
The Tax Reform Act of 1986\1572\ 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.\1573\ 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.\1574\ 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.\1575\ 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.''\1576\
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\1572\Pub. L. No. 99-514.
\1573\Sec. 1297.
\1574\Secs. 1293-1295.
\1575\Sec. 1291.
\1576\Sec. 1296
---------------------------------------------------------------------------
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. 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.\1577\ 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.\1578\
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\1577\Sec. 1297(b)(2)(B).
\1578\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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HOUSE BILL
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.\1579\ The requirement that the foreign
corporation would be subject to tax under subchapter L if it
were a domestic corporation is retained.
---------------------------------------------------------------------------
\1579\ 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.
---------------------------------------------------------------------------
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 mean, 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
Effective date.--The provision applies to taxable years
beginning after December 31, 2017.
2. Repeal of fair market value of interest expense apportionment (sec.
14503 of the Senate amendment and sec. 864 of the Code)
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision prohibits members of a U.S. affiliated
group from allocating interest expense on the basis of the fair
market value of assets for purposes of section 864(e). Instead,
the members must allocate interest expense based on the
adjusted tax basis of assets.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2017.
3. Modification to source rules involving possessions (sec. 14504 of
the Senate amendment and sec. 865 of the Code)
PRESENT LAW
In general
The U.S. Virgin Islands, Guam, and the Commonwealth of
the Northern Mariana Islands have income tax systems that
``mirror'' the U.S. Code, with the latter two possessions being
permitted under current law to delink and use their own tax
systems provided certain conditions are met. The U.S. Virgin
Islands may also impose certain local income taxes in addition
to taxes imposed by the mirror Code. The Code provides rules
for coordination of United States and U.S. Virgin Islands
taxation.\1580\ It permits the U.S. Virgin Islands to reduce or
remit tax otherwise imposed by the mirror code if the tax is
attributable to U.S. Virgin Islands source income or income
effectively connected to the conduct of a trade or business in
U.S. Virgin Islands.\1581\ The U.S. Virgin Islands has
exercised that authority to provide development incentives for
certain types of businesses operating within its borders. Under
such initiatives, companies can receive a 90 percent reduction
in their tax liability on certain income.
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\1580\Secs. 932 and 934.
\1581\Sec. 934. In general, a bona fide resident of the U.S. Virgin
Islands is required to file and pay tax only to the possession. Persons
incurring income tax liability in both the United States and the U.S.
Virgin Islands are required to file tax returns and pay income tax to
both jurisdictions.
---------------------------------------------------------------------------
Taxation of individuals
Under the mirror Code, U.S. Virgin Islands citizens and
residents are taxable on their worldwide income. A foreign tax
credit is allowed for income taxes paid to the United States,
foreign countries, and other possessions of the United States.
In general, a bona fide resident of the U.S. Virgin Islands is
required to file and pay tax only to the possession; compliance
with that obligation satisfies any Federal income tax filing
obligation. All other U.S. residents or citizens with income
from U.S. Virgin Island sources are subject to a dual filing
requirement.
In the case of an individual who is a U.S. citizen or
alien residing in the United States or the U.S. Virgin Islands,
only one tax is computed under the Code. If an individual is a
bona fide resident of U.S. Virgin Islands for the entire
taxable year, such tax is payable to the U.S. Virgin Islands
and no U.S. tax is imposed. Otherwise, a citizen or resident of
the United States who has income from sources within the U.S.
Virgin Islands must determine the portion of income
attributable to the U.S. Virgin Islands and the related tax
payable to the U.S. Virgin Islands. The remaining portion is
payable to the United States.\1582\
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\1582\Sec. 932(b). See, Internal Revenue Service, Tax Guide for
Individuals with Income from U.S. Possessions (Pub. 570), 2011, pp. 17-
18.
---------------------------------------------------------------------------
Concerns that U.S. citizens not resident in the U.S.
Virgin Islands were improperly claiming residence in the U.S.
