1 

" ! HOUSE OF REPRESENTATIVES 115TH CONGRESS

1st Session 

REPORT

115–409 

TAX CUTS AND JOBS ACT 

R E P O R T 

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES 

ON

H.R. 1 

together with 

DISSENTING AND ADDITIONAL VIEWS 

[Including cost estimate of the Congressional Budget Office] 

NOVEMBER 13, 2017.—Committed to the Committee of the Whole House 

on the State of the Union and ordered to be printed 


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TAX CUTS AND JOBS ACT 


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U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

1 

27–533 

" ! HOUSE OF REPRESENTATIVES 115TH CONGRESS

1st Session 

REPORT

2017

115–409 

TAX CUTS AND JOBS ACT 

R E P O R T 

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES 

ON

H.R. 1 

together with 

DISSENTING AND ADDITIONAL VIEWS 

[Including cost estimate of the Congressional Budget Office] 

NOVEMBER 13, 2017.—Committed to the Committee of the Whole House 

on the State of the Union and ordered to be printed 


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(III) 

C O N T E N T S 

Page 

I. SUMMARY AND BACKGROUND ............................................................... 112 

A. Purpose and Summary ..................................................................... 112 

B. Background and Need for Legislation ............................................. 112 

C. Legislative History ............................................................................ 112 

II. EXPLANATION OF THE BILL ................................................................... 115 

TITLE I—TAX REFORM FOR INDIVIDUALS .................................................... 115 

A. Simplification and Reform of Rates, Standard Deductions, and 

Exemptions ...................................................................................... 115 

1. Reduction and simplification of individual income tax rates 

(secs. 1001 and 1005 of the bill and sec. 1 of the Code) ....... 115 

2. Enhancement of standard deduction (sec. 1002 of the bill 

and sec. 63 of the Code) .......................................................... 123 

3. Repeal of deduction for personal exemptions (sec. 1003 of 

the bill and secs. 151–153 of the Code) ................................. 124 

4. Maximum rate on business income of individuals (sec. 1004 

of the bill and new sec. 4 of the Code) ................................... 126 

B. Simplification and Reform of Family and Individual Tax ............. 135 

1. Enhancement of child tax credit and new family tax credit 

(sec. 1101 of the bill and sec. 24 of the Code) ....................... 135 

2. Repeal of credit for the elderly and permanently disabled 

(sec. 1102(a) of the bill and sec. 22 of the Code) ................... 137 

3. Termination of credit for interest on certain home mortgages 

(sec. 1102(b) of the bill and sec. 25 of the Code) ................... 138 

4. Repeal of credit for plug-in electric drive motor vehicles 

(sec. 1102(c) of the bill and sec. 30D of the Code) ................ 138 

5. Modification of taxpayer identification number requirements 

for the child tax credit, earned income credit, and American Opportunity credit (sec. 1103 of the bill and secs. 

24, 25A and 32 of the Code) ................................................... 139 

6. Procedures to reduce improper claims of earned income credit (sec. 1104 of the bill and new secs. 32(c)(2)(B)(vii) and 

6011(i) of the Code) ................................................................. 142 

7. Certain income disallowed for purposes of the earned income 

tax credit (sec. 1105 of the bill, new secs. 32(n) and 

32(c)(2)(C) of the Code, and secs. 6051, 6052, 6041(a), and 

6050(w) of the Code) ................................................................ 144 

C. Simplification and Reform of Education Incentives ....................... 147 

1. Reform of American opportunity tax credit and repeal of 

lifetime learning credit (sec. 1201 of the bill and sec. 25A 

of the Code) .............................................................................. 147 

2. Consolidation and modification of education savings rules 

(sec. 1202 of the bill and secs. 529 and 530 of the Code) ..... 149 

3. Reforms to discharge of certain student loan indebtedness 

(sec. 1203 of the bill and sec. 108(f) of the Code) ................. 153 

4. Repeal of deduction for student loan interest (sec. 1204 

of the bill and sec. 221 of the Code) ....................................... 154 

5. Repeal of deduction for qualified tuition and related expenses (sec. 1204 of the bill and sec. 222 of the Code) ......... 155 

6. Repeal of exclusion for educational assistance programs (sec. 

1204 of the bill and sec. 127 of the Code) .............................. 156 

7. Repeal of exclusion for interest on United States savings 

bonds used for higher education expenses (sec. 1204 of 

the bill and sec. 135 of the Code) ........................................... 157 


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IV 

TITLE I—TAX REFORM FOR INDIVIDUALS—Continued 

8. Repeal of exclusion for qualified tuition reductions (sec. 

1204 of the bill and sec. 117(d) of the Code) ......................... 158 

9. Rollovers between qualified tuition programs and qualified 

ABLE programs (sec. 1205 of the bill and secs. 529 and 

529A of the Code) .................................................................... 159 

D. Simplification and Reform of Deductions ....................................... 162 

1. Repeal of overall limitation on itemized deductions (sec. 

1301 of the bill and sec. 68 of the Code) ................................ 162 

2. Modification of deduction for home mortgage interest (sec. 

1302 of the bill and sec. 163(h) of the Code) ......................... 163 

3. Modification of deduction for taxes not paid or accrued in 

a trade or business (sec. 1303 of the bill and sec. 164(b) 

of the Code) .............................................................................. 165 

4. Repeal of deduction for personal casualty and theft losses 

(sec. 1304 of the bill and sec. 165 of the Code) ..................... 166 

5. Limitation on wagering losses (sec. 1305 of the bill and 

sec. 165 of the Code) ............................................................... 167 

6. Modifications to the deduction for charitable contributions 

(sec. 1306 of the bill and sec. 170 of the Code) ..................... 168 

7. Repeal of deduction for tax preparation expenses (sec. 1307 

of the bill and sec. 212 of the Code) ....................................... 178 

8. Repeal of deduction for medical expenses (sec. 1308 of the 

bill and sec. 213 of the Code) ................................................. 179 

9. Repeal of deduction for alimony payments and corresponding inclusion in gross income (sec. 1309 of the 

bill and secs. 61, 71, and 215 of the Code) ............................ 179 

10. Repeal of deduction for moving expenses (sec. 1310 of the 

bill and secs. 134 and 217 of the Code) ................................. 180 

11. Termination of deduction and exclusions for contributions 

to medical savings accounts (sec. 1311 of the bill and secs. 

106(b) and 220 of the Code) .................................................... 181 

12. Denial of deduction for expenses attributable to the trade 

or business of being an employee, expenses of teachers, 

performing artists and certain officials (sec. 1312 of the 

bill and secs. 62, 67, and new sec. 262A of the Code) .......... 184 

E. Simplification and Reform of Exclusions and Taxable Compensation ................................................................................................... 186 

1. Limitation on exclusion for employer-provided housing (sec. 

1401 of the bill and sec. 119 of the Code) .............................. 186 

2. Modification of exclusion of gain on sale of a principal residence (sec. 1402 of the bill and sec. 121 of the Code) .......... 187 

3. Repeal of exclusion, etc., for employee achievement awards 

(sec. 1403 of the bill and secs. 74(c) and 274(j) of the 

Code) ......................................................................................... 188 

4. Sunset of exclusion for dependent care assistance programs 

(sec. 1404 of the bill and sec. 129 of the Code) ..................... 188 

5. Repeal of exclusion for qualified moving expense reimbursement (sec. 1405 of the bill and sec. 132(g) of the Code) ....... 189 

6. Repeal of exclusion for adoption assistance programs (sec. 

1406 of the bill and sec. 137 of the Code) .............................. 190 

F. Simplification and Reform of Savings, Pensions, Retirement ....... 191 

1. Repeal of special rule permitting recharacterization of IRA 

contributions (sec. 1501 of the bill and sec. 408A of the 

Code) ......................................................................................... 191 

2. Reduction in minimum age for allowable in-service distributions (sec. 1502 of the bill and secs. 401 and 457 of the 

Code) ......................................................................................... 194 

3. Modification of rules governing hardship distributions (sec. 

1503 of the bill and secs. 401 and 403 of the Code) ............. 195 

4. Modification of rules relating to hardship withdrawals from 

cash or deferred arrangements (sec. 1504 of the bill and 

sec. 401 of the Code) ............................................................... 196 

5. Extended rollover period for the rollover of plan loan offset 

amounts in certain cases (sec. 1505 of the bill and sec. 

402 of the Code) ....................................................................... 198 


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V 

TITLE I—TAX REFORM FOR INDIVIDUALS—Continued 

6. Modification of nondiscrimination rules for certain plans 

providing benefits or contributions to older, longer service 

participants (sec. 1506 of the bill and sec. 401 of the Code) 199 

G. Estate, Gift, and Generation-Skipping Transfer Taxes ................. 209 

1. Increase in estate and gift tax exemption, followed by repeal 

of estate and generation-skipping transfer taxes and reduction in gift tax rate (secs. 1601 and 1602 of the bill, 

secs. 2010, 2056A, 2502, and 2505 of the Code, and new 

secs. 2210 and 2664 of the Code) ........................................... 209 

TITLE II—ALTERNATIVE MINIMUM TAX REPEAL ....................................... 219 

1. Repeal of alternative minimum tax (sec. 2001 of the bill 

and sec. 55 of the Code) .......................................................... 219 

TITLE III—BUSINESS TAX REFORM ................................................................ 225 

A. Tax Rates ........................................................................................... 225 

1. Reduction in corporate tax rate (sec. 3001 of the bill and 

sec. 11 of the Code) ................................................................. 225 

B. Cost Recovery .................................................................................... 227 

1. Increased expensing (sec. 3101 of the bill and sec. 168(k) 

of the Code) .............................................................................. 227 

C. Small Business Reforms ................................................................... 234 

1. Expansion of section 179 expensing (sec. 3201 of the bill 

and sec. 179 of the Code) ........................................................ 234 

2. Small business accounting method reform and simplification 

(sec. 3202 of the bill and secs. 263A, 448, 460, and 471 

of the Code) .............................................................................. 236 

3. Small business exception from limitation on deduction of 

business interest (sec. 3203 of the bill and sec. 163(j) of 

the Code) .................................................................................. 243 

4. Modification of treatment of S corporation conversions to 

C corporations (sec. 3204 of the bill and secs. 481 and 

1371 of the Code) ..................................................................... 243 

D. Reform of Business-related Exclusions, Deductions, etc. .............. 246 

1. Interest (sec. 3301 of the bill and sec. 163(j) of the Code) ...... 246 

2. Modification of net operating loss deduction (sec. 3302 of 

the bill and sec. 172 of the Code) ........................................... 252 

3. Like-kind exchanges of real property (sec. 3303 of the bill 

and sec. 1031 of the Code) ...................................................... 253 

4. Revision of treatment of contributions to capital (sec. 3304 

of the bill and sec. 118 of the Code) ....................................... 255 

5. Repeal of deduction for local lobbying expenses (sec. 3305 

of the bill and sec. 162(e) of the Code) .................................. 257 

6. Repeal of deduction for income attributable to domestic production activities (sec. 3306 of the bill and sec. 199 of 

the Code) .................................................................................. 259 

7. Entertainment, etc. expenses (sec. 3307 of the bill and sec. 

274 of the Code) ....................................................................... 261 

8. Unrelated business taxable income increased by amount 

of certain fringe benefit expenses for which deduction is 

disallowed (sec. 3308 of the bill and sec. 512 of the Code) .. 265 

9. Limitation on deduction for FDIC premiums (sec. 3309 of 

the bill and sec. 162 of the Code) ........................................... 266 

10. Repeal of rollover of publicly traded securities gain into 

specialized small business investment companies (sec. 

3310 of the bill and sec. 1044 of the Code) ............................ 269 

11. Certain self-created property not treated as a capital asset 

(sec. 3311 of the bill and sec. 1221 of the Code) ................... 270 

12. Repeal of special rule for sale or exchange of patents (sec. 

3312 of the bill and sec. 1235 of the Code) ............................ 272 

13. Repeal of technical termination of partnerships (sec. 3313 

of the bill and sec. 708(b) of the Code) .................................. 272 

14. Recharacterization of certain gains in the case of partnership profits interests held in connection with performance 

of investment services (sec. 3314 of the bill and secs. 1 

and 83 of the Code) ................................................................. 274 

15. Amortization of research and experimental expenditures 

(sec. 3315 of the bill and sec. 174 of the Code) ..................... 280 


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VI 

TITLE III—BUSINESS TAX REFORM—Continued 

16. Uniform treatment of expenses in contingency fee cases 

(sec. 3316 of the bill and new sec. 162(q) of the Code) ......... 283 

E. Reform of Business Credits .............................................................. 284 

1. Repeal of credit for clinical testing expenses for certain 

drugs for rare diseases or conditions (sec. 3401 of the 

bill and sec. 45C of the Code) ................................................. 284 

2. Repeal of employer-provided child care credit (sec. 3402 

of the bill and sec. 45F of the Code) ...................................... 285 

3. Repeal of rehabilitation credit (sec. 3403 of the bill and 

sec. 47 of the Code) ................................................................. 286 

4. Repeal of work opportunity tax credit (sec. 3404 of the 

bill and sec. 51 of the Code) ................................................... 287 

5. Repeal of deduction for certain unused business credits (sec. 

3405 of the bill and sec. 196 of the Code) .............................. 289 

6. Termination of new markets tax credit (sec. 3406 of the 

bill and sec. 45D of the Code) ................................................. 290 

7. Repeal of credit for expenditures to provide access to disabled individuals (sec. 3407 of the bill and sec. 44 of the 

Code) ......................................................................................... 292 

8. Modification of credit for portion of employer social security 

taxes paid with respect to employee tips (sec. 3408 of 

the bill and sec. 45B of the Code) .......................................... 293 

F. Energy Credits .................................................................................. 295 

1. Modifications to credit for electricity produced from certain 

renewable resources (sec. 3501 of the bill and sec. 45 of 

the Code) .................................................................................. 295 

2. Modification of the energy investment tax credit (sec. 3502 

of the bill and sec. 48 of the Code) ......................................... 297 

3. Extension and phaseout of residential energy efficient property credit (sec. 3503 of the bill and sec. 25D of the Code) .. 300 

4. Repeal of enhanced oil recovery credit (sec. 3504 of the 

bill and sec. 43 of the Code) ................................................... 301 

5. Repeal of credit for producing oil and gas from marginal 

wells (sec. 3505 of the bill and sec. 45I of the Code) ............ 302 

6. Modification of credit for production from advanced nuclear 

power facilities (sec. 3506 of the bill and sec. 45J of the 

Code) ......................................................................................... 303 

G. Bond Reforms .................................................................................... 305 

1. Termination of private activity bonds (sec. 3601 of the bill 

and sec. 103 of the Code) ........................................................ 305 

2. Repeal of advance refunding bonds (sec. 3602 of the bill 

and sec. 149(d) of the Code) .................................................... 307 

3. Repeal of tax credit bonds (sec. 3603 of the bill and secs. 

54A, 54B, 54C, 54D, 54E, 54F and 6431 of the Code) .......... 309 

4. No tax-exempt bonds for professional stadiums (sec. 3604 

of the bill and sec. 103 of the Code) ....................................... 312 

H. Insurance ........................................................................................... 314 

1. Net operating losses of life insurance companies (sec. 3701 

of the bill and sec. 810 of the Code) ....................................... 314 

2. Repeal of small life insurance company deduction (sec. 3702 

of the bill and sec. 806 of the Code) ....................................... 315 

3. Surtax on life insurance company taxable income (sec. 3703 

of the bill and sec. 801 of the Code) ....................................... 316 

4. Adjustment for change in computing reserves (sec. 3704 

of the bill and sec. 807 of the Code) ....................................... 319 

5. Repeal of special rule for distributions to shareholders from 

pre-1984 policyholders surplus account (sec. 3705 of the 

bill and sec. 815 of the Code) ................................................. 320 

6. Modification of proration rules for property and casualty 

insurance companies (sec. 3706 of the bill and sec. 832 

of the Code) .............................................................................. 322 

7. Modification of discounting rules for property and casualty 

insurance companies (sec. 3707 of the bill and sec. 832 

of the Code) .............................................................................. 323 

8. Repeal of special estimated tax payments (sec. 3708 of the 

bill and sec. 847 of the Code) ................................................. 326 


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VII 

TITLE III—BUSINESS TAX REFORM—Continued 

I. Compensation ..................................................................................... 328 

1. Modification of limitation on excessive employee remuneration (sec. 3801 of the bill and sec. 162(m) of the Code) ........ 328 

2. Excise tax on excess tax-exempt organization executive compensation (sec. 3802 of the bill and sec. 4960 of the Code) .. 332 

3. Treatment of qualified equity grants (sec. 3803 of the bill 

and secs. 83, 3401, and 6051 of the Code) ............................. 335 

TITLE IV—TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS . 343 

PRESENT LAW ....................................................................................................... 343 

A. Principles Common to Inbound and Outbound Taxation .............. 343 

1. Residence .................................................................................... 344 

2. Entity classification .................................................................... 345 

3. Source of income rules ............................................................... 346 

4. Intercompany transfers .............................................................. 350 

B. U.S. Tax Rules Applicable to Nonresident Aliens and Foreign 

Corporations (Inbound) .................................................................. 351 

1. Gross-basis taxation of U.S.-source income .............................. 351 

2. Net-basis taxation of U.S.-source income ................................. 355 

3. Special rules ................................................................................ 359 

C. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons 

(Outbound) ...................................................................................... 361 

1. In general .................................................................................... 361 

2. Anti-deferral regimes ................................................................. 361 

3. Foreign tax credit ....................................................................... 366 

4. Special rules ................................................................................ 368 

TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS ..................... 370 

A. Establishment of Participation Exemption System for Taxation 

of Foreign Income ........................................................................... 370 

1. Deduction for foreign-source portion of dividends received 

by domestic corporations from specified 10-percent owned 

foreign corporations (sec. 4001 of the bill and new sec. 

245A of the Code) .................................................................... 370 

2. Application of participation exemption to investments in 

United States property (sec. 4002 of the bill sec. 956 of 

the Code) .................................................................................. 373 

3. Limitation on losses with respect to specified 10-percent 

owned foreign corporations (sec. 4003 of the bill secs. 

367(a)(3)(C) and 961 of the Code, and new sec. 91 of the 

Code) ......................................................................................... 373 

4. Treatment of deferred foreign income upon transition to 

participation exemption system of taxation (sec. 4004 of 

the bill and secs. 78, 904, 907, and 965 of the Code) ........... 375 

B. Modifications Related to Foreign Tax Credit System .................... 383 

1. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on current year basis (sec. 4101 

of the bill and secs. 78, 902 and 960 of the Code) ................ 383 

2. Source of income from sales of inventory determined solely 

on basis of production activities (sec. 4102 of the bill and 

sec. 863 of the Code) ............................................................... 384 

C. Modifications of Subpart F Provisions ............................................ 384 

1. Repeal of inclusion based on withdrawal of previously excluded subpart F income from qualified investment (sec. 

4201 of the bill and sec. 955 of the Code) .............................. 384 

2. Repeal of treatment of foreign base company oil related 

income as subpart F income (sec. 4202 of the bill and 

sec. 954(a) of the Code) ........................................................... 385 

3. Inflation adjustment of de minimis exception for foreign 

base company income (sec. 4203 of the bill and sec. 

954(b)(3) of the Code) .............................................................. 386 

4. Look-thru rule for related controlled foreign corporations 

made permanent (sec. 4204 of the bill and sec. 954(c)(6) 

of the Code) .............................................................................. 386 

5. Modification of stock attribution rules for determining status 

as a controlled foreign corporation (sec. 4205 of the bill 

secs. 318, 958 and 6038 of the Code). .................................... 387 


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VIII 

TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS—Continued 

6. Elimination of requirement that corporation must be controlled for 30 days before subpart F inclusions apply (sec. 

4206 of the bill and 951(a)(1) of the Code) ............................ 387 

D. Prevention of Base Erosion .............................................................. 388 

1. Current year inclusion by United States shareholders with 

foreign high returns (sec. 4301 of the bill and secs. 78 

and 960 and new sec. 951A of the Code) ............................... 388 

2. Limitation on deduction of interest by domestic corporations 

which are members of an international financial reporting 

group (sec. 4302 of the bill and sec. 163 of the Code) .......... 397 

3. Excise tax on certain payments from domestic corporations 

to related foreign corporations; election to treat such payments as effectively connected income (sec. 4303 of the 

bill and secs. 882, 4491, 6038C, and 6038E of the Code) ..... 400 

E. Provisions Related to Possessions of the United States ................ 405 

1. Extension of deduction allowable with respect to income 

attributable to domestic production activities in Puerto 

Rico (sec. 4401 of the bill and sec. 199 of the Code) ............. 405 

2. Extension of temporary increase in limit on cover over of 

rum excise taxes to Puerto Rico and the Virgin Islands 

(sec. 4402 of the bill and sec. 119(d) of the Code) ................. 406 

3. Extension of American Samoa economic development credit 

(sec. 4403 of the bill and sec. 119 of Pub. L. No. 109– 

432) ........................................................................................... 407 

F. Other International Reforms ............................................................ 409 

1. Restriction on insurance business exception to the passive 

foreign investment company rules (sec. 4501 of the bill 

and sec. 1297 of the Code) ...................................................... 409 

TITLE V—EXEMPT ORGANIZATIONS ............................................. 412 

A. Unrelated Business Income Tax ...................................................... 412 

1. Clarification of unrelated business income tax treatment 

of entities exempt from tax under section 501(a) (sec. 5001 

of the bill and sec. 511 of the Code) ....................................... 412 

2. Exclusion of research income from unrelated business taxable income limited to publicly available research (sec. 

5002 of the bill and sec. 512(b)(9) of the Code) ..................... 414 

B. Excise Taxes ...................................................................................... 416 

1. Simplification of excise tax on private foundation investment 

income (sec. 5101 of the bill and sec. 4940 of the Code) ...... 416 

2. Private operating foundation requirements relating to operation of an art museum (sec. 5102 of the bill and sec. 

4942(j) of the Code) ................................................................. 417 

3. Excise tax based on investment income of private colleges 

and universities (sec. 5103 of the bill and new sec. 4969 

of the Code) .............................................................................. 420 

4. Provide an exception to the private foundation excess business holdings rules for philanthropic business holdings 

(sec. 5104 of the bill and sec. 4943 of the Code) ................... 423 

C. Requirements for Organizations Exempt From Tax ...................... 426 

1. Section 501(c)(3) organizations permitted to make statements relating to political campaign in ordinary course 

of activities in carrying out exempt purpose (sec. 5201 

of the bill and sec. 501 of the Code) ....................................... 426 

2. Additional reporting requirements for donor advised fund 

sponsoring organizations (sec. 5202 of the bill and sec. 

6033 of the Code) ..................................................................... 428 

III. VOTES OF THE COMMITTEE .................................................................... 430 

IV. BUDGET EFFECTS OF THE BILL ............................................................ 449 

A. Committee Estimate of Budgetary Effects ...................................... 449 

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority .................................................................. 461 

C. Cost Estimate Prepared by the Congressional Budget Office ....... 461 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF 

THE HOUSE .............................................................................................. 470 

A. Committee Oversight Findings and Recommendations ................. 470 

B. Statement of General Performance Goals and Objectives ............. 470 


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IX 

TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS—Continued 

C. Information Relating to Unfunded Mandates ................................ 470 

D. Tax Complexity Analysis .................................................................. 470 

E. Congressional Earmarks, Limited Tax Benefits, and Limited 

Tariff Benefits ................................................................................. 475 

F. Duplication of Federal Programs ..................................................... 475 

G. Disclosure of Directed Rule Makings .............................................. 476 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 476 

VII. DISSENTING VIEWS AND ADDITIONAL VIEWS .................................. 477 


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rfrederick on DSKBCBPHB2PROD with HEARING
115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 115–409 

TAX CUTS AND JOBS ACT 

NOVEMBER 13, 2017.—Committed to the Committee of the Whole House on the 

State of the Union and ordered to be printed 

Mr. BRADY of Texas, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

DISSENTING AND ADDITIONAL VIEWS 

[To accompany H.R. 1] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Ways and Means, to whom was referred the bill (H.R. 1) to 

provide for reconciliation pursuant to title II of the concurrent resolution on the 

budget for fiscal year 2018, having considered the same, report favorably thereon 

with amendments and recommend that the bill as amended do pass. 

The amendments are as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE; ETC. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Tax Cuts and Jobs Act’’. 

(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment 

to, or repeal of, a section or other provision, the reference shall be considered to be 

made to a section or other provision of the Internal Revenue Code of 1986. 

(c) TABLE OF CONTENTS.—The table of contents for this Act is as follows: 

Sec. 1. Short title; etc. 

TITLE I—TAX REFORM FOR INDIVIDUALS 

Subtitle A—Simplification and Reform of Rates, Standard Deduction, and Exemptions 

Sec. 1001. Reduction and simplification of individual income tax rates. 

Sec. 1002. Enhancement of standard deduction. 

Sec. 1003. Repeal of deduction for personal exemptions. 

Sec. 1004. Maximum rate on business income of individuals. 

Sec. 1005. Conforming amendments related to simplification of individual income tax rates. 

Subtitle B—Simplification and Reform of Family and Individual Tax Credits 

Sec. 1101. Enhancement of child tax credit and new family tax credit. 

Sec. 1102. Repeal of nonrefundable credits. 

Sec. 1103. Refundable credit program integrity. 

Sec. 1104. Procedures to reduce improper claims of earned income credit. 

Sec. 1105. Certain income disallowed for purposes of the earned income tax credit. 


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Subtitle C—Simplification and Reform of Education Incentives 

Sec. 1201. American opportunity tax credit. 

Sec. 1202. Consolidation of education savings rules. 

Sec. 1203. Reforms to discharge of certain student loan indebtedness. 

Sec. 1204. Repeal of other provisions relating to education. 

Sec. 1205. Rollovers between qualified tuition programs and qualified ABLE programs. 

Subtitle D—Simplification and Reform of Deductions 

Sec. 1301. Repeal of overall limitation on itemized deductions. 

Sec. 1302. Mortgage interest. 

Sec. 1303. Repeal of deduction for certain taxes not paid or accrued in a trade or business. 

Sec. 1304. Repeal of deduction for personal casualty losses. 

Sec. 1305. Limitation on wagering losses. 

Sec. 1306. Charitable contributions. 

Sec. 1307. Repeal of deduction for tax preparation expenses. 

Sec. 1308. Repeal of medical expense deduction. 

Sec. 1309. Repeal of deduction for alimony payments. 

Sec. 1310. Repeal of deduction for moving expenses. 

Sec. 1311. Termination of deduction and exclusions for contributions to medical savings accounts. 

Sec. 1312. Denial of deduction for expenses attributable to the trade or business of being an employee. 

Subtitle E—Simplification and Reform of Exclusions and Taxable Compensation 

Sec. 1401. Limitation on exclusion for employer-provided housing. 

Sec. 1402. Exclusion of gain from sale of a principal residence. 

Sec. 1403. Repeal of exclusion, etc., for employee achievement awards. 

Sec. 1404. Sunset of exclusion for dependent care assistance programs. 

Sec. 1405. Repeal of exclusion for qualified moving expense reimbursement. 

Sec. 1406. Repeal of exclusion for adoption assistance programs. 

Subtitle F—Simplification and Reform of Savings, Pensions, Retirement 

Sec. 1501. Repeal of special rule permitting recharacterization of Roth IRA contributions as traditional IRA 

contributions. 

Sec. 1502. Reduction in minimum age for allowable in-service distributions. 

Sec. 1503. Modification of rules governing hardship distributions. 

Sec. 1504. Modification of rules relating to hardship withdrawals from cash or deferred arrangements. 

Sec. 1505. Extended rollover period for the rollover of plan loan offset amounts in certain cases. 

Sec. 1506. Modification of nondiscrimination rules to protect older, longer service participants. 

Subtitle G—Estate, Gift, and Generation-skipping Transfer Taxes 

Sec. 1601. Increase in credit against estate, gift, and generation-skipping transfer tax. 

Sec. 1602. Repeal of estate and generation-skipping transfer taxes. 

TITLE II—ALTERNATIVE MINIMUM TAX REPEAL 

Sec. 2001. Repeal of alternative minimum tax. 

TITLE III—BUSINESS TAX REFORM 

Subtitle A—Tax Rates 

Sec. 3001. Reduction in corporate tax rate. 

Subtitle B—Cost Recovery 

Sec. 3101. Increased expensing. 

Subtitle C—Small Business Reforms 

Sec. 3201. Expansion of section 179 expensing. 

Sec. 3202. Small business accounting method reform and simplification. 

Sec. 3203. Small business exception from limitation on deduction of business interest. 

Sec. 3204. Modification of treatment of S corporation conversions to C corporations. 

Subtitle D—Reform of Business-related Exclusions, Deductions, etc. 

Sec. 3301. Interest. 

Sec. 3302. Modification of net operating loss deduction. 

Sec. 3303. Like-kind exchanges of real property. 

Sec. 3304. Revision of treatment of contributions to capital. 

Sec. 3305. Repeal of deduction for local lobbying expenses. 

Sec. 3306. Repeal of deduction for income attributable to domestic production activities. 

Sec. 3307. Entertainment, etc. expenses. 

Sec. 3308. Unrelated business taxable income increased by amount of certain fringe benefit expenses for which 

deduction is disallowed. 

Sec. 3309. Limitation on deduction for FDIC premiums. 

Sec. 3310. Repeal of rollover of publicly traded securities gain into specialized small business investment companies. 

Sec. 3311. Certain self-created property not treated as a capital asset. 

Sec. 3312. Repeal of special rule for sale or exchange of patents. 

Sec. 3313. Repeal of technical termination of partnerships. 

Sec. 3314. Recharacterization of certain gains in the case of partnership profits interests held in connection 

with performance of investment services. 

Sec. 3315. Amortization of research and experimental expenditures. 

Sec. 3316. Uniform treatment of expenses in contingency fee cases. 

Subtitle E—Reform of Business Credits 

Sec. 3401. Repeal of credit for clinical testing expenses for certain drugs for rare diseases or conditions. 

Sec. 3402. Repeal of employer-provided child care credit. 

Sec. 3403. Repeal of rehabilitation credit. 

Sec. 3404. Repeal of work opportunity tax credit. 


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Sec. 3405. Repeal of deduction for certain unused business credits. 

Sec. 3406. Termination of new markets tax credit. 

Sec. 3407. Repeal of credit for expenditures to provide access to disabled individuals. 

Sec. 3408. Modification of credit for portion of employer social security taxes paid with respect to employee tips. 

Subtitle F—Energy Credits 

Sec. 3501. Modifications to credit for electricity produced from certain renewable resources. 

Sec. 3502. Modification of the energy investment tax credit. 

Sec. 3503. Extension and phaseout of residential energy efficient property. 

Sec. 3504. Repeal of enhanced oil recovery credit. 

Sec. 3505. Repeal of credit for producing oil and gas from marginal wells. 

Sec. 3506. Modifications of credit for production from advanced nuclear power facilities. 

Subtitle G—Bond Reforms 

Sec. 3601. Termination of private activity bonds. 

Sec. 3602. Repeal of advance refunding bonds. 

Sec. 3603. Repeal of tax credit bonds. 

Sec. 3604. No tax exempt bonds for professional stadiums. 

Subtitle H—Insurance 

Sec. 3701. Net operating losses of life insurance companies. 

Sec. 3702. Repeal of small life insurance company deduction. 

Sec. 3703. Surtax on life insurance company taxable income. 

Sec. 3704. Adjustment for change in computing reserves. 

Sec. 3705. Repeal of special rule for distributions to shareholders from pre-1984 policyholders surplus account. 

Sec. 3706. Modification of proration rules for property and casualty insurance companies. 

Sec. 3707. Modification of discounting rules for property and casualty insurance companies. 

Sec. 3708. Repeal of special estimated tax payments. 

Subtitle I—Compensation 

Sec. 3801. Modification of limitation on excessive employee remuneration. 

Sec. 3802. Excise tax on excess tax-exempt organization executive compensation. 

Sec. 3803. Treatment of qualified equity grants. 

TITLE IV—TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS 

Subtitle A—Establishment of Participation Exemption System for Taxation of Foreign Income 

Sec. 4001. Deduction for foreign-source portion of dividends received by domestic corporations from specified 10- 

percent owned foreign corporations. 

Sec. 4002. Application of participation exemption to investments in United States property. 

Sec. 4003. Limitation on losses with respect to specified 10-percent owned foreign corporations. 

Sec. 4004. Treatment of deferred foreign income upon transition to participation exemption system of taxation. 

Subtitle B—Modifications Related to Foreign Tax Credit System 

Sec. 4101. Repeal of section 902 indirect foreign tax credits; determination of section 960 credit on current year 

basis. 

Sec. 4102. Source of income from sales of inventory determined solely on basis of production activities. 

Subtitle C—Modification of Subpart F Provisions 

Sec. 4201. Repeal of inclusion based on withdrawal of previously excluded subpart F income from qualified in- vestment. Sec. 4202. Repeal of treatment of foreign base company oil related income as subpart F income. 

Sec. 4203. Inflation adjustment of de minimis exception for foreign base company income. 

Sec. 4204. Look-thru rule for related controlled foreign corporations made permanent. 

Sec. 4205. Modification of stock attribution rules for determining status as a controlled foreign corporation. 

Sec. 4206. Elimination of requirement that corporation must be controlled for 30 days before subpart F inclusions apply. 

Subtitle D—Prevention of Base Erosion 

Sec. 4301. Current year inclusion by United States shareholders with foreign high returns. 

Sec. 4302. Limitation on deduction of interest by domestic corporations which are members of an international 

financial reporting group. 

Sec. 4303. Excise tax on certain payments from domestic corporations to related foreign corporations; election 

to treat such payments as effectively connected income. 

Subtitle E—Provisions Related to Possessions of the United States 

Sec. 4401. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. 

Sec. 4402. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the 

Virgin Islands. 

Sec. 4403. Extension of American Samoa economic development credit. 

Subtitle F—Other International Reforms 

Sec. 4501. Restriction on insurance business exception to passive foreign investment company rules. 

TITLE V—EXEMPT ORGANIZATIONS 

Subtitle A—Unrelated Business Income Tax 

Sec. 5001. Clarification of unrelated business income tax treatment of entities treated as exempt from taxation 

under section 501(a). 

Sec. 5002. Exclusion of research income limited to publicly available research. 

Subtitle B—Excise Taxes 

Sec. 5101. Simplification of excise tax on private foundation investment income. 


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Sec. 5102. Private operating foundation requirements relating to operation of art museum. 

Sec. 5103. Excise tax based on investment income of private colleges and universities. 

Sec. 5104. Exception from private foundation excess business holding tax for independently-operated philanthropic business holdings. 

Subtitle C—Requirements for Organizations Exempt From Tax 

Sec. 5201. 501(c)(3) organizations permitted to make statements relating to political campaign in ordinary 

course of activities. 

Sec. 5202. Additional reporting requirements for donor advised fund sponsoring organizations. 

TITLE I—TAX REFORM FOR INDIVIDUALS 

Subtitle A—Simplification and Reform of Rates, 

Standard Deduction, and Exemptions 

SEC. 1001. REDUCTION AND SIMPLIFICATION OF INDIVIDUAL INCOME TAX RATES. 

(a) IN GENERAL.—Section 1 is amended by striking subsection (i) and by striking 

all that precedes subsection (h) and inserting the following: 

‘‘SEC. 1. TAX IMPOSED. 

‘‘(a) IN GENERAL.—There is hereby imposed on the income of every individual a 

tax equal to the sum of— 

‘‘(1) 12 PERCENT BRACKET.—12 percent of so much of the taxable income as 

does not exceed the 25-percent bracket threshold amount, 

‘‘(2) 25 PERCENT BRACKET.—25 percent of so much of the taxable income as 

exceeds the 25-percent bracket threshold amount but does not exceed the 35- 

percent bracket threshold amount, plus 

‘‘(3) 35 PERCENT BRACKET.—35 percent of so much of taxable income as exceeds the 35-percent bracket threshold amount but does not exceed the 39.6 percent bracket threshold amount. 

‘‘(4) 39.6 PERCENT BRACKET.—39.6 percent of so much of taxable income as exceeds the 39.6-percent bracket threshold amount. 

‘‘(b) BRACKET THRESHOLD AMOUNTS.—For purposes of this section— 

‘‘(1) 25-PERCENT BRACKET THRESHOLD AMOUNT.—The term ‘25-percent bracket 

threshold amount’ means— 

‘‘(A) in the case of a joint return or surviving spouse, $90,000, 

‘‘(B) in the case of an individual who is the head of a household (as defined in section 2(b)), $67,500, 

‘‘(C) in the case of any other individual (other than an estate or trust), 

an amount equal to 1⁄2 of the amount in effect for the taxable year under 

subparagraph (A), and 

‘‘(D) in the case of an estate or trust, $2,550. 

‘‘(2) 35-PERCENT BRACKET THRESHOLD AMOUNT.—The term ‘35-percent bracket 

threshold amount’ means— 

‘‘(A) in the case of a joint return or surviving spouse, $260,000, 

‘‘(B) in the case of a married individual filing a separate return, an 

amount equal to 1⁄2 of the amount in effect for the taxable year under subparagraph (A), and 

‘‘(C) in the case of any other individual (other than an estate or trust), 

$200,000, and 

‘‘(D) in the case of an estate or trust, $9,150. 

‘‘(3) 39.6-PERCENT BRACKET THRESHOLD AMOUNT.—The term ‘39.6-percent 

bracket threshold amount’ means— 

‘‘(A) in the case of a joint return or surviving spouse, $1,000,000, 

‘‘(B) in the case of any other individual (other than an estate or trust), 

an amount equal to 1⁄2 of the amount in effect for the taxable year under 

subparagraph (A), and 

‘‘(C) in the case of an estate or trust, $12,500. 

‘‘(c) INFLATION ADJUSTMENT.— 

‘‘(1) IN GENERAL.—In the case of any taxable year beginning after 2018, each 

dollar amount in subsections (b) and (e)(3) (other than any amount determined 

by reference to such a dollar amount) shall be increased by an amount equal 

to— 

‘‘(A) such dollar amount, multiplied by 

‘‘(B) the cost-of-living adjustment determined under this subsection for 

the calendar year in which the taxable year begins by substituting ‘2017’ 

for ‘2016’ in paragraph (2)(A)(ii). 


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If any increase determined under the preceding sentence is not a multiple of 

$100, such increase shall be rounded to the next lowest multiple of $100. 

‘‘(2) COST-OF-LIVING ADJUSTMENT.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The cost-of-living adjustment for any calendar year is 

the percentage (if any) by which— 

‘‘(i) the C-CPI-U for the preceding calendar year, exceeds 

‘‘(ii) the normalized CPI for calendar year 2016. 

‘‘(B) SPECIAL RULE FOR ADJUSTMENTS WITH A BASE YEAR AFTER 2016.—For 

purposes of any provision which provides for the substitution of a year after 

2016 for ‘2016’ in subparagraph (A)(ii), subparagraph (A) shall be applied 

by substituting ‘C-CPI-U’ for ‘normalized CPI’ in clause (ii). 

‘‘(3) NORMALIZED CPI.—For purposes of this subsection, the normalized CPI 

for any calendar year is the product of— 

‘‘(A) the CPI for such calendar year, multiplied by 

‘‘(B) the C-CPI-U transition multiple. 

‘‘(4) C-CPI-U TRANSITION MULTIPLE.—For purposes of this subsection, the 

term ‘C-CPI-U transition multiple’ means the amount obtained by dividing— 

‘‘(A) the C-CPI-U for calendar year 2016, by 

‘‘(B) the CPI for calendar year 2016. 

‘‘(5) C-CPI-U.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘C-CPI-U’ means the Chained Consumer 

Price Index for All Urban Consumers (as published by the Bureau of Labor 

Statistics of the Department of Labor). The values of the Chained Consumer Price Index for All Urban Consumers taken into account for purposes of determining the cost-of-living adjustment for any calendar year 

under this subsection shall be the latest values so published as of the date 

on which such Bureau publishes the initial value of the Chained Consumer 

Price Index for All Urban Consumers for the month of August for the preceding calendar year. 

‘‘(B) DETERMINATION FOR CALENDAR YEAR.—The C-CPI-U for any calendar 

year is the average of the C-CPI-U as of the close of the 12-month period 

ending on August 31 of such calendar year. 

‘‘(6) CPI.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘Consumer Price Index’ means the last Consumer Price Index for All Urban Consumers published by the Department 

of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent with the Consumer Price Index 

for calendar year 1986 shall be used. 

‘‘(B) DETERMINATION FOR CALENDAR YEAR.—The CPI for any calendar 

year is the average of the Consumer Price Index as of the close of the 12- 

month period ending on August 31 of such calendar year. 

‘‘(d) SPECIAL RULES FOR CERTAIN CHILDREN WITH UNEARNED INCOME.— 

‘‘(1) IN GENERAL.—In the case of any child to whom this subsection applies 

for any taxable year— 

‘‘(A) the 25-percent bracket threshold amount shall not be more than the 

taxable income of such child for the taxable year reduced by the net unearned income of such child, and 

‘‘(B) the 35-percent bracket threshold amount shall not be more than the 

sum of— 

‘‘(i) the taxable income of such child for the taxable year reduced by 

the net unearned income of such child, plus 

‘‘(ii) the dollar amount in effect under subsection (b)(2)(D) for the taxable year. 

‘‘(C) the 39.6-percent bracket threshold amount shall not be more than 

the sum of— 

‘‘(i) the taxable income of such child for the taxable year reduced by 

the net unearned income of such child, plus 

‘‘(ii) the dollar amount in effect under subsection (b)(3)(C). 

‘‘(2) CHILD TO WHOM SUBSECTION APPLIES.—This subsection shall apply to any 

child for any taxable year if— 

‘‘(A) such child— 

‘‘(i) has not attained age 18 before the close of the taxable year, or 

‘‘(ii) has attained age 18 before the close of the taxable year and is 

described in paragraph (3), 

‘‘(B) either parent of such child is alive at the close of the taxable year, 

and 

‘‘(C) such child does not file a joint return for the taxable year. 

‘‘(3) CERTAIN CHILDREN WHOSE EARNED INCOME DOES NOT EXCEED ONE-HALF

OF INDIVIDUAL’S SUPPORT.—A child is described in this paragraph if— 


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‘‘(A) such child— 

‘‘(i) has not attained age 19 before the close of the taxable year, or 

‘‘(ii) is a student (within the meaning of section 7706(f)(2)) who has 

not attained age 24 before the close of the taxable year, and 

‘‘(B) such child’s earned income (as defined in section 911(d)(2)) for such 

taxable year does not exceed one-half of the amount of the individual’s support (within the meaning of section 7706(c)(1)(D) after the application of 

section 7706(f)(5) (without regard to subparagraph (A) thereof)) for such 

taxable year. 

‘‘(4) NET UNEARNED INCOME.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘net unearned income’ means the excess of— 

‘‘(i) the portion of the adjusted gross income for the taxable year 

which is not attributable to earned income (as defined in section 

911(d)(2)), over 

‘‘(ii) the sum of— 

‘‘(I) the amount in effect for the taxable year under section 

63(c)(2)(A) (relating to limitation on standard deduction in the case 

of certain dependents), plus 

‘‘(II) The greater of the amount described in subclause (I) or, if 

the child itemizes his deductions for the taxable year, the amount 

of the itemized deductions allowed by this chapter for the taxable 

year which are directly connected with the production of the portion of adjusted gross income referred to in clause (i). 

‘‘(B) LIMITATION BASED ON TAXABLE INCOME.—The amount of the net unearned income for any taxable year shall not exceed the individual’s taxable 

income for such taxable year. 

‘‘(e) PHASEOUT OF 12-PERCENT RATE.— 

‘‘(1) IN GENERAL.—The amount of tax imposed by this section (determined 

without regard to this subsection) shall be increased by 6 percent of the excess 

(if any) of— 

‘‘(A) adjusted gross income, over 

‘‘(B) the applicable dollar amount. 

‘‘(2) LIMITATION.—The increase determined under paragraph (1) with respect 

to any taxpayer for any taxable year shall not exceed 27.6 percent of the lesser 

of— 

‘‘(A) the taxpayer’s taxable income for such taxable year, or 

‘‘(B) the 25-percent bracket threshold amount in effect with respect to the 

taxpayer for such taxable year. 

‘‘(3) APPLICABLE DOLLAR AMOUNT.—For purposes of this subsection, the term 

‘applicable dollar amount’ means— 

‘‘(A) in the case of a joint return or a surviving spouse, $1,200,000, 

‘‘(B) in the case of a married individual filing a separate return, an 

amount equal to 1⁄2 of the amount in effect for the taxable year under subparagraph (A), and 

‘‘(C) in the case of any other individual, $1,000,000. 

‘‘(4) ESTATES AND TRUSTS.—Paragraph (1) shall not apply in the case of an 

estate or trust.’’. 

(b) APPLICATION OF CURRENT INCOME TAX BRACKETS TO CAPITAL GAINS BRACKETS.— 

(1) IN GENERAL.— 

(A) 0-PERCENT CAPITAL GAINS BRACKET.—Section 1(h)(1) is amended by 

striking ‘‘which would (without regard to this paragraph) be taxed at a rate 

below 25 percent’’ in subparagraph (B)(i) and inserting ‘‘below the 15-percent rate threshold’’. 

(B) 15-PERCENT CAPITAL GAINS BRACKET.—Section 1(h)(1)(C)(ii)(I) is 

amended by striking ‘‘which would (without regard to this paragraph) be 

taxed at a rate below 39.6 percent’’ and inserting ‘‘below the 20-percent rate 

threshold’’. 

(2) RATE THRESHOLDS DEFINED.—Section 1(h) is amended by adding at the 

end the following new paragraph: 

‘‘(12) RATE THRESHOLDS DEFINED.—For purposes of this subsection— 

‘‘(A) 15-PERCENT RATE THRESHOLD.—The 15-percent rate threshold shall 

be— 

‘‘(i) in the case of a joint return or surviving spouse, $77,200 (1⁄2 such 

amount in the case of a married individual filing a separate return), 

‘‘(ii) in the case of an individual who is the head of a household (as 

defined in section 2(b)), $51,700, 


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‘‘(iii) in the case of any other individual (other than an estate or 

trust), an amount equal to 1⁄2 of the amount in effect for the taxable 

year under clause (i), and 

‘‘(iv) in the case of an estate or trust, $2,600. 

‘‘(B) 20-PERCENT RATE THRESHOLD.—The 20-percent rate threshold shall 

be— 

‘‘(i) in the case of a joint return or surviving spouse, $479,000 (1⁄2

such amount in the case of a married individual filing a separate return), 

‘‘(ii) in the case of an individual who is the head of a household (as 

defined in section 2(b)), $452,400, 

‘‘(iii) in the case of any other individual (other than an estate or 

trust), $425,800, and 

‘‘(iv) in the case of an estate or trust, $12,700. 

‘‘(C) INFLATION ADJUSTMENT.—In the case of any taxable year beginning 

after 2018, each of the dollar amounts in subparagraphs (A) and (B) shall 

be increased by an amount equal to— 

‘‘(i) such dollar amount, multiplied by 

‘‘(ii) the cost-of-living adjustment determined under subsection 

(c)(2)(A) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in 

clause (ii) thereof.’’. 

(c) APPLICATION OF SECTION 15.— 

(1) IN GENERAL.—Subsection (a) of section 15 is amended by striking ‘‘by this 

chapter’’ and inserting ‘‘by section 11 (or by reference to any such rates)’’. 

(2) CONFORMING AMENDMENTS.— 

(A) Section 15 is amended by striking subsections (d) and (f) and by redesignating subsection (e) as subsection (d). 

(B) Section 15(d), as redesignated by subparagraph (A), is amended by 

striking ‘‘section 1 or 11(b)’’ and inserting ‘‘section 11(b)’’. 

(C) Section 6013(c) is amended by striking ‘‘sections 15, 443, and 

7851(a)(1)(A)’’ and inserting ‘‘sections 443 and 7851(a)(1)(A)’’. 

(3) APPLICATION TO THIS ACT.—Section 15 of the Internal Revenue Code of 

1986 shall not apply to any change in a rate of tax imposed by chapter 1 of 

such Code which occurs by reason of any amendment made by this Act (other 

than the amendments made by section 3001). 

(d) EFFECTIVE DATE.— 

(1) IN GENERAL.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(2) SUBSECTION (c).—The amendments made by subsection (c) shall take effect 

on the date of the enactment of this Act. 

SEC. 1002. ENHANCEMENT OF STANDARD DEDUCTION. 

(a) INCREASE IN STANDARD DEDUCTION.—Section 63(c) is amended to read as follows: 

‘‘(c) STANDARD DEDUCTION.—For purposes of this subtitle— 

‘‘(1) IN GENERAL.—Except as otherwise provided in this subsection, the term 

‘standard deduction’ means— 

‘‘(A) $24,400, in the case of a joint return (or a surviving spouse (as defined in section 2(a)), 

‘‘(B) three-quarters of the amount in effect under subparagraph (A) for 

the taxable year, in the case of the head of a household (as defined in section 2(b)), and 

‘‘(C) one-half of the amount in effect under subparagraph (A) for the taxable year, in any other case. 

‘‘(2) LIMITATION ON STANDARD DEDUCTION IN THE CASE OF CERTAIN DEPENDENTS.—In the case of an individual who is a dependent of another taxpayer for 

a taxable year beginning in the calendar year in which the individual’s taxable 

year begins, the standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of— 

‘‘(A) $500, or 

‘‘(B) the sum of $250 and such individual’s earned income (within the 

means of section 32). 

‘‘(3) CERTAIN INDIVIDUALS, ETC., NOT ELIGIBLE FOR STANDARD DEDUCTION.—In 

the case of— 

‘‘(A) a married individual filing a separate return where either spouse 

itemizes deductions, 

‘‘(B) a nonresident alien individual, 


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‘‘(C) an individual making a return under section 443(a)(1) for a period 

of less than 12 months on account of a change in his annual accounting period, or 

‘‘(D) an estate or trust, common trust fund, or partnership, 

the standard deduction shall be zero. 

‘‘(4) UNMARRIED INDIVIDUAL.—For purposes of this section, the term ‘unmarried individual’ means any individual who— 

‘‘(A) is not married as of the close of the taxable year (as determined by 

applying section 7703), 

‘‘(B) is not a surviving spouse (as defined in section 2(a)) for the taxable 

year, and 

‘‘(C) is not a dependent of another taxpayer for a taxable year beginning 

in the calendar year in which the individual’s taxable year begins. 

‘‘(5) INFLATION ADJUSTMENTS.— 

‘‘(A) STANDARD DEDUCTION AMOUNT.—In the case of any taxable year beginning after 2019, the dollar amount in paragraph (1)(A) shall be increased 

by an amount equal to— 

‘‘(i) such dollar amount, multiplied by 

‘‘(ii) the cost-of-living adjustment determined under section 1(c)(2)(A) 

for the calendar year in which the taxable year begins, determined by 

substituting ‘calendar year 2018’ for ‘calendar year 2016’ in clause (ii) 

thereof. 

‘‘(B) LIMITATION AMOUNT IN CASE OF CERTAIN DEPENDENTS.—In the case 

of any taxable year beginning after 2017, each of the dollar amounts in 

paragraph (2) shall be increased by an amount equal to— 

‘‘(i) such dollar amount, multiplied by 

‘‘(ii)(I) in the case of the dollar amount in paragraph (2)(A), under 

section 1(c)(2)(A) for the calendar year in which the taxable year begins 

determined by substituting ‘calendar year 1987’ for ‘calendar year 2016’ 

in clause (ii) thereof, and 

‘‘(II) in the case of the dollar amount in paragraph (2)(B), under section 1(c)(2)(A) for the calendar year in which the taxable year begins 

determined by substituting ‘calendar year 1997’ for ‘calendar year 2016’ 

in clause (ii) thereof. 

If any increase determined under this paragraph is not a multiple of $100, such 

increase shall be rounded to the next lowest multiple of $100.’’. 

(b) CONFORMING AMENDMENTS.— 

(1) Section 63(b) is amended by striking ‘‘, minus—’’ and all that follows and 

inserting ‘‘minus the standard deduction’’. 

(2) Section 63 is amended by striking subsections (f) and (g). 

(3) Section 1398(c) is amended— 

(A) by striking ‘‘BASIC’’ in the heading thereof, 

(B) by striking ‘‘BASIC STANDARD’’ in the heading of paragraph (3) and inserting ‘‘STANDARD’’, and 

(C) by striking ‘‘basic’’ in paragraph (3). 

(4) Section 3402(m)(3) is amended by striking ‘‘(including the additional 

standard deduction under section 63(c)(3) for the aged and blind)’’. 

(5) Section 6014(b)(4) is amended by striking ‘‘section 63(c)(5)’’ and inserting 

‘‘section 63(c)(2)’’. 

(c) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2017. 

SEC. 1003. REPEAL OF DEDUCTION FOR PERSONAL EXEMPTIONS. 

(a) IN GENERAL.—Part V of subchapter B of chapter 1 is hereby repealed. 

(b) DEFINITION OF DEPENDENT RETAINED.—Section 152, prior to repeal by subsection (a), is hereby redesignated as section 7706 and moved to the end of chapter 

79. 

(c) APPLICATION TO ESTATES AND TRUSTS.—Subsection (b) of section 642 is amended— 

(1) by striking paragraph (2)(C), 

(2) by striking paragraph (3), and 

(3) by striking ‘‘DEDUCTION FOR PERSONAL EXEMPTION’’ in the heading thereof 

and inserting ‘‘BASIC DEDUCTION’’. 

(d) APPLICATION TO NONRESIDENT ALIENS.—Section 873(b) is amended by striking 

paragraph (3). 

(e) MODIFICATION OF WAGE WITHHOLDING RULES.— 

(1) IN GENERAL.—Section 3402(a) is amended by striking paragraph (2). 

(2) CONFORMING AMENDMENT.—Section 3402(a) is amended— 


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(A) by redesignating subparagraphs (A) and (B) of paragraph (1) as paragraphs (1) and (2) and moving such redesignated paragraphs 2 ems to the 

left, and 

(B) by striking all that precedes ‘‘otherwise provided in this section’’ and 

inserting the following: 

‘‘(a) REQUIREMENT OF WITHHOLDING.—Except as’’. 

(3) NUMBER OF EXEMPTIONS.—Section 3402(f)(1) is amended— 

(A) in subparagraph (A), by striking ‘‘an individual described in section 

151(d)(2)’’ and inserting ‘‘a dependent of any other taxpayer’’, and 

(B) in subparagraph (C), by striking ‘‘with respect to whom, on the basis 

of facts existing at the beginning of such day, there may reasonably be expected to be allowable an exemption under section 151(c)’’ and inserting 

‘‘who, on the basis of facts existing at the beginning of such day, is reasonably expected to be a dependent of the employee’’. 

(f) MODIFICATION OF RETURN REQUIREMENT.— 

(1) IN GENERAL.—Paragraph (1) of section 6012(a) is amended to read as follows: 

‘‘(1) Every individual who has gross income for the taxable year, except that 

a return shall not be required of— 

‘‘(A) an individual who is not married (determined by applying section 

7703) and who has gross income for the taxable year which does not exceed 

the standard deduction applicable to such individual for such taxable year 

under section 63, or 

‘‘(B) an individual entitled to make a joint return if— 

‘‘(i) the gross income of such individual, when combined with the 

gross income of such individual’s spouse, for the taxable year does not 

exceed the standard deduction which would be applicable to the taxpayer for such taxable year under section 63 if such individual and 

such individual’s spouse made a joint return, 

‘‘(ii) such individual and such individual’s spouse have the same 

household as their home at the close of the taxable year, 

‘‘(iii) such individual’s spouse does not make a separate return, and 

‘‘(iv) neither such individual nor such individual’s spouse is an individual described in section 63(c)(2) who has income (other than earned 

income) in excess of the amount in effect under section 63(c)(2)(A).’’. 

(2) BANKRUPTCY ESTATES.—Paragraph (8) of section 6012(a) is amended by 

striking ‘‘the sum of the exemption amount plus the basic standard deduction 

under section 63(c)(2)(D)’’ and inserting ‘‘the standard deduction in effect under 

section 63(c)(1)(B)’’. 

(g) CONFORMING AMENDMENTS.— 

(1) Section 2(a)(1)(B) is amended by striking ‘‘a dependent’’ and all that follows through ‘‘section 151’’ and inserting ‘‘a dependent who (within the meaning 

of section 7706, determined without regard to subsections (b)(1), (b)(2) and 

(d)(1)(B) thereof) is a son, stepson, daughter, or stepdaughter of the taxpayer’’. 

(2) Section 36B(b)(2)(A) is amended by striking ‘‘section 152’’ and inserting 

‘‘section 7706’’. 

(3) Section 36B(b)(3)(B) is amended by striking ‘‘unless a deduction is allowed 

under section 151 for the taxable year with respect to a dependent’’ in the flush 

matter at the end and inserting ‘‘unless the taxpayer has a dependent for the 

taxable year’’. 

(4) Section 36B(c)(1)(D) is amended by striking ‘‘with respect to whom a deduction under section 151 is allowable to another taxpayer’’ and inserting ‘‘who 

is a dependent of another taxpayer’’. 

(5) Section 36B(d)(1) is amended by striking ‘‘equal to the number of individuals for whom the taxpayer is allowed a deduction under section 151 (relating 

to allowance of deduction for personal exemptions) for the taxable year’’ and inserting ‘‘the sum of 1 (2 in the case of a joint return) plus the number of the 

taxpayer’s dependents for the taxable year’’. 

(6) Section 36B(e)(1) is amended by striking ‘‘1 or more individuals for whom 

a taxpayer is allowed a deduction under section 151 (relating to allowance of 

deduction for personal exemptions) for the taxable year (including the taxpayer 

or his spouse)’’ and inserting ‘‘1 or more of the taxpayer, the taxpayer’s spouse, 

or any dependent of the taxpayer’’. 

(7) Section 42(i)(3)(D)(ii)(I) is amended— 

(A) by striking ‘‘section 152’’ and inserting ‘‘section 7706’’, and 

(B) by striking the period at the end and inserting a comma. 

(8) Section 72(t)(2)(D)(i)(III) is amended by striking ‘‘section 152’’ and inserting ‘‘section 7706’’. 


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(9) Section 72(t)(7)(A)(iii) is amended by striking ‘‘section 152(f)(1)’’ and inserting ‘‘section 7706(f)(1)’’. 

(10) Section 105(b) is amended— 

(A) by striking ‘‘as defined in section 152’’ and inserting ‘‘as defined in 

section 7706’’, 

(B) by striking ‘‘section 152(f)(1)’’ and inserting ‘‘section 7706(f)(1)’’ and 

(C) by striking ‘‘section 152(e)’’ and inserting ‘‘section 7706(e)’’. 

(11) Section 105(c)(1) is amended by striking ‘‘section 152’’ and inserting ‘‘section 7706’’. 

(12) Section 125(e)(1)(D) is amended by striking ‘‘section 152’’ and inserting 

‘‘section 7706’’. 

(13) Section 132(h)(2)(B) is amended— 

(A) by striking ‘‘section 152(f)(1)’’ and inserting ‘‘section 7706(f)(1)’’, and 

(B) by striking ‘‘section 152(e)’’ and inserting ‘‘section 7706(e)’’. 

(14) Section 139D(c)(5) is amended by striking ‘‘section 152’’ and inserting 

‘‘section 7706’’. 

(15) Section 162(l)(1)(D) is amended by striking ‘‘section 152(f)(1)’’ and inserting ‘‘section 7706(f)(1)’’. 

(16) Section 170(g)(1) is amended by striking ‘‘section 152’’ and inserting ‘‘section 7706’’. 

(17) Section 170(g)(3) is amended by striking ‘‘section 152(d)(2)’’ and inserting 

‘‘section 7706(d)(2)’’. 

(18) Section 172(d) is amended by striking paragraph (3). 

(19) Section 220(b)(6) is amended by striking ‘‘with respect to whom a deduction under section 151 is allowable to’’ and inserting ‘‘who is a dependent of’’. 

(20) Section 220(d)(2)(A) is amended by striking ‘‘section 152’’ and inserting 

‘‘section 7706’’. 

(21) Section 223(b)(6) is amended by striking ‘‘with respect to whom a deduction under section 151 is allowable to’’ and inserting ‘‘who is a dependent of’’. 

(22) Section 223(d)(2)(A) is amended by striking ‘‘section 152’’ and inserting 

‘‘section 7706’’. 

(23) Section 401(h) is amended by striking ‘‘section 152(f)(1)’’ in the last sentence and inserting ‘‘section 7706(f)(1)’’. 

(24) Section 402(l)(4)(D) is amended by striking ‘‘section 152’’ and inserting 

‘‘section 7706’’. 

(25) Section 409A(a)(2)(B)(ii)(I) is amended by striking ‘‘section 152(a)’’ and inserting ‘‘section 7706(a)’’. 

(26) Section 501(c)(9) is amended by striking ‘‘section 152(f)(1)’’ and inserting 

‘‘section 7706(f)(1)’’. 

(27) Section 529(e)(2)(B) is amended by striking ‘‘section 152(d)(2)’’ and inserting ‘‘section 7706(d)(2)’’. 

(28) Section 703(a)(2) is amended by striking subparagraph (A) and by redesignating subparagraphs (B) through (F) as subparagraphs (A) through (E), respectively. 

(29) Section 874 is amended by striking subsection (b) and by redesignating 

subsection (c) as subsection (b). 

(30) Section 891 is amended by striking ‘‘under section 151 and’’. 

(31) Section 904(b) is amended by striking paragraph (1). 

(32) Section 931(b)(1) is amended by striking ‘‘(other than the deduction under 

section 151, relating to personal exemptions)’’. 

(33) Section 933 is amended— 

(A) by striking ‘‘(other than the deduction under section 151, relating to 

personal exemptions)’’ in paragraph (1), and 

(B) by striking ‘‘(other than the deduction for personal exemptions under 

section 151)’’ in paragraph (2). 

(34) Section 1212(b)(2)(B)(ii) is amended to read as follows: 

‘‘(ii) in the case of an estate or trust, the deduction allowed for such 

year under section 642(b).’’. 

(35) Section 1361(c)(1)(C) is amended by striking ‘‘section 152(f)(1)(C)’’ and inserting ‘‘section 7706(f)(1)(C)’’. 

(36) Section 1402(a) is amended by striking paragraph (7). 

(37) Section 2032A(c)(7)(D) is amended by striking ‘‘section 152(f)(2)’’ and inserting ‘‘section 7706(f)(2)’’. 

(38) Section 3402(m)(1) is amended by striking ‘‘other than the deductions referred to in section 151 and’’. 

(39) Section 3402(r)(2) is amended by striking ‘‘the sum of—’’ and all that follows and inserting ‘‘the standard deduction in effect under section 63(c)(1)(B).’’. 

(40) Section 5000A(b)(3)(A) is amended by striking ‘‘section 152’’ and inserting 

‘‘section 7706’’. 


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(41) Section 5000A(c)(4)(A) is amended by striking ‘‘the number of individuals 

for whom the taxpayer is allowed a deduction under section 151 (relating to allowance of deduction for personal exemptions) for the taxable year’’ and inserting ‘‘the sum of 1 (2 in the case of a joint return) plus the number of the taxpayer’s dependents for the taxable year’’. 

(42) Section 6013(b)(3)(A) is amended— 

(A) by striking ‘‘had less than the exemption amount of gross income’’ in 

clause (ii) and inserting ‘‘had no gross income’’, 

(B) by striking ‘‘had gross income of the exemption amount or more’’ in 

clause (iii) and inserting ‘‘had any gross income’’, and 

(C) by striking the flush language following clause (iii). 

(43) Section 6103(l)(21)(A)(iii) is amended to read as follows: 

‘‘(iii) the number of the taxpayer’s dependents,’’. 

(44) Section 6213(g)(2) is amended by striking subparagraph (H). 

(45) Section 6334(d)(2) is amended to read as follows: 

‘‘(2) EXEMPT AMOUNT.— ‘‘(A) IN GENERAL.—For purposes of paragraph (1), the term ‘exempt 

amount’ means an amount equal to— 

‘‘(i) the standard deduction, divided by 

‘‘(ii) 52. 

‘‘(B) VERIFIED STATEMENT.—Unless the taxpayer submits to the Secretary 

a written and properly verified statement specifying the facts necessary to 

determine the proper amount under subparagraph (A), subparagraph (A) 

shall be applied as if the taxpayer were a married individual filing a separate return with no dependents.’’. 

(46) Section 7702B(f)(2)(C)(iii) is amended by striking ‘‘section 152(d)(2)’’ and 

inserting ‘‘section 7706(d)(2)’’. 

(47) Section 7703(a) is amended by striking ‘‘part V of subchapter B of chapter 1 and’’. 

(48) Section 7703(b)(1) is amended by striking ‘‘section 152(f)(1)’’ and all that 

follows and inserting ‘‘section 7706(f)(1),’’. 

(49) Section 7706(a), as redesignated by this section, is amended by striking 

‘‘this subtitle’’ and inserting ‘‘subtitle A’’. 

(50)(A) Section 7706(d)(1)(B), as redesignated by this section, is amended by 

striking ‘‘the exemption amount (as defined in section 151(d))’’ and inserting 

‘‘$4,150’’. 

(B) Section 7706(d), as redesignated by this section, is amended by adding at 

the end the following new paragraph: 

‘‘(6) INFLATION ADJUSTMENT.—In the case of any calendar year beginning 

after 2018, the $4,150 amount in paragraph (1)(B) shall be increased by an 

amount equal to— 

‘‘(A) such dollar amount, multiplied by 

‘‘(B) the cost-of-living adjustment determined under section 1(c)(2)(A) for 

such calendar year, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in clause (ii) thereof. 

If any increase determined under the preceding sentence is not a multiple of 

$100, such increase shall be rounded to the next lowest multiple of $100.’’. 

(51) The table of sections for chapter 79 is amended by adding at the end the 

following new item: 

‘‘Sec. 7706. Dependent defined.’’. 

(h) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1004. MAXIMUM RATE ON BUSINESS INCOME OF INDIVIDUALS. 

(a) IN GENERAL.—Part I of subchapter A of chapter 1 is amended by inserting 

after section 3 the following new section: 

‘‘SEC. 4. 25 PERCENT MAXIMUM RATE ON BUSINESS INCOME OF INDIVIDUALS. 

‘‘(a) REDUCTION IN TAX TO ACHIEVE 25 PERCENT MAXIMUM RATE.—The tax imposed by section 1 shall be reduced by the sum of— 

‘‘(1) 10 percent of the lesser of— 

‘‘(A) qualified business income, or 

‘‘(B) the excess (if any) of— 

‘‘(i) taxable income reduced by net capital gain (as defined in section 

1(h)(11)(A)), over 

‘‘(ii) the maximum dollar amount for the 25-percent rate bracket 

which applies to the taxpayer under section 1 for the taxable year, and 

‘‘(2) 4.6 percent of the excess (if any) of— 

‘‘(A) the lesser of— 


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‘‘(i) qualified business income, or 

‘‘(ii) the excess (if any) determined under paragraph (1)(B), over 

‘‘(B) the excess of— 

‘‘(i) the maximum dollar amount for the 35-percent rate bracket 

which applies to the taxpayer under section 1 for the taxable year, over 

‘‘(ii) the maximum dollar amount for the 25-percent rate bracket 

which applies to the taxpayer under section 1 for the taxable year. 

‘‘(b) QUALIFIED BUSINESS INCOME.—For purposes of this section, the term ‘qualified business income’ means the excess (if any) of— 

‘‘(1) the sum of— 

‘‘(A) 100 percent of any net business income derived from any passive 

business activity, plus 

‘‘(B) the capital percentage of any net business income derived from any 

active business activity, over 

‘‘(2) the sum of— 

‘‘(A) 100 percent of any net business loss derived from any passive business activity, 

‘‘(B) except as provided in subsection (e)(3)(A), 30 percent of any net business loss derived from any active business activity, plus 

‘‘(C) any carryover business loss determined for the preceding taxable 

year. 

‘‘(c) DETERMINATION OF NET BUSINESS INCOME OR LOSS.—For purposes of this section— 

‘‘(1) IN GENERAL.—Net business income or loss shall be determined with respect to any business activity by appropriately netting items of income, gain, 

deduction, and loss with respect to such business activity. 

‘‘(2) WAGES, ETC.—Any wages (as defined in section 3401), payments described in subsection (a) or (c) of section 707, or directors’ fees received by the 

taxpayer which are properly attributable to any business activity shall be taken 

into account under paragraph (1) as an item of income with respect to such 

business activity. 

‘‘(3) EXCEPTION FOR CERTAIN INVESTMENT-RELATED ITEMS.—There shall not be 

taken into account under paragraph (1)— 

‘‘(A) any item of short-term capital gain, short-term capital loss, longterm capital gain, or long-term capital loss, 

‘‘(B) any dividend, income equivalent to a dividend, or payment in lieu 

of dividends described in section 954(c)(1)(G), 

‘‘(C) any interest income other than interest income which is properly allocable to a trade or business, 

‘‘(D) any item of gain or loss described in subparagraph (C) or (D) of section 954(c)(1) (applied by substituting ‘business activity’ for ‘controlled foreign corporation’), 

‘‘(E) any item of income, gain, deduction, or loss taken into account under 

section 954(c)(1)(F) (determined without regard to clause (ii) thereof and 

other than items attributable to notional principal contracts entered into in 

transactions qualifying under section 1221(a)(7)), 

‘‘(F) any amount received from an annuity which is not received in connection with the trade or business of the business activity, and 

‘‘(G) any item of deduction or loss properly allocable to an amount described in any of the preceding subparagraphs. 

‘‘(4) APPLICATION OF RESTRICTIONS APPLICABLE TO DETERMINING TAXABLE INCOME.—Net business income or loss shall be appropriately adjusted so as only 

to take into account any amount of income, gain, deduction, or loss to the extent 

such amount affects the determination of taxable income for the taxable year. 

‘‘(5) CARRYOVER BUSINESS LOSS.—For purposes of subsection (b)(2)(C), the carryover business loss determined for any taxable year is the excess (if any) of 

the sum described in subsection (b)(2) over the sum described in subsection 

(b)(1) for such taxable year. 

‘‘(d) PASSIVE AND ACTIVE BUSINESS ACTIVITY.—For purposes of this section— 

‘‘(1) PASSIVE BUSINESS ACTIVITY.—The term ‘passive business activity’ means 

any passive activity as defined in section 469(c) determined without regard to 

paragraphs (3) and (6)(B) thereof. 

‘‘(2) ACTIVE BUSINESS ACTIVITY.—The term ‘active business activity’ means 

any business activity which is not a passive business activity. 

‘‘(3) BUSINESS ACTIVITY.—The term ‘business activity’ means any activity 

(within the meaning of section 469) which involves the conduct of any trade or 

business. 

‘‘(e) CAPITAL PERCENTAGE.—For purposes of this section— 


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‘‘(1) IN GENERAL.—Except as otherwise provided in this section, the term ‘capital percentage’ means 30 percent. 

‘‘(2) INCREASED PERCENTAGE FOR CAPITAL-INTENSIVE BUSINESS ACTIVITIES.—In 

the case of a taxpayer who elects the application of this paragraph with respect 

to any active business activity (other than a specified service activity), the capital percentage shall be equal to the applicable percentage (as defined in subsection (f)) for each taxable year with respect to which such election applies. 

Any election made under this paragraph shall apply to the taxable year for 

which such election is made and each of the 4 subsequent taxable years. Such 

election shall be made not later than the due date (including extensions) for the 

return of tax for the taxable year for which such election is made, and, once 

made, may not be revoked. 

‘‘(3) TREATMENT OF SPECIFIED SERVICE ACTIVITIES.— ‘‘(A) IN GENERAL.—In the case of any active business activity which is a 

specified service activity— 

‘‘(i) the capital percentage shall be 0 percent, and 

‘‘(ii) subsection (b)(2)(B) shall be applied by substituting ‘0 percent’ 

for ‘30 percent’. 

‘‘(B) EXCEPTION FOR CAPITAL-INTENSIVE SPECIFIED SERVICE ACTIVITIES.— If— 

‘‘(i) the taxpayer elects the application of this subparagraph with respect to such activity for any taxable year, and 

‘‘(ii) the applicable percentage (as defined in subsection (f)) with respect to such activity for such taxable year is at least 10 percent, 

then subparagraph (A) shall not apply and the capital percentage with respect to such activity shall be equal to such applicable percentage. 

‘‘(C) SPECIFIED SERVICE ACTIVITY.—The term ‘specified service activity’ 

means any activity involving the performance of services described in section 1202(e)(3)(A), including investing, trading, or dealing in securities (as 

defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)). 

‘‘(4) REDUCTION IN CAPITAL PERCENTAGE IN CERTAIN CASES.—The capital percentage (determined after the application of paragraphs (2) and (3)) with respect 

to any active business activity shall not exceed 1 minus the quotient (not greater than 1) of— 

‘‘(A) any amounts described in subsection (c)(2) which are taken into account in determining the net business income derived from such activity, 

divided by 

‘‘(B) such net business income. 

‘‘(f) APPLICABLE PERCENTAGE.—For purposes of this section— 

‘‘(1) IN GENERAL.—The term ‘applicable percentage’ means, with respect to 

any active business activity for any taxable year, the quotient (not greater than 

1) of— 

‘‘(A) the specified return on capital with respect to such activity for such 

taxable year, divided by 

‘‘(B) the taxpayer’s net business income derived from such activity for 

such taxable year. 

‘‘(2) SPECIFIED RETURN ON CAPITAL.—The term ‘specified return on capital’ 

means, with respect to any active business activity referred to in paragraph (1), 

the excess of— 

‘‘(A) the product of— 

‘‘(i) the deemed rate of return for the taxable year, multiplied by 

‘‘(ii) the asset balance with respect to such activity for such taxable 

year, over 

‘‘(B) an amount equal to the interest which is paid or accrued, and for 

which a deduction is allowed under this chapter, with respect to such activity for such taxable year. 

‘‘(3) DEEMED RATE OF RETURN.—The term ‘deemed rate of return’ means, with 

respect to any taxable year, the Federal short-term rate (determined under section 1274(d) for the month in which or with which such taxable year ends) plus 

7 percentage points. 

‘‘(4) ASSET BALANCE.— 

‘‘(A) IN GENERAL.—The asset balance with respect to any active business 

activity referred to in paragraph (1) for any taxable year equals the taxpayer’s adjusted basis of any property described in section 1221(a)(2) which 

is used in connection with such activity as of the end of the taxable year 

(determined without regard to sections 168(k) and 179). 

‘‘(B) APPLICATION TO ACTIVITIES CARRIED ON THROUGH PARTNERSHIPS AND

S CORPORATIONS.—In the case of any active business activity carried on 


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through a partnership or S corporation, the taxpayer shall take into account such taxpayer’s distributive or pro rata share (as the case may be) 

of the asset balance with respect to such activity as determined with respect to such partnership or S corporation under subparagraph (A) (applied 

by substituting ‘the partnership’s or S corporation’s adjusted basis’ for ‘the 

taxpayer’s adjusted basis’). 

‘‘(g) REDUCED RATE FOR SMALL BUSINESSES WITH NET ACTIVE BUSINESS INCOME.— 

‘‘(1) IN GENERAL.—The tax imposed by section 1 shall be reduced by 3 percent 

of the excess (if any) of— 

‘‘(A) the least of— 

‘‘(i) qualified active business income, 

‘‘(ii) taxable income reduced by net capital gain (as defined in section 

1(h)(11)(A)), or 

‘‘(iii) the 9-percent bracket threshold amount, over 

‘‘(B) the excess (if any) of taxable income over the applicable threshold 

amount. 

‘‘(2) PHASE-IN OF RATE REDUCTION.—In the case of any taxable year beginning 

before January 1, 2022, paragraph (1) shall be applied by substituting for ‘3 percent’— 

‘‘(A) in the case of any taxable year beginning after December 31, 2017, 

and before January 1, 2020, ‘1 percent’, and 

‘‘(B) in the case of any taxable year beginning after December 31, 2019, 

and before January 1, 2022, ‘2 percent’. 

‘‘(3) QUALIFIED ACTIVE BUSINESS INCOME.—For purposes of this subsection, 

the term ‘qualified active business income’ means the excess (if any) of— 

‘‘(A) any net business income derived from any active business activity, 

over 

‘‘(B) any net business loss derived from any active business activity. 

‘‘(4) 9-PERCENT BRACKET THRESHOLD AMOUNT.—For purposes of this subsection, the term ‘9-percent bracket threshold amount’ means— 

‘‘(A) in the case of a joint return or surviving spouse, $75,000, 

‘‘(B) in the case of an individual who is the head of a household (as defined in section 2(b)), 3⁄4 of the amount in effect for the taxable year under 

subparagraph (A), and 

‘‘(C) in the case of any other individual, 1⁄2 of the amount in effect for the 

taxable year under subparagraph (A). 

‘‘(5) APPLICABLE THRESHOLD AMOUNT.—For purposes of this subsection, the 

term ‘applicable threshold amount’ means— 

‘‘(A) in the case of a joint return or surviving spouse, $150,000, 

‘‘(B) in the case of an individual who is the head of a household (as defined in section 2(b)), 3⁄4 of the amount in effect for the taxable year under 

subparagraph (A), and 

‘‘(C) in the case of any other individual, 1⁄2 of the amount in effect for the 

taxable year under subparagraph (A). 

‘‘(6) ESTATES AND TRUSTS.—Paragraph (1) shall not apply to any estate or 

trust. 

‘‘(7) INFLATION ADJUSTMENT.—In the case of any taxable year beginning after 

2018, the dollar amounts in paragraphs (4)(A) and (5)(A) shall each be increased 

by an amount equal to— 

‘‘(A) such dollar amount, multiplied by 

‘‘(B) the cost-of-living adjustment determined under subsection (c)(2)(A) 

for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in clause (ii) thereof. 

If any increase determined under the preceding sentence is not a multiple of 

$100, such increase shall be rounded to the next lowest multiple of $100. 

‘‘(h) REGULATIONS.—The Secretary may issue such regulations or other guidance 

as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance— 

‘‘(1) which ensures that no amount is taken into account under subsection 

(f)(4) with respect to more than one activity, and 

‘‘(2) which treats all specified service activities of the taxpayer as a single 

business activity for purposes of this section to the extent that such activities 

would be treated as a single employer under subsection (a) or (b) of section 52 

or subsection (m) or (o) of section 414. 

‘‘(i) REFERENCES.—Any reference in this title to section 1 shall be treated as including a reference to this section unless the context of such reference clearly indicates otherwise.’’. 


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(b) 25 PERCENT RATE FOR CERTAIN DIVIDENDS OF REAL ESTATE INVESTMENT

TRUSTS AND COOPERATIVES.—Section 1(h), as amended by the preceding provisions 

of this Act, is amended by adding at the end the following new paragraph: 

‘‘(13) 25 PERCENT RATE FOR CERTAIN DIVIDENDS OF REAL ESTATE INVESTMENT

TRUSTS AND COOPERATIVES.— ‘‘(A) IN GENERAL.—For purposes of this subsection, net capital gain (as 

defined in paragraph (11)) and unrecaptured section 1250 gain (as defined 

in paragraph (6)) shall each be increased by specified dividend income. 

‘‘(B) SPECIFIED DIVIDEND INCOME.—For purposes of this paragraph, the 

term ‘specified dividend income’ means— 

‘‘(i) in the case of any dividend received from a real estate investment 

trust, the portion of such dividend which is neither— 

‘‘(I) a capital gain dividend (as defined in section 852(b)(3)), nor 

‘‘(II) taken into account in determining qualified dividend income 

(as defined in paragraph (11)), and 

‘‘(ii) any dividend which is includible in gross income and which is 

received from an organization or corporation described in section 

501(c)(12) or 1381(a).’’. 

(c) CLERICAL AMENDMENT.—The table of sections for part I of subchapter A of 

chapter 1 is amended by inserting after the item relating to section 3 the following 

new item: 

‘‘Sec. 4. 25 percent maximum rate on business income of individuals.’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(e) TRANSITION RULE.—In the case of any taxable year which includes December 

31, 2017, the amendment made by subsection (a) shall apply with respect to such 

taxable year adjusted— 

(1) so as to apply with respect to the rates of tax in effect under section 1 

of the Internal Revenue Code of 1986 with respect to such taxable year (and 

so as to achieve a 25 percent effective rate of tax on the business income (determined without regard to paragraph (2)) in the same manner as such amendment applies to taxable years beginning after such date with respect to the 

rates of tax in effect for such years), and 

(2) by reducing the amount of the reduction in tax (as otherwise determined 

under paragraph (1)) by the amount which bears the same proportion to the 

amount of such reduction as the number of days in the taxable year which are 

before January 1, 2018, bears to the number of days in the entire taxable year. 

SEC. 1005. CONFORMING AMENDMENTS RELATED TO SIMPLIFICATION OF INDIVIDUAL INCOME TAX RATES. 

(a) AMENDMENTS RELATED TO MODIFICATION OF INFLATION ADJUSTMENT.— (1) Section 32(b)(2)(B)(ii)(II) is amended by striking ‘‘section 1(f)(3) for the calendar year in which the taxable year begins determined by substituting ‘calendar year 2008’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the calendar year in which the taxable year begins 

determined by substituting ‘calendar year 2008’ for ‘calendar year 2016’ in 

clause (ii) thereof’’. 

(2) Section 32(j)(1)(B) is amended— 

(A) in the matter preceding clause (i), by striking ‘‘section 1(f)(3)’’ and inserting ‘‘section 1(c)(2)(A)’’, 

(B) in clause (i), by striking ‘‘for ‘calendar year 1992’ in subparagraph (B) 

thereof’’ and inserting ‘‘for ‘calendar year 2016’ in clause (ii) thereof’’, and 

(C) in clause (ii), by striking ‘‘for ‘calendar year 1992’ in subparagraph (B) 

of such section 1’’ and inserting ‘‘for ‘calendar year 2016’ in clause (ii) thereof’’. 

(3) Section 36B(b)(3)(A)(ii)(II) is amended by striking ‘‘consumer price index’’ 

and inserting ‘‘C-CPI-U (as defined in section 1(c))’’. 

(4) Section 41(e)(5)(C) is amended to read as follows: 

‘‘(C) COST-OF-LIVING ADJUSTMENT DEFINED.— 

‘‘(i) IN GENERAL.—The cost-of-living adjustment for any calendar year 

is the cost-of-living adjustment for such calendar year determined 

under section 1(c)(2)(A), by substituting ‘calendar year 1987’ for ‘calendar year 2016’ in clause (ii) thereof. 

‘‘(ii) SPECIAL RULE WHERE BASE PERIOD ENDS IN A CALENDAR YEAR

OTHER THAN 1983 OR 1984.—If the base period of any taxpayer does not 

end in 1983 or 1984, clause (i) shall be applied by substituting the calendar year in which such base period ends for 1987.’’. 

(5) Section 42(e)(3)(D)(ii) is amended by striking ‘‘section 1(f)(3) for such calendar year by substituting ‘calendar year 2008’ for ‘calendar year 1992’ in subVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00027 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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16 

paragraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar year 

by substituting ‘calendar year 2008’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(6) Section 42(h)(3)(H)(i)(II) is amended by striking ‘‘section 1(f)(3) for such 

calendar year by substituting ‘calendar year 2001’ for ‘calendar year 1992’ in 

subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar 

year by substituting ‘calendar year 2001’ for ‘calendar year 2016’ in clause (ii) 

thereof’’. 

