As Congress continues to work on tax reform, an issue that could impact small businesses, like funeral homes, has arisen: it is the Small Business Exemption from Limitation on Deduction of Business Interest.
The tax bill passed by the House (H.R. 1 “Tax Cuts and Jobs Act”) holds that businesses with average annual gross receipts of $25 million or less would be exempt from the interest limitation rules (described in §3301 of the bill). This provision would be effective for tax years beginning after Dec. 31, 2017.
In the Senate bill that will be voted on this week (“Tax Cuts and Jobs Act”), businesses that satisfy the $15 million gross receipts test would be exempt from the interest limitation rules (described in JCT. III.C.1.). This provision would be effective for tax years beginning after Dec. 31, 2017.
NFDA, which maintains a year-round presence in D.C., is taking action to ensure that you are not adversely affected by this provision. We are actively engaging with our champions in the U.S. Senate to offer an amendment that would ensure businesses in this profession are treated fairly.
In addition to small business exemption above, we are also working with Congress on the following issues to ensure fair treatment for the funeral profession:
- Individual tax rates. The House bill collapses the current rate structure to four rates and generally lowers individual tax rates to 12%, 25%, 35% and 39.6%. The Senate bill keeps seven brackets and generally lowers individual tax rates 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%. The House bill simplifies the current law structure, but the Senate bill does not.
- Treatment of small business income. A wide gap exists in the House and Senate bills. There is relief in both bills but is it structured differently. How to tax small businesses will be one of the more challenging questions House and Senate tax writers have to resolve.
- The House bill reduces the tax rate on pass-through businesses to 25% at incomes above $250,000 (the lowest tax rate on small business income since World War II). It also provides a new, low tax rate of 9% on the first $75,000 in net business taxable income for active owners or shareholders if they earn less than $150,000. Those earning above $150,000 would receive a reduced special-rate benefit, which would fully phase out at $225,000.
- The Senate plan would allow owners and shareholders to claim a deduction equal to 17.4% of their business income. For owners or shareholders with incomes above $500,000 for joint filers and $250,000 for all other filers, the deduction would be limited to 50% of their W-2 income, defined as wages subject to wage withholding, elective deferrals, and deferred compensation paid by the entity.
- Estate taxes. The House bill provides relief from the estate tax by doubling the current exemptions to $10M and $20M and eliminates the taxes in year 2024. The Senate bill also doubles the current exemptions but does not eliminate the tax.
- State and local tax deductions. The Senate would eliminate this deduction for individuals. The House bill would eliminate the deduction but allow individuals to write off the cost of state and local property taxes up to $10,000.
Stay tuned for further updates on how NFDA is working on your behalf in D.C.!