Virgin Islands\1583\ or forming entities in the U.S. Virgin
Islands in order to recharacterize income earned in the United
States as sourced in the U.S. Virgin Islands and claim the 90
percent economic development credit led to legislative changes
in 2004.\1584\ These changes provided a definition of bona fide
residence in a possession and rules to determine source of
income from possessions. They also impose a requirement that
individuals report any change in residency status with respect
to a possession during a taxable year.\1585\
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\1583\In Notice 2004-45, 2004-2 C.B. 33 (2004), the IRS described
several scenarios in which U.S. persons claimed to have satisfied U.S.
liabilities by having filed a return with the U.S. Virgin Islands.
\1584\McHenry v. Commissioner, 2012 U.S. App. LEXIS 7562 (April 16,
2012) and Huff v. Commissioner, 135 T.C. 605 (2010).
\1585\Sec. 937. In the preamble to final regulations issued in
2008, certain de minimis exceptions are provided for the U.S. citizen
or resident with income from U.S. Virgin Island sources, in recognition
that ``the interaction of section 937 and other sections of the Code
relating to the territories requires a balance between implementing the
policies Congress intended in section 937(b) while recognizing the
territories' efforts to retain and attract workers and businesses.''
T.D. 9391, 73 F.R. 19350 (April 9, 2008); Treas. Reg. Sec. 1.937-2.
Those required to report changes in residency status must use Form
8898, ``Statement for Individuals Who Begin or End Bona Fide Residence
in a U.S. Possession.''
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Taxation of corporations
If a corporation is formed in U.S. Virgin Islands, it is
classified as a domestic corporation for U.S. Virgin Islands
purposes and a foreign corporation for U.S. tax purposes. Such
a corporation is only subject to U.S. tax if it has U.S.-source
income or income effectively connected with the conduct of a
trade or business in the United States. U.S. Virgin Islands
taxes a domestic corporation on its worldwide income, but the
company is allowed a foreign tax credit against U.S. Virgin
Islands tax for taxes imposed by the United States, foreign
countries and other possessions. A corporation that is not
formed in U.S. Virgin Islands is treated as a foreign
corporation under the U.S. Virgin Islands mirror Code. A
company not formed in U.S. Virgin Islands is only subject to
U.S. Virgin Islands tax if it has U.S. Virgin Islands source
income or income effectively connected with the conduct of a
trade or business in U.S. Virgin Islands. The United States
taxes its domestic corporations on their worldwide income, but
allows a foreign tax credit for taxes imposed by foreign
jurisdictions, including U.S. Virgin Islands.
Sourcing rules
As a general rule, the principles for determining whether
income is U.S. source are applicable for purposes of
determining whether income is possession source. In addition,
the principles for determining whether income is effectively
connected with the conduct of a U.S. trade or business are
applicable for purposes of determining whether income is
effectively connected to the conduct of a possession trade or
business. However, except as provided in regulations, any
income treated as U.S. source income or as effectively
connected with the conduct of a U.S. trade or business is not
treated as income from within any possession or as effectively
connected with a trade or business within any such
possession.\1586\ This rule applies regardless of where the
office or fixed place of business connected to such trade or
business is located.
---------------------------------------------------------------------------
\1586\1586 Sec. 937(b).
---------------------------------------------------------------------------
Section 865(j)(3) was added by the Technical and
Miscellaneous Revenue Act of 1988 (``TAMRA''),\1587\ and states
that Treasury is authorized to waive the requirements imposed
by sections 865(e)(1)(B) and 865(g)(2) (both of which impose a
10 percent foreign tax requirement for source treatment of
sales of personal property) for the purposes of determining
Guam, American Samoa, Commonwealth of the Northern Mariana
Islands, and Puerto Rico-source income (sections 931 and 933,
respectively).
---------------------------------------------------------------------------
\1587\Pub. L. No. 100-647.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies the sourcing rule in section
937(b)(2) by modifying the U.S. income limitation to exclude
only U.S. source (or effectively connected) income attributable
to a U.S. office or fixed place of business. The provision also
modifies section 865(j)(3) by providing Treasury with the
authority to waive the 10% foreign tax requirement for source
treatment of capital gains income earned by a U.S. Virgin
Islands resident.
Effective date.--The provision shall apply to taxable
years beginning after December 31, 2018.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
TITLE II
Section 20001. Oil and Gas Program
Section 20001 directs the Secretary of the Interior to
establish and administer all aspects of a competitive oil and
gas program in the non-wilderness portion of the Arctic
National Wildlife Refuge, known as the ``1002 Area'' or Coastal
Plain. The legislation defines the term ``Coastal Plain'' by
referencing Plate 1 and Plate 2 of the October 24, 2017 Map
prepared by the United States Geological Survey.