(7) Section 45R(d)(3)(B)(ii) is amended by striking ‘‘section 1(f)(3) for the calendar year, determined by substituting ‘calendar year 2012’ for ‘calendar year 

1992’ in subparagraph (B) thereof’’ and inserting ‘‘ ‘section 1(c)(2)(A) for such 

calendar year, determined by substituting ‘‘calendar year 2012’’ for ‘‘calendar 

year 2016’’ in clause (ii) thereof’ ’’. 

(8) Section 125(i)(2) is amended— 

(A) by striking ‘‘section 1(f)(3) for the calendar year in which the taxable 

year begins by substituting ‘calendar year 2012’ for ‘calendar year 1992’ in 

subparagraph (B) thereof’’ in subparagraph (B) and inserting ‘‘section 

1(c)(2)(A) for the calendar year in which the taxable year begins’’, and (B) by striking ‘‘$50’’ both places it appears in the last sentence and in- serting ‘‘$100’’. 

(9) Section 162(o)(3) is amended by inserting ‘‘as in effect before enactment 

of the Tax Cuts and Jobs Act’’ after ‘‘section 1(f)(5)’’. 

(10) Section 220(g)(2) is amended by striking ‘‘section 1(f)(3) for the calendar 

year in which the taxable year begins by substituting ‘calendar year 1997’ for 

‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 

1(c)(2)(A) for the calendar year in which the taxable year begins, determined by 

substituting ‘calendar year 1997’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(11) Section 223(g)(1) is amended by striking all that follows subparagraph 

(A) and inserting the following: 

‘‘(B) the cost-of-living adjustment determined under section 1(c)(2)(A) for 

the calendar year in which the taxable year begins, determined— 

‘‘(i) by substituting for ‘calendar year 2016’ in clause (ii) thereof— 

‘‘(I) except as provided in clause (ii), ‘calendar year 1997’, and 

‘‘(II) in the case of each dollar amount in subsection (c)(2)(A), ‘calendar year 2003’, and 

‘‘(ii) by substituting ‘March 31’ for ‘August 31’ in paragraphs (5)(B) 

and (6)(B) of section 1(c). 

The Secretary shall publish the dollar amounts as adjusted under this subsection for taxable years beginning in any calendar year no later than June 

1 of the preceding calendar year.’’. 

(12) Section 430(c)(7)(D)(vii)(II) is amended by striking ‘‘section 1(f)(3) for the 

calendar year, determined by substituting ‘calendar year 2009’ for ‘calendar 

year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the 

calendar year, determined by substituting ‘calendar year 2009’ for ‘calendar 

year 2016’ in clause (ii) thereof’’. 

(13) Section 512(d)(2)(B) is amended by striking ‘‘section 1(f)(3) for the calendar year in which the taxable year begins, by substituting ‘calendar year 

1994’ for ‘calendar year 1992’ in subparagraph (B) thereof’’and inserting ‘‘section 

1(c)(2)(A) for the calendar year in which the taxable year begins, determined by 

substituting ‘calendar year 1994’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(14) Section 513(h)(2)(C)(ii) is amended by striking ‘‘section 1(f)(3) for the calendar year in which the taxable year begins by substituting ‘calendar year 1987’ 

for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 

1(c)(2)(A) for the calendar year in which the taxable year begins, determined by 

substituting ‘calendar year 1987’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(15) Section 831(b)(2)(D)(ii) is amended by striking ‘‘section 1(f)(3) for such 

calendar year by substituting ‘calendar year 2013’ for ‘calendar year 1992’ in 

subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar 

year by substituting ‘calendar year 2013’ for ‘calendar year 2016’ in clause (ii) 

thereof’’. 

(16) Section 877A(a)(3)(B)(i)(II) is amended by striking ‘‘section 1(f)(3) for the 

calendar year in which the taxable year begins, by substituting ‘calendar year 

2007’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2007’ for ‘calendar year 2016’ in clause (ii) 

thereof’’. 

(17) Section 911(b)(2)(D)(ii)(II) is amended by striking ‘‘section 1(f)(3) for the 

calendar year in which the taxable year begins, determined by substituting 

‘2004’ for ‘1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) 


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for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2004’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(18) Section 1274A(d)(2) is amended to read as follows: 

‘‘(2) INFLATION ADJUSTMENT.— 

‘‘(A) IN GENERAL.—In the case of any debt instrument arising out of a 

sale or exchange during any calendar year after 2018, each adjusted dollar 

amount shall be increased by an amount equal to— 

‘‘(i) such adjusted dollar amount, multiplied by 

‘‘(ii) the cost-of-living adjustment determined under section 1(c)(2)(A) 

for such calendar year, determined by substituting ‘calendar year 2017’ 

for ‘calendar year 2016’ in clause (ii) thereof. 

‘‘(B) ADJUSTED DOLLAR AMOUNTS.—For purposes of this paragraph, the 

term ‘adjusted dollar amount’ means the dollar amounts in subsections (b) 

and (c), in each case as in effect for calendar year 2018. 

‘‘(C) ROUNDING.—Any increase under subparagraph (A) shall be rounded 

to the nearest multiple of $100.’’. 

(19) Section 2010(c)(3)(B)(ii) is amended by striking ‘‘section 1(f)(3) for such 

calendar year by substituting ‘calendar year 2010’ for ‘calendar year 1992’ in 

subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar 

year, determined by substituting ‘calendar year 2010’ for ‘calendar year 2016’ 

in clause (ii) thereof’’. 

(20) Section 2032A(a)(3)(B) is amended by striking ‘‘section 1(f)(3) for such 

calendar year by substituting ‘calendar year 1997’ for ‘calendar year 1992’ in 

subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar 

year, determined by substituting ‘calendar year 1997’ for ‘calendar year 2016’ 

in clause (ii) thereof’’. 

(21) Section 2503(b)(2)(B) is amended by striking ‘‘section 1(f)(3) for such calendar year by substituting ‘calendar year 1997’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the calendar year, 

determined by substituting ‘calendar year 1997’ for ‘calendar year 2016’ in 

clause (ii) thereof’’. 

(22) Section 4161(b)(2)(C)(i)(II) is amended by striking ‘‘section 1(f)(3) for such 

calendar year, determined by substituting ‘2004’ for ‘1992’ in subparagraph (B) 

thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar year, determined by 

substituting ‘calendar year 2004’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(23) Section 4261(e)(4)(A)(ii) is amended by striking ‘‘section 1(f)(3) for such 

calendar year by substituting the year before the last nonindexed year for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) 

for such calendar year, determined by substituting the year before the last nonindexed year for ‘calendar year 2016’ in clause (ii) thereof’’. 

(24) Section 4980I(b)(3)(C)(v)(II) is amended— 

(A) by striking ‘‘section 1(f)(3)’’ and inserting ‘‘section 1(c)(2)(A)’’, 

(B) by striking ‘‘subparagraph (B)’’ and inserting ‘‘clause (ii)’’, and 

(C) by striking ‘‘1992’’ and inserting ‘‘2016’’. 

(25) Section 5000A(c)(3)(D)(ii) is amended— 

(A) by striking ‘‘section 1(f)(3)’’ and inserting ‘‘section 1(c)(2)(A)’’, 

(B) by striking ‘‘subparagraph (B)’’ and inserting ‘‘clause (ii)’’, and 

(C) by striking ‘‘1992’’ and inserting ‘‘2016’’. 

(26) Section 6039F(d) is amended by striking ‘‘section 1(f)(3), except that subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A), except that clause (ii) 

thereof’’. 

(27) Section 6323(i)(4)(B) is amended by striking ‘‘section 1(f)(3) for the calendar year, determined by substituting ‘calendar year 1996’ for ‘calendar year 

1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the calendar year, determined by substituting ‘calendar year 1996’ for ‘calendar year 

2016’ in clause (ii) thereof’’. 

(28) Section 6334(g)(1)(B) is amended by striking ‘‘section 1(f)(3) for such calendar year, by substituting ‘calendar year 1998’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar year, 

determined by substituting ‘calendar year 1999’ for ‘calendar year 2016’ in 

clause (ii) thereof’’. 

(29) Section 6601(j)(3)(B) is amended by striking ‘‘section 1(f)(3) for such calendar year by substituting ‘calendar year 1997’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for such calendar year 

by substituting ‘calendar year 1997’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(30) Section 6651(i)(1) is amended by striking ‘‘section 1(f)(3) determined by 

substituting ‘calendar year 2013’ for ‘calendar year 1992’ in subparagraph (B) 


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thereof’’ and inserting ‘‘section 1(c)(2)(A) determined by substituting ‘calendar 

year 2013’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(31) Section 6721(f)(1) is amended— 

(A) by striking ‘‘section 1(f)(3)’’ and inserting ‘‘section 1(c)(2)(A)’’, 

(B) by striking ‘‘subparagraph (B)’’ and inserting ‘‘clause (ii)’’, and 

(C) by striking ‘‘1992’’ and inserting ‘‘2016’’. 

(32) Section 6722(f)(1) is amended— 

(A) by striking ‘‘section 1(f)(3)’’ and inserting ‘‘section 1(c)(2)(A)’’, 

(B) by striking ‘‘subparagraph (B)’’ and inserting ‘‘clause (ii)’’, and 

(C) by striking ‘‘1992’’ and inserting ‘‘2016’’. 

(33) Section 6652(c)(7)(A) is amended by striking ‘‘section 1(f)(3) determined 

by substituting ‘calendar year 2013’ for ‘calendar year 1992’ in subparagraph 

(B) thereof’’ and inserting ‘‘section 1(c)(2)(A) determined by substituting ‘calendar year 2013’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(34) Section 6695(h)(1) is amended by striking ‘‘section 1(f)(3) determined by 

substituting ‘calendar year 2013’ for ‘calendar year 1992’ in subparagraph (B) 

thereof’’ and inserting ‘‘section 1(c)(2)(A) determined by substituting ‘calendar 

year 2013’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(35) Section 6698(e)(1) is amended by striking ‘‘section 1(f)(3) determined by 

substituting ‘calendar year 2013’ for ‘calendar year 1992’ in subparagraph (B) 

thereof’’ and inserting ‘‘section 1(c)(2)(A) determined by substituting ‘calendar 

year 2013’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(36) Section 6699(e)(1) is amended by striking ‘‘section 1(f)(3) determined by 

substituting ‘calendar year 2013’ for ‘calendar year 1992’ in subparagraph (B) 

thereof’’ and inserting ‘‘section 1(c)(2)(A) determined by substituting ‘calendar 

year 2013’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(37) Section 7345(f)(2) is amended by striking ‘‘section 1(f)(3) for the calendar 

year, determined by substituting ‘calendar year 2015’ for ‘calendar year 1992’ 

in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the calendar 

year, determined by substituting ‘calendar year 2015’ for ‘calendar year 2016’ 

in clause (ii) thereof’’. 

(38) Section 7430(c)(1) is amended by striking ‘‘section 1(f)(3) for such calendar year, by substituting ‘calendar year 1995’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ in the flush text at the end and inserting ‘‘section 

1(c)(2)(A) for such calendar year, determined by substituting ‘calendar year 

1995’ for ‘calendar year 2016’ in clause (ii) thereof’’. 

(39) Section 7872(g)(5) is amended to read as follows: 

‘‘(5) INFLATION ADJUSTMENT.— 

‘‘(A) IN GENERAL.—In the case of any loan made during any calendar year 

after 2018 to which paragraph (1) applies, the adjusted dollar amount shall 

be increased by an amount equal to— 

‘‘(i) such adjusted dollar amount, multiplied by 

‘‘(ii) the cost-of-living adjustment determined under section 1(c)(2)(A) 

for such calendar year, determined by substituting ‘calendar year 2017’ 

for ‘calendar year 2016’ in clause (ii) thereof. 

‘‘(B) ADJUSTED DOLLAR AMOUNT.—For purposes of this paragraph, the 

term ‘adjusted dollar amount’ means the dollar amount in paragraph (2) as 

in effect for calendar year 2018. 

‘‘(C) ROUNDING.—Any increase under subparagraph (A) shall be rounded 

to the nearest multiple of $100.’’. 

(40) Section 219(b)(5)(C)(i)(II) is amended by striking ‘‘section 1(f)(3) for the 

calendar year in which the taxable year begins, determined by substituting ‘calendar year 2007’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2007’ for ‘calendar year 2016’ 

in clause (ii) thereof’’. 

(41) Section 219(g)(8)(B) is amended by striking ‘‘section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2005’ for ‘calendar year 1992’ in subparagraph (B) thereof’’ and inserting ‘‘section 1(c)(2)(A) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2005’ for ‘calendar year 2016’ 

in clause (ii) thereof’’. 

(b) OTHER CONFORMING AMENDMENTS.— 

(1) Section 36B(b)(3)(B)(ii)(I)(aa) is amended to read as follows: 

‘‘(aa) who is described in section 1(b)(1)(B) and who does not 

have any dependents for the taxable year,’’. 

(2) Section 486B(b)(1) is amended— 

(A) by striking ‘‘maximum rate in effect’’ and inserting ‘‘highest rate specified’’, and 


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(B) by striking ‘‘section 1(e)’’ and inserting ‘‘section 1’’. 

(3) Section 511(b)(1) is amended by striking ‘‘section 1(e)’’ and inserting ‘‘section 1’’. 

(4) Section 641(a) is amended by striking ‘‘section 1(e) shall apply to the taxable income’’ and inserting ‘‘section 1 shall apply to the taxable income’’. 

(5) Section 641(c)(2)(A) is amended to read as follows: 

‘‘(A) Except to the extent provided in section 1(h), the rate of tax shall 

be treated as being the highest rate of tax set forth in section 1(a).’’. 

(6) Section 646(b) is amended to read as follows: 

‘‘(b) TAXATION OF INCOME OF TRUST.—Except as provided in subsection (f)(1)(B)(ii), 

there is hereby imposed on the taxable income of an electing Settlement Trust a tax 

at the rate specified in section 1(a)(1). Such tax shall be in lieu of the income tax 

otherwise imposed by this chapter on such income.’’. 

(7) Section 685(c) is amended by striking ‘‘Section 1(e)’’ and inserting ‘‘Section 

1’’. 

(8) Section 904(b)(3)(E)(ii)(I) is amended by striking ‘‘set forth in subsection 

(a), (b), (c), (d), or (e) of section 1 (whichever applies)’’ and inserting ‘‘the highest 

rate of tax specified in section 1’’. 

(9) Section 1398(c)(2) is amended by striking ‘‘subsection (d) of’’. 

(10) Section 3402(p)(1)(B) is amended by striking ‘‘any percentage applicable 

to any of the 3 lowest income brackets in the table under section 1(c),’’ and inserting ‘‘12 percent, 25 percent,’’. 

(11) Section 3402(q)(1) is amended by striking ‘‘the product of third lowest 

rate of tax applicable under section 1(c) and’’ and inserting ‘‘25 percent of’’. 

(12) Section 3402(r)(3) is amended by striking ‘‘the amount of tax which would 

be imposed by section 1(c) (determined without regard to any rate of tax in excess of the fourth lowest rate of tax applicable under section 1(c)) on an amount 

of taxable income equal to’’ and inserting ‘‘an amount equal to the product of 

25 percent multiplied by’’. 

(13) Section 3406(a)(1) is amended by striking ‘‘the product of the fourth lowest rate of tax applicable under section 1(c) and’’ and inserting ‘‘25 percent of’’. 

(14) Section 6103(e)(1)(A)(iii) is amended by inserting ‘‘(as in effect on the day 

before the date of the enactment of the Tax Cuts and Jobs Act)’’ after ‘‘section 

1(g)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

Subtitle B—Simplification and Reform of Family 

and Individual Tax Credits 

SEC. 1101. ENHANCEMENT OF CHILD TAX CREDIT AND NEW FAMILY TAX CREDIT. 

(a) INCREASE IN CREDIT AMOUNT AND ADDITION OF OTHER DEPENDENTS.— 

(1) IN GENERAL.—Section 24(a) is amended to read as follows: 

‘‘(a) ALLOWANCE OF CREDIT.—There shall be allowed as a credit against the tax 

imposed by this chapter for the taxable year an amount equal to the sum of— 

‘‘(1) with respect to each qualifying child of the taxpayer, $1,600, and 

‘‘(2) for taxable years beginning before January 1, 2023, with respect to the 

taxpayer (each spouse in the case of a joint return) and each dependent of the 

taxpayer to whom paragraph (1) does not apply, $300.’’. 

(2) CONFORMING AMENDMENTS.— 

(A) Section 24(c) is amended— 

(i) by redesignating paragraphs (1) and (2) as paragraphs (2) and (3), respectively, 

(ii) by striking ‘‘152(c)’’ in paragraph (2) (as so redesignated) and inserting ‘‘7706(c)’’, 

(iii) by inserting before paragraph (2) (as so redesignated) the following 

new paragraph: 

‘‘(1) DEPENDENT.— 

‘‘(A) IN GENERAL.—The term ‘dependent’ shall have the meaning given 

such term by section 7706. 

‘‘(B) CERTAIN INDIVIDUALS NOT TREATED AS DEPENDENTS.—In the case of 

an individual with respect to whom a credit under this section is allowable 

to another taxpayer for a taxable year beginning in the calendar year in 

which the individual’s taxable year begins, the amount applicable to such 

individual under subsection (a) for such individual’s taxable year shall be 

zero.’’, 

(iv) in paragraph (3) (as so redesignated)— 


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(I) by striking ‘‘term ‘qualifying child’ ’’ and inserting ‘‘terms ‘qualifying child’ and ‘dependent’ ’’, and 

(II) by striking ‘‘152(b)(3)’’ and inserting ‘‘7706(b)(3)’’, and 

(v) in the heading by striking ‘‘QUALIFYING’’ and inserting ‘‘DEPENDENT; 

QUALIFYING’’. 

(B) The heading for section 24 is amended by inserting ‘‘AND FAMILY’’ after ‘‘CHILD’’. 

(C) The table of sections for subpart A of part IV of subchapter A of chapter 

1 is amended by striking the item relating to section 24 and inserting the following new item: 

‘‘Sec. 24. Child and family tax credit.’’. 

(b) ELIMINATION OF MARRIAGE PENALTY.—Section 24(b)(2) is amended— 

(1) by striking ‘‘$110,000’’ in subparagraph (A) and inserting ‘‘$230,000’’, 

(2) by inserting ‘‘and’’ at the end of subparagraph (A), 

(3) by striking ‘‘$75,000 in the case of an individual who is not married’’ and all 

that follows through the period at the end and inserting ‘‘one-half of the amount 

in effect under subparagraph (A) for the taxable year in the case of any other individual.’’. 

(c) CREDIT REFUNDABLE UP TO $1,000 PER CHILD.— (1) IN GENERAL.—Section 24(d)(1)(A) is amended by striking all that follows 

‘‘under this section’’ and inserting the following: ‘‘determined— 

‘‘(i) without regard to this subsection and the limitation under section 

26(a), 

‘‘(ii) without regard to subsection (a)(2), and 

‘‘(iii) by substituting ‘$1,000’ for ‘$1,600’ in subsection (a)(1), or’’. 

(2) INFLATION ADJUSTMENT.—Section 24(d) is amended by inserting after paragraph (2) the following new paragraph: 

‘‘(3) INFLATION ADJUSTMENT.—In the case of any taxable year beginning in a calendar year after 2017, the $1,000 amount in paragraph (1)(A)(iii) shall be increased by an amount equal to— 

‘‘(A) such dollar amount, multiplied by 

‘‘(B) the cost-of-living adjustment under section 1(c)(2)(A) for such calendar year. 

Any increase determined under the preceding sentence shall be rounded to the 

next highest multiple of $100 and shall not exceed the amount in effect under 

subsection (a)(2).’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1102. REPEAL OF NONREFUNDABLE CREDITS. 

(a) REPEAL OF SECTION 22.— 

(1) IN GENERAL.—Subpart A of part IV of subchapter A of chapter 1 is amended by striking section 22 (and by striking the item relating to such section in 

the table of sections for such subpart). 

(2) CONFORMING AMENDMENT.— (A) Section 86(f) is amended by striking paragraph (1) and by redesignating paragraphs (2), (3), and (4) as paragraphs (1), (2), and (3), respectively. 

(B)(i) Subsections (c)(3)(B) and (d)(4)(A) of section 7706, as redesignated 

by this Act, are each amended by striking ‘‘(as defined in section 22(e)(3)’’. 

(ii) Section 7706(f), as redesignated by this Act, is amended by redesignating paragraph (7) as paragraph (8) and by inserting after paragraph (6) 

the following new paragraph: 

‘‘(7) PERMANENT AND TOTAL DISABILITY DEFINED.—An individual is permanently and totally disabled if he is unable to engage in any substantial gainful 

activity by reason of any medically determinable physical or mental impairment 

which can be expected to result in death or which has lasted or can be expected 

to last for a continuous period of not less than 12 months. An individual shall 

not be considered to be permanently and totally disabled unless he furnishes 

proof of the existence thereof in such form and manner, and at such times, as 

the Secretary may require.’’. 

(iii) Section 415(c)(3)(C)(i) is amended by striking ‘‘22(e)(3)’’ and inserting 

‘‘7706(f)(7)’’. 

(iv) Section 422(c)(6) is amended by striking ‘‘22(e)(3)’’ and inserting 

‘‘7706(f)(7)’’. 

(b) TERMINATION OF SECTION 25.—Section 25, as amended by section 3601, is 

amended by adding at the end the following new subsection: 

‘‘(k) TERMINATION.—No credit shall be allowed under this section with respect to 

any mortgage credit certificate issued after December 31, 2017.’’. 


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(c) REPEAL OF SECTION 30D.— 

(1) IN GENERAL.—Subpart B of part IV of subchapter A of chapter 1 is amended by striking section 30D (and by striking the item relating to such section in 

the table of sections for such subpart). 

(2) CONFORMING AMENDMENTS.— 

(A) Section 38(b) is amended by striking paragraph (35). 

(B) Section 1016(a) is amended by striking paragraph (37). 

(C) Section 6501(m) is amended by striking ‘‘30D(e)(4),’’. 

(d) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(2) SUBSECTION (b).—The amendment made by subsection (c) shall apply to 

taxable years ending after December 31, 2017. 

(3) SUBSECTION (c).—The amendments made by subsection (d) shall apply to 

vehicles placed in service in taxable years beginning after December 31, 2017. 

SEC. 1103. REFUNDABLE CREDIT PROGRAM INTEGRITY. 

(a) IDENTIFICATION REQUIREMENTS FOR CHILD AND FAMILY TAX CREDIT.— 

(1) IN GENERAL.—Section 24(e) is amended to read as follows: 

‘‘(e) IDENTIFICATION REQUIREMENTS.— 

‘‘(1) REQUIREMENTS FOR QUALIFYING CHILD.—No credit shall be allowed under 

this section to a taxpayer with respect to any qualifying child unless the taxpayer includes the name and social security number of such qualifying child on 

the return of tax for the taxable year. The preceding sentence shall not prevent 

a qualifying child from being treated as a dependent described in subsection 

(a)(2). 

‘‘(2) OTHER IDENTIFICATION REQUIREMENTS.—No credit shall be allowed under 

this section with respect to any individual unless the taxpayer identification 

number of such individual is included on the return of tax for the taxable year 

and such identifying number was issued before the due date for filing the return for the taxable year. 

‘‘(3) SOCIAL SECURITY NUMBER.—For purposes of this subsection, the term ‘social security number’ means a social security number issued by the Social Security Administration (but only if the social security number is issued to a citizen 

of the United States or pursuant to subclause (I) (or that portion of subclause 

(III) that relates to subclause (I)) of section 205(c)(2)(B)(i) of the Social Security 

Act)).’’. 

(2) OMISSIONS TREATED AS MATHEMATICAL OR CLERICAL ERROR.— 

(A) IN GENERAL.—Section 6213(g)(2)(I) is amended to read as follows: 

‘‘(I) an omission of a correct social security number, or a correct TIN, required under section 24(e) (relating to child tax credit), to be included on 

a return,’’. 

(b) SOCIAL SECURITY NUMBER MUST BE PROVIDED.— 

(1) IN GENERAL.—Section 25A(f)(1)(A), as amended by section 1201 of this Act, 

is amended by striking ‘‘taxpayer identification number’’ each place it appears 

and inserting ‘‘social security number’’. 

(2) OMISSION TREATED AS MATHEMATICAL OR CLERICAL ERROR.—Section 

6213(g)(2)(J) is amended by striking ‘‘TIN’’ and inserting ‘‘social security number and employer identification number’’. 

(c) INDIVIDUALS PROHIBITED FROM ENGAGING IN EMPLOYMENT IN UNITED STATES

NOT ELIGIBLE FOR EARNED INCOME TAX CREDIT.—Section 32(m) is amended— 

(1) by striking ‘‘(other than:’’ and all that follows through ‘‘of the Social Security Act)’’, and 

(2) by inserting before the period at the end the following: ‘‘, but only if, in 

the case of subsection (c)(1)(E), the social security number is issued to a citizen 

of the United States or pursuant to subclause (I) (or that portion of subclause 

(III) that relates to subclause (I)) of section 205(c)(2)(B)(i) of the Social Security 

Act’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1104. PROCEDURES TO REDUCE IMPROPER CLAIMS OF EARNED INCOME CREDIT. 

(a) CLARIFICATION REGARDING DETERMINATION OF SELF-EMPLOYMENT INCOME

WHICH IS TREATED AS EARNED INCOME.—Section 32(c)(2)(B) is amended by striking 

‘‘and’’ at the end of clause (v), by striking the period at the end of clause (vi) and 

inserting ‘‘, and’’, and by adding at the end the following new clause: 

‘‘(vii) in determining the taxpayer’s net earnings from self-employment under subparagraph (A)(ii) there shall not fail to be taken into 


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account any deduction which is allowable to the taxpayer under this 

subtitle.’’. 

(b) REQUIRED QUARTERLY REPORTING OF WAGES OF EMPLOYEES.—Section 6011 is 

amended by adding at the end the following new subsection: 

‘‘(i) EMPLOYER REPORTING OF WAGES.—Every person required to deduct and withhold from an employee a tax under section 3101 or 3402 shall include on each return or statement submitted with respect to such tax, the name and address of such 

employee and the amount of wages for such employee on which such tax was withheld.’’. 

(c) EFFECTIVE DATE.— (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made 

by this section shall apply to taxable years ending after the date of the enactment of this Act. 

(2) REPORTING.—The Secretary of the Treasury, or his designee, may delay 

the application of the amendment made by subsection (b) for such period as 

such Secretary (or designee) determines to be reasonable to allow persons adequate time to modify electronic (or other) systems to permit such person to comply with the requirements of such amendment. 

SEC. 1105. CERTAIN INCOME DISALLOWED FOR PURPOSES OF THE EARNED INCOME TAX 

CREDIT. 

(a) SUBSTANTIATION REQUIREMENT.—Section 32 is amended by adding at the end 

the following new subsection: 

‘‘(n) INCONSISTENT INCOME REPORTING.—If the earned income of a taxpayer 

claimed on a return for purposes of this section is not substantiated by statements 

or returns under sections 6051, 6052, 6041(a), or 6050W with respect to such taxpayer, the Secretary may require such taxpayer to provide books and records to substantiate such income, including for the purpose of preventing fraud.’’. 

(b) EXCLUSION OF UNSUBSTANTIATED AMOUNT FROM EARNED INCOME.—Section 

32(c)(2) is amended by adding at the end the following new subparagraph: 

‘‘(C) EXCLUSION.—In the case of a taxpayer with respect to which there 

is an inconsistency described in subsection (n) who fails to substantiate 

such inconsistency to the satisfaction of the Secretary, the term ‘earned income’ shall not include amounts to the extent of such inconsistency.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act. 

Subtitle C—Simplification and Reform of 

Education Incentives 

SEC. 1201. AMERICAN OPPORTUNITY TAX CREDIT. 

(a) IN GENERAL.—Section 25A is amended to read as follows: 

‘‘SEC. 25A. AMERICAN OPPORTUNITY TAX CREDIT. 

‘‘(a) IN GENERAL.—In the case of an individual, there shall be allowed as a credit 

against the tax imposed by this chapter for the taxable year an amount equal to 

the sum of— 

‘‘(1) 100 percent of so much of the qualified tuition and related expenses paid 

by the taxpayer during the taxable year (for education furnished to any eligible 

student for whom an election is in effect under this section for such taxable year 

during any academic period beginning in such taxable year) as does not exceed 

$2,000, plus 

‘‘(2) 25 percent of so much of such expenses so paid as exceeds the dollar 

amount in effect under paragraph (1) but does not exceed twice such dollar 

amount. 

‘‘(b) PORTION OF CREDIT REFUNDABLE.—40 percent of the credit allowable under 

subsection (a)(1) (determined without regard to this subsection and section 26(a) and 

after application of all other provisions of this section) shall be treated as a credit 

allowable under subpart C (and not under this part). The preceding sentence shall 

not apply to any taxpayer for any taxable year if such taxpayer is a child to whom 

section 1(d) applies for such taxable year. 

‘‘(c) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME.— 

‘‘(1) IN GENERAL.—The amount allowable as a credit under subsection (a) for 

any taxable year shall be reduced (but not below zero) by an amount which 

bears the same ratio to the amount so allowable (determined without regard to 

this subsection and subsection (b) but after application of all other provisions 

of this section) as— 

‘‘(A) the excess of— 


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‘‘(i) the taxpayer’s modified adjusted gross income for such taxable 

year, over ‘‘(ii) $80,000 (twice such amount in the case of a joint return), bears 

to 

‘‘(B) $10,000 (twice such amount in the case of a joint return). 

‘‘(2) MODIFIED ADJUSTED GROSS INCOME.—For purposes of this subsection, the 

term ‘modified adjusted gross income’ means the adjusted gross income of the 

taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933. 

‘‘(d) OTHER LIMITATIONS.— ‘‘(1) CREDIT ALLOWED ONLY FOR 5 TAXABLE YEARS.—An election to have this 

section apply may not be made for any taxable year if such an election (by the 

taxpayer or any other individual) is in effect with respect to such student for 

any 5 prior taxable years. 

‘‘(2) CREDIT ALLOWED ONLY FOR FIRST 5 YEARS OF POSTSECONDARY EDU- CATION.— 

‘‘(A) IN GENERAL.—No credit shall be allowed under subsection (a) for a 

taxable year with respect to the qualified tuition and related expenses of 

an eligible student if the student has completed (before the beginning of 

such taxable year) the first 5 years of postsecondary education at an eligible 

educational institution. 

‘‘(B) FIFTH YEAR LIMITATIONS.—In the case of an eligible student with respect to whom an election has been in effect for 4 preceding taxable years 

for purposes of the fifth taxable year— 

‘‘(i) the amount of the credit allowed under this section for the taxable year shall not exceed an amount equal to 50 percent of the credit 

otherwise determined with respect to such student under this section 

(without regard to this subparagraph), and 

‘‘(ii) the amount of the credit determined under subsection (b) and allowable under subpart C shall not exceed an amount equal to 40 percent of the amount determined with respect to such student under 

clause (i). 

‘‘(e) DEFINITIONS.—For purposes of this section— 

‘‘(1) ELIGIBLE STUDENT.— The term ‘eligible student’ means, with respect to 

any academic period, a student who— 

‘‘(A) meets the requirements of section 484(a)(1) of the Higher Education 

Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on August 5, 1997, and 

‘‘(B) is carrying at least 1⁄2 the normal full-time work load for the course 

of study the student is pursuing. 

‘‘(2) QUALIFIED TUITION AND RELATED EXPENSES.— 

‘‘(A) IN GENERAL.—The term ‘qualified tuition and related expenses’ 

means tuition, fees, and course materials, required for enrollment or attendance of— 

‘‘(i) the taxpayer, 

‘‘(ii) the taxpayer’s spouse, or 

‘‘(iii) any dependent of the taxpayer, 

at an eligible educational institution for courses of instruction of such individual at such institution. 

‘‘(B) EXCEPTION FOR EDUCATION INVOLVING SPORTS, ETC.—Such term does 

not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part 

of the individual’s degree program. 

‘‘(C) EXCEPTION FOR NONACADEMIC FEES.—Such term does not include 

student activity fees, athletic fees, insurance expenses, or other expenses 

unrelated to an individual’s academic course of instruction. 

‘‘(3) ELIGIBLE EDUCATIONAL INSTITUTION.—The term ‘eligible educational institution’ means an institution— 

‘‘(A) which is described in section 481 of the Higher Education Act of 1965 

(20 U.S.C. 1088), as in effect on August 5, 1997, and 

‘‘(B) which is eligible to participate in a program under title IV of such 

Act. 

‘‘(f) SPECIAL RULES.— 

‘‘(1) IDENTIFICATION REQUIREMENTS.— 

‘‘(A) STUDENT.—No credit shall be allowed under subsection (a) to a taxpayer with respect to the qualified tuition and related expenses of an individual unless the taxpayer includes the name and taxpayer identification 

number of such individual on the return of tax for the taxable year, and 

such taxpayer identification number was issued on or before the due date 

for filing such return. 


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‘‘(B) TAXPAYER.—No credit shall be allowed under this section if the identifying number of the taxpayer was issued after the due date for filing the 

return for the taxable year. 

‘‘(C) INSTITUTION.—No credit shall be allowed under this section unless 

the taxpayer includes the employer identification number of any institution 

to which qualified tuition and related expenses were paid with respect to 

the individual. 

‘‘(2) ADJUSTMENT FOR CERTAIN SCHOLARSHIPS, ETC.—The amount of qualified 

tuition and related expenses otherwise taken into account under subsection (a) 

with respect to an individual for an academic period shall be reduced (before 

the application of subsection (c)) by the sum of any amounts paid for the benefit 

of such individual which are allocable to such period as— 

‘‘(A) a qualified scholarship which is excludable from gross income under 

section 117, 

‘‘(B) an educational assistance allowance under chapter 30, 31, 32, 34, or 

35 of title 38, United States Code, or under chapter 1606 of title 10, United 

States Code, and 

‘‘(C) a payment (other than a gift, bequest, devise, or inheritance within 

the meaning of section 102(a)) for such individual’s educational expenses, 

or attributable to such individual’s enrollment at an eligible educational institution, which is excludable from gross income under any law of the 

United States. 

‘‘(3) TREATMENT OF EXPENSES PAID BY DEPENDENT.—If an individual is a dependent of another taxpayer for a taxable year beginning in the calendar year 

in which such individuals taxable year begins— 

‘‘(A) no credit shall be allowed under subsection (a) to such individual for 

such individual’s taxable year, and 

‘‘(B) qualified tuition and related expenses paid by such individual during 

such individual’s taxable year shall be treated for purposes of this section 

as paid by such other taxpayer. 

‘‘(4) TREATMENT OF CERTAIN PREPAYMENTS.—If qualified tuition and related 

expenses are paid by the taxpayer during a taxable year for an academic period 

which begins during the first 3 months following such taxable year, such academic period shall be treated for purposes of this section as beginning during 

such taxable year. 

‘‘(5) DENIAL OF DOUBLE BENEFIT.—No credit shall be allowed under this section for any amount for which a deduction is allowed under any other provision 

of this chapter. 

‘‘(6) NO CREDIT FOR MARRIED INDIVIDUALS FILING SEPARATE RETURNS.—If the 

taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return 

for the taxable year. 

‘‘(7) NONRESIDENT ALIENS.—If the taxpayer is a nonresident alien individual 

for any portion of the taxable year, this section shall apply only if such individual is treated as a resident alien of the United States for purposes of this 

chapter by reason of an election under subsection (g) or (h) of section 6013. 

‘‘(8) RESTRICTIONS ON TAXPAYERS WHO IMPROPERLY CLAIMED CREDIT IN PRIOR

YEAR.— 

‘‘(A) TAXPAYERS MAKING PRIOR FRAUDULENT OR RECKLESS CLAIMS.— 

‘‘(i) IN GENERAL.—No credit shall be allowed under this section for 

any taxable year in the disallowance period. 

‘‘(ii) DISALLOWANCE PERIOD.—For purposes of clause (i), the disallowance period is— 

‘‘(I) the period of 10 taxable years after the most recent taxable 

year for which there was a final determination that the taxpayer’s 

claim of credit under this section was due to fraud, and 

‘‘(II) the period of 2 taxable years after the most recent taxable 

year for which there was a final determination that the taxpayer’s 

claim of credit under this section was due to reckless or intentional 

disregard of rules and regulations (but not due to fraud). 

‘‘(B) TAXPAYERS MAKING IMPROPER PRIOR CLAIMS.—In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require 

to demonstrate eligibility for such credit. 

‘‘(g) INFLATION ADJUSTMENT.— 


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‘‘(1) IN GENERAL.—In the case of a taxable year beginning after 2018, the 

$80,000 amount in subsection (c)(1)(A)(ii) shall each be increased by an amount 

equal to— 

‘‘(A) such dollar amount, multiplied by 

‘‘(B) the cost-of-living adjustment determined under section 1(c)(2)(A) for 

the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in clause (ii) thereof. 

‘‘(2) ROUNDING.—If any amount as adjusted under paragraph (1) is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of 

$1,000. 

‘‘(h) REGULATIONS.—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out this section, including regulations providing for a recapture of the credit allowed under this section in cases 

where there is a refund in a subsequent taxable year of any amount which was 

taken into account in determining the amount of such credit.’’. 

(b) CONFORMING AMENDMENTS.— 

(1) Section 72(t)(7)(B) is amended by striking ‘‘section 25A(g)(2)’’ and inserting 

‘‘section 25A(f)(2)’’. 

(2) Section 529(c)(3)(B)(v)(I) is amended by striking ‘‘section 25A(g)(2)’’ and inserting ‘‘section 25A(f)(2)’’. 

(3) Section 529(e)(3)(B)(i) is amended by striking ‘‘section 25A(b)(3)’’ and inserting ‘‘section 25A(d)’’. 

(4) Section 530(d)(2)(C) is amended— 

(A) by striking ‘‘section 25A(g)(2)’’ in clause (i)(I) and inserting ‘‘section 

25A(f)(2)’’, and 

(B) by striking ‘‘HOPE AND LIFETIME LEARNING CREDITS’’ in the heading 

and inserting ‘‘AMERICAN OPPORTUNITY TAX CREDIT’’. 

(5) Section 530(d)(4)(B)(iii) is amended by striking ‘‘section 25A(g)(2)’’ and inserting ‘‘section 25A(d)(4)(B)’’. 

(6) Section 6050S(e) is amended by striking ‘‘subsection (g)(2)’’ and inserting 

‘‘subsection (f)(2)’’. 

(7) Section 6211(b)(4)(A) is amended by striking ‘‘subsection (i)(6)’’ and inserting ‘‘subsection (b)’’. 

(8) Section 6213(g)(2)(J) is amended by striking ‘‘TIN required under section 

25A(g)(1)’’ and inserting ‘‘TIN, and employer identification number, required 

under section 25A(f)(1)’’. 

(9) Section 6213(g)(2)(Q) is amended to read as follows: 

‘‘(Q) an omission of information required by section 25A(f)(8)(B) or an 

entry on the return claiming the credit determined under section 25A(a) for 

a taxable year for which the credit is disallowed under section 

25A(f)(8)(A).’’. 

(10) Section 1004(c) of division B of the American Recovery and Reinvestment 

Tax Act of 2009 is amended— 

(A) in paragraph (1)— 

(i) by striking ‘‘section 25A(i)(6)’’ each place it appears and inserting 

‘‘section 25A(b)’’, and 

(ii) by striking ‘‘with respect to taxable years beginning after 2008 

and before 2018’’ each place it appears and inserting ‘‘with respect to 

each taxable year’’, 

(B) in paragraph (2), by striking ‘‘Section 25A(i)(6)’’ and inserting ‘‘Section 

25A(b)’’, and 

(C) in paragraph (3)(C), by striking ‘‘subsection (i)(6)’’ and inserting ‘‘subsection (b)’’. 

(11) The table of sections for subpart A of part IV of subchapter A of chapter 

1 is amended by striking the item relating to section 25A and inserting the following new item: 

‘‘Sec. 25A. American opportunity tax credit.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1202. CONSOLIDATION OF EDUCATION SAVINGS RULES. 

(a) NO NEW CONTRIBUTIONS TO COVERDELL EDUCATION SAVINGS ACCOUNT.—Section 530(b)(1)(A) is amended to read as follows: 

‘‘(A) Except in the case of rollover contributions, no contribution will be 

accepted after December 31, 2017.’’. 

(b) LIMITED DISTRIBUTION ALLOWED FOR ELEMENTARY AND SECONDARY TUITION.— 

(1) IN GENERAL.—Section 529(c) is amended by adding at the end the following new paragraph: 


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‘‘(7) TREATMENT OF ELEMENTARY AND SECONDARY TUITION.—Any reference in 

this subsection to the term ‘qualified higher education expense’ shall include a 

reference to expenses for tuition in connection with enrollment at an elementary 

or secondary school.’’. 

(2) LIMITATION.—Section 529(e)(3)(A) is amended by adding at the end the following: ‘‘The amount of cash distributions from all qualified tuition programs 

described in subsection (b)(1)(A)(ii) with respect to a beneficiary during any taxable year, shall, in the aggregate, include not more than $10,000 in expenses 

for tuition incurred during the taxable year in connection with the enrollment 

or attendance of the beneficiary as an elementary or secondary school student 

at a public, private, or religious school.’’. 

(c) ROLLOVERS TO QUALIFIED TUITION PROGRAMS PERMITTED.—Section 530(d)(5) is 

amended by inserting ‘‘, or into (by purchase or contribution) a qualified tuition program (as defined in section 529),’’ after ‘‘into another Coverdell education savings 

account’’. 

(d) DISTRIBUTIONS FROM QUALIFIED TUITION PROGRAMS FOR CERTAIN EXPENSES

ASSOCIATED WITH REGISTERED APPRENTICESHIP PROGRAMS.—Section 529(e)(3) is 

amended by adding at the end the following new subparagraph: 

‘‘(C) CERTAIN EXPENSES ASSOCIATED WITH REGISTERED APPRENTICESHIP

PROGRAMS.—The term ‘qualified higher education expenses’ shall include 

books, supplies, and equipment required for the enrollment or attendance 

of a designated beneficiary in an apprenticeship program registered and 

certified with the Secretary of Labor under section 1 of the National Apprenticeship Act (29 U.S.C. 50).’’. 

(e) UNBORN CHILDREN ALLOWED AS ACCOUNT BENEFICIARIES.—Section 529(e) is 

amended by adding at the end the following new paragraph: 

‘‘(6) TREATMENT OF UNBORN CHILDREN.— 

‘‘(A) IN GENERAL.—Nothing shall prevent an unborn child from being 

treated as a designated beneficiary or an individual under this section. 

‘‘(B) UNBORN CHILD.—For purposes of this paragraph— 

‘‘(i) IN GENERAL.—The term ‘unborn child’ means a child in utero. 

‘‘(ii) CHILD IN UTERO.—The term ‘child in utero’ means a member of 

the species homo sapiens, at any stage of development, who is carried 

in the womb.’’. 

(f) EFFECTIVE DATES.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to contributions made after December 

31, 2017. 

(2) ROLLOVERS TO QUALIFIED TUITION PROGRAMS.—The amendments made by 

subsection (b) shall apply to distributions after December 31, 2017. 

SEC. 1203. REFORMS TO DISCHARGE OF CERTAIN STUDENT LOAN INDEBTEDNESS. 

(a) TREATMENT OF STUDENT LOANS DISCHARGED ON ACCOUNT OF DEATH OR DISABILITY.—Section 108(f) is amended by adding at the end the following new paragraph: 

‘‘(5) DISCHARGES ON ACCOUNT OF DEATH OR DISABILITY.— 

‘‘(A) IN GENERAL.—In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in 

gross income by reasons of the discharge (in whole or in part) of any loan 

described in subparagraph (B) if such discharge was— 

‘‘(i) pursuant to subsection (a) or (d) of section 437 of the Higher Education Act of 1965 or the parallel benefit under part D of title IV of 

such Act (relating to the repayment of loan liability), 

‘‘(ii) pursuant to section 464(c)(1)(F) of such Act, or 

‘‘(iii) otherwise discharged on account of the death or total and permanent disability of the student. 

‘‘(B) LOANS DESCRIBED.—A loan is described in this subparagraph if such 

loan is— 

‘‘(i) a student loan (as defined in paragraph (2)), or 

‘‘(ii) a private education loan (as defined in section 140(7) of the Consumer Credit Protection Act (15 U.S.C. 1650(7))).’’. 

(b) EXCLUSION FROM GROSS INCOME FOR PAYMENTS MADE UNDER INDIAN HEALTH

SERVICE LOAN REPAYMENT PROGRAM.— 

(1) IN GENERAL.—Section 108(f)(4) is amended by inserting ‘‘under section 108 

of the Indian Health Care Improvement Act,’’ after ‘‘338I of such Act,’’. 

(2) CLERICAL AMENDMENT.—The heading for section 108(f)(4) is amended by 

striking ‘‘AND CERTAIN’’ and inserting ‘‘, INDIAN HEALTH SERVICE LOAN REPAYMENT PROGRAM, AND CERTAIN’’. 

(c) EFFECTIVE DATES.— 


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(1) SUBSECTION (a).—The amendment made by subsection (a)(1) shall apply 

to discharges of indebtedness after December 31, 2017. 

(2) SUBSECTION (b).—The amendments made by subsection (b) shall apply to 

amounts received in taxable years beginning after December 31, 2017. 

SEC. 1204. REPEAL OF OTHER PROVISIONS RELATING TO EDUCATION. 

(a) IN GENERAL.—Subchapter B of chapter 1 is amended— 

(1) in part VII by striking sections 221 and 222 (and by striking the items 

relating to such sections in the table of sections for such part), 

(2) in part VII by striking sections 135 and 127 (and by striking the items 

relating to such sections in the table of sections for such part), and 

(3) by striking subsection (d) of section 117. 

(b) CONFORMING AMENDMENT RELATING TO SECTION 221.— 

(1) Section 62(a) is amended by striking paragraph (17). 

(2) Section 74(d) is amended by striking ‘‘221,’’. 

(3) Section 86(b)(2)(A) is amended by striking ‘‘221,’’. 

(4) Section 219(g)(3)(A)(ii) is amended by striking ‘‘221,’’. 

(5) Section 163(h)(2) is amended by striking subparagraph (F). 

(6) Section 6050S(a) is amended— 

(A) by inserting ‘‘or’’ at the end of paragraph (1), 

(B) by striking ‘‘or’’ at the end of paragraph (2), and 

(C) by striking paragraph (3). 

(7) Section 6050S(e) is amended by striking all that follows ‘‘thereof)’’ and inserting a period. 

(c) CONFORMING AMENDMENTS RELATED TO SECTION 222.— 

(1) Section 62(a) is amended by striking paragraph (18). 

(2) Section 74(d)(2)(B) is amended by striking ‘‘222,’’. 

(3) Section 86(b)(2)(A) is amended by striking ‘‘222,’’. 

(4) Section 219(g)(3)(A)(ii) is amended by striking ‘‘222,’’. 

(d) CONFORMING AMENDMENTS RELATING TO SECTION 127.— 

(1) Section 125(f)(1) is amended by striking ‘‘127,’’. 

(2) Section 132(j)(8) is amended by striking ‘‘which are not excludable from 

gross income under section 127’’. 

(3) Section 414(n)(3)(C) is amended by striking ‘‘127,’’. 

(4) Section 414(t)(2) is amended by striking ‘‘127,’’. 

(5) Section 3121(a)(18) is amended by striking ‘‘127,’’. 

(6) Section 3231(e) is amended by striking paragraph (6). 

(7) Section 3306(b)(13) is amended by ‘‘127,’’. 

(8) Section 3401(a)(18) is amended by striking ‘‘127,’’. 

(9) Section 6039D(d)(1) is amended by striking ‘‘, 127’’. 

(e) CONFORMING AMENDMENTS RELATING TO SECTION 117(d).— 

(1) Section 117(c)(1) is amended— 

(A) by striking ‘‘subsections (a) and (d)’’ and inserting ‘‘subsection (a)’’, 

and 

(B) by striking ‘‘or qualified tuition reduction’’. 

(2) Section 414(n)(3)(C) is amended by striking ‘‘117(d),’’. 

(3) Section 414(t)(2) is amended by striking ‘‘117(d),’’. 

(f) CONFORMING AMENDMENTS RELATED TO SECTION 135.— 

(1) Section 74(d)(2)(B) is amended by striking ‘‘135,’’. 

(2) Section 86(b)(2)(A) is amended by striking ‘‘135,’’. 

(3) Section 219(g)(3)(A)(ii) is amended by striking ‘‘135,’’. 

(g) EFFECTIVE DATES.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(2) AMENDMENTS RELATING TO SECTION 117(d).—The amendments made by 

subsections (a)(3) and (e) shall apply to amounts paid or incurred after December 31, 2017. 

SEC. 1205. ROLLOVERS BETWEEN QUALIFIED TUITION PROGRAMS AND QUALIFIED ABLE 

PROGRAMS. 

(a) ROLLOVERS FROM QUALIFIED TUITION PROGRAMS TO QUALIFIED ABLE PROGRAMS.—Section 529(c)(3)(C)(i) is amended by striking ‘‘or’’ at the end of subclause 

(I), by striking the period at the end of subclause (II) and inserting ‘‘, or’’, and by 

adding at the end the following new subclause: 

‘‘(III) to an ABLE account (as defined in section 529A(e)(6)) of the 

designated beneficiary or a member of the family of the designated 

beneficiary. 


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Subclause (III) shall not apply to so much of a distribution which, when 

added to all other contributions made to the ABLE account for the taxable year, exceeds the limitation under section 529A(b)(2)(B).’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2017. 

Subtitle D—Simplification and Reform of 

Deductions 

SEC. 1301. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS. 

(a) IN GENERAL.—Part 1 of subchapter B of chapter 1 is amended by striking section 68 (and the item relating to such section in the table of sections for such part). 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1302. MORTGAGE INTEREST. 

(a) MODIFICATION OF LIMITATIONS.— 

(1) IN GENERAL.—Section 163(h)(3) is amended to read as follows: 

‘‘(3) QUALIFIED RESIDENCE INTEREST.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘qualified residence interest’ means any interest which is paid or accrued during the taxable year on indebtedness 

which— 

‘‘(i) is incurred in acquiring, constructing, or substantially improving 

any qualified residence (determined as of the time the interest is accrued) of the taxpayer, and 

‘‘(ii) is secured by such residence. 

Such term also includes interest on any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent 

the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. 

‘‘(B) LIMITATION.—The aggregate amount of indebtedness taken into account under subparagraph (A) for any period shall not exceed $500,000 

(half of such amount in the case of a married individual filing a separate 

return). 

‘‘(C) TREATMENT OF INDEBTEDNESS INCURRED ON OR BEFORE NOVEMBER 2, 

2017.— 

‘‘(i) IN GENERAL.—In the case of any pre-November 2, 2017, indebtedness, this paragraph shall apply as in effect immediately before the enactment of the Tax Cuts and Jobs Act. 

‘‘(ii) PRE-NOVEMBER 2, 2017, INDEBTEDNESS.—For purposes of this subparagraph, the term ‘pre-November 2, 2017, indebtedness’ means— 

‘‘(I) any principal residence acquisition indebtedness which was 

incurred on or before November 2, 2017, or 

‘‘(II) any principal residence acquisition indebtedness which is incurred after November 2, 2017, to refinance indebtedness described 

in clause (i) (or refinanced indebtedness meeting the requirements 

of this clause) to the extent (immediately after the refinancing) the 

principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing). 

‘‘(iii) LIMITATION ON PERIOD OF REFINANCING.—clause (ii)(II) shall not 

apply to any indebtedness after— 

‘‘(I) the expiration of the term of the original indebtedness, or 

‘‘(II) if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the 1st refinancing 

of such indebtedness (or if earlier, the date which is 30 years after 

the date of such 1st refinancing). 

‘‘(iv) BINDING CONTRACT EXCEPTION.—In the case of a taxpayer who 

enters into a written binding contract before November 2, 2017, to close 

on the purchase of a principal residence before January 1, 2018, and 

who purchases such residence before April 1, 2018, subparagraphs (A) 

and (B) shall be applied by substituting ‘April 1, 2018’ for ‘November 

2, 2017’.’’. 

(2) CONFORMING AMENDMENTS.— 


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(A) Section 108(h)(2) is by striking ‘‘for ‘$1,000,000 ($500,000’ in clause (ii) thereof’’ and inserting ‘‘for ‘$500,000 ($250,000’ in paragraph (2)(A), and 

‘$1,000,000’ for ‘$500,000’ in paragraph (2)(B), thereof’’. 

(B) Section 163(h) is amended by striking subparagraphs (E) and (F) in 

paragraph (4). 

(b) TAXPAYERS LIMITED TO 1 QUALIFIED RESIDENCE.—Section 163(h)(4)(A)(i) is 

amended to read as follows: 

‘‘(i) IN GENERAL.—The term ‘qualified residence’ means the principal 

residence (within the meaning of section 121) of the taxpayer.’’. 

(c) EFFECTIVE DATES.— (1) IN GENERAL.—The amendments made by this section shall apply to interest paid or accrued in taxable years beginning after December 31, 2017, with 

respect to indebtedness incurred before, on, or after such date. 

(2) TREATMENT OF GRANDFATHERED INDEBTEDNESS.—For application of the 

amendments made by this section to grandfathered indebtedness, see paragraph 

(3)(C) of section 163(h) of the Internal Revenue Code of 1986, as amended by 

this section. 

SEC. 1303. REPEAL OF DEDUCTION FOR CERTAIN TAXES NOT PAID OR ACCRUED IN A TRADE 

OR BUSINESS. 

(a) IN GENERAL.—Section 164(b)(5) is amended to read as follows: 

‘‘(5) LIMITATION IN CASE OF INDIVIDUALS.—In the case of a taxpayer other 

than a corporation— 

‘‘(A) foreign real property taxes (other than taxes which are paid or accrued in carrying on a trade or business or an activity described in section 

212) shall not be taken into account under subsection (a)(1), 

‘‘(B) the aggregate amount of taxes (other than taxes which are paid or 

accrued in carrying on a trade or business or an activity described in section 212) taken into account under subsection (a)(1) for any taxable year 

shall not exceed $10,000 ($5,000 in the case of a married individual filing 

a separate return), 

‘‘(C) subsection (a)(2) shall only apply to taxes which are paid or accrued 

in carrying on a trade or business or an activity described in section 212, 

and 

‘‘(D) subsection (a)(3) shall not apply to State and local taxes.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1304. REPEAL OF DEDUCTION FOR PERSONAL CASUALTY LOSSES. 

(a) IN GENERAL.—Section 165(c) is amended by inserting ‘‘and’’ at the end of paragraph (1), by striking ‘‘; and’’ at the end of paragraph (2) and inserting a period, 

and by striking paragraph (3). 

(b) CONFORMING AMENDMENTS.— 

(1) Section 165(h) is amended to read as follows: 

‘‘(h) SPECIAL RULE WHERE PERSONAL CASUALTY GAINS EXCEED PERSONAL CASUALTY LOSSES.— 

‘‘(1) IN GENERAL.—If the personal casualty gains for any taxable year exceed 

the personal casualty losses for such taxable year— 

‘‘(A) all such gains shall be treated as gains from sales or exchanges of 

capital assets, and 

‘‘(B) all such losses shall be treated as losses from sales or exchanges of 

capital assets. 

‘‘(2) DEFINITIONS OF PERSONAL CASUALTY GAIN AND PERSONAL CASUALTY

LOSS.—For purposes of this subsection— 

‘‘(A) PERSONAL CASUALTY LOSS.—The term ‘personal casualty loss’ means 

any loss of property not connected with a trade or business or a transaction 

entered into for profit, if such loss arises from fire, storm, shipwreck, or 

other casualty, or from theft. 

‘‘(B) PERSONAL CASUALTY GAIN.—The term ‘personal casualty gain’ means 

the recognized gain from any involuntary conversion of property which is 

described in subparagraph (A) arising from fire, storm, shipwreck, or other 

casualty, or from theft.’’. 

(2) Section 165 is amended by striking subsection (k). 

(3)(A) Section 165(l)(1) is amended by striking ‘‘a loss described in subsection 

(c)(3)’’ and inserting ‘‘an ordinary loss described in subsection (c)(2)’’. 

(B) Section 165(l) is amended— 

(i) by striking paragraph (5), 

(ii) by redesignating paragraphs (2), (3), and (4) as paragraphs (3), (4), 

and (5), respectively, and 

(iii) by inserting after paragraph (1) the following new paragraph: 


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‘‘(2) LIMITATIONS.— 

‘‘(A) DEPOSIT MAY NOT BE FEDERALLY INSURED.—No election may be made 

under paragraph (1) with respect to any loss on a deposit in a qualified financial institution if part or all of such deposit is insured under Federal 

law. 

‘‘(B) DOLLAR LIMITATION.—With respect to each financial institution, the 

aggregate amount of losses attributable to deposits in such financial institution to which an election under paragraph (1) may be made by the taxpayer 

for any taxable year shall not exceed $20,000 ($10,000 in the case of a separate return by a married individual). The limitation of the preceding sentence shall be reduced by the amount of any insurance proceeds under any 

State law which can reasonably be expected to be received with respect to 

losses on deposits in such institution.’’. 

(4) Section 172(b)(1)(E)(ii), prior to amendment under title III, is amended by 

striking subclause (I) and by redesignating subclauses (II) and (III) as subclauses (I) and (II), respectively. 

(5) Section 172(d)(4)(C) is amended by striking ‘‘paragraph (2) or (3) of section 

165(c)’’ and inserting ‘‘section 165(c)(2)’’. 

(6) Section 274(f) is amended by striking ‘‘CASUALTY LOSSES,’’ in the heading 

thereof. 

(7) Section 280A(b) is amended by striking ‘‘CASUALTY LOSSES,’’ in the heading thereof. 

(8) Section 873(b), as amended by the preceding provisions of this Act, is 

amended by striking paragraph (1) and by redesignating paragraphs (2) and (3) 

as paragraphs (1) and (2), respectively. 

(9) Section 504(b) of the Disaster Tax Relief and Airport and Airway Extension Act of 2017 is amended by adding at the end the following new paragraph: 

‘‘(4) COORDINATION WITH TAX REFORM.—This subsection shall be applied without regard to the amendments made by section 1304 of the Tax Cuts and Jobs 

Act.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1305. LIMITATION ON WAGERING LOSSES. 

(a) IN GENERAL.—Section 165(d) is amended by adding at the end the following: 

‘‘For purposes of the preceding sentence, the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in 

carrying on any wagering transaction.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1306. CHARITABLE CONTRIBUTIONS. 

(a) INCREASED LIMITATION FOR CASH CONTRIBUTIONS.—Section 170(b)(1) is 

amended by redesignating subparagraph (G) as subparagraph (H) and by inserting 

after subparagraph (F) the following new subparagraph: 

‘‘(G) INCREASED LIMITATION FOR CASH CONTRIBUTIONS.— 

‘‘(i) IN GENERAL.—In the case of any contribution of cash to an organization described in subparagraph (A), the total amount of such contributions which may be taken into account under subsection (a) for 

any taxable year shall not exceed 60 percent of the taxpayer’s contribution base for such year. 

‘‘(ii) CARRYOVER.—If the aggregate amount of contributions described 

in clause (i) exceeds the applicable limitation under clause (i), such excess shall be treated (in a manner consistent with the rules of subsection (d)(1)) as a charitable contribution to which clause (i) applies in 

each of the 5 succeeding years in order of time. 

‘‘(iii) COORDINATION WITH SUBPARAGRAPHS (A) AND (B).— 

‘‘(I) IN GENERAL.—Contributions taken into account under this 

subparagraph shall not be taken into account under subparagraph 

(A). 

‘‘(II) LIMITATION REDUCTION.—Subparagraphs (A) and (B) shall 

be applied by reducing (but not below zero) the aggregate contribution limitation allowed for the taxable year under each such subparagraph by the aggregate contributions allowed under this subparagraph for such taxable year.’’. 

(b) DENIAL OF DEDUCTION FOR COLLEGE ATHLETIC EVENT SEATING RIGHTS.—Section 170(l)(1) is amended to read as follows: 

‘‘(1) IN GENERAL.—No deduction shall be allowed under this section for any 

amount described in paragraph (2).’’. 


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(c) CHARITABLE MILEAGE RATE ADJUSTED FOR INFLATION.—Section 170(i) is 

amended by striking ‘‘shall be 14 cents per mile’’ and inserting ‘‘shall be a rate 

which takes into account the variable cost of operating an automobile’’. 

(d) REPEAL OF SUBSTANTIATION EXCEPTION IN CASE OF CONTRIBUTIONS REPORTED

BY DONEE.—Section 170(f)(8) is amended by striking subparagraph (D) and by redesignating subparagraph (E) as subparagraph (D). 

(e) EFFECTIVE DATE.—The amendments made by this section shall apply to contributions made in taxable years beginning after December 31, 2017. 

SEC. 1307. REPEAL OF DEDUCTION FOR TAX PREPARATION EXPENSES. 

(a) IN GENERAL.—Section 212 is amended by adding ‘‘or’’ at the end of paragraph 

(1), by striking ‘‘; or’’ at the end of paragraph (2) and inserting a period, and by 

striking paragraph (3). 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1308. REPEAL OF MEDICAL EXPENSE DEDUCTION. 

(a) IN GENERAL.—Part VII of subchapter B is amended by striking by striking section 213 (and by striking the item relating to such section in the table of sections 

for such subpart). 

(b) CONFORMING AMENDMENTS.— (1)(A) Section 105(f) is amended to read as follows: 

‘‘(f) MEDICAL CARE.—For purposes of this section— 

‘‘(1) IN GENERAL.—The term ‘medical care’ means amounts paid— 

‘‘(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, 

‘‘(B) for transportation primarily for and essential to medical care referred to in subparagraph (A), 

‘‘(C) for qualified long-term care services (as defined in section 7702B(c)), or ‘‘(D) for insurance (including amounts paid as premiums under part B of 

title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs 

(A) and (B) or for any qualified long-term care insurance contract (as defined in section 7702B(b)). 

In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in paragraph 

(7)) shall be taken into account under subparagraph (D). 

‘‘(2) AMOUNTS PAID FOR CERTAIN LODGING AWAY FROM HOME TREATED AS PAID

FOR MEDICAL CARE.—Amounts paid for lodging (not lavish or extravagant under 

the circumstances) while away from home primarily for and essential to medical 

care referred to in paragraph (1)(A) shall be treated as amounts paid for medical care if— 

‘‘(A) the medical care referred to in paragraph (1)(A) is provided by a physician in a licensed hospital (or in a medical care facility which is related 

to, or the equivalent of, a licensed hospital), and 

‘‘(B) there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. 

The amount taken into account under the preceding sentence shall not exceed 

$50 for each night for each individual. 

‘‘(3) PHYSICIAN.—The term ‘physician’ has the meaning given to such term by 

section 1861(r) of the Social Security Act (42 U.S.C. 1395x(r)). 

‘‘(4) CONTRACTS COVERING OTHER THAN MEDICAL CARE.—In the case of an insurance contract under which amounts are payable for other than medical care 

referred to in subparagraphs (A), (B) and (C) of paragraph (1)— 

‘‘(A) no amount shall be treated as paid for insurance to which paragraph 

(1)(D) applies unless the charge for such insurance is either separately stated in the contract, or furnished to the policyholder by the insurance company in a separate statement, 

‘‘(B) the amount taken into account as the amount paid for such insurance shall not exceed such charge, and 

‘‘(C) no amount shall be treated as paid for such insurance if the amount 

specified in the contract (or furnished to the policyholder by the insurance 

company in a separate statement) as the charge for such insurance is unreasonably large in relation to the total charges under the contract. 

‘‘(5) CERTAIN PRE-PAID CONTRACTS.—Subject to the limitations of paragraph 

(4), premiums paid during the taxable year by a taxpayer before he attains the 

age of 65 for insurance covering medical care (within the meaning of subparagraphs (A), (B), and (C) of paragraph (1)) for the taxpayer, his spouse, or a dependent after the taxpayer attains the age of 65 shall be treated as expenses 


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paid during the taxable year for insurance which constitutes medical care if premiums for such insurance are payable (on a level payment basis) under the contract for a period of 10 years or more or until the year in which the taxpayer 

attains the age of 65 (but in no case for a period of less than 5 years). 

‘‘(6) COSMETIC SURGERY.— ‘‘(A) IN GENERAL.—The term ‘medical care’ does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. 

‘‘(B) COSMETIC SURGERY DEFINED .—For purposes of this paragraph, the 

term ‘cosmetic surgery’ means any procedure which is directed at improving 

the patient’s appearance and does not meaningfully promote the proper 

function of the body or prevent or treat illness or disease. 

‘‘(7) ELIGIBLE LONG-TERM CARE PREMIUMS.— ‘‘(A) IN GENERAL.—For purposes of this section, the term ‘eligible longterm care premiums’ means the amount paid during a taxable year for any 

qualified long-term care insurance contract (as defined in section 7702B(b)) 

covering an individual, to the extent such amount does not exceed the limitation determined under the following table: 

‘‘In the case of an individual with an attained age before the close of 

the taxable year of: The limitation is: 

40 or less $200 

More than 40 but not more than 50 $375 

More than 50 but not more than 60 $750 

More than 60 but not more than 70 $2,000 

More than 70 $2,500 

‘‘(B) INDEXING.— ‘‘(i) IN GENERAL.—In the case of any taxable year beginning after 

1997, each dollar amount in subparagraph (A) shall be increased by the 

medical care cost adjustment of such amount for such calendar year. 

Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $10. 

‘‘(ii) MEDICAL CARE COST ADJUSTMENT.—For purposes of clause (i), the 

medical care cost adjustment for any calendar year is the adjustment 

prescribed by the Secretary, in consultation with the Secretary of 

Health and Human Services, for purposes of such clause. To the extent 

that CPI (as defined section 1(c)), or any component thereof, is taken 

into account in determining such adjustment, such adjustment shall be 

determined by taking into account C-CPI-U (as so defined), or the corresponding component thereof, in lieu of such CPI (or component thereof), but only with respect to the portion of such adjustment which relates to periods after December 31, 2017. 

‘‘(8) CERTAIN PAYMENTS TO RELATIVES TREATED AS NOT PAID FOR MEDICAL

CARE.—An amount paid for a qualified long-term care service (as defined in section 7702B(c)) provided to an individual shall be treated as not paid for medical 

care if such service is provided— 

‘‘(A) by the spouse of the individual or by a relative (directly or through 

a partnership, corporation, or other entity) unless the service is provided by 

a licensed professional with respect to such service, or 

‘‘(B) by a corporation or partnership which is related (within the meaning 

of section 267(b) or 707(b)) to the individual. 

For purposes of this paragraph, the term ‘relative’ means an individual bearing 

a relationship to the individual which is described in any of subparagraphs (A) 

through (G) of section 7706(d)(2). This paragraph shall not apply for purposes 

of subsection (b) with respect to reimbursements through insurance.’’. 

(B) Section 72(t)(2)(D)(i)(III) is amended by striking ‘‘section 213(d)(1)(D)’’ and 

inserting ‘‘section 105(f)(1)(D)’’. 

(C) Section 104(a) is amended by striking ‘‘section 213(d)(1)’’ in the last sentence and inserting ‘‘section 105(f)(1)’’. 

(D) Section 105(b) is amended by striking ‘‘section 213(d)’’ and inserting ‘‘section 105(f)’’. 

(E) Section 139D is amended by striking ‘‘section 213’’ and inserting ‘‘section 

223’’. 

(F) Section 162(l)(2) is amended by striking ‘‘section 213(d)(10)’’ and inserting 

‘‘section 105(f)(7)’’. 


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(G) Section 220(d)(2)(A) is amended by striking ‘‘section 213(d)’’ and inserting 

‘‘section 105(f)’’. 

(H) Section 223(d)(2)(A) is amended by striking ‘‘section 213(d)’’ and inserting 

‘‘section 105(f)’’. 

(I) Section 419A(f)(2) is amended by striking ‘‘section 213(d)’’ and inserting 

‘‘section 105(f)’’. 

(J) Section 501(c)(26)(A) is amended by striking ‘‘section 213(d)’’ and inserting 

‘‘section 105(f)’’. 

(K) Section 2503(e) is amended by striking ‘‘section 213(d)’’ and inserting ‘‘section 105(f)’’. 

(L) Section 4980B(c)(4)(B)(i)(I) is amended by striking ‘‘section 213(d)’’ and inserting ‘‘section 105(f)’’. 

(M) Section 6041(f) is amended by striking ‘‘section 213(d)’’ and inserting ‘‘section 105(f)’’. 

(N) Section 7702B(a)(2) is amended by striking ‘‘section 213(d)’’ and inserting 

‘‘section 105(f)’’. 

(O) Section 7702B(a)(4) is amended by striking ‘‘section 213(d)(1)(D)’’ and inserting ‘‘section 105(f)(1)(D)’’. 

(P) Section 7702B(d)(5) is amended by striking ‘‘section 213(d)(10)’’ and inserting ‘‘section 105(f)(7)’’. 

(Q) Section 9832(d)(3) is amended by striking ‘‘section 213(d)’’ and inserting 

‘‘section 105(f)’’. 

(2) Section 72(t)(2)(B) is amended to read as follows: 

‘‘(B) MEDICAL EXPENSES.—Distributions made to an individual (other than 

distributions described in subparagraph (A), (C), or (D) to the extent such 

distributions do not exceed the excess of— 

‘‘(i) the expenses paid by the taxpayer during the taxable year, not 

compensated for by insurance or otherwise, for medical care (as defined 

in 105(f)) of the taxpayer, his spouse, or a dependent (as defined in section 7706, determined without regard to subsections (b)(1), (b)(2), and 

(d)(1)(B) thereof), over 

‘‘(ii) 10 percent of the taxpayer’s adjusted gross income.’’. 

(3) Section 162(l) is amended by striking paragraph (3). 

(4) Section 402(l) is amended by striking paragraph (7) and redesignating 

paragraph (8) as paragraph (7). 

(5) Section 220(f) is amended by striking paragraph (6). 

(6) Section 223(f) is amended by striking paragraph (6). 

(7) Section 7702B(e) is amended by striking paragraph (2). 

(8) Section 7706(f)(7), as redesignated by this Act, is amended by striking 

‘‘sections 105(b), 132(h)(2)(B), and 213(d)(5)’’ and inserting ‘‘sections 105(b) and 

132(h)(2)(B)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1309. REPEAL OF DEDUCTION FOR ALIMONY PAYMENTS. 

(a) IN GENERAL.—Part VII of subchapter B is amended by striking by striking section 215 (and by striking the item relating to such section in the table of sections 

for such subpart). 

(b) CONFORMING AMENDMENTS.— 

(1) CORRESPONDING REPEAL OF PROVISIONS PROVIDING FOR INCLUSION OF ALIMONY IN GROSS INCOME.— 

(A) Subsection (a) of section 61 is amended by striking paragraph (8) and 

by redesignating paragraphs (9) through (15) as paragraphs (8) through 

(14), respectively. 

(B) Part II of subchapter B of chapter 1 is amended by striking section 

71 (and by striking the item relating to such section in the table of sections 

for such part). 

(C) Subpart F of part I of subchapter J of chapter 1 is amended by striking section 682 (and by striking the item relating to such section in the 

table of sections for such subpart). 

(2) RELATED TO REPEAL OF SECTION 215.— 

(A) Section 62(a) is amended by striking paragraph (10). 

(B) Section 3402(m)(1) is amended by striking ‘‘(other than paragraph 

(10) thereof)’’. 

(3) RELATED TO REPEAL OF SECTION 71.— 

(A) Section 121(d)(3) is amended— 

(i) by striking ‘‘(as defined in section 71(b)(2))’’ in subparagraph (B), 

and 

(ii) by adding at the end the following new subparagraph: 


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‘‘(C) DIVORCE OR SEPARATION INSTRUMENT.—For purposes of this paragraph, the term ‘divorce or separation instrument’ means— 

‘‘(i) a decree of divorce or separate maintenance or a written instrument incident to such a decree, 

‘‘(ii) a written separation agreement, or 

‘‘(iii) a decree (not described in clause (i)) requiring a spouse to make 

payments for the support or maintenance of the other spouse.’’. 

(B) Section 220(f)(7) is amended by striking ‘‘subparagraph (A) of section 

71(b)(2)’’ and inserting ‘‘clause (i) of section 121(d)(3)(C)’’. 

(C) Section 223(f)(7) is amended by striking ‘‘subparagraph (A) of section 

71(b)(2)’’ and inserting ‘‘clause (i) of section 121(d)(3)(C)’’. 

(D) Section 382(l)(3)(B)(iii) is amended by striking ‘‘section 71(b)(2)’’ and 

inserting ‘‘section 121(d)(3)(C)’’. 

(E) Section 408(d)(6) is amended by striking ‘‘subparagraph (A) of section 

71(b)(2)’’ and inserting ‘‘clause (i) of section 121(d)(3)(C)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to— 

(1) any divorce or separation instrument (as defined in section 71(b)(2) of the 

Internal Revenue Code of 1986 as in effect before the date of the enactment of 

this Act) executed after December 31, 2017, and 

(2) any divorce or separation instrument (as so defined) executed on or before 

such date and modified after such date if the modification expressly provides 

that the amendments made by this section apply to such modification. 

SEC. 1310. REPEAL OF DEDUCTION FOR MOVING EXPENSES. 

(a) IN GENERAL.—Part VII of subchapter B is amended by striking by striking section 217 (and by striking the item relating to such section in the table of sections 

for such subpart). 

(b) RETENTION OF MOVING EXPENSES FOR MEMBERS OF ARMED FORCES.—Section 

134(b) is amended by adding at the end the following new paragraph: 

‘‘(7) MOVING EXPENSES.—The term ‘qualified military benefit’ includes any 

benefit described in section 217(g) (as in effect before the enactment of the Tax 

Cuts And Jobs Act).’’. 

(c) CONFORMING AMENDMENTS.— 

(1) Section 62(a) is amended by striking paragraph (15). 

(2) Section 274(m)(3) is amended by striking ‘‘(other than section 217)’’. 

(3) Section 3121(a) is amended by striking paragraph (11). 

(4) Section 3306(b) is amended by striking paragraph (9). 

(5) Section 3401(a) is amended by striking paragraph (15). 

(6) Section 7872(f) is amended by striking paragraph (11). 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1311. TERMINATION OF DEDUCTION AND EXCLUSIONS FOR CONTRIBUTIONS TO MEDICAL SAVINGS ACCOUNTS. 

(a) TERMINATION OF INCOME TAX DEDUCTION.—Section 220 is amended by adding 

at the end the following new subsection: 

‘‘(k) TERMINATION.—No deduction shall be allowed under subsection (a) with respect to any taxable year beginning after December 31, 2017.’’. 

(b) TERMINATION OF EXCLUSION FOR EMPLOYER-PROVIDED CONTRIBUTIONS.—Section 106 is amended by striking subsection (b). 

(c) CONFORMING AMENDMENTS.— 

(1) Section 62(a) is amended by striking paragraph (16). 

(2) Section 106(d) is amended by striking paragraph (2), by redesignating 

paragraph (3) as paragraph (6), and by inserting after paragraph (1) the following new paragraphs: 

‘‘(2) NO CONSTRUCTIVE RECEIPT.—No amount shall be included in the gross income of any employee solely because the employee may choose between the contributions referred to in paragraph (1) and employer contributions to another 

health plan of the employer. 

‘‘(3) SPECIAL RULE FOR DEDUCTION OF EMPLOYER CONTRIBUTIONS.—Any employer contribution to a health savings account (as so defined), if otherwise allowable as a deduction under this chapter, shall be allowed only for the taxable 

year in which paid. 

‘‘(4) EMPLOYER HEALTH SAVINGS ACCOUNT CONTRIBUTION REQUIRED TO BE

SHOWN ON RETURN.—Every individual required to file a return under section 

6012 for the taxable year shall include on such return the aggregate amount 

contributed by employers to the health savings accounts (as so defined) of such 

individual or such individual’s spouse for such taxable year. 

‘‘(5) HEALTH SAVINGS ACCOUNT CONTRIBUTIONS NOT PART OF COBRA COVERAGE.—Paragraph (1) shall not apply for purposes of section 4980B.’’. 


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(3) Section 223(b)(4) is amended by striking subparagraph (A), by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively, 

and by striking the second sentence thereof. 

(4) Section 223(b)(5) is amended by striking ‘‘under paragraph (3))’’ and all 

that follows through ‘‘shall be divided equally between them’’ and inserting the 

following: ‘‘under paragraph (3)) shall be divided equally between the spouses’’. 

(5) Section 223(c) is amended by striking paragraph (5). 

(6) Section 3231(e) is amended by striking paragraph (10). 

(7) Section 3306(b) is amended by striking paragraph (17). 

(8) Section 3401(a) is amended by striking paragraph (21). 

(9) Chapter 43 is amended by striking section 4980E (and by striking the item 

relating to such section in the table of sections for such chapter). 

(10) Section 4980G is amended to read as follows: 

‘‘SEC. 4980G. FAILURE OF EMPLOYER TO MAKE COMPARABLE HEALTH SAVINGS ACCOUNT 

CONTRIBUTIONS. 

‘‘(a) IN GENERAL.—In the case of an employer who makes a contribution to the 

health savings account of any employee during a calendar year, there is hereby imposed a tax on the failure of such employer to meet the requirements of subsection 

(d) for such calendar year. 

‘‘(b) AMOUNT OF TAX.—The amount of the tax imposed by subsection (a) on any 

failure for any calendar year is the amount equal to 35 percent of the aggregate 

amount contributed by the employer to health savings accounts of employees for 

taxable years of such employees ending with or within such calendar year. 

‘‘(c) WAIVER BY SECRETARY.—In the case of a failure which is due to reasonable 

cause and not to willful neglect, the Secretary may waive part or all of the tax imposed by subsection (a) to the extent that the payment of such tax would be excessive relative to the failure involved. 

‘‘(d) EMPLOYER REQUIRED TO MAKE COMPARABLE HEALTH SAVINGS ACCOUNT CON- TRIBUTIONS FOR ALL PARTICIPATING EMPLOYEES.— ‘‘(1) IN GENERAL.—An employer meets the requirements of this subsection for 

any calendar year if the employer makes available comparable contributions to 

the health savings accounts of all comparable participating employees for each 

coverage period during such calendar year. 

‘‘(2) COMPARABLE CONTRIBUTIONS.— ‘‘(A) IN GENERAL.—For purposes of paragraph (1), the term ‘comparable 

contributions’ means contributions— 

‘‘(i) which are the same amount, or 

‘‘(ii) which are the same percentage of the annual deductible limit 

under the high deductible health plan covering the employees. 

‘‘(B) PART-YEAR EMPLOYEES.—In the case of an employee who is employed 

by the employer for only a portion of the calendar year, a contribution to 

the health savings account of such employee shall be treated as comparable 

if it is an amount which bears the same ratio to the comparable amount 

(determined without regard to this subparagraph) as such portion bears to 

the entire calendar year. 

‘‘(3) COMPARABLE PARTICIPATING EMPLOYEES.— ‘‘(A) IN GENERAL.—For purposes of paragraph (1), the term ‘comparable 

participating employees’ means all employees— 

‘‘(i) who are eligible individuals covered under any high deductible 

health plan of the employer, and 

‘‘(ii) who have the same category of coverage. 

‘‘(B) CATEGORIES OF COVERAGE.—For purposes of subparagraph (B), the 

categories of coverage are self-only and family coverage. 

‘‘(4) PART-TIME EMPLOYEES.— ‘‘(A) IN GENERAL .—Paragraph (3) shall be applied separately with respect 

to part-time employees and other employees. 

‘‘(B) PART-TIME EMPLOYEE.—For purposes of subparagraph (A), the term 

‘part-time employee’ means any employee who is customarily employed for 

fewer than 30 hours per week. 

‘‘(5) SPECIAL RULE FOR NON-HIGHLY COMPENSATED EMPLOYEES.—For purposes 

of applying this section to a contribution to a health savings account of an employee who is not a highly compensated employee (as defined in section 414(q)), 

highly compensated employees shall not be treated as comparable participating 

employees. 

‘‘(e) CONTROLLED GROUPS.—For purposes of this section, all persons treated as a 

single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated 

as 1 employer. 

‘‘(f) DEFINITIONS.—Terms used in this section which are also used in section 223 

have the respective meanings given such terms in section 223. 


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‘‘(g) REGULATIONS.—The Secretary shall issue regulations to carry out the purposes of this section.’’. 

(11) Section 6051(a) is amended by striking paragraph (11). 

(12) Section 6051(a)(14)(A) is amended by striking ‘‘paragraphs (11) and (12)’’ 

and inserting ‘‘paragraph (12)’’. 

(d) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2017. 

SEC. 1312. DENIAL OF DEDUCTION FOR EXPENSES ATTRIBUTABLE TO THE TRADE OR BUSINESS OF BEING AN EMPLOYEE. 

(a) IN GENERAL.—Part IX of subchapter B of chapter 1 is amended by inserting 

after the item relating to section 262 the following new item: 

‘‘SEC. 262A. EXPENSES ATTRIBUTABLE TO BEING AN EMPLOYEE. 

‘‘(a) IN GENERAL.—Except as otherwise provided in this section, no deduction shall 

be allowed with respect to any trade or business of the taxpayer which consists of 

the performance of services by the taxpayer as an employee. 

‘‘(b) EXCEPTION FOR ABOVE-THE-LINE DEDUCTIONS.—Subsection (a) shall not apply 

to any deduction allowable (determined without regard to subsection (a)) in determining adjusted gross income.’’. 

(b) REPEAL OF CERTAIN ABOVE-THE-LINE TRADE AND BUSINESS DEDUCTIONS OF

EMPLOYEES.— (1) IN GENERAL.—Section 62(a)(2) is amended— 

(A) by striking subparagraphs (B), (C), and (D), and 

(B) by redesignating subparagraph (E) as subparagraph (B). 

(2) CONFORMING AMENDMENTS.— (A) Section 62 is amended by striking subsections (b) and (d) and by redesignating subsections (c) and (e) as subsections (b) and (c), respectively. 

(B) Section 62(a)(20) is amended by striking ‘‘subsection (e)’’ and inserting 

‘‘subsection (c)’’. 

(c) CONTINUED EXCLUSION OF WORKING CONDITION FRINGE BENEFITS.—Section 

132(d) is amended by inserting ‘‘(determined without regard to section 262A)’’ after 

‘‘section 162’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

Subtitle E—Simplification and Reform of 

Exclusions and Taxable Compensation 

SEC. 1401. LIMITATION ON EXCLUSION FOR EMPLOYER-PROVIDED HOUSING. 

(a) IN GENERAL.—Section 119 is amended by adding at the end the following new 

subsection: 

‘‘(e) LIMITATION ON EXCLUSION OF LODGING.— 

‘‘(1) IN GENERAL.—The aggregate amount excluded from gross income of the 

taxpayer under subsections (a) and (d) with respect to lodging for any taxable 

year shall not exceed $50,000 (half such amount in the case of a married individual filing a separate return). 

‘‘(2) LIMITATION TO 1 HOME.—Subsections (a) and (d) (separately and in combination) shall not apply with respect to more than 1 residence of the taxpayer 

at any given time. In the case of a joint return, the preceding sentence shall 

apply separately to each spouse for any period during which each spouse resides 

separate from the other spouse in a residence which is provided in connection 

with the employment of each spouse, respectively. 

