With tax reform front and center in Washington and the House expected to vote on their version of the tax reform bill today (H.R. 1), NMMA continues meeting with elected officials to ensure the recreational boating industry’s voice is heard on key elements of interest within both the House and Senate bills. Below is a comprehensive update of where things stand as of today and how NMMA is addressing on your behalf. With the final tax reform bill now being hammered out, we will continue to keep you apprised on our position. As always, please don’t hesitate to contact NMMA with your questions or feedback, including NMMA's Michael Pasko at firstname.lastname@example.org, who is handling tax reform matters.
Corporate Tax Reform Highlights
Corporate Tax Rate: NMMA’s goal was to see a decrease from the top corporate rate of 35% to a flat rate of 20%. Currently, that 20% flat rate is reflected in both the House bill and Senate proposal. However, under the Senate proposal, this shift would occur in 2019, rather than 2018. This is because the Senate is hemmed in by budget constraints that the House isn’t.
Pass-Through Businesses: NMMA supported an across-the-board rate reduction to 25%. We have mixed results in the House bill. Under the House bill, the top rate of 25% would apply to 100% of net income from passive business activities and 30% of net income from active business activities. That leaves 70% of net income from active business activities that would be taxed at the relevant individual income rate. An alternative formula for calculating the split would be used in certain situations. Not surprisingly, there has been pushback on this provision from the small business lobby. The Senate proposal takes a different approach and provides a 17.4% deduction for non-wage income for a partnership, s-corp, or sole proprietorship.
Floor Plan Financing Indebtedness: Floor plan financing indebtedness is the short-term debt used by retailers to buy high-cost items, which is secured by the inventory acquired. This includes debt used to finance the purchase of boats held for the purpose of selling them to retail customers. It also includes cars and RVs.
The House bill creates an exemption from limits on deductibility of net business interest for taxpayers that paid or accrued interest on floor plan financing indebtedness. However, the bill creates a trade-off, stating that because they are exempt from the deductibility rules, companies that have floor plan financing indebtedness (and therefore take floor plan financing interest into account for determining their ratio of debt to equity) are not eligible to receive the benefits of the bill’s increased expensing provision. The increased expensing provision allows for immediate, 100% expensing of qualified property (tangible property, certain software, etc.) placed in service between 9/27/17-1/1/23.
The Senate proposal does not discuss floor plan financing indebtedness.
Individual Tax Reform Highlights
Individual Income Tax Brackets: In current law there are seven tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. NMMA asked for three brackets: 12%, 25%, and 35%. The current House bill has four: 12%, 25%, 35%, and 39.6% while the Senate bill retains a seven-bracket system, but lowers the rates to 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%.
Luxury Tax: Thankfully, there is no talk of a luxury tax so far. The only luxury language is in the Senate proposal, and would raise the current fairly tight caps on allowable depreciation amounts for luxury passenger automobiles (defined as 4-wheeled, primarily for use on roads).
Second Home Mortgage Interest Deduction: As NMMA reported last week, under the House bill, the deduction would not apply to second homes, and it would be gone not just for boats but for RV’s and everything else that had qualified as a second home in this category. For primary residences, mortgage interest deduction was halved from a million to $500,000, and there would be no deduction for interest on home equity. Real estate and builders have been pushing back hard on those items.
The Senate proposal would eliminate the home equity deduction, but would not alter the rest of the credit—including its application to second homes.
Estate Tax: The House bill and the Senate proposal would both nearly double the basic (per filer) exemption amount under which estate, gift, and generation-skipping transfer taxes on the property do not apply. Both use similar language, but the House cites this figure as being $10 million, while the Senate Finance Committee lists it as “approximately $11 million.”
The House bill would terminate the estate tax and generation-skipping tax after 2024. Currently, there isn’t language in the House bill or Senate proposal that directly addresses valuation of family-owned entities for estate tax purposes. In particular, there aren’t references to Section 2704, which sets special valuation rules for valuing intra-family transfers of interests in corporations and partnerships subject to lapsing voting or liquidation rights and restrictions on liquidation—and was the subject of the 8/4/16 IRS notice of proposed rulemaking. There is a section with similar language that pertains to re-characterization of certain gains in the case of partnership profit interests (that includes a part on transfers of partnership interest to relatives), but it states that it pertains to partnership profit interests held in connection with performance of investment services.