On Nov. 2, House Republican leaders released a draft of tax reform legislation – the Tax Cuts and Jobs Act – that makes numerous changes to the tax code for corporations and individual taxpayers.
The more than 400-page bill also includes a number of provisions that will have a direct and indirect effect on the banking industry.
Among the key provisions in the bill are:
A reduction in the corporate tax rate for C-corporations from 35 to 20 percent.
Reduce the number of tax brackets (ranging from 10 to 39.6 percent) from seven to four: 12, 25, 35 and 39.6 percent.
Twenty-five-percent bracket begins at $90,000 for joint returns/surviving spouses and $67,500 for heads of household.
The 35-percent bracket would begin at $260,000 for joint returns/surviving spouses; a married individual filing separately is capped at $130,000.
The 39.6-percent bracket begins at $1 million for joint returns/surviving spouses, $500,000 for individuals.
Repealing the Alternative Minimum Tax.
The standard deduction is increased to $24,400 for joint returns and surviving spouses. For single taxpayers with at least one child, the exemption is $18,300; and other single individuals are limited to $12,200.
An income tax rate of 25 percent for passive income from “pass-through” entities, like LLCs, Subchapter S banks and others. CAVEAT: the draft bill has restrictions on the ability of active shareholders to claim the lower corporate rate .
It would double the estate tax exclusion before eliminating the estate tax after 2023.
Banks in excess of $50 billion would no longer be allowed to deduct the bank’s FDIC insurance premium, phasing in the elimination for banks with $10-50 billion in assets.
Repeals the current deductibility for state and local income taxes;
Eliminates deductions for entertainment or recreation activities.
Some home ownership provisions have been changed, such as changing the mortgage interest deduction from $1 million to $500,000 for new purchase mortgages and capping the deduction for property taxes at $10,000.
Businesses with average gross receipts exceeding $25 million will be prohibited from deducting net interest expense exceeding 30 percent of adjusted taxable income.
The taxation of some exempt organizations, including the expansion of UBIT to all Code Sec. 501(a) exempt entities (this is a step closer to looking at all tax-exempt entities, like credit unions).
Individual taxpayers would see the number of tax brackets reduced to three, fewer households would be in the top bracket of 39.5 percent.
Taxpayers would be able to immediately expense 100 percent of the cost of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (with some minimal exceptions).
“This is just a quick summary of what’s in the tax proposal,” OBA President and CEO Roger Beverage said. “I’m disappointed that, once again, credit unions were left out of the mix.It’s absurd Congress doesn’t even consider including their (unrelated business income) for taxation. But we’re not giving up. Ever.
“I’m just not certain this thing is going to get very strong legs. There just seems to be a lot more disgruntlement than most people expected.”