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US Senate Approves Tax Bill in Race to Enact Tax Reform by Year End

Senate Republicans voted early Saturday morning to approve the Senate’s version of the Tax Cuts and Jobs Act with a vote of 51-49 on a party line vote. Bob Corker was the only Republican Senator to vote no. Because the Senate is utilizing a budget reconciliation process to push tax reform legislation forward, only a simple majority (50 or more votes) was required in the Senate. At this point there are two separate tax reform bills: the House bill passed the House on November 16, 2017, and the Senate bill passed the Senate December 2, 2017. The House and Senate have to pass the same bill, and President Trump must sign the bill, for it to become law. The Republican goal is for the tax bill to become law before Christmas.

What Comes Next?

The next step is for the House and Senate to hash out a compromise bill. A vote is scheduled in the House for 6:30 p.m. on Monday, December 4, 2017 regarding whether to go to conference with the Senate on a tax bill. It is possible the House could accept the Senate bill as it stands, which would avoid a conference. The House and Senate bills are already quite similar and it is a near certainty that Congress will find an acceptable compromise. There are certain substantive differences between the bills as well as areas where a different approach is taken toward the same objective. The ultimate bill is likely to include a hybrid of some of the provisions in each bill and may include additional new revenue raising measures (if necessary) for the compromise bill to meet budgetary requirements. Key differences that will need to be resolved include individual rate brackets, the structure for a special rate or deduction for pass-through business income, the interest expense disallowance (the Senate provision uses a stricter definition), and the details of an anti-base erosion regime for multinationals (the goals are the same, but there are differences in approach). The Senate bill left in place various deductions, credits, and tax incentives that the House would repeal and includes additional revenue raising measures that the House doesn’t (and vice-versa).

What’s the Bottom Line?

The bottom line is that there will almost certainly be sweeping changes to the taxation of businesses and individuals effective by the end of the year. The changes are targeted in nature and the impact on any particular individual or business varies depending on the types of deductions, amount of leverage, and structure (C corporation or pass-through entity). Businesses will need to be prepared to include the effect of the legislation in their 2017 financial statements. Business and individuals need to evaluate what steps can be taken to optimize their tax situation by year end in light of the tax legislation. For example, individuals may want to prepay deductions that are slated to be eliminated, such as state and local taxes and real estate taxes.

For an analysis of the provisions in the House bill and Senate bill, see House and Senate Tax Reform Proposals – Highlights of the Key Issues.

The Takeaway

The proposed sweeping changes stand to affect the taxation of every business and individual, and it is necessary to model the impacts of these changes now to optimize your position before the end of the year. Please contact us as soon as possible to discuss the potential effects of pending legislation and how you can position your business and financial affairs to address the likely changes ahead.