‘‘(3) LIMITATION FOR HIGHLY COMPENSATED EMPLOYEES.— 

‘‘(A) REDUCED FOR EXCESS COMPENSATION.—In the case of an individual 

whose compensation for the taxable year exceeds the amount in effect 

under section 414(q)(1)(B)(i) for the calendar in which such taxable year begins, the $50,000 amount under paragraph (1) shall be reduced (but not 

below zero) by an amount equal to 50 percent of such excess. For purposes 

of the preceding sentence, the term ‘compensation’ means wages (as defined 

in section 3121(a) (without regard to the contribution and benefit base limitation in section 3121(a)(1)). 

‘‘(B) EXCLUSION DENIED FOR 5-PERCENT OWNERS.—In the case of an individual who is a 5-percent owner (as defined in section 416(i)(1)(B)(i)) of the 

employer at any time during the taxable year, the amount under paragraph 

(1) shall be zero.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2017. 


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SEC. 1402. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL RESIDENCE. 

(a) REQUIREMENT THAT RESIDENCE BE PRINCIPAL RESIDENCE FOR 5 YEARS DURING

8-YEAR PERIOD.—Subsection (a) of section 121 is amended— 

(1) by striking ‘‘5-year period’’ and inserting ‘‘8-year period’’, and 

(2) by striking ‘‘2 years’’ and inserting ‘‘5 years’’. 

(b) APPLICATION TO ONLY 1 SALE OR EXCHANGE EVERY 5 YEARS.—Paragraph (3) 

of section 121(b) is amended to read as follows: 

‘‘(3) APPLICATION TO ONLY 1 SALE OR EXCHANGE EVERY 5 YEARS.—Subsection 

(a) shall not apply to any sale or exchange by the taxpayer if, during the 5-year 

period ending on the date of such sale or exchange, there was any other sale 

or exchange by the taxpayer to which subsection (a) applied.’’. 

(c) PHASEOUT BASED ON MODIFIED ADJUSTED GROSS INCOME.—Section 121 is 

amended by adding at the end the following new subsection: 

‘‘(h) PHASEOUT BASED ON MODIFIED ADJUSTED GROSS INCOME.— 

‘‘(1) IN GENERAL.—If the average modified adjusted gross income of the taxpayer for the taxable year and the 2 preceding taxable years exceeds $250,000 

(twice such amount in the case of a joint return), the amount which would (but 

for this subsection) be excluded from gross income under subsection (a) for such 

taxable year shall be reduced (but not below zero) by the amount of such excess. 

‘‘(2) MODIFIED ADJUSTED GROSS INCOME.—For purposes of this subsection, the 

term ‘modified adjusted gross income’ means, with respect to any taxable year, 

adjusted gross income determined after application of this section (but without 

regard to subsection (b)(1) and this subsection). 

‘‘(3) SPECIAL RULE FOR JOINT RETURNS.—In the case of a joint return, the average modified adjusted gross income of the taxpayer shall be determined without regard to any taxable year with respect to which the taxpayer did not file 

a joint return.’’. 

(d) CONFORMING AMENDMENTS.— 

(1) The following provisions of section 121 are each amended by striking ‘‘5- 

year period’’ each place it appears therein and inserting ‘‘8-year period’’: 

(A) Subsection (b)(5)(C)(ii)(I). 

(B) Subsection (c)(1)(B)(i)(I). 

(C) Subsection (d)(7)(B). 

(D) Subparagraphs (A) and (B) of subsection (d)(9). 

(E) Subsection (d)(10). 

(F) Subsection (d)(12)(A). 

(2) Section 121(c)(1)(B)(ii) is amended by striking ‘‘2 years’’ and inserting ‘‘5 

years’’: 

(e) EFFECTIVE DATE.—The amendments made by this section shall apply to sales 

and exchanges after December 31, 2017. 

SEC. 1403. REPEAL OF EXCLUSION, ETC., FOR EMPLOYEE ACHIEVEMENT AWARDS. 

(a) IN GENERAL.—Section 74 is amended by striking subsection (c). 

(b) REPEAL OF LIMITATION ON DEDUCTION.—Section 274 is amended by striking 

subsection (j). 

(c) CONFORMING AMENDMENTS.— 

(1) Section 102(c)(2) is amended by striking the first sentence. 

(2) Section 414(n)(3)(C) is amended by striking ‘‘274(j),’’. 

(3) Section 414(t)(2) is amended by striking ‘‘274(j),’’. 

(4) Section 3121(a)(20) is amended by striking ‘‘74(c)’’. 

(5) Section 3231(e)(5) is amended by striking ‘‘74(c),’’. 

(6) Section 3306(b)(16) is amended by striking ‘‘74(c),’’. 

(7) Section 3401(a)(19) is amended by striking ‘‘74(c),’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1404. SUNSET OF EXCLUSION FOR DEPENDENT CARE ASSISTANCE PROGRAMS. 

(a) IN GENERAL.—Section 129 is amended by adding at the end the following new 

subsection: 

‘‘(f) TERMINATION.—Subsection (a) shall not apply to taxable years beginning after 

December 31, 2022.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall take effect on 

the date of the enactment of this Act. 

SEC. 1405. REPEAL OF EXCLUSION FOR QUALIFIED MOVING EXPENSE REIMBURSEMENT. 

(a) IN GENERAL.—Section 132(a) is amended by striking paragraph (6). 

(b) CONFORMING AMENDMENTS.— 

(1) Section 82 is amended by striking ‘‘Except as provided in section 132(a)(6), 

there’’ and inserting ‘‘There’’. 

(2) Section 132 is amended by striking subsection (g). 


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(3) Section 132(l) is amended by striking by striking ‘‘subsections (e) and (g)’’ 

and inserting ‘‘subsection (e)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1406. REPEAL OF EXCLUSION FOR ADOPTION ASSISTANCE PROGRAMS. 

(a) IN GENERAL.—Part III of subchapter B of chapter 1 is amended by striking 

section 137 (and by striking the item relating to such section in the table of sections 

for such part). 

(b) CONFORMING AMENDMENTS.— 

(1) Sections 414(n)(3)(C), 414(t)(2), 74(d)(2)(B), 86(b)(2)(A), 219(g)(3)(A)(ii) are 

each amended by striking ‘‘, 137’’. 

(2) Section 1016(a), as amended by the preceding provision of this Act, is 

amended by striking paragraph (26). 

(3) Section 6039D(d)(1), as amended by the preceding provisions of this Act, 

is amended— 

(A) by striking ‘‘, or 137’’, and 

(B) by inserting ‘‘or’’ before ‘‘125’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

Subtitle F—Simplification and Reform of Savings, 

Pensions, Retirement 

SEC. 1501. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZATION OF ROTH IRA 

CONTRIBUTIONS AS TRADITIONAL IRA CONTRIBUTIONS. 

(a) IN GENERAL.—Section 408A(d) is amended by striking paragraph (6) and by 

redesignating paragraph (7) as paragraph (6). 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1502. REDUCTION IN MINIMUM AGE FOR ALLOWABLE IN-SERVICE DISTRIBUTIONS. 

(a) IN GENERAL.—Section 401(a)(36) is amended by striking ‘‘age 62’’ and inserting 

‘‘age 59 1⁄2’’. 

(b) APPLICATION TO GOVERNMENTAL SECTION 457(b) PLANS.—Clause (i) of section 

457(d)(1)(A) is amended by inserting ‘‘(in the case of a plan maintained by an employer described in subsection (e)(1)(A), age 59 1⁄2)’’ before the comma at the end. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to plan 

years beginning after December 31, 2017. 

SEC. 1503. MODIFICATION OF RULES GOVERNING HARDSHIP DISTRIBUTIONS. 

(a) IN GENERAL.—Not later than 1 year after the date of the enactment of this 

Act, the Secretary of the Treasury shall modify Treasury Regulation section 

1.401(k)–1(d)(3)(iv)(E) to— 

(1) delete the 6-month prohibition on contributions imposed by paragraph (2) 

thereof, and 

(2) make any other modifications necessary to carry out the purposes of section 401(k)(2)(B)(i)(IV) of the Internal Revenue Code of 1986. 

(b) EFFECTIVE DATE.—The revised regulations under this section shall apply to 

plan years beginning after December 31, 2017. 

SEC. 1504. MODIFICATION OF RULES RELATING TO HARDSHIP WITHDRAWALS FROM CASH OR 

DEFERRED ARRANGEMENTS. 

(a) IN GENERAL.—Section 401(k) is amended by adding at the end the following: 

‘‘(14) SPECIAL RULES RELATING TO HARDSHIP WITHDRAWALS.—For purposes of 

paragraph (2)(B)(i)(IV)— 

‘‘(A) AMOUNTS WHICH MAY BE WITHDRAWN.—The following amounts may 

be distributed upon hardship of the employee: 

‘‘(i) Contributions to a profit-sharing or stock bonus plan to which 

section 402(e)(3) applies. 

‘‘(ii) Qualified nonelective contributions (as defined in subsection 

(m)(4)(C)). 

‘‘(iii) Qualified matching contributions described in paragraph 

(3)(D)(ii)(I). 

‘‘(iv) Earnings on any contributions described in clause (i), (ii), or (iii). 

‘‘(B) NO REQUIREMENT TO TAKE AVAILABLE LOAN.—A distribution shall not 

be treated as failing to be made upon the hardship of an employee solely 

because the employee does not take any available loan under the plan.′′.’’. 


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(b) CONFORMING AMENDMENT.—Section 401(k)(2)(B)(i)(IV) is amended to read as 

follows: 

‘‘(IV) subject to the provisions of paragraph (14), upon hardship 

of the employee, or′′.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to plan 

years beginning after December 31, 2017. 

SEC. 1505. EXTENDED ROLLOVER PERIOD FOR THE ROLLOVER OF PLAN LOAN OFFSET 

AMOUNTS IN CERTAIN CASES. 

(a) IN GENERAL.—Paragraph (3) of section 402(c) is amended by adding at the end 

the following new subparagraph: 

‘‘(C) ROLLOVER OF CERTAIN PLAN LOAN OFFSET AMOUNTS.— ‘‘(i) IN GENERAL.—In the case of a qualified plan loan offset amount, 

paragraph (1) shall not apply to any transfer of such amount made 

after the due date (including extensions) for filing the return of tax for 

the taxable year in which such amount is treated as distributed from 

a qualified employer plan. 

‘‘(ii) QUALIFIED PLAN LOAN OFFSET AMOUNT.—For purposes of this 

subparagraph, the term ‘qualified plan loan offset amount’ means a 

plan loan offset amount which is treated as distributed from a qualified 

employer plan to a participant or beneficiary solely by reason of— 

‘‘(I) the termination of the qualified employer plan, or 

‘‘(II) the failure to meet the repayment terms of the loan from 

such plan because of the separation from service of the participant 

(whether due to layoff, cessation of business, termination of employment, or otherwise). 

‘‘(iii) PLAN LOAN OFFSET AMOUNT.—For purposes of clause (ii), the 

term ‘plan loan offset amount’ means the amount by which the participant’s accrued benefit under the plan is reduced in order to repay a 

loan from the plan. 

‘‘(iv) LIMITATION.—This subparagraph shall not apply to any plan 

loan offset amount unless such plan loan offset amount relates to a 

loan to which section 72(p)(1) does not apply by reason of section 

72(p)(2). 

‘‘(v) QUALIFIED EMPLOYER PLAN.—For purposes of this subsection, the 

term ‘qualified employer plan’ has the meaning given such term by section 72(p)(4).’’. 

(b) CONFORMING AMENDMENT.—Subparagraph (A) of section 402(c)(3) is amended 

by striking ‘‘subparagraph (B)’’ and inserting ‘‘subparagraphs (B) and (C)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 1506. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT OLDER, LONGER 

SERVICE PARTICIPANTS. 

(a) IN GENERAL.—Section 401 is amended— 

(1) by redesignating subsection (o) as subsection (p), and 

(2) by inserting after subsection (n) the following new subsection: 

‘‘(o) SPECIAL RULES FOR APPLYING NONDISCRIMINATION RULES TO PROTECT OLDER, 

LONGER SERVICE AND GRANDFATHERED PARTICIPANTS.— 

‘‘(1) TESTING OF DEFINED BENEFIT PLANS WITH CLOSED CLASSES OF PARTICIPANTS.— 

‘‘(A) BENEFITS, RIGHTS, OR FEATURES PROVIDED TO CLOSED CLASSES.—A 

defined benefit plan which provides benefits, rights, or features to a closed 

class of participants shall not fail to satisfy the requirements of subsection 

(a)(4) by reason of the composition of such closed class or the benefits, 

rights, or features provided to such closed class, if— 

‘‘(i) for the plan year as of which the class closes and the 2 succeeding 

plan years, such benefits, rights, and features satisfy the requirements 

of subsection (a)(4) (without regard to this subparagraph but taking 

into account the rules of subparagraph (I)), 

‘‘(ii) after the date as of which the class was closed, any plan amendment which modifies the closed class or the benefits, rights, and features provided to such closed class does not discriminate significantly 

in favor of highly compensated employees, and 

‘‘(iii) the class was closed before April 5, 2017, or the plan is described in subparagraph (C). 

‘‘(B) AGGREGATE TESTING WITH DEFINED CONTRIBUTION PLANS PERMITTED

ON A BENEFITS BASIS.— 

‘‘(i) IN GENERAL.—For purposes of determining compliance with subsection (a)(4) and section 410(b), a defined benefit plan described in 


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clause (iii) may be aggregated and tested on a benefits basis with 1 or 

more defined contribution plans, including with the portion of 1 or 

more defined contribution plans which— 

‘‘(I) provides matching contributions (as defined in subsection 

(m)(4)(A)), 

‘‘(II) provides annuity contracts described in section 403(b) which 

are purchased with matching contributions or nonelective contributions, or 

‘‘(III) consists of an employee stock ownership plan (within the 

meaning of section 4975(e)(7)) or a tax credit employee stock ownership plan (within the meaning of section 409(a)). 

‘‘(ii) SPECIAL RULES FOR MATCHING CONTRIBUTIONS.—For purposes of 

clause (i), if a defined benefit plan is aggregated with a portion of a defined contribution plan providing matching contributions— 

‘‘(I) such defined benefit plan must also be aggregated with any 

portion of such defined contribution plan which provides elective 

deferrals described in subparagraph (A) or (C) of section 402(g)(3), 

and 

‘‘(II) such matching contributions shall be treated in the same 

manner as nonelective contributions, including for purposes of applying the rules of subsection (l). 

‘‘(iii) PLANS DESCRIBED.—A defined benefit plan is described in this 

clause if— 

‘‘(I) the plan provides benefits to a closed class of participants, 

‘‘(II) for the plan year as of which the class closes and the 2 succeeding plan years, the plan satisfies the requirements of section 

410(b) and subsection (a)(4) (without regard to this subparagraph 

but taking into account the rules of subparagraph (I)), 

‘‘(III) after the date as of which the class was closed, any plan 

amendment which modifies the closed class or the benefits provided to such closed class does not discriminate significantly in 

favor of highly compensated employees, and 

‘‘(IV) the class was closed before April 5, 2017, or the plan is described in subparagraph (C). 

‘‘(C) PLANS DESCRIBED.—A plan is described in this subparagraph if, taking into account any predecessor plan— 

‘‘(i) such plan has been in effect for at least 5 years as of the date 

the class is closed, and 

‘‘(ii) during the 5-year period preceding the date the class is closed, 

there has not been a substantial increase in the coverage or value of 

the benefits, rights, or features described in subparagraph (A) or in the 

coverage or benefits under the plan described in subparagraph (B)(iii) 

(whichever is applicable). 

‘‘(D) DETERMINATION OF SUBSTANTIAL INCREASE FOR BENEFITS, RIGHTS, 

AND FEATURES.—In applying subparagraph (C)(ii) for purposes of subparagraph (A)(iii), a plan shall be treated as having had a substantial increase 

in coverage or value of the benefits, rights, or features described in subparagraph (A) during the applicable 5-year period only if, during such period— 

‘‘(i) the number of participants covered by such benefits, rights, or 

features on the date such period ends is more than 50 percent greater 

than the number of such participants on the first day of the plan year 

in which such period began, or 

‘‘(ii) such benefits, rights, and features have been modified by 1 or 

more plan amendments in such a way that, as of the date the class is 

closed, the value of such benefits, rights, and features to the closed 

class as a whole is substantially greater than the value as of the first 

day of such 5-year period, solely as a result of such amendments. 

‘‘(E) DETERMINATION OF SUBSTANTIAL INCREASE FOR AGGREGATE TESTING

ON BENEFITS BASIS.—In applying subparagraph (C)(ii) for purposes of subparagraph (B)(iii)(IV), a plan shall be treated as having had a substantial 

increase in coverage or benefits during the applicable 5-year period only if, 

during such period— 

‘‘(i) the number of participants benefitting under the plan on the date 

such period ends is more than 50 percent greater than the number of 

such participants on the first day of the plan year in which such period 

began, or 

‘‘(ii) the average benefit provided to such participants on the date 

such period ends is more than 50 percent greater than the average benVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00052 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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efit provided on the first day of the plan year in which such period 

began. 

‘‘(F) CERTAIN EMPLOYEES DISREGARDED.—For purposes of subparagraphs 

(D) and (E), any increase in coverage or value or in coverage or benefits, 

whichever is applicable, which is attributable to such coverage and value 

or coverage and benefits provided to employees— 

‘‘(i) who became participants as a result of a merger, acquisition, or 

similar event which occurred during the 7-year period preceding the 

date the class is closed, or 

‘‘(ii) who became participants by reason of a merger of the plan with 

another plan which had been in effect for at least 5 years as of the date 

of the merger, 

shall be disregarded, except that clause (ii) shall apply for purposes of subparagraph (D) only if, under the merger, the benefits, rights, or features 

under 1 plan are conformed to the benefits, rights, or features of the other 

plan prospectively. 

‘‘(G) RULES RELATING TO AVERAGE BENEFIT.—For purposes of subparagraph (E)— 

‘‘(i) the average benefit provided to participants under the plan will 

be treated as having remained the same between the 2 dates described 

in subparagraph (E)(ii) if the benefit formula applicable to such participants has not changed between such dates, and 

‘‘(ii) if the benefit formula applicable to 1 or more participants under 

the plan has changed between such 2 dates, then the average benefit 

under the plan shall be considered to have increased by more than 50 

percent only if— 

‘‘(I) the total amount determined under section 430(b)(1)(A)(i) for 

all participants benefitting under the plan for the plan year in 

which the 5-year period described in subparagraph (E) ends, exceeds 

‘‘(II) the total amount determined under section 430(b)(1)(A)(i) for 

all such participants for such plan year, by using the benefit formula in effect for each such participant for the first plan year in 

such 5-year period, by more than 50 percent. 

In the case of a CSEC plan (as defined in section 414(y)), the normal 

cost of the plan (as determined under section 433(j)(1)(B)) shall be used 

in lieu of the amount determined under section 430(b)(1)(A)(i). 

‘‘(H) TREATMENT AS SINGLE PLAN.—For purposes of subparagraphs (E) 

and (G), a plan described in section 413(c) shall be treated as a single plan 

rather than as separate plans maintained by each participating employer. 

‘‘(I) SPECIAL RULES.—For purposes of subparagraphs (A)(i) and (B)(iii)(II), 

the following rules shall apply: 

‘‘(i) In applying section 410(b)(6)(C), the closing of the class of participants shall not be treated as a significant change in coverage under 

section 410(b)(6)(C)(i)(II). 

‘‘(ii) 2 or more plans shall not fail to be eligible to be aggregated and 

treated as a single plan solely by reason of having different plan years. 

‘‘(iii) Changes in the employee population shall be disregarded to the 

extent attributable to individuals who become employees or cease to be 

employees, after the date the class is closed, by reason of a merger, acquisition, divestiture, or similar event. 

‘‘(iv) Aggregation and all other testing methodologies otherwise applicable under subsection (a)(4) and section 410(b) may be taken into account. 

The rule of clause (ii) shall also apply for purposes of determining whether 

plans to which subparagraph (B)(i) applies may be aggregated and treated 

as 1 plan for purposes of determining whether such plans meet the requirements of subsection (a)(4) and section 410(b). 

‘‘(J) SPUN-OFF PLANS.—For purposes of this paragraph, if a portion of a 

defined benefit plan described in subparagraph (A) or (B)(iii) is spun off to 

another employer and the spun-off plan continues to satisfy the requirements of— 

‘‘(i) subparagraph (A)(i) or (B)(iii)(II), whichever is applicable, if the 

original plan was still within the 3-year period described in such subparagraph at the time of the spin off, and 

‘‘(ii) subparagraph (A)(ii) or (B)(iii)(III), whichever is applicable, 

the treatment under subparagraph (A) or (B) of the spun-off plan shall continue with respect to such other employer. 

‘‘(2) TESTING OF DEFINED CONTRIBUTION PLANS.— 


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‘‘(A) TESTING ON A BENEFITS BASIS.—A defined contribution plan shall be 

permitted to be tested on a benefits basis if— 

‘‘(i) such defined contribution plan provides make-whole contributions 

to a closed class of participants whose accruals under a defined benefit 

plan have been reduced or eliminated, 

‘‘(ii) for the plan year of the defined contribution plan as of which the 

class eligible to receive such make-whole contributions closes and the 

2 succeeding plan years, such closed class of participants satisfies the 

requirements of section 410(b)(2)(A)(i) (determined by applying the 

rules of paragraph (1)(I)), 

‘‘(iii) after the date as of which the class was closed, any plan amendment to the defined contribution plan which modifies the closed class 

or the allocations, benefits, rights, and features provided to such closed 

class does not discriminate significantly in favor of highly compensated 

employees, and 

‘‘(iv) the class was closed before April 5, 2017, or the defined benefit 

plan under clause (i) is described in paragraph (1)(C) (as applied for 

purposes of paragraph (1)(B)(iii)(IV)). 

‘‘(B) AGGREGATION WITH PLANS INCLUDING MATCHING CONTRIBUTIONS.— ‘‘(i) IN GENERAL.—With respect to 1 or more defined contribution 

plans described in subparagraph (A), for purposes of determining compliance with subsection (a)(4) and section 410(b), the portion of such 

plans which provides make-whole contributions or other nonelective 

contributions may be aggregated and tested on a benefits basis with 

the portion of 1 or more other defined contribution plans which— 

‘‘(I) provides matching contributions (as defined in subsection 

(m)(4)(A)), 

‘‘(II) provides annuity contracts described in section 403(b) which 

are purchased with matching contributions or nonelective contributions, or 

‘‘(III) consists of an employee stock ownership plan (within the 

meaning of section 4975(e)(7)) or a tax credit employee stock ownership plan (within the meaning of section 409(a)). 

‘‘(ii) SPECIAL RULES FOR MATCHING CONTRIBUTIONS.—Rules similar to 

the rules of paragraph (1)(B)(ii) shall apply for purposes of clause (i). 

‘‘(C) SPECIAL RULES FOR TESTING DEFINED CONTRIBUTION PLAN FEATURES

PROVIDING MATCHING CONTRIBUTIONS TO CERTAIN OLDER, LONGER SERVICE

PARTICIPANTS.—In the case of a defined contribution plan which provides 

benefits, rights, or features to a closed class of participants whose accruals 

under a defined benefit plan have been reduced or eliminated, the plan 

shall not fail to satisfy the requirements of subsection (a)(4) solely by reason of the composition of the closed class or the benefits, rights, or features 

provided to such closed class if the defined contribution plan and defined 

benefit plan otherwise meet the requirements of subparagraph (A) but for 

the fact that the make-whole contributions under the defined contribution 

plan are made in whole or in part through matching contributions. 

‘‘(D) SPUN-OFF PLANS.—For purposes of this paragraph, if a portion of a 

defined contribution plan described in subparagraph (A) or (C) is spun off 

to another employer, the treatment under subparagraph (A) or (C) of the 

spun-off plan shall continue with respect to the other employer if such plan 

continues to comply with the requirements of clauses (ii) (if the original 

plan was still within the 3-year period described in such clause at the time 

of the spin off) and (iii) of subparagraph (A), as determined for purposes 

of subparagraph (A) or (C), whichever is applicable. 

‘‘(3) DEFINITIONS.—For purposes of this subsection— 

‘‘(A) MAKE-WHOLE CONTRIBUTIONS.—Except as otherwise provided in 

paragraph (2)(C), the term ‘make-whole contributions’ means nonelective allocations for each employee in the class which are reasonably calculated, in 

a consistent manner, to replace some or all of the retirement benefits which 

the employee would have received under the defined benefit plan and any 

other plan or qualified cash or deferred arrangement under subsection 

(k)(2) if no change had been made to such defined benefit plan and such 

other plan or arrangement. For purposes of the preceding sentence, consistency shall not be required with respect to employees who were subject to 

different benefit formulas under the defined benefit plan. 

‘‘(B) REFERENCES TO CLOSED CLASS OF PARTICIPANTS.—References to a 

closed class of participants and similar references to a closed class shall include arrangements under which 1 or more classes of participants are 

closed, except that 1 or more classes of participants closed on different 


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dates shall not be aggregated for purposes of determining the date any such 

class was closed. 

‘‘(C) HIGHLY COMPENSATED EMPLOYEE.—The term ‘highly compensated 

employee’ has the meaning given such term in section 414(q).′′.’’. 

(b) PARTICIPATION REQUIREMENTS.—Paragraph (26) of section 401(a) is amended 

by adding at the end the following new subparagraph: 

‘‘(I) PROTECTED PARTICIPANTS.— 

‘‘(i) IN GENERAL.—A plan shall be deemed to satisfy the requirements 

of subparagraph (A) if— 

‘‘(I) the plan is amended— 

‘‘(aa) to cease all benefit accruals, or 

‘‘(bb) to provide future benefit accruals only to a closed class 

of participants, 

‘‘(II) the plan satisfies subparagraph (A) (without regard to this 

subparagraph) as of the effective date of the amendment, and 

‘‘(III) the amendment was adopted before April 5, 2017, or the 

plan is described in clause (ii). 

‘‘(ii) PLANS DESCRIBED.—A plan is described in this clause if the plan 

would be described in subsection (o)(1)(C), as applied for purposes of 

subsection (o)(1)(B)(iii)(IV) and by treating the effective date of the 

amendment as the date the class was closed for purposes of subsection 

(o)(1)(C). 

‘‘(iii) SPECIAL RULES.—For purposes of clause (i)(II), in applying section 410(b)(6)(C), the amendments described in clause (i) shall not be 

treated as a significant change in coverage under section 

410(b)(6)(C)(i)(II). 

‘‘(iv) SPUN-OFF PLANS.—For purposes of this subparagraph, if a portion of a plan described in clause (i) is spun off to another employer, 

the treatment under clause (i) of the spun-off plan shall continue with 

respect to the other employer.’’. 

(c) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made 

by this section shall take effect on the date of the enactment of this Act, without 

regard to whether any plan modifications referred to in such amendments are 

adopted or effective before, on, or after such date of enactment. 

(2) SPECIAL RULES.— 

(A) ELECTION OF EARLIER APPLICATION.—At the election of the plan sponsor, the amendments made by this section shall apply to plan years beginning after December 31, 2013. 

(B) CLOSED CLASSES OF PARTICIPANTS.—For purposes of paragraphs 

(1)(A)(iii), (1)(B)(iii)(IV), and (2)(A)(iv) of section 401(o) of the Internal Revenue Code of 1986 (as added by this section), a closed class of participants 

shall be treated as being closed before April 5, 2017, if the plan sponsor’s 

intention to create such closed class is reflected in formal written documents and communicated to participants before such date. 

(C) CERTAIN POST-ENACTMENT PLAN AMENDMENTS.—A plan shall not be 

treated as failing to be eligible for the application of section 401(o)(1)(A), 

401(o)(1)(B)(iii), or 401(a)(26) of such Code (as added by this section) to such 

plan solely because in the case of— 

(i) such section 401(o)(1)(A), the plan was amended before the date 

of the enactment of this Act to eliminate 1 or more benefits, rights, or 

features, and is further amended after such date of enactment to provide such previously eliminated benefits, rights, or features to a closed 

class of participants, or 

(ii) such section 401(o)(1)(B)(iii) or section 401(a)(26), the plan was 

amended before the date of the enactment of this Act to cease all benefit accruals, and is further amended after such date of enactment to 

provide benefit accruals to a closed class of participants. Any such section shall only apply if the plan otherwise meets the requirements of 

such section and in applying such section, the date the class of participants is closed shall be the effective date of the later amendment. 


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Subtitle G—Estate, Gift, and Generation-skipping 

Transfer Taxes 

SEC. 1601. INCREASE IN CREDIT AGAINST ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX. 

(a) IN GENERAL.—Section 2010(c)(3) is amended by striking ‘‘$5,000,000’’ and inserting ‘‘$10,000,000’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to estates of decedents dying, generation-skipping transfers, and gifts made, after December 31, 2017. 

SEC. 1602. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER TAXES. 

(a) ESTATE TAX REPEAL.— 

(1) IN GENERAL.—Subchapter C of chapter 11 is amended by adding at the 

end the following new section: 

‘‘SEC. 2210. TERMINATION. 

‘‘(a) IN GENERAL.—Except as provided in subsection (b), this chapter shall not 

apply to the estates of decedents dying after December 31, 2024. 

‘‘(b) CERTAIN DISTRIBUTIONS FROM QUALIFIED DOMESTIC TRUSTS.—In applying 

section 2056A with respect to the surviving spouse of a decedent dying on or before 

December 31, 2024— 

‘‘(1) section 2056A(b)(1)(A) shall not apply to distributions made after the 10- 

year period beginning on such date, and 

‘‘(2) section 2056A(b)(1)(B) shall not apply after such date.’’. 

(2) CONFORMING AMENDMENTS.—Section 1014(b) is amended— 

(A) in paragraph (6), by striking ‘‘was includible in determining’’ and all 

that follows through the end and inserting ‘‘was includible (or would have 

been includible without regard to section 2210) in determining the value of 

the decedent’s gross estate under chapter 11 of subtitle B’’ , 

(B) in paragraph (9), by striking ‘‘required to be included’’ through ‘‘Code 

of 1939’’ and inserting ‘‘required to be included (or would have been required to be included without regard to section 2210) in determining the 

value of the decedent’s gross estate under chapter 11 of subtitle B’’, and 

(C) in paragraph (10), by striking ‘‘Property includible in the gross estate’’ 

and inserting ‘‘Property includible (or which would have been includible 

without regard to section 2210) in the gross estate’’. 

(3) CLERICAL AMENDMENT.—The table of sections for subchapter C of chapter 

11 is amended by adding at the end the following new item: 

‘‘Sec. 2210. Termination.’’. 

(b) GENERATION-SKIPPING TRANSFER TAX REPEAL.— 

(1) IN GENERAL.—Subchapter G of chapter 13 of subtitle B of such Code is 

amended by adding at the end the following new section: 

‘‘SEC. 2664. TERMINATION. 

‘‘This chapter shall not apply to generation-skipping transfers after December 31, 

2024.’’. 

(2) CLERICAL AMENDMENT.—The table of sections for subchapter G of chapter 

13 of such Code is amended by adding at the end the following new item: 

‘‘Sec. 2664. Termination.’’. 

(c) CONFORMING AMENDMENTS RELATED TO GIFT TAX.— 

(1) COMPUTATION OF GIFT TAX.—Section 2502 is amended by adding at the 

end the following new subsection: 

‘‘(d) GIFTS MADE AFTER 2024.— 

‘‘(1) IN GENERAL.—In the case of a gift made after December 31, 2024, subsection (a) shall be applied by substituting ‘subsection (d)(2)’ for ‘section 2001(c)’ 

and ‘such subsection’ for ‘such section’. 

‘‘(2) RATE SCHEDULE.— 

‘‘If the amount with respect to which the tentative tax to 

be computed is:.

The tentative tax is: 

Not over $10,000 ................................................................................ 18% of such amount. 

Over $10,000 but not over $20,000 ................................................... $1,800, plus 20% of the excess over $10,000. 

Over $20,000 but not over $40,000 ................................................... $3,800, plus 22% of the excess over $20,000. 


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Over $40,000 but not over $60,000 ................................................... $8,200, plus 24% of the excess over $40,000. 

Over $60,000 but not over $80,000 ................................................... $13,000, plus 26% of the excess over $60,000. 

Over $80,000 but not over $100,000 ................................................. $18,200, plus 28% of the excess over $80,000. 

Over $100,000 but not over $150,000 ............................................... $23,800, plus 30% of the excess over $100,000. 

Over $150,000 but not over $250,000 ............................................... $38,800, plus 32% of the excess of $150,000. 

Over $250,000 but not over $500,000 ............................................... $70,800, plus 34% of the excess over $250,000. 

Over $500,000 .................................................................................... $155,800, plus 35% of the 

excess of $500,000.’’. 

(2) LIFETIME GIFT EXEMPTION.—Section 2505 is amended by adding at the end 

the following new subsection: 

‘‘(d) GIFTS MADE AFTER 2024.— 

‘‘(1) IN GENERAL.—In the case of a gift made after December 31, 2024, subsection (a)(1) shall be applied by substituting ‘the amount of the tentative tax 

which would be determined under the rate schedule set forth in section 

2502(a)(2) if the amount with respect to which such tentative tax is to be computed were $10,000,000’ for ‘the applicable credit amount in effect under section 

2010(c) which would apply if the donor died as of the end of the calendar year’. 

‘‘(2) INFLATION ADJUSTMENT.— ‘‘(A) IN GENERAL.—In the case of any calendar year after 2024, the dollar 

amount in subsection (a)(1) (after application of this subsection) shall be increased by an amount equal to— 

‘‘(i) such dollar amount, multiplied by 

‘‘(ii) the cost-of-living adjustment determined under section 1(c)(2)(A) 

of such calendar year by substituting ‘calendar year 2011’ for ‘calendar 

year 2016’ in clause (ii) thereof. 

‘‘(B) ROUNDING.—If any amount as adjusted under paragraph (1) is not a multiple of $10,000, such amount shall be rounded to the nearest multiple 

of $10,000.’’. 

(3) OTHER CONFORMING AMENDMENTS RELATED TO GIFT TAX.—Section 2801 is 

amended by adding at the end the following new subsection: 

‘‘(g) GIFTS RECEIVED AFTER 2024.—In the case of a gift received after December 

31, 2024, subsection (a)(1) shall be applied by substituting ‘section 2502(a)(2)’ for 

‘section 2001(c) as in effect on the date of such receipt’.’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to estates of decedents dying, generation-skipping transfers, and gifts made, after December 31, 2024. 

TITLE II—ALTERNATIVE MINIMUM TAX 

REPEAL 

SEC. 2001. REPEAL OF ALTERNATIVE MINIMUM TAX. 

(a) IN GENERAL.—Subchapter A of chapter 1 is amended by striking part VI (and 

by striking the item relating to such part in the table of parts for subchapter A). 

(b) CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.— (1) LIMITATION.—Subsection (c) of section 53 is amended to read as follows: 

‘‘(c) LIMITATION.—The credit allowable under subsection (a) shall not exceed the 

regular tax liability of the taxpayer reduced by the sum of the credits allowed under 

subparts A, B, and D.’’. 

(2) CREDITS TREATED AS REFUNDABLE.—Section 53 is amended by adding at 

the end the following new subsection: 

‘‘(e) PORTION OF CREDIT TREATED AS REFUNDABLE.— 

‘‘(1) IN GENERAL.—In the case of any taxable year beginning in 2019, 2020, 

2021, or 2022, the limitation under subsection (c) shall be increased by the AMT 

refundable credit amount for such year. 

‘‘(2) AMT REFUNDABLE CREDIT AMOUNT.—For purposes of paragraph (1), the 

AMT refundable credit amount is an amount equal to 50 percent (100 percent 

in the case of a taxable year beginning in 2022) of the excess (if any) of— 

‘‘(A) the minimum tax credit determined under subsection (b) for the taxable year, over 

‘‘(B) the minimum tax credit allowed under subsection (a) for such year 

(before the application of this subsection for such year). 


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‘‘(3) CREDIT REFUNDABLE.—For purposes of this title (other than this section), 

the credit allowed by reason of this subsection shall be treated as a credit allowed under subpart C (and not this subpart). 

‘‘(4) SHORT TAXABLE YEARS.—In the case of any taxable year of less than 365 

days, the AMT refundable credit amount determined under paragraph (2) with 

respect to such taxable year shall be the amount which bears the same ratio 

to such amount determined without regard to this paragraph as the number of 

days in such taxable year bears to 365.’’. 

(3) TREATMENT OF REFERENCES.—Section 53(d) is amended by adding at the 

end the following new paragraph: 

‘‘(3) AMT TERM REFERENCES.—Any references in this subsection to section 55, 

56, or 57 shall be treated as a reference to such section as in effect before its 

repeal by the Tax Cuts and Jobs Act.’’. 

(c) CONFORMING AMENDMENTS RELATED TO AMT REPEAL.— (1) Section 2(d) is amended by striking ‘‘sections 1 and 55’’ and inserting ‘‘section 1’’. 

(2) Section 5(a) is amended by striking paragraph (4). 

(3) Section 11(d) is amended by striking ‘‘the taxes imposed by subsection (a) 

and section 55’’ and inserting ‘‘the tax imposed by subsection (a)’’. 

(4) Section 12 is amended by striking paragraph (7). 

(5) Section 26(a) is amended to read as follows: 

‘‘(a) LIMITATION BASED ON AMOUNT OF TAX.—The aggregate amount of credits allowed by this subpart for the taxable year shall not exceed the taxpayer’s regular 

tax liability for the taxable year.’’. 

(6) Section 26(b)(2) is amended by striking subparagraph (A). 

(7) Section 26 is amended by striking subsection (c). 

(8) Section 38(c) is amended— 

(A) by striking paragraphs (1) through (5), 

(B) by redesignating paragraph (6) as paragraph (2), 

(C) by inserting before paragraph (2) (as so redesignated) the following 

new paragraph: 

‘‘(1) IN GENERAL.—The credit allowed under subsection (a) for any taxable 

year shall not exceed the excess (if any) of— 

‘‘(A) the sum of— 

‘‘(i) so much of the regular tax liability as does not exceed $25,000, 

plus 

‘‘(ii) 75 percent of so much of the regular tax liability as exceeds 

$25,000, over 

‘‘(B) the sum of the credits allowable under subparts A and B of this 

part.’’, and 

(D) by striking ‘‘subparagraph (B) of paragraph (1)’’ each place it appears 

in paragraph (2) (as so redesignated) and inserting ‘‘clauses (i) and (ii) of 

paragraph (1)(A)’’. 

(9) Section 39(a) is amended— 

(A) by striking ‘‘or the eligible small business credits’’ in paragraph (3)(A), 

and 

(B) by striking paragraph (4). 

(10) Section 45D(g)(4)(B) is amended by striking ‘‘or for purposes of section 

55’’. 

(11) Section 54(c)(1) is amended to read as follows: 

‘‘(1) regular tax liability (as defined in section 26(b)), over’’. 

(12) Section 54A(c)(1)(A) is amended to read as follows: 

‘‘(A) regular tax liability (as defined in section 26(b)), over’’. 

(13) Section 148(b)(3) is amended to read as follows: 

‘‘(3) TAX-EXEMPT BONDS NOT TREATED AS INVESTMENT PROPERTY.—The term 

‘investment property’ does not include any tax-exempt bond.’’. 

(14) Section 168(k)(2) is amended by striking subparagraph (G). 

(15) Section 168(k) is amended by striking paragraph (4). 

(16) Section 168(k)(5) is amended by striking subparagraph (E). 

(17) Section 168(m)(2)(B)(i) is amended by striking ‘‘(determined without regard to paragraph (4) thereof)’’. 

(18) Section 168(m)(2) is amended by striking subparagraph (D). 

(19) Section 173 is amended by striking subsection (b). 

(20) Section 263(c) is amended by striking ‘‘section 59(e) or 291’’ and inserting 

‘‘section 291’’. 

(21) Section 263A(c) is amended by striking paragraph (6) and by redesignating paragraph (7) (as amended) as paragraph (6). 

(22) Section 382(l) is amended by striking paragraph (7) and by redesignating 

paragraph (8) as paragraph (7). 


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(23) Section 443 is amended by striking subsection (d) and by redesignating 

subsection (e) as subsection (d). 

(24) Section 616 is amended by striking subsection (e). 

(25) Section 617 is amended by striking subsection (i). 

(26) Section 641(c) is amended— 

(A) in paragraph (2) by striking subparagraph (B) and by redesignating 

subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively, and 

(B) in paragraph (3), by striking ‘‘paragraph (2)(C)’’ and inserting ‘‘paragraph (2)(B)’’. 

(27) Subsections (b) and (c) of section 666 are each amended by striking 

‘‘(other than the tax imposed by section 55)’’. 

(28) Section 848 is amended by striking subsection (i). 

(29) Section 860E(a) is amended by striking paragraph (4). 

(30) Section 871(b)(1) is amended by striking ‘‘or 55’’. 

(31) Section 882(a)(1) is amended by striking ‘‘55,’’. 

(32) Section 897(a) is amended to read as follows: 

‘‘(a) TREATMENT AS EFFECTIVELY CONNECTED WITH UNITED STATES TRADE OR

BUSINESS.—For purposes of this title, gain or loss of a nonresident alien individual 

or a foreign corporation from the disposition of a United States real property interest shall be taken into account— 

‘‘(1) in the case of a nonresident alien individual, under section 871(b)(1), or 

‘‘(2) in the case of a foreign corporation, under section 882(a)(1), 

as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such 

trade or business.’’. 

(33) Section 904(k) is amended to read as follows: 

‘‘(k) CROSS REFERENCE.—For increase of limitation under subsection (a) for taxes 

paid with respect to amounts received which were included in the gross income of 

the taxpayer for a prior taxable year as a United States shareholder with respect 

to a controlled foreign corporation, see section 960(b).’’. 

(34) Section 911(f) is amended to read as follows: 

‘‘(f) DETERMINATION OF TAX LIABILITY.— 

‘‘(1) IN GENERAL.—If, for any taxable year, any amount is excluded from gross 

income of a taxpayer under subsection (a), then, notwithstanding section 1, if 

such taxpayer has taxable income for such taxable year, the tax imposed by section 1 for such taxable year shall be equal to the excess (if any) of— 

‘‘(A) the tax which would be imposed by section 1 for such taxable year 

if the taxpayer’s taxable income were increased by the amount excluded 

under subsection (a) for such taxable year, over 

‘‘(B) the tax which would be imposed by section 1 for such taxable year 

if the taxpayer’s taxable income were equal to the amount excluded under 

subsection (a) for such taxable year. 

For purposes of this paragraph, the amount excluded under subsection (a) shall 

be reduced by the aggregate amount of any deductions or exclusions disallowed 

under subsection (d)(6) with respect to such excluded amount. 

‘‘(2) TREATMENT OF CAPITAL GAIN EXCESS.— 

‘‘(A) IN GENERAL.—In applying section 1(h) for purposes of determining 

the tax under paragraph (1)(A) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds taxable income (hereafter in this subparagraph referred to as the capital gain excess)— 

‘‘(i) the taxpayer’s net capital gain (determined without regard to section 1(h)(11)) shall be reduced (but not below zero) by such capital gain 

excess, 

‘‘(ii) the taxpayer’s qualified dividend income shall be reduced by so 

much of such capital gain excess as exceeds the taxpayer’s net capital 

gain (determined without regard to section 1(h)(11) and the reduction 

under clause (i)), and 

‘‘(iii) adjusted net capital gain, unrecaptured section 1250 gain, and 

28-percent rate gain shall each be determined after increasing the 

amount described in section 1(h)(4)(B) by such capital gain excess. 

‘‘(B) DEFINITIONS.—Terms used in this paragraph which are also used in 

section 1(h) shall have the respective meanings given such terms by section 

1(h).’’. 

(35) Section 962(a)(1) is amended— 

(A) by striking ‘‘sections 1 and 55’’ and inserting ‘‘section 1’’, and 

(B) by striking ‘‘sections 11 and 55’’ and inserting ‘‘section 11’’. 

(36) Section 1016(a) is amended by striking paragraph (20). 


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(37) Section 1202(a)(4) is amended by inserting ‘‘and’’ at the end of subparagraph (A), by striking ‘‘, and’’ and inserting a period at the end of subparagraph 

(B), and by striking subparagraph (C). 

(38) Section 1374(b)(3)(B) is amended by striking the last sentence thereof. 

(39) Section 1561(a) is amended— 

(A) by inserting ‘‘and’’ at the end of paragraph (1), by striking ‘‘, and’’ at 

the end of paragraph (2) and inserting a period, and by striking paragraph 

(3), and 

(B) by striking the last sentence. 

(40) Section 6015(d)(2)(B) is amended by striking ‘‘or 55’’. 

(41) Section 6211(b)(4)(A) is amended by striking‘‘, 168(k)(4)’’. 

(42) Section 6425(c)(1)(A) is amended to read as follows: 

‘‘(A) the tax imposed under section 11 or subchapter L of chapter 1, 

whichever is applicable, over’’. 

(43) Section 6654(d)(2) is amended— 

(A) in clause (i) of subparagraph (B), by striking ‘‘, alternative minimum 

taxable income,’’, and 

(B) in clause (i) of subparagraph (C), by striking ‘‘, alternative minimum 

taxable income,’’. 

(44) Section 6655(e)(2)(B)(i) is amended by striking ‘‘The taxable income and 

alternative minimum taxable income shall’’ and inserting ‘‘Taxable income 

shall’’. 

(45) Section 6655(g)(1)(A) is amended by adding ‘‘plus’’ at the end of clause 

(i), by striking clause (ii), and by redesignating clause (iii) as clause (ii). 

(46) Section 6662(e)(3)(C) is amended by striking ‘‘the regular tax (as defined 

in section 55(c))’’ and inserting ‘‘the regular tax liability (as defined in section 

26(b))’’. 

(d) EFFECTIVE DATES.— (1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(2) PRIOR ELECTIONS WITH RESPECT TO CERTAIN TAX PREFERENCES.—So much 

of the amendment made by subsection (a) as relates to the repeal of section 

59(e) of the Internal Revenue Code of 1986 shall apply to amounts paid or incurred after December 31, 2017. 

(3) TREATMENT OF NET OPERATING LOSS CARRYBACKS.—For purposes of section 

56(d) of the Internal Revenue Code of 1986 (as in effect before its repeal), the 

amount of any net operating loss which may be carried back from a taxable 

year beginning after December 31, 2017, to taxable years beginning before January 1, 2018, shall be determined without regard to any adjustments under section 56(d)(2)(A) of such Code (as so in effect). 

TITLE III—BUSINESS TAX REFORM 

Subtitle A—Tax Rates 

SEC. 3001. REDUCTION IN CORPORATE TAX RATE. 

(a) IN GENERAL.—Section 11(b) is amended to read as follows: 

‘‘(b) AMOUNT OF TAX.— 

‘‘(1) IN GENERAL.—Except as otherwise provided in this subsection, the 

amount of the tax imposed by subsection (a) shall be 20 percent of taxable income. 

‘‘(2) SPECIAL RULE FOR PERSONAL SERVICE CORPORATIONS.— 

‘‘(A) IN GENERAL.—In the case of a personal service corporation (as defined in section 448(d)(2)), the amount of the tax imposed by subsection (a) 

shall be 25 percent of taxable income. 

‘‘(B) REFERENCES TO CORPORATE RATE.—Any reference to the rate imposed under this section or to the highest rate in effect under this section 

(or any similar reference) shall be determined without regard to the rate 

imposed with respect to personal service corporations (as so defined).’’. 

(b) CONFORMING AMENDMENTS.— 

(1)(A) Part I of subchapter P of chapter 1 is amended by striking section 1201 

(and by striking the item relating to such section in the table of sections for 

such part). 

(B) Section 12 is amended by striking paragraph (4). 

(C) Section 527(b) is amended— 

(i) by striking paragraph (2), and 


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(ii) by striking all that precedes ‘‘is hereby imposed’’ and inserting: 

‘‘(b) TAX IMPOSED.—A tax’’. 

(D) Section 594(a) is amended by striking ‘‘taxes imposed by section 11 or 

1201(a)’’ and inserting ‘‘tax imposed by section 11’’. 

(E) Section 691(c)(4) is amended by striking ‘‘1201,’’. 

(F) Section 801(a) is amended— 

(i) by striking paragraph (2), and 

(ii) by striking all that precedes ‘‘is hereby imposed’’ and inserting: 

‘‘(a) TAX IMPOSED.—A tax’’. 

(G) Section 831(e) is amended by striking paragraph (1) and by redesignating 

paragraphs (2) and (3) as paragraphs (1) and (2), respectively. 

(H) Sections 832(c)(5) and 834(b)(1)(D) are each amended by striking ‘‘sec. 

1201 and following,’’. 

(I) Section 852(b)(3)(A) is amended by striking ‘‘section 1201(a)’’ and inserting 

‘‘section 11(b)(1)’’. 

(J) Section 857(b)(3) is amended— 

(i) by striking subparagraph (A) and redesignating subparagraphs (B) 

through (F) as subparagraphs (A) through (E), respectively, 

(ii) in subparagraph (C), as so redesignated— 

(I) by striking ‘‘subparagraph (A)(ii)’’ in clause (i) thereof and inserting ‘‘paragraph (1)’’, 

(II) by striking ‘‘the tax imposed by subparagraph (A)(ii)’’ in clauses 

(ii) and (iv) thereof and inserting ‘‘the tax imposed by paragraph (1) on 

undistributed capital gain’’, 

(iii) in subparagraph (E), as so redesignated, by striking ‘‘subparagraph 

(B) or (D)’’ and inserting ‘‘subparagraph (A) or (C)’’, and 

(iv) by adding at the end the following new subparagraph: 

‘‘(F) UNDISTRIBUTED CAPITAL GAIN.—For purposes of this paragraph, the 

term ‘undistributed capital gain’ means the excess of the net capital gain 

over the deduction for dividends paid (as defined in section 561) determined 

with reference to capital gain dividends only.’’. 

(K) Section 882(a)(1) is amended by striking ‘‘, or 1201(a)’’. 

(L) Section 1374(b) is amended by striking paragraph (4). 

(M) Section 1381(b) is amended by striking ‘‘taxes imposed by section 11 or 

1201’’ and inserting ‘‘tax imposed by section 11’’. 

(N) Section 6655(g)(1)(A)(i) is amended by striking ‘‘or 1201(a),’’. 

(O) Section 7518(g)(6)(A) is amended by striking ‘‘or 1201(a)’’. 

(2) Section 1445(e)(1) is amended by striking ‘‘35 percent (or, to the extent 

provided in regulations, 20 percent)’’ and inserting ‘‘20 percent’’. 

(3) Section 1445(e)(2) is amended by striking ‘‘35 percent’’ and inserting ‘‘20 

percent’’. 

(4) Section 1445(e)(6) is amended by striking ‘‘35 percent (or, to the extent 

provided in regulations, 20 percent)’’ and inserting ‘‘20 percent’’. 

(5)(A) Part I of subchapter B of chapter 5 is amended by striking section 1551 

(and by striking the item relating to such section in the table of sections for 

such part). 

(B) Section 12 is amended by striking paragraph (6). 

(C) Section 535(c)(5) is amended to read as follows: 

‘‘(5) CROSS REFERENCE.—For limitation on credit provided in paragraph (2) or 

(3) in the case of certain controlled corporations, see section 1561.’’. 

(6)(A) Section 1561, as amended by the preceding provisions of this Act, is 

amended to read as follows: 

‘‘SEC. 1561. LIMITATION ON ACCUMULATED EARNINGS CREDIT IN THE CASE OF CERTAIN 

CONTROLLED CORPORATIONS. 

‘‘(a) IN GENERAL.—The component members of a controlled group of corporations 

on a December 31 shall, for their taxable years which include such December 31, 

be limited for purposes of this subtitle to one $250,000 ($150,000 if any component 

member is a corporation described in section 535(c)(2)(B)) amount for purposes of 

computing the accumulated earnings credit under section 535(c)(2) and (3). Such 

amount shall be divided equally among the component members of such group on 

such December 31 unless the Secretary prescribes regulations permitting an unequal allocation of such amount. 

‘‘(b) CERTAIN SHORT TAXABLE YEARS.—If a corporation has a short taxable year 

which does not include a December 31 and is a component member of a controlled 

group of corporations with respect to such taxable year, then for purposes of this 

subtitle, the amount to be used in computing the accumulated earnings credit under 

section 535(c)(2) and (3) of such corporation for such taxable year shall be the 

amount specified in subsection (a) with respect to such group, divided by the number of corporations which are component members of such group on the last day of 


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such taxable year. For purposes of the preceding sentence, section 1563(b) shall be 

applied as if such last day were substituted for December 31.’’. 

(B) The table of sections for part II of subchapter B of chapter 5 is amended 

by striking the item relating to section 1561 and inserting the following new 

item: 

‘‘Sec. 1561. Limitation on accumulated earnings credit in the case of certain controlled corporations.’’. 

(7) Section 7518(g)(6)(A) is amended— 

(A) by striking ‘‘With respect to the portion’’ and inserting ‘‘In the case 

of a taxpayer other than a corporation, with respect to the portion’’, and 

(B) by striking ‘‘(34 percent in the case of a corporation)’’. 

(c) REDUCTION IN DIVIDEND RECEIVED DEDUCTIONS TO REFLECT LOWER CORPORATE INCOME TAX RATES.— 

(1) DIVIDENDS RECEIVED BY CORPORATIONS.— 

(A) IN GENERAL.—Section 243(a)(1) is amended by striking ‘‘70 percent’’ 

and inserting ‘‘50 percent’’. 

(B) DIVIDENDS FROM 20-PERCENT OWNED CORPORATIONS.—Section 243(c)(1) 

is amended— 

(i) by striking ‘‘80 percent’’ and inserting ‘‘65 percent’’, and 

(ii) by striking ‘‘70 percent’’ and inserting ‘‘50 percent’’. 

(C) CONFORMING AMENDMENT.—The heading for section 243(c) is amended by striking ‘‘RETENTION OF 80-PERCENT DIVIDEND RECEIVED DEDUCTION’’ 

and inserting ‘‘INCREASED PERCENTAGE’’. 

(2) DIVIDENDS RECEIVED FROM FSC.—Section 245(c)(1)(B) is amended— 

(A) by striking ‘‘70 percent’’ and inserting ‘‘50 percent’’, and 

(B) by striking ‘‘80 percent’’ and inserting ‘‘65 percent’’. 

(3) LIMITATION ON AGGREGATE AMOUNT OF DEDUCTIONS.—Section 246(b)(3) is 

amended— 

(A) by striking ‘‘80 percent’’ in subparagraph (A) and inserting ‘‘65 percent’’, and 

(B) by striking ‘‘70 percent’’ in subparagraph (B) and inserting ‘‘50 percent’’. 

(4) REDUCTION IN DEDUCTION WHERE PORTFOLIO STOCK IS DEBT-FINANCED.— 

Section 246A(a)(1) is amended— 

(A) by striking ‘‘70 percent’’ and inserting ‘‘50 percent’’, and 

(B) by striking ‘‘80 percent’’ and inserting ‘‘65 percent’’. 

(5) INCOME FROM SOURCES WITHIN THE UNITED STATES.—Section 861(a)(2) is 

amended— 

(A) by striking ‘‘100/70th’’ and inserting ‘‘100/50th’’ in subparagraph (B), 

and 

(B) in the flush sentence at the end— 

(i) by striking ‘‘100/80th’’ and inserting ‘‘100/65th’’, and 

(ii) by striking ‘‘100/70th’’ and inserting ‘‘100/50th’’. 

(d) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(2) CERTAIN CONFORMING AMENDMENTS.—The amendments made by paragraphs (2), (3), and (4) of subsection (b) shall apply to distributions after December 31, 2017. 

(e) NORMALIZATION REQUIREMENTS.— 

(1) IN GENERAL.—A normalization method of accounting shall not be treated 

as being used with respect to any public utility property for purposes of section 

167 or 168 of the Internal Revenue Code of 1986 if the taxpayer, in computing 

its cost of service for ratemaking purposes and reflecting operating results in 

its regulated books of account, reduces the excess tax reserve more rapidly or 

to a greater extent than such reserve would be reduced under the average rate 

assumption method. 

(2) ALTERNATIVE METHOD FOR CERTAIN TAXPAYERS.—If, as of the first day of 

the taxable year that includes the date of enactment of this Act— 

(A) the taxpayer was required by a regulatory agency to compute depreciation for public utility property on the basis of an average life or composite rate method, and 

(B) the taxpayer’s books and underlying records did not contain the vintage account data necessary to apply the average rate assumption method, 

the taxpayer will be treated as using a normalization method of accounting if, 

with respect to such jurisdiction, the taxpayer uses the alternative method for 

public utility property that is subject to the regulatory authority of that jurisdiction. 


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(3) DEFINITIONS.—For purposes of this subsection— 

(A) EXCESS TAX RESERVE.—The term ‘‘excess tax reserve’’ means the excess of— 

(i) the reserve for deferred taxes (as described in section 

168(i)(9)(A)(ii) of the Internal Revenue Code of 1986 as in effect on the 

day before the date of the enactment of this Act), over 

(ii) the amount which would be the balance in such reserve if the 

amount of such reserve were determined by assuming that the corporate rate reductions provided in this Act were in effect for all prior 

periods. 

(B) AVERAGE RATE ASSUMPTION METHOD.—The average rate assumption 

method is the method under which the excess in the reserve for deferred 

taxes is reduced over the remaining lives of the property as used in its regulated books of account which gave rise to the reserve for deferred taxes. 

Under such method, if timing differences for the property reverse, the 

amount of the adjustment to the reserve for the deferred taxes is calculated 

by multiplying— 

(i) the ratio of the aggregate deferred taxes for the property to the 

aggregate timing differences for the property as of the beginning of the 

period in question, by 

(ii) the amount of the timing differences which reverse during such 

period. 

(C) ALTERNATIVE METHOD.—The ‘‘alternative method’’ is the method in 

which the taxpayer— 

(i) computes the excess tax reserve on all public utility property included in the plant account on the basis of the weighted average life 

or composite rate used to compute depreciation for regulatory purposes, 

and 

(ii) reduces the excess tax reserve ratably over the remaining regulatory life of the property. 

(4) TAX INCREASED FOR NORMALIZATION VIOLATION.—If, for any taxable year 

ending after the date of the enactment of this Act, the taxpayer does not use 

a normalization method of accounting, the taxpayer’s tax for the taxable year 

shall be increased by the amount by which it reduces its excess tax reserve 

more rapidly than permitted under a normalization method of accounting. 

Subtitle B—Cost Recovery 

SEC. 3101. INCREASED EXPENSING. 

(a) 100 PERCENT EXPENSING.—Section 168(k)(1)(A) is amended by striking ‘‘50 

percent’’ and inserting ‘‘100 percent’’. 

(b) EXTENSION THROUGH JANUARY 1, 2023.—Section 168(k)(2) is amended— 

(1) in subparagraph (A)(iii), by striking ‘‘January 1, 2020’’ and inserting ‘‘January 1, 2023’’, 

(2) in subparagraph (B)(i)(II), by striking ‘‘January 1, 2021’’ and inserting 

‘‘January 1, 2024’’, 

(3) in subparagraph (B)(i)(III), by striking ‘‘January 1, 2020’’ and inserting 

‘‘January 1, 2023’’, 

(4) in subparagraph (B)(ii), by striking ‘‘January 1, 2020’’ in each place it appears and inserting ‘‘January 1, 2023’’, and 

(5) in subparagraph (E)(i), by striking ‘‘January 1, 2020’’ and replacing it with 

‘‘January 1, 2023’’. 

(c) APPLICATION TO USED PROPERTY.— 

(1) IN GENERAL.—Section 168(k)(2)(A)(ii) is amended to read as follows: 

‘‘(ii) the original use of which begins with the taxpayer or the acquisition of which by the taxpayer meets the requirements of clause (ii) of 

subparagraph (E), and’’. 

(2) ACQUISITION REQUIREMENTS.—Section 168(k)(2)(E)(ii) is amended to read 

as follows: 

‘‘(ii) ACQUISITION REQUIREMENTS.—An acquisition of property meets 

the requirements of this clause if— 

‘‘(I) such property was not used by the taxpayer at any time prior 

to such acquisition, and 

‘‘(II) the acquisition of such property meets the requirements of 

paragraphs (2)(A), (2)(B), (2)(C), and (3) of section 179(d).’’, 

(3) ANTI-ABUSE RULES.—Section 168(k)(2)(E) is further amended by amending 

clause (iii)(I) to read as follows: 


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‘‘(I) property is used by a lessor of such property and such use 

is the lessor’s first use of such property,’’. 

(d) EXCEPTION FOR CERTAIN TRADES AND BUSINESSES NOT SUBJECT TO LIMITATION

ON INTEREST EXPENSE.—Section 168(k)(2), as amended by section 2001, is amended 

by inserting after subparagraph (F) the following new subparagraph: 

‘‘(G) EXCEPTION FOR PROPERTY OF CERTAIN BUSINESSES NOT SUBJECT TO

LIMITATION ON INTEREST EXPENSE.—The term ‘qualified property’ shall not 

include any property used in— 

‘‘(i) a trade or business described in subparagraph (B) or (C) of section 163(j)(7), or 

‘‘(ii) a trade or business that has had floor plan financing indebtedness (as defined in paragraph (9) of section 163(j)), if the floor plan financing interest related to such indebtedness was taken into account 

under paragraph (1)(C) of such section.’’. 

(e) COORDINATION WITH SECTION 280F.—Section 168(k)(2)(F) is amended— 

(1) by striking ‘‘$8,000’’ in clauses (i) and (iii) and inserting ‘‘$16,000’’, and 

(2) in clause (iii)— 

(A) by striking ‘‘placed in service by the taxpayer after December 31, 

2017’’ and inserting ‘‘acquired by the taxpayer before September 28, 2017, 

and placed in service by the taxpayer after September 27, 2017’’, and 

(B) by redesignating subclauses (I) and (II) as subclauses (II) and (III) respectively, and inserting before clause (II), as so redesignated, the following 

new subclause: 

‘‘(I) in the case of a passenger automobile placed in service before 

January 1, 2018, ‘$8,000’,’’. 

(f) CONFORMING AMENDMENTS.— 

(1) Section 168(k)(2)(B)(i)(III), as amended, is amended by inserting ‘‘binding’’ 

before ‘‘contract’’. 

(2) Section 168(k)(5) is amended by— 

(A) by striking ‘‘January 1, 2020’’ in subparagraph (A) and inserting ‘‘January 1, 2023’’, 

(B) by striking ‘‘50 percent’’ in subparagraph (A)(i) and inserting ‘‘100 

percent’’, and 

(C) by striking subparagraph (F). 

(3) Section 168(k)(6) is amended to read as follows: 

‘‘(6) PHASE DOWN.—In the case of qualified property acquired by the taxpayer 

before September 28, 2017, and placed in service by the taxpayer after September 27, 2017, paragraph (1)(A) shall be applied by substituting for ‘100 percent’— 

‘‘(A) ‘50 percent’ in the case of— 

‘‘(i) property placed in service before January 1, 2018, and 

‘‘(ii) property described in subparagraph (B) or (C) of paragraph (2) 

which is placed in service in 2018, 

‘‘(B) ‘40 percent’ in the case of— 

‘‘(i) property placed in service in 2018 (other than property described 

in subparagraph (B) or (C) of paragraph (2)), and 

‘‘(ii) property described in subparagraph (B) or (C) of paragraph (2) 

which is placed in service in 2019, and 

‘‘(C) ‘30 percent’ in the case of— 

‘‘(i) property placed in service in 2019 (other than property described 

in subparagraph (B) or (C) of paragraph (2)), and 

‘‘(ii) property described in subparagraph (B) or (C) of paragraph (2) 

which is placed in service in 2020.’’. 

(4) The heading of section 168(k) is amended by striking ‘‘SPECIAL ALLOWANCE FOR CERTAIN PROPERTY ACQUIRED AFTER DECEMBER 31, 2007, AND BEFORE JANUARY 1, 2020’’ and inserting ‘‘FULL EXPENSING OF CERTAIN PROPERTY’’. 

(5) Section 460(c)(6)(B)(ii) is amended by striking ‘‘January 1, 2020 (January 

1, 2021 in the case of property described in section 168(k)(2)(B))’’ and inserting 

‘‘January 1, 2023 (January 1, 2024 in the case of property described in section 

168(k)(2)(B))’’. 

(g) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except at provided by paragraph (2), the amendments made 

by this section shall apply to property which— 

(A) is acquired after September 27, 2017, and 

(B) is placed in service after such date. 

For purposes of the preceding sentence, property shall not be treated as acquired after the date on which a written binding contract is entered into for 

such acquisition. 


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(2) SPECIFIED PLANTS.—The amendments made by subsection (f)(2) shall 

apply to specified plants planted or grafted after September 27, 2017. 

(3) TRANSITION RULE.—In the case of any taxpayer’s first taxable year ending 

after September 27, 2017, the taxpayer may elect (at such time and in such 

form and manner as the Secretary of the Treasury, or his designee, may provide) to apply section 168 of the Internal Revenue Code of 1986 without regard 

to the amendments made by this section. 

(4) LIMITATION ON NET OPERATING LOSS CARRYBACKS ATTRIBUTABLE TO FULL

EXPENSING.—In the case of any taxable year which includes any portion of the 

period beginning on September 28, 2017, and ending on December 31, 2017, the 

amount of any net operating loss for such taxable year which may be treated 

as a net operating loss carryback (including any such carryback attributable to 

any specified liability loss under section 172(b)(1)(C), any corporate equity reduction interest loss under section 172(b)(1)(D), any eligible loss under section 

172(b)(1)(E), and any farming loss under section 172(b)(1)(F)) shall be determined without regard to the amendments made by this section. For purposes 

of this paragraph, terms which are used in section 172 of the Internal Revenue 

Code of 1986 (determined without regard to the amendments made by section 

3302) shall have the same meaning as when used in such section. 

Subtitle C—Small Business Reforms 

SEC. 3201. EXPANSION OF SECTION 179 EXPENSING. 

(a) INCREASED DOLLAR LIMITATIONS.— (1) IN GENERAL.—Section 179(b) is amended— 

(A) by inserting ‘‘($5,000,000, in the case of taxable years beginning be- fore January 1, 2023)’’ after ‘‘$500,000’’ in paragraph (1), and (B) by inserting ‘‘($20,000,000, in the case of taxable years beginning be- fore January 1, 2023)’’ after ‘‘$2,000,000’’ in paragraph (2). 

(2) INFLATION ADJUSTMENT.—Section 179(b)(6) is amended to read as follows: 

‘‘(6) INFLATION ADJUSTMENT.— ‘‘(A) IN GENERAL.—In the case of a taxable year beginning after 2015 (2018 in the case of the $5,000,000 and $20,000,000 amounts in subsection 

(b)), each dollar amount in subsection (b) shall be increased by an amount 

equal to such dollar amount multiplied by— ‘‘(i) in the case of the $500,000 and $2,000,000 amounts in subsection 

(b), the cost-of-living adjustment determined under section 1(c)(2) for 

the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2014’ for ‘calendar year 2016’ in subparagraph 

(A)(ii) thereof, and 

‘‘(ii) in the case of the $5,000,000 and $20,000,000 amounts in subsection (b), the cost-of-living adjustment determined under section 

1(c)(2) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in 

subparagraph (A)(ii) thereof. 

‘‘(B) ROUNDING.—The amount of any increase under subparagraph (A) shall be rounded to the nearest multiple of $10,000 ($100,000 in the case 

of the $5,000,000 and $20,000,000 amounts in subsection (b)).’’. 

(b) APPLICATION TO QUALIFIED ENERGY EFFICIENT HEATING AND AIR-CONDI- TIONING PROPERTY.— (1) IN GENERAL.—Section 179(f)(2) is amended by striking ‘‘and’’ at the end 

of subparagraph (B), by striking the period at the end of subparagraph (C) and 

inserting ‘‘, and’’, and by adding at the end the following new subparagraph: 

‘‘(D) qualified energy efficient heating and air-conditioning property.’’. 

(2) QUALIFIED ENERGY EFFICIENT HEATING AND AIR-CONDITIONING PROPERTY.— Section 179(f) is amended by adding at the end the following new paragraph: 

‘‘(3) QUALIFIED ENERGY EFFICIENT HEATING AND AIR-CONDITIONING PROP- ERTY.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘qualified energy efficient heating and airconditioning property’ means any section 1250 property— 

‘‘(i) with respect to which depreciation (or amortization in lieu of depreciation) is allowable, 

‘‘(ii) which is installed as part of a building’s heating, cooling, ventilation, or hot water system, and 

‘‘(iii) which is within the scope of Standard 90.1–2007 or any successor standard. 

‘‘(B) STANDARD 90.1–2007.—The term ‘Standard 90.1–2007’ means Standard 90.1–2007 of the American Society of Heating, Refrigerating and AirVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00065 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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Conditioning Engineers and the Illuminating Engineering Society of North 

America (as in effect on the day before the date of the adoption of Standard 

90.1–2010 of such Societies).’’. 

(c) EFFECTIVE DATE.— 

(1) INCREASED DOLLAR LIMITATIONS.—The amendments made by subsection 

(a) shall apply to taxable years beginning after December 31, 2017. 

(2) APPLICATION TO QUALIFIED ENERGY EFFICIENT HEATING AND AIR-CONDITIONING PROPERTY.—The amendments made by subsection (b) shall apply to 

property acquired and placed in service after November 2, 2017. For purposes 

of the preceding sentence, property shall not be treated as acquired after the 

date on which a written binding contract is entered into for such acquisition. 

SEC. 3202. SMALL BUSINESS ACCOUNTING METHOD REFORM AND SIMPLIFICATION. 

(a) MODIFICATION OF LIMITATION ON CASH METHOD OF ACCOUNTING.— 

(1) INCREASED LIMITATION.—So much of section 448(c) as precedes paragraph 

(2) is amended to read as follows: 

‘‘(c) GROSS RECEIPTS TEST.—For purposes of this section— 

‘‘(1) IN GENERAL.—A corporation or partnership meets the gross receipts test 

of this subsection for any taxable year if the average annual gross receipts of 

such entity for the 3-taxable-year period ending with the taxable year which 

precedes such taxable year does not exceed $25,000,000.’’. 

(2) APPLICATION OF EXCEPTION ON ANNUAL BASIS.—Section 448(b)(3) is amended to read as follows: 

‘‘(3) ENTITIES WHICH MEET GROSS RECEIPTS TEST.—Paragraphs (1) and (2) of 

subsection (a) shall not apply to any corporation or partnership for any taxable 

year if such entity (or any predecessor) meets the gross receipts test of subsection (c) for such taxable year.’’. 

(3) INFLATION ADJUSTMENT.—Section 448(c) is amended by adding at the end 

the following new paragraph: 

‘‘(4) ADJUSTMENT FOR INFLATION.—In the case of any taxable year beginning 

after December 31, 2018, the dollar amount in paragraph (1) shall be increased 

by an amount equal to— 

‘‘(A) such dollar amount, multiplied by 

‘‘(B) the cost-of-living adjustment determined under section 1(c)(2) for the 

calendar year in which the taxable year begins, by substituting ‘calendar 

year 2017’ for ‘calendar year 2016’ in subparagraph (A)(ii) thereof. 

If any amount as increased under the preceding sentence is not a multiple of 

$1,000,000, such amount shall be rounded to the nearest multiple of 

$1,000,000.’’. 

(4) COORDINATION WITH SECTION 481.—Section 448(d)(7) is amended to read as 

follows: 

‘‘(7) COORDINATION WITH SECTION 481.—Any change in method of accounting 

made pursuant to this section shall be treated for purposes of section 481 as 

initiated by the taxpayer and made with the consent of the Secretary.’’. 

(5) APPLICATION OF EXCEPTION TO CORPORATIONS ENGAGED IN FARMING.— 

(A) IN GENERAL.—Section 447(c) is amended— 

(i) by inserting ‘‘for any taxable year’’ after ‘‘not being a corporation’’ 

in the matter preceding paragraph (1), and 

(ii) by amending paragraph (2) to read as follows: 

‘‘(2) a corporation which meets the gross receipts test of section 448(c) for 

such taxable year.’’. 

(B) COORDINATION WITH SECTION 481.—Section 447(f) is amended to read 

as follows: 

‘‘(f) COORDINATION WITH SECTION 481.—Any change in method of accounting 

made pursuant to this section shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.’’. 

(C) CONFORMING AMENDMENTS.—Section 447 is amended— 

(i) by striking subsections (d), (e), (h), and (i), and 

(ii) by redesignating subsections (f) and (g) (as amended by subparagraph (B)) as subsections (d) and (e), respectively. 

(b) EXEMPTION FROM UNICAP REQUIREMENTS.— 

(1) IN GENERAL.—Section 263A is amended by redesignating subsection (i) as 

subsection (j) and by inserting after subsection (h) the following new subsection: 

‘‘(i) EXEMPTION FOR CERTAIN SMALL BUSINESSES.— 

‘‘(1) IN GENERAL.—In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting 

under section 448(a)(3)) which meets the gross receipts test of section 448(c) for 

any taxable year, this section shall not apply with respect to such taxpayer for 

such taxable year. 


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‘‘(2) APPLICATION OF GROSS RECEIPTS TEST TO INDIVIDUALS, ETC.— In the case 

of any taxpayer which is not a corporation or a partnership, the gross receipts 

test of section 448(c) shall be applied in the same manner as if each trade or 

business of such taxpayer were a corporation or partnership. 

‘‘(3) COORDINATION WITH SECTION 481.—Any change in method of accounting 

made pursuant to this subsection shall be treated for purposes of section 481 

as initiated by the taxpayer and made with the consent of the Secretary.’’. 

(2) CONFORMING AMENDMENT.—Section 263A(b)(2) is amended to read as follows: 

‘‘(2) PROPERTY ACQUIRED FOR RESALE.—Real or personal property described in 

section 1221(a)(1) which is acquired by the taxpayer for resale.’’. 

(c) EXEMPTION FROM INVENTORIES.—Section 471 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new 

subsection: 

‘‘(c) EXEMPTION FOR CERTAIN SMALL BUSINESSES.— ‘‘(1) IN GENERAL.—In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting 

under section 448(a)(3)) which meets the gross receipts test of section 448(c) for 

any taxable year— 

‘‘(A) subsection (a) shall not apply with respect to such taxpayer for such 

taxable year, and 

‘‘(B) the taxpayer’s method of accounting for inventory for such taxable 

year shall not be treated as failing to clearly reflect income if such method 

either— 

‘‘(i) treats inventory as non-incidental materials and supplies, or 

‘‘(ii) conforms to such taxpayer’s method of accounting reflected in an 

applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial 

statement with respect to such taxable year, the books and records of 

the taxpayer prepared in accordance with the taxpayer’s accounting 

procedures. 

‘‘(2) APPLICABLE FINANCIAL STATEMENT.—For purposes of this subsection, the 

term ‘applicable financial statement’ means— 

‘‘(A) a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is— 

‘‘(i) a 10-K (or successor form), or annual statement to shareholders, 

required to be filed by the taxpayer with the United States Securities 

and Exchange Commission, 

‘‘(ii) an audited financial statement of the taxpayer which is used 

for— 

‘‘(I) credit purposes, 

‘‘(II) reporting to shareholders, partners, or other proprietors, or 

to beneficiaries, or 

‘‘(III) any other substantial nontax purpose, 

but only if there is no statement of the taxpayer described in clause (i), 

or 

‘‘(iii) filed by the taxpayer with any other Federal or State agency for 

nontax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii), or 

‘‘(B) a financial statement of the taxpayer which— 

‘‘(i) is used for a purpose described in subclause (I), (II), or (III) of 

subparagraph (A)(ii), or 

‘‘(ii) filed by the taxpayer with any regulatory or governmental body 

(whether domestic or foreign) specified by the Secretary, 

but only if there is no statement of the taxpayer described in subparagraph 

(A). 

‘‘(3) APPLICATION OF GROSS RECEIPTS TEST TO INDIVIDUALS, ETC.—In the case 

of any taxpayer which is not a corporation or a partnership, the gross receipts 

test of section 448(c) shall be applied in the same manner as if each trade or 

business of such taxpayer were a corporation or partnership. 

‘‘(4) COORDINATION WITH SECTION 481.—Any change in method of accounting 

made pursuant to this subsection shall be treated for purposes of section 481 

as initiated by the taxpayer and made with the consent of the Secretary.’’. 

(d) EXEMPTION FROM PERCENTAGE COMPLETION FOR LONG-TERM CONTRACTS.— 

(1) IN GENERAL.—Section 460(e)(1)(B) is amended— 

(A) by inserting ‘‘(other than a tax shelter prohibited from using the cash 

receipts and disbursements method of accounting under section 448(a)(3))’’ 

after ‘‘taxpayer’’ in the matter preceding clause (i), and 

(B) by amending clause (ii) to read as follows: 


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‘‘(ii) who meets the gross receipts test of section 448(c) for the taxable 

year in which such contract is entered into.’’. 

(2) CONFORMING AMENDMENTS.—Section 460(e) is amended by striking paragraphs (2) and (3), by redesignating paragraphs (4), (5), and (6) as paragraphs 

(3), (4), and (5), respectively, and by inserting after paragraph (1) the following 

new paragraph: 

‘‘(2) RULES RELATED TO GROSS RECEIPTS TEST.— 

‘‘(A) APPLICATION OF GROSS RECEIPTS TEST TO INDIVIDUALS, ETC.— For 

purposes of paragraph (1)(B)(ii), in the case of any taxpayer which is not 

a corporation or a partnership, the gross receipts test of section 448(c) shall 

be applied in the same manner as if each trade or business of such taxpayer 

were a corporation or partnership. 

‘‘(B) COORDINATION WITH SECTION 481.—Any change in method of accounting made pursuant to paragraph (1)(B)(ii) shall be treated as initiated by 

the taxpayer and made with the consent of the Secretary. Such change 

shall be effected on a cut-off basis for all similarly classified contracts entered into on or after the year of change.’’. 

(e) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(2) PRESERVATION OF SUSPENSE ACCOUNT RULES WITH RESPECT TO ANY EXISTING SUSPENSE ACCOUNTS.—So much of the amendments made by subsection 

(a)(5)(C) as relate to section 447(i) of the Internal Revenue Code of 1986 shall 

not apply with respect to any suspense account established under such section 

before the date of the enactment of this Act. 

(3) EXEMPTION FROM PERCENTAGE COMPLETION FOR LONG-TERM CONTRACTS.— 

The amendments made by subsection (d) shall apply to contracts entered into 

after December 31, 2017, in taxable years ending after such date. 

SEC. 3203. SMALL BUSINESS EXCEPTION FROM LIMITATION ON DEDUCTION OF BUSINESS INTEREST. 

(a) IN GENERAL.—Section 163(j)(2), as amended by section 3301, is amended to 

read as follows: 

‘‘(2) EXEMPTION FOR CERTAIN SMALL BUSINESSES.—In the case of any taxpayer 

(other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, paragraph (1) shall not apply 

to such taxpayer for such taxable year. In the case of any taxpayer which is 

not a corporation or a partnership, the gross receipts test of section 448(c) shall 

be applied in the same manner as if such taxpayer were a corporation or partnership.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2017. 

SEC. 3204. MODIFICATION OF TREATMENT OF S CORPORATION CONVERSIONS TO C CORPORATIONS. 

(a) ADJUSTMENTS ATTRIBUTABLE TO CONVERSION FROM S CORPORATION TO C CORPORATION.—Section 481 is amended by adding at the end the following new subsection: 

‘‘(d) ADJUSTMENTS ATTRIBUTABLE TO CONVERSION FROM S CORPORATION TO C 

CORPORATION.— 

‘‘(1) IN GENERAL.—In the case of an eligible terminated S corporation, any adjustment required by subsection (a)(2) which is attributable to such corporation’s revocation described in paragraph (2)(A)(ii) shall be taken into account 

ratably during the 6-taxable year period beginning with the year of change. 

‘‘(2) ELIGIBLE TERMINATED S CORPORATION.—For purposes of this subsection, 

the term ‘eligible terminated S corporation’ means any C corporation— 

‘‘(A) which— 

‘‘(i) was an S corporation on the day before the date of the enactment 

of the Tax Cuts and Jobs Act, and 

‘‘(ii) during the 2-year period beginning on the date of such enactment makes a revocation of its election under section 1362(a), and 

‘‘(B) the owners of the stock of which, determined on the date such revocation is made, are the same owners (and in identical proportions) as on 

the date of such enactment.’’. 

(b) CASH DISTRIBUTIONS FOLLOWING POST-TERMINATION TRANSITION PERIOD FROM

S CORPORATION STATUS.—Section 1371 is amended by adding at the end the following new subsection: 


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‘‘(f) CASH DISTRIBUTIONS FOLLOWING POST-TERMINATION TRANSITION PERIOD.—In 

the case of a distribution of money by an eligible terminated S corporation (as defined in section 481(d)) after the post-termination transition period, the accumulated 

adjustments account shall be allocated to such distribution, and the distribution 

shall be chargeable to accumulated earnings and profits, in the same ratio as the 

amount of such accumulated adjustments account bears to the amount of such accumulated earnings and profits.’’. 

Subtitle D—Reform of Business-related 

Exclusions, Deductions, etc. 

SEC. 3301. INTEREST. 

(a) IN GENERAL.—Section 163(j) is amended to read as follows: 

‘‘(j) LIMITATION ON BUSINESS INTEREST.— 

‘‘(1) IN GENERAL.—In the case of any taxpayer for any taxable year, the 

amount allowed as a deduction under this chapter for business interest shall 

not exceed the sum of— 

‘‘(A) the business interest income of such taxpayer for such taxable year, 

‘‘(B) 30 percent of the adjusted taxable income of such taxpayer for such 

taxable year, plus 

‘‘(C) the floor plan financing interest of such taxpayer for such taxable 

year. 

The amount determined under subparagraph (B) (after any increases in such 

amount under paragraph (3)(A)(iii)) shall not be less than zero. 

‘‘(2) EXEMPTION FOR CERTAIN SMALL BUSINESSES.—For exemption for certain 

small businesses, see the amendment made by section 3203 of the Tax Cuts and 

Jobs Act. 

‘‘(3) APPLICATION TO PARTNERSHIPS, ETC.— 

‘‘(A) IN GENERAL.—In the case of any partnership— 

‘‘(i) this subsection shall be applied at the partnership level and any 

deduction for business interest shall be taken into account in determining the non-separately stated taxable income or loss of the partnership, 

‘‘(ii) the adjusted taxable income of each partner of such partnership 

shall be determined without regard to such partner’s distributive share 

of the non-separately stated taxable income or loss of such partnership, 

and 

‘‘(iii) the amount determined under paragraph (1)(B) with respect to 

each partner of such partnership shall be increased by such partner’s 

distributive share of such partnership’s excess amount. 

‘‘(B) EXCESS AMOUNT.—The term ‘excess amount’ means, with respect to 

any partnership, the excess (if any) of— 

‘‘(i) 30 percent of the adjusted taxable income of the partnership, over 

‘‘(ii) the amount (if any) by which the business interest of the partnership, reduced by floor plan financing interest, exceeds the business 

interest income of the partnership. 

‘‘(C) APPLICATION TO S CORPORATIONS.—Rules similar to the rules of subparagraphs (A) and (B) shall apply with respect to any S corporation and 

its shareholders. 

‘‘(4) BUSINESS INTEREST.—For purposes of this subsection, the term ‘business 

interest’ means any interest paid or accrued on indebtedness properly allocable 

to a trade or business. Such term shall not include investment interest (within 

the meaning of subsection (d)). 

‘‘(5) BUSINESS INTEREST INCOME.—For purposes of this subsection, the term 

‘business interest income’ means the amount of interest includible in the gross 

income of the taxpayer for the taxable year which is properly allocable to a 

trade or business. Such term shall not include investment income (within the 

meaning of subsection (d)). 