The legislation repeals the prohibition on development
from the Coastal Plain contained in section 1003 of the Alaska
National Interest Lands Conservation Act (16 U.S.C. 3143), and
directs the Secretary to manage the oil and gas program on the
Coastal Plain in a manner similar to what is required by the
Naval Petroleum Reserves Production Act of 1976 (42 U.S.C. 6501
et seq.). The legislation sets a 16.67 percent royalty rate for
leases and allocates 50 percent of the revenue derived from the
program to the State of Alaska, with the remainder going to the
Federal Treasury.
Section 20001 further requires the Secretary to conduct
at least two area-wide lease sales within the 10-year budget
window--the first lease sale within four years of the Act's
enactment and the second lease sale within seven years of
enactment. Each lease sale must contain not fewer than 400,000
acres and be comprised of those areas that have the highest
hydrocarbon potential.
The legislation directs the Secretary to issue any
necessary rights-of-way or easements across the Coastal Plain
for the exploration, development, production, or transportation
associated with the oil and gas program. Additionally, the
section authorizes the development of up to 2,000 surface acres
of federal land on the Coastal Plain.
Section 20002. Limitations on Amount of Distributed Qualified Outer
Continental Shelf Revenues
Section 20002 temporarily increases the annual limitation
on offshore revenue sharing under section 105(f)(1) of the Gulf
of Mexico Energy Security Act of 2006 (Public Law 109-432) for
the states of Alabama, Louisiana, Mississippi, and Texas from
$500 million annually for FY 2020 and FY 2021, to $650 million
annually for those two fiscal years.
Section 20003. Strategic Petroleum Reserve Drawdown and Sale
Section 20003 directs the Secretary of Energy to draw
down and sell a total of seven million barrels of crude oil
from the Strategic Petroleum Reserve during FY 2026 through FY
2027. The section prohibits the Secretary from taking actions
that would limit the President's authority to direct a drawdown
and sale of petroleum products to address a domestic or
international energy supply shortage pursuant to section 161(h)
of the Energy Policy and Conservation Act (42 U.S.C. 6241). The
Secretary is further directed to stop the drawdown or sale of
crude oil after the date on which a total of $600 million has
been deposited in the general fund of the Federal Treasury.
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.
TAX COMPLEXITY ANALYSIS
Section 4022(b) of the Internal Revenue Service Reform
and Restructuring Act of 1998 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 Code and has widespread
applicability to individuals or small businesses. The staff of
the Joint Committee on Taxation has determined that the
following provisions are of widespread applicability to
individuals or small businesses.
1. Temporary modification of tax rates, tax brackets, standard
deduction and repeal of personal exemptions (secs. 11001,
11002, 11021 and 11041 of the bill)
Summary description of the provisions
The bill temporarily changes the structure of the
individual income tax by modifying the rate structure such that
the tax brackets are 10-percent, 12-percent, 22-percent, 24-
percent, 32-percent, 35-percent and 37-percent. The bill
temporarily increases the size of the standard deduction (for
2018 the standard deduction is $24,000 for joint filers,
$18,000 for heads of household and $12,000 for other filers),
and temporarily eliminates personal exemptions. These
provisions sunset for taxable years beginning after December
31, 2025.
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).
The IRS will need to modify its forms and publications.
The temporary nature of the provision will necessitate that the
IRS do this again once the temporary provisions expire.
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. Temporary deduction for qualified business income (sec. 11011 of the
bill)
Summary description of the provisions
For taxable years beginning after December 31, 2017 and
before January 1, 2026, an individual taxpayer generally may
deduct 20 percent of qualified business income from a
partnership, S corporation, or sole proprietorship, as well as
20 percent of aggregate qualified REIT dividends, qualified
cooperative dividends, and qualified publicly traded
partnership income. Special rules apply to specified
agricultural or horticultural cooperatives permitting the
cooperative a deduction.
