| Topic |
House Bill |
Senate Bill |
| Income Tax Brackets |
| Individual |
- Four brackets
- The top marginal tax rate is 39.6% on income in excess of $1 million for married-filing-joint taxpayers (or $500,000 for single and married-filing separate taxpayers). 1
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- No reduction in number of brackets.
- Top marginal tax rate is 38.5% on income in excess of $1 million for married-filing-joint taxpayers (or $500,000 for single and married-filing separate taxpayers).
- These tax rates will expire after 2025 and will revert back to pre-2018 tax rates.
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| Corporate |
- Corporate tax rate reduced to 20% for tax years beginning in 2018 and later.
- 25% tax rate applicable to personal service corporations.
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- Corporate tax rate reduced to 20% for tax years beginning in 2019 and later.
- No separate rate for personal service corporations.
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| Proposals Affecting Investment Managers and Management Companies |
| Treatment of Carried Interest |
- Managers receiving an incentive allocation can treat underlying capital gains from the partnership as long-term capital gains, if the partnership held the asset for more than three years.
- Carried interest from investments held for less than three years would be taxed at short-term capital gains rates (i.e., ordinary income rates).
- It is unclear how this provision would apply to Section 1256 contracts (which are currently eligible for 60 percent long-term capital gains treatment on a mark-to-market basis irrespective of holding period) and qualified dividend income.
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- Substantially similar treatment under the Senate Bill.
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| Taxation of Pass-Through Entities |
- A portion (generally 30%) of net income allocated by a pass-through entity to an individual owner or shareholder would be treated as “business income” and therefore subject to a maximum 25% rate. The remaining amount of income would be taxed at ordinary individual income tax rates.
- Investment managers, however, would likely not be eligible for the 25% rate. Taxpayers actively participating in a ‘specified service activity,’ which includes investing, trading, or dealing in securities, partnership interests, or commodities, may not directly benefit from this provision.
- While not every pass-through entity (and its owners) will directly benefit from this provision, there may be opportunities available if this provision is enacted.
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- After 2017, individual taxpayers may deduct 17.4% of “qualified business income” from a pass-through entity. For this purpose, qualified business income may include REIT dividends that are not attributable to capital gains.
- Investment managers, however, would likely not be eligible for the 17.4% deduction under the Senate Bill.
- This deduction will expire after 2025.
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| Repeal of LP Exception to Self-Employment Tax |
- Since our previous memorandum, the House Bill was amended and no longer repeals the exception to self-employment tax for limited partners.
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| Entertainment Expense Deductions |
- No deduction would be allowed for entertainment, amusement or recreation activities, even if directly related to the active conduct of the taxpayer’s trade or business.
- Food and beverage expenses will continue to be deductible, subject to the existing 50-percent limitation
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- Substantially similar treatment under the Senate Bill.
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| State and Local Taxes |
- State and local income or sales taxes would generally not be deductible under the House Bill.
- However, state and local property taxes would continue to be deductible up to $10,000.
- In addition, state and local taxes incurred in connection with a trade or business or certain investment activities will continue to be deductible.
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- State and local real estate taxes would not be deductible.
- State and local property taxes on business assets would be deductible.
- State and local income or sales taxes would not generally be deductible.
- This provision is scheduled to sunset after 2025.
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| Proposals Affecting Fund Structures |
| Cost Basis Rules |
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- The tax basis of certain securities that are sold after 12/31/2017 will be determined on a “first-in, first-out” basis.
- This rule would not apply to RICs and would not apply where the “average basis method” is available.
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| Sale of Partnership Interests |
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- Sales or exchanges of partnership interests by non-U.S. partners will be treated as ECI to the extent such partner would be allocated ECI on the hypothetical sale of all assets by the partnership.
- This change would codify a 1991 IRS ruling that was recently overturned by the Tax Court.
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| Interest Deductibility |
- Business interest expense will be deductible only to the extent of business interest income plus 30% of adjusted taxable income.2
- If the taxpayer claiming interest expense deductions is a pass-through entity, the determination of disallowed excess interest expense is made at the entity level (not at the level of the owner).
- Businesses (and not owners in the case of pass-through entities) can carry forward interest for five taxable years.
- This provision may increase the overall effective tax rate applicable to certain “leveraged blocker” structures used by private equity funds.
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- Substantially similar treatment under the Senate Bill.
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| Public Pension Plans Subject to UBTI |
- State and local government entities (such as state pension plans) would become subject to tax on their unrelated business taxable income (“UBTI”), imposing income tax liability on otherwise tax-exempt organizations that earn certain types of income or utilize borrowed funds to acquire assets.
- If this provision were enacted, state and local governmental entities that invest in private funds or joint ventures would need to consider whether to structure (or restructure) their investments to avoid UBTI (e.g., by investing in an offshore feeder fund or a UBTI sensitive vehicle).
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| Foreign Insurance Company PFIC Changes |
- Tightens requirements for foreign insurance companies to avoid being treated as passive foreign investment companies (“PFICs”), which could subject U.S. shareholders to unfavorable tax treatment.
- The House Bill could treat certain offshore reinsurance companies as PFICs, which would reduce the attractiveness of such investments to U.S. taxable investors.
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- Substantially similar treatment under the Senate Bill.
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| Proposals Affecting Estate Planning |
| Increase in Credit against Estate, Gift and Generation-Skipping Transfer Taxes |
- As of January 1, 2018, the lifetime credit against gift, estate and generation-skipping transfer tax would double, to $11.2 million for individuals and $22.4 million for married couples.
- These amounts are indexed for inflation in future years.
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- Same increase in credit as is included in House Bill.
- The increase is only temporary, however, and ends as of January 1, 2026, when the credit returns to its current amount ($5,600,000 for individuals and $11,200,000 for married couples in 2018 under current law).
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| Repeal of Estate and Generation-Skipping Transfer Taxes |
- As of January 1, 2025, the estate and generation-skipping transfer taxes are repealed.3
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| Changes in Estate Tax Rules Regarding Non-Citizen Spouses |
- For individuals dying on or before December 31, 2024, qualified domestic trust (“QDOT”) distributions made after December 31, 2034 are not subject to estate tax, and the value of the property remaining in a QDOT on the date of death of the surviving spouse is not subject to estate tax if the surviving spouse dies after December 31, 2024.
- For individuals dying on or after January 1, 2025, the QDOT rules would no longer be relevant, due to the estate tax repeal.
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| Changes to Education Savings Rules |
- Taxpayers may make tax-free withdrawals of up to $10,000 per year from §529 plans to pay elementary or secondary school tuition expenses, and may make unlimited tax-free withdrawals to pay for books, supplies, and equipment in connection with an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act.
- Taxpayers may not make new contributions (other than rollover contributions) to Coverdell Education Savings Accounts (“Coverdell accounts”), but may elect to make tax-free rollovers of their Coverdell accounts into §529 plans.
- These changes would take effect as of January 1, 2018.
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