‘‘(6) ADJUSTED TAXABLE INCOME.—For purposes of this subsection, the term 

‘adjusted taxable income’ means the taxable income of the taxpayer— 

‘‘(A) computed without regard to— 

‘‘(i) any item of income, gain, deduction, or loss which is not properly 

allocable to a trade or business, 

‘‘(ii) any business interest or business interest income, 

‘‘(iii) the amount of any net operating loss deduction under section 

172, and 


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‘‘(iv) any deduction allowable for depreciation, amortization, or depletion, and 

‘‘(B) computed with such other adjustments as the Secretary may provide. 

‘‘(7) TRADE OR BUSINESS.—For purposes of this subsection, the term ‘trade or 

business’ shall not include— 

‘‘(A) the trade or business of performing services as an employee, 

‘‘(B) a real property trade or business (as such term is defined in section 

469(c)(7)(C)), or 

‘‘(C) the trade or business of the furnishing or sale of— 

‘‘(i) electrical energy, water, or sewage disposal services, 

‘‘(ii) gas or steam through a local distribution system, or 

‘‘(iii) transportation of gas or steam by pipeline, 

if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency 

or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision 

thereof. 

‘‘(8) CARRYFORWARD OF DISALLOWED INTEREST.—For carryforward of interest 

disallowed under paragraph (1), see subsection (o). 

‘‘(9) FLOOR PLAN FINANCING INTEREST DEFINED.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘floor plan financing interest’ means interest 

paid or accrued on floor plan financing indebtedness. 

‘‘(B) FLOOR PLAN FINANCING INDEBTEDNESS.—The term ‘floor plan financing indebtedness’ means indebtedness— 

‘‘(i) used to finance the acquisition of motor vehicles held for sale to 

retail customers, and 

‘‘(ii) secured by the inventory so acquired. 

‘‘(C) MOTOR VEHICLE.—The term ‘motor vehicle’ means a motor vehicle 

that is any of the following: 

‘‘(i) An automobile. 

‘‘(ii) A truck. 

‘‘(iii) A recreational vehicle. 

‘‘(iv) A motorcycle. 

‘‘(v) A boat. 

‘‘(vi) Farm machinery or equipment. 

‘‘(vii) Construction machinery or equipment.’’. 

(b) CARRYFORWARD OF DISALLOWED BUSINESS INTEREST.—Section 163, after 

amendment by section 4302(a) and before amendment by section 4302(b), is amended by inserting after subsection (n) the following new subsection: 

‘‘(o) CARRYFORWARD OF DISALLOWED BUSINESS INTEREST.—The amount of any 

business interest not allowed as a deduction for any taxable year by reason of subsection (j) shall be treated as business interest paid or accrued in the succeeding 

taxable year. Business interest paid or accrued in any taxable year (determined 

without regard to the preceding sentence) shall not be carried past the 5th taxable 

year following such taxable year, determined by treating business interest as allowed as a deduction on a first-in, first-out basis.’’. 

(c) TREATMENT OF CARRYFORWARD OF DISALLOWED BUSINESS INTEREST IN CERTAIN CORPORATE ACQUISITIONS.— 

(1) IN GENERAL.—Section 381(c) is amended by inserting after paragraph (19) 

the following new paragraph: 

‘‘(20) CARRYFORWARD OF DISALLOWED INTEREST.—The carryover of disallowed 

interest described in section 163(o) to taxable years ending after the date of distribution or transfer.’’. 

(2) APPLICATION OF LIMITATION.—Section 382(d) is amended by adding at the 

end the following new paragraph: 

‘‘(3) APPLICATION TO CARRYFORWARD OF DISALLOWED INTEREST.—The term 

‘pre-change loss’ shall include any carryover of disallowed interest described in 

section 163(o) under rules similar to the rules of paragraph (1).’’. 

(3) CONFORMING AMENDMENT.—Section 382(k)(1) is amended by inserting 

after the first sentence the following: ‘‘Such term shall include any corporation 

entitled to use a carryforward of disallowed interest described in section 

381(c)(20).’’ 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 


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SEC. 3302. MODIFICATION OF NET OPERATING LOSS DEDUCTION. 

(a) INDEFINITE CARRYFORWARD OF NET OPERATING LOSSES.—Section 

172(b)(1)(A)(ii) is amended by striking ‘‘to each of the 20 taxable years’’ and inserting ‘‘to each taxable year’’. 

(b) REPEAL OF NET OPERATING LOSS CARRYBACKS OTHER THAN 1-YEAR CARRYBACK

OF ELIGIBLE DISASTER LOSSES.— 

(1) IN GENERAL.—Section 172(b)(1)(A)(i) is amended to read as follows: 

‘‘(i) in the case of any portion of a net operating loss for the taxable 

year which is an eligible disaster loss with respect to the taxpayer, 

shall be a net operating loss carryback to the taxable year preceding 

the taxable year of such loss, and’’. 

(2) CONFORMING AMENDMENTS.— 

(A) Section 172(b)(1) is amended by striking subparagraphs (B) through 

(F) and inserting the following: 

‘‘(B) ELIGIBLE DISASTER LOSS.— 

‘‘(i) IN GENERAL.—For purposes of subparagraph (A)(i), the term ‘eligible disaster loss’ means— 

‘‘(I) in the case of a taxpayer which is a small business, net operating losses attributable to federally declared disasters (as defined 

by section 165(i)(5)), and 

‘‘(II) in the case of a taxpayer engaged in the trade or business 

of farming, net operating losses attributable to such federally declared disasters. 

‘‘(ii) SMALL BUSINESS.—For purposes of this subparagraph, the term 

‘small business’ means a corporation or partnership which meets the 

gross receipts test of section 448(c) (determined by substituting 

‘$5,000,000’ for ‘$25,000,000’ each place it appears therein) for the taxable year in which the loss arose (or, in the case of a sole proprietorship, which would meet such test if such proprietorship were a corporation). 

‘‘(iii) TRADE OR BUSINESS OF FARMING.—For purposes of this subparagraph, the trade or business of farming shall include the trade or business of— 

‘‘(I) operating a nursery or sod farm, or 

‘‘(II) the raising or harvesting of trees bearing fruit, nuts, or 

other crops, or ornamental trees. 

For purposes of subclause (II), an evergreen tree which is more than 

6 years old at the time severed from the roots shall not be treated as 

an ornamental tree.’’. 

(B) Section 172 is amended by striking subsections (f), (g), and (h). 

(c) LIMITATION OF NET OPERATING LOSS TO 90 PERCENT OF TAXABLE INCOME.— 

(1) IN GENERAL.—Section 172(a) is amended to read as follows: 

‘‘(a) DEDUCTION ALLOWED.—There shall be allowed as a deduction for the taxable 

year an amount equal to the lesser of— 

‘‘(1) the aggregate of the net operating loss carryovers to such year, plus the 

net operating loss carrybacks to such year, or 

‘‘(2) 90 percent of taxable income computed without regard to the deduction 

allowable under this section. 

For purposes of this subtitle, the term ‘net operating loss deduction’ means the deduction allowed by this subsection.’’. 

(2) COORDINATION OF LIMITATION WITH CARRYBACKS AND CARRYOVERS.—Section 172(b)(2) is amended by striking ‘‘shall be computed—’’ and all that follows 

and inserting ‘‘shall— 

‘‘(A) be computed with the modifications specified in subsection (d) other 

than paragraphs (1), (4), and (5) thereof, and by determining the amount 

of the net operating loss deduction without regard to the net operating loss 

for the loss year or for any taxable year thereafter, 

‘‘(B) not be considered to be less than zero, and 

‘‘(C) not exceed the amount determined under subsection (a)(2) for such 

prior taxable year.’’. 

(3) CONFORMING AMENDMENT.—Section 172(d)(6) is amended by striking ‘‘and’’ 

at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ‘‘; and’’, and by adding at the end the following new 

subparagraph: 

‘‘(C) subsection (a)(2) shall be applied by substituting ‘real estate investment trust taxable income (as defined in section 857(b)(2) but without regard to the deduction for dividends paid (as defined in section 561))’ for 

‘taxable income’.’’. 


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(d) ANNUAL INCREASE OF INDEFINITE CARRYOVER AMOUNTS.—Section 172(b) is 

amended by redesignating paragraph (3) as paragraph (4) and by inserting after 

paragraph (2) the following new paragraph: 

‘‘(3) ANNUAL INCREASE OF INDEFINITE CARRYOVER AMOUNTS.—For purposes of 

paragraph (2)— 

‘‘(A) the amount of any indefinite net operating loss which is carried to 

the next succeeding taxable year after the loss year (within the meaning 

of paragraph (2)) shall be increased by an amount equal to— 

‘‘(i) the amount of the loss which may be so carried over to such succeeding taxable year (determined without regard to this paragraph), 

multiplied by 

‘‘(ii) the sum of— 

‘‘(I) the annual Federal short-term rate (determined under section 1274(d)) for the last month ending before the beginning of 

such taxable year, plus 

‘‘(II) 4 percentage points, and 

‘‘(B) the amount of any indefinite net operating loss which is carried to 

any succeeding taxable year (after such next succeeding taxable year) shall 

be an amount equal to— 

‘‘(i) the excess of— 

‘‘(I) the amount of the loss carried to the prior taxable year (after 

any increase under this paragraph with respect to such amount), 

over 

‘‘(II) the amount by which such loss was reduced under paragraph (2) by reason of the taxable income for such prior taxable 

year, multiplied by 

‘‘(ii) a percentage equal to 100 percent plus the percentage determined under subparagraph (A)(ii) with respect to such succeeding taxable year. 

For purposes of the preceding sentence, the term ‘indefinite net operating 

loss’ means any net operating loss arising in a taxable year beginning after 

December 31, 2017.’’. 

(e) EFFECTIVE DATE.— 

(1) CARRYFORWARDS AND CARRYBACKS.—The amendments made by subsections (a) and (b) shall apply to net operating losses arising in taxable years 

beginning after December 31, 2017. 

(2) NET OPERATING LOSS LIMITED TO 90 PERCENT OF TAXABLE INCOME.—The 

amendments made by subsection (c) shall apply to taxable years beginning after 

December 31, 2017. 

(3) ANNUAL INCREASE IN CARRYOVER AMOUNTS.—The amendments made by 

subsection (d) shall apply to amounts carried to taxable years beginning after 

December 31, 2017. 

(4) SPECIAL RULE FOR NET DISASTER LOSSES.—Notwithstanding paragraph (1), 

the amendments made by subsection (b) shall not apply to the portion of the 

net operating loss for any taxable year which is a net disaster loss to which section 504(b) of the Disaster Tax Relief and Airport and Airway Extension Act 

of 2017 applies. 

SEC. 3303. LIKE-KIND EXCHANGES OF REAL PROPERTY. 

(a) IN GENERAL.—Section 1031(a)(1) is amended by striking ‘‘property’’ each place 

it appears and inserting ‘‘real property’’. 

(b) CONFORMING AMENDMENTS.— 

(1) Paragraph (2) of section 1031(a) is amended to read as follows: 

‘‘(2) EXCEPTION FOR REAL PROPERTY HELD FOR SALE.—This subsection shall 

not apply to any exchange of real property held primarily for sale.’’. 

(2) Section 1031 is amended by striking subsections (e) and (i). 

(3) Section 1031, as amended by paragraph (2), is amended by inserting after 

subsection (d) the following new subsection: 

‘‘(e) APPLICATION TO CERTAIN PARTNERSHIPS.—For purposes of this section, an interest in a partnership which has in effect a valid election under section 761(a) to 

be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.’’. 

(4) Section 1031(h) is amended to read as follows: 

‘‘(h) SPECIAL RULES FOR FOREIGN REAL PROPERTY.—Real property located in the 

United States and real property located outside the United States are not property 

of a like kind.’’. 

(5) The heading of section 1031 is amended by striking ‘‘PROPERTY’’ and inserting ‘‘REAL PROPERTY’’. 


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(6) The table of sections for part III of subchapter O of chapter 1 is amended 

by striking the item relating to section 1031 and inserting the following new 

item: 

‘‘Sec. 1031. Exchange of real property held for productive use or investment.’’. 

(c) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to exchanges completed after December 

31, 2017. 

(2) TRANSITION RULE.—The amendments made by this section shall not apply 

to any exchange if— 

(A) the property disposed of by the taxpayer in the exchange is disposed 

of on or before December 31 2017, or 

(B) the property received by the taxpayer in the exchange is received on 

or before December 31, 2017. 

SEC. 3304. REVISION OF TREATMENT OF CONTRIBUTIONS TO CAPITAL. 

(a) INCLUSION OF CONTRIBUTIONS TO CAPITAL.—Part II of subchapter B of chapter 

1 is amended by inserting after section 75 the following new section: 

‘‘SEC. 76. CONTRIBUTIONS TO CAPITAL. 

‘‘(a) IN GENERAL.—Gross income includes any contribution to the capital of any 

entity. 

‘‘(b) TREATMENT OF CONTRIBUTIONS IN EXCHANGE FOR STOCK, ETC.— 

‘‘(1) IN GENERAL.—In the case of any contribution of money or other property 

to a corporation in exchange for stock of such corporation— 

‘‘(A) such contribution shall not be treated for purposes of subsection (a) 

as a contribution to the capital of such corporation (and shall not be includible in the gross income of such corporation), and 

‘‘(B) no gain or loss shall be recognized to such corporation upon the 

issuance of such stock. 

‘‘(2) TREATMENT LIMITED TO VALUE OF STOCK.—For purposes of this subsection, a contribution of money or other property to a corporation shall be 

treated as being in exchange for stock of such corporation only to the extent 

that the fair market value of such money and other property does not exceed 

the fair market value of such stock. 

‘‘(3) APPLICATION TO ENTITIES OTHER THAN CORPORATIONS.—In the case of any 

entity other than a corporation, rules similar to the rules of paragraphs (1) and 

(2) shall apply in the case of any contribution of money or other property to 

such entity in exchange for any interest in such entity. 

‘‘(c) TREASURY STOCK TREATED AS STOCK.—Any reference in this section to stock 

shall be treated as including a reference to treasury stock.’’. 

(b) BASIS OF CORPORATION IN CONTRIBUTED PROPERTY.— 

(1) CONTRIBUTIONS TO CAPITAL.—Subsection (c) of section 362 is amended to 

read as follows: 

‘‘(c) CONTRIBUTIONS TO CAPITAL.—If property other than money is transferred to 

a corporation as a contribution to the capital of such corporation (within the meaning of section 76) then the basis of such property shall be the greater of— 

‘‘(1) the basis determined in the hands of the transferor, increased by the 

amount of gain recognized to the transferor on such transfer, or 

‘‘(2) the amount included in gross income by such corporation under section 

76 with respect to such contribution.’’. 

(2) CONTRIBUTIONS IN EXCHANGE FOR STOCK.—Paragraph (2) of section 362(a) 

is amended by striking ‘‘contribution to capital’’ and inserting ‘‘contribution in 

exchange for stock of such corporation (determined under rules similar to the 

rules of paragraphs (2) and (3) of section 76(b))’’. 

(c) CONFORMING AMENDMENTS.— 

(1) Section 108(e) is amended by striking paragraph (6). 

(2) Part III of subchapter B of chapter 1 is amended by striking section 118 

(and by striking the item relating to such section in the table of sections for 

such part). 

(3) The table of sections for part II of subchapter B of chapter 1 is amended 

by inserting after the item relating to section 75 the following new item: 

‘‘Sec. 76. Contributions to capital.’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to contributions made, and transactions entered into, after the date of the enactment of 

this Act. 


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SEC. 3305. REPEAL OF DEDUCTION FOR LOCAL LOBBYING EXPENSES. 

(a) IN GENERAL.—Section 162(e) is amended by striking paragraphs (2) and (7) 

and by redesignating paragraphs (3), (4), (5), (6), and (8) as paragraphs (2), (3), (4), 

(5), and (6), respectively. 

(b) CONFORMING AMENDMENT.—Section 6033(e)(1)(B)(ii) is amended by striking 

‘‘section 162(e)(5)(B)(ii)’’ and inserting ‘‘section 162(e)(4)(B)(ii)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred after December 31, 2017. 

SEC. 3306. REPEAL OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION 

ACTIVITIES. 

(a) IN GENERAL.—Part VI of subchapter B of chapter 1 is amended by striking 

section 199 (and by striking the item relating to such section in the table of sections 

for such part). 

(b) CONFORMING AMENDMENTS.— (1) Sections 74(d)(2)(B), 86(b)(2)(A), 137(b)(3)(A), 219(g)(3)(A)(ii), and 246(b)(1) 

are each amended by striking ‘‘199,’’. 

(2) Section 170(b)(2)(D), as amended by the preceding provisions of this Act, 

is amended by striking clause (iv), by redesignating clause (v) as clause (iv), and 

by inserting ‘‘and’’ at the end of clause (iii). 

(3) Section 172(d) is amended by striking paragraph (7). 

(4) Section 613(a) is amended by striking ‘‘and without the deduction under 

section 199’’. 

(5) Section 613A(d)(1) is amended by striking subparagraph (B) and by redesignating subparagraphs (C), (D), and (E) as subparagraphs (B), (C), and (D), respectively. 

(6) Section 1402(a) is amended by adding ‘‘and’’ at the end of paragraph (15) 

and by striking paragraph (16). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3307. ENTERTAINMENT, ETC. EXPENSES. 

(a) DENIAL OF DEDUCTION.—Subsection (a) of section 274 is amended to read as 

follows: 

‘‘(a) ENTERTAINMENT, AMUSEMENT, RECREATION, AND OTHER FRINGE BENEFITS .— 

‘‘(1) IN GENERAL.—No deduction otherwise allowable under this chapter shall 

be allowed for amounts paid or incurred for any of the following items: 

‘‘(A) ACTIVITY.—With respect to an activity which is of a type generally 

considered to constitute entertainment, amusement, or recreation. 

‘‘(B) MEMBERSHIP DUES.—With respect to membership in any club organized for business, pleasure, recreation or other social purposes. 

‘‘(C) AMENITY.—With respect to a de minimis fringe (as defined in section 

132(e)(1)) that is primarily personal in nature and involving property or 

services that are not directly related to the taxpayer’s trade or business. 

‘‘(D) FACILITY.—With respect to a facility or portion thereof used in connection with an activity referred to in subparagraph (A), membership dues 

or similar amounts referred to in subparagraph (B), or an amenity referred 

to in subparagraph (C). 

‘‘(E) QUALIFIED TRANSPORTATION FRINGE AND PARKING FACILITY.—Which 

is a qualified transportation fringe (as defined in section 132(f)) or which 

is a parking facility used in connection with qualified parking (as defined 

in section 132(f)(5)(C)). 

‘‘(F) ON-PREMISES ATHLETIC FACILITY.—Which is an on-premises athletic 

facility as defined in section 132(j)(4)(B). 

‘‘(2) SPECIAL RULES.—For purposes of applying paragraph (1), an activity described in section 212 shall be treated as a trade or business. 

‘‘(3) REGULATIONS.—Under the regulations prescribed to carry out this section, the Secretary shall include regulations— 

‘‘(A) defining entertainment, amenities, recreation, amusement, and facilities for purposes of this subsection, 

‘‘(B) providing for the appropriate allocation of depreciation and other 

costs with respect to facilities used for parking or for on-premises athletic 

facilities, and 

‘‘(C) specifying arrangements a primary purpose of which is the avoidance 

of this subsection.’’. 

(b) EXCEPTION FOR CERTAIN EXPENSES INCLUDIBLE IN INCOME OF RECIPIENT.— 

(1) EXPENSES TREATED AS COMPENSATION.—Paragraph (2) of section 274(e) is 

amended to read as follows: 

‘‘(2) EXPENSES TREATED AS COMPENSATION.—Expenses for goods, services, and 

facilities, to the extent that the expenses do not exceed the amount of the exVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00074 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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penses which are treated by the taxpayer, with respect to the recipient of the 

entertainment, amusement, or recreation, as compensation to an employee on 

the taxpayer’s return of tax under this chapter and as wages to such employee 

for purposes of chapter 24 (relating to withholding of income tax at source on 

wages).’’. 

(2) EXPENSES INCLUDIBLE IN INCOME OF PERSONS WHO ARE NOT EMPLOYEES.— 

Paragraph (9) of section 274(e) is amended by striking ‘‘to the extent that the 

expenses’’ and inserting ‘‘to the extent that the expenses do not exceed the 

amount of the expenses that’’. 

(c) EXCEPTIONS FOR REIMBURSED EXPENSES.—Paragraph (3) of section 274(e) is 

amended to read as follows: 

‘‘(3) REIMBURSED EXPENSES.— 

‘‘(A) IN GENERAL.—Expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether 

or not such other person is the taxpayer’s employer), under a reimbursement or other expense allowance arrangement with such other person, but 

this paragraph shall apply— 

‘‘(i) where the services are performed for an employer, only if the employer has not treated such expenses in the manner provided in paragraph (2), or 

‘‘(ii) where the services are performed for a person other than an employer, only if the taxpayer accounts (to the extent provided by subsection (d)) to such person. 

‘‘(B) EXCEPTION.—Except as provided by the Secretary, subparagraph (A) 

shall not apply— 

‘‘(i) in the case of an arrangement in which the person other than the 

employer is an entity described in section 168(h)(2)(A), or 

‘‘(ii) to any other arrangement designated by the Secretary as having 

the effect of avoiding the limitation under subparagraph (A).’’. 

(d) 50 PERCENT LIMITATION ON MEALS AND ENTERTAINMENT EXPENSES.—Subsection (n) of section 274 is amended to read as follows: 

‘‘(n) LIMITATION ON CERTAIN EXPENSES.— 

‘‘(1) IN GENERAL.—The amount allowable as a deduction under this chapter 

for any expense for food or beverages (pursuant to subsection (e)(1)) or business 

meals (pursuant to subsection (k)(1)) shall not exceed 50 percent of the amount 

of such expense or item which would (but for this paragraph) be allowable as 

a deduction under this chapter. 

‘‘(2) EXCEPTIONS.—Paragraph (1) shall not apply to any expense if— 

‘‘(A) such expense is described in paragraph (2), (3), (6), (7), or (8) of subsection (e), 

‘‘(B) in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section 132 by reason 

of subsection (e) thereof (relating to de minimis fringes) or under section 

119 (relating to meals and lodging furnished for convenience of employer), 

or 

‘‘(C) in the case of an employer who pays or reimburses moving expenses 

of an employee, such expenses are includible in the income of the employee 

under section 82. 

‘‘(3) SPECIAL RULE FOR INDIVIDUALS SUBJECT TO FEDERAL HOURS OF SERVICE.— 

In the case of any expenses for food or beverages consumed while away from 

home (within the meaning of section 162(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, paragraph (1) shall be applied by substituting ‘80 

percent’ for ‘50 percent’.’’. 

(e) CONFORMING AMENDMENTS.— 

(1) Section 274(d) is amended— 

(A) by striking paragraph (2) and redesignating paragraphs (3) and (4) 

as paragraphs (2) and (3), respectively, and 

(B) in the flush material following paragraph (3) (as so redesignated)— 

(i) by striking ‘‘, entertainment, amusement, recreation, or’’ in item 

(B), and 

(ii) by striking ‘‘(D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift’’ 

and inserting ‘‘(D) the business relationship to the taxpayer of the person receiving the benefit’’. 

(2) Section 274(e) is amended by striking paragraph (4) and redesignating 

paragraphs (5), (6), (7), (8), and (9) as paragraphs (4), (5), (6), (7), and (8), respectively. 


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(3) Section 274(k)(2)(A) is amended by striking ‘‘(4), (7), (8), or (9)’’ and inserting ‘‘(6), (7), or (8)’’. 

(4) Section 274 is amended by striking subsection (l). 

(5) Section 274(m)(1)(B)(ii) is amended by striking ‘‘(4), (7), (8), or (9)’’ and inserting ‘‘(6), (7), or (8)’’. 

(f) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred after December 31, 2017. 

SEC. 3308. UNRELATED BUSINESS TAXABLE INCOME INCREASED BY AMOUNT OF CERTAIN 

FRINGE BENEFIT EXPENSES FOR WHICH DEDUCTION IS DISALLOWED. 

(a) IN GENERAL.—Section 512(a) is amended by adding at the end the following 

new paragraph: 

‘‘(6) INCREASE IN UNRELATED BUSINESS TAXABLE INCOME BY DISALLOWED

FRINGE.—Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization 

for any qualified transportation fringe (as defined in section 132(f)), any parking 

facility used in connection with qualified parking (as defined in section 

132(f)(5)(C)), or any on-premises athletic facility (as defined in section 

132(j)(4)(B)). The preceding sentence shall not apply to the extent the amount 

paid or incurred is directly connected with an unrelated trade or business which 

is regularly carried on by the organization. The Secretary may issue such regulations or other guidance as may be necessary or appropriate to carry out the 

purposes of this paragraph, including regulations or other guidance providing 

for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities. 

’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to 

amounts paid or incurred after December 31, 2017. 

SEC. 3309. LIMITATION ON DEDUCTION FOR FDIC PREMIUMS. 

(a) IN GENERAL.—Section 162 is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection: 

‘‘(q) DISALLOWANCE OF FDIC PREMIUMS PAID BY CERTAIN LARGE FINANCIAL INSTITUTIONS.— 

‘‘(1) IN GENERAL.—No deduction shall be allowed for the applicable percentage 

of any FDIC premium paid or incurred by the taxpayer. 

‘‘(2) EXCEPTION FOR SMALL INSTITUTIONS.—Paragraph (1) shall not apply to 

any taxpayer for any taxable year if the total consolidated assets of such taxpayer (determined as of the close of such taxable year) do not exceed 

$10,000,000,000. 

‘‘(3) APPLICABLE PERCENTAGE.—For purposes of this subsection, the term ‘applicable percentage’ means, with respect to any taxpayer for any taxable year, 

the ratio (expressed as a percentage but not greater than 100 percent) which— 

‘‘(A) the excess of— 

‘‘(i) the total consolidated assets of such taxpayer (determined as of 

the close of such taxable year), over 

‘‘(ii) $10,000,000,000, bears to 

‘‘(B) $40,000,000,000. 

‘‘(4) FDIC PREMIUMS.—For purposes of this subsection, the term ‘FDIC premium’ means any assessment imposed under section 7(b) of the Federal Deposit 

Insurance Act (12 U.S.C. 1817(b)). 

‘‘(5) TOTAL CONSOLIDATED ASSETS.—For purposes of this subsection, the term 

‘total consolidated assets’ has the meaning given such term under section 165 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 

5365). 

‘‘(6) AGGREGATION RULE.— 

‘‘(A) IN GENERAL.—Members of an expanded affiliated group shall be 

treated as a single taxpayer for purposes of applying this subsection. 

‘‘(B) EXPANDED AFFILIATED GROUP.—For purposes of this paragraph, the 

term ‘expanded affiliated group’ means an affiliated group as defined in section 1504(a), determined— 

‘‘(i) by substituting ‘more than 50 percent’ for ‘at least 80 percent’ 

each place it appears, and 

‘‘(ii) without regard to paragraphs (2) and (3) of section 1504(b). 

A partnership or any other entity (other than a corporation) shall be treated as a member of an expanded affiliated group if such entity is controlled 

(within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence).’’. 


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(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3310. REPEAL OF ROLLOVER OF PUBLICLY TRADED SECURITIES GAIN INTO SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES. 

(a) IN GENERAL.—Part III of subchapter O of chapter 1 is amended by striking 

section 1044 (and by striking the item relating to such section in the table of sections of such part). 

(b) CONFORMING AMENDMENTS.—Section 1016(a)(23) is amended— 

(1) by striking ‘‘1044,’’, and 

(2) by striking ‘‘1044(d),’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to sales 

after December 31, 2017. 

SEC. 3311. CERTAIN SELF-CREATED PROPERTY NOT TREATED AS A CAPITAL ASSET. 

(a) PATENTS, ETC.—Section 1221(a)(3) is amended by inserting ‘‘a patent, invention, model or design (whether or not patented), a secret formula or process,’’ before 

‘‘a copyright’’. 

(b) CONFORMING AMENDMENT.—Section 1231(b)(1)(C) is amended by inserting ‘‘a 

patent, invention, model or design (whether or not patented), a secret formula or 

process,’’ before ‘‘a copyright’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to dispositions after December 31, 2017. 

SEC. 3312. REPEAL OF SPECIAL RULE FOR SALE OR EXCHANGE OF PATENTS. 

(a) IN GENERAL.—Part IV of subchapter P of chapter 1 is amended by striking section 1235 (and by striking the item relating to such section in the table of sections 

of such part). 

(b) CONFORMING AMENDMENTS.— (1) Section 483(d) is amended by striking paragraph (4). 

(2) Section 901(l)(5) is amended by striking ‘‘without regard to section 1235 

or any similar rule’’ and inserting ‘‘without regard to any provision which treats 

a disposition as a sale or exchange of a capital asset held for more than 1 year 

or any similar provision’’. 

(3) Section 1274(c)(3) is amended by striking subparagraph (E) and redesignating subparagraph (F) as subparagraph (E). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to dispositions after December 31, 2017. 

SEC. 3313. REPEAL OF TECHNICAL TERMINATION OF PARTNERSHIPS. 

(a) IN GENERAL.—Paragraph (1) of section 708(b) is amended— 

(1) by striking ‘‘, or’’ at the end of subparagraph (A) and all that follows and 

inserting a period, and 

(2) by striking ‘‘only if—’’ and all that follows through ‘‘no part of any business’’ and inserting the following: ‘‘only if no part of any business’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to partnership taxable years beginning after December 31, 2017. 

SEC. 3314. RECHARACTERIZATION OF CERTAIN GAINS IN THE CASE OF PARTNERSHIP PROFITS INTERESTS HELD IN CONNECTION WITH PERFORMANCE OF INVESTMENT 

SERVICES. 

(a) IN GENERAL.—Part IV of subchapter O of chapter 1 is amended— 

(1) by redesignating section 1061 as section 1062, and 

(2) by inserting after section 1060 the following new section: 

‘‘SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNECTION WITH PERFORMANCE OF SERVICES. 

‘‘(a) IN GENERAL.—If one or more applicable partnership interests are held by a 

taxpayer at any time during the taxable year, the excess (if any) of— 

‘‘(1) the taxpayer’s net long-term capital gain with respect to such interests 

for such taxable year, over 

‘‘(2) the taxpayer’s net long-term capital gain with respect to such interests 

for such taxable year computed by applying paragraphs (3) and (4) of sections 

1222 by substituting ‘3 years’ for ‘1 year’, 

shall be treated as short-term capital gain. 

‘‘(b) SPECIAL RULE.—To the extent provided by the Secretary, subsection (a) shall 

not apply to income or gain attributable to any asset not held for portfolio investment on behalf of third party investors. 

‘‘(c) APPLICABLE PARTNERSHIP INTEREST.—For purposes of this section— 

‘‘(1) IN GENERAL.—Except as provided in this paragraph or paragraph (4), the 

term ‘applicable partnership interest’ means any interest in a partnership 

which, directly or indirectly, is transferred to (or is held by) the taxpayer in conVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00077 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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nection with the performance of substantial services by the taxpayer, or any 

other related person, in any applicable trade or business. The previous sentence 

shall not apply to an interest held by a person who is employed by another entity that is conducting a trade or business (other than an applicable trade or business) and only provides services to such other entity. 

‘‘(2) APPLICABLE TRADE OR BUSINESS.—The term ‘applicable trade or business’ 

means any activity conducted on a regular, continuous, and substantial basis 

which, regardless of whether the activity is conducted in one or more entities, 

consists, in whole or in part, of— 

‘‘(A) raising or returning capital, and 

‘‘(B) either— 

‘‘(i) investing in (or disposing of) specified assets (or identifying specified assets for such investing or disposition), or 

‘‘(ii) developing specified assets. 

‘‘(3) SPECIFIED ASSET.—The term ‘specified asset’ means securities (as defined 

in section 475(c)(2) without regard to the last sentence thereof), commodities (as 

defined in section 475(e)(2)), real estate held for rental or investment, cash or 

cash equivalents, options or derivative contracts with respect to any of the foregoing, and an interest in a partnership to the extent of the partnership’s proportionate interest in any of the foregoing. 

‘‘(4) EXCEPTIONS.—The term ‘applicable partnership interest’ shall not include— 

‘‘(A) any interest in a partnership directly or indirectly held by a corporation, or 

‘‘(B) any capital interest in the partnership which provides the taxpayer 

with a right to share in partnership capital commensurate with— 

‘‘(i) the amount of capital contributed (determined at the time of receipt of such partnership interest), or 

‘‘(ii) the value of such interest subject to tax under section 83 upon 

the receipt or vesting of such interest. 

‘‘(5) THIRD PARTY INVESTOR.—The term ‘third party investor’ means a person 

who— 

‘‘(A) holds an interest in the partnership which does not constitute property held in connection with an applicable trade or business; and 

‘‘(B) is not (and has not been) actively engaged, and is (and was) not related to a person so engaged, in (directly or indirectly) providing substantial 

services described in paragraph (1) for such partnership or any applicable 

trade or business. 

‘‘(d) TRANSFER OF APPLICABLE PARTNERSHIP INTEREST TO RELATED PERSON.— 

‘‘(1) IN GENERAL.—If a taxpayer transfers any applicable partnership interest, 

directly or indirectly, to a person related to the taxpayer, the taxpayer shall include in gross income (as short term capital gain) the excess (if any) of— 

‘‘(A) so much of the taxpayer’s long-term capital gains with respect to 

such interest for such taxable year attributable to the sale or exchange of 

any asset held for not more than 3 years as is allocable to such interest, 

over 

‘‘(B) any amount treated as short term capital gain under subsection (a) 

with respect to the transfer of such interest. 

‘‘(2) RELATED PERSON.—For purposes of this paragraph, a person is related to 

the taxpayer if— 

‘‘(A) the person is a member of the taxpayer’s family within the meaning 

of section 318(a)(1), or 

‘‘(B) the person performed a service within the current calendar year or 

the preceding three calendar years in any applicable trade or business in 

which or for which the taxpayer performed a service. 

‘‘(e) REPORTING.—The Secretary shall require such reporting (at the time and in 

the manner prescribed by the Secretary) as is necessary to carry out the purposes 

of this section. 

‘‘(f) REGULATIONS.—The Secretary shall issue such regulations or other guidance 

as is necessary or appropriate to carry out the purposes of this section’’. 

(b) COORDINATION WITH SECTION 83.—Subsection (e) of section 83 is amended by 

striking ‘‘or’’ at the end of paragraph (4), by striking the period at the end of paragraph (5) and inserting ‘‘, or’’, and by adding at the end the following new paragraph: 

‘‘(6) a transfer of an applicable partnership interest to which section 1061 applies.’’. 

(c) CLERICAL AMENDMENT.—The table of sections for part IV of subchapter O of 

chapter 1 is amended by striking the item relating to 1061 and inserting the following new items: 


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‘‘Sec. 1061. Partnership interests held in connection with performance of services. 

‘‘Sec. 1062. Cross references.’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3315. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES. 

(a) IN GENERAL.—Section 174 is amended to read as follows: 

‘‘SEC. 174. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES. 

‘‘(a) IN GENERAL.—In the case of a taxpayer’s specified research or experimental 

expenditures for any taxable year— 

‘‘(1) except as provided in paragraph (2), no deduction shall be allowed for 

such expenditures, and 

‘‘(2) the taxpayer shall— 

‘‘(A) charge such expenditures to capital account, and 

‘‘(B) be allowed an amortization deduction of such expenditures ratably 

over the 5-year period (15-year period in the case of any specified research 

or experimental expenditures which are attributable to foreign research 

(within the meaning of section 41(d)(4)(F))) beginning with the midpoint of 

the taxable year in which such expenditures are paid or incurred. 

‘‘(b) SPECIFIED RESEARCH OR EXPERIMENTAL EXPENDITURES.—For purposes of this 

section, the term ‘specified research or experimental expenditures’ means, with respect to any taxable year, research or experimental expenditures which are paid or 

incurred by the taxpayer during such taxable year in connection with the taxpayer’s 

trade or business. 

‘‘(c) SPECIAL RULES.— 

‘‘(1) LAND AND OTHER PROPERTY.—This section shall not apply to any expenditure for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character which is subject to the allowance under section 167 

(relating to allowance for depreciation, etc.) or section 611 (relating to allowance 

for depletion); but for purposes of this section allowances under section 167, and 

allowances under section 611, shall be considered as expenditures. 

‘‘(2) EXPLORATION EXPENDITURES.—This section shall not apply to any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas). 

‘‘(3) SOFTWARE DEVELOPMENT.—For purposes of this section, any amount paid 

or incurred in connection with the development of any software shall be treated 

as a research or experimental expenditure. 

‘‘(d) TREATMENT UPON DISPOSITION, RETIREMENT, OR ABANDONMENT.—If any 

property with respect to which specified research or experimental expenditures are 

paid or incurred is disposed, retired, or abandoned during the period during which 

such expenditures are allowed as an amortization deduction under this section, no 

deduction shall be allowed with respect to such expenditures on account of such disposition, retirement, or abandonment and such amortization deduction shall continue with respect to such expenditures.’’. 

(b) CLERICAL AMENDMENT.—The table of sections for part VI of subchapter B of 

chapter 1 is amended by striking the item relating to section 174 and inserting the 

following new item: 

‘‘Sec. 174. Amortization of research and experimental expenditures.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred in taxable years beginning after December 31, 2022. 

SEC. 3316. UNIFORM TREATMENT OF EXPENSES IN CONTINGENCY FEE CASES. 

(a) IN GENERAL.—Section 162, as amended by the preceding provisions of this Act, 

is amended by redesignating subsection (r) as subsection (s) and by inserting after 

subsection (q) the following new subsection: 

‘‘(r) EXPENSES IN CONTINGENCY FEE CASES.—No deduction shall be allowed under 

subsection (a) to a taxpayer for any expense— 

‘‘(1) paid or incurred in the course of the trade or business of practicing law, 

and 

‘‘(2) resulting from a case for which the taxpayer is compensated primarily on 

a contingent basis, 

until such time as such contingency is resolved.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to expenses and costs paid or incurred in taxable years beginning after the date of the 

enactment of this Act. 


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Subtitle E—Reform of Business Credits 

SEC. 3401. REPEAL OF CREDIT FOR CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR 

RARE DISEASES OR CONDITIONS. 

(a) IN GENERAL.—Subpart D of part IV of subchapter A of chapter 1 is amended 

by striking section 45C (and by striking the item relating to such section in the 

table of sections for such subpart). 

(b) CONFORMING AMENDMENTS.— (1) Section 38(b) is amended by striking paragraph (12). 

(2) Section 280C is amended by striking subsection (b). 

(3) Section 6501(m) is amended by striking ‘‘45C(d)(4),’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred in taxable years beginning after December 31, 2017. 

SEC. 3402. REPEAL OF EMPLOYER-PROVIDED CHILD CARE CREDIT. 

(a) IN GENERAL.—Subpart D of part IV of subchapter A of chapter 1 is amended 

by striking section 45F (and by striking the item relating to such section in the 

table of sections for such subpart). 

(b) CONFORMING AMENDMENTS.— (1) Section 38(b) is amended by striking paragraph (15). 

(2) Section 1016(a) is amended by striking paragraph (28). 

(c) EFFECTIVE DATE.— (1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(2) BASIS ADJUSTMENTS.—The amendment made by subsection (b)(2) shall 

apply to credits determined for taxable years beginning after December 31, 

2017. 

SEC. 3403. REPEAL OF REHABILITATION CREDIT. 

(a) IN GENERAL.—Subpart E of part IV of subchapter A of chapter 1 is amended 

by striking section 47 (and by striking the item relating to such section in the table 

of sections for such subpart). 

(b) CONFORMING AMENDMENTS.— (1) Section 170(f)(14)(A) is amended by inserting ‘‘(as in effect before its repeal 

by the Tax Cuts and Jobs Act)’’ after ‘‘section 47’’. 

(2) Section 170(h)(4) is amended— 

(A) by striking ‘‘(as defined in section 47(c)(3)(B))’’ in subparagraph (C)(ii), 

and 

(B) by adding at the end the following new subparagraph: 

‘‘(D) REGISTERED HISTORIC DISTRICT.—The term ‘registered historic district’ means— 

‘‘(i) any district listed in the National Register, and 

‘‘(ii) any district— 

‘‘(I) which is designated under a statute of the appropriate State 

or local government, if such statute is certified by the Secretary of 

the Interior to the Secretary as containing criteria which will substantially achieve the purpose of preserving and rehabilitating 

buildings of historic significance to the district, and 

‘‘(II) which is certified by the Secretary of the Interior to the Secretary as meeting substantially all of the requirements for the listing of districts in the National Register.’’. 

(3) Section 469(i)(3) is amended by striking subparagraph (B). 

(4) Section 469(i)(6)(B) is amended— 

(A) by striking ‘‘in the case of—’’ and all that follows and inserting ‘‘in 

the case of any credit determined under section 42 for any taxable year.’’, 

and 

(B) by striking ‘‘, REHABILITATION CREDIT,’’ in the heading thereof. 

(5) Section 469(k)(1) is amended by striking ‘‘, or any rehabilitation credit determined under section 47,’’. 

(c) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made 

by this section shall apply to amounts paid or incurred after December 31, 2017. 

(2) TRANSITION RULE.—In the case of qualified rehabilitation expenditures 

(within the meaning of section 47 of the Internal Revenue Code of 1986 as in 

effect before its repeal) with respect to any building— 

(A) owned or leased (as permitted by section 47 of the Internal Revenue 

Code of 1986 as in effect before its repeal) by the taxpayer at all times after 

December 31, 2017, and 


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(B) with respect to which the 24-month period selected by the taxpayer 

under section 47(c)(1)(C) of such Code begins not later than the end of the 

180-day period beginning on the date of the enactment of this Act, 

the amendments made by this section shall apply to such expenditures paid or 

incurred after the end of the taxable year in which the 24-month period referred 

to in subparagraph (B) ends. 

SEC. 3404. REPEAL OF WORK OPPORTUNITY TAX CREDIT. 

(a) IN GENERAL.—Subpart F of part IV of subchapter A of chapter 1 is amended 

by striking section 51 (and by striking the item relating to such section in the table 

of sections for such subpart). 

(b) CLERICAL AMENDMENT.—The heading of such subpart F (and the item relating 

to such subpart in the table of subparts for part IV of subchapter A of chapter 1) 

are each amended by striking ‘‘Rules for Computing Work Opportunity Credit’’ and 

inserting ‘‘Special Rules’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred to individuals who begin work for the employer after December 31, 2017. 

SEC. 3405. REPEAL OF DEDUCTION FOR CERTAIN UNUSED BUSINESS CREDITS. 

(a) IN GENERAL.—Part VI of subchapter B of chapter 1 is amended by striking 

section 196 (and by striking the item relating to such section in the table of sections 

for such part). 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3406. TERMINATION OF NEW MARKETS TAX CREDIT. 

(a) IN GENERAL.—Section 45D(f) is amended— 

(1) by striking ‘‘2019’’ in paragraph (1)(G) and inserting ‘‘2017’’, and 

(2) by striking ‘‘2024’’ in paragraph (3) and inserting ‘‘2022’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to calendar years beginning after December 31, 2017. 

SEC. 3407. REPEAL OF CREDIT FOR EXPENDITURES TO PROVIDE ACCESS TO DISABLED INDIVIDUALS. 

(a) IN GENERAL.—Subpart D of part IV of subchapter A of chapter 1 is amended 

by striking section 44 (and by striking the item relating to such section in the table 

of sections for such subpart). 

(b) CONFORMING AMENDMENT.—Section 38(b) is amended by striking paragraph 

(7). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3408. MODIFICATION OF CREDIT FOR PORTION OF EMPLOYER SOCIAL SECURITY TAXES 

PAID WITH RESPECT TO EMPLOYEE TIPS. 

(a) CREDIT DETERMINED WITH RESPECT TO MINIMUM WAGE AS IN EFFECT.—Section 45B(b)(1)(B) is amended by striking ‘‘as in effect on January 1, 2007, and’’. 

(b) INFORMATION RETURN REQUIREMENT.—Section 45B is amended by redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and by inserting after subsection (b) the following new subsection: 

‘‘(c) INFORMATION RETURN REQUIREMENT.— 

‘‘(1) IN GENERAL.—No credit shall be determined under subsection (a) with respect to any food or beverage establishment of any taxpayer for any taxable 

year unless such taxpayer has, with respect to the calendar year which ends 

in or with such taxable year— 

‘‘(A) made a report to the Secretary showing the information described in 

section 6053(c)(1) with respect to such food or beverage establishment, and 

‘‘(B) furnished written statements to each employee of such food or beverage establishment showing the information described in section 

6053(c)(2). 

‘‘(2) ALLOCATION OF 10 PERCENT OF GROSS RECEIPTS.—For purposes of determining the information referred to in subparagraphs (A) and (B), section 

6053(c)(3)(A)(i) shall be applied by substituting ‘10 percent’ for ‘8 percent’. For 

purposes of section 6053(c)(5), any reference to section 6053(c)(3)(B) contained 

therein shall be treated as including a reference to this paragraph. 

‘‘(3) FOOD OR BEVERAGE ESTABLISHMENT.—For purposes of this subsection, the 

term ‘food or beverage establishment’ means any trade or business (or portion 

thereof) which would be a large food or beverage establishment (as defined in 

section 6053(c)(4)) if such section were applied without regard to subparagraph 

(C) thereof.’’. 


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(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

Subtitle F—Energy Credits 

SEC. 3501. MODIFICATIONS TO CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES. 

(a) TERMINATION OF INFLATION ADJUSTMENT.—Section 45(b)(2) is amended— 

(1) by striking ‘‘The 1.5 cent amount’’ and inserting the following: 

‘‘(A) IN GENERAL.—The 1.5 cent amount’’, and 

(2) by adding at the end the following new subparagraph: 

‘‘(B) TERMINATION.—Subparagraph (A) shall not apply with respect to any 

electricity or refined coal produced at a facility the construction of which 

begins after the date of the enactment of this subparagraph.’’. 

(b) SPECIAL RULE FOR DETERMINATION OF BEGINNING OF CONSTRUCTION.—Section 

45(e) is amended by adding at the end the following new paragraph: 

‘‘(12) SPECIAL RULE FOR DETERMINING BEGINNING OF CONSTRUCTION.—For purposes of subsection (d), the construction of any facility, modification, improvement, addition, or other property shall not be treated as beginning before any 

date unless there is a continuous program of construction which begins before 

such date and ends on the date that such property is placed in service.’’. 

(c) EFFECTIVE DATES.— 

(1) TERMINATION OF INFLATION ADJUSTMENT.—The amendments made by subsection (a) shall apply to taxable years ending after the date of the enactment 

of this Act. 

(2) SPECIAL RULE FOR DETERMINATION OF BEGINNING OF CONSTRUCTION.—The 

amendment made by subsection (b) shall apply to taxable years beginning before, on, or after the date of the enactment of this Act. 

SEC. 3502. MODIFICATION OF THE ENERGY INVESTMENT TAX CREDIT. 

(a) EXTENSION OF SOLAR ENERGY PROPERTY.—Section 48(a)(3)(A)(ii) is amended 

by striking ‘‘periods ending before January 1, 2017’’ and inserting ‘‘property the construction of which begins before January 1, 2022’’. 

(b) EXTENSION OF QUALIFIED FUEL CELL PROPERTY.—Section 48(c)(1)(D) is amended by striking ‘‘for any period after December 31, 2016’’ and inserting ‘‘the construction of which does not begin before January 1, 2022’’. 

(c) EXTENSION OF QUALIFIED MICROTURBINE PROPERTY.—Section 48(c)(2)(D) is 

amended by striking ‘‘for any period after December 31, 2016’’ and inserting ‘‘the 

construction of which does not begin before January 1, 2022’’. 

(d) EXTENSION OF COMBINED HEAT AND POWER SYSTEM PROPERTY.—Section 

48(c)(3)(A)(iv) is amended by striking ‘‘which is placed in service before January 1, 

2017’’ and inserting ‘‘the construction of which begins before January 1, 2022’’. 

(e) EXTENSION OF QUALIFIED SMALL WIND ENERGY PROPERTY.—Section 48(c)(4)(C) 

is amended by striking ‘‘for any period after December 31, 2016’’ and inserting ‘‘the 

construction of which does not begin before January 1, 2022’’. 

(f) EXTENSION OF THERMAL ENERGY PROPERTY.—Section 48(a)(3)(A)(vii) is amended by striking ‘‘periods ending before January 1, 2017’’ and inserting ‘‘property the 

construction of which begins before January 1, 2022’’. 

(g) PHASEOUT OF 30 PERCENT CREDIT RATE FOR FUEL CELL AND SMALL WIND ENERGY PROPERTY.—Section 48(a) is amended by adding at the end the following new 

paragraph: 

‘‘(7) PHASEOUT FOR QUALIFIED FUEL CELL PROPERTY AND QUALIFIED SMALL

WIND ENERGY PROPERTY.— 

‘‘(A) IN GENERAL.—In the case of qualified fuel cell property or qualified 

small wind energy property, the construction of which begins before January 1, 2022, the energy percentage determined under paragraph (2) shall 

be equal to— 

‘‘(i) in the case of any property the construction of which begins after 

December 31, 2019, and before January 1, 2021, 26 percent, and 

‘‘(ii) in the case of any property the construction of which begins after 

December 31, 2020, and before January 1, 2022, 22 percent. 

‘‘(B) PLACED IN SERVICE DEADLINE.—In the case of any qualified fuel cell 

property or qualified small wind energy property, the construction of which 

begins before January 1, 2022, and which is not placed in service before 

January 1, 2024, the energy percentage determined under paragraph (2) 

shall be equal to 10 percent.’’. 


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(h) PHASEOUT FOR FIBER-OPTIC SOLAR ENERGY PROPERTY.—Subparagraphs (A) 

and (B) of section 48(a)(6) are each amended by inserting ‘‘or (3)(A)(ii)’’ after ‘‘paragraph (3)(A)(i)’’. 

(i) TERMINATION OF SOLAR ENERGY PROPERTY.—Section 48(a)(3)(A)(i) is amended 

by inserting ‘‘, the construction of which begins before January 1, 2028, and’’ after 

‘‘equipment’’. 

(j) TERMINATION OF GEOTHERMAL ENERGY PROPERTY.—Section 48(a)(3)(A)(iii) is 

amended by inserting ‘‘, the construction of which begins before January 1, 2028, 

and’’ after ‘‘equipment’’. 

(k) SPECIAL RULE FOR DETERMINATION OF BEGINNING OF CONSTRUCTION.—Section 

48(c) is amended by adding at the end the following new paragraph: 

‘‘(5) SPECIAL RULE FOR DETERMINING BEGINNING OF CONSTRUCTION.—The construction of any facility, modification, improvement, addition, or other property 

shall not be treated as beginning before any date unless there is a continuous 

program of construction which begins before such date and ends on the date 

that such property is placed in service.’’. 

(l) EFFECTIVE DATE.— (1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to periods after December 31, 2016, 

under rules similar to the rules of section 48(m) of the Internal Revenue Code 

of 1986 (as in effect on the day before the date of the enactment of the Revenue 

Reconciliation Act of 1990). 

(2) EXTENSION OF COMBINED HEAT AND POWER SYSTEM PROPERTY.—The 

amendment made by subsection (d) shall apply to property placed in service 

after December 31, 2016. 

(3) PHASEOUTS AND TERMINATIONS.—The amendments made by subsections 

(g), (h), (i), and (j) shall take effect on the date of the enactment of this Act. 

(4) SPECIAL RULE FOR DETERMINATION OF BEGINNING OF CONSTRUCTION.—The 

amendment made by subsection (k) shall apply to taxable years beginning before, on, or after the date of the enactment of this Act. 

SEC. 3503. EXTENSION AND PHASEOUT OF RESIDENTIAL ENERGY EFFICIENT PROPERTY. 

(a) EXTENSION.—Section 25D(h) is amended by striking ‘‘December 31, 2016 (December 31, 2021, in the case of any qualified solar electric property expenditures 

and qualified solar water heating property expenditures)’’ and inserting ‘‘December 

31, 2021’’. 

(b) PHASEOUT.— (1) IN GENERAL.—Paragraphs (3), (4), and (5) of section 25D(a) are amended 

by striking ‘‘30 percent’’ each place it appears and inserting ‘‘the applicable percentage’’. 

(2) CONFORMING AMENDMENT.—Section 25D(g) of such Code is amended by 

striking ‘‘paragraphs (1) and (2) of’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to property placed in service after December 31, 2016. 

SEC. 3504. REPEAL OF ENHANCED OIL RECOVERY CREDIT. 

(a) IN GENERAL.—Subpart D of part IV of subchapter A of chapter 1 is amended 

by striking section 43 (and by striking the item relating to such section in the table 

of sections for such subpart). 

(b) CONFORMING AMENDMENTS.— (1) Section 38(b) is amended by striking paragraph (6). 

(2) Section 6501(m) is amended by striking ‘‘43,’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3505. REPEAL OF CREDIT FOR PRODUCING OIL AND GAS FROM MARGINAL WELLS. 

(a) IN GENERAL.—Subpart D of part IV of subchapter A of chapter 1 is amended 

by striking section 45I (and by striking the item relating to such section in the table 

of sections for such subpart). 

(b) CONFORMING AMENDMENT.—Section 38(b) is amended by striking paragraph 

(19). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3506. MODIFICATIONS OF CREDIT FOR PRODUCTION FROM ADVANCED NUCLEAR POWER 

FACILITIES. 

(a) TREATMENT OF UNUTILIZED LIMITATION AMOUNTS.—Section 45J(b) is amended— 

(1) in paragraph (4), by inserting ‘‘or any amendment to’’ after ‘‘enactment of’’; 

and 

(2) by adding at the end the following new paragraph: 


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‘‘(5) ALLOCATION OF UNUTILIZED LIMITATION.— 

‘‘(A) IN GENERAL.—Any unutilized national megawatt capacity limitation 

shall be allocated by the Secretary under paragraph (3) as rapidly as is 

practicable after December 31, 2020— 

‘‘(i) first to facilities placed in service on or before such date to the 

extent that such facilities did not receive an allocation equal to their 

full nameplate capacity; and 

‘‘(ii) then to facilities placed in service after such date in the order 

in which such facilities are placed in service. 

‘‘(B) UNUTILIZED NATIONAL MEGAWATT CAPACITY LIMITATION.—The term 

‘unutilized national megawatt capacity limitation’ means the excess (if any) 

of— 

‘‘(i) 6,000 megawatts, over 

‘‘(ii) the aggregate amount of national megawatt capacity limitation 

allocated by the Secretary before January 1, 2021, reduced by any 

amount of such limitation which was allocated to a facility which was 

not placed in service before such date. 

‘‘(C) COORDINATION WITH OTHER PROVISIONS.—In the case of any unutilized national megawatt capacity limitation allocated by the Secretary pursuant to this paragraph— 

‘‘(i) such allocation shall be treated for purposes of this section in the 

same manner as an allocation of national megawatt capacity limitation; 

and 

‘‘(ii) subsection (d)(1)(B) shall not apply to any facility which receives 

such allocation.’’. 

(b) TRANSFER OF CREDIT BY CERTAIN PUBLIC ENTITIES.— 

(1) IN GENERAL.—Section 45J is amended— 

(A) by redesignating subsection (e) as subsection (f); and 

(B) by inserting after subsection (d) the following new subsection: 

‘‘(e) TRANSFER OF CREDIT BY CERTAIN PUBLIC ENTITIES.— 

‘‘(1) IN GENERAL.—If, with respect to a credit under subsection (a) for any taxable year— 

‘‘(A) the taxpayer would be a qualified public entity; and 

‘‘(B) such entity elects the application of this paragraph for such taxable 

year with respect to all (or any portion specified in such election) of such 

credit, 

the eligible project partner specified in such election (and not the qualified public entity) shall be treated as the taxpayer for purposes of this title with respect 

to such credit (or such portion thereof). 

‘‘(2) DEFINITIONS.—For purposes of this subsection— 

‘‘(A) QUALIFIED PUBLIC ENTITY.—The term ‘qualified public entity’ 

means— 

‘‘(i) a Federal, State, or local government entity, or any political subdivision, agency, or instrumentality thereof; 

‘‘(ii) a mutual or cooperative electric company described in section 

501(c)(12) or section 1381(a)(2); or 

‘‘(iii) a not-for-profit electric utility which has or had received a loan 

or loan guarantee under the Rural Electrification Act of 1936. 

‘‘(B) ELIGIBLE PROJECT PARTNER.—The term ‘eligible project partner’ 

means— 

‘‘(i) any person responsible for, or participating in, the design or construction of the advanced nuclear power facility to which the credit 

under subsection (a) relates; 

‘‘(ii) any person who participates in the provision of the nuclear 

steam supply system to the advanced nuclear power facility to which 

the credit under subsection (a) relates; 

‘‘(iii) any person who participates in the provision of nuclear fuel to 

the advanced nuclear power facility to which the credit under subsection (a) relates; or 

‘‘(iv) any person who has an ownership interest in such facility. 

‘‘(3) SPECIAL RULES.— 

‘‘(A) APPLICATION TO PARTNERSHIPS.—In the case of a credit under subsection (a) which is determined at the partnership level— 

‘‘(i) for purposes of paragraph (1)(A), a qualified public entity shall 

be treated as the taxpayer with respect to such entity’s distributive 

share of such credit; and 

‘‘(ii) the term ‘eligible project partner’ shall include any partner of the 

partnership. 


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‘‘(B) TAXABLE YEAR IN WHICH CREDIT TAKEN INTO ACCOUNT.—In the case 

of any credit (or portion thereof) with respect to which an election is made 

under paragraph (1), such credit shall be taken into account in the first taxable year of the eligible project partner ending with, or after, the qualified 

public entity’s taxable year with respect to which the credit was determined. 

‘‘(C) TREATMENT OF TRANSFER UNDER PRIVATE USE RULES.—For purposes 

of section 141(b)(1), any benefit derived by an eligible project partner in 

connection with an election under this subsection shall not be taken into 

account as a private business use.’’. 

(2) SPECIAL RULE FOR PROCEEDS OF TRANSFERS FOR MUTUAL OR COOPERATIVE

ELECTRIC COMPANIES.—Section 501(c)(12) of such Code is amended by adding at 

the end the following new subparagraph: 

‘‘(I) In the case of a mutual or cooperative electric company described in 

this paragraph or an organization described in section 1381(a)(2), income 

received or accrued in connection with an election under section 45J(e)(1) 

shall be treated as an amount collected from members for the sole purpose 

of meeting losses and expenses.’’. 

(c) EFFECTIVE DATES.— (1) TREATMENT OF UNUTILIZED LIMITATION AMOUNTS.—The amendment made 

by subsection (a) shall take effect on the date of the enactment of this Act. 

(2) TRANSFER OF CREDIT BY CERTAIN PUBLIC ENTITIES.—The amendments 

made by subsection (b) shall apply to taxable years beginning after the date of 

the enactment of this Act. 

Subtitle G—Bond Reforms 

SEC. 3601. TERMINATION OF PRIVATE ACTIVITY BONDS. 

(a) IN GENERAL.—Paragraph (1) of section 103(b) is amended— 

(1) by striking ‘‘which is not a qualified bond (within the meaning of section 

141)’’, and 

(2) by striking ‘‘WHICH IS NOT A QUALIFIED BOND’’ in the heading thereof. 

(b) CONFORMING AMENDMENTS.— (1) Subpart A of part IV of subchapter B of chapter 1 is amended by striking 

sections 142, 143, 144, 145, 146, and 147 (and by striking each of the items relating to such sections in the table of sections for such subpart). 

(2) Section 25 is amended by adding at the end the following new subsection: 

‘‘(j) COORDINATION WITH REPEAL OF PRIVATE ACTIVITY BONDS.—Any reference to 

section 143, 144, or 146 shall be treated as a reference to such section as in effect 

before its repeal by the Tax Cuts and Jobs Act.’’. 

(3) Section 26(b)(2) is amended by striking subparagraph (D). 

(4) Section 141(b) is amended by striking paragraphs (5) and (9). 

(5) Section 141(d) is amended by striking paragraph (5). 

(6) Section 141 is amended by striking subsection (e). 

(7) Section 148(f)(4) is amended— 

(A) by striking ‘‘(determined in accordance with section 147(b)(2)(A))’’ in 

the flush matter following subparagraph (A)(ii) and inserting ‘‘(determined 

by taking into account the respective issue prices of the bonds issued as 

part of the issue)’’, and 

(B) by striking the last sentence of subparagraph (D)(v). 

(8) Clause (iv) of section 148(f)(4)(C) is amended to read as follows: 

‘‘(iv) CONSTRUCTION ISSUE.—For purposes of this subparagraph— 

‘‘(I) IN GENERAL.—The term ‘construction issue’ means any issue 

if at least 75 percent of the available construction proceeds of such 

issue are to be used for construction expenditures. 

‘‘(II) CONSTRUCTION.—The term ‘construction’ includes reconstruction and rehabilitation.’’. 

(9) Section 149(b)(3) is amended by striking subparagraph (C). 

(10) Section 149(e)(2) is amended— 

(A) by striking subparagraphs (C), (D), and (F) and by redesignating subparagraphs (E) and (G) as subparagraphs (C) and (D), respectively, and 

(B) by striking the second sentence. 

(11) Section 149(f)(6) is amended— 

(A) by striking subparagraph (B), and 

(B) by striking ‘‘For purposes of this subsection’’ and all that follows 

through ‘‘The term’’ and inserting the following: ‘‘For purposes of this subsection, the term’’. 

(12) Section 150(e)(3) is amended to read as follows: 


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‘‘(3) PUBLIC APPROVAL REQUIREMENT.—A bond shall not be treated as part of 

an issue which meets the requirements of paragraph (1) unless such bond satisfies the requirements of section 147(f)(2) (as in effect before its repeal by the 

Tax Cuts and Jobs Act).’’. 

(13) Section 269A(b)(3) is amended by striking ‘‘144(a)(3)’’ and inserting 

‘‘414(n)(6)(A)’’. 

(14) Section 414(m)(5) is amended by striking ‘‘section 144(a)(3)’’ and inserting 

‘‘subsection (n)(6)(A)’’. 

(15) Section 414(n)(6)(A) is amended to read as follows: 

‘‘(A) RELATED PERSONS.—A person is a related person to another person 

if— 

‘‘(i) the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), or 

‘‘(ii) such persons are members of the same controlled group of corporations (as defined in section 1563(a), except that ‘more than 50 percent’ shall be substituted for ‘at least 80 percent’ each place it appears 

therein).’’. 

(16) Section 6045(e)(4)(B) is amended by inserting ‘‘(as in effect before its repeal by the Tax Cuts and Jobs Act)’’ after ‘‘section 143(m)(3)’’. 

(17) Section 6654(f)(1) is amended by inserting ‘‘(as in effect before its repeal 

by the Tax Cuts and Jobs Act)’’ after ‘‘section 143(m)’’. 

(18) Section 7871(c) is amended— 

(A) by striking paragraphs (2) and (3), and 

(B) by striking ‘‘TAX-EXEMPT BONDS.—’’ and all that follows through ‘‘Subsection (a) of section 103’’ and inserting the following: ‘‘TAX-EXEMPT

BONDS.—Subsection (a) of section 103’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to bonds 

issued after December 31, 2017. 

SEC. 3602. REPEAL OF ADVANCE REFUNDING BONDS. 

(a) IN GENERAL.—Paragraph (1) of section 149(d) is amended by striking ‘‘as part 

of an issue described in paragraph (2), (3), or (4).’’ and inserting ‘‘to advance refund 

another bond.’’. 

(b) CONFORMING AMENDMENTS.— 

(1) Section 149(d) is amended by striking paragraphs (2), (3), (4), and (6) and 

by redesignating paragraphs (5) and (7) as paragraphs (2) and (3). 

(2) Section 148(f)(4)(C) is amended by striking clause (xiv) and by redesignating clauses (xv) to (xvii) as clauses (xiv) to (xvi). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to advance refunding bonds issued after December 31, 2017. 

SEC. 3603. REPEAL OF TAX CREDIT BONDS. 

(a) IN GENERAL.—Part IV of subchapter A of chapter 1 is amended by striking 

subparts H, I, and J (and by striking the items relating to such subparts in the 

table of subparts for such part). 

(b) PAYMENTS TO ISSUERS.—Subchapter B of chapter 65 is amended by striking 

section 6431 (and by striking the item relating to such section in the table of sections for such subchapter). 

(c) CONFORMING AMENDMENTS.— 

(1) Part IV of subchapter U of chapter 1 is amended by striking section 1397E 

(and by striking the item relating to such section in the table of sections for 

such part). 

(2) Section 54(l)(3)(B) is amended by inserting ‘‘(as in effect before its repeal 

by the Tax Cuts and Jobs Act)’’ after ‘‘section 1397E(I)’’. 

(3) Section 6211(b)(4)(A) is amended by striking ‘‘, and 6431’’ and inserting 

‘‘and’’ before ‘‘36B’’. 

(4) Section 6401(b)(1) is amended by striking ‘‘G, H, I, and J’’ and inserting 

‘‘and G’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to bonds 

issued after December 31, 2017. 

SEC. 3604. NO TAX EXEMPT BONDS FOR PROFESSIONAL STADIUMS. 

(a) IN GENERAL.—Section 103(b), as amended by this Act, is further amended by 

adding at the end the following new paragraph: 

‘‘(4) PROFESSIONAL STADIUM BOND.—Any professional stadium bond.’’. 

(b) PROFESSIONAL STADIUM BOND DEFINED.—Subsection (c) of section 103 is 

amended by adding at the end the following new paragraph: 

‘‘(3) PROFESSIONAL STADIUM BOND.—The term ‘professional stadium bond’ 

means any bond issued as part of an issue any proceeds of which are used to 

finance or refinance capital expenditures allocable to a facility (or appurtenant 


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real property) which, during at least 5 days during any calendar year, is used 

as a stadium or arena for professional sports exhibitions, games, or training.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to bonds 

issued after November 2, 2017. 

Subtitle H—Insurance 

SEC. 3701. NET OPERATING LOSSES OF LIFE INSURANCE COMPANIES. 

(a) IN GENERAL.—Section 805(b) is amended by striking paragraph (4) and by redesignating paragraph (5) as paragraph (4). 

(b) CONFORMING AMENDMENTS.— 

(1) Part I of subchapter L of chapter 1 is amended by striking section 810 

(and by striking the item relating to such section in the table of sections for 

such part). 

(2) Part III of subchapter L of chapter 1 is amended by striking section 844 

(and by striking the item relating to such section in the table of sections for 

such part). 

(3) Section 381 is amended by striking subsection (d). 

(4) Section 805(a)(4)(B)(ii) is amended to read as follows: 

‘‘(ii) the deduction allowed under section 172,’’. 

(5) Section 805(a) is amended by striking paragraph (5). 

(6) Section 953(b)(1)(B) is amended to read as follows: 

‘‘(B) So much of section 805(a)(8) as relates to the deduction allowed 

under section 172.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to losses 

arising in taxable years beginning after December 31, 2017. 

SEC. 3702. REPEAL OF SMALL LIFE INSURANCE COMPANY DEDUCTION. 

(a) IN GENERAL.—Part I of subchapter L of chapter 1 is amended by striking section 806 (and by striking the item relating to such section in the table of sections 

for such part). 

(b) CONFORMING AMENDMENTS.— 

(1) Section 453B(e) is amended— 

(A) by striking ‘‘(as defined in section 806(b)(3))’’ in paragraph (2)(B), and 

(B) by adding at the end the following new paragraph: 

‘‘(3) NONINSURANCE BUSINESS.— 

‘‘(A) IN GENERAL.—For purposes of this subsection, the term ‘noninsurance business’ means any activity which is not an insurance business. 

‘‘(B) CERTAIN ACTIVITIES TREATED AS INSURANCE BUSINESSES.—For purposes of subparagraph (A), any activity which is not an insurance business 

shall be treated as an insurance business if— 

‘‘(i) it is of a type traditionally carried on by life insurance companies 

for investment purposes, but only if the carrying on of such activity 

(other than in the case of real estate) does not constitute the active conduct of a trade or business, or 

‘‘(ii) it involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and 

health benefits.’’. 

(2) Section 465(c)(7)(D)(v)(II) is amended by striking ‘‘section 806(b)(3)’’ and 

inserting ‘‘section 453B(e)(3)’’. 

(3) Section 801(a)(2) is amended by striking subparagraph (C). 

(4) Section 804 is amended by striking ‘‘means—’’ and all that follows and inserting ‘‘means the general deductions provided in section 805.’’. 

(5) Section 805(a)(4)(B), as amended by section 3701, is amended by striking 

clause (i) and by redesignating clauses (ii), (iii), and (iv) as clauses (i), (ii), and 

(iii), respectively. 

(6) Section 805(b)(2)(A) is amended by striking clause (iii) and by redesignating clauses (iv) and (v) as clauses (iii) and (iv), respectively. 

(7) Section 842(c) is amended by striking paragraph (1) and by redesignating 

paragraphs (2) and (3) as paragraphs (1) and (2), respectively. 

(8) Section 953(b)(1), as amended by section 3701, is amended by striking subparagraph (A) and by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3703. SURTAX ON LIFE INSURANCE COMPANY TAXABLE INCOME. 

(a) IN GENERAL.—Section 801(a)(1) is amended— 


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(1) by striking ‘‘consist of a tax’’ and insert ‘‘consist of the sum of— 

‘‘(A) a tax’’, and 

(2) by striking the period at the end and inserting ‘‘, and’’, and 

(3) by adding at the end the following new subparagraph: 

‘‘(B) a tax equal to 8 percent of the life insurance company taxable income.’’. 

SEC. 3704. ADJUSTMENT FOR CHANGE IN COMPUTING RESERVES. 

(a) IN GENERAL.—Paragraph (1) of section 807(f) is amended to read as follows: 

‘‘(1) TREATMENT AS CHANGE IN METHOD OF ACCOUNTING.—If the basis for determining any item referred to in subsection (c) as of the close of any taxable 

year differs from the basis for such determination as of the close of the preceding taxable year, then so much of the difference between— 

‘‘(A) the amount of the item at the close of the taxable year, computed 

on the new basis, and 

‘‘(B) the amount of the item at the close of the taxable year, computed 

on the old basis, 

as is attributable to contracts issued before the taxable year shall be taken into 

account under section 481 as adjustments attributable to a change in method 

of accounting initiated by the taxpayer and made with the consent of the Secretary.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3705. REPEAL OF SPECIAL RULE FOR DISTRIBUTIONS TO SHAREHOLDERS FROM PRE1984 POLICYHOLDERS SURPLUS ACCOUNT. 

(a) IN GENERAL.—Subpart D of part I of subchapter L is amended by striking section 815 (and by striking the item relating to such section in the table of sections 

for such subpart). 

(b) CONFORMING AMENDMENT.—Section 801 is amended by striking subsection (c). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(d) PHASED INCLUSION OF REMAINING BALANCE OF POLICYHOLDERS SURPLUS ACCOUNTS.—In the case of any stock life insurance company which has a balance (determined as of the close of such company’s last taxable year beginning before January 1, 2018) in an existing policyholders surplus account (as defined in section 815 

of the Internal Revenue Code of 1986, as in effect before its repeal), the tax imposed 

by section 801 of such Code for the first 8 taxable years beginning after December 

31, 2017, shall be the amount which would be imposed by such section for such year 

on the sum of— 

(1) life insurance company taxable income for such year (within the meaning 

of such section 801 but not less than zero), plus 

(2) 1⁄8 of such balance. 

SEC. 3706. MODIFICATION OF PRORATION RULES FOR PROPERTY AND CASUALTY INSURANCE 

COMPANIES. 

(a) IN GENERAL.—Section 832(b)(5)(B) is amended by striking ‘‘15 percent’’ and inserting ‘‘26.25 percent’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2017. 

SEC. 3707. MODIFICATION OF DISCOUNTING RULES FOR PROPERTY AND CASUALTY INSURANCE COMPANIES. 

(a) MODIFICATION OF RATE OF INTEREST USED TO DISCOUNT UNPAID LOSSES.— 

Paragraph (2) of section 846(c) is amended to read as follows: 

‘‘(2) DETERMINATION OF ANNUAL RATE.—The annual rate determined by the 

Secretary under this paragraph for any calendar year shall be a rate determined on the basis of the corporate bond yield curve (as defined in section 

430(h)(2)(D)(i)).’’. 

(b) MODIFICATION OF COMPUTATIONAL RULES FOR LOSS PAYMENT PATTERNS.—Section 846(d)(3) is amended by striking subparagraphs (B) through (G) and inserting 

the following new subparagraphs: 

‘‘(B) TREATMENT OF CERTAIN LOSSES.—Losses which would have been 

treated as paid in the last year of the period applicable under subparagraph 

(A)(i) or (A)(ii) shall be treated as paid in the following manner: 

‘‘(i) 3-YEAR LOSS PAYMENT PATTERN.— 

‘‘(I) IN GENERAL.—The period taken into account under subparagraph (A)(i) shall be extended to the extent required under subclause (II). 

‘‘(II) COMPUTATION OF EXTENSION.—The amount of losses which 

would have been treated as paid in the 3d year after the accident 


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year shall be treated as paid in such 3d year and each subsequent 

year in an amount equal to the average of the losses treated as 

paid in the 1st and 2d years after the accident year (or, if lesser, 

the portion of the unpaid losses not theretofore taken into account). 

To the extent such unpaid losses have not been treated as paid before the 18th year after the accident year, they shall be treated as 

paid in such 18th year. 

‘‘(ii) 10-YEAR LOSS PAYMENT PATTERN.— 

‘‘(I) IN GENERAL.—The period taken into account under subparagraph (A)(ii) shall be extended to the extent required under subclause (II). 

‘‘(II) COMPUTATION OF EXTENSION.—The amount of losses which 

would have been treated as paid in the 10th year after the accident 

year shall be treated as paid in such 10th year and each subsequent year in an amount equal to the amount of the average of the 

losses treated as paid in the 7th, 8th, and 9th years after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account). To the extent such unpaid losses have not 

been treated as paid before the 25th year after the accident year, 

they shall be treated as paid in such 25th year.’’. 

(c) REPEAL OF HISTORICAL PAYMENT PATTERN ELECTION.—Section 846 is amended 

by striking subsection (e) and by redesignating subsections (f) and (g) as subsections 

(e) and (f), respectively. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

(e) TRANSITIONAL RULE.—For the first taxable year beginning after December 31, 

2017— 

(1) the unpaid losses and the expenses unpaid (as defined in paragraphs 

(5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end 

of the preceding taxable year, and 

(2) the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such 

Code at the end of the preceding taxable year, 

shall be determined as if the amendments made by this section had applied to such 

unpaid losses and expenses unpaid in the preceding taxable year and by using the 

interest rate and loss payment patterns applicable to accident years ending with calendar year 2018, and any adjustment shall be taken into account ratably in such 

first taxable year and the 7 succeeding taxable years. For subsequent taxable years, 

such amendments shall be applied with respect to such unpaid losses and expenses 

unpaid by using the interest rate and loss payment patterns applicable to accident 

years ending with calendar year 2018. 

SEC. 3708. REPEAL OF SPECIAL ESTIMATED TAX PAYMENTS. 

(a) IN GENERAL.—Part III of subchapter L of chapter 1 is amended by striking 

section 847 (and by striking the item relating to such section in the table of sections 

for such part). 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

Subtitle I—Compensation 

SEC. 3801. MODIFICATION OF LIMITATION ON EXCESSIVE EMPLOYEE REMUNERATION. 

(a) REPEAL OF PERFORMANCE-BASED COMPENSATION AND COMMISSION EXCEPTIONS

FOR LIMITATION ON EXCESSIVE EMPLOYEE REMUNERATION.— 

(1) IN GENERAL.—Section 162(m)(4) is amended by striking subparagraphs (B) 

and (C) and by redesignating subparagraphs (D), (E), (F), and (G) as subparagraphs (B), (C), (D), and (E), respectively. 

(2) CONFORMING AMENDMENTS.— 

(A) Paragraphs (5)(E) and (6)(D) of section 162(m) are each amended by 

striking ‘‘subparagraphs (B), (C), and (D)’’ and inserting ‘‘subparagraph 

(B)’’. 

(B) Paragraphs (5)(G) and (6)(G) of section 162(m) are each amended by 

striking ‘‘(F) and (G)’’ and inserting ‘‘(D) and (E)’’. 

(b) EXPANSION OF APPLICABLE EMPLOYER.—Section 162(m)(2) is amended to read 

as follows: 

‘‘(2) PUBLICLY HELD CORPORATION.—For purposes of this subsection, the term 

‘publicly held corporation’ means any corporation which is an issuer (as defined 

in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c))— 


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‘‘(A) the securities of which are required to be registered under section 

12 of such Act (15 U.S.C. 78l), or 

‘‘(B) that is required to file reports under section 15(d) of such Act (15 

U.S.C. 78o(d)).’’. 

(c) MODIFICATION OF DEFINITION OF COVERED EMPLOYEES.—Section 162(m)(3) is 

amended— 

(1) in subparagraph (A), by striking ‘‘as of the close of the taxable year, such 

employee is the chief executive officer of the taxpayer or is’’ and inserting ‘‘such 

employee is the principal executive officer or principal financial officer of the 

taxpayer at any time during the taxable year, or was’’, 

(2) in subparagraph (B)— 

(A) by striking ‘‘4’’ and inserting ‘‘3’’, and 

(B) by striking ‘‘(other than the chief executive officer)’’ and inserting 

‘‘(other than the principal executive officer or principal financial officer)’’, 

and 

(3) by striking ‘‘or’’ at the end of subparagraph (A), by striking the period at 

the end of subparagraph (B) and inserting ‘‘, or’’, and by adding at the end the 

following: 

‘‘(C) was a covered employee of the taxpayer (or any predecessor) for any 

preceding taxable year beginning after December 31, 2016. 

Such term shall include any employee who would be described in subparagraph 

(B) if the reporting described in such subparagraph were required as so described.’’. 

(d) SPECIAL RULE FOR REMUNERATION PAID TO BENEFICIARIES, ETC.—Section 

162(m)(4), as amended by subsection (a), is amended by adding at the end the following new subparagraph: 

‘‘(F) SPECIAL RULE FOR REMUNERATION PAID TO BENEFICIARIES, ETC.—Remuneration shall not fail to be applicable employee remuneration merely 

because it is includible in the income of, or paid to, a person other than 

the covered employee, including after the death of the covered employee.’’. 

(e) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3802. EXCISE TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE COMPENSATION. 

(a) IN GENERAL.—Subchapter D of chapter 42 is amended by adding at the end 

the following new section: 

‘‘SEC. 4960. TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE COMPENSATION. 

‘‘(a) TAX IMPOSED.—There is hereby imposed a tax equal to 20 percent of the sum 

of— 

‘‘(1) so much of the remuneration paid (other than any excess parachute payment) by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1,000,000, plus 

‘‘(2) any excess parachute payment paid by such an organization to any covered employee. 

‘‘(b) LIABILITY FOR TAX.—The employer shall be liable for the tax imposed under 

subsection (a). 

‘‘(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this section— 

‘‘(1) APPLICABLE TAX-EXEMPT ORGANIZATION.—The term ‘applicable tax-exempt 

organization’ means any organization that for the taxable year— 

‘‘(A) is exempt from taxation under section 501(a), 

‘‘(B) is a farmers’ cooperative organization described in section 521(b)(1), 

‘‘(C) has income excluded from taxation under section 115(1), or 

‘‘(D) is a political organization described in section 527(e)(1). 

‘‘(2) COVERED EMPLOYEE.—For purposes of this section, the term ‘covered employee’ means any employee (including any former employee) of an applicable 

tax-exempt organization if the employee— 

‘‘(A) is one of the 5 highest compensated employees of the organization 

for the taxable year, or 

‘‘(B) was a covered employee of the organization (or any predecessor) for 

any preceding taxable year beginning after December 31, 2016. 

‘‘(3) REMUNERATION.—For purposes of this section, the term ‘remuneration’ 

means wages (as defined in section 3401(a)), except that such term shall not include any designated Roth contribution (as defined in section 402A(c)). 

‘‘(4) REMUNERATION FROM RELATED ORGANIZATIONS.— 

‘‘(A) IN GENERAL.—Remuneration of a covered employee paid by an applicable tax-exempt organization shall include any remuneration paid with respect to employment of such employee by any related person or governmental entity. 


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‘‘(B) RELATED ORGANIZATIONS.—A person or governmental entity shall be 

treated as related to an applicable tax-exempt organization if such person 

or governmental entity— 

‘‘(i) controls, or is controlled by, the organization, 

‘‘(ii) is controlled by one or more persons that control the organization, 

‘‘(iii) is a supported organization (as defined in section 509(f)(2)) during the taxable year with respect to the organization, 

‘‘(iv) is a supporting organization described in section 509(a)(3) during the taxable year with respect to the organization, or 

‘‘(v) in the case of an organization that is a voluntary employees’ beneficiary association described in section 501(a)(9), establishes, maintains, or makes contributions to such voluntary employees’ beneficiary 

association. 

‘‘(C) LIABILITY FOR TAX.—In any case in which remuneration from more 

than one employer is taken into account under this paragraph in determining the tax imposed by subsection (a), each such employer shall be liable for such tax in an amount which bears the same ratio to the total tax 

determined under subsection (a) with respect to such remuneration as— 

‘‘(i) the amount of remuneration paid by such employer with respect 

to such employee, bears to 

‘‘(ii) the amount of remuneration paid by all such employers to such 

employee. 

‘‘(5) EXCESS PARACHUTE PAYMENT.—For purposes determining the tax imposed 

by subsection (a)(2)— 

‘‘(A) IN GENERAL.—The term ‘excess parachute payment’ means an 

amount equal to the excess of any parachute payment over the portion of 

the base amount allocated to such payment. 

‘‘(B) PARACHUTE PAYMENT.—The term ‘parachute payment’ means any 

payment in the nature of compensation to (or for the benefit of) a covered 

employee if— 

‘‘(i) such payment is contingent on such employee’s separation from 

employment with the employer, and 

‘‘(ii) the aggregate present value of the payments in the nature of 

compensation to (or for the benefit of) such individual which are contingent on such separation equals or exceeds an amount equal to 3 times 

the base amount. 

Such term does not include any payment described in section 280G(b)(6) 

(relating to exemption for payments under qualified plans) or any payment 

made under or to an annuity contract described in section 403(b) or a plan 

described in section 457(b). 

‘‘(C) BASE AMOUNT.—Rules similar to the rules of 280G(b)(3) shall apply 

for purposes of determining the base amount. 

‘‘(D) PROPERTY TRANSFERS; PRESENT VALUE.—Rules similar to the rules of 

paragraphs (3) and (4) of section 280G(d) shall apply. 

‘‘(6) COORDINATION WITH DEDUCTION LIMITATION.—Remuneration the deduction for which is not allowed by reason of section 162(m) shall not be taken into 

account for purposes of this section. 

‘‘(d) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to prevent avoidance of the purposes of this section through the performance 

of services other than as an employee.’’. 

(b) CLERICAL AMENDMENT.—The table of sections for subchapter D of chapter 42 

is amended by adding at the end the following new item: 

‘‘Sec. 4960. Tax on excess exempt organization executive compensation.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 3803. TREATMENT OF QUALIFIED EQUITY GRANTS. 