A limitation based on the greater of 50 percent of W-2
wages paid, or the sum of 25 percent of W-2 wages paid plus a
capital allowance, is phased in above a threshold amount of
taxable income. A disallowance of the deduction with respect to
specified service trades or businesses is also phased in above
the same threshold amount of taxable income. The threshold
amount is $157,500 (twice that amount or $315,000 in the case
of a joint return), indexed. These limitations are fully phased
in for a taxpayer with taxable income in excess of the
threshold amount plus $50,000 ($100,000 in the case of a joint
return).
Qualified business income for a taxable year generally
means the net amount of domestic qualified items of income,
gain, deduction, and loss with respect to the taxpayer's
qualified businesses. Qualified business income does not
include any amount paid by an S corporation that is treated as
reasonable compensation of the taxpayer. Similarly, qualified
business income does not include any guaranteed payment for
services rendered with respect to the trade or business, and to
the extent provided in regulations, does not include any amount
allocated or distributed by a partnership to a partner who is
acting other than in his or her capacity as a partner for
services. Qualified business income or loss does not include
certain investment-related income, gain, deductions, or loss.
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 the 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 business income and
how to apply the phaseins of the W-2 wage (or W-2 wage and
capital) limit and of the exclusion of service business income
in the case of taxpayers with taxable income exceeding the
threshold amount of $157,500 (twice that amount or $315,000 in
the case of a joint return), indexed. This increased volume of
questions could have an adverse impact on other elements of
IRS's 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 business income, as well as the phaseins. This
worksheet will require a series of calculations.
3. Temporary increase in child tax credit (sec. 11022 of the bill)
Summary description of the provisions
The bill temporarily increases the value of the child tax
credit to $2,000, providing that no more than $1,400 per child
shall be refundable. This $1,400 limitation is indexed for
inflation. In order to qualify for the child tax credit, a
Social Security number must be provided for the qualifying
child for whom such credit is claimed. These provisions sunset
for taxable years beginning after December 31, 2025.
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. The temporary nature of the provision will
necessitate that the IRS do this again once the temporary
provision expires.
4. Temporary suspension of the deduction for State and local income
taxes (sec. 11042 of the bill)
Summary description of the provisions
The bill provides that 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. 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).
Under the bill, in the case of an individual, State and
local income, war profits, and excess profits taxes are not
allowable as a deduction.
The bill contains an exception to the above-stated rule.
Under the provision a taxpayer may claim an itemized deduction
of up to $10,000 ($5,000 for married taxpayer filing a separate
return) for the aggregate of (i) State and local property taxes
not paid or accrued in carrying on a trade or business, or an
activity described in section 212, and (ii) State and local
income, war profits, and excess profits taxes (or sales taxes
in lieu of income, etc. taxes) paid or accrued in the taxable
year. Foreign real property taxes may not be deducted under
this exception.
The above rules apply to taxable years beginning after
December 31, 2017, and beginning before January 1, 2026.
The bill also provides that, in the case of an amount
paid in a taxable year beginning before January 1, 2018, with
respect to a State or local income tax imposed for a taxable
year beginning after December 31, 2017, the payment shall be
treated as paid on the last day of the taxable year for which
such tax is so imposed for purposes of applying the provision
limiting the dollar amount of the deduction. Thus, under the
provision, an individual may not claim an itemized deduction in
2017 on a pre-payment of income tax for a future taxable year
in order to avoid the dollar limitation applicable for taxable
years beginning after 2017.
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.
The IRS will need to modify its forms and publications to
reflect this change. The temporary nature of the provision will
necessitate that the IRS do this again once the temporary
provision expires.
5. Modifications of rules for expensing depreciable business assets
(sec. 13101 of the bill)
The bill increases the maximum amount a taxpayer may
expense under section 179 to $1,000,000, and increases the
phase-out threshold amount to $2,500,000. The $1,000,000 and
$2,500,000 amounts, as well as the $25,000 sport utility
vehicle limitation, are indexed for inflation for taxable years
beginning after 2018.
The bill expands the definition of section 179 property
to include certain depreciable tangible personal property used
predominantly to furnish lodging or in connection with
furnishing lodging.
The bill also expands the definition of qualified real
property eligible for section 179 expensing to include any of
the following improvements to nonresidential real property
placed in service after the date such property was first placed
in service: roofs; heating, ventilation, and air-conditioning
property; fire protection and alarm systems; and security
systems.
