As a follow up to NMMA's update last week, below is insight on how the House and Senate tax reform bills are shaking out for marine manufacturing. Last week as expected, the House passed their bill. It marked the first time the House voted to overhaul the tax code since the 1986 tax reform bill. In the Senate, committee action has occurred, which is the first step in the legislative process. A full vote in the Senate is expected after Congress reconvenes from the Thanksgiving break. Since our last update, the items of interest to NMMA members did not change in the final House bill. Below are those items in the Senate proposal we continue to be engaged with on behalf of the recreational boating industry.
NMMA will continue to work with Congress to inform them of our industry’s interests and keep you apprised throughout the process. Should you have questions or feedback, we encourage you to reach out to NMMA’s Michael Pasko at firstname.lastname@example.org who is handling tax reform matters.
Business Tax Highlights
Corporate Tax Rate: NMMA’s goal is 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 Finance Committee proposal. However, under the Senate Finance proposal, this shift would occur in 2019, rather than 2018.
Pass-Through Businesses: Pass-through business refers to how individual owners of a business pay taxes on income derived from that business on their person income tax returns. Pass-through taxation applies to sole proprietorships, partnerships, and s-corporations. Many small businesses approach taxes as a pass -through business. NMMA supported an across-the-board rate reduction to 25%. Currently, pass-through businesses see a top marginal rate of 39.6%.
Under the Senate Finance Committee proposal, taxpayers would generally be able to deduct 17.4% of domestic qualified business income from a partnership, s-corp, or sole proprietorship. The deduction does not apply to certain service businesses (related to accounting, financial services, brokerage services, and health) unless the taxpayer’s taxable income does not exceed $150,000 for joint filers or $75,000 for single individuals. For a partnership or s-corp, the deduction is limited to 50% of the W-2 wages of the taxpayer. Qualified business income for a tax year is defined as the net amount of domestic qualified items of income, gain, deduction, and loss with respect to the taxpayer’s qualified businesses. Dividends from real estate investment trusts (other than any portion that is a capital gain dividend) are qualified items of income. Business income or loss does not include certain investment-related income, gain, deductions, or loss.
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.
Unlike the House bill, the current Senate Finance Committee proposal does not discuss floor plan financing indebtedness.
Individual Tax 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 House bill has four: 12%, 25%, 35%, and 39.6% while the Senate Finance Committee Chairman’s modified proposal sets seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%.
Luxury Tax: There remains no talk of a luxury tax on new boats. The only luxury language is in the Senate Finance Committee 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, etc.).
Second Home Mortgage Interest Deduction: Under the House bill, the deduction would not apply to second homes, and it would be eliminated not only 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 $1 million to $500,000, and there is no deduction for interest on home equity.
The current Senate Finance Committee proposal would eliminate the home equity deduction, but would not alter the rest of the deduction—including its application to second homes.
Estate Tax: The House bill and the current Senate Finance Committee proposal would both nearly double the basic (per filer) exemption amount under which estate, gift, and generation-skipping transfer taxes on property do not apply. Both proposals use similar language, but the House cites this figure as being $10 million, while the Senate Finance Committee lists “approximately $11 million.”
The Senate Finance Committee proposal states that for estates and trusts at or under $2,550, the rate is 10% of the taxable income; for $2,550-$9,150 the rate is $255 plus 24% of the excess over $2,550; for $9,150-$12,500, the rate is $1,839 plus 35% of the excess over $9,150; and over $12,500, the rate is $3,011.50 plus 38.5% of the excess over $12,500.