(a) IN GENERAL.— 

(1) ELECTION TO DEFER INCOME.—Section 83 is amended by adding at the end 

the following new subsection: 

‘‘(i) QUALIFIED EQUITY GRANTS.— 

‘‘(1) IN GENERAL.—For purposes of this subtitle, if qualified stock is transferred to a qualified employee who makes an election with respect to such stock 

under this subsection— 

‘‘(A) except as provided in subparagraph (B), no amount shall be included 

in income under subsection (a) for the first taxable year in which the rights 

of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable, and 


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‘‘(B) an amount equal to the amount which would be included in income 

of the employee under subsection (a) (determined without regard to this 

subsection) shall be included in income for the taxable year of the employee 

which includes the earliest of— 

‘‘(i) the first date such qualified stock becomes transferable (including 

transferable to the employer), 

‘‘(ii) the date the employee first becomes an excluded employee, 

‘‘(iii) the first date on which any stock of the corporation which issued 

the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any 

market unless such market is recognized as an established securities 

market by the Secretary for purposes of a provision of this title other 

than this subsection), 

‘‘(iv) the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial 

risk of forfeiture, whichever occurs earlier, or 

‘‘(v) the date on which the employee revokes (at such time and in 

such manner as the Secretary may provide) the election under this subsection with respect to such stock. 

‘‘(2) QUALIFIED STOCK.— ‘‘(A) IN GENERAL.—For purposes of this subsection, the term ‘qualified 

stock’ means, with respect to any qualified employee, any stock in a corporation which is the employer of such employee, if— 

‘‘(i) such stock is received— 

‘‘(I) in connection with the exercise of an option, or 

‘‘(II) in settlement of a restricted stock unit, and 

‘‘(ii) such option or restricted stock unit was provided by the corporation— 

‘‘(I) in connection with the performance of services as an employee, and 

‘‘(II) during a calendar year in which such corporation was an eligible corporation. 

‘‘(B) LIMITATION.—The term ‘qualified stock’ shall not include any stock 

if the employee may sell such stock to, or otherwise receive cash in lieu of 

stock from, the corporation at the time that the rights of the employee in 

such stock first become transferable or not subject to a substantial risk of 

forfeiture. 

‘‘(C) ELIGIBLE CORPORATION.—For purposes of subparagraph (A)(ii)(II)— 

‘‘(i) IN GENERAL.—The term ‘eligible corporation’ means, with respect 

to any calendar year, any corporation if— 

‘‘(I) no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market 

(as determined under paragraph (1)(B)(iii)) during any preceding 

calendar year, and 

‘‘(II) such corporation has a written plan under which, in such 

calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or restricted stock units, with the same rights and privileges to receive 

qualified stock. 

‘‘(ii) SAME RIGHTS AND PRIVILEGES.—For purposes of clause (i)(II)— 

‘‘(I) except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be determined in a similar manner as provided under section 423(b)(5), 

‘‘(II) employees shall not fail to be treated as having the same 

rights and privileges to receive qualified stock solely because the 

number of shares available to all employees is not equal in amount, 

so long as the number of shares available to each employee is more 

than a de minimis amount, and 

‘‘(III) rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with 

respect to the settlement of a restricted stock unit. 

‘‘(iii) EMPLOYEE.—For purposes of clause (i)(II), the term ‘employee’ 

shall not include any employee described in section 4980E(d)(4) or any 

excluded employee. 

‘‘(iv) SPECIAL RULE FOR CALENDAR YEARS BEFORE 2018.—In the case of 

any calendar year beginning before January 1, 2018, clause (i)(II) shall 

be applied without regard to whether the rights and privileges with respect to the qualified stock are the same. 


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‘‘(3) QUALIFIED EMPLOYEE; EXCLUDED EMPLOYEE.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘qualified employee’ means any individual 

who— 

‘‘(i) is not an excluded employee, and 

‘‘(ii) agrees in the election made under this subsection to meet such 

requirements as determined by the Secretary to be necessary to ensure 

that the withholding requirements of the corporation under chapter 24 

with respect to the qualified stock are met. 

‘‘(B) EXCLUDED EMPLOYEE.—The term ‘excluded employee’ means, with 

respect to any corporation, any individual— 

‘‘(i) who was a 1-percent owner (within the meaning of section 

416(i)(1)(B)(ii)) at any time during the 10 preceding calendar years, 

‘‘(ii) who is or has been at any prior time— 

‘‘(I) the chief executive officer of such corporation or an individual 

acting in such a capacity, or 

‘‘(II) the chief financial officer of such corporation or an individual acting in such a capacity, 

‘‘(iii) who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or 

‘‘(iv) who has been for any of the 10 preceding taxable years one of 

the 4 highest compensated officers of such corporation determined with 

respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 

(as if such rules applied to such corporation). 

‘‘(4) ELECTION.— 

‘‘(A) TIME FOR MAKING ELECTION.—An election with respect to qualified 

stock shall be made under this subsection no later than 30 days after the 

first time the rights of the employee in such stock are transferable or are 

not subject to a substantial risk of forfeiture, whichever occurs earlier, and 

shall be made in a manner similar to the manner in which an election is 

made under subsection (b). 

‘‘(B) LIMITATIONS.—No election may be made under this section with respect to any qualified stock if— 

‘‘(i) the qualified employee has made an election under subsection (b) 

with respect to such qualified stock, 

‘‘(ii) any stock of the corporation which issued the qualified stock is 

readily tradable on an established securities market (as determined 

under paragraph (1)(B)(iii)) at any time before the election is made, or 

‘‘(iii) such corporation purchased any of its outstanding stock in the 

calendar year preceding the calendar year which includes the first time 

the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, unless— 

‘‘(I) not less than 25 percent of the total dollar amount of the 

stock so purchased is deferral stock, and 

‘‘(II) the determination of which individuals from whom deferral 

stock is purchased is made on a reasonable basis. 

‘‘(C) DEFINITIONS AND SPECIAL RULES RELATED TO LIMITATION ON STOCK

REDEMPTIONS.— 

‘‘(i) DEFERRAL STOCK.—For purposes of this paragraph, the term ‘deferral stock’ means stock with respect to which an election is in effect 

under this subsection. 

‘‘(ii) DEFERRAL STOCK WITH RESPECT TO ANY INDIVIDUAL NOT TAKEN

INTO ACCOUNT IF INDIVIDUAL HOLDS DEFERRAL STOCK WITH LONGER DEFERRAL PERIOD.—Stock purchased by a corporation from any individual 

shall not be treated as deferral stock for purposes of clause (iii) if such 

individual (immediately after such purchase) holds any deferral stock 

with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock 

so purchased. 

‘‘(iii) PURCHASE OF ALL OUTSTANDING DEFERRAL STOCK.—The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated 

as met if the stock so purchased includes all of the corporation’s outstanding deferral stock. 

‘‘(iv) REPORTING.—Any corporation which has outstanding deferral 

stock as of the beginning of any calendar year and which purchases any 

of its outstanding stock during such calendar year shall include on its 

return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00093 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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chased during such calendar year and such other information as the 

Secretary may require for purposes of administering this paragraph. 

‘‘(5) CONTROLLED GROUPS.—For purposes of this subsection, all corporations 

which are members of the same controlled group of corporations (as defined in 

section 1563(a)) shall be treated as one corporation. 

‘‘(6) NOTICE REQUIREMENT.—Any corporation that transfers qualified stock to 

a qualified employee shall, at the time that (or a reasonable period before) an 

amount attributable to such stock would (but for this subsection) first be includible in the gross income of such employee— 

‘‘(A) certify to such employee that such stock is qualified stock, and 

‘‘(B) notify such employee— 

‘‘(i) that the employee may elect to defer income on such stock under 

this subsection, and 

‘‘(ii) that, if the employee makes such an election— 

‘‘(I) the amount of income recognized at the end of the deferral 

period will be based on the value of the stock at the time at which 

the rights of the employee in such stock first become transferable 

or not subject to substantial risk of forfeiture, notwithstanding 

whether the value of the stock has declined during the deferral period, 

‘‘(II) the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at 

the rate determined under section 3402(t), and 

‘‘(III) the responsibilities of the employee (as determined by the 

Secretary under paragraph (3)(A)(ii)) with respect to such withholding. 

‘‘(7) RESTRICTED STOCK UNITS.—This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock 

units.’’. 

(2) DEDUCTION BY EMPLOYER.—Subsection (h) of section 83 is amended by 

striking ‘‘or (d)(2)’’ and inserting ‘‘(d)(2), or (i)’’. 

(b) WITHHOLDING.— 

(1) TIME OF WITHHOLDING.—Section 3401 is amended by adding at the end 

the following new subsection: 

‘‘(i) QUALIFIED STOCK FOR WHICH AN ELECTION IS IN EFFECT UNDER SECTION

83(i).—For purposes of subsection (a), qualified stock (as defined in section 83(i)) 

with respect to which an election is made under section 83(i) shall be treated as 

wages— 

‘‘(1) received on the earliest date described in section 83(i)(1)(B), and 

‘‘(2) in an amount equal to the amount included in income under section 83 

for the taxable year which includes such date.’’. 

(2) AMOUNT OF WITHHOLDING.—Section 3402 is amended by adding at the end 

the following new subsection: 

‘‘(t) RATE OF WITHHOLDING FOR CERTAIN STOCK.—In the case of any qualified 

stock (as defined in section 83(i)) with respect to which an election is made under 

section 83(i)— 

‘‘(1) the rate of tax under subsection (a) shall not be less than the maximum 

rate of tax in effect under section 1, and 

‘‘(2) such stock shall be treated for purposes of section 3501(b) in the same 

manner as a non-cash fringe benefit.’’. 

(c) COORDINATION WITH OTHER DEFERRED COMPENSATION RULES.— 

(1) ELECTION TO APPLY DEFERRAL TO STATUTORY OPTIONS.— 

(A) INCENTIVE STOCK OPTIONS.—Section 422(b) is amended by adding at 

the end the following: ‘‘Such term shall not include any option if an election 

is made under section 83(i) with respect to the stock received in connection 

with the exercise of such option.’’. 

(B) EMPLOYEE STOCK PURCHASE PLANS.—Section 423(a) is amended by 

adding at the end the following flush sentence: 

‘‘The preceding sentence shall not apply to any share of stock with respect to which 

an election is made under section 83(i).’’. 

(2) EXCLUSION FROM DEFINITION OF NONQUALIFIED DEFERRED COMPENSATION

PLAN.—Subsection (d) of section 409A is amended by adding at the end the following new paragraph: 

‘‘(7) TREATMENT OF QUALIFIED STOCK.—An arrangement under which an employee may receive qualified stock (as defined in section 83(i)(2)) shall not be 

treated as a nonqualified deferred compensation plan solely because of an employee’s election, or ability to make an election, to defer recognition of income 

under section 83(i).’’. 


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(d) INFORMATION REPORTING.—Section 6051(a) is amended by striking ‘‘and’’ at 

the end of paragraph (13), by striking the period at the end of paragraph (14) and 

inserting a comma, and by inserting after paragraph (14) the following new paragraphs: 

‘‘(15) the amount excludable from gross income under subparagraph (A) of 

section 83(i)(1), 

‘‘(16) the amount includible in gross income under subparagraph (B) of section 

83(i)(1) with respect to an event described in such subparagraph which occurs 

in such calendar year, and 

‘‘(17) the aggregate amount of income which is being deferred pursuant to 

elections under section 83(i), determined as of the close of the calendar year.’’. 

(e) PENALTY FOR FAILURE OF EMPLOYER TO PROVIDE NOTICE OF TAX CON- SEQUENCES.—Section 6652 is amended by adding at the end the following new subsection: 

‘‘(o) FAILURE TO PROVIDE NOTICE UNDER SECTION 83(i).—In the case of each failure to provide a notice as required by section 83(i)(6), at the time prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful 

neglect, there shall be paid, on notice and demand of the Secretary and in the same 

manner as tax, by the person failing to provide such notice, an amount equal to 

$100 for each such failure, but the total amount imposed on such person for all such 

failures during any calendar year shall not exceed $50,000.’’. 

(f) EFFECTIVE DATES.— (1) IN GENERAL.—Except as provided in paragraph (2), the amendments made 

by this section shall apply to stock attributable to options exercised, or restricted stock units settled, after December 31, 2017. 

(2) REQUIREMENT TO PROVIDE NOTICE.—The amendments made by subsection 

(e) shall apply to failures after December 31, 2017. 

(g) TRANSITION RULE.—Until such time as the Secretary (or the Secretary’s delegate) issue regulations or other guidance for purposes of implementing the requirements of paragraph (2)(C)(i)(II) of section 83(i) of the Internal Revenue Code of 1986 

(as added by this section), or the requirements of paragraph (6) of such section, a 

corporation shall be treated as being in compliance with such requirements (respectively) if such corporation complies with a reasonable good faith interpretation of 

such requirements. 

TITLE IV—TAXATION OF FOREIGN INCOME 

AND FOREIGN PERSONS 

Subtitle A—Establishment of Participation 

Exemption System for Taxation of Foreign Income 

SEC. 4001. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS. 

(a) IN GENERAL.—Part VIII of subchapter B of chapter 1 is amended by inserting 

after section 245 the following new section: 

‘‘SEC. 245A. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS. 

‘‘(a) IN GENERAL.—In the case of any dividend received from a specified 10-percent 

owned foreign corporation by a domestic corporation which is a United States shareholder with respect to such foreign corporation, there shall be allowed as a deduction an amount equal to the foreign-source portion of such dividend. 

‘‘(b) SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATION.—For purposes of this 

section, the term ‘specified 10-percent owned foreign corporation’ means any foreign 

corporation with respect to which any domestic corporation is a United States shareholder. Such term shall not include any passive foreign investment company (within 

the meaning of subpart D of part VI of subchapter P) that is not a controlled foreign 

corporation. 

‘‘(c) FOREIGN-SOURCE PORTION.—For purposes of this section— 

‘‘(1) IN GENERAL.—The foreign-source portion of any dividend is an amount 

which bears the same ratio to such dividend as— 

‘‘(A) the post-1986 undistributed foreign earnings of the specified 10-percent owned foreign corporation, bears to 

‘‘(B) the total post-1986 undistributed earnings of such foreign corporation. 


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‘‘(2) POST-1986 UNDISTRIBUTED EARNINGS.—The term ‘post-1986 undistributed 

earnings’ means the amount of the earnings and profits of the specified 10-percent owned foreign corporation (computed in accordance with sections 964(a) 

and 986) accumulated in taxable years beginning after December 31, 1986— 

‘‘(A) as of the close of the taxable year of the specified 10-percent owned 

foreign corporation in which the dividend is distributed, and 

‘‘(B) without diminution by reason of dividends distributed during such 

taxable year. 

‘‘(3) POST-1986 UNDISTRIBUTED FOREIGN EARNINGS.—The term ‘post-1986 undistributed foreign earnings’ means the portion of the post-1986 undistributed 

earnings which is attributable to neither— 

‘‘(A) income described in subparagraph (A) of section 245(a)(5), nor 

‘‘(B) dividends described in subparagraph (B) of such section (determined 

without regard to section 245(a)(12)). 

‘‘(4) TREATMENT OF DISTRIBUTIONS FROM EARNINGS BEFORE 1987.— ‘‘(A) IN GENERAL.—In the case of any dividend paid out of earnings and 

profits of the specified 10-percent owned foreign corporation (computed in 

accordance with sections 964(a) and 986) accumulated in taxable years beginning before January 1, 1987— 

‘‘(i) paragraphs (1), (2), and (3) shall be applied without regard to the 

phrase ‘post-1986’ each place it appears, and 

‘‘(ii) paragraph (2) shall be applied by substituting ‘after the date 

specified in section 316(a)(1)’ for ‘in taxable years beginning after December 31, 1986’. 

‘‘(B) DIVIDENDS PAID FIRST OUT OF POST-1986 EARNINGS.—Dividends shall 

be treated as paid out of post-1986 undistributed earnings to the extent 

thereof. 

‘‘(5) TREATMENT OF CERTAIN DIVIDENDS IN EXCESS OF UNDISTRIBUTED EARNINGS.—In the case of any dividend from the specified 10-percent owned foreign 

corporation which is in excess of undistributed earnings (as determined under 

paragraph (2) after taking into account the modifications described in clauses 

(i) and (ii) of paragraph (4)(A)), the foreign-source portion of such dividend is 

an amount which bears the same ratio to such dividend as— 

‘‘(A) the portion of the earnings and profits described in subparagraph (B) 

which is attributable to neither income described in paragraph (3)(A) nor 

dividends described in paragraph (3)(B), bears to 

‘‘(B) the earnings and profits of such corporation for the taxable year in 

which such distribution is made (computed as of the close of the taxable 

year without diminution by reason of any distributions made during the 

taxable year). 

‘‘(d) DISALLOWANCE OF FOREIGN TAX CREDIT, ETC.— 

‘‘(1) IN GENERAL.—No credit shall be allowed under section 901 for any taxes 

paid or accrued (or treated as paid or accrued) with respect to any dividend for 

which a deduction is allowed under this section. 

‘‘(2) DENIAL OF DEDUCTION.—No deduction shall be allowed under this chapter 

for any tax for which credit is not allowable under section 901 by reason of 

paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N). 

‘‘(e) REGULATIONS.—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.’’. 

(b) APPLICATION OF HOLDING PERIOD REQUIREMENT.—Section 246(c) is amended— 

(1) by striking ‘‘or 245’’ in paragraph (1) and inserting ‘‘245, or 245A’’, and 

(2) by adding at the end the following new paragraph: 

‘‘(5) SPECIAL RULES FOR FOREIGN SOURCE PORTION OF DIVIDENDS RECEIVED

FROM SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS.— 

‘‘(A) 6-MONTH HOLDING PERIOD REQUIREMENT.—For purposes of section 

245A— 

‘‘(i) paragraph (1)(A) shall be applied— 

‘‘(I) by substituting ‘180 days’ for ‘45 days’each place it appears, 

and 

‘‘(II) by substituting ‘361-day period’ for ‘91-day period’, and 

‘‘(ii) paragraph (2) shall not apply. 

‘‘(B) STATUS MUST BE MAINTAINED DURING HOLDING PERIOD.—For purposes of applying paragraph (1) with respect to section 245A, the taxpayer 

shall be treated as holding the stock referred to in paragraph (1) for any 

period only if— 

‘‘(i) the specified 10-percent owned foreign corporation referred to in 

section 245A(a) is a specified 10-percent owned foreign corporation for 

such period, and 


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‘‘(ii) the taxpayer is a United States shareholder with respect to such 

specified 10-percent owned foreign corporation for such period.’’. 

(c) APPLICATION OF RULES GENERALLY APPLICABLE TO DEDUCTIONS FOR DIVIDENDS

RECEIVED.— 

(1) TREATMENT OF DIVIDENDS FROM CERTAIN CORPORATIONS.—Section 

246(a)(1) is amended by striking ‘‘and 245’’ and inserting ‘‘245, and 245A’’. 

(2) COORDINATION WITH SECTION 1059.—Section 1059(b)(2)(B) is amended by 

striking ‘‘or 245’’ and inserting ‘‘245, or 245A’’. 

(d) COORDINATION WITH FOREIGN TAX CREDIT LIMITATION.—Section 904(b) is 

amended by adding at the end the following new paragraph: 

‘‘(5) TREATMENT OF DIVIDENDS FOR WHICH DEDUCTION IS ALLOWED UNDER SECTION 245A.—For purposes of subsection (a), in the case of a United States shareholder with respect to a specified 10-percent owned foreign corporation, such 

shareholder’s taxable income from sources without the United States (and entire taxable income) shall be determined without regard to— 

‘‘(A) the foreign-source portion of any dividend received from such foreign 

corporation, and 

‘‘(B) any deductions properly allocable or apportioned to— 

‘‘(i) income (other than subpart F income (as defined in section 952) 

and foreign high return amounts (as defined in section 951A(b)) with 

respect to stock of such specified 10-percent owned foreign corporation, 

or 

‘‘(ii) such stock (to the extent income with respect to such stock is 

other than subpart F income (as so defined) or foreign high return 

amounts (as so defined)). 

Any term which is used in section 245A and in this paragraph shall have the 

same meaning for purposes of this paragraph as when used in such section.’’. 

(e) CONFORMING AMENDMENTS.— 

(1) Section 245(a)(4) is amended by striking ‘‘section 902(c)(1)’’ and inserting 

‘‘section 245A(c)(2) applied by substituting ‘qualified 10-percent owned foreign 

corporation’ for ‘specified 10-percent owned foreign corporation’ each place it appears’’. 

(2) Section 951(b) is amended by striking ‘‘subpart’’ and inserting ‘‘title’’. 

(3) Section 957(a) is amended by striking ‘‘subpart’’ in the matter preceding 

paragraph (1) and inserting ‘‘title’’. 

(4) The table of sections for part VIII of subchapter B of chapter 1 is amended 

by inserting after section 245 the following new item: 

‘‘Sec. 245A. Deduction for foreign-source portion of dividends received by domestic corporations from specified 

10-percent owned foreign corporations.’’. 

(f) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions made after (and, in the case of the amendments made by subsection (d), 

deductions with respect to taxable years ending after) December 31, 2017. 

SEC. 4002. APPLICATION OF PARTICIPATION EXEMPTION TO INVESTMENTS IN UNITED 

STATES PROPERTY. 

(a) IN GENERAL.—Section 956(a) is amended in the matter preceding paragraph 

(1) by inserting ‘‘(other than a corporation)’’ after ‘‘United States shareholder’’. 

(b) REGULATORY AUTHORITY TO PREVENT ABUSE.—Section 956(e) is amended by 

striking ‘‘including regulations to prevent’’ and inserting ‘‘including regulations— 

‘‘(1) to address United States shareholders that are partnerships with corporate partners, and 

‘‘(2) to prevent’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2017. 

SEC. 4003. LIMITATION ON LOSSES WITH RESPECT TO SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS. 

(a) BASIS IN SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATION REDUCED BY

NONTAXED PORTION OF DIVIDEND FOR PURPOSES OF DETERMINING LOSS.— 

(1) IN GENERAL.—Section 961 is amended by adding at the end the following 

new subsection: 

‘‘(d) BASIS IN SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATION REDUCED BY

NONTAXED PORTION OF DIVIDEND FOR PURPOSES OF DETERMINING LOSS.—If a domestic corporation received a dividend from a specified 10-percent owned foreign 

corporation (as defined in section 245A) in any taxable year, solely for purposes of 

determining loss on any disposition of stock of such foreign corporation in such taxable year or any subsequent taxable year, the basis of such domestic corporation in 

such stock shall be reduced (but not below zero) by the amount of any deduction 

allowable to such domestic corporation under section 245A with respect to such 


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stock except to the extent such basis was reduced under section 1059 by reason of 

a dividend for which such a deduction was allowable.’’. 

(2) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to distributions made after December 31, 2017. 

(b) TREATMENT OF FOREIGN BRANCH LOSSES TRANSFERRED TO SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS.— 

(1) IN GENERAL.—Part II of subchapter B of chapter 1 is amended by adding 

at the end the following new section: 

‘‘SEC. 91. CERTAIN FOREIGN BRANCH LOSSES TRANSFERRED TO SPECIFIED 10-PERCENT 

OWNED FOREIGN CORPORATIONS. 

‘‘(a) IN GENERAL.—If a domestic corporation transfers substantially all of the assets of a foreign branch (within the meaning of section 367(a)(3)(C)) to a specified 

10-percent owned foreign corporation (as defined in section 245A) with respect to 

which it is a United States shareholder after such transfer, such domestic corporation shall include in gross income for the taxable year which includes such transfer 

an amount equal to the transferred loss amount with respect to such transfer. 

‘‘(b) TRANSFERRED LOSS AMOUNT.—For purposes of this section, the term ‘transferred loss amount’ means, with respect to any transfer of substantially all of the 

assets of a foreign branch, the excess (if any) of— 

‘‘(1) the sum of losses— 

‘‘(A) which were incurred by the foreign branch after December 31, 2017, 

and before the transfer, and 

‘‘(B) with respect to which a deduction was allowed to the taxpayer, over 

‘‘(2) the sum of— 

‘‘(A) any taxable income of such branch for a taxable year after the taxable year in which the loss was incurred and through the close of the taxable year of the transfer, and 

‘‘(B) any amount which is recognized under section 904(f)(3) on account 

of the transfer. 

‘‘(c) REDUCTION FOR RECOGNIZED GAINS.— 

‘‘(1) IN GENERAL.—In the case of a transfer not described in section 

367(a)(3)(C), the transferred loss amount shall be reduced (but not below zero) 

by the amount of gain recognized by the taxpayer on account of the transfer 

(other than amounts taken into account under subsection (c)(2)(B)). 

‘‘(2) COORDINATION WITH RECOGNITION UNDER SECTION 367.—In the case of a 

transfer described in section 367(a)(3)(C), the transferred loss amount shall not 

exceed the excess (if any) of— 

‘‘(A) the excess of the amount described in section 367(a)(3)(C)(i) over the 

amount described in section 367(a)(3)(C)(ii) with respect to such transfer, 

over 

‘‘(B) the amount of gain recognized under section 367(a)(3)(C) with respect to such transfer. 

‘‘(d) SOURCE OF INCOME.—Amounts included in gross income under this section 

shall be treated as derived from sources within the United States. 

‘‘(e) BASIS ADJUSTMENTS.—Consistent with such regulations or other guidance as 

the Secretary may prescribe, proper adjustments shall be made in the adjusted basis 

of the taxpayer’s stock in the specified 10-percent owned foreign corporation to 

which the transfer is made, and in the transferee’s adjusted basis in the property 

transferred, to reflect amounts included in gross income under this section.’’. 

(2) AMOUNTS RECOGNIZED UNDER SECTION 367 ON TRANSFER OF FOREIGN

BRANCH WITH PREVIOUSLY DEDUCTED LOSSES TREATED AS UNITED STATES

SOURCE.—Section 367(a)(3)(C) is amended by striking ‘‘outside’’ in the last sentence and inserting ‘‘within’’. 

(3) CLERICAL AMENDMENT.—The table of sections for part II of subchapter B 

of chapter 1 is amended by adding at the end the following new item: 

‘‘Sec. 91. Certain foreign branch losses transferred to specified 10-percent owned foreign corporations.’’. 

(4) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to transfers after December 31, 2017. 

SEC. 4004. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF TAXATION. 

(a) IN GENERAL.—Section 965 is amended to read as follows: 

‘‘SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF TAXATION. 

‘‘(a) TREATMENT OF DEFERRED FOREIGN INCOME AS SUBPART F INCOME.—In the 

case of the last taxable year of a deferred foreign income corporation which begins 

before January 1, 2018, the subpart F income of such foreign corporation (as otherVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00098 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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wise determined for such taxable year under section 952) shall be increased by the 

greater of— 

‘‘(1) the accumulated post-1986 deferred foreign income of such corporation 

determined as of November 2, 2017, or 

‘‘(2) the accumulated post-1986 deferred foreign income of such corporation 

determined as of December 31, 2017. 

‘‘(b) REDUCTION IN AMOUNTS INCLUDED IN GROSS INCOME OF UNITED STATES

SHAREHOLDERS OF SPECIFIED FOREIGN CORPORATIONS WITH DEFICITS IN EARNINGS

AND PROFITS.— ‘‘(1) IN GENERAL.—In the case of a taxpayer which is a United States shareholder with respect to at least one deferred foreign income corporation and at 

least one E&P deficit foreign corporation, the amount which would (but for this 

subsection) be taken into account under section 951(a)(1) by reason of subsection (a) as such United States shareholder’s pro rata share of the subpart 

F income of each deferred foreign income corporation shall be reduced (but not 

below zero) by the amount of such United States shareholder’s aggregate foreign 

E&P deficit which is allocated under paragraph (2) to such deferred foreign income corporation. 

‘‘(2) ALLOCATION OF AGGREGATE FOREIGN E&P DEFICIT.—The aggregate foreign 

E&P deficit of any United States shareholder shall be allocated among the deferred foreign income corporations of such United States shareholder in an 

amount which bears the same proportion to such aggregate as— 

‘‘(A) such United States shareholder’s pro rata share of the accumulated 

post-1986 deferred foreign income of each such deferred foreign income corporation, bears to 

‘‘(B) the aggregate of such United States shareholder’s pro rata share of 

the accumulated post-1986 deferred foreign income of all deferred foreign 

income corporations of such United States shareholder. 

‘‘(3) DEFINITIONS RELATED TO E&P DEFICITS.—For purposes of this subsection— 

‘‘(A) AGGREGATE FOREIGN E&P DEFICIT.—The term ‘aggregate foreign E&P 

deficit’ means, with respect to any United States shareholder, the aggregate 

of such shareholder’s pro rata shares of the specified E&P deficits of the 

E&P deficit foreign corporations of such shareholder. 

‘‘(B) E&P DEFICIT FOREIGN CORPORATION.—The term ‘E&P deficit foreign 

corporation’ means, with respect to any taxpayer, any specified foreign corporation with respect to which such taxpayer is a United States shareholder, if— 

‘‘(i) such specified foreign corporation has a deficit in post-1986 earnings and profits, and 

‘‘(ii) as of November 2, 2017— 

‘‘(I) such corporation was a specified foreign corporation, and 

‘‘(II) such taxpayer was a United States shareholder of such corporation. 

‘‘(C) SPECIFIED E&P DEFICIT.—The term ‘specified E&P deficit’ means, 

with respect to any E&P deficit foreign corporation, the amount of the deficit referred to in subparagraph (B). 

‘‘(4) NETTING AMONG UNITED STATES SHAREHOLDERS IN SAME AFFILIATED

GROUP.— 

‘‘(A) IN GENERAL.—In the case of any affiliated group which includes at 

least one E&P net surplus shareholder and one E&P net deficit shareholder, the amount which would (but for this paragraph) be taken into account under section 951(a)(1) by reason of subsection (a) by each such E&P 

net surplus shareholder shall be reduced (but not below zero) by such 

shareholder’s applicable share of the affiliated group’s aggregate unused 

E&P deficit. 

‘‘(B) E&P NET SURPLUS SHAREHOLDER.—For purposes of this paragraph, 

the term ‘E&P net surplus shareholder’ means any United States shareholder which would (determined without regard to this paragraph) take 

into account an amount greater than zero under section 951(a)(1) by reason 

of subsection (a). 

‘‘(C) E&P NET DEFICIT SHAREHOLDER.—For purposes of this paragraph, 

the term ‘E&P net deficit shareholder’ means any United States shareholder if— 

‘‘(i) the aggregate foreign E&P deficit with respect to such shareholder (as defined in paragraph (3)(A)), exceeds 

‘‘(ii) the amount which would (but for this subsection) be taken into 

account by such shareholder under section 951(a)(1) by reason of subsection (a). 


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‘‘(D) AGGREGATE UNUSED E&P DEFICIT.—For purposes of this paragraph— 

‘‘(i) IN GENERAL.—The term ‘aggregate unused E&P deficit’ means, 

with respect to any affiliated group, the lesser of— 

‘‘(I) the sum of the excesses described in subparagraph (C), determined with respect to each E&P net deficit shareholder in such 

group, or 

‘‘(II) the amount determined under subparagraph (E)(ii). 

‘‘(ii) REDUCTION WITH RESPECT TO E&P NET DEFICIT SHAREHOLDERS

WHICH ARE NOT WHOLLY OWNED BY THE AFFILIATED GROUP.—If the 

group ownership percentage of any E&P net deficit shareholder is less 

than 100 percent, the amount of the excess described in subparagraph 

(C) which is taken into account under clause (i)(I) with respect to such 

E&P net deficit shareholder shall be such group ownership percentage 

of such amount. 

‘‘(E) APPLICABLE SHARE.—For purposes of this paragraph, the term ‘applicable share’ means, with respect to any E&P net surplus shareholder in any 

affiliated group, the amount which bears the same proportion to such 

group’s aggregate unused E&P deficit as— 

‘‘(i) the product of— 

‘‘(I) such shareholder’s group ownership percentage, multiplied 

by 

‘‘(II) the amount which would (but for this paragraph) be taken 

into account under section 951(a)(1) by reason of subsection (a) by 

such shareholder, bears to 

‘‘(ii) the aggregate amount determined under clause (i) with respect 

to all E&P net surplus shareholders in such group. 

‘‘(F) GROUP OWNERSHIP PERCENTAGE.—For purposes of this paragraph, 

the term ‘group ownership percentage’ means, with respect to any United 

States shareholder in any affiliated group, the percentage of the value of 

the stock of such United States shareholder which is held by other includible corporations in such affiliated group. Notwithstanding the preceding 

sentence, the group ownership percentage of the common parent of the affiliated group is 100 percent. Any term used in this subparagraph which 

is also used in section 1504 shall have the same meaning as when used in 

such section. 

‘‘(c) APPLICATION OF PARTICIPATION EXEMPTION TO INCLUDED INCOME.— 

‘‘(1) IN GENERAL.—In the case of a United States shareholder of a deferred 

foreign income corporation, there shall be allowed as a deduction for the taxable 

year in which an amount is included in the gross income of such United States 

shareholder under section 951(a)(1) by reason of this section an amount equal 

to the sum of— 

‘‘(A) the United States shareholder’s 7 percent rate equivalent percentage 

of the excess (if any) of— 

‘‘(i) the amount so included as gross income, over 

‘‘(ii) the amount of such United States shareholder’s aggregate foreign cash position, plus 

‘‘(B) the United States shareholder’s 14 percent rate equivalent percentage of so much of the amount described in subparagraph (A)(ii) as does not 

exceed the amount described in subparagraph (A)(i). 

‘‘(2) 7 AND 14 PERCENT RATE EQUIVALENT PERCENTAGES.—For purposes of this 

subsection— 

‘‘(A) 7 PERCENT RATE EQUIVALENT PERCENTAGE.—The term ‘7 percent rate 

equivalent percentage’ means, with respect to any United States shareholder for any taxable year, the percentage which would result in the 

amount to which such percentage applies being subject to a 7 percent rate 

of tax determined by only taking into account a deduction equal to such 

percentage of such amount and the highest rate of tax specified in section 

11 for such taxable year. In the case of any taxable year of a United States 

shareholder to which section 15 applies, the highest rate of tax under section 11 before the effective date of the change in rates and the highest rate 

of tax under section 11 after the effective date of such change shall each 

be taken into account under the preceding sentence in the same proportions 

as the portion of such taxable year which is before and after such effective 

date, respectively. 

‘‘(B) 14 PERCENT RATE EQUIVALENT PERCENTAGE.—The term ‘14 percent 

rate equivalent percentage’ means, with respect to any United States shareholder for any taxable year, the percentage determined under subparagraph 

(A) applied by substituting ‘14 percent rate of tax’ for ‘7 percent rate of tax’. 

‘‘(3) AGGREGATE FOREIGN CASH POSITION.—For purposes of this subsection— 


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‘‘(A) IN GENERAL.—The term ‘aggregate foreign cash position’ means, with 

respect to any United States shareholder, one-third of the sum of— 

‘‘(i) the aggregate of such United States shareholder’s pro rata share 

of the cash position of each specified foreign corporation of such United 

States shareholder determined as of November 2, 2017, 

‘‘(ii) the aggregate described in clause (i) determined as of the close 

of the last taxable year of each such specified foreign corporation which 

ends before November 2, 2017, and 

‘‘(iii) the aggregate described in clause (i) determined as of the close 

of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in clause (ii). 

In the case of any foreign corporation which did not exist as of the determination date described in clause (ii) or (iii), this subparagraph shall be applied separately to such foreign corporation by not taking into account such 

clause and by substituting ‘one-half (100 percent in the case that both 

clauses (ii) and (iii) are disregarded)’ for ‘one-third’. 

‘‘(B) CASH POSITION.—For purposes of this paragraph, the cash position 

of any specified foreign corporation is the sum of— 

‘‘(i) cash held by such foreign corporation, 

‘‘(ii) the net accounts receivable of such foreign corporation, plus 

‘‘(iii) the fair market value of the following assets held by such corporation: 

‘‘(I) Actively traded personal property for which there is an established financial market. 

‘‘(II) Commercial paper, certificates of deposit, the securities of 

the Federal government and of any State or foreign government. 

‘‘(III) Any foreign currency. 

‘‘(IV) Any obligation with a term of less than one year. 

‘‘(V) Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph. 

‘‘(C) NET ACCOUNTS RECEIVABLE.—For purposes of this paragraph, the 

term ‘net accounts receivable’ means, with respect to any specified foreign 

corporation, the excess (if any) of— 

‘‘(i) such corporation’s accounts receivable, over 

‘‘(ii) such corporation’s accounts payable (determined consistent with 

the rules of section 461). 

‘‘(D) PREVENTION OF DOUBLE COUNTING.— 

‘‘(i) IN GENERAL.—The applicable percentage of each specified cash 

position of a specified foreign corporation shall not be taken into account by— 

‘‘(I) the United States shareholder referred to in clause (ii) with 

respect to such position, or 

‘‘(II) any United States shareholder which is an includible corporation in the same affiliated group as such United States shareholder referred to in clause (ii). 

‘‘(ii) SPECIFIED CASH POSITION.—For purposes of this subparagraph, 

the term ‘specified cash position’ means— 

‘‘(I) amounts described in subparagraph (B)(ii) to the extent such 

amounts are receivable from another specified foreign corporation 

with respect to any United States shareholder, 

‘‘(II) amounts described in subparagraph (B)(iii)(I) to the extent 

such amounts consist of an equity interest in another specified foreign corporation with respect to any United States shareholder, 

and 

‘‘(III) amounts described in subparagraph (B)(iii)(IV) to the extent that another specified foreign corporation with respect to any 

United States shareholder is obligated to repay such amount. 

‘‘(iii) APPLICABLE PERCENTAGE.—For purposes of this subparagraph, 

the term ‘applicable percentage’ means— 

‘‘(I) with respect to each specified cash position described in subclause (I) or (III) of clause (ii), the pro rata share of the United 

States shareholder referred to in clause (ii) with respect to the 

specified foreign corporation referred to in such clause, and 

‘‘(II) with respect to each specified cash position described in 

clause (ii)(II), the ratio (expressed as a percentage and not in excess of 100 percent) of the United States shareholder’s pro rata 

share of the cash position of the specified foreign corporation referred to in such clause divided by the amount of such specified 

cash position. 


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For purposes of this subparagraph, a separate applicable percentage 

shall be determined under each of subclauses (I) and (II) with respect 

to each specified foreign corporation referred to in clause (ii) with respect to which a specified cash position is determined for the specified 

foreign corporation referred to in clause (i). 

‘‘(iv) REDUCTION WITH RESPECT TO AFFILIATED GROUP MEMBERS NOT

WHOLLY OWNED BY THE AFFILIATED GROUP.—For purposes of clause 

(i)(II), in the case of an includible corporation the group ownership percentage of which is less than 100 percent (as determined under subsection (b)(4)(F)), the amount not take into account by reason of such 

clause shall be the group ownership percentage of such amount (determined without regard to this clause). 

‘‘(E) CERTAIN BLOCKED ASSETS NOT TAKEN INTO ACCOUNT.—A cash position of a specified foreign corporation shall not be taken into account under 

subparagraph (A) if such position could not (as of the date that it would 

otherwise have been taken into account under clause (i), (ii), or (iii) of subparagraph (A)) have been distributed by such specified foreign corporation 

to United States shareholders of such specified foreign corporation because 

of currency or other restrictions or limitations imposed under the laws of 

any foreign country (within the meaning of section 964(b)). 

‘‘(F) CASH POSITIONS OF CERTAIN NON-CORPORATE ENTITIES TAKEN INTO

ACCOUNT.—An entity (other than a domestic corporation) shall be treated 

as a specified foreign corporation of a United States shareholder for purposes of determining such United States shareholder’s aggregate foreign 

cash position if any interest in such entity is held by a specified foreign corporation of such United States shareholder (determined after application of 

this subparagraph) and such entity would be a specified foreign corporation 

of such United States shareholder if such entity were a foreign corporation. 

‘‘(G) TIME OF CERTAIN DETERMINATIONS.—For purposes of this paragraph, 

the determination of whether a person is a United States shareholder, 

whether a person is a specified foreign corporation, and the pro rata share 

of a United States shareholder with respect to a specified foreign corporation, shall be determined as of the end of the taxable year described in subsection (a). 

‘‘(H) ANTI-ABUSE.—If the Secretary determines that the principal purpose 

of any transaction was to reduce the aggregate foreign cash position taken 

into account under this subsection, such transaction shall be disregarded 

for purposes of this subsection. 

‘‘(d) DEFERRED FOREIGN INCOME CORPORATION; ACCUMULATED POST-1986 DEFERRED FOREIGN INCOME.—For purposes of this section— 

‘‘(1) DEFERRED FOREIGN INCOME CORPORATION.—The term ‘deferred foreign income corporation’ means, with respect to any United States shareholder, any 

specified foreign corporation of such United States shareholder which has accumulated post-1986 deferred foreign income (as of the date referred to in paragraph (1) or (2) of subsection (a), whichever is applicable with respect to such 

foreign corporation) greater than zero. 

‘‘(2) ACCUMULATED POST-1986 DEFERRED FOREIGN INCOME.—The term ‘accumulated post-1986 deferred foreign income’ means the post-1986 earnings and profits except to the extent such earnings— 

‘‘(A) are attributable to income of the specified foreign corporation which 

is effectively connected with the conduct of a trade or business within the 

United States and subject to tax under this chapter, or 

‘‘(B) if distributed, would be excluded from the gross income of a United 

States shareholder under section 959. 

To the extent provided in regulations or other guidance prescribed by the Secretary, in the case of any controlled foreign corporation which has shareholders 

which are not United States shareholders, accumulated post-1986 deferred foreign income shall be appropriately reduced by amounts which would be described in subparagraph (B) if such shareholders were United States shareholders. 

‘‘(3) POST-1986 EARNINGS AND PROFITS.—The term ‘post-1986 earnings and 

profits’ means the earnings and profits of the foreign corporation (computed in 

accordance with sections 964(a) and 986) accumulated in taxable years beginning after December 31, 1986, and determined— 

‘‘(A) as of the date referred to in paragraph (1) or (2) of subsection (a), 

whichever is applicable with respect to such foreign corporation, 

‘‘(B) without diminution by reason of dividends distributed during the 

taxable year ending with or including such date, and 


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‘‘(C) increased by the amount of any qualified deficit (within the meaning 

of section 952(c)(1)(B)(ii)) arising before January 1, 2018, which is treated 

as a qualified deficit (within the meaning of such section as amended by 

the Tax Cuts and Jobs Act) for purposes of such foreign corporation’s first 

taxable year beginning after December 31, 2017. 

‘‘(e) SPECIFIED FOREIGN CORPORATION.— ‘‘(1) IN GENERAL.—For purposes of this section, the term ‘specified foreign corporation’ means— 

‘‘(A) any controlled foreign corporation, and 

‘‘(B) any foreign corporation with respect to which one or more domestic 

corporations is a United States shareholder (determined without regard to 

section 958(b)(4)). 

‘‘(2) APPLICATION TO CERTAIN FOREIGN CORPORATIONS.—For purposes of sections 951 and 961, a foreign corporation described in paragraph (1)(B) shall be 

treated as a controlled foreign corporation solely for purposes of taking into account the subpart F income of such corporation under subsection (a) (and for 

purposes of applying subsection (f)). 

‘‘(3) EXCEPTION FOR PASSIVE FOREIGN INVESTMENT COMPANIES.—The term 

‘specified foreign corporation’ shall not include any passive foreign investment 

company (within the meaning of subpart D of part VI of subchapter P) that is 

not a controlled foreign corporation. 

‘‘(f) DETERMINATIONS OF PRO RATA SHARE.—For purposes of this section, the determination of any United States shareholder’s pro rata share of any amount with 

respect to any specified foreign corporation shall be determined under rules similar 

to the rules of section 951(a)(2) by treating such amount in the same manner as 

subpart F income (and by treating such specified foreign corporation as a controlled 

foreign corporation). 

‘‘(g) DISALLOWANCE OF FOREIGN TAX CREDIT, ETC.— 

‘‘(1) IN GENERAL.—No credit shall be allowed under section 901 for the applicable percentage of any taxes paid or accrued (or treated as paid or accrued) 

with respect to any amount for which a deduction is allowed under this section. 

‘‘(2) APPLICABLE PERCENTAGE.—For purposes of this subsection, the term ‘applicable percentage’ means the amount (expressed as a percentage) equal to the 

sum of— 

‘‘(A) 80 percent of the ratio of— 

‘‘(i) the excess to which subsection (c)(1)(A) applies, divided by 

‘‘(ii) the sum of such excess plus the amount to which subsection 

(c)(1)(B) applies, plus 

‘‘(B) 60 percent of the ratio of— 

‘‘(i) the amount to which subsection (c)(1)(B) applies, divided by 

‘‘(ii) the sum described in subparagraph (A)(ii). 

‘‘(3) DENIAL OF DEDUCTION.—No deduction shall be allowed under this chapter 

for any tax for which credit is not allowable under section 901 by reason of 

paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N). 

‘‘(4) COORDINATION WITH SECTION 78.—With respect to the taxes treated as 

paid or accrued by a domestic corporation with respect to amounts which are 

includible in gross income of such domestic corporation by reason of this section, 

section 78 shall apply only to so much of such taxes as bears the same proportion to the amount of such taxes as— 

‘‘(A) the excess of— 

‘‘(i) the amounts which are includible in gross income of such domestic corporation by reason of this section, over 

‘‘(ii) the deduction allowable under subsection (c) with respect to such 

amounts, bears to 

‘‘(B) such amounts. 

‘‘(5) EXTENSION OF FOREIGN TAX CREDIT CARRYOVER PERIOD.—With respect to 

any taxes paid or accrued (or treated as paid or accrued) with respect to any 

amount for which a deduction is allowed under this section, section 904(c) shall 

be applied by substituting ‘first 20 succeeding taxable years’ for ‘first 10 succeeding taxable years’. 

‘‘(h) ELECTION TO PAY LIABILITY IN INSTALLMENTS.— 

‘‘(1) IN GENERAL.—In the case of a United States shareholder of a deferred 

foreign income corporation, such United States shareholder may elect to pay the 

net tax liability under this section in 8 equal installments. 

‘‘(2) DATE FOR PAYMENT OF INSTALLMENTS.—If an election is made under paragraph (1), the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax 

for the taxable year described in subsection (a) and each succeeding installment 


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shall be paid on the due date (as so determined) for the return of tax for the 

taxable year following the taxable year with respect to which the preceding installment was made. 

‘‘(3) ACCELERATION OF PAYMENT.—If there is an addition to tax for failure to 

timely pay any installment required under this subsection, a liquidation or sale 

of substantially all the assets of the taxpayer (including in a title 11 or similar 

case), a cessation of business by the taxpayer, or any similar circumstance, then 

the unpaid portion of all remaining installments shall be due on the date of 

such event (or in the case of a title 11 or similar case, the day before the petition is filed). The preceding sentence shall not apply to the sale of substantially 

all the assets of a taxpayer to a buyer if such buyer enters into an agreement 

with the Secretary under which such buyer is liable for the remaining installments due under this subsection in the same manner as if such buyer were the 

taxpayer. 

‘‘(4) PRORATION OF DEFICIENCY TO INSTALLMENTS.—If an election is made 

under paragraph (1) to pay the net tax liability under this section in installments and a deficiency has been assessed with respect to such net tax liability, 

the deficiency shall be prorated to the installments payable under paragraph 

(1). The part of the deficiency so prorated to any installment the date for payment of which has not arrived shall be collected at the same time as, and as 

a part of, such installment. The part of the deficiency so prorated to any installment the date for payment of which has arrived shall be paid upon notice and 

demand from the Secretary. This subsection shall not apply if the deficiency is 

due to negligence, to intentional disregard of rules and regulations, or to fraud 

with intent to evade tax. 

‘‘(5) ELECTION.—Any election under paragraph (1) shall be made not later 

than the due date for the return of tax for the taxable year described in subsection (a) and shall be made in such manner as the Secretary may provide. 

‘‘(6) NET TAX LIABILITY UNDER THIS SECTION.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The net tax liability under this section with respect to 

any United States shareholder is the excess (if any) of— 

‘‘(i) such taxpayer’s net income tax for the taxable year in which an 

amount is included in the gross income of such United States shareholder under section 951(a)(1) by reason of this section, over 

‘‘(ii) such taxpayer’s net income tax for such taxable year determined— 

‘‘(I) without regard to this section, and 

‘‘(II) without regard to any income, deduction, or credit, properly 

attributable to a dividend received by such United States shareholder from any deferred foreign income corporation. 

‘‘(B) NET INCOME TAX.—The term ‘net income tax’ means the regular tax 

liability reduced by the credits allowed under subparts A, B, and D of part 

IV of subchapter A. 

‘‘(i) SPECIAL RULES FOR S CORPORATION SHAREHOLDERS.— 

‘‘(1) IN GENERAL.—In the case of any S corporation which is a United States 

shareholder of a deferred foreign income corporation, each shareholder of such 

S corporation may elect to defer payment of such shareholder’s net tax liability 

under this section with respect to such S corporation until the shareholder’s 

taxable year which includes the triggering event with respect to such liability. 

Any net tax liability payment of which is deferred under the preceding sentence 

shall be assessed on the return as an addition to tax in the shareholder’s taxable year which includes such triggering event. 

‘‘(2) TRIGGERING EVENT.— 

‘‘(A) IN GENERAL.—In the case of any shareholder’s net tax liability under 

this section with respect to any S corporation, the triggering event with respect to such liability is whichever of the following occurs first: 

‘‘(i) Such corporation ceases to be an S corporation (determined as of 

the first day of the first taxable year that such corporation is not an 

S corporation). 

‘‘(ii) A liquidation or sale of substantially all the assets of such S corporation (including in a title 11 or similar case), a cessation of business 

by such S corporation, such S corporation ceases to exist, or any similar 

circumstance. 

‘‘(iii) A transfer of any share of stock in such S corporation by the 

taxpayer (including by reason of death, or otherwise). 

‘‘(B) PARTIAL TRANSFERS OF STOCK.—In the case of a transfer of less than 

all of the taxpayer’s shares of stock in the S corporation, such transfer shall 

only be a triggering event with respect to so much of the taxpayer’s net tax 


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liability under this section with respect to such S corporation as is properly 

allocable to such stock. 

‘‘(C) TRANSFER OF LIABILITY.—A transfer described in clause (iii) shall not 

be treated as a triggering event if the transferee enters into an agreement 

with the Secretary under which such transferee is liable for net tax liability 

with respect to such stock in the same manner as if such transferee were 

the taxpayer. 

‘‘(3) NET TAX LIABILITY.—A shareholder’s net tax liability under this section 

with respect to any S corporation is the net tax liability under this section 

which would be determined under subsection (h)(6) if the only subpart F income 

taken into account by such shareholder by reason of this section were allocations from such S corporation. 

‘‘(4) ELECTION TO PAY DEFERRED LIABILITY IN INSTALLMENTS.—In the case of 

a taxpayer which elects to defer payment under paragraph (1)— 

‘‘(A) subsection (h) shall be applied separately with respect to the liability 

to which such election applies, 

‘‘(B) an election under subsection (h) with respect to such liability shall 

be treated as timely made if made not later than the due date for the return of tax for the taxable year in which the triggering event with respect 

to such liability occurs, 

‘‘(C) the first installment under subsection (h) with respect to such liability shall be paid not later than such due date (but determined without regard to any extension of time for filing the return), and 

‘‘(D) if the triggering event with respect to any net tax liability is described in paragraph (2)(A)(ii), an election under subsection (h) with respect 

to such liability may be made only with the consent of the Secretary. 

‘‘(5) JOINT AND SEVERAL LIABILITY OF S CORPORATION.—If any shareholder of 

an S corporation elects to defer payment under paragraph (1), such S corporation shall be jointly and severally liable for such payment and any penalty, addition to tax, or additional amount attributable thereto. 

‘‘(6) EXTENSION OF LIMITATION ON COLLECTION.—Notwithstanding any other 

provision of law, any limitation on the time period for the collection of a liability 

deferred under this subsection shall not be treated as beginning before the date 

of the triggering event with respect to such liability. 

‘‘(7) ANNUAL REPORTING OF NET TAX LIABILITY.— 

‘‘(A) IN GENERAL.—Any shareholder of an S corporation which makes an 

election under paragraph (1) shall report the amount of such shareholder’s 

deferred net tax liability on such shareholder’s return of tax for the taxable 

year for which such election is made and on the return of tax for each taxable year thereafter until such amount has been fully assessed on such returns. 

‘‘(B) DEFERRED NET TAX LIABILITY.—For purposes of this paragraph, the 

term ‘deferred net tax liability’ means, with respect to any taxable year, the 

amount of net tax liability payment of which has been deferred under paragraph (1) and which has not been assessed on a return of tax for any prior 

taxable year. 

‘‘(C) FAILURE TO REPORT.—In the case of any failure to report any amount 

required to be reported under subparagraph (A) with respect to any taxable 

year before the due date for the return of tax for such taxable year, there 

shall be assessed on such return as an addition to tax 5 percent of such 

amount. 

‘‘(8) ELECTION.—Any election under paragraph (1)— 

‘‘(A) shall be made by the shareholder of the S corporation not later than 

the due date for such shareholder’s return of tax for the taxable year which 

includes the close of the taxable year of such S corporation in which the 

amount described in subsection (a) is taken into account, and 

‘‘(B) shall be made in such manner as the Secretary may provide. 

‘‘(j) REPORTING BY S CORPORATION.—Each S corporation which is a United States 

shareholder of a deferred foreign income corporation shall report in its return of tax 

under section 6037(a) the amount includible in its gross income for such taxable 

year by reason of this section and the amount of the deduction allowable by subsection (c). Any copy provided to a shareholder under section 6037(b) shall include 

a statement of such shareholder’s pro rata share of such amounts. 

‘‘(k) INCLUSION OF DEFERRED FOREIGN INCOME UNDER THIS SECTION NOT TO

TRIGGER RECAPTURE OF OVERALL FOREIGN LOSS, ETC.—For purposes of sections 

904(f)(1) and 907(c)(4), in the case of a United States shareholder of a deferred foreign income corporation, such United States shareholder’s taxable income from 

sources without the United States and combined foreign oil and gas income shall 

be determined without regard to this section. 


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‘‘(l) REGULATIONS.—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.’’. 

(b) CLERICAL AMENDMENT.—The table of sections for subpart F of part III of subchapter N of chapter 1 is amended by striking the item relating to section 965 and 

inserting the following: 

‘‘Sec. 965. Treatment of deferred foreign income upon transition to participation exemption system of taxation.’’. 

Subtitle B—Modifications Related to Foreign Tax 

Credit System 

SEC. 4101. REPEAL OF SECTION 902 INDIRECT FOREIGN TAX CREDITS; DETERMINATION OF 

SECTION 960 CREDIT ON CURRENT YEAR BASIS. 

(a) REPEAL OF SECTION 902 INDIRECT FOREIGN TAX CREDITS.—Subpart A of part 

III of subchapter N of chapter 1 is amended by striking section 902. 

(b) DETERMINATION OF SECTION 960 CREDIT ON CURRENT YEAR BASIS.—Section 

960 is amended— 

(1) by striking subsection (c), by redesignating subsection (b) as subsection (c), 

by striking all that precedes subsection (c) (as so redesignated) and inserting 

the following: 

‘‘SEC. 960. DEEMED PAID CREDIT FOR SUBPART F INCLUSIONS. 

‘‘(a) IN GENERAL.—For purposes of this subpart, if there is included in the gross 

income of a domestic corporation any item of income under section 951(a)(1) with 

respect to any controlled foreign corporation with respect to which such domestic 

corporation is a United States shareholder, such domestic corporation shall be 

deemed to have paid so much of such foreign corporation’s foreign income taxes as 

are properly attributable to such item of income. 

‘‘(b) SPECIAL RULES FOR DISTRIBUTIONS FROM PREVIOUSLY TAXED EARNINGS AND

PROFITS.—For purposes of this subpart— 

‘‘(1) IN GENERAL.—If any portion of a distribution from a controlled foreign 

corporation to a domestic corporation which is a United States shareholder with 

respect to such controlled foreign corporation is excluded from gross income 

under section 959(a), such domestic corporation shall be deemed to have paid 

so much of such foreign corporation’s foreign income taxes as— 

‘‘(A) are properly attributable to such portion, and 

‘‘(B) have not been deemed to have to been paid by such domestic corporation under this section for the taxable year or any prior taxable year. 

‘‘(2) TIERED CONTROLLED FOREIGN CORPORATIONS.—If section 959(b) applies to 

any portion of a distribution from a controlled foreign corporation to another 

controlled foreign corporation, such controlled foreign corporation shall be 

deemed to have paid so much of such other controlled foreign corporation’s foreign income taxes as— 

‘‘(A) are properly attributable to such portion, and 

‘‘(B) have not been deemed to have been paid by a domestic corporation 

under this section for the taxable year or any prior taxable year.’’, 

(2) and by adding after subsection (c) (as so redesignated) the following new 

subsections: 

‘‘(d) FOREIGN INCOME TAXES.—The term ‘foreign income taxes’ means any income, 

war profits, or excess profits taxes paid or accrued to any foreign country or possession of the United States. 

‘‘(e) REGULATIONS.—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section.’’. 

(c) CONFORMING AMENDMENTS.— (1) Section 78 is amended to read as follows: 

‘‘SEC. 78. GROSS UP FOR DEEMED PAID FOREIGN TAX CREDIT. 

‘‘If a domestic corporation chooses to have the benefits of subpart A of part III 

of subchapter N (relating to foreign tax credit) for any taxable year, an amount 

equal to the taxes deemed to be paid by such corporation under subsections (a) and 

(b) of section 960 for such taxable year shall be treated for purposes of this title 

(other than sections 959, 960, and 961) as an item of income required to be included 

in the gross income of such domestic corporation under section 951(a) for such taxable year.’’. 

(2) Section 245(a)(10)(C) is amended by striking ‘‘sections 902, 907, and 960’’ 

and inserting ‘‘sections 907 and 960’’. 

(3) Sections 535(b)(1) and 545(b)(1) are each amended by striking ‘‘section 

902(a) or 960(a)(1)’’ and inserting ‘‘section 960’’. 

(4) Section 814(f)(1) is amended— 


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(A) by striking subparagraph (B), and 

(B) by striking all that precedes ‘‘No income’’ and inserting the following: 

‘‘(1) TREATMENT OF FOREIGN TAXES.—’’. 

(5) Section 865(h)(1)(B) is amended by striking ‘‘sections 902, 907, and 960’’ 

and inserting ‘‘sections 907 and 960’’. 

(6) Section 901(a) is amended by striking ‘‘sections 902 and 960’’ and inserting 

‘‘section 960’’. 

(7) Section 901(e)(2) is amended by striking ‘‘but is not limited to—’’ and all 

that follows through ‘‘that portion’’ and inserting ‘‘but is not limited to, that portion’’. 

(8) Section 901(f) is amended by striking ‘‘sections 902 and 960’’ and inserting 

‘‘section 960’’. 

(9) Section 901(j)(1)(A) is amended by striking ‘‘902 or’’. 

(10) Section 901(j)(1)(B) is amended by striking ‘‘sections 902 and 960’’ and 

inserting ‘‘section 960’’. 

(11) Section 901(k)(2) is amended by striking ‘‘section 853, 902, or 960’’ and 

inserting ‘‘section 853 or 960’’. 

(12) Section 901(k)(6) is amended by striking ‘‘902 or’’. 

(13) Section 901(m)(1) is amended by striking ‘‘relevant foreign assets—’’ and 

all that follows and inserting ‘‘relevant foreign assets shall not be taken into 

account in determining the credit allowed under subsection (a).’’. 

(14) Section 904(d)(1) is amended by striking ‘‘sections 902, 907, and 960’’ and 

inserting ‘‘sections 907 and 960’’. 

(15) Section 904(d)(6)(A) is amended by striking ‘‘sections 902, 907, and 960’’ 

and inserting ‘‘sections 907 and 960’’. 

(16) Section 904(h)(10)(A) is amended by striking ‘‘sections 902, 907, and 960’’ 

and inserting ‘‘sections 907 and 960’’. 

(17) Section 904 is amended by striking subsection (k). 

(18) Section 905(c)(1) is amended by striking the last sentence. 

(19) Section 905(c)(2)(B)(i) is amended to read as follows: 

‘‘(i) shall be taken into account for the taxable year to which such 

taxes relate, and’’. 

(20) Section 906(a) is amended by striking ‘‘(or deemed, under section 902, 

paid or accrued during the taxable year)’’. 

(21) Section 906(b) is amended by striking paragraphs (4) and (5). 

(22) Section 907(b)(2)(B) is amended by striking ‘‘902 or’’. 

(23) Section 907(c)(3) is amended— 

(A) by striking subparagraph (A) and redesignating subparagraphs (B) 

and (C) as subparagraphs (A) and (B), respectively, and 

(B) by striking ‘‘section 960(a)’’ in subparagraph (A) (as so redesignated) 

and inserting ‘‘section 960’’. 

(24) Section 907(c)(5) is amended by striking ‘‘902 or’’. 

(25) Section 907(f)(2)(B)(i) is amended by striking ‘‘902 or’’. 

(26) Section 908(a) is amended by striking ‘‘902 or’’. 

(27) Section 909(b) is amended— 

(A) by striking ‘‘section 902 corporation’’ in the matter preceding paragraph (1) and inserting ‘‘10/50 corporation’’, 

(B) by striking ‘‘902 or’’ in paragraph (1), 

(C) by striking ‘‘by such section 902 corporation’’ and all that follows in 

the matter following paragraph (2) and inserting ‘‘by such 10/50 corporation 

or a domestic corporation which is a United States shareholder with respect 

to such 10/50 corporation.’’, and 

(D) by striking ‘‘SECTION 902 CORPORATIONS’’ in the heading thereof and 

inserting ‘‘10/50 CORPORATIONS’’. 

(28) Section 909(d)(5) is amended to read as follows: 

‘‘(5) 10/50 CORPORATION.—The term ‘10/50 corporation’ means any foreign corporation with respect to which one or more domestic corporations is a United 

States shareholder.’’. 

(29) Section 958(a)(1) is amended by striking ‘‘960(a)(1)’’ and inserting ‘‘960’’. 

(30) Section 959(d) is amended by striking ‘‘Except as provided in section 

960(a)(3), any’’ and inserting ‘‘Any’’. 

(31) Section 959(e) is amended by striking ‘‘section 960(b)’’ and inserting ‘‘section 960(c)’’. 

(32) Section 1291(g)(2)(A) is amended by striking ‘‘any distribution—’’ and all 

that follows through ‘‘but only if’’ and inserting ‘‘any distribution, any withholding tax imposed with respect to such distribution, but only if’’. 

(33) Section 6038(c)(1)(B) is amended by striking ‘‘sections 902 (relating to foreign tax credit for corporate stockholder in foreign corporation) and 960 (relating to special rules for foreign tax credit)’’ and inserting ‘‘section 960’’. 


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(34) Section 6038(c)(4) is amended by striking subparagraph (C). 

(35) The table of sections for subpart A of part III of subchapter N of chapter 

1 is amended by striking the item relating to section 902. 

(36) The table of sections for subpart F of part III of subchapter N of chapter 

1 is amended by striking the item relating to section 960 and inserting the following: 

‘‘Sec. 960. Deemed paid credit for subpart F inclusions.’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 4102. SOURCE OF INCOME FROM SALES OF INVENTORY DETERMINED SOLELY ON BASIS 

OF PRODUCTION ACTIVITIES. 

(a) IN GENERAL.—Section 863(b) is amended by adding at the end the following: 

‘‘Gains, profits, and income from the sale or exchange of inventory property described in paragraph (2) shall be allocated and apportioned between sources within 

and without the United States solely on the basis of the production activities with 

respect to the property.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2017. 

Subtitle C—Modification of Subpart F Provisions 

SEC. 4201. REPEAL OF INCLUSION BASED ON WITHDRAWAL OF PREVIOUSLY EXCLUDED SUBPART F INCOME FROM QUALIFIED INVESTMENT. 

(a) IN GENERAL.—Subpart F of part III of subchapter N of chapter 1 is amended 

by striking section 955. 

(b) CONFORMING AMENDMENTS.— 

(1)(A) Section 951(a)(1)(A) is amended to read as follows: 

‘‘(A) his pro rata share (determined under paragraph (2)) of the corporation’s subpart F income for such year, and’’. 

(B) Section 851(b)(3) is amended by striking ‘‘section 951(a)(1)(A)(i)’’ in the 

flush language at the end and inserting ‘‘section 951(a)(1)(A)’’. 

(C) Section 952(c)(1)(B)(i) is amended by striking ‘‘section 951(a)(1)(A)(i)’’ and 

inserting ‘‘section 951(a)(1)(A)’’. 

(D) Section 953(c)(1)(C) is amended by striking ‘‘section 951(a)(1)(A)(i)’’ and 

inserting ‘‘section 951(a)(1)(A)’’. 

(2) Section 951(a) is amended by striking paragraph (3). 

(3) Section 953(d)(4)(B)(iv)(II) is amended by striking ‘‘or amounts referred to 

in clause (ii) or (iii) of section 951(a)(1)(A)’’. 

(4) Section 964(b) is amended by striking ‘‘, 955,’’. 

(5) Section 970 is amended by striking subsection (b). 

(6) The table of sections for subpart F of part III of subchapter N of chapter 

1 is amended by striking the item relating to section 955. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable 

years of United States shareholders in which or with which such taxable years of 

foreign corporations end. 

SEC. 4202. REPEAL OF TREATMENT OF FOREIGN BASE COMPANY OIL RELATED INCOME AS 

SUBPART F INCOME. 

(a) IN GENERAL.—Section 954(a) is amended by striking paragraph (5), by striking 

the comma at the end of paragraph (3) and inserting a period, and by inserting 

‘‘and’’ at the end of paragraph (2). 

(b) CONFORMING AMENDMENTS.— 

(1) Section 952(c)(1)(B)(iii) is amended by striking subclause (I) and by redesignating subclauses (II) through (V) as subclauses (I) through (IV), respectively. 

(2) Section 954(b)(4) is amended by striking the last sentence. 

(3) Section 954(b)(5) is amended by striking ‘‘the foreign base company services income, and the foreign base company oil related income’’ and inserting 

‘‘and the foreign base company services income’’. 

(4) Section 954(b) is amended by striking paragraph (6). 

(5) Section 954 is amended by striking subsection (g). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable 

years of United States shareholders in which or with which such taxable years of 

foreign corporations end. 


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SEC. 4203. INFLATION ADJUSTMENT OF DE MINIMIS EXCEPTION FOR FOREIGN BASE COMPANY INCOME. 

(a) IN GENERAL.—Section 954(b)(3) is amended by adding at the end the following 

new subparagraph: 

‘‘(D) INFLATION ADJUSTMENT.—In the case of any taxable year beginning 

after 2017, the dollar amount in subparagraph (A)(ii) shall be increased by 

an amount equal to— 

‘‘(i) such dollar amount, multiplied by 

‘‘(ii) the cost-of-living adjustment determined under section 1(c)(2)(A) 

for the calendar year in which the taxable year begins. 

Any increase determined under the preceding sentence shall be rounded to 

the nearest multiple of $50,000.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable 

years of United States shareholders in which or with which such taxable years of 

foreign corporations end. 

SEC. 4204. LOOK-THRU RULE FOR RELATED CONTROLLED FOREIGN CORPORATIONS MADE 

PERMANENT. 

(a) IN GENERAL.—Paragraph (6) of section 954(c) is amended by striking subparagraph (C). 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2019, and to taxable 

years of United States shareholders in which or with which such taxable years of 

foreign corporations end. 

SEC. 4205. MODIFICATION OF STOCK ATTRIBUTION RULES FOR DETERMINING STATUS AS A 

CONTROLLED FOREIGN CORPORATION. 

(a) IN GENERAL.—Section 958(b) is amended— 

(1) by striking paragraph (4), and 

(2) by striking ‘‘Paragraphs (1) and (4)’’ in the last sentence and inserting 

‘‘Paragraph (1)’’. 

(b) APPLICATION OF CERTAIN REPORTING REQUIREMENTS.—Section 6038(e)(2) is 

amended by striking ‘‘except that—’’ and all that follows through ‘‘in applying subparagraph (C)’’ and inserting ‘‘except that in applying subparagraph (C)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable 

years of United States shareholders in which or with which such taxable years of 

foreign corporations end. 

SEC. 4206. ELIMINATION OF REQUIREMENT THAT CORPORATION MUST BE CONTROLLED FOR 

30 DAYS BEFORE SUBPART F INCLUSIONS APPLY. 

(a) IN GENERAL.—Section 951(a)(1) is amended by striking ‘‘for an uninterrupted 

period of 30 days or more’’ and inserting ‘‘at any time’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years of foreign corporations beginning after December 31, 2017, and to taxable 

years of United States shareholders with or within which such taxable years of foreign corporations end. 

Subtitle D—Prevention of Base Erosion 

SEC. 4301. CURRENT YEAR INCLUSION BY UNITED STATES SHAREHOLDERS WITH FOREIGN 

HIGH RETURNS. 

(a) IN GENERAL.—Subpart F of part III of subchapter N of chapter 1 is amended 

by inserting after section 951 the following new section: 

‘‘SEC. 951A. FOREIGN HIGH RETURN AMOUNT INCLUDED IN GROSS INCOME OF UNITED 

STATES SHAREHOLDERS. 

‘‘(a) IN GENERAL.—Each person who is a United States shareholder of any controlled foreign corporation for any taxable year of such United States shareholder 

shall include in gross income for such taxable year 50 percent of such shareholder’s 

foreign high return amount for such taxable year. 

‘‘(b) FOREIGN HIGH RETURN AMOUNT.—For purposes of this section— 

‘‘(1) IN GENERAL.—The term ‘foreign high return amount’ means, with respect 

to any United States shareholder for any taxable year of such United States 

shareholder, the excess (if any) of— 

‘‘(A) such shareholder’s net CFC tested income for such taxable year, over 

‘‘(B) the excess (if any) of— 

‘‘(i) the applicable percentage of the aggregate of such shareholder’s 

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trolled foreign corporation with respect to which such shareholder is a 

United States shareholder for such taxable year (determined for each 

taxable year of each such controlled foreign corporation which ends in 

or with such taxable year of such United States shareholder), over 

‘‘(ii) the amount of interest expense taken into account under subsection (c)(2)(A)(ii) in determining the shareholder’s net CFC tested income for the taxable year. 

‘‘(2) APPLICABLE PERCENTAGE.—The term ‘applicable percentage’ means, with 

respect to any taxable year, the Federal short-term rate (determined under section 1274(d) for the month in which or with which such taxable year ends) plus 

7 percentage points. 

‘‘(c) NET CFC TESTED INCOME.—For purposes of this section— 

‘‘(1) IN GENERAL.—The term ‘net CFC tested income’ means, with respect to 

any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of— 

‘‘(A) the aggregate of such shareholder’s pro rata share of the tested income of each controlled foreign corporation with respect to which such 

shareholder is a United States shareholder for such taxable year of such 

United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such 

United States shareholder), over 

‘‘(B) the aggregate of such shareholder’s pro rata share of the tested loss 

of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United 

States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United 

States shareholder). 

‘‘(2) TESTED INCOME; TESTED LOSS.—For purposes of this section— 

‘‘(A) TESTED INCOME.—The term ‘tested income’ means, with respect to 

any controlled foreign corporation for any taxable year of such controlled 

foreign corporation, the excess (if any) of— 

‘‘(i) the gross income of such corporation determined without regard 

to— 

‘‘(I) any item of income which is effectively connected with the 

conduct by such corporation of a trade or business within the 

United States if subject to tax under this chapter, 

‘‘(II) any gross income taken into account in determining the subpart F income of such corporation, 

‘‘(III) except as otherwise provided by the Secretary, any amount 

excluded from the foreign personal holding company income (as defined in section 954) of such corporation by reason of section 

954(c)(6) but only to the extent that any deduction allowable for 

the payment or accrual of such amount does not result in a reduction in the foreign high return amount of any United States shareholder (determined without regard to this subclause), 

‘‘(IV) any gross income excluded from the foreign personal holding company income (as defined in section 954) of such corporation 

by reason of subsection (c)(2)(C), (h), or (i) of section 954, 

‘‘(V) any gross income excluded from the insurance income (as defined in section 953) of such corporation by reason of section 

953(a)(2), 

‘‘(VI) any gross income excluded from foreign base company income (as defined in section 954) or insurance income (as defined in 

section 953) of such corporation by reason of section 954(b)(4), 

‘‘(VII) any dividend received from a related person (as defined in 

section 954(d)(3)), and 

‘‘(VIII) any commodities gross income of such corporation, over 

‘‘(ii) the deductions (including taxes) properly allocable to such gross 

income under rules similar to the rules of section 954(b)(5) (or which 

would be so properly allocable if such corporation had such gross income). 

‘‘(B) TESTED LOSS.—The term ‘tested loss’ means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign 

corporation, the excess (if any) of the amount described in subparagraph 

(A)(ii) over the amount described in subparagraph (A)(i). 

‘‘(d) QUALIFIED BUSINESS ASSET INVESTMENT.—For purposes of this section— 

‘‘(1) IN GENERAL.—The term ‘qualified business asset investment’ means, with 

respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the aggregate of the corporation’s adjusted bases (deVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00110 Fmt 6659 Sfmt 6621 E:\HR\OC\HR409.XXX HR409

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termined as of the close of such taxable year and after any adjustments with 

respect to such taxable year) in specified tangible property— 

‘‘(A) used in a trade or business of the corporation, and 

‘‘(B) of a type with respect to which a deduction is allowable under section 

168. 

‘‘(2) SPECIFIED TANGIBLE PROPERTY.—The term ‘specified tangible property’ 

means any tangible property to the extent such property is used in the production of tested income or tested loss. 

‘‘(3) PARTNERSHIP PROPERTY.—For purposes of this subsection, if a controlled 

foreign corporation holds an interest in a partnership at the close of such taxable year of the controlled foreign corporation, such controlled foreign corporation shall take into account under paragraph (1) the controlled foreign corporation’s distributive share of the aggregate of the partnership’s adjusted bases (determined as of such date in the hands of the partnership) in tangible property 

held by such partnership to the extent such property— 

‘‘(A) is used in the trade or business of the partnership, 

‘‘(B) is of a type with respect to which a deduction is allowable under section 168, and 

‘‘(C) is used in the production of tested income or tested loss (determined 

with respect to such controlled foreign corporation’s distributive share of income or loss with respect to such property). 

For purposes of this paragraph, the controlled foreign corporation’s distributive 

share of the adjusted basis of any property shall be the controlled foreign corporation’s distributive share of income and loss with respect to such property. 

‘‘(4) DETERMINATION OF ADJUSTED BASIS.—For purposes of this subsection, the 

adjusted basis in any property shall be determined without regard to any provision of this title (or any other provision of law) which is enacted after the date 

of the enactment of this section. 

‘‘(5) REGULATIONS.—The Secretary shall issue such regulations or other guidance as the Secretary determines appropriate to prevent the avoidance of the 

purposes of this subsection, including regulations or other guidance which provide for the treatment of property if— 

‘‘(A) such property is transferred, or held, temporarily, or 

‘‘(B) the avoidance of the purposes of this paragraph is a factor in the 

transfer or holding of such property. 

‘‘(e) COMMODITIES GROSS INCOME.—For purposes of this section— 

‘‘(1) COMMODITIES GROSS INCOME.—The term ‘commodities gross income’ 

means, with respect to any corporation— 

‘‘(A) gross income of such corporation from the disposition of commodities 

which are produced or extracted by such corporation (or a partnership in 

which such corporation is a partner), and 

‘‘(B) gross income of such corporation from the disposition of property 

which gives rise to income described in subparagraph (A). 

‘‘(2) COMMODITY.—The term ‘commodity’ means any commodity described in 

section 475(e)(2)(A) or section 475(e)(2)(D) (determined without regard to clause 

(i) thereof and by substituting ‘a commodity described in subparagraph (A)’ for 

‘such a commodity’ in clause (ii) thereof). 

‘‘(f) TAXABLE YEARS FOR WHICH PERSONS ARE TREATED AS UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN CORPORATIONS.—For purposes of this section— 

‘‘(1) IN GENERAL.—A United States shareholder of a controlled foreign corporation shall be treated as a United States shareholder of such controlled foreign corporation for any taxable year of such United States shareholder if— 

‘‘(A) a taxable year of such controlled foreign corporation ends in or with 

such taxable year of such person, and 

‘‘(B) such person owns (within the meaning of section 958(a)) stock in 

such controlled foreign corporation on the last day, in such taxable year of 

such foreign corporation, on which the foreign corporation is a controlled 

foreign corporation. 

‘‘(2) TREATMENT AS A CONTROLLED FOREIGN CORPORATION.—Except for purposes of paragraph (1)(B) and the application of section 951(a)(2) to this section 

pursuant to subsection (g), a foreign corporation shall be treated as a controlled 

foreign corporation for any taxable year of such foreign corporation if such foreign corporation is a controlled foreign corporation at any time during such taxable year. 

‘‘(g) DETERMINATION OF PRO RATA SHARE.—For purposes of this section, pro rata 

shares shall be determined under the rules of section 951(a)(2) in the same manner 

as such section applies to subpart F income. 

‘‘(h) COORDINATION WITH SUBPART F.— 


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‘‘(1) TREATMENT AS SUBPART F INCOME FOR CERTAIN PURPOSES.—Except as 

otherwise provided by the Secretary any foreign high return amount included 

in gross income under subsection (a) shall be treated in the same manner as 

an amount included under section 951(a)(1)(A) for purposes of applying sections 

168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 

1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D), and 6655(e)(4). 

‘‘(2) ENTIRE FOREIGN HIGH RETURN AMOUNT TAKEN INTO ACCOUNT FOR PURPOSES OF CERTAIN SECTIONS.—For purposes of applying paragraph (1) with respect to sections 168(h)(2)(B), 851(b), 959, 961, 962, 1248(b)(1), and 1248(d)(1), 

the foreign high return amount included in gross income under subsection (a) 

shall be determined by substituting ‘100 percent’ for ‘50 percent’ in such subsection. 

‘‘(3) ALLOCATION OF FOREIGN HIGH RETURN AMOUNT TO CONTROLLED FOREIGN

CORPORATIONS.—For purposes of the sections referred to in paragraph (1), with 

respect to any controlled foreign corporation any pro rata amount from which 

is taken into account in determining the foreign high return amount included 

in gross income of a United States shareholder under subsection (a), the portion 

of such foreign high return amount which is treated as being with respect to 

such controlled foreign corporation is— 

‘‘(A) in the case of a controlled foreign corporation with tested loss, zero, 

and 

‘‘(B) in the case of a controlled foreign corporation with tested income, the 

portion of such foreign high return amount which bears the same ratio to 

such foreign high return amount as— 

‘‘(i) such United States shareholder’s pro rata amount of the tested 

income of such controlled foreign corporation, bears to 

‘‘(ii) the aggregate amount determined under subsection (c)(1)(A) with 

respect to such United States shareholder. 

‘‘(4) COORDINATION WITH SUBPART F TO DENY DOUBLE BENEFIT OF LOSSES.— 

In the case of any United States shareholder of any controlled foreign corporation, the amount included in gross income under section 951(a)(1)(A) shall be 

determined by increasing the earnings and profits of such controlled foreign corporation (solely for purposes of determining such amount) by an amount that 

bears the same ratio (not greater than 1) to such shareholder’s pro rata share 

of the tested loss of such controlled foreign corporation as— 

‘‘(A) the aggregate amount determined under subsection (c)(1)(A) with respect to such shareholder, bears to 

‘‘(B) the aggregate amount determined under subsection (c)(1)(B) with respect to such shareholder.’’. 

(b) FOREIGN TAX CREDIT.— 

(1) APPLICATION OF DEEMED PAID FOREIGN TAX CREDIT.—Section 960, as 

amended by the preceding provisions of this Act, is amended by redesignating 

subsections (d) and (e) as subsections (e) and (f), respectively, and by inserting 

after subsection (c) the following new subsection: 

‘‘(d) DEEMED PAID CREDIT FOR TAXES PROPERLY ATTRIBUTABLE TO TESTED INCOME.— 

‘‘(1) IN GENERAL.—For purposes of this subpart, if any amount is includible 

in the gross income of a domestic corporation under section 951A, such domestic 

corporation shall be deemed to have paid foreign income taxes equal to 80 percent of— 

‘‘(A) such domestic corporation’s foreign high return percentage, multiplied by 

‘‘(B) the aggregate tested foreign income taxes paid or accrued by controlled foreign corporations with respect to which such domestic corporation 

is a United States shareholder. 

‘‘(2) FOREIGN HIGH RETURN PERCENTAGE.—For purposes of paragraph (1), the 

term ‘foreign high return percentage’ means, with respect to any domestic corporation, the ratio (expressed as a percentage) of— 

‘‘(A) such corporation’s foreign high return amount (as defined in section 

951A(b)), divided by 

‘‘(B) the aggregate amount determined under section 951A(c)(1)(A) with 

respect to such corporation. 

‘‘(3) TESTED FOREIGN INCOME TAXES.—For purposes of paragraph (1), the term 

‘tested foreign income taxes’ means, with respect to any domestic corporation 

which is a United States shareholder of a controlled foreign corporation, the foreign income taxes paid or accrued by such foreign corporation which are properly attributable to gross income described in section 951A(c)(2)(A)(i).’’. 

(2) APPLICATION OF FOREIGN TAX CREDIT LIMITATION.— 


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(A) SEPARATE BASKET FOR FOREIGN HIGH RETURN AMOUNT.—Section 

904(d)(1) is amended by redesignating subparagraphs (A) and (B) as subparagraphs (B) and (C), respectively, and by inserting before subparagraph 

(B) (as so redesignated) the following new subparagraph: 

‘‘(A) any amount includible in gross income under section 951A,’’. 

(B) NO CARRYOVER OF EXCESS TAXES.—Section 904(c) is amended by adding at the end the following: ‘‘This subsection shall not apply to taxes paid 

or accrued with respect to amounts described in subsection (d)(1)(A).’’ 

(3) GROSS UP FOR DEEMED PAID FOREIGN TAX CREDIT.—Section 78, as amended 

by the preceding provisions of this Act, is amended— 

(A) by striking ‘‘any taxable year, an amount’’ and inserting ‘‘any taxable 

year— 

‘‘(1) an amount’’, and 

(B) by striking the period at the end and inserting ‘‘, and 

‘‘(2) an amount equal to the taxes deemed to be paid by such corporation 

under section 960(d) for such taxable year (determined by substituting ‘100 percent’ for ‘80 percent’ in such section) shall be treated for purposes of this title 

(other than sections 959, 960, and 961) as an increase in the foreign high return 

amount of such domestic corporation under section 951A for such taxable year.’’. 

(c) CONFORMING AMENDMENTS.— 

(1) Section 170(b)(2)(D) is amended by striking ‘‘computed without regard to’’ 

and all that follows and inserting ‘‘computed— 

‘‘(i) without regard to— 

‘‘(I) this section, 

‘‘(II) part VIII (except section 248), 

‘‘(III) any net operating loss carryback to the taxable year under 

section 172, 

‘‘(IV) any capital loss carryback to the taxable year under section 

1212(a)(1), and 

‘‘(ii) by substituting ‘100 percent’ for ‘50 percent’ in section 951A(a).’’. 

(2) Section 246(b)(1) is amended by— 

(A) striking ‘‘and without regard to’’ and inserting ‘‘without regard to’’, 

and 

(B) by striking the period at the end and inserting ‘‘, and by substituting 

‘100 percent’ for ‘50 percent’ in section 951A(a).’’. 