The bill applies to property placed in service in taxable
years beginning after December 31, 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.
6. Temporary 100-percent expensing for certain business assets (sec.
13201 of the bill)
The bill extends and modifies the additional first-year
depreciation deduction through 2026 (through 2027 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. Thus, the bill follows the present-law phase-
down of bonus depreciation for property acquired before
September 28, 2017, and placed in service after September 27,
2017. The 100-percent allowance is phased down by 20 percent
per calendar year for property placed in service, and specified
plants planted or grafted, in taxable years beginning after
2022 (after 2023 for longer production period property and
certain aircraft).
The bill removes the requirement that the original use of
qualified property must commence with the taxpayer (i.e., it
allows the additional first-year depreciation deduction for new
and used property).
As a conforming amendment to the repeal of corporate AMT,
the election to accelerate AMT credits in lieu of bonus
depreciation is repealed.
The bill maintains the section 280F increase amount of
$8,000 for passenger automobiles placed in service after
December 31, 2017. However, the bill follows the present-law
phase-down of the section 280F increase amount in the
limitation on the depreciation deduction allowed with respect
to certain passenger automobiles 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, 2027 (January 1, 2028, in the case of longer
production period property).
The bill expands the definition of qualified property
eligible for the additional first-year depreciation allowance
to include qualified film, television and live theatrical
productions (as defined in section 181(d) and (e)) for which a
deduction otherwise would have been allowable under section 181
without regard to the dollar limitation or termination of such
section, effective for productions placed in service after
September 27, 2017, and before January 1, 2027. For purposes of
this provision, a production is considered placed in service at
the time of initial release, broadcast, or live staged
performance (i.e., at the time of the first commercial
exhibition, broadcast, or live staged performance of a
production to an audience).
The bill excludes from the definition of qualified
property any property which is primarily used in 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, by a public service or
public utility commission or other similar body of any State or
political subdivision thereof, or by the governing or
ratemaking body of an electric cooperative.
The bill excludes from the definition of qualified
property any property used 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 prohibited from
using the cash method and is exempt from the interest
limitation rules by meeting a small business $25 million gross
receipts test.
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.
From the Committee on Ways and Means, for
consideration of the House bill and the Senate
amendment, and modifications committed to
conference:
Kevin Brady,
Devin Nunes,
Peter J. Roskam,
Diane Black,
Kristi L. Noem,
From the Committee on Energy and Commerce, for
consideration of sec. 20003 of the Senate
amendment, and modifications committed to
conference:
Fred Upton,
John Shimkus,
From the Committee on Natural Resources, for
consideration of secs. 20001 and 20002 of the
Senate amendment, and modifications committed
to conference:
Rob Bishop,
Don Young,
Managers on the Part of the House.
Orrin G. Hatch,
Michael B. Enzi,
Lisa Murkowski,
John Cornyn,
John Thune,
Rob Portman,
Tim Scott,
Patrick J. Toomey,
Managers on the Part of the Senate.
ENDNOTES
This table belongs to Footnote 520
Recovery method Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total
200-percent declining balance 288.71 204.08 145.77 104.12 86.77 86.77 86.77 1,000.00
150-percent declining balance 214.29 168.37 132.29 121.26 121.26 121.26 121.26 1,000.00
Straight-line................ 142.86 142.86 142.86 142.86 142.86 142.86 142.86 1,000.00
This table belongs to Footnote 540
Recovery method Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total
200-percent declining balance 285.71 204.08 145.77 104.12 86.77 86.77 86.77 1,000.00
150-percent declining balance 214.29 2168.37 132.29 121.26 121.26 121.26 121.26 1,000.00
Straight -line............... 142.86 142.86 142.86 142.86 142.86 142.86 142.86 1,000.00
This table belongs to Footnote 573
Recovery method Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total
200-percent delining balance. 285.71 204.08 145.77 104.12 86.77 86.77 86.77 1,000.00
150-percent declining balance 214.29 168.37 132.29 121.26 121.26 121.26 121.26 1,000.00
Straight-line................ 142.86 142.86 142.86 142.86 142.86 142.86 142.86 1,000.00