The Tax Cuts And Jobs Act

Today, the Republicans in the U.S. House of Representatives released their long-anticipated tax reform bill, entitled the "Tax Cuts and Jobs Act". While there have been multiple statements from the Republican majority in the House that swift action is expected on this bill, nevertheless the text proposed today all but certainly will be extensively revised in the legislative process. Further, the Republicans in the U.S. Senate are expected to introduce their own tax reform bill as early as next week, and that bill is anticipated to diverge from the House bill in many respects and, in order for tax reform to be enacted, the House and Senate will have to pass a single piece of agreed legislation, which the President must in turn sign into law.

Notwithstanding the very substantial effort that remains before the Congress to enact tax reform into law, the introduction of legislative text along with the publication of a highly detailed summary of each provision is an important milestone in the process and the draft of the bill contains important details.

It is the stated goal of the Republicans in Congress, and the President, to enact tax reform before the end of the calendar year. However, it is not clear that, if that date of enactment were to slip into early 2018, any of the effective date provisions of the bill would be modified, and therefore time to plan around the effective date provisions may be very limited. As a result, taxpayers should consider, now, whether to begin taking steps to plan for legislation that will in large part become effective on January 1, 2018.

Certain significant aspects of the bill are summarized below. However, this summary does not describe all of the proposals in the bill. To discuss tax reform in general, or the effect of any particular aspect of the bill that is of interest to you, please contact any member of the Tax Department.

Business Provisions.

20% Permanent Corporate Tax Rate.

The bill proposes a permanent reduction of the corporate tax rate from 35% to 20% beginning in 2018. Prior reports had suggested that the rate reduction would be phased in over a number of years.

Limitation on Business Interest Deductions.

The bill would limit business interest deductions to 30% of adjusted taxable income, as specifically adjusted to approximate earnings before interest, tax, depreciation and amortization ("EBITDA") for the tax year. "Investment interest" would be excluded, and businesses with adjusted gross receipts of $25 million or less would be exempt. Section 163(j) would be repealed. The provision would be effective beginning in 2018.

Five-Year Expensing for Capital Investment and Expansion of Section 179 Expensing.

The bill permits immediate expensing for certain tangible personal property placed into service after September 27, 2017 and before January 1, 2023. The limitation on section 179 expensing would be increased from $500,000 to $5 million, and the phase out increased from $2 million to $20 million, adjusted for inflation. The expansion of section 179 expensing would be effective for tax years beginning after 2017 and before 2023.

Limitation on Use of Net Operating Losses.

Deductions for net operating losses ("NOLs") would be limited to 90% of taxable income for a taxable year. NOLs would be carried forward indefinitely to future taxable years, rather than expiring after 20 years, as under current law. NOL carrybacks would generally be disallowed, with exceptions for certain disaster losses.

Denial of Like-Kind Exchanges for Personal Property.

The bill would end like-kind exchanges for personal property (but retain it for real property).

Current Tax on Deemed Repatriated Foreign Earnings.

The bill imposes a one-time tax on the untaxed earnings of foreign subsidiaries of U.S. multinationals. The tax rate would be 12% on cash and 5% on illiquid investments. At the election of the U.S. shareholder, the tax liability would be payable over a period of up to 8 years.

Territorial International Tax System With Special 10% Tax on High-Profit Foreign Subsidiaries.

The bill would shift the current U.S. "worldwide" international tax system under which U.S. companies are taxable on worldwide income to a "territorial" system under which foreign active profits are generally exempt from tax. The mechanism would be to exempt the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10% or more of the foreign corporation. No foreign tax credit or deduction would be permitted for any exempt dividend, and no deductions for expenses allocable to the exempt dividend would be taken into account for purposes of determining the U.S. corporate shareholder's foreign-source income. The provision would be effective for distributions made after 2017.

The bill would impose a 10% tax (i.e., half of the 20% corporate tax) on 50% of a U.S. parent's "foreign high returns" from its foreign subsidiaries.

Foreign high returns would be the excess of (x) a U.S. parent's...