(3) Section 469(i)(3)(F) is amended by striking ‘‘determined without regard to’’ 

and all that follows and inserting ‘‘determined— 

‘‘(i) without regard to— 

‘‘(I) any amount includible in gross income under section 86, 

‘‘(II) the amounts allowable as a deduction under section 219, 

and 

‘‘(III) any passive activity loss or any loss allowable by reason of 

subsection (c)(7), and 

‘‘(ii) by substituting ‘100 percent’ for ‘50 percent’ in section 951A(a).’’. 

(4) Section 856(c)(2) is amended by striking ‘‘and’’ at the end of subparagraph 

(H), by adding ‘‘and’’ at the end of subparagraph (I), and by inserting after subparagraph (I) the following new subparagraph: 

‘‘(J) amounts includible in gross income under section 951A(a);’’. 

(5) Section 856(c)(3)(D) is amended by striking ‘‘dividends or other distributions on, and gain’’ and inserting ‘‘dividends, other distributions on, amounts includible in gross income under section 951A(a) with respect to, and gain’’. 

(6) The table of sections for subpart F of part III of subchapter N of chapter 

1 is amended by inserting after the item relating to section 951 the following 

new item: 

‘‘Sec. 951A. Foreign high return amount included in gross income of United States shareholders.’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable 

years of United States shareholders in which or with which such taxable years of 

foreign corporations end. 

SEC. 4302. LIMITATION ON DEDUCTION OF INTEREST BY DOMESTIC CORPORATIONS WHICH 

ARE MEMBERS OF AN INTERNATIONAL FINANCIAL REPORTING GROUP. 

(a) IN GENERAL.—Section 163 is amended by redesignating subsection (n) as subsection (p) and by inserting after subsection (m) the following new subsection: 

‘‘(n) LIMITATION ON DEDUCTION OF INTEREST BY DOMESTIC CORPORATIONS IN

INTERNATIONAL FINANCIAL REPORTING GROUPS.— 

‘‘(1) IN GENERAL.—In the case of any domestic corporation which is a member 

of any international financial reporting group, the deduction under this chapter 


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for interest paid or accrued during the taxable year shall not exceed the sum 

of— 

‘‘(A) the allowable percentage of 110 percent of the excess (if any) of — 

‘‘(i) the amount of such interest so paid or accrued, over 

‘‘(ii) the amount described in subparagraph (B), plus 

‘‘(B) the amount of interest includible in gross income of such corporation 

for such taxable year. 

‘‘(2) INTERNATIONAL FINANCIAL REPORTING GROUP.— 

‘‘(A) For purposes of this subsection, the term ‘international financial reporting group’ means, with respect to any reporting year, any group of entities which— 

‘‘(i) includes— 

‘‘(I) at least one foreign corporation engaged in a trade or business within the United States, or 

‘‘(II) at least one domestic corporation and one foreign corporation, 

‘‘(ii) prepares consolidated financial statements with respect to such 

year, and 

‘‘(iii) reports in such statements average annual gross receipts (determined in the aggregate with respect to all entities which are part of 

such group) for the 3-reporting-year period ending with such reporting 

year in excess of $100,000,000. 

‘‘(B) RULES RELATING TO DETERMINATION OF AVERAGE GROSS RECEIPTS.— 

For purposes of subparagraph (A)(iii), rules similar to the rules of section 

448(c)(3) shall apply. 

‘‘(3) ALLOWABLE PERCENTAGE.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘allowable percentage’ means, with respect 

to any domestic corporation for any taxable year, the ratio (expressed as a 

percentage and not greater than 100 percent) of— 

‘‘(i) such corporation’s allocable share of the international financial 

reporting group’s reported net interest expense for the reporting year 

of such group which ends in or with such taxable year of such corporation, over 

‘‘(ii) such corporation’s reported net interest expense for such reporting year of such group. 

‘‘(B) REPORTED NET INTEREST EXPENSE.—The term ‘reported net interest 

expense’ means— 

‘‘(i) with respect to any international financial reporting group for 

any reporting year, the excess of— 

‘‘(I) the aggregate amount of interest expense reported in such 

group’s consolidated financial statements for such taxable year, 

over 

‘‘(II) the aggregate amount of interest income reported in such 

group’s consolidated financial statements for such taxable year, 

and 

‘‘(ii) with respect to any domestic corporation for any reporting year, 

the excess of— 

‘‘(I) the amount of interest expense of such corporation reported 

in the books and records of the international financial reporting 

group which are used in preparing such group’s consolidated financial statements for such taxable year, over 

‘‘(II) the amount of interest income of such corporation reported 

in such books and records. 

‘‘(C) ALLOCABLE SHARE OF REPORTED NET INTEREST EXPENSE.—With respect to any domestic corporation which is a member of any international 

financial reporting group, such corporation’s allocable share of such group’s 

reported net interest expense for any reporting year is the portion of such 

expense which bears the same ratio to such expense as— 

‘‘(i) the EBITDA of such corporation for such reporting year, bears to 

‘‘(ii) the EBITDA of such group for such reporting year. 

‘‘(D) EBITDA.— 

‘‘(i) IN GENERAL.—The term ‘EBITDA’ means, with respect to any reporting year, earnings before interest, taxes, depreciation, and amortization— 

‘‘(I) as determined in the international financial reporting group’s 

consolidated financial statements for such year, or 

‘‘(II) for purposes of subparagraph (A)(i), as determined in the 

books and records of the international financial reporting group 


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which are used in preparing such statements if not determined in 

such statements. 

‘‘(ii) TREATMENT OF DISREGARDED ENTITIES.—The EBITDA of any domestic corporation shall not fail to include the EBITDA of any entity 

which is disregarded for purposes of this chapter. 

‘‘(iii) TREATMENT OF INTRA-GROUP DISTRIBUTIONS.—The EBITDA of 

any domestic corporation shall be determined without regard to any 

distribution received by such corporation from any other member of the 

international financial reporting group. 

‘‘(E) SPECIAL RULES FOR NON-POSITIVE EBITDA.— ‘‘(i) NON-POSITIVE GROUP EBITDA.—In the case of any international financial reporting group the EBITDA of which is zero or less, paragraph 

(1) shall not apply to any member of such group the EBITDA of which 

is above zero. 

‘‘(ii) NON-POSITIVE ENTITY EBITDA.—In the case of any group member 

the EBITDA of which is zero or less, paragraph (1) shall be applied 

without regard to subparagraph (A) thereof. 

‘‘(4) CONSOLIDATED FINANCIAL STATEMENT.—For purposes of this subsection, 

the term ‘consolidated financial statement’ means any consolidated financial 

statement described in paragraph (2)(A)(ii) if such statement is— 

‘‘(A) a financial statement which is certified as being prepared in accordance with generally accepted accounting principles, international financial 

reporting standards, or any other comparable method of accounting identified by the Secretary, and which is— 

‘‘(i) a 10-K (or successor form), or annual statement to shareholders, 

required to be filed with the United States Securities and Exchange 

Commission, 

‘‘(ii) an audited financial statement which is used for— 

‘‘(I) credit purposes, 

‘‘(II) reporting to shareholders, partners, or other proprietors, or 

to beneficiaries, or 

‘‘(III) any other substantial nontax purpose, 

but only if there is no statement described in clause (i), or 

‘‘(iii) filed with any other Federal or State agency for nontax purposes, but only if there is no statement described in clause (i) or (ii), 

or 

‘‘(B) a financial statement which— 

‘‘(i) is used for a purpose described in subclause (I), (II), or (III) of 

subparagraph (A)(ii), or 

‘‘(ii) filed with any regulatory or governmental body (whether domestic or foreign) specified by the Secretary, 

but only if there is no statement described in subparagraph (A). 

‘‘(5) REPORTING YEAR.—For purposes of this subsection, the term ‘reporting 

year’ means, with respect to any international financial reporting group, the 

year with respect to which the consolidated financial statements are prepared. 

‘‘(6) APPLICATION TO CERTAIN ENTITIES.— 

‘‘(A) PARTNERSHIPS.—Except as otherwise provided by the Secretary in 

paragraph (7), this subsection shall apply to any partnership which is a 

member of any international financial reporting group under rules similar 

to the rules of section 163(j)(3). 

‘‘(B) FOREIGN CORPORATIONS ENGAGED IN TRADE OR BUSINESS WITHIN THE

UNITED STATES.—Except as otherwise provided by the Secretary in paragraph (8), any deduction for interest paid or accrued by a foreign corporation engaged in a trade or business within the United States shall be limited in a manner consistent with the principles of this subsection. 

‘‘(C) CONSOLIDATED GROUPS.—For purposes of this subsection, the members of any group that file (or are required to file) a consolidated return 

with respect to the tax imposed by chapter 1 for a taxable year shall be 

treated as a single corporation. 

‘‘(7) REGULATIONS.—The Secretary may issue such regulations or other guidance as are necessary or appropriate to carry out the purposes of this subsection.’’. 

(b) CARRYFORWARD OF DISALLOWED INTEREST.— 

(1) IN GENERAL.—Section 163(o) is amended to read as follows: 

‘‘(o) CARRYFORWARD OF CERTAIN DISALLOWED INTEREST.—The amount of any interest not allowed as a deduction for any taxable year by reason of subsection (j)(1) 

or (n)(1) (whichever imposes the lower limitation with respect to such taxable year) 

shall be treated as interest (and as business interest for purposes of subsection 

(j)(1)) paid or accrued in the succeeding taxable year. Interest paid or accrued in 


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any taxable year (determined without regard to the preceding sentence) shall not 

be carried past the 5th taxable year following such taxable year, determined by 

treating interest as allowed as a deduction on a first-in, first-out basis.’’. 

(2) TREATMENT OF CARRYFORWARD OF DISALLOWED INTEREST IN CERTAIN CORPORATE ACQUISITIONS.—For rules related to the carryforward of disallowed interest in certain corporate acquisitions, see the amendments made by section 

3301(c). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 4303. EXCISE TAX ON CERTAIN PAYMENTS FROM DOMESTIC CORPORATIONS TO RELATED FOREIGN CORPORATIONS; ELECTION TO TREAT SUCH PAYMENTS AS EFFECTIVELY CONNECTED INCOME. 

(a) EXCISE TAX ON CERTAIN AMOUNTS FROM DOMESTIC CORPORATIONS TO FOREIGN

AFFILIATES.— 

(1) IN GENERAL.—Chapter 36 is amended by adding at the end the following 

new subchapter: 

‘‘Subchapter E—Tax on Certain Amounts to Foreign Affiliates 

‘‘Sec. 4491. Imposition of tax on certain amounts from domestic corporations to foreign affiliates. 

‘‘SEC. 4491. IMPOSITION OF TAX ON CERTAIN AMOUNTS FROM DOMESTIC CORPORATIONS TO 

FOREIGN AFFILIATES. 

‘‘(a) IN GENERAL.—There is hereby imposed on each specified amount paid or incurred by a domestic corporation to a foreign corporation which is a member of the 

same international financial reporting group as such domestic corporation a tax 

equal to the highest rate of tax in effect under section 11 multiplied by such 

amount. 

‘‘(b) BY WHOM PAID.—The tax imposed by subsection (a) shall be paid by the domestic corporation described in such subsection. 

‘‘(c) EXCEPTION FOR EFFECTIVELY CONNECTED INCOME.—Subsection (a) shall not 

apply to so much of any specified amount as is effectively connected with the conduct of a trade or business within the United States if such amount is subject to 

tax under chapter 1. In the case of any amount which is treated as effectively connected with the conduct of a trade or business within the United States by reason 

of section 882(g), the preceding sentence shall apply to such amount only if the domestic corporation provides to the Secretary (at such time and in such form and 

manner as the Secretary may provide) a copy of the election made under section 

882(g) by the foreign corporation referred to in subsection (a). 

‘‘(d) DEFINITIONS AND SPECIAL RULES.—Terms used in this section that are also 

used in section 882(g) shall have the same meaning as when used in such section 

and rules similar to the rules of paragraphs (5) and (6) of such section shall apply 

for purposes of this section.’’. 

(2) DENIAL OF DEDUCTION FOR TAX IMPOSED.—Section 275(a) is amended by 

inserting after paragraph (6) the following new paragraph: 

‘‘(7) Taxes imposed by section 4491.’’. 

(3) CLERICAL AMENDMENT.—The table of subchapters for chapter 36 is amended by adding at the end the following new item: 

‘‘SUBCHAPTER E. TAX ON CERTAIN AMOUNTS TO FOREIGN AFFILIATES.’’. 

(b) ELECTION TO TREAT CERTAIN PAYMENTS FROM DOMESTIC CORPORATIONS TO

RELATED FOREIGN CORPORATIONS AS EFFECTIVELY CONNECTED INCOME.—Section 

882 is amended by adding at the end the following new subsection: 

‘‘(g) ELECTION TO TREAT CERTAIN PAYMENTS FROM DOMESTIC CORPORATIONS TO

RELATED FOREIGN CORPORATIONS AS EFFECTIVELY CONNECTED INCOME.— 

‘‘(1) IN GENERAL.—In the case of any specified amount paid or incurred by a 

domestic corporation to a foreign corporation which is a member of the same 

international financial reporting group as such domestic corporation and which 

has elected to be subject to the provisions of this subsection— 

‘‘(A) such amount shall be taken into account (other than for purposes of 

sections 245, 245A, and 881) in the taxable year of such foreign corporation 

during which such amount is paid or incurred as if— 

‘‘(i) such foreign corporation were engaged in a trade or business 

within the United States, 

‘‘(ii) such foreign corporation had a permanent establishment in the 

United States during the taxable year, and 

‘‘(iii) such payment were effectively connected with the conduct of a 

trade or business within the United States and were attributable to 

such permanent establishment, 


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‘‘(B) for purposes of subsection (c)(1)(A), no deduction shall be allowed 

with respect to such amount and such subsection shall be applied without 

regard to such amount, and 

‘‘(C) the foreign corporation shall be allowed a deduction (for the taxable 

year referred to in subparagraph (A)) equal to the deemed expenses with 

respect to such amount. 

‘‘(2) SPECIFIED AMOUNT.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘specified amount’ means any amount which 

is, with respect to the payor, allowable as a deduction or includible in costs 

of goods sold, inventory, or the basis of a depreciable or amortizable asset. 

‘‘(B) EXCEPTIONS.—The term ‘specified amount’ shall not include— 

‘‘(i) interest, 

‘‘(ii) any amount paid or incurred for the acquisition of any security 

described in section 475(c)(2) (determined without regard to the last 

sentence thereof) or any commodity described in section 475(e)(2), 

‘‘(iii) except as provided in subparagraph (C), any amount with respect to which tax is imposed under section 881(a), and 

‘‘(iv) in the case of a payor which has elected to use a services cost 

method for purposes of section 482, any amount paid or incurred for 

services if such amount is the total services cost with no markup. 

‘‘(C) AMOUNTS NOT TREATED AS EFFECTIVELY CONNECTED TO EXTENT OF

GROSS-BASIS TAX.—Subparagraph (B)(iii) shall only apply to so much of any 

specified amount as bears the proportion to such amount as— 

‘‘(i) the rate of tax imposed under section 881(a) with respect to such 

amount, bears to 

‘‘(ii) 30 percent. 

‘‘(3) DEEMED EXPENSES.— 

‘‘(A) IN GENERAL.—The deemed expenses with respect to any specified 

amount received by a foreign corporation during any reporting year is the 

amount of expenses such that the net income ratio of such foreign corporation with respect to such amount (taking into account only such specified 

amount and such deemed expenses) is equal to the net income ratio of the 

international financial reporting group determined for such reporting year 

with respect to the product line to which the specified amount relates. 

‘‘(B) NET INCOME RATIO.—For purposes of this paragraph, the term ‘net 

income ratio’ means the ratio of— 

‘‘(i) net income determined without regard to interest income, interest 

expense, and income taxes, divided by 

‘‘(ii) revenues. 

‘‘(C) METHOD OF DETERMINATION.—Amounts described in subparagraph 

(B) shall be determined with respect to the international financial reporting 

group on the basis of the consolidated financial statements referred to in 

paragraph (4)(A)(i) and the books and records of the members of the international financial reporting group which are used in preparing such statements, taking into account only revenues and expenses of the members of 

such group (other than the members of such group which are (or are treated as) a domestic corporation for purposes of this subsection) derived from, 

or incurred with respect to— 

‘‘(i) persons who are not members of such group, and 

‘‘(ii) members of such group which are (or are treated as) a domestic 

corporation for purposes of this subsection. 

‘‘(4) INTERNATIONAL FINANCIAL REPORTING GROUP.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘international financial reporting group’ 

means any group of entities, with respect to any specified amount, if such 

amount is paid or incurred during a reporting year of such group with respect to which— 

‘‘(i) such group prepares consolidated financial statements (within the 

meaning of section 163(n)(4)) with respect to such year, and 

‘‘(ii) the average annual aggregate payment amount of such group for 

the 3-reporting-year period ending with such reporting year exceeds 

$100,000,000. 

‘‘(B) ANNUAL AGGREGATE PAYMENT AMOUNT.—The term ‘annual aggregate 

payment amount’ means, with respect to any reporting year of the group 

referred to in subparagraph (A)(i), the aggregate specified amounts to which 

paragraph (1) applies (or would apply if such group were an international 

financial reporting group). 


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‘‘(C) APPLICATION OF CERTAIN RULES.—Rules similar to the rules of subparagraphs (A), (B), and (D) of section 448(c)(3) shall apply for purposes of 

this paragraph. 

‘‘(5) TREATMENT OF PARTNERSHIPS.—Any specified amount paid, incurred, or 

received by a partnership which is a member of any international financial reporting group (and any amount treated as paid, incurred, or received by a partnership under this paragraph) shall be treated for purposes of this subsection 

as amounts paid, incurred, or received, respectively, by each partner of such 

partnership in an amount equal to such partner’s distributive share of the items 

of income, gain, deduction, or loss to which such amounts relate. 

‘‘(6) TREATMENT OF AMOUNTS IN CONNECTION WITH UNITED STATES TRADE OR

BUSINESS.—Any specified amount paid, incurred, or received by a foreign corporation in connection with the conduct of a trade or business within the United 

States (other than a trade or business it is deemed to conduct pursuant to this 

subsection) shall be treated for purposes of this subsection as an amount paid, 

incurred, or received, respectively, by a domestic corporation. For purposes of 

the preceding sentence, a foreign corporation shall be deemed to pay, incur, and 

receive amounts with respect to a trade or business it conducts within the 

United States (other than a trade or business it is deemed to conduct pursuant 

to this subsection) to the extent such foreign corporation would be treated as 

paying, incurring, or receiving such amounts from such trade or business if such 

trade or business were a domestic corporation. 

‘‘(7) JOINT AND SEVERAL LIABILITY OF MEMBERS OF INTERNAL FINANCIAL REPORTING GROUP.—In the case of any underpayment with respect to any taxable 

year of a foreign corporation which is a member of an international financial 

accounting group, each domestic corporation which is a member of such group 

at any time during such taxable year shall be jointly and severally liable for— 

‘‘(A) so much of such underpayment as does not exceed the excess (if any) 

of such underpayment over the amount of such underpayment determined 

without regard to this subsection, and 

‘‘(B) any penalty, addition to tax, or additional amount attributable to the 

amount described in subparagraph (A). 

‘‘(8) FOREIGN TAX CREDIT ALLOWED.—The credit allowed under section 906(a) 

with respect to amounts taken into account in income under paragraph (1)(A) 

shall be limited to 80 percent of the amount of taxes paid or accrued and determined without regard to section 906(b)(1). 

‘‘(9) ELECTION.—Any election under paragraph (1)— 

‘‘(A) shall be made at such time and in such form and manner as the Secretary may provide, and 

‘‘(B) shall apply for the taxable year for which made and all subsequent 

taxable years unless revoked with the consent of the Secretary. 

‘‘(10) REGULATIONS.—The Secretary may issue such regulations or other guidance as are necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance— 

‘‘(A) to provide for the proper determination of product lines, and 

‘‘(B) to prevent the avoidance of the purposes of this subsection through 

the use of conduit transactions or by other means.’’. 

(c) REPORTING REQUIREMENTS.— 

(1) REPORTING BY FOREIGN CORPORATION.—Section 6038C(b) is amended to 

read as follows: 

‘‘(b) REQUIRED INFORMATION.— 

‘‘(1) IN GENERAL.—The information described in this subsection is— 

‘‘(A) the information described in section 6038A(b), and 

‘‘(B) such other information as the Secretary may prescribe by regulations 

relating to any item not directly connected with a transaction for which information is required under subparagraph (A). 

‘‘(2) CERTAIN PAYMENTS FROM RELATED DOMESTIC CORPORATIONS.— 

‘‘(A) IN GENERAL.—In the case of any reporting corporation that receives 

during the taxable year any amount to which section 882(g)(1) applies, the 

information described in this subsection shall include, with respect to each 

member of the international financial reporting group from which any such 

amount is received— 

‘‘(i) the name and taxpayer identification number of such member, 

‘‘(ii) the aggregate amounts received from such member, 

‘‘(iii) the product lines to which such amounts relate, the aggregate 

amounts relating to each such product line, and the net income ratio 

for each such product line (determined under section 882(g)(3)(B) with 

respect to the international financial reporting group), and 


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‘‘(iv) a summary of any changes in financial accounting methods that 

affect the computation of any net income ratio described in clause (iii). 

‘‘(B) DEFINITIONS AND SPECIAL RULES.—Terms used in this paragraph 

that are also used in section 882(g) shall have the same meaning as when 

used in such section and rules similar to the rules of paragraphs (5) and 

(6) of such section shall apply for purposes of this paragraph.’’. 

(2) REPORTING BY DOMESTIC GROUP MEMBERS.— 

(A) IN GENERAL .—Subpart A of part III of subchapter A of chapter 61 

is amended by inserting after section 6038D the following new section: 

‘‘SEC. 6038E. INFORMATION WITH RESPECT TO CERTAIN PAYMENTS FROM DOMESTIC CORPORATIONS TO RELATED FOREIGN CORPORATIONS. 

‘‘(a) IN GENERAL.—In the case of any domestic corporation which pays or incurs 

any amount to which section 882(g)(1) applies, such person shall— 

‘‘(1) make a return according to the forms and regulations prescribed the Secretary, setting forth the information described in subsection (b), and 

‘‘(2) maintain (at the location, in the manner, and to the extent prescribed in 

regulations) such records as may be appropriate to determine liability for tax 

pursuant to paragraphs (1) and (7) of section 882(g). 

‘‘(b) REQUIRED INFORMATION.—The information described in this subsection is— 

‘‘(1) the name and taxpayer identification number of the common parent of 

the international financial reporting group in which such domestic corporation 

is a member, and 

‘‘(2) with respect to any person who receives an amount described in subsection (a) from such domestic corporation— 

‘‘(A) the name and taxpayer identification number of such person, 

‘‘(B) the aggregate amounts received by such person, 

‘‘(C) the product lines to which such amounts relate, the aggregate 

amounts relating to each such product line, and the net income ratio for 

each such product line (determined under section 882(g)(3)(B) with respect 

to the international financial reporting group), and 

‘‘(D) a summary of any changes in financial accounting methods that affect the computation of any net income ratios described in subparagraph 

(C). 

‘‘(c) DEFINITIONS AND SPECIAL RULES.—Terms used in this paragraph that are 

also used in section 882(g) shall have the same meaning as when used in such section and rules similar to the rules of paragraphs (5) and (6) of such section shall 

apply for purposes of this paragraph.’’. 

(B) CLERICAL AMENDMENT.—The table of sections for subpart A of part III 

of subchapter A of chapter 61 is amended by inserting after the item relating to section 6038D the following new item: 

‘‘Sec. 6038E. Information with respect to certain payments from domestic corporations to related foreign corporations.’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred after December 31, 2018. 

Subtitle E—Provisions Related to Possessions of 

the United States 

SEC. 4401. EXTENSION OF DEDUCTION ALLOWABLE WITH RESPECT TO INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES IN PUERTO RICO. 

(a) IN GENERAL.—Section 199(d)(8)(C), prior to its repeal by this Act, is amended— 

(1) by striking ‘‘first 11 taxable years’’ and inserting ‘‘first 12 taxable years’’, 

and 

(2) by striking ‘‘January 1, 2017’’ and inserting ‘‘January 1, 2018’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2016. 

SEC. 4402. EXTENSION OF TEMPORARY INCREASE IN LIMIT ON COVER OVER OF RUM EXCISE 

TAXES TO PUERTO RICO AND THE VIRGIN ISLANDS. 

(a) IN GENERAL.—Section 7652(f)(1) is amended by striking ‘‘January 1, 2017’’ and 

inserting ‘‘January 1, 2023’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to distilled spirits brought into the United States after December 31, 2016. 


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SEC. 4403. EXTENSION OF AMERICAN SAMOA ECONOMIC DEVELOPMENT CREDIT. 

(a) IN GENERAL.—Section 119(d) of division A of the Tax Relief and Health Care 

Act of 2006 is amended— 

(1) by striking ‘‘January 1, 2017’’ each place it appears and inserting ‘‘January 

1, 2023’’, 

(2) by striking ‘‘first 11 taxable years’’ in paragraph (1) and inserting ‘‘first 

17 taxable years’’, and 

(3) by striking ‘‘first 5 taxable years’’ in paragraph (2) and inserting ‘‘first 11 

taxable years’’. 

(b) TREATMENT OF CERTAIN REFERENCES.—Section 119(e) of division A of the Tax 

Relief and Health Care Act of 2006 is amended by adding at the end the following: 

‘‘References in this subsection to section 199 of the Internal Revenue Code of 1986 

shall be treated as references to such section as in effect before its repeal by the 

Tax Cuts and Jobs Act.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2016. 

Subtitle F—Other International Reforms 

SEC. 4501. RESTRICTION ON INSURANCE BUSINESS EXCEPTION TO PASSIVE FOREIGN INVESTMENT COMPANY RULES. 

(a) IN GENERAL.—Section 1297(b)(2)(B) is amended to read as follows: 

‘‘(B) derived in the active conduct of an insurance business by a qualifying insurance corporation (as defined in subsection (f)),’’. 

(b) QUALIFYING INSURANCE CORPORATION DEFINED.—Section 1297 is amended by 

adding at the end the following new subsection: 

‘‘(f) QUALIFYING INSURANCE CORPORATION.—For purposes of subsection (b)(2)(B)— 

‘‘(1) IN GENERAL.—The term ‘qualifying insurance corporation’ means, with respect to any taxable year, a foreign corporation— 

‘‘(A) which would be subject to tax under subchapter L if such corporation 

were a domestic corporation, and 

‘‘(B) the applicable insurance liabilities of which constitute more than 25 

percent of its total assets, determined on the basis of such liabilities and 

assets as reported on the corporation’s applicable financial statement for 

the last year ending with or within the taxable year. 

‘‘(2) ALTERNATIVE FACTS AND CIRCUMSTANCES TEST FOR CERTAIN CORPORA- TIONS.—If a corporation fails to qualify as a qualified insurance corporation 

under paragraph (1) solely because the percentage determined under paragraph 

(1)(B) is 25 percent or less, a United States person that owns stock in such corporation may elect to treat such stock as stock of a qualifying insurance corporation if— 

‘‘(A) the percentage so determined for the corporation is at least 10 percent, and 

‘‘(B) under regulations provided by the Secretary, based on the applicable 

facts and circumstances— 

‘‘(i) the corporation is predominantly engaged in an insurance business, and 

‘‘(ii) such failure is due solely to runoff-related or rating-related circumstances involving such insurance business. 

‘‘(3) APPLICABLE INSURANCE LIABILITIES.—For purposes of this subsection— 

‘‘(A) IN GENERAL.—The term ‘applicable insurance liabilities’ means, with 

respect to any life or property and casualty insurance business— 

‘‘(i) loss and loss adjustment expenses, and 

‘‘(ii) reserves (other than deficiency, contingency, or unearned premium reserves) for life and health insurance risks and life and health 

insurance claims with respect to contracts providing coverage for mortality or morbidity risks. 

‘‘(B) LIMITATIONS ON AMOUNT OF LIABILITIES.—Any amount determined 

under clause (i) or (ii) of subparagraph (A) shall not exceed the lesser of 

such amount— 

‘‘(i) as reported to the applicable insurance regulatory body in the applicable financial statement described in paragraph (4)(A) (or, if less, 

the amount required by applicable law or regulation), or 

‘‘(ii) as determined under regulations prescribed by the Secretary. 

‘‘(4) OTHER DEFINITIONS AND RULES.—For purposes of this subsection— 

‘‘(A) APPLICABLE FINANCIAL STATEMENT.—The term ‘applicable financial 

statement’ means a statement for financial reporting purposes which— 

‘‘(i) is made on the basis of generally accepted accounting principles, 


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‘‘(ii) is made on the basis of international financial reporting standards, but only if there is no statement that meets the requirement of 

clause (i), or 

‘‘(iii) except as otherwise provided by the Secretary in regulations, is 

the annual statement which is required to be filed with the applicable 

insurance regulatory body, but only if there is no statement which 

meets the requirements of clause (i) or (ii). 

‘‘(B) APPLICABLE INSURANCE REGULATORY BODY.—The term ‘applicable insurance regulatory body’ means, with respect to any insurance business, the 

entity established by law to license, authorize, or regulate such business 

and to which the statement described in subparagraph (A) is provided.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

TITLE V—EXEMPT ORGANIZATIONS 

Subtitle A—Unrelated Business Income Tax 

SEC. 5001. CLARIFICATION OF UNRELATED BUSINESS INCOME TAX TREATMENT OF ENTITIES 

TREATED AS EXEMPT FROM TAXATION UNDER SECTION 501(a). 

(a) IN GENERAL.—Section 511 is amended by adding at the end the following new 

subsection: 

‘‘(d) ORGANIZATIONS AND TRUSTS EXEMPT FROM TAXATION NOT SOLELY BY REASON

OF SECTION 501(a).—For purposes of subsections (a)(2) and (b)(2), an organization 

or trust shall not fail to be treated as exempt from taxation under this subtitle by 

reason of section 501(a) solely because such organization is also so exempt, or excludes amounts from gross income, by reason of any other provision of this title.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 5002. EXCLUSION OF RESEARCH INCOME LIMITED TO PUBLICLY AVAILABLE RESEARCH. 

(a) IN GENERAL.—Section 512(b)(9) is amended by striking ‘‘from research’’ and inserting ‘‘from such research’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

Subtitle B—Excise Taxes 

SEC. 5101. SIMPLIFICATION OF EXCISE TAX ON PRIVATE FOUNDATION INVESTMENT INCOME. 

(a) RATE REDUCTION.—Section 4940(a) is amended by striking ‘‘2 percent’’ and inserting ‘‘1.4 percent’’. 

(b) REPEAL OF SPECIAL RULES FOR CERTAIN PRIVATE FOUNDATIONS.—Section 4940 

is amended by striking subsection (e). 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 5102. PRIVATE OPERATING FOUNDATION REQUIREMENTS RELATING TO OPERATION OF 

ART MUSEUM. 

(a) IN GENERAL.—Section 4942(j) is amended by adding at the end the following 

new paragraph: 

‘‘(6) ORGANIZATION OPERATING ART MUSEUM.—For purposes of this section, the 

term ‘operating foundation’ shall not include an organization which operates an 

art museum as a substantial activity unless such museum is open during normal business hours to the public for at least 1,000 hours during the taxable 

year.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 5103. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES AND UNIVERSITIES. 

(a) IN GENERAL.—Chapter 42 is amended by adding at the end the following new 

subchapter: 

‘‘Subchapter H—Excise Tax Based on Investment Income of Private 

Colleges and Universities 

‘‘Sec. 4969. Excise tax based on investment income of private colleges and universities. 


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‘‘SEC. 4969. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES AND UNIVERSITIES. 

‘‘(a) TAX IMPOSED.—There is hereby imposed on each applicable educational institution for the taxable year a tax equal to 1.4 percent of the net investment income 

of such institution for the taxable year. 

‘‘(b) APPLICABLE EDUCATIONAL INSTITUTION.—For purposes of this subchapter— 

‘‘(1) IN GENERAL.—The term ‘applicable educational institution’ means an eligible educational institution (as defined in section 25A(e)(3))— 

‘‘(A) which has at least 500 students during the preceding taxable year, 

‘‘(B) which is not described in the first sentence of section 511(a)(2)(B), 

and 

‘‘(C) the aggregate fair market value of the assets of which at the end of 

the preceding taxable year (other than those assets which are used directly 

in carrying out the institution’s exempt purpose) is at least $250,000 per 

student of the institution. 

‘‘(2) STUDENTS.—For purposes of paragraph (1), the number of students of an 

institution shall be based on the daily average number of full-time students attending such institution (with part-time students taken into account on a fulltime student equivalent basis). 

‘‘(c) NET INVESTMENT INCOME.—For purposes of this section, net investment income shall be determined under rules similar to the rules of section 4940(c). 

‘‘(d) ASSETS AND NET INVESTMENT INCOME OF RELATED ORGANIZATIONS.— 

‘‘(1) IN GENERAL.—For purposes of subsections (b)(1)(C) and (c), the assets and 

net investment income of any related organization shall be treated as the assets 

and net investment income of the eligible educational institution. 

‘‘(2) RELATED ORGANIZATION.—For purposes of this subsection, the term ‘related organization’ means, with respect to an eligible educational institution, 

any organization which— 

‘‘(A) controls, or is controlled by, such institution, 

‘‘(B) is controlled by one or more persons that control such institution, or 

‘‘(C) is a supported organization (as defined in section 509(f)(3)), or an organization described in section 509(a)(3), during the taxable year with respect to such institution.’’. 

(b) CLERICAL AMENDMENT.—The table of subchapters for chapter 42 is amended 

by adding at the end the following new item: 

‘‘SUBCHAPTER H—EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES AND UNIVERSITIES’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

SEC. 5104. EXCEPTION FROM PRIVATE FOUNDATION EXCESS BUSINESS HOLDING TAX FOR 

INDEPENDENTLY-OPERATED PHILANTHROPIC BUSINESS HOLDINGS. 

(a) IN GENERAL.—Section 4943 is amended by adding at the end the following new 

subsection: 

‘‘(g) EXCEPTION FOR CERTAIN HOLDINGS LIMITED TO INDEPENDENTLY-OPERATED

PHILANTHROPIC BUSINESS.— 

‘‘(1) IN GENERAL.—Subsection (a) shall not apply with respect to the holdings 

of a private foundation in any business enterprise which for the taxable year 

meets— 

‘‘(A) the ownership requirements of paragraph (2), 

‘‘(B) the all profits to charity distribution requirement of paragraph (3), 

and 

‘‘(C) the independent operation requirements of paragraph (4). 

‘‘(2) OWNERSHIP.—The ownership requirements of this paragraph are met if— 

‘‘(A) 100 percent of the voting stock in the business enterprise is held by 

the private foundation at all times during the taxable year, and 

‘‘(B) all the private foundation’s ownership interests in the business enterprise were acquired not by purchase. 

‘‘(3) ALL PROFITS TO CHARITY.— 

‘‘(A) IN GENERAL.—The all profits to charity distribution requirement of 

this paragraph is met if the business enterprise, not later than 120 days 

after the close of the taxable year, distributes an amount equal to its net 

operating income for such taxable year to the private foundation. 

‘‘(B) NET OPERATING INCOME.—For purposes of this paragraph, the net operating income of any business enterprise for any taxable year is an amount 

equal to the gross income of the business enterprise for the taxable year, 

reduced by the sum of— 

‘‘(i) the deductions allowed by chapter 1 for the taxable year which 

are directly connected with the production of such income, 


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‘‘(ii) the tax imposed by chapter 1 on the business enterprise for the 

taxable year, and 

‘‘(iii) an amount for a reasonable reserve for working capital and 

other business needs of the business enterprise. 

‘‘(4) INDEPENDENT OPERATION.—The independent operation requirements of 

this paragraph are met if, at all times during the taxable year— 

‘‘(A) no substantial contributor (as defined in section 4958(c)(3)(C)) to the 

private foundation, or family member of such a contributor (determined 

under section 4958(f)(4)) is a director, officer, trustee, manager, employee, 

or contractor of the business enterprise (or an individual having powers or 

responsibilities similar to any of the foregoing), 

‘‘(B) at least a majority of the board of directors of the private foundation 

are not— 

‘‘(i) also directors or officers of the business enterprise, or 

‘‘(ii) members of the family (determined under section 4958(f)(4)) of 

a substantial contributor (as defined in section 4958(c)(3)(C)) to the private foundation, and 

‘‘(C) there is no loan outstanding from the business enterprise to a substantial contributor (as so defined) to the private foundation or a family 

member of such contributor (as so determined). 

‘‘(5) CERTAIN DEEMED PRIVATE FOUNDATIONS EXCLUDED.—This subsection 

shall not apply to— 

‘‘(A) any fund or organization treated as a private foundation for purposes 

of this section by reason of subsection (e) or (f), 

‘‘(B) any trust described in section 4947(a)(1) (relating to charitable 

trusts), and 

‘‘(C) any trust described in section 4947(a)(2) (relating to split-interest 

trusts).’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 

Subtitle C—Requirements for Organizations 

Exempt From Tax 

SEC. 5201. 501(c)(3) ORGANIZATIONS PERMITTED TO MAKE STATEMENTS RELATING TO POLITICAL CAMPAIGN IN ORDINARY COURSE OF ACTIVITIES. 

(a) IN GENERAL.—Section 501 is amended by adding at the end the following new 

subsection: 

‘‘(s) SPECIAL RULE RELATING TO POLITICAL CAMPAIGN STATEMENTS OF ORGANIZATIONS DESCRIBED IN SUBSECTION (c)(3).— 

‘‘(1) IN GENERAL.—For purposes of subsection (c)(3) and sections 170(c)(2), 

2055, 2106, 2522, and 4955, an organization shall not fail to be treated as organized and operated exclusively for a purpose described in subsection (c)(3), nor 

shall it be deemed to have participated in, or intervened in any political campaign on behalf of (or in opposition to) any candidate for public office, solely because of the content of any statement which— 

‘‘(A) is made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose, and 

‘‘(B) results in the organization incurring not more than de minimis incremental expenses. 

‘‘(2) TERMINATION.—Paragraph (1) shall not apply to taxable years beginning 

after December 31, 2023.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2018. 

SEC. 5202. ADDITIONAL REPORTING REQUIREMENTS FOR DONOR ADVISED FUND SPONSORING ORGANIZATIONS. 

(a) IN GENERAL.—Section 6033(k) is amended by striking ‘‘and’’ at the end of paragraph (2), by striking the period at the end of paragraph (3), and by adding at the 

end the following new paragraphs: 

‘‘(4) indicate the average amount of grants made from such funds during such 

taxable year (expressed as a percentage of the value of assets held in such funds 

at the beginning of such taxable year), and 

‘‘(5) indicate whether the organization has a policy with respect to donor advised funds (as so defined) for frequency and minimum level of distributions. 

Such organization shall include with such return a copy of any policy described in 

paragraph (5).’’. 


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(b) EFFECTIVE DATE.—The amendment made by this section shall apply for returns filed for taxable years beginning after December 31, 2017. 

Amend the title so as to read: 

A bill to provide for reconciliation pursuant to titles II and V of 

the concurrent resolution on the budget for fiscal year 2018. 

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

H.R. 1, as reported by the Committee on Ways and Means, 

makes comprehensive reforms to the Internal Revenue Code of 

1986 to provide tax relief and simplification to American families 

and individuals so that they can keep more of what they earn and 

devote less time and resources to filing their tax returns; to provide 

tax relief to businesses of all sizes so that they can create jobs, increase paychecks, and invest in the American economy; and to 

modernize the U.S. international tax system to unleash the global 

competitiveness of America and American businesses. H.R. 1 fulfills the reconciliation instructions included in Titles II and V of 

the Concurrent Resolution on the Budget for Fiscal Year 2018. 

B. BACKGROUND AND NEED FOR LEGISLATION

H.R. 1 reflects the Committee’s long-standing focus on achieving 

comprehensive tax reform in order to promote economic growth and 

job creation, to support global competiveness, and to reduce tax 

burdens on families and individuals. Lowering tax burdens on the 

middle class and creating a healthier economy will help American 

families, as will reforms that make the system simpler and fairer 

for taxpayers. Lowering the tax burden on businesses small and 

large and modernizing the U.S. international tax rules will promote 

investment and job creation and put America back in the lead 

pack. The Committee believes that H.R. 1 delivers a 21st century 

tax code that is built for growth. 

C. LEGISLATIVE HISTORY

Budget resolution 

On October 26, 2017, the House of Representatives approved H. 

Con. Res. 71, the budget resolution for fiscal year 2018. Pursuant 

to section 5113(b) of H. Con. Res. 71, the Committee on Ways and 

Means was directed to submit to the Committee on the Budget recommendations for changes in law within the jurisdiction of the 

Committee on Ways and Means that increase the deficit by not 

more than $1,500,000,000,000 for the period of fiscal years 2018 

through 2027. 

Committee action 

Beginning November 6, 2017, the Committee on Ways and 

Means marked up H.R. 1, a bill to provide for reconciliation pursuant to the concurrent resolution on the budget for fiscal year 2018, 

and ordered the bill, as amended, favorably reported (with a 

quorum being present) on November 9, 2017. 


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Committee hearings 

The Ways and Means Committee has held extensive hearings 

over many years focused on tax reform overall and on particular 

aspects of tax reform. 

During the 115th Congress, the Committee held the following 

hearings that addressed aspects of tax reform: 

• How Tax Reform Will Grow our Economy and Create Jobs 

(May 18, 2017) 

• Increasing U.S. Competitiveness and Preventing American 

Jobs from Moving Overseas (May 23, 2017) 

• The President’s Fiscal Year 2018 Budget Proposals (May 

24, 2017). 

Also during the 115th Congress, the Subcommittee on Tax Policy 

held hearings on the following tax reform topics: 

• How Tax Reform Will Help America’s Small Businesses 

Grow and Create New Jobs (July 13, 2017) 

• How Tax Reform Will Simplify Our Broken Tax Code and 

Help Individuals and Families (July 19, 2017). 

In addition, the Committee and its Subcommittees held many 

hearings over the past several years on a wide variety of subjects 

relevant to comprehensive tax reform, including the following hearings: 

Committee on Ways and Means 

• The Global Tax Environment in 2016 and Implications for 

International Tax Reform (February 24, 2016) 

• Reaching America’s Potential: Delivering Growth and Opportunity for All Americans (February 2, 2016) 

• Benefits of Permanent Tax Policy for America’s Job Creators (April 8, 2014). 

• Tax Reform: Tax Havens, Base Erosion, and Profit-Shifting (June 13, 2013) 

• Tax Reform and Residential Real Estate (April 25, 2013) 

• Tax Reform and Tax Provisions Affecting State and Local 

Governments (March 19, 2013) 

• Tax Reform and Charitable Contributions (February 14, 

2013) 

• Tax Reform and the Tax Treatment of Capital Gains (September 20, 2012) 

• Tax Reform and the U.S. Manufacturing Sector (July 19, 

2012) 

• Tax Reform and Tax-Favored Retirement Accounts (April 

17, 2012) 

• Treatment of Closely-Held Businesses in the Context of 

Tax Reform (March 7, 2012) 

• Interaction of Tax and Financial Accounting on Tax Reform (February 8, 2012) 

• Economic Models Available to the Joint Committee on Taxation for Analyzing Tax Reform Proposals (September 21, 

2011) 

• Tax Reform and Consumption-Based Tax Systems (July 

26, 2011) 

• Tax Reform and the Tax Treatment of Debt and Equity 

(July 13, 2011) 


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• How Business Tax Reform Can Encourage Job Creation 

(June 2, 2011) • How Other Countries Have Used Tax Reform to Help 

Their Companies Compete in the Global Market and Create 

Jobs (May 24, 2011) • The Need for Comprehensive Tax Reform to Help American Companies Compete in the Global Market and Create 

Jobs for American Workers (May 12, 2011) • How the Tax Code’s Burdens on Individuals and Families 

Demonstrate the Need for Comprehensive Tax Reform (April 

13, 2011) • Fundamental Tax Reform (January 20, 2011) 

Subcommittee on Tax Policy (formerly Subcommittee on Select Revenue Measures) 

• Perspectives on Need for Tax Reform (May 25, 2016) • Member Proposals for Improvements to the U.S. Tax System (May 12, 2016) • Fundamental Tax Reform Proposals, Part II (April 13, 

2016) • Fundamental Tax Reform Proposals, Part I (March 22, 

2016) • OECD Base Erosion and Profit Shifting (BEPS) Project 

(December 1, 2015) • Burden of the Estate Tax on Family Businesses and 

Farms (March 18, 2015) • Dynamic Analysis of the Tax Reform Act of 2014 (July 30, 

2014) • Small Business Pass-Through Entity Tax Reform Discussion Draft (May 15, 2013) • Financial Products Tax Reform Discussion Draft (March 

20, 2013) • How Welfare and Tax Benefits Can Discourage Work 

(June 27, 2012) 

• Framework for Evaluating Certain Expiring Tax Provisions (June 8, 2012) 

• Certain Expiring Tax Provisions (April 26, 2012) 

• International Tax Reform Discussion Draft (November 17, 

2011) 

• Energy Tax Policy and Tax Reform (September 22, 2011) 

• Tax Reform and Foreign Investment in the United States 

(June 23, 2011) 

• Small Business and Tax Reform (March 3, 2011) 

Subcommittee on Oversight 

• Back to School: A Review of Tax-Exempt College and University Endowments (September 13, 2016) 

• Tax-Exempt Colleges and Universities: Encouraging the 

Free Exchange of Ideas (March 2, 2016) 

• The Rising Costs of Higher Education and Tax Policy (October 7, 2015) 

• The Department of Labor’s Proposed Fiduciary Rule (September 30, 2015) 

• Protecting Small Businesses from IRS Abuse (February 11, 

2015) 


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• Internal Revenue Service’s Colleges and Universities Compliance Project (May 8, 2013) • Public Charity Organizational Issues, Unrelated Business 

Income Tax, and the Revised Form 990 (July 25, 2012) • Tax Exempt Organizations (May 16, 2012) 

II. EXPLANATION OF THE BILL 

TITLE I—TAX REFORM FOR INDIVIDUALS 

A. SIMPLIFICATION AND REFORM OF RATES, STANDARD DEDUCTIONS, AND EXEMPTIONS

1. Reduction and simplification of individual income tax rates (secs. 

1001 and 1005 of the bill and sec. 1 of the Code) 

PRESENT LAW

In general 

To determine regular tax liability, an individual taxpayer generally must apply the tax rate schedules (or the tax tables) to his 

or her regular taxable income. The rate schedules are broken into 

several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer’s income increases. 

Tax rate schedules 

Separate rate schedules apply based on an individual’s filing status. For 2017, the regular individual income tax rate schedules are 

as follows: 

TABLE 1.—FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2017 1

If taxable income is: Then income tax equals: 

Single Individuals 

Not over $9,325 ......................................................................... 10% of the taxable income. 

Over $9,325 but not over $37,950 ........................................... $932.50 plus 15% of the excess over $9,325. 

Over $37,950 but not over $91,900 ......................................... $5,226.25 plus 25% of the excess over $37,950. 

Over $91,900 but not over $191,650 ....................................... $18,713.75 plus 28% of the excess over $91,900. 

Over $191,650 but not over $416,700 ..................................... $46,643.75 plus 33% of the excess over $191,650. 

Over $416,700 but not over $418,400 ..................................... $120,910.25 plus 35% of the excess over $416,700. 

Over $418,400 ........................................................................... $121,505.25 plus 39.6% of the excess over $418,400. 

Heads of Households 

Not over $13,350 ....................................................................... 10% of the taxable income. 

Over $13,350 but not over $50,800 ......................................... $1,335 plus 15% of the excess over $13,350. 

Over $50,800 but not over $131,200 ....................................... $6,952.50 plus 25% of the excess over $50,800. 

Over $131,200 but not over $212,500 ..................................... $27,052.50 plus 28% of the excess over $131,200. 

Over $212,500 but not over $416,700 ..................................... $49,816.50 plus 33% of the excess over $212,500. 

Over $416,700 but not over $444,550 ..................................... $117,202.50 plus 35% of the excess over $416,700. 

Over $444,550 ........................................................................... $126,950 plus 39.6% of the excess over $444,550. 

Married Individuals Filing Joint Returns and Surviving Spouses 

Not over $18,650 ....................................................................... 10% of the taxable income. 

Over $18,650 but not over $75,900 ......................................... $1,865 plus 15% of the excess over $18,650. 

Over $75,900 but not over $153,100 ....................................... $10,452.50 plus 25% of the excess over $75,900. 

Over $153,100 but not over $233,350 ..................................... $29,752.50 plus 28% of the excess over $153,100. 

Over $233,350 but not over $416,700 ..................................... $52,222.50 plus 33% of the excess over $233,350. 

Over $416,700 but not over $470,700 ..................................... $112,728 plus 35% of the excess over $416,700. 

Over $470,700 ........................................................................... $131,628 plus 39.6% of the excess over $470,700. 


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1Sec. 1(g). Unless otherwise stated, all section references are to the Internal Revenue Code 

of 1986, as amended (the ‘‘Code’’). 2Sec. 1(g)(2). 

3Special rules apply for determining which parent’s rate applies where a joint return is not 

filed. 4Sec. 1(g)(4) and sec. 911(d)(2). 

5Sec. 1(h). 

6Sec. 3.02 of Rev. Proc. 2016–55, supra. 

TABLE 1.—FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2017 1—Continued 

If taxable income is: Then income tax equals: 

Married Individuals Filing Separate Returns 

Not over $9,325 ......................................................................... 10% of the taxable income. 

Over $9,325 but not over $37,950 ........................................... $932.50 plus 15% of the excess over $9,325. 

Over $37,950 but not over $76,550 ......................................... $5,226.25 plus 25% of the excess over $37,950. 

Over $76,550 but not over $116,675 ....................................... $14,876.25 plus 28% of the excess over $76,550. 

Over $116,675 but not over $208,350 ..................................... $26,111.25 plus 33% of the excess over $116,675. 

Over $208,350 but not over $235,350 ..................................... $56,364 plus 35% of the excess over $208,350. 

Over $235,350 ........................................................................... $65,814 plus 39.6% of the excess over $235,350. 

Estates and Trusts 

Not over $2,550 ......................................................................... 15% of the taxable income. 

Over $2,550 but not over $6,000 ............................................. $382.50 plus 25% of the excess over $2,550. 

Over $6,000 but not over $9,150 ............................................. $1,245 plus 28% of the excess over $6,000. 

Over $9,150 but not over $12,500 ........................................... $2,127 plus 33% of the excess over $9,150. 

Over $12,500 ............................................................................. $3,232.50 plus 39.6% of the excess over $12,500. 

1 Rev. Proc. 2016–55, 2016–45 I.R.B. 707, sec. 3.01. 

Unearned income of children 

Special rules (generally referred to as the ‘‘kiddie tax’’) apply to 

the net unearned income of certain children.1 Generally, the kiddie 

tax applies to a child if: (1) the child has not reached the age of 

19 by the close of the taxable year, or the child is a full-time student under the age of 24, and either of the child’s parents is alive 

at such time; (2) the child’s unearned income exceeds $2,100 (for 

2017); and (3) the child does not file a joint return.2 The kiddie tax 

applies regardless of whether the child may be claimed as a dependent by either or both parents. For children above age 17, the 

kiddie tax applies only to children whose earned income does not 

exceed one-half of the amount of their support. 

Under these rules, the net unearned income of a child (for 2017, 

unearned income over $2,100) is taxed at the parents’ tax rates if 

the parents’ tax rates are higher than the tax rates of the child.3

The remainder of a child’s taxable income (i.e., earned income, plus 

unearned income up to $2,100 (for 2017), less the child’s standard 

deduction) is taxed at the child’s rates, regardless of whether the 

kiddie tax applies to the child. For these purposes, unearned income is income other than wages, salaries, professional fees, other 

amounts received as compensation for personal services actually 

rendered, and distributions from qualified disability trusts.4 In general, a child is eligible to use the preferential tax rates for qualified 

dividends and capital gains.5

The kiddie tax is calculated by computing the ‘‘allocable parental 

tax.’’ This involves adding the net unearned income of the child to 

the parent’s income and then applying the parent’s tax rate. A 

child’s ‘‘net unearned income’’ is the child’s unearned income less 

the sum of (1) the minimum standard deduction allowed to dependents ($1,050 for 2017 6), and (2) the greater of (a) such minimum 


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7Sec. 1(g)(4). 

8Sec. 1(g)(3). 

9Sec. 1(g)(6). See Form 8615, Tax for Certain Children Who Have Unearned Income. 

10Sec. 1(g)(1). 11Sec. 1(g)(7). 12Sec. 1(f)(5). 

standard deduction amount or (b) the amount of allowable itemized 

deductions that are directly connected with the production of the 

unearned income.7

The allocable parental tax equals the hypothetical increase in tax 

to the parent that results from adding the child’s net unearned income to the parent’s taxable income.8 If the child has net capital 

gains or qualified dividends, these items are allocated to the parent’s hypothetical taxable income according to the ratio of net unearned income to the child’s total unearned income. If a parent has 

more than one child subject to the kiddie tax, the net unearned income of all children is combined, and a single kiddie tax is calculated. Each child is then allocated a proportionate share of the 

hypothetical increase, based upon the child’s net unearned income 

relative to the aggregate net unearned income of all of the parent’s 

children subject to the tax. 

Generally, a child must file a separate return to report his or her 

income.9 In such case, items on the parents’ return are not affected 

by the child’s income, and the total tax due from the child is the 

greater of: 

1. The sum of (a) the tax payable by the child on the child’s 

earned income and unearned income up to $2,100 (for 2017), 

plus (b) the allocable parental tax on the child’s unearned income, or 

2. The tax on the child’s income without regard to the kiddie 

tax provisions.10

Under certain circumstances, a parent may elect to report a 

child’s unearned income on the parent’s return.11

Indexing tax provisions for inflation 

Under present law, many parameters of the tax system are adjusted for inflation to protect taxpayers from the effects of rising 

prices. Most of the adjustments are based on annual changes in the 

level of the Consumer Price Index for all Urban Consumers (‘‘CPI– 

U’’).12 The CPI–U is an index that measures prices paid by typical 

urban consumers on a broad range of products, and is developed 

and published by the Department of Labor. 

Among the inflation-indexed tax parameters are the following individual income tax amounts: (1) the regular income tax brackets; 

(2) the basic standard deduction; (3) the additional standard deduction for aged and blind; (4) the personal exemption amount; (5) the 

thresholds for the overall limitation on itemized deductions and the 

personal exemption phase-out; (6) the phase-in and phase-out 

thresholds of the earned income credit; (7) IRA contribution limits 

and deductible amounts; and (8) the saver’s credit. 

Capital gains rates 

In general 

In the case of an individual, estate, or trust, any adjusted net 

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cent rate is not taxed. Any adjusted net capital gain which otherwise would be taxed at rates over 15-percent and below 39.6 percent is taxed at a 15-percent rate. Any adjusted net capital gain 

which otherwise would be taxed at a 39.6-percent rate is taxed at 

a 20-percent rate. 

The unrecaptured section 1250 gain is taxed at a maximum rate 

of 25 percent, and 28-percent rate gain is taxed at a maximum rate 

of 28 percent. Any amount of unrecaptured section 1250 gain or 28- 

percent rate gain otherwise taxed at a 10- or 15-percent rate is 

taxed at the otherwise applicable rate. 

In addition, a tax is imposed on net investment income in the 

case of an individual, estate, or trust. In the case of an individual, 

the tax is 3.8 percent of the lesser of net investment income, which 

includes gains and dividends, or the excess of modified adjusted 

gross income over the threshold amount. The threshold amount is 

$250,000 in the case of a joint return or surviving spouse, $125,000 

in the case of a married individual filing a separate return, and 

$200,000 in the case of any other individual. 

Definitions 

Net capital gain 

In general, gain or loss reflected in the value of an asset is not 

recognized for income tax purposes until a taxpayer disposes of the 

asset. On the sale or exchange of a capital asset, any gain generally 

is included in income. Net capital gain is the excess of the net longterm capital gain for the taxable year over the net short-term capital loss for the year. Gain or loss is treated as long-term if the 

asset is held for more than one year. 

A capital asset generally means any property except (1) inventory, stock in trade, or property held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, 

(2) depreciable or real property used in the taxpayer’s trade or 

business, (3) specified literary or artistic property, (4) business accounts or notes receivable, (5) certain U.S. publications, (6) certain 

commodity derivative financial instruments, (7) hedging transactions, and (8) business supplies. In addition, the net gain from 

the disposition of certain property used in the taxpayer’s trade or 

business is treated as long-term capital gain. Gain from the disposition of depreciable personal property is not treated as capital 

gain to the extent of all previous depreciation allowances. Gain 

from the disposition of depreciable real property is generally not 

treated as capital gain to the extent of the depreciation allowances 

in excess of the allowances available under the straight-line method of depreciation. 

Adjusted net capital gain 

The ‘‘adjusted net capital gain’’ of an individual is the net capital 

gain reduced (but not below zero) by the sum of the 28-percent rate 

gain and the unrecaptured section 1250 gain. The net capital gain 

is reduced by the amount of gain that the individual treats as investment income for purposes of determining the investment interest limitation under section 163(d). 


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Qualified dividend income 

Adjusted net capital gain is increased by the amount of qualified 

dividend income. 

A dividend is the distribution of property made by a corporation 

to its shareholders out of its after-tax earnings and profits. Qualified dividends generally includes dividends received from domestic 

corporations and qualified foreign corporations. The term ‘‘qualified 

foreign corporation’’ includes a foreign corporation that is eligible 

for the benefits of a comprehensive income tax treaty with the 

United States which the Treasury Department determines to be 

satisfactory and which includes an exchange of information program. In addition, a foreign corporation is treated as a qualified 

foreign corporation for any dividend paid by the corporation with 

respect to stock that is readily tradable on an established securities 

market in the United States. 

If a shareholder does not hold a share of stock for more than 60 

days during the 121-day period beginning 60 days before the exdividend date (as measured under section 246(c)), dividends received on the stock are not eligible for the reduced rates. Also, the 

reduced rates are not available for dividends to the extent that the 

taxpayer is obligated to make related payments with respect to positions in substantially similar or related property. 

Dividends received from a corporation that is a passive foreign 

investment company (as defined in section 1297) in either the taxable year of the distribution, or the preceding taxable year, are not 

qualified dividends. 

A dividend is treated as investment income for purposes of determining the amount of deductible investment interest only if the 

taxpayer elects to treat the dividend as not eligible for the reduced 

rates. 

The amount of dividends qualifying for reduced rates that may 

be paid by a regulated investment company (‘‘RIC’’) for any taxable 

year in which the qualified dividend income received by the RIC is 

less than 95 percent of its gross income (as specially computed) 

may not exceed the sum of (1) the qualified dividend income of the 

RIC for the taxable year and (2) the amount of earnings and profits 

accumulated in a non-RIC taxable year that were distributed by 

the RIC during the taxable year. 

The amount of qualified dividend income that may be paid by a 

real estate investment trust (‘‘REIT’’) for any taxable year may not 

exceed the sum of (1) the qualified dividend income of the REIT for 

the taxable year, (2) an amount equal to the excess of the income 

subject to the taxes imposed by section 857(b)(1) and the regulations prescribed under section 337(d) for the preceding taxable year 

over the amount of these taxes for the preceding taxable year, and 

(3) the amount of earnings and profits accumulated in a non-REIT 

taxable year that were distributed by the REIT during the taxable 

year. 

Dividends received from an organization that was exempt from 

tax under section 501 or was a tax-exempt farmers’ cooperative in 

either the taxable year of the distribution or the preceding taxable 

year; dividends received from a mutual savings bank that received 

a deduction under section 591; or deductible dividends paid on employer securities are not qualified dividend income. 


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28-percent rate gain 

The term ‘‘28-percent rate gain’’ means the excess of the sum of 

the amount of net gain attributable to long-term capital gains and 

losses from the sale or exchange of collectibles (as defined in section 408(m) without regard to paragraph (3) thereof) and the 

amount of gain equal to the additional amount of gain that would 

be excluded from gross income under section 1202 (relating to certain small business stock) if the percentage limitations of section 

1202(a) did not apply, over the sum of the net short-term capital 

loss for the taxable year and any long-term capital loss carryover 

to the taxable year. 

Unrecaptured section 1250 gain 

‘‘Unrecaptured section 1250 gain’’ means any long-term capital 

gain from the sale or exchange of section 1250 property (i.e., depreciable real estate) held more than one year to the extent of the gain 

that would have been treated as ordinary income if section 1250 

applied to all depreciation, reduced by the net loss (if any) attributable to the items taken into account in computing 28-percent rate 

gain. The amount of unrecaptured section 1250 gain (before the reduction for the net loss) attributable to the disposition of property 

to which section 1231 (relating to certain property used in a trade 

or business) applies may not exceed the net section 1231 gain for 

the year. 

REASONS FOR CHANGE

The Committee believes that changing the individual rate structure by reducing the total number of rate brackets and the size of 

some rate brackets creates a simpler and fairer Federal income tax. 

The committee further believes that a tax system with lower rates 

will allow taxpayers to keep more of their earnings to spend on 

family needs and will contribute to economic growth. 

Under present law, the tax on the unearned income of children 

depends on the income of the child, parents, and when applicable, 

siblings. The Committee intends to simplify the taxation of unearned income of children, while continuing to minimize the benefit 

of tax-motivated income shifting, by subjecting this unearned income to the rates applicable to trusts. 

The Committee believes that the cost-of-living adjustments provided throughout the code can be improved by indexing with the 

chained Consumer Price Index (‘‘C–CPI–U’’), which is designed by 

the Bureau of Labor Statistics to be a closer approximation of a 

cost-of-living index than other CPI measures. 

EXPLANATION OF PROVISION

Modification of rates 

The provision replaces the individual income tax rate structure 

with a new rate structure. 


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TABLE 2.—FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE PROVISION 

If taxable income is: Then income tax equals: 

Single Individuals 

Not over $45,000 ....................................................................... 12% of the taxable income. 

Over $45,000 but not over $200,000 ....................................... $5,400 plus 25% of the excess over $45,000. 

Over $200,000 but not over $500,000 ..................................... $44,150 plus 35% of the excess over $200,000. 

Over $500,000 ........................................................................... $149,150 plus 39.6% of the excess over $500,000. 

Heads of Households 

Not over $67,500 ....................................................................... 12% of the taxable income. 

Over $67,500 but not over $200,000 ....................................... $8,100 plus 25% of the excess over $67,500. 

Over $200,000 but not over $500,000 ..................................... $41,225 plus 35% of the excess over $200,000. 

Over $500,000 ........................................................................... $146,225 plus 39.6% of the excess over $500,000. 

Married Individuals Filing Joint Returns and Surviving Spouses 

Not over $90,000 ....................................................................... 12% of the taxable income. 

Over $90,000 but not over $260,000 ....................................... $10,800 plus 25% of the excess over $90,000. 

Over $260,000 but not over $1,000,000 .................................. $53,300 plus 35% of the excess over $260,000. 

Over $1,000,000 ........................................................................ $312,300 plus 39.6% of the excess over $1,000,000. 

Married Individuals Filing Separate Returns 

Not over $45,000 ....................................................................... 12% of the taxable income. 

Over $45,000 but not over $130,000 ....................................... $5,400 plus 25% of the excess over $45,000. 

Over $130,000 but not over $500,000 ..................................... $26,650 plus 35% of the excess over $130,000. 

Over $500,000 ........................................................................... $156,150 plus 39.6% of the excess over $500,000. 

Estates and Trusts 

Not over $2,550 ......................................................................... 12% of the taxable income. 

Over $2,550 but not over $9,150 ............................................. $306 plus 25% of the excess over $2,550. 

Over $9,150 but not over $12,500 ........................................... $1,956 plus 35% of the excess over $9,150. 

Over $12,500 ............................................................................. $3,128.50 plus 39.6% of the excess over $12,500. 

The bracket thresholds are all adjusted for inflation and then 

rounded to the next lowest multiple of $100 in future years. Unlike 

present law (which uses a measure of the consumer price index for 

all-urban consumers), the new inflation adjustment uses the 

chained consumer price index for all-urban consumers. 

Phaseout of benefit of the 12-percent bracket 

For taxpayers with adjusted gross income in excess of $1,000,000 ($1,200,000 in the case of married taxpayers filing jointly), the benefit of the 12-percent bracket, as measured against the 39.6-percent 

bracket, is phased out at a rate of 6-percent for taxpayers whose 

AGI is in excess of these amounts. Thus, in the case of a married 

taxpayer filing a joint return, if AGI is in excess of $1,200,000, the 

benefit of $24,840 (27.6-percent of $90,000) phases out over an income range of $414,000. The phaseout thresholds are indexed for 

inflation. 

Simplification of tax on unearned income of children 

The provision simplifies the ‘‘kiddie tax’’ by effectively applying 

the rates applicable to trusts, without the 12-percent rate applicable to estates and trusts, to the net unearned income of a child to 

whom the provision applies. Specifically, the amount of taxable income taxed at a 12 percent rate may not exceed the amount of taxable income in excess of the net unearned income of the child. The 


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amount of taxable income taxed at rates below 35 percent may not 

exceed sum of (1) the taxable income in excess of the net unearned 

income of the child plus (2) the amount of taxable income not in 

excess of the 35-percent bracket threshold applicable to a trust. 

The amount of taxable income taxed at rates below 39.6 percent 

may not exceed sum of (1) the taxable income in excess of the net 

unearned income of the child plus (2) the amount of taxable income 

not in excess of the 39.6-percent bracket threshold applicable to a 

trust. 

The following examples illustrate the application of the provision: 

Example 1.—Assume a child to whom the ‘‘kiddie tax’’ applies has $60,000 taxable income of which $50,000 is net unearned income, which would otherwise be treated as ordinary income, such 

as interest. Assume the 25-percent bracket threshold amount for 

the taxable year is $45,000 for an unmarried taxpayer, and the 35- 

percent and 39.6-percent bracket thresholds for a trust are $9,150 

and $12,500 respectively. The child’s 25-percent bracket threshold is $10,000 ($60,000 less $50,000), 35-percent bracket threshold is $19,150 ($10,000 plus 

$9,150), and 39.6-percent bracket threshold is $22,500 ($10,000 

plus $12,500). Thus, $10,000 is taxed at a 12-percent rate, $9,150 

at a 25 percent rate, $3,350 at a 35-percent rate, and $37,500 at 

a 39.6-percent rate. 

Example 2.—Assume the same facts as Example 1 except that the amount of the child’s net unearned income is $20,000 (rather 

than $50,000). 

The child’s 25-percent bracket threshold is $40,000 ($60,000 less $50,000), 35-percent bracket threshold is $49,150 ($40,000 plus 

$9,150), and the 39.6-percent bracket threshold is $52,500 ($40,000 

plus $12,500). Thus, $40,000 is taxed at a 10-percent rate, $9,150 

at a 25-percent rate, $3,350 at a 35-percent rate, and $7,500 at a 

39.6-percent rate. 

Replacing CPI–U with chained CPI–U 

The provision requires the use of the chained CPI–U (‘‘C–CPI– 

U’’) to index tax parameters currently indexed by the CPI–U. The 

C–CPI–U, like the CPI–U, is a measure of the average change over 

time in prices paid by urban consumers. It is developed and published by the Department of Labor, but differs from the CPI–U in 

accounting for the ability of individuals to alter their consumption 

patterns in response to relative price changes. The C–CPI–U accomplishes this by allowing for consumer substitution between item 

categories in the market basket of consumer goods and services 

that make up the index, while the CPI–U only allows for modest 

substitution within item categories. Values that are reset for 2018, 

such as the bracket thresholds and standard deduction, are indexed 

by the C–CPI–U in taxable years beginning after December 31, 

2018. Other indexed values in the code switch from CPI indexing 

to C–CPI–U indexing going forward in taxable years beginning 

after December 31, 2017. 

Maximum rates on capital gains and qualified dividends 

The provision generally retains the present-law maximum rates 

on net capital gain and qualified dividends. The breakpoints between the zero-and 15-percent rates (‘‘15-percent breakpoint’’) and 


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13For 2017, the additional amount is $1,250 for married taxpayers (for each spouse meeting 

the applicable criterion) and surviving spouses. The additional amount for single individuals and 

heads of households is $1,550. An individual who qualifies as both blind and elderly is entitled 

to two additional standard educations, for a total additional amount (for 2017) of $2,500 or 

$3,100, as applicable. 

the 15-and 20-percent rates (‘‘20-percent breakpoint’’) are the same 

amounts as the breakpoints under present law, except the 

breakpoints are indexed using the C–CPI–U in taxable years beginning after 2017. Thus, for 2018, the 15-percent breakpoint is 

$77,200 for joint returns and surviving spouses (one-half of this 

amount for married taxpayers filing separately), $51,700 for heads 

of household, $2,600 for estates and trusts, and $38,600 for other 

unmarried individuals. The 20-percent breakpoint is $479,000 for 

joint returns and surviving spouses (one-half of this amount for 

married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals. 

Therefore, in the case of an individual (including an estate or 

trust) with adjusted net capital gain, to the extent the gain would 

not result in taxable income exceeding the 15-percent breakpoint is 

not taxed. Any adjusted net capital gain which would result in taxable income exceeding the 15-percent breakpoint but not exceeding 

the 20-percent breakpoint is taxed at 15 percent. The remaining 

adjusted net capital gain is taxed at 20 percent. 

As under present law, unrecaptured section 1250 gain generally 

is taxed at a maximum rate of 25 percent, and 28-percent rate gain 

is taxed at a maximum rate of 28 percent. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

2. Enhancement of standard deduction (sec. 1002 of the bill and 

sec. 63 of the Code) 

PRESENT LAW

Under present law, an individual who does not elect to itemize 

deductions may reduce his adjusted gross income (‘‘AGI’’) by the 

amount of the applicable standard deduction in arriving at his taxable income. The standard deduction is the sum of the basic standard deduction and, if applicable, the additional standard deduction. 

The basic standard deduction varies depending upon a taxpayer’s 

filing status. For 2017, the amount of the basic standard deduction 

is $6,350 for single individuals and married individuals filing separate returns, $9,350 for heads of households, and $12,700 for married individuals filing a joint return and surviving spouses. An additional standard deduction is allowed with respect to any individual who is elderly or blind.13 The amount of the standard deduction is indexed annually for inflation. 

In the case of a dependent for whom a deduction for a personal 

exemption is allowed to another taxpayer, the standard deduction 

may not exceed the greater of (i) $1,050 (in 2017) or (ii) the sum 

of $350 (in 2017) plus the individual’s earned income. 


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14Thus, the standard deduction is the same for 2018 and 2019. 

REASONS FOR CHANGE

The Committee believes that consolidating the basic standard deduction, additional standard deduction, personal exemption, and 

other tax benefits for taxpayer and spouse into a larger standard 

deduction simplifies the tax code while allowing a minimum level 

of income to be exempt from Federal income taxation. 

EXPLANATION OF PROVISION

The provision increases the standard deduction for individuals 

across all filing statuses. Under the provision, the amount of the 

standard deduction is $24,400 for married individuals filing a joint 

return, $18,300 for head-of-household filers, and $12,200 for all 

other taxpayers. The amount of the standard deduction is indexed 

for inflation using the chained consumer price index for all-urban 

consumers for taxable years beginning after December 31, 2019.14

The provision eliminates the additional standard deduction for 

the aged and the blind. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

3. Repeal of deduction for personal exemptions (sec. 1003 of the bill 

and secs. 151–153 of the Code) 

PRESENT LAW

Under present law, in determining taxable income, an individual 

reduces AGI by any personal exemption deductions and either the 

applicable standard deduction or his or her itemized deductions. 

Personal exemptions generally are allowed for the taxpayer, his or 

her spouse, and any dependents. For 2017, the amount deductible 

for each personal exemption is $4,050. This amount is indexed annually for inflation. The personal exemption amount is phased out 

in the case of an individual with AGI in excess of $313,800 for taxpayers filing jointly, $287,650 for heads of household and $261,500 

for all other filers. In addition, no personal exemption is allowed 

in the case of a dependent if a deduction is allowed to another taxpayer. 

Withholding rules 

Under present law, the amount of tax required to be withheld by 

employers from a taxpayer’s wages is based in part on the number 

of withholding exemptions a taxpayer claims on his Form W–4. An 

employee is entitled to the following exemptions: (1) an exemption 

for himself, unless he allowed to be claimed as a dependent of another person; (2) an exemption to which the employee’s spouse 

would be entitled, if that spouse does not file a Form W–4 for that 

taxable year claiming an exemption described in (1); (3) an exemption for each individual who is a dependent (but only if the employee’s spouse has not also claimed such a withholding exemption on 

a Form W–4); (4) additional withholding allowances (taking into account estimated itemized deductions, estimated tax credits, and adVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00136 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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ditional deductions as provided by the Secretary of the Treasury); 

and (5) a standard deduction allowance. 

Filing requirements 

Under present law, an unmarried individual is required to file a 

tax return for the taxable year if in that year the individual had 

income which equals or exceeds the exemption amount plus the 

standard deduction applicable to such individual (i.e., single, head 

of household, or surviving spouse). An individual entitled to file a 

joint return is required to do so unless that individual’s gross income, when combined with the individual’s spouse’s gross income 

for the taxable year, is less than the sum of twice the exemption 

amount plus the basic standard deduction applicable to a joint return, provided that such individual and his spouse, at the close of 

the taxable year, had the same household as their home. 

TRUSTS AND ESTATES

In lieu of the deduction for personal exemptions, an estate is allowed a deduction of $600. A trust is allowed a deduction of $100; 

$300 if required to distribute all its income currently; and an 

amount equal to the personal exemption of an individual in the 

case of a qualified disability trust. 

REASONS FOR CHANGE

The Committee believes that consolidating the basic standard deduction, additional standard deduction, personal exemption, and 

other tax benefits for taxpayer and spouse into a larger standard 

deduction simplifies the tax code while allowing a minimum level 

of income to be exempt from Federal income taxation. 

EXPLANATION OF PROVISION

The provision repeals the deduction for personal exemptions. 

The provision modifies the requirements for those who are required to file a tax return. In the case of an individual who is not 

married, such individual is required to file a tax return if the taxpayer’s gross income for the taxable year exceeds the applicable 

standard deduction. Married individuals are required to file a return if that individual’s gross income, when combined with the individual’s spouse’s gross income, for the taxable year is more than 

the standard deduction applicable to a joint return, provided that: 

(i) such individual and his spouse, at the close of the taxable year, 

had the same household as their home; (ii) the individual’s spouse 

does not make a separate return; and (iii) neither the individual 

nor his spouse is a dependent of another taxpayer who has income 

(other than earned income) in excess of $500 (indexed for inflation). 

The provision repeals the enhanced deduction for qualified disability trusts. 

Under the provision, the Secretary of the Treasury is to develop 

rules to determine the amount of tax required to be withheld by 

employers from a taxpayer’s wages. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 


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15Sec. 701. 16Sec. 702(a). 17Sec. 704(d). In addition, passive loss and at-risk limitations limit the extent to which certain 

types of income can be offset by partnership deductions (sections 469 and 465). These limitations 

do not apply to corporate partners (except certain closely-held corporations) and may not be important to individual partners who have partner-level passive income from other investments. 18Sec. 705. 19Sec. 731. Gain or loss may nevertheless be recognized, for example, on the distribution of 

money or marketable securities, distributions with respect to contributed property, or in the case 

of disproportionate distributions (which can result in ordinary income). 20Sec. 704(b)(2). 

4. Maximum rate on business income of individuals (sec. 1004 of 

the bill and new sec. 4 of the Code) 

PRESENT LAW

Individual income tax rates 

To determine regular tax liability, an individual taxpayer generally must apply the tax rate schedules (or the tax tables) to his 

or her regular taxable income. The rate schedules are broken into 

several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer’s income increases. Separate 

rate schedules apply based on an individual’s filing status (i.e, single, head of household, married filing jointly, or married filing separately). For 2017, the regular individual income tax rate schedule 

provides rates of 10, 15, 25, 28, 33, 35, and 39.6 percent. 

Under present law, no separate or different tax rate schedule applies to business income of individuals from partnerships, S corporations, or sole proprietorships. 

Partnerships 

In general 

Partnerships generally are treated for Federal income tax purposes as pass-through entities not subject to tax at the entity 

level.15 Items of income (including tax-exempt income), gain, loss, 

deduction, and credit of the partnership are taken into account by 

the partners in computing their income tax liability (based on the 

partnership’s method of accounting and regardless of whether the 

income is distributed to the partners).16 A partner’s deduction for 

partnership losses is limited to the partner’s adjusted basis in its 

partnership interest.17 Losses not allowed as a result of that limitation generally are carried forward to the next year. A partner’s 

adjusted basis in the partnership interest generally equals the sum 

of (1) the partner’s capital contributions to the partnership, (2) the 

partner’s distributive share of partnership income, and (3) the partner’s share of partnership liabilities, less (1) the partner’s distributive share of losses allowed as a deduction and certain nondeductible expenditures, and (2) any partnership distributions to the partner.18 Partners generally may receive distributions of partnership 

property without recognition of gain or loss, subject to some exceptions.19

Partnerships may allocate items of income, gain, loss, deduction, 

and credit among the partners, provided the allocations have substantial economic effect.20 In general, an allocation has substantial 

economic effect to the extent the partner to which the allocation is 

made receives the economic benefit or bears the economic burden 

of such allocation and the allocation substantially affects the dollar 


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21Treas. Reg. sec. 1.704–1(b)(2). 22The first LLC statute was enacted in Wyoming in 1977. All States (and the District of Columbia) now have an LLC statute, though the tax treatment of LLCs for State tax purposes 

may differ. 23 Under Treasury regulations promulgated in 1996, any domestic nonpublicly traded unincorporated entity with two or more members generally is treated as a partnership for federal income tax purposes, while any single-member domestic unincorporated entity generally is treated 

as disregarded for Federal income tax purposes (i.e., treated as not separate from its owner). 

Instead of the applicable default treatment, however, an LLC may elect to betreate as a corporation for Federal income tax purposes. Treas. Reg. sec. 301.7701–3. These are known as the 

‘‘check-the-box’’ regulations. 24Sec. 7704(a). The reasons for change stated by the Ways and Means Committee when the 

provision was enacted provide in part: ‘‘[t]he recent proliferation of publicly traded partnerships 

has come to the committee’s attention. The growth in such partnerships has caused concern 

about long-term erosion of the corporate tax base.’’ H.R. Rep. 100–391, Omnibus Reconciliation 

Act of 1987, October 26, 1987, p. 1065. 25Sec. 7704(b). 26Sec. 7704(c)(2). Qualifying income is defined to include interest, dividends, and gains from 

the disposition of a capital asset (or of property described in section 1231(b)) that is held for 

the production of income that is qualifying income. Sec. 7704(d). Qualifying income also includes 

rents from real property, gains from the sale or other disposition of real property, and income 

and gains from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any 

mineral or natural resource (including fertilizer, geothermal energy, and timber), industrial 

source carbon dioxide, or the transportation or storage of certain fuel mixtures, alternative fuel, 

alcohol fuel, or biodiesel fuel. It also includes income and gains from commodities (not described 

in section 1221(a)(1)) or futures, options, or forward contracts with respect to such commodities 

(including foreign currency transactions of a commodity pool) where a principal activity of the 

partnership is the buying and selling of such commodities, futures, options, or forward contracts. 

However, the exception for partnerships with qualifying income does not apply to any partnership resembling a mutual fund (i.e., that would be described in section 851(a) if it were a domestic corporation), which includes a corporation registered under the Investment Company Act of 

1940 (Pub. L. No. 76–768 (1940)) as a management company or unit investment trust (sec. 

7704(c)(3)). 27 An S corporation is so named because its Federal tax treatment is governed by subchapter 

S of the Code. 28Secs. 1363 and 1366. 

amounts to be received by the partners from the partnership independent of tax consequences.21

Limited liability companies 

State laws of every State provide for limited liability companies 22 (‘‘LLCs’’), which are neither partnerships nor corporations 

under applicable State law, but which are generally treated as 

partnerships for Federal tax purposes.23

Publicly traded partnerships 

Under present law, a publicly traded partnership generally is 

treated as a corporation for Federal tax purposes.24 For this purpose, a publicly traded partnership means any partnership if interests in the partnership are traded on an established securities market or interests in the partnership are readily tradable on a secondary market (or the substantial equivalent thereof).25

An exception from corporate treatment is provided for certain 

publicly traded partnerships, 90 percent or more of whose gross income is qualifying income.26

S corporations 

Generally 

For Federal income tax purposes, an S corporation 27 generally is 

not subject to tax at the corporate level.28 Items of income (including tax-exempt income), gain, loss, deduction, and credit of the S 

corporation are taken into account by the S corporation shareholders in computing their income tax liabilities (based on the S 


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29Sec. 1367. If any amount that would reduce the adjusted basis of a shareholder’s S corporation stock exceeds the amount that would reduce that basis to zero, the excess is applied to reduce (but not below zero) the shareholder’s basis in any indebtedness of the S corporation to 

the shareholder. If, after a reduction in the basis of such indebtedness, there is an event that 

would increase the adjusted basis of the shareholder’s S corporation stock, such increase is instead first applied to restore the reduction in the basis of the shareholder’s indebtedness. Sec. 

1367(b)(2). 30Sec. 1361. For this purpose, a husband and wife and all members of a family are treated 

as one shareholder. Sec. 1361(c)(1). 31Sec. 1362. 32Sec. 1361(b)(2). 33Sec. 1374. The period was seven years for taxable years beginning in 2009 and 2010, and 

five years for taxable years beginning in 2011, 2012, 2013, and 2014. If a C corporation elects 

to be an S corporation (or transfers assets to an S corporation in a carryover basis transaction), 

certain net built-in gains that are attributable to the period in which it was a C corporation, 

and that are recognized during the first five years in which the former C corporation is an S 

corporation, are subject to corporate-level tax. 34Sec. 1375. An S corporation with accumulated earnings and profits is subject to corporate 

tax on excess net passive investment income (but not in excess of its taxable income, subject 

to certain adjustments), if more than 25 percent of its gross receipts for the year are passive 

investment income. Subchapter C earnings and profits generally refers to the earnings of the 

corporation prior to its subchapter S election which would have been taxable as dividends if distributed to shareholders by the corporation prior to its subchapter S election. If the S corporation continues to have C corporation earnings and profits and has gross receipts more than 25 

corporation’s method of accounting and regardless of whether the 

income is distributed to the shareholders). A shareholder’s deduction for corporate losses is limited to the sum of the shareholder’s 

adjusted basis in its S corporation stock and the indebtedness of 

the S corporation to such shareholder. Losses not allowed as a result of that limitation generally are carried forward to the next 

year. A shareholder’s adjusted basis in the S corporation stock generally equals the sum of (1) the shareholder’s capital contributions 

to the S corporation and (2) the shareholder’s pro rata share of S 

corporation income, less (1) the shareholder’s pro rata share of 

losses allowed as a deduction and certain nondeductible expenditures, and (2) any S corporation distributions to the shareholder.29

To be eligible to elect S corporation status, a corporation may not 

have more than 100 shareholders and may not have more than one 

class of stock.30 Only individuals (other than nonresident aliens), 

certain tax-exempt organizations, and certain trusts and estates 

are permitted shareholders of an S corporation. A corporation may 

elect S corporation status only with the consent of all of its shareholders, and may terminate its election with the consent of shareholders holding more than 50 percent of the stock.31 Although 

there are limitations on the types of shareholders and stock structure an S corporation may have, businesses organized as S corporations may be as large as those organized as C corporations or partnerships. Certain corporations may not elect S corporation status, 

including financial institutions using the reserve method of accounting for bad debts and insurance companies subject to tax 

under subchapter L.32

In general, an S corporation shareholder is not subject to tax on 

corporate distributions unless the distributions exceed the shareholder’s basis in the stock of the corporation. 

