The U.S. House of Representatives on Tuesday passed the Tax Cuts and Jobs Act 227-203, bringing the $1.5 trillion tax cut package one step closer to reality as the Senate begins debate on the bill.
The approval follows months of debate that concluded with the passage of separate bills in the House on Nov. 16 and Senate on Dec. 2 that had some major differences. In the end, a compromise bill is expected to reach President Donald Trump's desk by Congress' self-imposed Christmas deadline.
Among the provisions in the compromise tax bill is creation of a 20% deduction for pass-through business income, which affects some private equity limited partnerships.
In the version that passed in November, the House lowered the pass-through tax rate to 25%, and in the Senate version that passed on Dec. 2, the original bill called for a 20% deduction on pass-through income until Ron Johnson, R-Wis., a former small business owner, won a slight increase in the deduction for pass-through businesses to 23%. The final version of the bill restores that 20% deduction. The provision expires on Dec. 31, 2025.
The bill also adds a 1.4% tax on net investment income for private colleges and universities with at least 500 students and assets of at least $500,000 per full-time student at the end of the preceding tax year. The version of the bill that passed on Tuesday further limits those colleges and universities to those that have more than 50% of students who are located in the United States.
Also included is a provision to limit the ability of firm partners to pay a lower capital gains rate on carried interest to investments held for at least three years, up from one year.
One of the main provisions was dropping the corporate tax rate from 35%, and the final tax bill settled on a 21% rate. While private equity and other firms would gain with that rate for the companies they own, the bill does limit interest deductibility to 30% of adjusted income, although real estate firms won several exceptions.
A new unrelated business income tax that would have applied to public pension funds' direct investments, such as real estate and private equity, was not included in the final bill. The UBIT measure, which was included in November's House version and not in the later Senate version, had been under fire from public pension funds. The Internal Revenue Service already applies UBIT to state colleges and universities but had long remained silent on the application of that tax to other state entities, which led public plans to believe it does not apply to them, particularly since their gross income already is excluded under another part of the IRS code.
The bill does keep intact the tax treatment of 401(k) contributions and allows highly compensated employees the ability to use non-qualified deferred compensation plans to boost retirement savings.