S corporations that were previously C corporations 

There are two principal exceptions to the general pass-through 

treatment of S corporations. Both are applicable only if the S corporation was previously a C corporation. The first applies when the 

C corporation had appreciated assets,33 and the second applies 

when the C corporation had accumulated earnings and profits.34


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percent of which are passive investment income in each year for three consecutive years, the 

S corporation election is automatically terminated. Sec. 1362(d)(3). Further, while an S corporation shareholder generally is not subject to tax on corporate distributions unless the distributions exceed the shareholder’s basis in the stock of the corporation, distributions from an S corporation that was formerly a C corporation generally are taxed to shareholders as dividends to 

the extent of the S corporation’s accumulated earnings and profits. Sec. 1368. 35 A single-member unincorporated entity is disregarded for Federal income tax purposes, unless its owner elects to be treated as a C corporation. Treas. Reg. sec. 301.7701–3(b)(1)(ii). Sole 

proprietorships often are conducted through legal entities for nontax reasons. While sole proprietorships generally may have no more than one owner, a married couple that files a joint return 

and jointly owns and operates a business may elect to have that business treated as a sole proprietorship under section 761(f). 36Treas. Reg. sec. 301.7701–2(c)(2)(iv). 37Treas. Reg. sec. 301.7701–2(c)(2)(v). 38Treas. Reg. sec. 301.7701–2(c)(2)(vi). 

Sole proprietorships 

Unlike a C corporation, partnership, or S corporation, a business 

conducted as a sole proprietorship is not treated as an entity distinct from its owner for Federal income tax purposes.35 Rather, the 

business owner is taxed directly on business income, and files 

Schedule C (sole proprietorships generally), Schedule E (rental real 

estate and royalties), or Schedule F (farms) with his or her individual tax return. Furthermore, transfer of a sole proprietorship is 

treated as a transfer of each individual asset of the business. Nonetheless, a sole proprietorship is treated as an entity separate from 

its owner for employment tax purposes,36 for certain excise taxes,37

and certain information reporting requirements.38

REASONS FOR CHANGE

The Committee believes that a reduction in the corporate income 

tax rate to 20 percent provided by the bill does not completely address the income tax rate on business income. Many businesses are 

conducted in the form of passthrough entities, namely partnerships 

and S corporations. Further, businesses are frequently conducted 

as sole proprietorships, rather than through a legal entity that is 

treated for tax purposes as separate from the individual who owns 

the business. The income of businesses conducted in passthrough 

form or in sole proprietorship form is subject to tax in the hands 

of their individual owners at the income tax rates of individuals. 

To treat corporate and noncorporate business income more similarly under the income tax, the bill provides a maximum rate of 25 

percent on qualified business income of individuals. 

EXPLANATION OF PROVISION

Qualified business income of an individual from a partnership, S 

corporation, or sole proprietorship is subject to Federal income tax 

at a rate no higher than 25 percent. Qualified business income 

means, generally, all net business income from a passive business 

activity plus the capital percentage of net business income from an 

active business activity, reduced by carryover business losses and 

by certain net business losses from the current year, as determined 

under the provision. 

Determination of rate 

25-percent rate 

The provision provides that an individual’s tax is reduced to reflect a maximum rate of 25 percent on qualified business income. 


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Qualified business income includes the capital percentage, generally 30 percent, of net business income. The percentage differs in 

the case of specified service activities or in the case of a taxpayer 

election to prove out a different percentage. 

Taxable income (reduced by net capital gain) that exceeds the 

maximum dollar amount for the 25-percent rate bracket applicable 

to the taxpayer, and that exceeds qualified business income, is subject to tax in the next higher brackets. 

The provision provides that a 25-percent tax rate applies generally to dividends received from a real estate investment trust 

(other than any portion that is a capital gain dividend or a qualified dividend), and applies generally to dividends that are includable in gross income from certain cooperatives. 

Nine-percent rate 

A special rule provides a reduced tax rate of 11, 10, or nine percent in the case of an individual’s qualified active business income 

below an indexed threshold of $75,000 (in the case of a joint return 

or a surviving spouse) (the ‘‘nine-percent bracket threshold 

amount’’). The indexed $75,000 threshold is three quarters of that 

amount for individuals filing as head of household and half that 

amount for other individuals. The reduced rate is not available to 

estates and trusts. 

The reduced rate is phased in. The reduced rate is 11 percent 

(that is, one percentage point below the 12 percent rate) for taxable 

years beginning in 2018 and 2019, and is 10 percent (that is, two 

percentage points below the 12 percent rate) for taxable years beginning in 2020 and 2021. For taxable years beginning in 2022 and 

thereafter the reduced rate is nine percent (that is, three percentage points below the 12 percent rate). 

The reduced tax rate applies to the least of three amounts, the 

taxpayer’s: (1) qualified active business income, (2) taxable income 

reduced by net capital gain, or (3) nine-percent bracket threshold 

amount (described above). Qualified active business income for a 

taxable year means the excess of the taxpayer’s net business income from any active business activity over his or her net business 

loss from any active business activity. An active business activity 

is an activity that involves the conduct of any trade or business 

and that is not a passive activity for purposes of the passive loss 

rules of section 469 determined without regard to paragraphs (2) 

and (6)(B) of section 469(c) (that is, generally, the taxpayer materially participates in the trade or business activity). Qualified active 

business income includes income from any trade or business activity, including service businesses. No capital percentage limitation 

applies in determining qualified active business income. 

A phaseout applies to the amount subject to the 11-, 10-, or ninepercent rate. The amount taxed at one of these rates is reduced by 

the excess of taxable income over an indexed applicable threshold 

amount, $150,000 in the case of married individuals filing jointly. 

The applicable threshold amount is three quarters of that amount 

for individuals filing as head of household and half that amount for 

other individuals. 

For example, assume that in 2022, an individual (married filing 

jointly) has $70,000 of qualified active business income and $40,000 

of other income, resulting in taxable income of $110,000. The 


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$70,000 of qualified active business income is subject to tax at nine 

percent. Alternatively, assume that in 2022, another individual has 

$160,000 of qualified active business income and $10,000 of other 

income resulting in taxable income of $170,000. The excess of the 

taxpayer’s $170,000 taxable income over the $150,000 applicable 

threshold amount is $20,000. Taking into account the phaseout, 

this $20,000 amount reduces the $75,000 amount that, absent the 

phaseout, would be subject to the nine-percent rate, reversing the 

benefit of the nine-percent rate for $20,000 of the taxpayer’s qualified active business income. The effect is that $55,000 is subject to 

the nine percent rate. 

Qualified business income 

Qualified business income is defined as the sum of 100 percent 

of any net business income derived from any passive business activity plus the capital percentage of net business income derived 

from any active business activity, reduced by the sum of 100 percent of any net business loss derived from any passive business activity, 30 percent (except as otherwise provided under rules for determining the capital percentage, below) of any net business loss 

derived from any active business activity, and any carryover business loss determined for the preceding taxable year. Qualified business income does not include income from a business activity that 

exceeds these percentages. 

Net business income or loss 

To determine qualified business income requires a calculation of 

net business income or loss from each of an individual’s passive 

business activities and active business activities. Net business income or loss is determined at the activity level, that is, separately 

for each business activity. 

Net business income is determined by appropriately netting 

items of income, gain, deduction and loss with respect to the business activity. The determination takes into account these amounts 

only to the extent the amount affects the determination of taxable 

income for the year. For example, if in a taxable year, a business 

activity has 100 of ordinary income from inventory sales, and 

makes an expenditure of 25 that is required to be capitalized and 

amortized over 5 years under applicable tax rules, the net business 

income is 100 minus 5 (current-year ordinary amortization deduction), or 95. The net business income is not reduced by the entire 

amount of the capital expenditure, only by the amount deductible 

in determining taxable income for the year. 

Net business income or loss includes the amounts received by the 

individual taxpayer as wages, director’s fees, guaranteed payments 

and amounts received from a partnership other than in the individual’s capacity as a partner, that are properly attributable to a business activity. These amounts are taken into account as an item of 

income with respect to the business activity. For example, if an individual shareholder of an S corporation engaged in a business activity is paid wages or director’s fees by the S corporation, the 

amount of wages or director’s fees is added in determining net 

business or loss with respect to the business activity. This rule is 

intended to ensure that the amount eligible for the 25-percent tax 

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ices or other specified amounts that are paid separately (or treated 

as separate) from the individual’s distributive share of passthrough 

income. 

Net business income or loss does not include specified investment-related income, deductions, or loss. Specifically, net business 

income does not include (1) any item taken into account in determining net long-term capital gain or net long-term capital loss, (2) 

dividends, income equivalent to a dividend, or payments in lieu of 

dividends, (3) interest income and income equivalent to interest, 

other than that which is properly allocable to a trade or business, 

(4) the excess of gain over loss from commodities transactions, 

other than those entered into in the normal course of the trade or 

business or with respect to stock in trade or property held primarily for sale to customers in the ordinary course of the trade or 

business, property used in the trade or business, or supplies regularly used or consumed in the trade or business, (5) the excess of 

foreign currency gains over foreign currency losses from section 988 

transactions, other than transactions directly related to the business needs of the business activity, (6) net income from notional 

principal contracts, other than clearly identified hedging transactions that are treated as ordinary (i.e., not treated as capital assets), and (7) any amount received from an annuity that is not used 

in the trade or business of the business activity. Net business income does not include any item of deduction or loss properly allocable to such income. 

Carryover business loss 

The carryover business loss from the preceding taxable year reduces qualified business income in the taxable year. The carryover 

business loss is the excess of (1) the sum of 100 percent of any net 

business loss derived from any passive business activity, 30 percent 

(except as otherwise provided under rules for determining the capital percentage, below) of any net business loss derived from any 

active business activity, and any carryover business loss determined for the preceding taxable year, over (2) the sum of 100 percent of any net business income derived from any passive business 

activity plus the capital percentage of net business income derived 

from any active business activity. There is no time limit on carryover business losses. For example, an individual has two business 

activities that give rise to a net business loss of 3 and 4, respectively, in year one, giving rise to a carryover business loss of 7 in 

year two. If in year two the two business activities each give rise 

to net business income of 2, a carryover business loss of 3 is carried 

to year three (that is, <7> ¥ (2 + 2) = <3>). 

Passive business activity and active business activity 

A business activity means an activity that involves the conduct 

of any trade or business. A taxpayer’s activities include those conducted through partnerships, S corporations, and sole proprietorships. An activity has the same meaning as under the present-law 

passive loss rules (section 469). As provided in regulations under 

those rules, a taxpayer may use any reasonable method of applying 

the relevant facts and circumstances in grouping activities together 

or as separate activities (through rental activities generally may 

not be grouped with other activities unless together they constitute 


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an appropriate economic unit, and grouping real property rentals 

with personal property rentals is not permitted). It is intended that 

the activity grouping the taxpayer has selected under the passive 

loss rules is required to be used for purposes of the passthrough 

rate rules. For example, an individual taxpayer has an interest in 

a bakery and a movie theater in Baltimore, and a bakery and a 

movie theatre in Philadelphia. For purposes of the passive loss 

rules, the taxpayer has grouped them as two activities, a bakery 

activity and a movie theatre activity. The taxpayer must group 

them the same way, that is as two activities, a bakery activity and 

a movie theatre activity, for purposes of rules of this provision. 

Regulatory authority is provided to require or permit grouping as 

one or as multiple activities in particular circumstances, in the 

case of specified services activities that would be treated as a single 

employer under broad related party rules of present law. 

A passive business activity generally has the same meaning as 

a passive activity under the present-law passive loss rules. However, for this purpose, a passive business activity is not defined to 

exclude a working interest in any oil or gas property that the taxpayer holds directly or through an entity that does not limit the 

taxpayer’s liability. Rather, whether the taxpayer materially participates in the activity is relevant. Further, for this purpose, a 

passive business activity does not include an activity in connection 

with a trade or business or in connection with the production of income. 

An active business activity is an activity that involves the conduct of any trade or business and that is not a passive activity. For 

example, if an individual has a partnership interest in a manufacturing business and materially participates in the manufacturing 

business, it is considered an active business activity of the individual. 

Capital percentage 

The capital percentage is the percentage of net business income 

from an active business activity that is included in qualified business income subject to Federal income tax at a rate no higher than 

25 percent. 

In general, the capital percentage is 30 percent, except as provided in the case of application of an increased percentage for capital-intensive business activities, in the case of specified service activities, and in the case of application of the rule for capital-intensive specified service activities. 

The capital percentage is reduced if the portion of net business 

income represented by the sum of wages, director’s fees, guaranteed payments and amounts received from a partnership other 

than in the individual’s capacity as a partner, that are properly attributable to a business activity exceeds the difference between 100 

percent and the capital percentage. For example, if net business income from an individual’s active business activity conducted 

through an S corporation is 100, including 75 of wages that the S 

corporation pays the individual, the otherwise applicable capital 

percentage is reduced from 30 percent to 25 percent. 

Increased percentage for capital-intensive business activities.—A 

taxpayer may elect the application of an increased percentage with 

respect to any active business activity other than a specified service 


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activity (described below). The election applies for the taxable year 

it is made and each of the next four taxable years. The election is 

to be made no later than the due date (including extensions) of the 

return for the taxable year made, and is irrevocable. The percentage under the election is the applicable percentage (described 

below) for the five taxable years of the election. 

Specified service activities.—In the case of an active business activity that is a specified service activity, generally the capital percentage is 0 and the percentage of any net business loss from the 

specified service activity that is taken into account as qualified 

business income is 0 percent. 

A specified service activity means any trade or business activity 

involving the performance of services in the fields of health, law, 

engineering, architecture, accounting, actuarial science, performing 

arts, consulting, athletics, financial services, brokerage services, 

any trade or business where the principal asset of such trade or 

business is the reputation or skill of one or more of its employees, 

or investing, trading, or dealing in securities, partnership interests, 

or commodities. For this purpose a security and a commodity have 

the meanings provided in the rules for the mark-to-market accounting method for dealers in securities (sections 475(c)(2) and 

475(e)(2), respectively). 

Capital-intensive specified service activities.—A taxpayer may 

elect the application of an exception with respect to any active 

business activity that is specified service activity, provided the applicable percentage (described below) for the taxable year is at least 

10 percent. If the election is validly made, the capital percentage 

and the percentage of net business loss with respect to the activity 

are not 0 percent, but rather, the applicable percentage for the taxable year. 

Calculation of applicable percentage.—The applicable percentage 

is the percentage applied in lieu of the capital percentage in the 

case of either of the foregoing elections. The applicable percentage 

(not the capital percentage) then determines the portion of the net 

business income or loss from the activity for the taxable year that 

is taken into account in determining qualified business income subject to Federal income tax at a rate no higher than 25 percent. 

The applicable percentage is determined by dividing (1) the specified return on capital for the activity for the taxable year, by (2) 

the taxpayer’s net business income derived from that activity for 

that taxable year. The specified return on capital for any active 

business activity is determined by multiplying a deemed rate of return, the short-term AFR plus 7 percentage points, times the asset 

balance for the activity for the taxable year, and reducing the product by interest expense deducted with respect to the activity for the 

taxable year. The asset balance for this purpose is the adjusted 

basis of property used in connection with the activity as of the end 

of the taxable year, but without taking account of basis adjustments for bonus depreciation under section 168(k) or expensing 

under section 179. In the case of an active business activity conducted through a partnership or S corporation, the taxpayer takes 

into account his distributive share of the asset balance of the partnership’s or S corporation’s property used in connection with the 

activity. Regulatory authority is provided to ensure that in deterVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00146 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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39The refundable credit may not exceed the maximum credit per child of $1,000. 

mining asset balance, no amount is taken into account for more 

than one activity. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. A transition rule provides that for fiscal year taxpayers whose taxable year includes December 31, 2017, a proportional benefit of the reduced rate under the provision is allowed for 

the period beginning January 1, 2018, and ending on the day before the beginning of the taxable year beginning after December 31, 

2017. 

B. SIMPLIFICATION AND REFORM OF FAMILY AND INDIVIDUAL TAX

CREDITS

1. Enhancement of child tax credit and new family tax credit (sec. 

1101 of the bill and sec. 24 of the Code) 

PRESENT LAW

An individual may claim a tax credit for each qualifying child 

under the age of 17. The amount of the credit per child is $1,000. 

A child who is not a citizen, national, or resident of the United 

States cannot be a qualifying child. 

The aggregate amount of child credits that may be claimed is 

phased out for individuals with income over certain threshold 

amounts. Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income (‘‘AGI’’) over $75,000 for single individuals or 

heads of households, $110,000 for married individuals filing joint 

returns, and $55,000 for married individuals filing separate returns. For purposes of this limitation, modified AGI includes certain otherwise excludable income earned by U.S. citizens or residents living abroad or in certain U.S. territories. 

The credit is allowable against both the regular tax and the alternative minimum tax (‘‘AMT’’). To the extent the child credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit 39 (the ‘‘additional child tax credit’’) equal to 15 per- cent of earned income in excess of $3,000 (the ‘‘earned income’’ formula). 

Families with three or more children may determine the additional child tax credit using the ‘‘alternative formula,’’ if this results in a larger credit than determined under the earned income 

formula. Under the alternative formula, the additional child tax 

credit equals the amount by which the taxpayer’s Social Security 

taxes exceed the taxpayer’s earned income credit (‘‘EIC’’). 

Earned income is defined as the sum of wages, salaries, tips, and 

other taxable employee compensation plus net self-employment 

earnings. At the taxpayer’s election, combat pay may be treated as 

earned income for these purposes. Unlike the EIC, which also includes the preceding items in its definition of earned income, the 

additional child tax credit is based only on earned income to the 

extent it is included in computing taxable income. For example, 

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40The alternate formula described in the present law section applies to the refundable portion 

of the family credit as well. 

ment income, and thus are considered earned income for purposes 

of computing the EIC, but the allowances are excluded from gross 

income for individual income tax purposes, and thus are not considered earned income for purposes of the additional child tax credit 

since the income is not included in taxable income. 

Any credit or refund allowed or made to an individual under this 

provision (including to any resident of a U.S. possession) is not 

taken into account as income and is not be taken into account as 

resources for the month of receipt and the following two months for 

purposes of determining eligibility of such individual or any other 

individual for benefits or assistance, or the amount or extent of 

benefits or assistance, under any Federal program or under any 

State or local program financed in whole or in part with Federal 

funds. 

REASONS FOR CHANGE

The Committee believes that it is important to provide an increased tax benefit for families raising children, as well as to ensure that all members of a household are accounted for in determining families’ ability to pay income tax. The Committee believes 

that an expanded child tax credit and a new family tax credit are 

an equitable means of achieving this goal. 

EXPLANATION OF PROVISION

The provision expands the child tax credit into a new family tax 

credit. The family credit consists of a $1,600 credit per qualifying 

child under the age of 17, and a $300 credit for each of the taxpayer (both spouses in the case of married taxpayers filing a joint 

return) and each dependent of the taxpayer who is not a qualifying 

child under age 17. 

The provision generally retains the present-law definition of dependent. However, under the provision, a qualifying child is eligible 

for the $1,600 credit only if such child is a citizen or national of 

the United States. 

The family credit phases out at AGI of $230,000 for married taxpayers filing joint returns and $115,000 for other individuals. The 

credit is refundable under rules similar to the present law additional child tax credit. That is, to the extent the credit exceeds the 

taxpayer’s tax liability, the taxpayer is eligible for a refundable 

credit equal to 15 percent of earned income in excess of $3,000.40

The refundable credit is limited to $1,000 times the number of 

qualifying children under the age of 17 claimed on the return. This 

$1,000 per child dollar limitation is indexed for inflation, with a 

base year of 2017, rounding up to the nearest $100. Accordingly, 

in 2018 the limitation will be $1,100. 

The provision requires that the taxpayer include the name and 

taxpayer identification number of each qualifying child and dependent on the tax return for each taxable year. 

The $300 credit for the taxpayer, spouse, and non-child dependents of the taxpayer expires for taxable years beginning after December 31, 2022. 


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41Sec. 22(a). 42Sec. 22(d). 43Sec. 22(c)(3). 44Sec. 22(b). 45Sec. 22(e)(3). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

2. Repeal of credit for the elderly and permanently disabled (sec. 

1102(a) OF THE BILL AND SEC. 22 OF THE CODE) 

PRESENT LAW

Certain taxpayers who are over the age of 65 or retired on account of permanent and total disability may claim a nonrefundable 

credit. The maximum credit is 15 percent of $5,000 for a return 

where one individual qualifies and $7,500 on a joint return where 

both spouses qualify.41 Thus, the maximum credit amounts are 

$750 and $1,125, respectively. 

The credit base is reduced by one half of the amount by which 

the taxpayer’s adjusted gross income exceeds $7,500 if the taxpayer 

is unmarried, $10,000 if the taxpayer is married and files a joint 

return, or $5,000 if the taxpayer is married and files a separate return.42 Thus, the credit base is phased down to zero when adjusted 

gross income exceeds $17,500 for an unmarried person, $20,000 for 

a married couple filing a joint return where only one spouse qualifies for the credit, $25,000 for a joint return where both spouses 

qualify, and $12,500 for a married person filing a separate return. 

Additionally, the credit base is reduced by certain items of income otherwise exempt from tax: (1) benefits under Title II of the 

Social Security Act; (2) retirement benefits under the Railroad Retirement Act of 1974; (3) disability benefits paid by the Veterans 

Administration, except for benefits payable on account of personal 

injuries or sickness resulting from active service in the Armed 

Forces; and (4) pensions, annuities, and disability benefits exempted from tax by any provision not in the Code.43

To qualify for the credit, a taxpayer must, at the end of the taxable year, be at least 65 years old or retired on account of permanent and total disability.44 Permanent and total disability exists if, 

at the time of retirement, the taxpayer was ‘‘unable to engage in 

any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to 

result in death or which has lasted or can be expected to last for 

a continuous period of not less than 12 months.45

REASONS FOR CHANGE

The Committee recognizes that, because the parameters of the 

credit for the elderly and permanently disabled are not indexed for 

inflation, under present law virtually no taxpayers benefit from the 

credit. Accordingly, repealing the credit makes the system simpler 

by reducing outdated and unnecessary provisions in the Code and 

in IRS forms and publications. 


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46Sec. 25. 47Sec. 143. 48Sec. 3601 of the bill, infra. 49Sec. 30D. 

EXPLANATION OF PROVISION

The provision repeals the credit for the elderly and permanently 

disabled. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

3. Termination of credit for interest on certain home mortgages 

(sec. 1102(b) OF THE BILL AND SEC. 25 OF THE CODE) 

PRESENT LAW

Qualified governmental units can elect to exchange all or a portion of their qualified mortgage bond authority for authority to 

issue mortgage credit certificates (‘‘MCCs’’).46 MCCs entitle homebuyers to a nonrefundable income tax credit for a specified percentage of interest paid on mortgage loans on their principal residences. The tax credit provided by the MCC may be carried forward three years. Once issued, an MCC generally remains in effect 

as long as the residence being financed is the certificate-recipient’s 

principal residence. MCCs generally are subject to the same eligibility and targeted area requirements as qualified mortgage 

bonds.47

REASONS FOR CHANGE

As the bill repeals the authority to issue qualified private activity 

bonds,48 including qualified mortgage bonds, the Committee believes it is an appropriate conforming change to also terminate the 

related mortgage credit certificate program. 

EXPLANATION OF PROVISION

No credit is allowed with respect to any MCC issued after December 31, 2017. 

EFFECTIVE DATE

The provision applies to taxable years ending after December 31, 

2017. Credits continue for interest paid on mortgage loans on principal residences for which MCCs have been issued on or before December 31, 2017. 

4. Repeal of credit for plug-in electric drive motor vehicles (sec. 

1102(c) OF THE BILL AND SEC. 30D OF THE CODE) 

PRESENT LAW

A credit is available for new four-wheeled vehicles (excluding low 

speed vehicles and vehicles weighing 14,000 pounds or more) propelled by a battery with at least 4 kilowatt-hours of electricity that 

can be charged from an external source.49 The base credit is $2,500 

plus $417 for each kilowatt-hour of additional battery capacity in 

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50 Earned income is defined as (1) wages, salaries, tips, and other employee compensation, but 

only if such amounts are includible in gross income, plus (2) the amount of the individual’s net 

self-employment earnings. 

fied vehicles are subject to a 200,000 vehicle-permanufacturer limitation. Once the limitation has been reached the credit is phased 

down over four calendar quarters. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the credit for plug-in electric drive motor vehicles, makes the system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further believes that repeal of this provision is consistent with streamlining 

the tax code, broadening the tax base, lowering rates, and growing 

the economy. 

EXPLANATION OF PROVISION

The provision repeals the credit for plug-in electric drive motor 

vehicles. 

EFFECTIVE DATE

The provision is effective for vehicles placed in service in taxable 

years beginning after December 31, 2017. 

5. Modification of taxpayer identification number requirements for 

the child tax credit, earned income credit, and american opportunity credit (sec. 1103 of the bill and secs. 24, 25A and 32 of 

the Code) 

PRESENT LAW

Earned income credit 

Low and moderate-income taxpayers may be eligible for the refundable earned income credit (‘‘EIC’’). Eligibility for the EIC is 

based on the taxpayer’s earned income, adjusted gross income, investment income, filing status, and work status in the United 

States. The amount of the EIC is based on the presence and number of qualifying children in the worker’s family, as well as on adjusted gross income and earned income. 

The earned income credit generally equals a specified percentage 

of earned income 50 up to a maximum dollar amount. The maximum amount applies over a certain income range and then diminishes to zero over a specified phase-out range. For taxpayers with 

earned income (or adjusted gross income (‘‘AGI’’), if greater) in excess of the beginning of the phase-out range, the maximum EIC 

amount is reduced by the phase-out rate multiplied by the amount 

of earned income (or AGI, if greater) in excess of the beginning of 

the phase-out range. For taxpayers with earned income (or AGI, if 

greater) in excess of the end of the phase-out range, no credit is 

allowed. 

An individual is not eligible for the EIC if the aggregate amount 

of disqualified income of the taxpayer for the taxable year exceeds 

$3,450 (for 2017). This threshold is indexed for inflation. Disqualified income is the sum of: (1) interest (taxable and tax-exempt); (2) 

dividends; (3) net rent and royalty income (if greater than zero); (4) 


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51See description of sec. 1101 of the bill for the provision’s modifications to the child tax 

credit. 52Sec. 911. 53See description of sec. 1201 of the bill for the provision’s modifications to the American Opportunity credit. 

capital gains net income; and (5) net passive income (if greater 

than zero) that is not self-employment income. 

The EIC is a refundable credit, meaning that if the amount of 

the credit exceeds the taxpayer’s Federal income tax liability, the 

excess is payable to the taxpayer as a direct transfer payment. 

Child tax credit 51

An individual may claim a tax credit of $1,000 for each qualifying child under the age of 17. A child who is not a citizen, national, or resident of the United States cannot be a qualifying child. 

The aggregate amount of allowable child credits is phased out for 

individuals with income over certain threshold amounts. Specifically, the otherwise allowable aggregate child tax credit (‘‘CTC’’) 

amount is reduced by $50 for each $1,000 (or fraction thereof) of 

modified adjusted gross income (‘‘modified AGI’’) over $75,000 for 

single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals 

filing separate returns. For purposes of this limitation, modified 

AGI includes certain otherwise excludable income 52 earned by U.S. 

citizens or residents living abroad or in certain U.S. territories. 

The child tax credit is allowable against both the regular tax and 

the alternative minimum tax (‘‘AMT’’). To the extent the credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the ‘‘additional child tax credit’’) equal to 15 percent of earned income in excess of a threshold dollar amount of 

$3,000 (the ‘‘earned income’’ formula). 

Families with three or more qualifying children may determine 

the additional child tax credit using the ‘‘alternative formula’’ if 

this results in a larger credit than determined under the earned income formula. Under the alternative formula, the additional child 

tax credit equals the amount by which the taxpayer’s Social Security taxes exceed the taxpayer’s EIC. 

As with the EIC, earned income is defined as the sum of wages, 

salaries, tips, and other taxable employee compensation plus net 

self-employment earnings. Unlike the EIC, the additional child tax 

credit is based on earned income only to the extent it is included 

in computing taxable income. For example, some ministers’ parsonage allowances are considered self-employment income and thus 

are considered earned income for purposes of computing the EIC, 

but the allowances are excluded from gross income for individual 

income tax purposes and thus are not considered earned income for 

purposes of the additional child tax credit. 

American Opportunity credit 53

The American Opportunity credit provides individuals with a tax 

credit of up to $2,500 per eligible student per year for qualified tuition and related expenses (including course materials) paid for each 

of the first four years of the student’s post-secondary education in 

a degree or certificate program. The credit rate is 100 percent on 

the first $2,000 of qualified tuition and related expenses, and 25 


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54Sec. 6109(a). 55Treas. Reg. Sec. 301.6109–1(d)(3)(i). 56Treas. Reg. Sec. 301.6109–1(d)(3)(ii). 57For instance, in the case of an individual that has income which is effectively connected 

with a United States trade or business, such as the performance of personal services in the 

United States. 58Such an individual would have a filing requirement without regard to whether the individual is lawfully present or has work authorization. 59Sec. 205(c)(2)(B)(i)(II) (and that portion of sec. 205(c)(2)(B)(i)(III) relating to it) of the Social 

Security Act. 

percent on the next $2,000 of qualified tuition and related expenses. 

The American Opportunity credit is phased out ratably for tax- payers with modified AGI between $80,000 and $90,000 ($160,000 

and $180,000 for married taxpayers filing a joint return). The credit may be claimed against a taxpayer’s AMT liability. 

Forty percent of a taxpayer’s otherwise allowable modified credit 

is refundable. A refundable credit is a credit which, if the amount 

of the credit exceeds the taxpayer’s Federal income tax liability, the 

excess is payable to the taxpayer as a direct transfer payment. 

No credit is allowed to a taxpayer who fails to include the taxpayer identification number of the student to whom the qualified 

tuition and related expenses relate. 

Taxpayer identification number requirements 

Any individual filing a U.S. tax return is required to state his or 

her taxpayer identification number on such return. Generally, a 

taxpayer identification number is the individual’s Social Security 

number (‘‘SSN’’).54 However, in the case of an individual who is not 

eligible to be issued an SSN, but who has a tax filing obligation, 

the Internal Revenue Service (‘‘IRS’’) issues an individual taxpayer 

identification number (‘‘ITIN’’) for use in connection with the individual’s tax filing requirements.55 An individual who is eligible to 

receive an SSN may not obtain an ITIN for purposes of his or her 

tax filing obligations.56 An ITIN does not provide eligibility to work 

in the United States or claim Social Security benefits. 

Examples of individuals who are not eligible for SSNs, but potentially need ITINs in order to file U.S. returns include a nonresident 

alien filing a claim for a reduced withholding rate under a U.S. income tax treaty, a nonresident alien required to file a U.S. tax return,57 an individual who is a U.S. resident alien under the substantial presence test and who therefore must file a U.S. tax return,58 a dependent or spouse of the prior two categories of individuals, or a dependent or spouse of a nonresident alien visa holder. 

An individual is ineligible for the EIC (but not the child tax credit) if he or she does not include a valid SSN and the qualifying 

child’s valid SSN (and, if married, the spouse’s SSN) on his or her 

tax return. For these purposes, the Code defines an SSN as a Social Security number issued to an individual, other than an SSN 

issued to an individual solely for the purpose of applying for or receiving federally funded benefits.59 If an individual fails to provide 

a correct taxpayer identification number, such omission will be 

treated as a mathematical or clerical error by the IRS. 

A taxpayer who resides with a qualifying child may not claim the 

EIC with respect to the qualifying child if such child does not have 

a valid SSN. The taxpayer also is ineligible for the EIC for workers 

without children because he or she resides with a qualifying child. 


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60See description of sec. 1101 of the bill. 

However, if a taxpayer has two or more qualifying children, some 

of whom do not have a valid SSN, the taxpayer may claim the EIC 

based on the number of qualifying children for whom there are 

valid SSNs. 

REASONS FOR CHANGE

The Committee believes that it is important to ensure that refundable and other credits are not being claimed fraudulently. The 

Committee believes that requiring Social Security numbers as the 

identifying number for taxpayers and children will substantially 

lower the overpayment rate on these credits. 

EXPLANATION OF PROVISION

Under the provision, any qualifying child claimed by the taxpayer on the tax return must use, as that child’s identifying number, a Social Security number that is valid for employment in the 

United States in order to be eligible for the CTC. Under the provision, if a child’s identifying number was other than a Social Security number (such as an ITIN), the taxpayer would be eligible to 

receive the $300 credit for dependents other than qualifying children, assuming such child otherwise qualified as a dependent of 

the taxpayer.60

Additionally, under the provision, taxpayers who use as their 

taxpayer identification number a Social Security number issued for 

non-work reasons, such as for purposes of receiving Federal benefits or for any other reason, are not eligible for the EIC. 

Lastly, under the provision, in order to claim the American Opportunity credit, the identification number provided with respect to 

the student to whom the tuition and related expenses relate must 

be a Social Security number. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

6. Procedures to reduce improper claims of earned income credit 

(sec. 1104 of the bill and new secs. 32(c)(2)(B)(vii) and 6011(i) of 

the Code) 

PRESENT LAW

Earned income credit 

Low-and moderate-income workers may be eligible for the refundable earned income credit (‘‘EIC’’). Eligibility for the EIC is 

based on earned income, adjusted gross income (‘‘AGI’’), investment 

income, filing status, number of children, and immigration and 

work status in the United States. The maximum amount of the 

EIC applies over a certain income range and then diminishes to 

zero over a specified phaseout range. The EIC is a refundable credit, meaning that if the amount of the credit exceeds the taxpayer’s 

Federal income tax liability, the excess is payable to the taxpayer 

as a direct transfer payment. 


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61Sec. 32(c)(2)(A). 62Sec. 32(c)(2)(B). 63Sec. 1402(a); Chief Counsel Advice 200022051. 64Secs. 3101–3128 (FICA) and 3401–3404 (income tax withholding). Employment taxes also 

include taxes under the Railroad Retirement Act (‘‘RRTA’’), sections 3201–3241, and tax under 

the Federal Unemployment Taxes Act (‘‘FUTA’’), sections 3301–3311. Sections 3501–3510 provide additional employment tax rules. 65Treas. Secs. 31.6011(a)–1(a)(1), 31.6011(a)–4(a)(1), 31.6011(a)–1(a)(5). If the total amount of 

FICA taxes and withheld income tax for a year is $1,000 or less, instead of filing Form 941 for 

each quarter, the employer is permitted file annually on Form 944, Employer’s Annual Federal 

Tax Return. Separate forms and filing requirement apply with respect to RRTA and FUTA 

taxes. 66Sec. 6051(a). Employees are required to include a copy of Form W–2 when filing their income tax returns. 

The EIC generally equals a specified percentage of earned income up to a maximum dollar amount. Earned income is the sum 

of employee compensation includible in gross income (generally the 

amount reported in Box 1 of Form W–2, Wage and Tax Statement, 

discussed below) plus net earnings from self-employment determined with regard to the deduction for one-half of self-employment 

taxes.61 Special rules apply in computing earned income for purposes of the EIC.62 Net earnings from self-employment generally 

includes the gross income derived by an individual from any trade 

or business carried on by the individual, less the deductions attributable to the trade or business that are allowed under the self-employment tax rules, plus the individual’s distributive share of income or loss from any trade or business of a partnership in which 

the individual is a partner.63

Employment taxes and quarterly reporting by employers 

Employment taxes include employer and employee taxes on employee wages under the Federal Insurance Contributions Act 

(‘‘FICA’’) and income taxes required to be withheld by employers 

from employee wages (‘‘income tax withholding’’).64 Income tax 

withholding rates vary depending on the amount of wages paid, the 

length of the payroll period, and the number of withholding allowances claimed by the employee. Employers are required also to 

withhold the employee share of FICA tax from employee wages. 

For these purposes, wages is defined broadly to include all remuneration, subject to exceptions specifically provided in the relevant 

statutory provisions. 

Employers generally submit quarterly reports to IRS on Form 

941, Employer’s Quarterly Federal Tax Return, showing the number of employees to whom wages were paid during the quarter, the 

total wages paid to employees, total FICA taxes (employer and employee) on the wages, and total income tax withheld from the 

wages.65 In addition, by January 31 after the end of a calendar 

year, an employer must provide each employee with Form W–2, 

Wage and Tax Statement, showing the total wages paid to the employee during the calendar year and certain other information.66

The information contained on each employee’s W–2 is also provided 

to the IRS, accompanied by Form W–3, Transmittal of Wage and 

Tax Statements, showing the total number of Forms W–2 and aggregate information for all employees, such as aggregate wages reported on Forms W–2. IRS then compares the W–3 wage totals to 

the Form 941 (or Form 944) wage totals. 


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REASONS FOR CHANGE

The Committee recognizes that overclaims and overpayments are 

prevalent in the EIC program. The Committee further recognizes 

that the overwhelming majority of individuals making overclaims 

were not eligible for the credit. The Committee believes that these 

overclaims and overpayments can be significantly reduced by making it clear that taxpayers are required to claim all allowable deductions in determining earned income and by providing the IRS 

additional quarterly wage information on every taxpayer-employee 

such that the IRS will be able to verify reported income before any 

refundable EIC payment is made. 

EXPLANATION OF PROVISION

Modification of the definition of ‘‘earned income’’ 

The provision clarifies that a taxpayer is required to claim all allowable deductions in computing net earnings from self-employment for EIC purposes. 

Quarterly reporting of wages by employers 

The provision modifies employer reporting requirements associated with the deduction and withholding of certain employment 

taxes on wages. Under the provision, employers must report, along 

with the aggregate wages paid and employment taxes collected on 

Form 941 or Form 944, the name and address of each employee 

and the amount of reportable wages received by each of those employees. 

EFFECTIVE DATE

Modification of the definition of ‘‘earned income’’ 

The provision applies to taxable years ending after the date of 

enactment. 

Quarterly reporting of wages by employers 

The provision applies to taxable years ending after the date of 

enactment, subject to the authority of the Secretary to delay for 

such period as the Secretary determines to be reasonable to allow 

adequate time to modify systems to permit compliance with the additional reporting requirements. 

7. Certain income disallowed for purposes of the earned income tax 

credit (sec. 1105 of the bill, new secs. 32(n) and 32(c)(2)(C) of the 

Code, and secs. 6051, 6052, 6041(a), and 6050(w) of the Code) 

PRESENT LAW

Earned income credit 

Low-and moderate-income workers may be eligible for the refundable earned income credit (‘‘EIC’’). Eligibility for the EIC is 

based on earned income, adjusted gross income (‘‘AGI’’), investment 

income, filing status, number of children, and immigration and 

work status in the United States. The maximum amount of the 

EIC applies over a certain income range and then diminishes to 

zero over a specified phaseout range. The EIC is a refundable credit, meaning that if the amount of the credit exceeds the taxpayer’s 


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67Sec. 32(c)(2)(A). 68Sec. 32(c)(2)(B). 69Sec. 6031 through 6060. 70The information return generally is submitted electronically as a Form-1099 or Form-1096, 

although certain payments to beneficiaries or employees may require use of Forms W–3 or W– 

2, respectively. Treas. Reg. sec. 1.6041–1(a)(2). 71Sec. 6041(a) requires reporting as to fixed or determinable gains, profits, and income (other 

than payments to which section 6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 6050N(a) applies and 

other than payments with respect to which a statement is required under authority of section 

6042(a), 6044(a)(2) or 6045). These payments excepted from section 6041(a) include most interest, royalties, and dividends. 72Secs. 6042 (dividends), 6045 (broker reporting) and 6049 (interest) and the Treasury regulations thereunder. 73Sec. 6051(a). 74Sec. 6041A. 75Sec. 6050W. 76Sec. 6041(d). 

Federal income tax liability, the excess is payable to the taxpayer 

as a direct transfer payment. 

The EIC generally equals a specified percentage of earned income up to a maximum dollar amount. Earned income is the sum 

of employee compensation includible in gross income plus net earnings from self-employment determined with regard to the deduction 

for one-half of self-employment taxes.67 Special rules apply in computing earned income for purposes of the EIC.68

Information reporting 

Present law imposes a variety of information reporting requirements on participants in certain transactions.69 These requirements are intended to assist taxpayers in preparing their income 

tax returns and to help the Internal Revenue Service (‘‘IRS’’) determine whether such returns are correct and complete. 

The primary provision governing information reporting by payors 

requires an information return by every person engaged in a trade 

or business who makes payments aggregating $600 or more in any 

taxable year to a single payee in the course of the payor’s trade or 

business.70 Payments to corporations generally are excepted from 

this requirement. Payments subject to reporting include fixed or 

determinable income or compensation, but do not include payments 

for goods or certain enumerated types of payments that are subject 

to other specific reporting requirements.71 Detailed rules are provided for the reporting of various types of investment income, including interest, dividends, and gross proceeds from brokered 

transactions (such as a sale of stock) paid to U.S. persons.72

Special information reporting requirements exist for employers 

required to deduct and withhold tax from employees’ income.73 In 

addition, any service recipient engaged in a trade or business and 

paying for services is required to make a return according to regulations when the aggregate of payments is $600 or more.74

There are also information reporting requirements for merchant 

acquiring entities and third party settlement organizations with respect to payments made in settlement of payment card transactions 

and third party payment network transactions occurring in that 

calendar year.75

The payor of amounts described above is required to provide the 

recipient of the payment with an annual statement showing the aggregate payments made and contact information for the payor.76

The statement must be supplied to taxpayers by the payors by January 31 of the following calendar year.7 Payors generally must file 


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77Sec. 6071(d). 78Sec. 6721. 79Sec. 6722. 80Sec. 6723. 81Sec. 6724. 82Sec. 6001. 83Treas. sec. 1.6001–1(a). 84Treas. sec. 1.6001–1(e). 

the information return with the IRS on or before January 31 of the 

year following the calendar year to which such returns relate.77

Failure to comply with the information reporting requirements 

results in penalties, which may include a penalty for failure to file 

the information return,78 to furnish payee statements,79 or to comply with other various reporting requirements.80 No penalty is imposed if the failure is due to reasonable cause.81 Any person who 

is required to file an information return, but who fails to do so on 

or before the prescribed filing date is subject to a penalty that varies based on when, if at all, the correct information return is filed 

and the correct payee statement is furnished. 

Books or records 

Every person liable for any tax imposed by the Code, or for the 

collection thereof, must keep such records, render such statements, 

make such returns, and comply with such rules and regulations as 

the Secretary may from time to time prescribe.82 Whenever necessary, the Secretary may require any person, by notice served 

upon that person or by regulations, to make such returns, render 

such statements, or keep such records, as the Secretary deems sufficient to show whether or not that person is liable for tax. Persons 

subject to income tax are required to keep books or records sufficient to establish the amount of gross income, deductions, credits, 

or other matters required to be shown by that person in any return 

of such tax or information.83 The books or records are required to 

be kept available at all times for inspection by the IRS, and must 

be retained so long as the contents thereof may become material 

in the administration of any internal revenue law.84

REASONS FOR CHANGE

The Committee recognizes that overclaims and overpayments are 

prevalent in the EIC program. The Committee further recognizes 

that the overwhelming majority of individuals making overclaims 

were not eligible for the credit. The Committee believes that these 

overclaims and overpayments can be significantly reduced by limiting earned income for purposes of the EIC to amounts that can 

be verified by third party reporting or the taxpayer. 

EXPLANATION OF PROVISION

The provision limits earned income for purposes of the earned income credit to amounts substantiated by the taxpayer on statements furnished or returns filed under third party information reporting requirements, or amounts substantiated by the taxpayer’s 

books and records. The authority of the IRS to make returns, 

render statements, or keep records and, pursuant to the Code, to 

make corresponding adjustments to income to reflect substantiated 

amounts for purposes other than the EIC remains unaffected by 

this provision. 


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85Sec. 25A(b)(2)(D). 86Sec. 25A(a)(2). 

EFFECTIVE DATE

The provision is effective for taxable years ending after the date 

of enactment. 

C. SIMPLIFICATION AND REFORM OF EDUCATION INCENTIVES

1. Reform of American Opportunity tax credit and repeal of Lifetime Learning credit (sec. 1201 of the bill and sec. 25A of the 

Code) 

PRESENT LAW

American Opportunity credit 

The American Opportunity credit provides individuals with a tax credit of up to $2,500 per eligible student per year for qualified tuition and related expenses (including course materials) paid for each 

of the first four years of the student’s post-secondary education in 

a degree or certificate program. The credit rate is 100 percent on 

the first $2,000 of qualified tuition and related expenses, and 25 

percent on the next $2,000 of qualified tuition and related expenses. The credit may not be claimed for more than four taxable 

years with respect to any student. 

The American Opportunity credit is phased out ratably for tax- payers with modified AGI between $80,000 and $90,000 ($160,000 

and $180,000 for married taxpayers filing a joint return). The credit may be claimed against a taxpayer’s AMT liability. 

Forty percent of a taxpayer’s otherwise allowable modified credit 

is refundable. A refundable credit is a credit which, if the amount 

of the credit exceeds the taxpayer’s Federal income tax liability, the 

excess is payable to the taxpayer as a direct transfer payment. 

A taxpayer may not claim the American Opportunity credit if the 

qualified tuition and related expenses for the enrollment or attendance of a student, if such student has been convicted of a Federal 

or State felony offense consisting of the possession or distribution 

of a controlled substance before the end of the taxable year.85

Lifetime learning credit 

Individual taxpayers may be eligible to claim a nonrefundable 

credit, the Lifetime Learning credit, against Federal income taxes 

equal to 20 percent of qualified tuition and related expenses incurred during the taxable year on behalf of the taxpayer, the taxpayer’s spouse, or any dependents. Up to $10,000 of qualified tuition and related expenses per taxpayer return are eligible for the 

Lifetime Learning credit (i.e., the maximum credit per taxpayer re- turn is $2,000). 

In contrast to the American Opportunity credit, a taxpayer may 

claim the Lifetime Learning credit for an unlimited number of taxable years.86 Also in contrast to the American Opportunity credit, 

the maximum amount of the Lifetime Learning credit that may be 

claimed on a taxpayer’s return does not vary based on the number 

of students in the taxpayer’s family—that is, the American Opportunity credit is computed on a per-student basis while the Lifetime 

Learning credit is computed on a family-wide basis. The Lifetime 


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87The provision also repeals the Hope credit, a precursor to the American Opportunity credit 

which since 2009 has been largely superseded in the Code by the American Opportunity credit. 

Learning credit amount that a taxpayer may otherwise claim is 

phased out ratably for taxpayers with modified AGI between 

$56,000 and $66,000 ($112,000 and $132,000 for married taxpayers 

filing a joint return) in 2017. 

REASONS FOR CHANGE

The Committee believes that it is important to provide access to 

affordable, high-quality higher education. Combining the American 

Opportunity credit with elements of the Lifetime Learning Credit 

will continue to serve to make college more affordable, while also 

streamlining these tax provisions so that they are easier for families to apply—an important step towards consolidating duplicative 

Code provisions and simplifying the Code. The Committee believes 

that these changes will make the system simpler and fairer for all 

families and individuals. 

EXPLANATION OF PROVISION

The provision modifies the American Opportunity credit 87 by 

providing that a credit may be claimed with respect to a student 

for five taxable years (rather than four taxable years under present 

law). For a credit claimed with respect to the student’s fifth taxable 

year, the credit is half the value of the American Opportunity credit that is applicable to the first four taxable years (the refundable 

portion of the credit is 40-percent of the half-value credit). Additionally, the provision allows a student to claim the American Opportunity credit for any of the first five years of postsecondary education. 

The operation of this provision is as follows. Assume that a student enters college in the Fall of 2018, attending for eight consecutive semesters, such that the student graduates in the Spring of 

2022. Assume that qualifying tuition and fees for each semester is 

in excess of $5,000. For each of taxable years 2018, 2019, 2020 and 

2021, an individual claiming the credit on behalf of the student 

would be eligible for the maximum credit of $2,500 (of which 

$1,000 is refundable). For taxable year 2022, a taxpayer claiming 

the credit on behalf of the student may be eligible for a $1,250 

credit (of which $500 is refundable). Alternatively, if no credit were 

claimed with respect to the student in 2022, and the student were 

to decide to attend graduate school in the Fall of 2024, the student 

may claim the half-value fifth year credit ($1,250 ($500 refundable)) for the 2024 taxable year. 

The provision repeals the lifetime learning credit. 

EFFECTIVE DATE

The proposal applies to taxable years beginning after December 

31, 2017. 


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88Sec. 530. 89 In addition, Coverdell education savings accounts are subject to the unrelated business income tax imposed by section 511. 90This 10-percent additional tax does not apply if a distribution from an education savings 

account is made on account of the death or disability of the designated beneficiary, or if made 

on account of a scholarship received by the designated beneficiary. 

2. Consolidation and modification of education savings rules (sec. 

1202 of the bill and secs. 529 and 530 of the Code) 

PRESENT LAW

Coverdell education savings accounts 

A Coverdell education savings account is a trust or custodial account created exclusively for the purpose of paying qualified education expenses of a named beneficiary.88 Annual contributions to 

Coverdell education savings accounts may not exceed $2,000 per 

designated beneficiary and may not be made after the designated 

beneficiary reaches age 18 (except in the case of a special needs 

beneficiary). The contribution limit is phased out for taxpayers 

with modified AGI between $95,000 and $110,000 ($190,000 and 

$220,000 for married taxpayers filing a joint return); the AGI of the 

contributor, and not that of the beneficiary, controls whether a contribution is permitted by the taxpayer. 

Earnings on contributions to a Coverdell education savings account generally are subject to tax when withdrawn.89 However, distributions from a Coverdell education savings account are excludable from the gross income of the distributee (i.e., the student) to 

the extent that the distribution does not exceed the qualified education expenses incurred by the beneficiary during the year the distribution is made. The earnings portion of a Coverdell education 

savings account distribution not used to pay qualified education expenses is includible in the gross income of the distributee and generally is subject to an additional 10-percent tax.90

Tax-free (and free of additional 10-percent tax) transfers or rollovers of account balances from one Coverdell education savings account benefiting one beneficiary to another Coverdell education 

savings account benefiting another beneficiary (as well as redesignations of the named beneficiary) are permitted, provided that 

the new beneficiary is a member of the family of the prior beneficiary and is under age 30 (except in the case of a special needs 

beneficiary). In general, any balance remaining in a Coverdell education savings account is deemed to be distributed within 30 days 

after the date that the beneficiary reaches age 30 (or, if the beneficiary dies before attaining age 30, within 30 days of the date that 

the beneficiary dies). 

Qualified education expenses include qualified elementary and 

secondary expenses and qualified higher education expenses. Such 

qualified education expenses generally include only out-of-pocket 

expenses. They do not include expenses covered by employer-provided educational assistance or scholarships for the benefit of the 

beneficiary that are excludable from gross income. 

The term qualified elementary and secondary school expenses, 

means expenses for: (1) tuition, fees, academic tutoring, special 

needs services, books, supplies, and other equipment incurred in 

connection with the enrollment or attendance of the beneficiary at 

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91Qualified higher education expenses are defined in the same manner as for qualified tuition 

programs. 92Sec. 530(b)(2)(B). 93For purposes of this description, the term ‘‘account’’ is used interchangeably to refer to a 

prepaid tuition benefit contract or a tuition savings account established pursuant to a qualified 

tuition program. 

ondary education (kindergarten through grade 12) as determined 

under State law; (2) room and board, uniforms, transportation, and 

supplementary items or services (including extended day programs) 

required or provided by such a school in connection with such enrollment or attendance of the beneficiary; and (3) the purchase of 

any computer technology or equipment (as defined in section 

170(e)(6)(F)(i)) or internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and 

the beneficiary’s family during any of the years the beneficiary is 

in elementary or secondary school. Computer software primarily involving sports, games, or hobbies is not considered a qualified elementary and secondary school expense unless the software is predominantly educational in nature. 

The term qualified higher education expenses includes tuition, 

fees, books, supplies, and equipment required for the enrollment or 

attendance of the designated beneficiary at an eligible education institution, regardless of whether the beneficiary is enrolled at an eligible educational institution on a full-time, half-time, or less than 

half-time basis.91 Moreover, qualified higher education expenses include certain room and board expenses for any period during which 

the beneficiary is at least a half-time student. Qualified higher education expenses include expenses with respect to undergraduate or 

graduate-level courses. In addition, qualified higher education expenses include amounts paid or incurred to purchase tuition credits 

(or to make contributions to an account) under a qualified tuition 

program for the benefit of the beneficiary of the Coverdell education savings account.92

Section 529 qualified tuition programs 

In general 

A qualified tuition program is a program established and maintained by a State or agency or instrumentality thereof, or by one 

or more eligible educational institutions, which satisfies certain requirements and under which a person may purchase tuition credits 

or certificates on behalf of a designated beneficiary that entitle the 

beneficiary to the waiver or payment of qualified higher education 

expenses of the beneficiary (a ‘‘prepaid tuition program’’). Section 

529 provides specified income tax and transfer tax rules for the 

treatment of accounts and contracts established under qualified 

tuition programs.93 In the case of a program established and maintained by a State or agency or instrumentality thereof, a qualified 

tuition program also includes a program under which a person may 

make contributions to an account that is established for the purpose of satisfying the qualified higher education expenses of the 

designated beneficiary of the account, provided it satisfies certain 

specified requirements (a ‘‘savings account program’’). Under both 

types of qualified tuition programs, a contributor establishes an account for the benefit of a particular designated beneficiary to provide for that beneficiary’s higher education expenses. 


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94Section 529 refers to contributors and designated beneficiaries, but does not define or otherwise refer to the term ‘‘account owner,’’ which is a commonly used term among qualified tuition 

programs. 

In general, prepaid tuition contracts and tuition savings accounts 

established under a qualified tuition program involve prepayments 

or contributions made by one or more individuals for the benefit of 

a designated beneficiary. Decisions with respect to the contract or 

account are typically made by an individual who is not the designated beneficiary. Qualified tuition accounts or contracts generally require the designation of a person (generally referred to as 

an ‘‘account owner’’) 94 whom the program administrator (oftentimes a third party administrator retained by the State or by the 

educational institution that established the program) may look to 

for decisions, recordkeeping, and reporting with respect to the account established for a designated beneficiary. The person or persons who make the contributions to the account need not be the 

same person who is regarded as the account owner for purposes of 

administering the account. Under many qualified tuition programs, 

the account owner generally has control over the account or contract, including the ability to change designated beneficiaries and 

to withdraw funds at any time and for any purpose. Thus, in practice, qualified tuition accounts or contracts generally involve a contributor, a designated beneficiary, an account owner (who oftentimes is not the contributor or the designated beneficiary), and an 

administrator of the account or contract. 

Qualified higher education expenses 

For purposes of receiving a distribution from a qualified tuition 

program that qualifies for favorable tax treatment under the Code, 

qualified higher education expenses means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of 

a designated beneficiary at an eligible educational institution, and 

expenses for special needs services in the case of a special needs 

beneficiary that are incurred in connection with such enrollment or 

attendance. Qualified higher education expenses generally also include room and board for students who are enrolled at least halftime. Qualified higher education expenses include the purchase of 

any computer technology or equipment, or Internet access or related services, if such technology or services were to be used primarily by the beneficiary during any of the years a beneficiary is 

enrolled at an eligible institution. 

Contributions to qualified tuition programs 

Contributions to a qualified tuition program must be made in 

cash. Section 529 does not impose a specific dollar limit on the 

amount of contributions, account balances, or prepaid tuition benefits relating to a qualified tuition account; however, the program is 

required to have adequate safeguards to prevent contributions in 

excess of amounts necessary to provide for the beneficiary’s qualified higher education expenses. Contributions generally are treated 

as a completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for Federal income tax purposes, 

although they may be deductible for State income tax purposes. 

Amounts in the account accumulate on a tax-free basis (i.e., income 

on accounts in the plan is not subject to current income tax). 


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A qualified tuition program may not permit any contributor to, 

or designated beneficiary under, the program to direct (directly or 

indirectly) the investment of any contributions (or earnings thereon) more than two times in any calendar year, and must provide 

separate accounting for each designated beneficiary. A qualified 

tuition program may not allow any interest in an account or contract (or any portion thereof) to be used as security for a loan. 

REASONS FOR CHANGE

The Committee believes that expanding and strengthening the 

529 program will help families have the ability to save for future 

college expenses. Additionally, the Committee believes that replacing Coverdell savings accounts with an expanded 529 program that 

allows individuals to save for primary and secondary school tuition 

is an important step towards consolidating duplicative Code provisions and simplifying the Code. 

EXPLANATION OF PROVISION

Under the provision, no new contributions are permitted into 

Coverdell savings accounts after December 31, 2017. However, rollovers of account balances from one Coverdell education savings account to another pre-existing Coverdell education savings account 

benefiting another beneficiary remain permitted after this date. 

Additionally, the provision allows section 529 plans to receive rollover contributions from Coverdell education savings accounts. 

The provision modifies section 529 plans to allow such plans to 

distribute not more than $10,000 in expenses for tuition incurred 

during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a 

per-student basis, rather than a per-account basis. Thus, under the 

provision, although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maximum of $10,000 in distributions free of tax, regardless of whether 

the funds are distributed from multiple accounts. Any excess distributions received by the individual would be treated as a distribution subject to tax under the general rules of section 529. 

The provision also modifies section 529 plans to allow such plan 

distributions to be used for certain expenses, including books, supplies, and equipment, required for attendance in a registered apprenticeship program. Registered apprenticeship programs are apprenticeship programs registered and certified with the Secretary 

of Labor. 

Finally, the provision specifies that nothing in this section shall 

prevent an unborn child from qualifying as a designated beneficiary. For these purposes, an unborn child means a child in utero, 

and the term child in utero means a member of the species homo 

sapiens, at any stage of development, who is carried in the womb. 

EFFECTIVE DATE

The provision applies to contributions and distributions made 

after December 31, 2017. 


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95Sec. 108(f). 

3. Reforms to discharge of certain student loan indebtedness (sec. 

1203 of the bill and sec. 108(f) of the Code) 

PRESENT LAW

Gross income generally includes the discharge of indebtedness of 

the taxpayer. Under an exception to this general rule, gross income 

does not include any amount from the forgiveness (in whole or in 

part) of certain student loans, provided that the forgiveness is contingent on the student’s working for a certain period of time in certain professions for any of a broad class of employers.95

Student loans eligible for this special rule must be made to an 

individual to assist the individual in attending an educational institution that normally maintains a regular faculty and curriculum 

and normally has a regularly enrolled body of students in attendance at the place where its education activities are regularly carried on. Loan proceeds may be used not only for tuition and required fees, but also to cover room and board expenses. The loan 

must be made by (1) the United States (or an instrumentality or 

agency thereof), (2) a State (or any political subdivision thereof), (3) 

certain tax-exempt public benefit corporations that control a State, 

county, or municipal hospital and whose employees have been 

deemed to be public employees under State law, or (4) an educational organization that originally received the funds from which 

the loan was made from the United States, a State, or a tax-exempt public benefit corporation. 

In addition, an individual’s gross income does not include 

amounts from the forgiveness of loans made by educational organizations (and certain tax-exempt organizations in the case of refinancing loans) out of private, nongovernmental funds if the proceeds of such loans are used to pay costs of attendance at an educational institution or to refinance any outstanding student loans 

(not just loans made by educational organizations) and the student 

is not employed by the lender organization. In the case of such 

loans made or refinanced by educational organizations (or refinancing loans made by certain tax-exempt organizations), cancellation of the student loan must be contingent on the student working 

in an occupation or area with unmet needs and such work must be 

performed for, or under the direction of, a tax-exempt charitable organization or a governmental entity. 

Finally, an individual’s gross income does not include any loan 

repayment amount received under the National Health Service 

Corps loan repayment program, certain State loan repayment programs, or any amount received by an individual under any State 

loan repayment or loan forgiveness program that is intended to 

provide for the increased availability of health care services in underserved or health professional shortage areas (as determined by 

the State). 

REASONS FOR CHANGE

The Committee believes that the discharge of a student loan in 

the case of an individual whose loan was discharged on account of 

death or disability of the student borrower should not be a taxable 

event. 


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96 15 U.S.C. 1650(7). 97 Although the provision makes specific reference to those provisions of the Higher Education 

Act of 1965 that discharge William D. Ford Federal Direct Loan Program loans, Federal Family 

Education Loan Program loans, and Federal Perkins Loan Program loans in the case of death 

and total and permanent disability, the provision also contains a catch-all exclusion in the case 

of a student loan discharged on account of the death or total and permanent disability of the 

student, in addition to those specific statutory references. 98Section 108 of the Indian Health Care Improvement Act established the Indian Health 

Service loan repayment program to assure a sufficient supply of trained health professionals 

needed to provide health care services to Indians. Pub. L. No. 94–437, as amended by Pub. L. 

No. 100–713, sec. 108, and Pub. L. No. 102–573, sec. 106, and as amended, and permanently 

reauthorized by Pub. L. No. 111–148, sec. 10221. 99Sec. 221. 100Sec. 221(c). 

EXPLANATION OF PROVISION

The provision modifies the exclusion of student loan discharges 

from gross income, by including within the exclusion certain discharges on account of death or disability. Loans eligible for the exclusion under the provision are loans made by (1) the United States 

(or an instrumentality or agency thereof), (2) a State (or any political subdivision thereof), (3) certain tax-exempt public benefit corporations that control a State, county, or municipal hospital and 

whose employees have been deemed to be public employees under 

State law, (4) an educational organization that originally received 

the funds from which the loan was made from the United States, 

a State, or a tax-exempt public benefit corporation, or (5) private 

education loans (for this purpose, private education loan is defined 

in section 140(7) of the Consumer Protection Act).96

Under the provision, the discharge of a loan as described above 

is excluded from gross income if the discharge was pursuant to the 

death or total and permanent disability of the student.97

Additionally, the provision modifies the gross income exclusion 

for amounts received under the National Health Service Corps loan 

repayment program or certain State loan repayment programs to 

include any amount received by an individual under the Indian 

Health Service loan repayment program.98

EFFECTIVE DATE

The provision applies to discharges of loans after, and amounts 

received after, December 31, 2017. 

4. Repeal of deduction for student loan interest (sec. 1204 of the bill 

and sec. 221 of the Code) 

PRESENT LAW

Certain individuals who have paid interest on qualified education 

loans may claim an above-the-line deduction for such interest expenses, subject to a maximum annual deduction limit.99 Required 

payments of interest generally do not include voluntary payments, 

such as interest payments made during a period of loan forbearance. No deduction is allowed to an individual if that individual is 

claimed as a dependent on another taxpayer’s return for the taxable year.100

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101Sec. 221(b)(1). 102Sec. 222(a). 

curred in attending on at least a half-time basis (1) eligible educational institutions, or (2) institutions conducting internship or 

residency programs leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility conducting postgraduate training. The cost of attendance is reduced by 

any amount excluded from gross income under the exclusions for 

qualified scholarships and tuition reductions, employer-provided 

educational assistance, interest earned on education savings bonds, 

qualified tuition programs, and Coverdell education savings accounts, as well as the amount of certain other scholarships and 

similar payments. 

The maximum allowable deduction per year is $2,500.101 For 

2017, the deduction is phased out ratably for taxpayers with AGI 

between $65,000 and $80,000 ($135,000 and $165,000 for married 

taxpayers filing a joint return). The income phase-out ranges are 

indexed for inflation and rounded to the next lowest multiple of 

$5,000. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for student loan interest, makes 

the system simpler and fairer for all families and individuals, and 

allows for lower tax rates. The Committee further believes that repeal of this provision is consistent with streamlining the tax code, 

broadening the tax base, lowering rates, and growing the economy. 

EXPLANATION OF PROVISION

The provision repeals the deduction for student loan interest. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

5. Repeal of deduction for qualified tuition and related expenses 

(sec. 1204 of the bill and sec. 222 of the Code) 

PRESENT LAW

For taxable years beginning before January 1, 2017, an individual is allowed an above-the-line deduction for qualified tuition 

and related expenses for higher education paid by the individual 

during the taxable year.102 Qualified tuition includes tuition and 

fees required for the enrollment or attendance by the taxpayer, the 

taxpayer’s spouse, or any dependent of the taxpayer with respect 

to whom the taxpayer may claim a personal exemption, at an eligible institution of higher education for courses of instruction of such 

individual at such institution. The expenses must be in connection 

with enrollment at an institution of higher education during the 

taxable year, or with an academic term beginning during the taxable year or during the first three months of the next taxable year. 

The deduction is not available for tuition and related expenses paid 

for elementary or secondary education. 


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103Sec. 222(b)(2)(B). 104Sec. 127(a). 105The employer’s educational assistance program must not discriminate in favor of highly 

compensated employees, within the meaning of Sec. 414(q). In addition, no more than five percent of the amounts paid or incurred by the employer during the year for educational assistance 

under a qualified educational assistance program can be provided for the class of individuals 

consisting of more-than-five-percent owners of the employer and the spouses or dependents of 

such more-than-five-percent owners. 

The maximum deduction is $4,000 for an individual whose AGI 

for the taxable year does not exceed $65,000 ($130,000 in the case 

of a joint return), or $2,000 for other individuals whose AGI does 

not exceed $80,000 ($160,000 in the case of a joint return).103 No 

deduction is allowed for an individual whose AGI exceeds the relevant AGI limitations, for a married individual who does not file 

a joint return, or for an individual with respect to whom a personal 

exemption deduction may be claimed by another taxpayer for the 

taxable year. The deduction is not available for taxable years beginning after December 31, 2016. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for tuition, makes the system simpler and fairer for all families and individuals, and allows for lower 

tax rates. The Committee further believes that repeal of this provision is consistent with streamlining the tax code, broadening the 

tax base, lowering rates, and growing the economy. 

EXPLANATION OF PROVISION

The provision repeals the deduction for qualified tuition and related expenses. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

6. Repeal of exclusion for educational assistance programs (sec. 

1204 of the bill and sec. 127 of the Code) 

PRESENT LAW

Up to $5,250 annually of educational assistance provided by an 

employer to an employee is excludible from the employee’s gross income, provided that certain requirements are satisfied.104 Nondiscrimination rules 105 apply and the educational assistance must 

be provided pursuant to a separate written plan of the employer. 

The exclusion applies to both graduate and undergraduate courses, 

and applies only with respect to education provided to the employee (i.e., it does not apply to education provided to the spouse 

or a child of the employee). Amounts that are excludible from gross 

income for income tax purposes are also excluded from wages for 

employment tax purposes. 

For purposes of the exclusion, educational assistance means the 

payment by an employer of expenses incurred by or on behalf of 

the employee for education of the employee including, but not limited to, tuition, fees and similar payments, books, supplies, and 

equipment. Educational assistance also includes the provision by 

the employer of courses of instruction for the employee (including 


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106Sec. 135. 

books, supplies, and equipment). Educational assistance does not 

include (1) tools or supplies that may be retained by the employee 

after completion of a course, (2) meals, lodging, or transportation, 

and (3) any education involving sports, games, or hobbies. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the exclusion for educational assistance programs, makes the system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further 

believes that repeal of this provision is consistent with streamlining the tax code, broadening the tax base, lowering rates, and 

growing the economy. 

EXPLANATION OF PROVISION

The provision repeals the exclusions from gross income and 

wages for educational assistance programs. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

7. Repeal of exclusion for interest on United States savings bonds 

used for higher education expenses (sec. 1204 of the bill and sec. 

135 of the Code) 

PRESENT LAW

Interest earned on a qualified United States Series EE savings 

bond issued after 1989 is excludable from gross income if the proceeds of the bond upon redemption do not exceed qualified higher 

education expenses paid by the taxpayer during the taxable 

year.106 Qualified higher education expenses include tuition and 

fees (but not room and board expenses) required for the enrollment 

or attendance of the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer at certain eligible higher educational institutions. The amount of qualified higher education expenses taken 

into account for purposes of the exclusion is reduced by the amount 

of such expenses taken into account in determining the Hope, 

American Opportunity, or Lifetime Learning credits claimed by any 

taxpayer, or taken into account in determining an exclusion from 

gross income for a distribution from a qualified tuition program or 

a Coverdell education savings account, with respect to a particular 

student for the taxable year. 

The exclusion is phased out for certain higher-income taxpayers, 

determined by the taxpayer’s modified AGI during the year the 

bond is redeemed. For 2017, the exclusion is phased out for taxpayers with modified AGI between $78,150 and $93,150 ($117,250 

and $147,250 for married taxpayers filing a joint return). To prevent taxpayers from effectively avoiding the income phaseout limitation through the purchase of bonds directly in the child’s name, 

the interest exclusion is available only with respect to U.S. Series 

EE savings bonds issued to taxpayers who are at least 24 years old. 


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107 Individuals described under the rules of Sec. 132(h). 108 Educational organization described in section 170(b)(1)(A)(ii). Sec. 117(d)(2). 109The exclusion applies with respect to highly compensated employees, within the meaning 

of Sec. 414(q), only if such tuition reductions are available on substantially the same terms to 

each member of a group of employees which is defined under a reasonable classification established by the employer, such that the benefit does not discriminate in favor of highly compensated employees. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the exclusion for interest on United States savings bonds used for higher education expenses, makes the system 

simpler and fairer for all families and individuals, and allows for 

lower tax rates. The Committee further believes that repeal of this 

provision is consistent with streamlining the tax code, broadening 

the tax base, lowering rates, and growing the economy. 

EXPLANATION OF PROVISION

The provision repeals exclusion for interest on Series EE savings 

bonds used for qualified higher education expenses. 

EFFECTIVE DATE

The provision generally applies to taxable years beginning after 

December 31, 2017. 

8. Repeal of exclusion for qualified tuition reductions (sec. 1204 of 

the bill and sec. 117(d) of the Code) 

PRESENT LAW

Qualified tuition reductions for certain education provided to employees (and their spouses and dependents 107) of certain educational organizations are excludible from gross income.108 The tuition reduction is subject to nondiscrimination rules.109 The exclusion generally applies below the graduate level, and to teaching 

and research assistants who are students at the graduate level, but 

does not apply to any amount received by a student that represents 

payment for teaching, research or other services by the student required as a condition for receiving the tuition reduction. Amounts 

that are excludible from gross income for income tax purposes are 

also excluded from wages for employment tax purposes. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the exclusion for qualified tuition reductions, 

makes the system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further believes that repeal of this provision is consistent with streamlining 

the tax code, broadening the tax base, lowering rates, and growing 

the economy. 

EXPLANATION OF PROVISION

The provision repeals the exclusions from gross income and 

wages for qualified tuition reductions. 


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110For a description of qualified tuition programs (also known as 529 plans), see the description of sec. 1203 of the bill. 111Sec. 529A. 112This amount is indexed for inflation. In the case that contributions to an ABLE account 

exceed the annual limit, an excise tax in the amount of six percent of the excess contribution 

to such account is imposed on the designated beneficiary. Such tax does not apply in the event 

that the trustee of such account makes a corrective distribution of such excess amounts by the 

due date (including extensions) of the individual’s tax return for the year within the taxable 

year. 

EFFECTIVE DATE

The provision applies to amounts paid or incurred after December 31, 2017. 

9. Rollovers between qualified tuition programs and qualified 

ABLE programs (sec. 1205 of the bill and secs. 529 and 529A of 

the Code) 

PRESENT LAW 110

Qualified ABLE programs 

The Code provides for a tax-favored savings program intended to 

benefit disabled individuals, known as qualified ABLE programs.111 A qualified ABLE program is a program established and 

maintained by a State or agency or instrumentality thereof. A 

qualified ABLE program must meet the following conditions: (1) 

under the provisions of the program, contributions may be made to 

an account (an ‘‘ABLE account’’), established for the purpose of 

meeting the qualified disability expenses of the designated beneficiary of the account; (2) the program must limit a designated beneficiary to one ABLE account; and (3) the program must meet certain other requirements discussed below. A qualified ABLE program is generally exempt from income tax, but is otherwise subject 

to the taxes imposed on the unrelated business income of tax-exempt organizations. 

A designated beneficiary of an ABLE account is the owner of the 

ABLE account. A designated beneficiary must be an eligible individual (defined below) who established the ABLE account and who 

is designated at the commencement of participation in the qualified 

ABLE program as the beneficiary of amounts paid (or to be paid) 

into and from the program. 

Contributions to an ABLE account must be made in cash and are 

not deductible for Federal income tax purposes. Except in the case 

of a rollover contribution from another ABLE account, an ABLE account must provide that it may not receive aggregate contributions 

during a taxable year in excess of the amount under section 

2503(b) of the Code (the annual gift tax exemption). For 2017, this 

is $14,000.112 Additionally, a qualified ABLE program must provide adequate safeguards to ensure that ABLE account contributions do not exceed the limit imposed on accounts under the qualified tuition program of the State maintaining the qualified ABLE 

program. Amounts in the account accumulate on a tax-deferred 

basis (i.e., income on accounts under the program is not subject to 

current income tax). 

A qualified ABLE program may permit a designated beneficiary 

to direct (directly or indirectly) the investment of any contributions 

(or earnings thereon) no more than two times in any calendar year 

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113The rules of section 72 apply in determining the portion of a distribution that consists of 

earnings. 114For instance, if a designated beneficiary were to relocate to a different State. 115 In which case the contributor ABLE account must be closed 60 days after the transfer to 

the new ABLE account is made. 116These are benefits, respectively, under Title II or Title XVI of the Social Security Act. 

ficiary. A qualified ABLE program may not allow any interest in 

the program (or any portion thereof) to be used as security for a 

loan. 

Distributions from an ABLE account are generally includible in 

the distributee’s income to the extent consisting of earnings on the 

account.113 Distributions from an ABLE account are excludable 

from income to the extent that the total distribution does not exceed the qualified disability expenses of the designated beneficiary 

during the taxable year. If a distribution from an ABLE account 

exceeds the qualified disability expenses of the designated beneficiary, a pro rata portion of the distribution is excludable from income. The portion of any distribution that is includible in income 

is subject to an additional 10-percent tax unless the distribution is 

made after the death of the beneficiary. Amounts in an ABLE account may be rolled over without income tax liability to another 

ABLE account for the same beneficiary 114 or another ABLE account for the designated beneficiary’s brother, sister, stepbrother or 

stepsister who is also an eligible individual. 

Except in the case of an ABLE account established in a different 

ABLE program for purposes of transferring ABLE accounts,115 no 

more than one ABLE account may be established by a designated 

beneficiary. Thus, once an ABLE account has been established by 

a designated beneficiary, no account subsequently established by 

such beneficiary shall be treated as an ABLE account. 

A contribution to an ABLE account is treated as a completed gift 

of a present interest to the designated beneficiary of the account. 

Such contributions qualify for the per-donee annual gift tax exclusion ($14,000 for 2017) and, to the extent of such exclusion, are exempt from the generation skipping transfer (‘‘GST’’) tax. A distribution from an ABLE account generally is not subject to gift tax or 

GST tax. 

Eligible individuals 

As described above, a qualified ABLE program may provide for 

the establishment of ABLE accounts only if those accounts are established and owned by an eligible individual, such owner referred 

to as a designated beneficiary. For these purposes, an eligible individual is an individual either (1) for whom a disability certification 

has been filed with the Secretary for the taxable year, or (2) who 

is entitled to Social Security Disability Insurance benefits or SSI 

benefits 116 based on blindness or disability, and such blindness or 

disability occurred before the individual attained age 26. 

A disability certification means a certification to the satisfaction 

of the Secretary, made by the eligible individual or the parent or 

guardian of the eligible individual, that the individual has a medically determinable physical or mental impairment, which results in 

marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected 

to last for a continuous period of not less than 12 months, or is 

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117 No inference may be drawn from a disability certification for purposes of eligibility for Social Security, SSI or Medicaid benefits. 

rity Act). Such blindness or disability must have occurred before 

the date the individual attained age 26. Such certification must include a copy of the diagnosis of the individual’s impairment and be 

signed by a licensed physician.117

Qualified disability expenses 

As described above, the earnings on distributions from an ABLE 

account are excluded from income only to the extent total distributions do not exceed the qualified disability expenses of the designated beneficiary. For this purpose, qualified disability expenses 

are any expenses related to the eligible individual’s blindness or 

disability which are made for the benefit of the designated beneficiary. Such expenses include the following expenses: education, 

housing, transportation, employment training and support, assistive technology and personal support services, health, prevention 

and wellness, financial management and administrative services, 

legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of section 529A. 

Transfer to State 

In the event that the designated beneficiary dies, subject to any 

outstanding payments due for qualified disability expenses incurred by the designated beneficiary, all amounts remaining in the 

deceased designated beneficiary’s ABLE account not in excess of 

the amount equal to the total medical assistance paid such individual under any State Medicaid plan established under title XIX 

of the Social Security Act shall be distributed to such State upon 

filing of a claim for payment by such State. Such repaid amounts 

shall be net of any premiums paid from the account or by or on behalf of the beneficiary to the State’s Medicaid Buy-In program. 

Treatment of ABLE accounts under Federal programs 

Any amounts in an ABLE account, and any distribution for 

qualified disability expenses, shall be disregarded for purposes of 

determining eligibility to receive, or the amount of, any assistance 

or benefit authorized by any Federal means-tested program. However, in the case of the SSI program, a distribution for housing expenses is not disregarded, nor are amounts in an ABLE account in 

excess of $100,000. In the case that an individual’s ABLE account 

balance exceeds $100,000, such individual’s SSI benefits shall not 

be terminated, but instead shall be suspended until such time as 

the individual’s resources fall below $100,000. However, such suspension shall not apply for purposes of Medicaid eligibility. 

REASONS FOR CHANGE

ABLE programs can be viewed as an alternative to college savings, allowing a parent to save for a child with a disability in the 

same way a parent might save for a child to go to college. The 

Committee believes that families should have the flexibility to 

transition between these savings vehicles by allowing amounts 


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118For these purposes, a member of the family means, with respect to any designated beneficiary, the taxpayer’s: (1) spouse; (2) child or descendant of a child; (3) brother, sister, stepbrother or stepsister; (4) father, mother or ancestor of either; (5) stepfather or stepmother; (6) 

niece or nephew; (7) aunt or uncle; (8) in-law; (9) the spouse of any individual described in (2)- 

(8); and (10) any first cousin of the designated beneficiary. 119 529A(b)(2)(B). 120 529(c)(3)(A). 121Sec. 68. 

saved in a section 529 account to be transferred to an ABLE account tax-free.’’ 

EXPLANATION OF PROVISION

The provision allows for amounts from qualified tuition programs 

(also known as 529 accounts) to be rolled over to an ABLE account 

without penalty, provided that the ABLE account is owned by the 

designated beneficiary of that 529 account, or a member of such 

designated beneficiary’s family.118 Such rolled-over amounts count 

towards the overall limitation on amounts that can be contributed 

to an ABLE account within a taxable year.119 Any amount rolled 

over that is in excess of this limitation shall be includible in the 

gross income of the distributee in a manner provided by section 

72.120

EFFECTIVE DATE

The provision applies to distributions after December 31, 2017. 

D. SIMPLIFICATION AND REFORM OF DEDUCTIONS

1. Repeal of overall limitation on itemized deductions (sec. 1301 of 

the bill and sec. 68 of the Code) 

PRESENT LAW

The total amount of most otherwise allowable itemized deductions (other than the deductions for medical expenses, investment 

interest and casualty, theft or gambling losses) is limited for certain upper-income taxpayers.121 All other limitations applicable to 

such deductions (such as the separate floors) are first applied and, 

then, the otherwise allowable total amount of itemized deductions 

is reduced by three percent of the amount by which the taxpayer’s 

adjusted gross income exceeds a threshold amount. 

For 2017, the threshold amounts are $261,500 for single taxpayers, $287,650 for heads of household, $313,800 for married couples filing jointly, and $156,900 for married taxpayers filing separately. These threshold amounts are indexed for inflation. The otherwise allowable itemized deductions may not be reduced by more 

than 80 percent by reason of the overall limit on itemized deductions. 

REASONS FOR CHANGE

The Committee believes that the overall limitation on itemized 

deductions has functioned as a hidden marginal tax rate. In its 

mission to make the Code simpler, fairer, and more transparent, 

the Committee believes that the provision should be repealed. 


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122Sec. 163(h)(1). 123Sec. 163(h)(2)(D) and (h)(3). 

EXPLANATION OF PROVISION

The provision repeals the overall limitation on itemized deductions. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

2. Modification of deduction for home mortgage interest (sec. 1302 

of the bill and sec. 163(h) of the Code) 

PRESENT LAW

As a general matter, personal interest is not deductible.122 Qualified residence interest is not treated as personal interest and is allowed as an itemized deduction, subject to limitations.123 Qualified 

residence interest means interest paid or accrued during the taxable year on either acquisition indebtedness or home equity indebtedness. A qualified residence means the taxpayer’s principal residence and one other residence of the taxpayer selected to be a 

qualified residence. A qualified residence can be a house, condominium, cooperative, mobile home, house trailer, or boat. 

Acquisition indebtedness 

Acquisition indebtedness is indebtedness that is incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer and which secures the residence. The maximum amount treated as acquisition indebtedness is $1 million 

($500,000 in the case of a married person filing a separate return). 

Acquisition indebtedness also includes indebtedness from the refinancing of other acquisition indebtedness but only to the extent 

of the amount (and term) of the refinanced indebtedness. Thus, for 

example, if the taxpayer incurs $200,000 of acquisition indebtedness to acquire a principal residence and pays down the debt to 

$150,000, the taxpayer’s acquisition indebtedness with respect to 

the residence cannot thereafter be increased above $150,000 (except by indebtedness incurred to substantially improve the residence). 

Interest on acquisition indebtedness is allowable in computing alternative minimum taxable income. However, in the case of a second residence, the acquisition indebtedness may only be incurred 

with respect to a house, apartment, condominium, or a mobile 

home that is not used on a transient basis. 

Home equity indebtedness 

Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured by a qualified residence. 

The amount of home equity indebtedness may not exceed $100,000 ($50,000 in the case of a married individual filing a separate return) and may not exceed the fair market value of the residence reduced by the acquisition indebtedness. 

Interest on home equity indebtedness is not deductible in computing alternative minimum taxable income. 


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124Special rules apply in the case of indebtedness from refinancing existing principal resi- dence acquisition indebtedness. Specifically, the $1,000,000 ($500,000 in the case of married taxpayers filing separately) limitation continues to apply to any indebtedness incurred on or after 

November 2, 2017, to refinance qualified residence indebtedness incurred before that date to the 

extent the amount of the indebtedness resulting from the refinancing does not exceed the 

amount of the refinanced indebtedness. Thus, the maximum dollar amount that may be treated 

as principal residence acquisition indebtedness will not decrease by reason of a refinancing. 

Interest on qualifying home equity indebtedness is deductible, regardless of how the proceeds of the indebtedness are used. For example, personal expenditures may include health costs and education expenses for the taxpayer’s family members or any other 

personal expenses such as vacations, furniture, or automobiles. A 

taxpayer and a mortgage company can contract for the home equity 

indebtedness loan proceeds to be transferred to the taxpayer in a 

lump sum payment (e.g., a traditional mortgage), a series of payments (e.g., a reverse mortgage), or the lender may extend the borrower a line of credit up to a fixed limit over the term of the loan 

(e.g., a home equity line of credit). 

Thus, the aggregate limitation on the total amount of a taxpayer’s acquisition indebtedness and home equity indebtedness 

with respect to a taxpayer’s principal residence and a second residence that may give rise to deductible interest is $1,100,000 

($550,000, for married persons filing a separate return). 

REASONS FOR CHANGE

The Committee believes that scaling back existing tax incentives, 

including the home mortgage interest deduction, makes the system 

simpler and fairer for all families and individuals, and allows for 

lower tax rates. The Committee further believes that modification 

of this provision is consistent with streamlining the tax code, 

broadening the tax base, lowering rates, and growing the economy. 

EXPLANATION OF PROVISION

The provision modifies the home mortgage interest deduction in 

the following ways. 

First, under the provision, only interest paid on indebtedness 

used to acquire, construct or substantially improve the taxpayer’s 

principal residence may be included in the calculation of the deduction. Thus, under the provision, a taxpayer receives no deduction 

for interest paid on indebtedness used to acquire a second home. 

Second, under the provision, a taxpayer may treat no more than 

$500,000 as principal residence acquisition indebtedness ($250,000 

in the case of married taxpayers filing separately). In the case of 

principal residence acquisition indebtedness incurred before the 

date of introduction (November 2, 2017), this limitation is 

$1,000,000 ($500,000 in the case of married taxpayers filing separately).124 Although the term principal residence acquisition indebtedness is not defined in the statute, it is intended that this 

‘‘grandfathering’’ provision apply only with respect to indebtedness 

incurred with respect to a taxpayer’s principal residence. 

Last, under the provision, interest paid on home equity indebtedness is not treated as qualified residence interest, and thus is not 

deductible. This is the case regardless of when the home equity indebtedness was incurred. 


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125Sec. 164(a)(1). 126Sec. 164(a)(2). 127Sec. 164(a)(3). A foreign tax credit, in lieu of a deduction, is allowable for foreign taxes 

if the taxpayer so elects. 128Sec. 164(b)(5). 129See H. Rep. No. 1365 to accompany Individual Income Tax Bill of 1944 (78th Cong., 2d. 

Sess.), reprinted at 19 C.B. 839 (1944). 130Sec. 164(a)(4). 131The proposal does not modify the deductibility of GST tax imposed on certain income distributions. 

EFFECTIVE DATE

The provision is effective for interest paid or accrued in taxable 

years beginning after December 31, 2017. 

3. Modification of deduction for taxes not paid or accrued in a trade 

or business (sec. 1303 of the bill and sec. 164(b) of the Code) 

PRESENT LAW

Individuals are permitted a deduction for certain taxes paid or 

accrued, whether or not incurred in a taxpayer’s trade or business. 

These taxes are: (i) State and local real and foreign property 

taxes; 125 (ii) State and local personal property taxes; 126 (iii) State, 

local, and foreign income, war profits, and excess profits taxes.127

At the election of the taxpayer, an itemized deduction may be 

taken for State and local general sales taxes in lieu of the itemized 

deduction for State and local income taxes.128

Property taxes may be allowed as a deduction in computing adjusted gross income if incurred in connection with property used in 

a trade or business; otherwise they are an itemized deduction. In 

the case of State and local income taxes, the deduction is an 

itemized deduction notwithstanding that the tax may be imposed 

on profits from a trade or business.129

Individuals also are permitted a deduction for Federal and State 

generation skipping transfer tax (‘‘GST tax’’) imposed on certain income distributions that are included in the gross income of the distributee.130

In determining a taxpayer’s alternative minimum taxable income, no itemized deduction for property, income, or sales tax is allowed. 

REASONS FOR CHANGE

The Committee believe that scaling back existing tax incentives, 

including the deduction for State and local taxes, makes the system 

simpler and fairer for all families and individuals, and allows for 

lower tax rates. The Committee further believes that modification 

of this provision to apply only to real property taxes is consistent 

with streamlining the tax code, broadening the tax base, lowering 

rates, and growing the economy. 

EXPLANATION OF PROVISION

Under the provision, in the case of an individual, as a general 

matter, State, local, and foreign property taxes and State and local 

sales taxes are allowed as a deduction only when paid or accrued 

in carrying on a trade or business, or an activity described in section 212 (relating to expenses for the production of income).131


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132Sec. 165(c). 

Thus, the provision allows only those deductions for State, local, 

and foreign property taxes, and sales taxes, that are presently deductible in computing income on an individual’s Schedule C, Schedule E, or Schedule F on such individual’s tax return. Thus, for instance, in the case of property taxes, an individual may deduct 

such items only if these taxes were imposed on business assets 

(such as residential rental property). 

The provision contains an exception to the above-stated rule in 

the case of real property taxes. Under this exception, an individual 

may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for property taxes paid or 

accrued in the taxable year, in addition to any property taxes deducted in carrying on a trade or business or an activity described 

in section 212. Foreign real property taxes may not be deducted 

under this exception. 

Under the provision, in the case of an individual, State and local 

income, war profits, and excess profits taxes are not allowable as 

a deduction. 

It is intended that persons required to report refunds of State 

and local income taxes under section 6050E should no longer be required to report such refunds of tax relating to taxable years beginning after December 31, 2017. A technical amendment may be 

needed to reflect this intent. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

4. Repeal of deduction for personal casualty and theft losses (sec. 

1304 of the bill and sec. 165 of the Code) 

PRESENT LAW

A taxpayer may generally claim a deduction for any loss sustained during the taxable year, not compensated by insurance or 

otherwise. For individual taxpayers, deductible losses must be incurred in a trade or business or other profit-seeking activity or consist of property losses arising from fire, storm, shipwreck, or other 

casualty, or from theft.132 Personal casualty or theft losses are deductible only if they exceed $100 per casualty or theft. In addition, 

aggregate net casualty and theft losses are deductible only to the 

extent they exceed 10 percent of an individual taxpayer’s adjusted 

gross income. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for personal casualty and theft 

losses, makes the system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further 

believes that repeal of this provision is consistent with streamlining the tax code, broadening the tax base, lowering rates, and 

growing the economy. 


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133Pub. L. No. 115–63. 134Sec. 165(d). 135The provision thus reverses the result reached by the Tax Court in Ronald A. Mayo v. 

Commissioner, 136 T.C. 81 (2011). In that case, the Court held that a taxpayer’s expenses incurred in the conduct of the trade or business of gambling, other than the cost of wagers, were 

not limited by sec. 165(d), and were thus deductible under sec. 162(a). 

EXPLANATION OF PROVISION

The provision repeals the deduction for personal casualty and 

theft losses. However, notwithstanding the repeal of the deduction, 

the provision retains the benefit of the deduction, as modified by 

the Disaster Tax Relief and Airport and Airway Extension Act of 

2017,133 for those individuals who sustained a personal casualty 

loss arising from hurricanes Harvey, Irma, or Maria. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

5. Limitation on wagering losses (sec. 1305 of the bill and sec. 165 

of the Code) 

PRESENT LAW

Losses sustained during the taxable year on wagering transactions are allowed as a deduction only to the extent of the gains 

during the taxable year from such transactions.134

REASONS FOR CHANGE

The Committee believes that the scope of the limitation on wagering losses should be broadened to cover expenses incurred in the 

conduct of the individual’s gambling activity. 

EXPLANATION OF PROVISION

The provision clarifies the scope of ‘‘losses from wagering transactions’’ as that term is used in section 165(d). Under the provision, 

this term includes any deduction otherwise allowable under chapter 1 of the Code incurred in carrying on any wagering transaction. 

The provision is intended to clarify that the limitation on losses 

from wagering transactions applies not only to the actual costs of 

wagers incurred by an individual, but to other expenses incurred 

by the individual in connection with the conduct of that individual’s 

gambling activity.135 The provision clarifies, for instance, an individual’s otherwise deductible expenses in traveling to or from a casino are subject to the limitation under section 165(d). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 


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136Sec. 170(a)(1). 137For example, as discussed in greater detail below, the value of time spent volunteering for 

a charitable organization is not deductible. Incidental expenses such as mileage, supplies, or 

other expenses incurred while volunteering for a charitable organization, however, may be deductible. 138Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and 2522(c)(2) (gift tax). 139Sec. 170(a)(3). 

6. Modifications to the deduction for charitable contributions (sec. 

1306 of the bill and sec. 170 of the Code) 

PRESENT LAW

In general 

The Internal Revenue Code allows taxpayers to reduce their income tax liability by taking deductions for contributions to certain 

organizations, including charities, Federal, State, local, and Indian 

tribal governments, and certain other organizations. 

To be deductible, a charitable contribution generally must meet 

several threshold requirements. First, the recipient of the transfer 

must be eligible to receive charitable contributions (i.e., an organization or entity described in section 170(c)). Second, the transfer 

must be made with gratuitous intent and without the expectation 

of a benefit of substantial economic value in return. Third, the 

transfer must be complete and generally must be a transfer of a 

donor’s entire interest in the contributed property (i.e., not a contingent or partial interest contribution). To qualify for a current 

year charitable deduction, payment of the contribution must be 

made within the taxable year.136 Fourth, the transfer must be of 

money or property—contributions of services are not deductible.137

Finally, the transfer must be substantiated and in the proper form. 

As discussed below, special rules limit the deductibility of a taxpayer’s charitable contributions in a given year to a percentage of 

income, and those rules, in part, turn on whether the organization 

receiving the contributions is a public charity or a private foundation. Other special rules determine the deductible value of contributed property for each type of property. 

Contributions of partial interests in property 

In general 

In general, a charitable deduction is not allowed for income, estate, or gift tax purposes if the donor transfers an interest in property to a charity while retaining an interest in that property or 

transferring an interest in that property to a noncharity for less 

than full and adequate consideration.138 This rule of nondeductibility, often referred to as the partial interest rule, generally prohibits a charitable deduction for contributions of income interests, 

remainder interests, or rights to use property. 

A charitable contribution deduction generally is not allowable for 

a contribution of a future interest in tangible personal property.139

For this purpose, a future interest is one ‘‘in which a donor purports to give tangible personal property to a charitable organization, but has an understanding, arrangement, agreement, etc., 

whether written or oral, with the charitable organization that has 


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140Treas. Reg. sec. 1.170A–5(a)(4). Treasury regulations provide that section 170(a)(3), which 

generally denies a deduction for a contribution of a future interest in tangible personal property, 

has ‘‘no application in respect of a transfer of an undivided present interest in property. For 

example, a contribution of an undivided one-quarter interest in a painting with respect to which 

the donee is entitled to possession during three months of each year shall be treated as made 

upon the receipt by the donee of a formally executed and acknowledged deed of gift. However, 

the period of initial possession by the donee may not be deferred in time for more than one 

year.’’ Treas. Reg. sec. 1.170A–5(a)(2). 141Sec. 170(f)(3)(B)(ii). 142Treas. Reg. sec. 1.170A–7(b)(1). 143Treas. Reg. sec. 1.170A–7(b)(1). 144Secs. 170(f)(3)(B)(iii) and 170(h). 

the effect of reserving to, or retaining in, such donor a right to the 

use, possession, or enjoyment of the property.’’ 140

A gift of an undivided portion of a donor’s entire interest in property generally is not treated as a nondeductible gift of a partial interest in property.141 For this purpose, an undivided portion of a 

donor’s entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by 

the donor in such property and must extend over the entire term 

of the donor’s interest in such property.142 A gift generally is treated as a gift of an undivided portion of a donor’s entire interest in 

property if the donee is given the right, as a tenant in common 

with the donor, to possession, dominion, and control of the property 

for a portion of each year appropriate to its interest in such property.143

Other exceptions to the partial interest rule are provided for, 

among other interests: (1) remainder interests in charitable remainder annuity trusts, charitable remainder unitrusts, and pooled 

income funds; (2) present interests in the form of a guaranteed annuity or a fixed percentage of the annual value of the property; (3) 

a remainder interest in a personal residence or farm; and (4) qualified conservation contributions. 

Qualified conservation contributions 

Qualified conservation contributions are not subject to the partial 

interest rule, which generally bars deductions for charitable contributions of partial interests in property.144 A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest is defined as: (1) the entire 

interest of the donor other than a qualified mineral interest; (2) a 

remainder interest; or (3) a restriction (granted in perpetuity) on 

the use that may be made of the real property (generally, a conservation easement). Qualified organizations include certain governmental units, public charities that meet certain public support 

tests, and certain supporting organizations. Conservation purposes 

include: (1) the preservation of land areas for outdoor recreation by, 

or for the education of, the general public; (2) the protection of a 

relatively natural habitat of fish, wildlife, or plants, or similar ecosystem; (3) the preservation of open space (including farmland and 

forest land) where such preservation will yield a significant public 

benefit and is either for the scenic enjoyment of the general public 

or pursuant to a clearly delineated Federal, State, or local governmental conservation policy; and (4) the preservation of an historically important land area or a certified historic structure. 


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145Sec. 170(b)(1)(G). 146 Rockefeller v. Commissioner, 676 F.2d 35, 39 (2d Cir. 1982). 

Percentage limits on charitable contributions 

Individual taxpayers 

Charitable contributions by individual taxpayers are limited to a 

specified percentage of the individual’s contribution base. The contribution base is the taxpayer’s adjusted gross income (‘‘AGI’’) for 

a taxable year, disregarding any net operating loss carryback to the 

year under section 172.145 In general, more favorable (higher) percentage limits apply to contributions of cash and ordinary income 

property than to contributions of capital gain property. More favorable limits also generally apply to contributions to public charities 

(and certain operating foundations) than to contributions to nonoperating private foundations. 

More specifically, the deduction for charitable contributions by 

an individual taxpayer of cash and property that is not appreciated 

to a charitable organization described in section 170(b)(1)(A) (public 

charities, private foundations other than nonoperating private 

foundations, and certain governmental units) may not exceed 50 

percent of the taxpayer’s contribution base. Contributions of this 

type of property to nonoperating private foundations generally may 

be deducted up to the lesser of 30 percent of the taxpayer’s contribution base or the excess of (i) 50 percent of the contribution 

base over (ii) the amount of contributions subject to the 50 percent 

limitation. 

Contributions of appreciated capital gain property to public charities and other organizations described in section 170(b)(1)(A) generally are deductible up to 30 percent of the taxpayer’s contribution 

base (after taking into account contributions other than contributions of capital gain property). An individual may elect, however, 

to bring all these contributions of appreciated capital gain property 

for a taxable year within the 50-percent limitation category by reducing the amount of the contribution deduction by the amount of 

the appreciation in the capital gain property. Contributions of appreciated capital gain property to nonoperating private foundations 

are deductible up to the lesser of 20 percent of the taxpayer’s contribution base or the excess of (i) 30 percent of the contribution 

base over (ii) the amount of contributions subject to the 30 percent 

limitation. 

Finally, contributions that are for the use of (not to) the donee 

charity get less favorable percentage limits. Contributions of capital gain property for the use of public charities and other organizations described in section 170(b)(1)(A) also are limited to 20 percent 

of the taxpayer’s contribution base. Property contributed for the 

use of an organization generally has been interpreted to mean 

property contributed in trust for the organization.146 Charitable 

contributions of income interests (where deductible) also generally 

are treated as contributions for the use of the donee organization. 


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150Sec. 170(b)(2)(A). 151Sec. 170(b)(2)(C). 152Sec. 170(d). 153Sec. 170(b)(1)(E). 

Table 3—CHARITABLE CONTRIBUTION PERCENTAGE LIMITS FOR INDIVIDUAL TAXPAYERS 147

Ordinary Income 

Property and 

Cash 

Capital Gain 

Property to the 

Recipient 148

Capital Gain 

Property for the 

use of the Recipient 

Public Charities, Private Operating Foundations, and Private Distributing Foundations .................................................................................. 50% 30% 149 20% 

Nonoperating Private Foundations .............................................................. 30% 20% 20% 

147 Percentages shown are the percentage of an individual’s contribution base. 148 Capital gain property contributed to public charities, private operating foundations, or private distributing foundations will be subject to 

the 50-percent limitation if the donor elects to reduce the fair market value of the property by the amount that would have been long-term 

capital gain if the property had been sold. 149 Certain qualified conservation contributions to public charities (generally, conservation easements), qualify for more generous contribution limits. In general, the 30-percent limit applicable to contributions of capital gain property is increased to 100 percent if the individual 

making the qualified conservation contribution is a qualified farmer or rancher or to 50 percent if the individual is not a qualified farmer or 

rancher. 

Corporate taxpayers 

A corporation generally may deduct charitable contributions up 

to 10 percent of the corporation’s taxable income for the year.150

For this purpose, taxable income is determined without regard to: 

(1) the charitable contributions deduction; (2) any net operating 

loss carryback to the taxable year; (3) deductions for dividends received; (4) deductions for dividends paid on certain preferred stock 

of public utilities; and (5) any capital loss carryback to the taxable 

year.151

Carryforwards of excess contributions 

Charitable contributions that exceed the applicable percentage 

limit generally may be carried forward for up to five years.152 In 

general, contributions carried over from a prior year are taken into 

account after contributions for the current year that are subject to 

the same percentage limit. Excess contributions made for the use 

of (rather than to) an organization generally may not be carried 

forward. 

Qualified conservation contributions 

Preferential percentage limits and carryforward rules apply for 

qualified conservation contributions.153 In general, the 30-percent 

contribution base limitation on contributions of capital gain property by individuals does not apply to qualified conservation contributions. Instead, individuals may deduct the fair market value 

of any qualified conservation contribution to an organization described in section 170(b)(1)(A) (generally, public charities) to the extent of the excess of 50 percent of the contribution base over the 

amount of all other allowable charitable contributions. These contributions are not taken into account in determining the amount of 

other allowable charitable contributions. Individuals are allowed to 

carry forward any qualified conservation contributions that exceed 

the 50-percent limitation for up to 15 years. In the case of an individual who is a qualified farmer or rancher for the taxable year in 

which the contribution is made, a qualified conservation contribution is allowable up to 100 percent of the excess of the taxpayer’s 


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154Sec. 170(b)(2)(B). 155 Capital gain property means any capital asset or property used in the taxpayer’s trade or 

business, the sale of which at its fair market value, at the time of contribution, would have resulted in gain that would have been long-term capital gain. Sec. 170(e)(1)(A). 156Sec. 170(e). Special rules, discussed below, apply for certain contributions of inventory and 

other property. 157Sec. 170(e)(1)(B)(i)(I). 158Sec. 170(e)(1)(B)(ii). Certain contributions of patents or other intellectual property also generally are limited to the donor’s basis in the property. Sec. 170(e)(1)(B)(iii). However, a special 

rule permits additional charitable deductions beyond the donor’s tax basis in certain situations. 159Sec. 170(e)(5). 

contribution base over the amount of all other allowable charitable 

contributions. 

In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher for the taxable year in 

which the contribution is made, any qualified conservation contribution is allowable up to 100 percent of the excess of the corporation’s taxable income (as computed under section 170(b)(2)) 

over the amount of all other allowable charitable contributions. 

Any excess may be carried forward for up to 15 years as a contribution subject to the 100-percent limitation.154

A qualified farmer or rancher means a taxpayer whose gross income from the trade or business of farming (within the meaning of 

section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s 

gross income for the taxable year. 

Valuation of charitable contributions 

In general 

For purposes of the income tax charitable deduction, the value of 

property contributed to charity may be limited to the fair market 

value of the property, the donor’s tax basis in the property, or in 

some cases a different amount. 

Charitable contributions of cash are deductible in the amount 

contributed, subject to the percentage limits discussed above. In addition, a taxpayer generally may deduct the full fair market value 

of long-term capital gain property contributed to charity.155 Contributions of tangible personal property also generally are deductible at fair market value if the use by the recipient charitable organization is related to its tax-exempt purpose. 

In certain other cases, however, section 170(e) limits the deductible value of the contribution of appreciated property to the donor’s 

tax basis in the property. This limitation of the property’s deductible value to basis generally applies, for example, for: (1) contributions of inventory or other ordinary income or short-term capital 

gain property; 156 (2) contributions of tangible personal property if 

the use by the recipient charitable organization is unrelated to the 

organization’s tax-exempt purpose; 157 and (3) contributions to or 

for the use of a private foundation (other than certain private operating foundations).158

For contributions of qualified appreciated stock, the above-described rule that limits the value of property contributed to or for 

the use of a private nonoperating foundation to the taxpayer’s basis 

in the property does not apply; therefore, subject to certain limits, 

contributions of qualified appreciated stock to a nonoperating private foundation may be deducted at fair market value.159 Qualified 

appreciated stock is stock that is capital gain property and for 

which (as of the date of the contribution) market quotations are 


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160Sec. 170(e)(5)(B). 161Sec. 170(e)(5)(C). 162Sec. 170(e)(3). 163Sec. 170(e)(3)(A)(i)–(iii). 164Sec. 170(e)(3)(C). 

readily available on an established securities market.160 A contribution of qualified appreciated stock (when increased by the aggregate amount of all prior such contributions by the donor of stock 

in the corporation) generally does not include a contribution of 

stock to the extent the amount of the stock contributed exceeds 10 

percent (in value) of all of the outstanding stock of the corporation.161

Contributions of property with a fair market value that is less 

than the donor’s tax basis generally are deductible at the fair market value of the property. 

Enhanced deduction rules for certain contributions of inventory and other property 

Although most charitable contributions of property are valued at 

fair market value or the donor’s tax basis in the property, certain 

statutorily described contributions of appreciated inventory and 

other property qualify for an enhanced deduction valuation that exceeds the donor’s tax basis in the property, but which is less than 

the fair market value of the property. 

As discussed above, a taxpayer’s deduction for charitable contributions of inventory property generally is limited to the taxpayer’s basis (typically, cost) in the inventory, or if less, the fair 

market value of the property. For certain contributions of inventory, however, C corporations (but not other taxpayers) may claim 

an enhanced deduction equal to the lesser of (1) basis plus one-half 

of the item’s appreciation (i.e., basis plus one-half of fair market 

value in excess of basis) or (2) two times basis.162 To be eligible for 

the enhanced deduction value, the contributed property generally 

must be inventory of the taxpayer, contributed to a charitable organization described in section 501(c)(3) (except for private nonoperating foundations), and the donee must (1) use the property consistent with the donee’s exempt purpose solely for the care of the 

ill, the needy, or infants, (2) not transfer the property in exchange 

for money, other property, or services, and (3) provide the taxpayer 

a written statement that the donee’s use of the property will be 

consistent with such requirements.163 Contributions to organizations that are not described in section 501(c)(3), such as governmental entities, do not qualify for this enhanced deduction. 

To use the enhanced deduction provision, the taxpayer must establish that the fair market value of the donated item exceeds 

basis. 

A taxpayer engaged in a trade or business, whether or not a C 

corporation, is eligible to claim the enhanced deduction for certain 

donations of food inventory.164

Selected statutory rules for specific types of contributions 

Special statutory rules limit the deductible value (and impose enhanced reporting obligations on donors) of charitable contributions 

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165 Under present and prior law, certain copyrights are not considered capital assets, such that 

the charitable deduction for such copyrights generally is limited to the taxpayer’s basis. See sec. 

1221(a)(3), 1231(b)(1)(C). 166Sec. 170(e)(1)(B)(iii). 167The present-law rules allowing additional charitable deductions for qualified donee income 

were enacted as part of the American Jobs Creation Act of 2004, and are effective for contributions made after June 3, 2004. For a more detailed description of these rules, see Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress 

(JCS–5–05), May 2005, pp. 457–461. 

acted in response to concerns that some taxpayers did not accurately report—and in many instances overstated—the value of the 

property for purposes of claiming a charitable deduction. 

Vehicle donations.—Under present law, the amount of deduction 

for charitable contributions of vehicles (generally including automobiles, boats, and airplanes for which the claimed value exceeds 

$500 and excluding inventory property) depends upon the use of 

the vehicle by the donee organization. If the donee organization 

sells the vehicle without any significant intervening use or material 

improvement of such vehicle by the organization, the amount of the 

deduction may not exceed the gross proceeds received from the 

sale. In other situations, a fair market value deduction may be allowed. 

Patents and other intellectual property.—If a taxpayer contributes 

a patent or other intellectual property (other than certain copyrights or inventory) 165 to a charitable organization, the taxpayer’s 

initial charitable deduction is limited to the lesser of the taxpayer’s 

basis in the contributed property or the fair market value of the 

property.166 In addition, the taxpayer generally is permitted to deduct, as a charitable contribution, certain additional amounts in 

the year of contribution or in subsequent taxable years based on a 

specified percentage of the qualified donee income received or accrued by the charitable donee with respect to the contributed intellectual property. For this purpose, qualified donee income includes 

net income received or accrued by the donee that properly is allocable to the intellectual property itself (as opposed to the activity 

in which the intellectual property is used).167

Clothing and household items.—Charitable contributions of clothing and household items generally are subject to the charitable deduction rules applicable to tangible personal property. If such contributed property is appreciated property in the hands of the taxpayer, and is not used to further the donee’s exempt purpose, the 

deduction is limited to basis. In most situations, however, clothing 

and household items have a fair market value that is less than the 

taxpayer’s basis in the property. Because property with a fair market value less than basis generally is deductible at the property’s 

fair market value, taxpayers generally may deduct only the fair 

market value of most contributions of clothing or household items, 

regardless of whether the property is used for exempt or unrelated 

purposes by the donee organization. Furthermore, a special rule 

generally provides that no deduction is allowed for a charitable 

contribution of clothing or a household item unless the item is in 

good used or better condition. The Secretary is authorized to deny 

by regulation a deduction for any contribution of clothing or a 

household item that has minimal monetary value, such as used 

socks and used undergarments. Notwithstanding the general rule, 

a charitable contribution of clothing or household items not in good 

used or better condition with a claimed value of more than $500 


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168 As is discussed above, the charitable contribution substantiation rules generally require a qualified appraisal where the claimed value of a contribution is more than $5,000. 169The special rules concerning the deductibility of clothing and household items were enacted 

as part of the Pension Protection Act of 2006, P.L. 109–280 (August 17, 2006), and are effective 

for contributions made after August 17, 2006. For a more detailed description of these rules, 

see Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 109th 

Congress (JCS–1–07), January 17, 2007, pp. 597–600. 170Sec. 170(l). 171Treas. Reg. sec. 1.170A–1(g). 172Sec. 170(j). 173Sec. 170(i). 

may be deducted if the taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property.168 Household items include furniture, furnishings, electronics, appliances, 

linens, and other similar items. Food, paintings, antiques, and 

other objects of art, jewelry and gems, and certain collections are 

excluded from the special rules described in the preceding paragraph.169

College athletic seating rights.—In general, where a taxpayer receives or expects to receive a substantial return benefit for a payment to charity, the payment is not deductible as a charitable contribution. However, special rules apply to certain payments to institutions of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. 

Specifically, the payor may treat 80 percent of a payment as a 

charitable contribution where: (1) the amount is paid to or for the 

benefit of an institution of higher education (as defined in section 

3304(f)) described in section (b)(1)(A)(ii) (generally, a school with a 

regular faculty and curriculum and meeting certain other requirements), and (2) such amount would be allowable as a charitable deduction but for the fact that the taxpayer receives (directly or indirectly) as a result of the payment the right to purchase tickets for 

seating at an athletic event in an athletic stadium of such institution.170

Use of a vehicle when volunteering for a charity 

Unreimbursed out-of-pocket expenditures made incident to providing donated services to a qualified charitable organization—such 

as out-of-pocket transportation expenses necessarily incurred in 

performing donated services—may qualify as a charitable contribution.171 No charitable contribution deduction is allowed for traveling expenses (including expenses for meals and lodging) while 

away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, 

or vacation in such travel.172

In determining the amount treated as a charitable contribution 

where a taxpayer operates a vehicle in providing donated services 

to a charity, the taxpayer either may track and deduct actual outof-pocket expenditures or, in the case of a passenger automobile, 

may use the charitable standard mileage rate. The charitable 

standard mileage rate is set by statute at 14 cents per mile.173 The 

taxpayer may also deduct (under either computation method), any 

parking fees and tolls incurred in rendering the services, but may 

not deduct any amount (regardless of the computation method 

used) for general repair or maintenance expenses, depreciation, insurance, registration fees, etc. Regardless of the computation method used, the taxpayer must keep reliable written records of exVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00187 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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174 In lieu of actual operating expenses, an optional standard mileage rate may be used in 

computing deductible transportation expenses for medical purposes (section 213) or for work-related moving (section 217). The standard mileage rates for medical and moving purposes generally cover only out-of-pocket operating expenses (including gasoline and oil) directly related 

to the use of the automobile. Such rates do not include costs that are not deductible for medical 

or moving purposes, such as general maintenance expenses, depreciation, insurance, and registration fees. The medical and moving standard mileage rates are determined by the IRS and 

updated periodically. For expenses paid or incurred on or after January 1, 2017, the rate for 

both such purposes is 17 cents per mile. IRS Notice 2016–79. 175Sec. 170(f)(17). 176Such acknowledgement must include the amount of cash and a description (but not value) 

of any property other than cash contributed, whether the donee provided any goods or services 

in consideration for the contribution, and a good faith estimate of the value of any such goods 

or services. Sec. 170(f)(8). 177Sec. 6115. 178Sec. 170(f)(11). 

penses incurred. For example, where a taxpayer uses the charitable 

standard mileage rate to determine a deduction, the IRS has stated 

that the taxpayer generally must maintain records of miles driven, 

time, place (or use), and purpose of the mileage. If the charitable 

standard mileage rate is not used to determine the deduction, the 

taxpayer generally must maintain reliable written records of actual 

expenses incurred.174

Substantiation and other formal requirements 

In general 

A donor who claims a deduction for a charitable contribution 

must maintain reliable written records regarding the contribution, 

regardless of the value or amount of such contribution.175 In the 

case of a charitable contribution of money, regardless of the 

amount, applicable recordkeeping requirements are satisfied only if 

the donor maintains as a record of the contribution a bank record 

or a written communication from the donee showing the name of 

the donee organization, the date of the contribution, and the 

amount of the contribution. In such cases, the recordkeeping requirements may not be satisfied by maintaining other written 

records. 

No charitable contribution deduction is allowed for a separate 

contribution of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the 

charity indicating whether the charity provided any good or service 

(and an estimate of the value of any such good or service) to the 

taxpayer in consideration for the contribution.176

In addition, any charity receiving a contribution exceeding $75 

made partly as a gift and partly as consideration for goods or services furnished by the charity (a ‘‘quid pro quo’’ contribution) is required to inform the contributor in writing of an estimate of the 

value of the goods or services furnished by the charity and that 

only the portion exceeding the value of the goods or services is deductible as a charitable contribution.177

If the total charitable deduction claimed for noncash property is 

more than $500, the taxpayer must attach a completed Form 8283 

(Noncash Charitable Contributions) to the taxpayer’s return or the 

deduction is not allowed.178 In general, taxpayers are required to 

obtain a qualified appraisal for donated property with a value of 

more than $5,000, and to attach an appraisal summary to the tax 

return. 


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179See IRS, Notice of Proposed Rulemaking, Substantiation Requirement for Certain Contributions, REG–138344–13 (October 13, 2015), I.R.B. 2015–41 (preamble). 180 In October 2015, the IRS issued proposed regulations that, if finalized, would have implemented the section 170(f)(8)(D) exception to the contemporaneous written acknowledgment requirement. The proposed regulations provided that a return filed by a donee organization under 

section 170(f)(8)(D) must include, in addition to the information generally required on a contemporaneous written acknowledgment: (1) the name and address of the donee organization; (2) the 

name and address of the donor; and (3) the taxpayer identification number of the donor. In addition, the return must be filed with the IRS (with a copy provided to the donor) on or before 

February 28 of the year following the calendar year in which the contribution was made. Under 

the proposed regulations, donee reporting would have been optional and would have been available solely at the discretion of the donee organization. The proposed regulations were withdrawn 

in January 2016. See Prop. Treas. Reg. sec 1.170A–13(f)(18). 

Exception for certain contributions reported by the donee organization 

Subsection 170(f)(8)(D) provides an exception to the contemporaneous written acknowledgment requirement described above. 

Under the exception, a contemporaneous written acknowledgment 

is not required if the donee organization files a return, on such 

form and in accordance with such regulations as the Secretary may 

prescribe, that includes the same content. ‘‘[T]he section 

170(f)(8)(D) exception is not available unless and until the Treasury Department and the IRS issue final regulations prescribing the 

method by which donee reporting may be accomplished.’’ 179 No 

such final regulations have been issued.180

REASONS FOR CHANGE

The Committee believes that a robust charitable sector is vital to 

our economy, and that charitable giving is critical to ensuring that 

the sector thrives. For this reason, the Committee believes that it 

is desirable to provide additional incentives for taxpayers to provide monetary and volunteer support to charities. Increasing the 

charitable percentage limit for cash contributions to public charities will encourage taxpayers to provide essential monetary support to front-line charities. Allowing the charitable standard mileage rate to be adjusted for inflation will encourage the volunteer 

support that charities need to carry out their missions. At the same 

time, the Committee believes that taxpayers should only be permitted a charitable deduction commensurate with the value of assets given to charity. For this reason, the provision eliminates the 

special rule under present law that allows taxpayers to take a 

charitable deduction for 80 percent of an amount contributed to a 

college or university in exchange for the right to purchase stadium 

seating and denies a deduction for such contribution. 

EXPLANATION OF PROVISION

The provision makes the following modifications to the present 

law charitable deduction rules. 

Increased percentage limits for contributions of cash to public charities 

The provision increases the income-based percentage limit described in section 170(b)(1)(A) for certain charitable contributions 

by an individual taxpayer of cash to public charities and certain 

other organizations from 50 percent to 60 percent. 


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181Sec. 212. 

Charitable mileage rate adjusted for inflation 

The provision repeals the statutory charitable mileage rate and 

provides instead that the standard mileage rate used for determining the charitable contribution deduction shall be a rate which 

takes into account the variable costs of operating an automobile. 

The intent of the provision is to allow the IRS to determine, and 

make periodic adjustments to, the charitable standard mileage 

rate, taking into account the types of costs that are deductible 

under section 170 of the Code when operating a vehicle in connection with providing volunteer services (i.e., generally, the out-ofpocket operating expenses (including gasoline and oil) directly related to the use of the automobile for such purposes). 

Denial of deduction for college athletic event seating rights 

The provision amends section 170(l) to provide that no charitable 

deduction shall be allowed for any amount described in paragraph 

170(l)(2), generally, a payment to an institution of higher education 

in exchange for which the payor receives the right to purchase tickets or seating at an athletic event, as described in greater detail 

above. 

Repeal of substantiation exception for certain contributions reported 

by the donee organization 

The provision repeals the section 170(f)(8)(D) exception to the 

contemporaneous written acknowledgment requirement. 

EFFECTIVE DATE

The provision is effective for contributions made in taxable years 

beginning after December 31, 2017. 

7. Repeal of deduction for tax preparation expenses (sec. 1307 of 

the bill and sec. 212 of the Code) 

PRESENT LAW

For regular income tax purposes, individuals are allowed an 

itemized deduction for expenses for the production of income. These 

expenses are defined as ordinary and necessary expenses paid or 

incurred in a taxable year: (1) for the production or collection of income; (2) for the management, conservation, or maintenance of 

property held for the production of income; or (3) in connection 

with the determination, collection, or refund of any tax.181

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for tax preparation expenses, 

makes the system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further believes that repeal of this provision is consistent with streamlining 

the tax code, broadening the tax base, lowering rates, and growing 

the economy. 


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182Sec. 213. The threshold was amended by the Patient Protection and Affordable Care Act 

(Pub. L. No. 111–118). For taxable years beginning before January 1, 2013, the threshold was 

7.5 percent and 10 percent for alternative minimum tax (‘‘AMT’’) purposes. 183Secs. 215(a), 61(a)(8) and 71(a). 184Sec. 71(c). 

EXPLANATION OF PROVISION

The provision repeals the deduction for expenses in connection 

with the determination, collection, or refund of any tax. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

8. Repeal of deduction for medical expenses (sec. 1308 of the bill 

and sec. 213 of the Code) 

PRESENT LAW

Individuals may claim an itemized deduction for unreimbursed 

medical expenses, but only to the extent that such expenses exceed 

10 percent of adjusted gross income.182 For taxable years beginning 

before January 1, 2017, the 10-percent threshold is reduced to 7.5 

percent in the case of taxpayers who have attained the age of 65 

before the close of the taxable year. In the case of married taxpayers, the 7.5 percent threshold applies if either spouse has obtained the age of 65 before the close of the taxable year. For these 

taxpayers, during these years, the threshold is 10 percent for AMT 

purposes. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for unreimbursed medical expenses, makes the system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further 

believes that repeal of this provision is consistent with streamlining the tax code, broadening the tax base, lowering rates, and 

growing the economy. 

EXPLANATION OF PROVISION

The provision repeals the deduction for unreimbursed medical 

expenses. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

9. Repeal of deduction for alimony payments and corresponding inclusion in gross income (sec. 1309 of the bill and secs. 61, 71, and 

215 of the Code) 

PRESENT LAW

Alimony and separate maintenance payments are deductible by 

the payor spouse and includible in income by the recipient 

spouse.183 Child support payments are not treated as alimony.184


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185 245 U.S. 151 (1917). 186Sec. 217(a). 187Sec. 217(g). 188Sec. 217(g)(2). 

REASONS FOR CHANGE

The Committee believes that the repeal of the deduction for alimony payments from the payor spouse and repeal of the corresponding inclusion in gross income by the recipient spouse simplifies the tax code and prevents divorced couples from reducing income tax through a specific form of payments unavailable to married couples. 

EXPLANATION OF PROVISION

Under the provision, alimony and separate maintenance payments are not deductible by the payor spouse. The provision repeals the Code provisions that specify that alimony and separate 

maintenance payments are included in income. Thus, the intent of 

the provision is to follow the rule of the United States Supreme 

Court’s holding in Gould v. Gould,185 in which the Court held that 

such payments are not income to the recipient. Income used for alimony payments is taxed at the rates applicable to the payor spouse 

rather than the recipient spouse. The treatment of child support is 

not changed. 

EFFECTIVE DATE

The provision is effective for any divorce or separation instrument executed after December 31, 2017, or for any divorce or separation instrument executed on or before December 31, 2017, and 

modified after that date, if the modification expressly provides that 

the amendments made by this section apply to such modification. 

10. Repeal of deduction for moving expenses (sec. 1310 of the bill 

and secs. 134 and 217 of the Code) 

PRESENT LAW

Individuals are permitted an above-the-line deduction for moving 

expenses paid or incurred during the taxable year in connection 

with the commencement of work by the taxpayer as an employee 

or as a self-employed individual at a new principal place of 

work.186 Such expenses are deductible only if the move meets certain conditions related to distance from the taxpayer’s previous residence and the taxpayer’s status as a full-time employee in the new 

location. 

Special rules apply in the case of a member of the Armed Forces 

of the United States. In the case of any such individual who is on 

active duty, who moves pursuant to a military order and incident 

to a permanent change of station, the limitations related to distance from the taxpayer’s previous residence and status as a fulltime employee in the new location do not apply.187 Additionally, 

any moving and storage expenses which are furnished in kind to 

such an individual, spouse, or dependents, or if such expenses are 

reimbursed or an allowance for such expenses is provided, such 

amounts are excluded from gross income.188 Rules also apply to exclude amounts furnished to the spouse and dependents of such an 


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189Sec. 134. 190 A technical amendment may be needed to reflect this intent for the deduction for moving 

expenses for members of the Armed Forces. 191 Under the provision, these exclusions are added to section 134. 192 Archer MSAs were originally called medical savings accounts or MSAs. 193The FICA exclusion is provided under IRS Notice 96–53. 194Secs. 106(b) and 220. 

individual in the event that such individuals move to a location 

other than to where the member of the Armed Forces is moving. 

Present law provides income exclusions for various benefits provided to members of the Armed Forces.189

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for moving expenses, makes the 

system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further believes that repeal of this provision is consistent with streamlining the tax code, 

broadening the tax base, lowering rates, and growing the economy. 

However, the Committee recognizes that special circumstances 

apply to members of the Armed Forces, and thus the provision retains the present law benefits relating to the moving expenses of 

these taxpayers. 

EXPLANATION OF PROVISION

The provision generally repeals the deduction for moving expenses. The provision intends to retain tax benefits for the moving 

expenses of members of the Armed Forces of the United States.190

Thus, the provision retains the special rules under present law that 

provide a exclusions for amounts attributable to in-kind moving 

and storage expenses (and reimbursements or allowances for these 

expenses) for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order 

and incident to a permanent change of station.191

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

11. Termination of deduction and exclusions for contributions to 

medical savings accounts (sec. 1311 of the bill and secs. 106(b) 

and 220 of the Code) 

PRESENT LAW

Archer MSAs 

As of 1997, certain individuals are permitted to contribute to an 

Archer MSA, which is a tax-exempt trust or custodial account.192

Within limits, contributions to an Archer MSA are deductible in determining adjusted gross income if made by an individual and are 

excludible from gross income for income tax purposes and wages for 

employment tax 193 purposes if made by the employer of an individual.194

An individual is generally eligible for an Archer MSA if the individual is covered by a high deductible health plan and no other 

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surance or permitted coverage. In addition, the individual either 

must be an employee of a small employer (generally an employer 

with 50 or fewer employees on average) that provides the high deductible health plan or must be self-employed or the spouse of a 

self-employed individual and the high deductible health plan is not 

provided by the employer of the individual or spouse. 

For 2017, a high deductible health plan for purposes of Archer 

MSA eligibility is a health plan with an annual deductible of at 

least $2,250 and not more than $3,350 in the case of self-only coverage and at least $4,500 and not more than $6,750 in the case of 

family coverage. In addition, for 2017, the maximum out-of-pocket 

expenses with respect to allowed costs must be no more than 

$4,500 in the case of self-only coverage and no more than $8,250 

in the case of family coverage. Out-of-pocket expenses include 

deductibles, co-payments, and other amounts (other than premiums) that the individual must pay for covered benefits under the 

plan. A plan does not fail to qualify as a high deductible health 

plan if substantially all of the coverage under the plan is certain 

permitted insurance or is coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision 

care, or long-term care. 

The maximum annual contribution that can be made to an Archer MSA for a year is 65 percent of the annual deductible under 

the individual’s high deductible health plan in the case of self-only 

coverage (65 percent of $3,350 for 2017) and 75 percent of the annual deductible in the case of family coverage (75 percent of $6,750 

for 2017), but in no case more than the individual’s compensation 

income. In addition, the maximum contribution can be made only 

if the individual is covered by the high deductible health plan for 

the full year. 

Distributions from an Archer MSA for qualified medical expenses 

are not includible in gross income. Distributions not used for qualified medical expenses are includible in gross income and subject to 

an additional 20-percent tax unless an exception applies. A distribution from an Archer MSA may be rolled over on a nontaxable 

basis to another Archer MSA or to a health savings account and 

does not count against the contribution limits. 

After 2007, no new contributions can be made to Archer MSAs 

except by or on behalf of individuals who previously had made Archer MSA contributions and employees of small employers that 

previously contributed to Archer MSAs (or at least 20 percent of 

whose employees who were previously eligible to contribute to Archer MSAs did so). 

Health savings accounts 

As of 2004, an individual with a high deductible health plan (and 

no other health plan other than a plan that provides certain permitted insurance or permitted coverage) generally may contribute 

to a health savings account (‘‘HSA’’), which is a tax-exempt trust 

or custodial account. HSAs provide similar tax-favored savings 

treatment as Archer MSAs. That is, within limits, contributions to 

an HSA are deductible in determining adjusted gross income if 

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195The FICA exclusion is provided under IRS Notice 2004–2. 196Secs. 106(d) and 223. 197Sections 4980E and 4980G respectively require an employer making MSA or HSA contributions to make comparable contributions for comparable participating employees. However, under 

section 4980G(d), an employer may make larger HSA contributions for nonhighly compensated 

employees. 198The provision retains the requirement that an employer making HSA contributions must 

make comparable contributions for comparable participating employees, including the rule under 

which an employer may make larger HSA contributions for nonhighly compensated employees. 

As under present law, with respect to highly compensated employees, both highly compensated 

employees and nonhighly compensated employees are to be treated as comparable participating 

employees. (A technical amendment is needed to the reference within new section 4980G(d)(3)(B) 

to subparagraph (B), which should be a reference to subparagraph (A)(ii).) 

come tax purposes and wages for employment tax 195 purposes if 

made by the employer of an individual, and distributions for qualified medical expenses are not includible in gross income.196 However, the rules for HSAs are in various aspects more favorable than 

the rules for Archer MSAs.197 For example, the availability of 

HSAs is not limited to employees of small employers or self-employed individuals and their spouses. 

For 2017, a high deductible health plan for purposes of HSA eligibility is a health plan with an annual deductible of at least 

$1,300 in the case of self-only coverage and at least $2,600 in the 

case of family coverage. In addition, for 2017, the sum of the deductible and the maximum out-of-pocket expenses with respect to 

allowed costs must be no more than $6,550 in the case of self-only 

coverage and no more than $13,100 in the case of family coverage. 

A plan does not fail to qualify as a high deductible health plan for 

HSA purposes merely because it does not have a deductible for preventive care. 

For 2017, the maximum aggregate annual contribution that can 

be made to an HSA is $3,400 in the case of self-only coverage and 

$6,750 in the case of family coverage. The annual contribution limits are increased by $1,000 for individuals who have attained age 

55 by the end of the taxable year (referred to as ‘‘catch-up contributions’’). The maximum amount that an individual make contribute 

is reduced by the amount of any contributions to the individual’s 

Archer MSA and any excludable HSA contributions made by the 

individual’s employer. In some cases, an individual may make the 

maximum HSA contribution, even if the individual is covered by 

the high deductible health plan for only part of the year. A distribution from an HSA may be rolled over on a nontaxable basis 

to another HSA and does not count against the contribution limits. 

REASONS FOR CHANGE

The Committee recognizes that Archer MSAs provide fewer benefits than HSAs. The termination of the deduction and exclusions 

for contributions to Archer MSAs therefore simplifies the Code by 

consolidating two similar tax-favored accounts into a single account 

with more favorable benefits for the taxpayer (i.e., HSAs). 

EXPLANATION OF PROVISION

Under the provision, contributions to Archer MSAs for taxable 

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199Secs. 62(a)(1) and 67. 200Sec. 62(a)(2)(B), (C), and (D). Under section 62(a)(2)(A) and (c), certain reimbursements of 

employee business expenses are excluded from income. Under section 62(a)(2)(E), an above-theline deduction applies to expenses of members of a reserve component of the Armed Forces. 201See IRS Publication 529, ‘‘Miscellaneous Deductions’’ (2016), p. 3. 202 Under a special provision, these expenses are deductible ‘‘above the line’’ up to $250. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

12. Denial of deduction for expenses attributable to the trade or 

business of being an employee, expenses of teachers, performing 

artists and certain officials (sec. 1312 of the bill and secs. 62, 67, 

and new sec. 262A of the Code) 

PRESENT LAW

In general, business expenses incurred by an employee are deductible, but only as an itemized deduction and only to the extent 

the expenses exceed two percent of adjusted gross income.199 However, in the case of certain employees and certain expenses, a deduction may be taken in determining adjusted gross income (referred to as an ‘‘above-the-line’’ deduction), including expenses of 

qualified performing artists, expenses of State or local government 

officials performing services on a fee basis, and expenses of eligible 

educators.200

Present law and IRS guidance provide for numerous items that 

may be deducted under this provision (subject to the two-percent 

adjusted gross income floor). This non-exhaustive list includes): 201

• Business bad debt of an employee; 

• Business liability insurance premiums; 

• Damages paid to a former employer for breach of an employment contract; 

• Depreciation on a computer a taxpayer’s employer requires 

him to use in his work; 

• Dues to a chamber of commerce if membership helps the 

taxpayer do his job; 

• Dues to professional societies; 

• Educator expenses; 202

• Home office or part of a taxpayer’s home used regularly 

and exclusively in the taxpayer’s work; 

• Job search expenses in the taxpayer’s present occupation; 

• Laboratory breakage fees; 

• Legal fees related to the taxpayer’s job; 

• Licenses and regulatory fees; 

• Malpractice insurance premiums; 

• Medical examinations required by an employer; 

• Occupational taxes; 

• Passport for a business trip; 

• Repayment of an income aid payment received under an 

employer’s plan; 

• Research expenses of a college professor; 

• Rural mail carriers’ vehicle expenses; 

• Subscriptions to professional journals and trade magazines related to the taxpayer’s work; 

• Tools and supplies used in the taxpayer’s work; 


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203Sec. 132(a)(3) and (d). 204The provision retains the present-law provisions under which certain reimbursements of 

employee business expenses are excluded from income and under which an above-the-line deduction applies to expenses of members of a reserve component of the Armed Forces. 

• Travel, transportation, meals, entertainment, gifts, and 

local lodging related to the taxpayer’s work; 

• Union dues and expenses; 

• Work clothes and uniforms if required and not suitable for 

everyday use; and 

• Work-related education. 

A working condition fringe provided to an employee is excluded 

from the employee’s income and wages.203 For this purpose, a 

working condition fringe means property or services provided to an 

employee to the extent that, if the employee paid for the property 

or service, the payment would be deductible as a business expense 

or depreciation. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for expenses attributable to the 

trade or business of being an employee, and expenses of teachers, 

performing artists, and certain officials, makes the system simpler 

and fairer for all families and individuals, and allows for lower tax 

rates. The Committee further believes that repeal of this provision 

is consistent with streamlining the tax code, broadening the tax 

base, lowering rates, and growing the economy. 

EXPLANATION OF PROVISION

Under the provision, business expenses incurred by an employee 

are not deductible, other than expenses that are deductible in determining adjusted gross income (that is, above-the-line deductions). 

In addition, the present-law provisions allowing above-the-line 

deductions for expenses of qualified performing artists and expenses of State or local government officials performing services on 

a fee basis are repealed. The present-law provision allowing an 

above-the-line deduction for expenses of eligible educators is also 

repealed.204

In addition, whether property or services provided by an employer are excluded as a working condition fringe is determined 

without regard to the provision. That is, the same standard as 

under present law applies for this purpose. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 


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205Sec. 119(a). 206Sec. 119(c). 207Sec. 119(d). 208The compensation threshold is that amount in effect under section 414(q)(1)(B)(i). 209 As defined in section 416(i)(1)(B)(i). 

E. SIMPLIFICATION AND REFORM OF EXCLUSIONS AND TAXABLE

COMPENSATION

1. Limitation on exclusion for employer-provided housing (sec. 1401 

of the bill and sec. 119 of the Code) 

PRESENT LAW

The value of lodging furnished to an employee, spouse, or dependents by or on behalf of an employer for the convenience of the 

employer (referred to as ‘‘employer-provided lodging’’) is excludible 

from the employee’s gross income, but only if the employee is required to accept the lodging on the business premises of the employer as a condition of employment.205 Special rules apply with respect to employees living in foreign camps 206 and lodging furnished 

by certain educational institutions to employees.207 Amounts attributable to employer-provided lodging that are excludible from 

gross income for income tax purposes are also excluded from wages 

for employment tax purposes. 

REASONS FOR CHANGE

The Committee believes that limiting the exclusion for employerprovided housing broadens the tax base, closes loopholes, and allows for lower tax rates. The Committee further believes that limiting the exclusion accomplishes these goals without placing undue 

burden on lower income taxpayers, achieving simplicity and fairness for all individuals and families. 

EXPLANATION OF PROVISION

The provision limits the amount that may be excluded from gross 

income for employer-provided lodging to $50,000 ($25,000 in the 

case of a married individual filing a separate return), subject to a 

phase-out based on the employee’s level of compensation. The exclusion is phased out by $1 for every $2 earned above the indexed 

compensation threshold. For 2017, this compensation threshold is 

$120,000.208 The provision also denies any exclusion for employerprovided housing provided to 5% owners,209 regardless of their 

compensation level. 

In addition, the exclusion does not apply to more than one residence at any given time. In the case of spouses filing a joint return, 

the one residence limit may be applied separately to each spouse 

for a period during which the spouses reside in separate residences 

provided in connection with their respective employments. 

Those amounts that are not excludible from gross income for income tax purposes will also not be excluded from wages for employment tax purposes. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 


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2. Modification of exclusion of gain on sale of a principal residence 

(sec. 1402 of the bill and sec. 121 of the Code) 

PRESENT LAW

A taxpayer who is an individual may exclude up to $250,000 

($500,000 if married filing a joint return) of gain realized on the 

sale or exchange of a principal residence. To be eligible for the exclusion, the taxpayer must have owned and used the residence as 

a principal residence for at least two of the five years ending on 

the date of the sale or exchange. A taxpayer who fails to meet 

these requirements by reason of a change of place of employment, 

health, or, to the extent provided under regulations, unforeseen circumstances, is able to exclude an amount equal to the fraction of 

the $250,000 ($500,000 if married filing a joint return) that is 

equal to the fraction of the two years that the ownership and use 

requirements are met. 

The exclusion under this provision may not be claimed for more 

than one sale or exchange during any two-year period. 

REASONS FOR CHANGE

The Committee believes that the exclusion on proceeds from the 

sale of a principal residence is intended to prevent longtime homeowners from recognizing a gain upon an infrequent and important 

transaction, and to allow those individuals to use the full proceeds 

of the home sale to purchase another home. The Committee believes that present-law the rule allowing individuals to live in their 

home for only two out of the prior five years to qualify for the exclusion has allowed individuals to cycle between building homes 

and living in those homes while they build the next, selling the 

lived-in home and qualifying for the exclusion on the proceeds. 

Such use takes advantage of the exclusion in a manner that was 

not intended. 

The Committee further believes that high income taxpayers 

should not be eligible for the exclusion. 

EXPLANATION OF PROVISION

The provision extends the length of time a taxpayer must own 

and use a residence to qualify for this exclusion. Specifically, the 

exclusion is available only if the taxpayer has owned and used the 

residence as a principal residence for at least five of the eight years 

ending on the date of the sale or exchange. A taxpayer who fails 

to meet these requirements by reason of a change of place of employment, health, or, to the extent provided under regulations, unforeseen circumstances is able to exclude an amount equal to the 

fraction of the $250,000 ($500,000 if married filing a joint return) 

that is equal to the fraction of the five years that the ownership 

and use requirements are met. 

The provision limits the exclusion so that the exclusion may not 

apply to more than one sale or exchange during any five-year period. 

The provision phases-out the exclusion by one dollar for every dollar a taxpayer’s AGI exceeds $250,000 ($500,000 if married filing a joint return). For purposes of this provision, AGI is measured 

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210Sec. 274(j). 211Sec. 74(c). 212Sec. 129(a). 

ing any income from the sale of the home) and the prior two taxable years before the sale. 

EFFECTIVE DATE

The provision is effective for sales and exchanges after December 

31, 2017. 

3. Repeal of exclusion, etc., for employee achievement awards (sec. 

1403 of the bill and secs. 74(c) and 274(j) of the Code) 

PRESENT LAW

An employer’s deduction for the cost of an employee achievement 

award is limited to a certain amount.210 Employee achievement 

awards that are deductible by an employer (or would be deductible 

but for the fact that the employer is a tax-exempt organization) are 

excludible from an employee’s gross income.211 Amounts that are 

excludible from gross income under section 74(c) for income tax 

purposes are also excluded from wages for employment tax purposes. 

An employee achievement award is an item of tangible personal 

property given to an employee in recognition of either length of 

service or safety achievement and presented as part of a meaningful presentation. 

REASONS FOR CHANGE

The Committee believes that the repeal of the deduction limitation and exclusions for employee achievement awards makes the 

system simpler and fairer for all families and individuals, and allows for lower tax rates. The Committee further believes that the 

repeal of this provision is part of its larger effort toward tax reform 

which broadens the tax base, closes loopholes, and grows the economy. 

EXPLANATION OF PROVISION

The provision repeals the deduction limitation for employee 

achievement awards. It also repeals the exclusions from gross income and wages. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

4. Sunset of exclusion for dependent care assistance programs (sec. 

1404 of the bill and sec. 129 of the Code) 

PRESENT LAW

An exclusion from the gross income of an employee of up to 

$5,000 annually for employer-provided dependent care assistance 212 is allowed if the assistance is provided pursuant to a separate written plan of an employer that does not discriminate in 


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213Section 129(d). The exclusion applies if the contributions or benefits under the program do 

not discriminate in favor of highly compensated employees, within the meaning of Sec. 414(q), 

or their dependents, and the program benefits employees under a classification established by 

the employer found not to be discriminatory in favor or such highly compensated employees or 

their dependents. 214Section 132(a)(6) and 132(g). 215 Individuals are allowed an itemized deduction for moving expenses paid or incurred during 

the taxable year in connection with the commencement of work by the taxpayer as an employee 

or as a self-employed individual at a new principal place of work. Such expenses are deductible 

only if the move meets certain conditions related to distance from the taxpayer’s previous residence and the taxpayer’s status as a full-time employee in the new location. 

favor of highly compensated employees 213 and meets certain other 

requirements. The amount excludible cannot exceed the earned income of the employee or, if the employee is married, the lesser of 

the earned income of the employee or the earned income of the employee’s spouse. Amounts attributable to dependent care assistance 

that are excludible from gross income for income tax purposes are 

also excludible from wages for employment tax purposes. 

REASONS FOR CHANGE

The Committee believes that the sunset of the exclusion for dependent care assistance programs makes the system simpler and 

fairer for all families and individuals, and allows for lower tax 

rates. The Committee further believes that repeal of this provision 

is consistent with streamlining the tax code, broadening the tax 

base, lowering rates, and growing the economy. 

EXPLANATION OF PROVISION

The provision terminates the exclusions from gross income and 

wages for dependent care assistance programs for taxable years beginning after December 31, 2022. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

5. Repeal of exclusion for qualified moving expense reimbursement 

(sec. 1405 of the bill and sec. 132(g) of the Code) 

PRESENT LAW

Qualified moving expense reimbursements are excludible from an 

employee’s gross income 214, and are defined as any amount received (directly or indirectly) from an employer as payment for (or 

reimbursement of) expenses which would be deductible as moving 

expenses under section 217 215 if directly paid or incurred by the 

employee. However, any such amount actually deducted by the individual is not eligible for this exclusion. Amounts excludible from 

gross income for income tax purposes as qualified moving expense 

reimbursements are also excluded from wages for employment tax 

purposes. 

REASONS FOR CHANGE

The Committee believes that the repeal of the exclusion for qualified moving expense reimbursement makes the system simpler and 

fairer for all families and individuals, and allows for lower tax 

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216Section 137(a). 217Section 23(d)(1). 218The employer’s adoption assistance program must not discriminate in favor of highly compensated employees, within the meaning of Sec. 414(q). In addition, no more than five percent 

of the amounts paid or incurred by the employer during the year for qualified adoption expenses 

under an adoption assistance program can be provided for the class of individuals consisting of 

more-than-five-percent owners of the employer and the spouses or dependents of such morethan-five-percent owners. 

sion is part of its larger effort toward tax reform which broadens 

the tax base, closes loopholes and grows the economy. 

EXPLANATION OF PROVISION

The provision repeals the exclusion from gross income and wages 

for qualified moving expense reimbursements. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

6. Repeal of exclusion for adoption assistance programs (sec. 1406 

of the bill and sec. 137 of the Code) 

PRESENT LAW

An exclusion from an employee’s gross income is allowed for 

qualified adoption expenses paid or reimbursed by an employer, if 

such amounts are furnished pursuant to an adoption assistance 

program.216 For 2017, the maximum exclusion amount is $13,570, 

and is phased out ratably for taxpayers with modified adjusted 

gross income (‘‘AGI’’) above a certain amount. In 2017, the phase 

out range begins at modified AGI of $203,540, with no exclusion 

when modified AGI equals or exceeds $243,540. Modified AGI is 

the sum of the taxpayer’s AGI plus amounts excluded from income 

under sections 911, 931, and 933 (relating to the exclusion of income of U.S. citizens or residents living abroad; residents of Guam, 

American Samoa, and the Northern Mariana Islands and residents 

of Puerto Rico, respectively). 

In the case of adoption of a child with special needs that is finalized during a taxable year, the taxpayer may claim as an exclusion 

the amount of the maximum exclusion minus the aggregate qualified adoption expenses with respect to that adoption for all prior 

taxable years. 

Qualified adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, and other expenses that are: 

(1) directly related to, and the principal purpose of which is for, the 

legal adoption of an eligible child by the taxpayer; (2) not incurred 

in violation of State or Federal law, or in carrying out any surrogate parenting arrangement; (3) not for the adoption of the child 

of the taxpayer’s spouse; and (4) not reimbursed (e.g., by an employer).217

For the exclusion to apply, certain requirements must be satisfied, including satisfaction of nondiscrimination rules and providing 

employees with reasonable notification of the availability and 

terms of the program.218

Adoption expenses paid or reimbursed by the employer under an 

adoption assistance program are not eligible for the adoption credit 

under section 23. A taxpayer may be eligible for the adoption credit 


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219Sec. 408. 220Secs. 219(a) and 408(o). 221Sec. 408A. 

(with respect to qualified adoption expenses he or she incurs) and 

also for the exclusion (with respect to different qualified adoption 

expenses paid or reimbursed by his or her employer). 

REASONS FOR CHANGE

The Committee believes that the repeal of the exclusion for adoption assistance programs makes the system simpler and fairer for 

all families and individuals, and allows for lower tax rates. The 

Committee further believes that the repeal of this provision is part 

of its larger effort toward tax reform which broadens the tax base, 

closes loopholes and grows the economy. 

EXPLANATION OF PROVISION

The provision repeals the exclusion from gross income for adoption assistance programs. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

F. SIMPLIFICATION AND REFORM OF SAVINGS, PENSIONS, RETIREMENT

1. Repeal of special rule permitting recharacterization of IRA 

contributions (sec. 1501 of the bill and sec. 408A of the Code) 

PRESENT LAW

Individual retirement arrangements 

There are two basic types of individual retirement arrangements 

(‘‘IRAs’’) under present law: traditional IRAs,219 to which both deductible and nondeductible contributions may be made,220 and 

Roth IRAs, to which only nondeductible contributions may be 

made.221 The principal difference between these two types of IRAs 

is the timing of income tax inclusion. 

An annual limit applies to contributions to IRAs. The contribution limit is coordinated so that the aggregate maximum amount 

that can be contributed to all of an individual’s IRAs (both traditional and Roth) for a taxable year is the lesser of a certain dollar 

amount ($5,500 for 2017) or the individual’s compensation. In the 

case of a married couple, contributions can be made up to the dollar limit for each spouse if the combined compensation of the 

spouses is at least equal to the contributed amount. The dollar 

limit is increased annually (‘‘indexed’’) as needed to reflect increases in the cost-of living. An individual who has attained age 50 

before the end of the taxable year may also make catch-up contributions up to $1,000 to an IRA. The IRA catch-up contribution 

limit is not indexed. 

Traditional IRAs 

An individual may make deductible contributions to a traditional 

IRA up to the IRA contribution limit (reduced by any contributions 


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222Sec. 219(g). 223 Basis results from after-tax contributions to traditional IRAs or a rollovers to traditional 

IRAs of after-tax amounts from another eligible retirement plan. 224 Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA 

and convert the traditional IRA to a Roth IRA, as discussed below. 225 Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA 

and convert the traditional IRA to a Roth IRA. 

to Roth IRAs) if neither the individual nor the individual’s spouse 

is an active participant in an employer-sponsored retirement plan. 

If an individual (or the individual’s spouse) is an active participant 

in an employer-sponsored retirement plan, the deduction is phased 

out for taxpayers with adjusted gross income (‘‘AGI’’) for the taxable year over certain indexed levels.222 To the extent an individual 

cannot or does not make deductible contributions to a traditional 

IRA or contributions to a Roth IRA for the taxable year, the individual may make nondeductible after-tax contributions to a traditional IRA (that is, no AGI limits apply), subject to the same contribution limits as the limits on deductible contributions, including 

catch-up contributions. An individual who has attained age 701⁄2

before to the close of a year is not permitted to make contributions 

to a traditional IRA for that year. 

Amounts held in a traditional IRA are includible in income when 

withdrawn, except to the extent the withdrawal is a return of the 

individual’s basis.223 All traditional IRAs of an individual are treated as a single contract for purposes of recovering basis in the IRAs. 

Roth IRAs 

Individuals with AGI below certain levels may make nondeductible contributions to a Roth IRA. The maximum annual contribution that can be made to a Roth IRA is phased out for taxpayers 

with AGI for the taxable year over certain indexed levels.224

Amounts held in a Roth IRA that are withdrawn as a qualified 

distribution are not includible in income. A qualified distribution is 

a distribution that (1) is made after the five-taxable-year period beginning with the first taxable year for which the individual first 

made a contribution to a Roth IRA, and (2) is made after attainment of age 591⁄2, on account of death or disability, or is made for 

first-time homebuyer expenses of up to $10,000. 

Distributions from a Roth IRA that are not qualified distributions are includible in income to the extent attributable to earnings; amounts that are attributable to a return of contributions to 

the Roth IRA are not includible in income. All Roth IRAs are treated as a single contract for purposes of determining the amount that 

is a return of contributions. 

Separation of traditional and Roth IRA accounts 

Contributions to traditional IRAs and to Roth IRAs must be segregated into separate IRAs, meaning arrangements with separate 

trusts, accounts, or contracts, and separate IRA documents. Except 

in the case of a conversion or recharacterization, amounts cannot 

be transferred or rolled over between the two types of IRAs. 

Taxpayers generally may convert an amount in a traditional IRA 

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226Subject to various exceptions, distributions from an IRA before age 591⁄2 that are includible 

in income are subject to a 10-percent early distribution tax under section 72(t). An exception 

applies to an amount includible in income as a result of the conversion from a traditional IRA 

into a Roth IRA. However, the early distribution tax applies if the taxpayer withdraws the 

amount within five years of the conversion. 227Secs. 401(a), 403(a), 403(b) and 457(b). 228 As in the case of a conversion of an amount from a traditional IRA to a Roth IRA, the 

special recapture rule relating to the 10-percent additional tax on early distributions applies for 

distributions made from the Roth IRA within a specified five-year period after the rollover. 229Sec. 408A(d)(6). 230Treas. Reg. sec. 1.408A–5, Q&A–2(b). 

payer’s income as if a withdrawal had been made.226 The conversion is accomplished by a trustee-to-trustee transfer of the amount 

from the traditional IRA to the Roth IRA, or by a distribution from 

the traditional IRA and contribution to the Roth IRA within 60 

days. 

Rollovers to IRAs of distributions from tax-favored employersponsored retirement plans (that is, qualified retirement plans, taxdeferred annuity plans, and governmental eligible deferred compensation plans 227) are also permitted. For tax-free rollovers, distributions from pretax accounts under an employer-sponsored plan 

generally must are contributed to a traditional IRA, and distributions from a designated Roth account under an employer-sponsored 

plan must be contributed only to a Roth IRA. However, a distribution from an employer-sponsored plan that is not from a designated 

Roth account is also permitted to be rolled over into a Roth IRA, 

subject to the rules that apply to conversions from a traditional 

IRA into a Roth IRA. Thus, a rollover from a tax-favored employersponsored plan to a Roth IRA is includible in gross income (except 

to the extent it represents a return of after-tax contributions).228

Recharacterization of IRA contributions 

If an individual makes a contribution to an IRA (traditional or 

Roth) for a taxable year, the individual is permitted to recharacterize the contribution as a contribution to the other type of IRA 

(traditional or Roth) by making a trustee-to-trustee transfer to the 

other type of IRA before the due date for the individual’s income 

tax return for that year.229 In the case of a recharacterization, the 

contribution will be treated as having been made to the transferee 

IRA (and not the original, transferor IRA) as of the date of the 

original contribution. Both regular contributions and conversion 

contributions to a Roth IRA can be recharacterized as having been 

made to a traditional IRA. 

The amount transferred in a recharacterization must be accompanied by any net income allocable to the contribution. In general, 

even if a recharacterization is accomplished by transferring a specific asset, net income is calculated as a pro rata portion of income 

on the entire account rather than income allocable to the specific 

asset transferred. However, when doing a Roth conversion of an 

amount for a year, an individual may establish multiple Roth IRAs, 

for example, Roth IRAs with different investment strategies, and 

divide the amount being converted among the IRAs. The individual 

can then choose whether to recharacterize any of the Roth IRAs as 

a traditional IRA by transferring the entire amount in the particular Roth IRA to a traditional IRA.230 For example, if the value 

of the assets in a particular Roth IRA declines after the conversion, 

the conversion can be reversed by recharacterizing that IRA as a 


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231Treas. Reg. sec. 1.408A–5, Q&A–9. 232The provision does not preclude an individual from making a contribution to a traditional 

IRA and converting the traditional IRA to a Roth IRA. Rather, the provision would preclude 

the individual from later unwinding the conversion through a recharacterization. 233Secs. 401(a), 401(k), 403(a), 403(b), and 457(b). 234Sec. 401(k)(2)(B). Similar restrictions apply to certain other contributions, such as employer matching or nonelective contributions required under the nondiscrimination safe harbors 

under section 401(k). 

traditional IRA. The individual may then later convert that traditional IRA to a Roth IRA (referred to as a reconversion), including 

only the lower value in income. Treasury regulations prevent the 

reconversion from taking place immediately after the 

recharcterization, by requiring a minimum period to elapse before 

the reconversion. Generally the reconversion cannot occur sooner 

than the later of 30 days after the recharacterization or a date during the taxable year following the taxable year of the original conversion.231

REASONS FOR CHANGE

Recharacterization of IRA contributions may enable an individual to avoid tax by retroactively manipulating the amount of income that must be recognized for tax purposes. The Committee intends to repeal the recharacterization rule in order to prevent such 

manipulation. 

EXPLANATION OF PROVISION

The provision repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus, for 

example, under the provision, a conversion contribution establishing a Roth IRA during a taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby 

unwinding the conversion).232

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

2. Reduction in minimum age for allowable in-service distributions 

(sec. 1502 of the bill and secs. 401 and 457 of the Code) 

PRESENT LAW

Tax-favored employer-sponsored retirement plans consist of 

qualified retirement plans, including certain defined contribution 

plans that allow employees to make elective deferrals (a ‘‘section 

401(k) plan’’), tax-deferred annuity plans (a ‘‘section 403(b) plan’’), 

which may also allow employees to make elective deferrals, and eligible deferred compensation plans of State and local government 

employers (a ‘‘governmental section 457(b) plan’’).233 The terms of 

an employer-sponsored retirement plan generally determine when 

distributions are permitted. However, in some cases, restrictions 

may apply to distribution before an employee’s severance from employment, referred to as ‘‘in-service’’ distributions. 

In-service distributions of elective deferrals (and related earnings) under a section 401(k) plan generally are permitted only after 

attainment of age 591⁄2 or termination of the plan.234 In-service disVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00206 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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235Secs. 403(b)(7)(A)(ii) and 403(b)(11). 236Sec. 401(a)(36) and Treas. Reg. secs. 1.401–1(b)(1)(i) and 1.401(a)–1(b). 237Sec. 457(d)(1)(A). 238Secs. 401(k)(2)(B)(i)(IV) and 403(b)(7)(A)(ii) and (b)(11)(B). Other types of contributions 

may also be subject to this restriction. 

tributions of elective deferrals (but not related earnings) are also 

permitted in the case of hardship. Elective deferrals under a section 403(b) plan are subject to in-service distribution restrictions 

similar to those applicable to elective deferrals under a section 

401(k) plan, and, in some cases, other contributions to a section 

403(b) plan are subject to similar restrictions.235

Pension plans, that is, qualified defined benefit plans and money 

purchase pension plans, a type of qualified defined contribution 

plan, generally may not permit in-service distributions before attainment of age 62 (or attainment of normal retirement age under 

the plan if earlier) or termination of the plan.236

Deferrals under a governmental section 457(b) plan are subject 

to in-service distribution restrictions similar to those applicable to 

elective deferrals under a section 401(k) plan, except that in-service 

distributions under a governmental section 457(b) plan are permitted only after attainment of age 701⁄2 (rather than age 591⁄2).237

REASONS FOR CHANGE

Present law offers various types of tax-favored employer-sponsored retirement plans that are very similar, but with minor variations such as the age at which in-service distributions are permitted. These variations create complexity for employers and plan 

administrators and may cause confusion for employees. These variations also impose different rules on generally similarly situated 

taxpayers instead of providing the same rules for all taxpayers. 

Providing a uniform age for allowable in-service distributions will 

help simplify the rules for various types of plans. In addition, lowering the age to 591⁄2 for all plans will remove a tax barrier to 

phased retirement as an alternative to early retirement. 

EXPLANATION OF PROVISION

Under the provision, in-service distributions are permitted under 

a pension plan or a governmental section 457(b) plan at age 591⁄2, thus making the rules for those plans consistent with the rules for 

section 401(k) plans and section 403(b) plans. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2017. 

3. Modification of rules governing hardship distributions (sec. 1503 

of the bill and secs. 401 and 403 of the Code) 

PRESENT LAW

Elective deferrals under a section 401(k) plan or a section 403(b) 

plan may not be distributed before the occurrence of one or more 

specified events, including financial hardship of the employee.238

Applicable Treasury regulations provide that a distribution is 

made on account of hardship only if the distribution is made on account of an immediate and heavy financial need of the employee 


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239Treas. Reg. sec. 1.401(k)–1(d)(3). 240Sec. 401(k)(2)(B)(i). 

and is necessary to satisfy the heavy need.239 The Treasury regulations provide a safe harbor under which a distribution may be 

deemed necessary to satisfy an immediate and heavy financial 

need. One requirement of this safe harbor is that the employee be 

prohibited from making elective deferrals and employee contributions to the plan and all other plans maintained by the employer 

for at least six months after receipt of the hardship distribution. 

REASONS FOR CHANGE

The rules relating to hardship distributions contain minor distinctions that create complexity for employers and plan administrators. These distinctions may lead to inadvertent errors, correction 

of which increases plan costs, and may also cause confusion for employees. In addition, the rule prohibiting employees from making 

contributions for six months after receiving a hardship distribution 

impedes employees’ ability to save for retirement. The Committee 

believes that the rules relating to hardship withdrawals should be 

more consistent and should not impede retirement savings. 

EXPLANATION OF PROVISION

The Secretary of the Treasury is directed to modify the applicable regulations within one year of the date of enactment to (1) delete the requirement that an employee be prohibited from making 

elective deferrals and employee contributions for six months after 

the receipt of a hardship distribution in order for the distribution 

to be deemed necessary to satisfy an immediate and heavy financial need, and (2) make any other modifications necessary to carry 

out the purposes of the rule allowing elective deferrals to be distributed in the case of hardship. Thus, under the modified regulations, an employee would not be prevented for any period after the 

receipt of a hardship distribution from continuing to make elective 

deferrals and employee contributions. 

EFFECTIVE DATE

The regulations as revised by the provision shall apply to plan 

years beginning after December 31, 2017. 

4. Modification of rules relating to hardship withdrawals from cash 

or deferred arrangements (sec. 1504 of the bill and sec. 401 of the 

Code) 

PRESENT LAW

Amounts attributable to elective deferrals (including earnings 

thereon) under a section 401(k) plan generally may not be distributed before the earliest of the employee’s severance from employment, death, disability or attainment of age 591⁄2, or termination 

of the plan, or as a qualified reservist distribution.240 Elective deferrals, but not associated earnings, may be distributed on account 

of hardship. 

An employer may make nonelective and matching contributions 

for employees under a section 401(k) plan. Elective deferrals, and 

matching contributions and after-tax employee contributions, are 


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241Treas. Reg. sec. 1.401(k)–1(d)(3). 

subject to special tests (‘‘nondiscrimination tests’’) to prevent discrimination in favor of highly compensated employees. Nonelective 

contributions and matching contributions that satisfy certain requirements (‘‘qualified nonelective contributions and qualified 

matching contributions’’) may be used to enable the plan to satisfy 

these nondiscrimination tests. One of the requirements is that 

these contributions be subject to the same distribution restrictions 

as elective deferrals, except that these contributions (and associated earnings) are not permitted to be distributed on account of 

hardship. 

Applicable Treasury regulations provide that a distribution is 

made on account of hardship only if the distribution is made on account of an immediate and heavy financial need of the employee 

and is necessary to satisfy the heavy need.241 The Treasury regulations provide a safe harbor under which a distribution may be 

deemed necessary to satisfy an immediate and heavy financial 

need. One requirement of the safe harbor is that the employee represent that the need cannot be satisfied through currently available 

plan loans. This in effect requires an employee to take any available plan loan before receiving a hardship distribution. 

REASONS FOR CHANGE

The rules for determining which amounts may be distributed as 

hardship distributions are overly complex. This complexity may 

lead to inadvertent errors, correction of which increases plan costs, 

and may also cause confusion for employees. The Committee wishes to provide more consistency in these rules, thereby reducing 

complexity. 

Plan loans serve a valid purpose in providing employees with 

temporary use of retirement funds without depleting retirement 

savings. However, in some cases, a loan may not be suitable to 

cover an employee’s financial need. In that case, a requirement to 

document the need for a distribution, rather than a loan, creates 

an unnecessary burden for the employee and plan administrator 

and may cause a delay that aggravates the employee’s financial 

hardship. The Committee wishes to reduce administrative complexity by removing the requirement to obtain a loan before a hardship distribution. In addition the Committee believes that hardship 

distributions should not be limited to amounts contributed by the 

employee. 

EXPLANATION OF PROVISION

The provision allows earnings on elective deferrals under a section 401(k) plan, as well as qualified nonelective contributions and 

qualified matching contributions (and associated earnings), to be 

distributed on account of hardship. Further, a distribution is not 

treated as failing to be on account of hardship solely because the 

employee does not take any available plan loan. 

EFFECTIVE DATE

The provision applies to plan years beginning after December 31, 

2017. 


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242Secs. 402(a) and (c), 402A(d), 403(a) and (b), 457(a) and (e)(16). 243Sec. 72(t). 244 Certain distributions are not eligible rollover distributions, such as annuity payments, required minimum distributions, hardship distributions, and loans that are treated as deemed distributions under section 72(p). 245Treas. Reg. sec. 1.402(c)–2, Q&A–1(b)(3). 246Sec. 72(p). 

5. Extended rollover period for the rollover of plan loan offset 

amounts in certain cases (sec. 1505 of the bill and sec. 402 of the 

Code) 

PRESENT LAW

Taxation of retirement plan distributions 

A distribution from a tax-favored employer-sponsored retirement 

plan (that is, a qualified retirement plan, section 403(b) plan, or a 

governmental section 457(b) plan) is generally includible in gross 

income, except in the case of a qualified distribution from a designated Roth account or to the extent the distribution is a recovery 

of basis under the plan or the distribution is contributed to another 

such plan or an IRA (referred to as eligible retirement plans) in a 

tax-free rollover.242 In the case of a distribution from a retirement 

plan to an employee under age 591⁄2, the distribution (other than 

a distribution from a governmental section 457(b) plan) is also subject to a 10-percent early distribution tax unless an exception applies.243

A distribution from a tax-favored employer-sponsored retirement 

plan that is an eligible rollover distribution may be rolled over to 

an eligible retirement plan.244 The rollover generally can be 

achieved by direct rollover (direct payment from the distributing 

plan to the recipient plan) or by contributing the distribution to the 

eligible retirement plan within 60 days of receiving the distribution 

(‘‘60-day rollover’’). 

Employer-sponsored retirement plans are required to offer an 

employee a direct rollover with respect to any eligible rollover distribution before paying the amount to the employee. If an eligible 

rollover distribution is not directly rolled over to an eligible retirement plan, the taxable portion of the distribution generally is subject to mandatory 20-percent income tax withholding.245 Employees 

who do not elect a direct rollover but who roll over eligible distributions within 60 days of receipt also defer tax on the rollover 

amounts; however, the 20 percent withheld will remain taxable unless the employee substitutes funds within the 60-day period. 

Plan loans 

Employer-sponsored retirement plans may provide loans to employees. Unless the loan satisfies certain requirements in both form 

and operation, the amount of a retirement plan loan is a deemed 

distribution from the retirement plan, including that the terms of 

the loan provide for a repayment period of not more than five years 

(except for a loan specifically to purchase a home) and for level amortization of loan payments with payments not less frequently than 

quarterly.246 Thus, if an employee stops making payments on a 

loan before the loan is repaid, a deemed distribution of the outstanding loan balance generally occurs. A deemed distribution of an 

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tribution occurred, including being subject to a 10-percent early 

distribution tax, if applicable. A deemed distribution is not eligible 

for rollover to another eligible retirement plan. 

A plan may also provide that, in certain circumstances (for example, if an employee terminates employment), an employee’s obligation to repay a loan is accelerated and, if the loan is not repaid, 

the loan is cancelled and the amount in employee’s account balance 

is offset by the amount of the unpaid loan balance, referred to as 

a loan offset. A loan offset is treated as an actual distribution from 

the plan equal to the unpaid loan balance (rather than a deemed 

distribution), and (unlike a deemed distribution) the amount of the 

distribution is eligible for tax-free rollover to another eligible retirement plan within 60 days. However, the plan is not required to 

offer a direct rollover with respect to a plan loan offset amount that 

is an eligible rollover distribution, and the plan loan offset amount 

is generally not subject to 20-percent income tax withholding. 

REASONS FOR CHANGE

The Committee believes that providing a longer rollover period 

with respect to plan loan offsets may result in more rollovers, thus 

increasing retirement savings. 

EXPLANATION OF PROVISION

Under the provision, the period during which a qualified plan 

loan offset amount may be contributed to an eligible retirement 

plan as a rollover contribution is extended from 60 days after the 

date of the offset to the due date (including extensions) for filing 

the Federal income tax return for the taxable year in which the 

plan loan offset occurs, that is, the taxable year in which the 

amount is treated as distributed from the plan. Under the provision, a qualified plan loan offset amount is a plan loan offset 

amount that is treated as distributed from a qualified retirement 

plan, a section 403(b) plan or a governmental section 457(b) plan 

solely by reason of the termination of the plan or the failure to 

meet the repayment terms of the loan because of the employee’s 

separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise. As under present 

law, a loan offset amount under the provision is the amount by 

which an employee’s account balance under the plan is reduced to 

repay a loan from the plan. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

6. Modification of nondiscrimination rules for certain plans providing benefits or contributions to older, longer service participants (sec. 1506 of the bill and sec. 401 of the Code) 

PRESENT LAW

In general 

Qualified retirement plans are subject to nondiscrimination requirements, under which the group of employees covered by a plan 

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247Secs. 401(a)(3)–(5) and 410(b). Detailed rules are provided in Treas. Reg. secs. 1.401(a)(4)– 

1 through–13 and secs. 1.410(b)–2 through –10. In applying the nondiscrimination requirements, 

certain employees, such as those under age 21 or with less than a year of service, generally may 

be disregarded. In addition, employees of controlled groups and affiliated service groups under 

the aggregation rules of section 414(b), (c), (m) and (o) are treated as employed by a single employer. 248Sec. 401(a)(26). 249Sec. 414(q). At the election of the employer, employees who are highly compensated based 

on the amount of their compensation may be limited to employees who were among the top 20 

percent of employees based on compensation. 250 Elective deferrals are contributions that an employee elects to have made to a defined contribution plan that includes a qualified cash or deferred arrangement (referred to as ‘‘section 

401(k) plan’’) rather than receive the same amount as current compensation. Employer matching 

contributions are contributions made by an employer only if an employee makes elective deferrals or after-tax employee contributions. Employer nonelective contributions are contributions 

made by an employer regardless of whether an employee makes elective deferrals or after-tax 

employee contributions. Under section 4975(e)(7), an ESOP is a defined contribution plan, or 

portion of a defined contribution plan, that is designated as an ESOP and is designed to invest 

primarily in employer stock. 

ployees, including benefits, rights, and features under the plan, 

must not discriminate in favor of highly compensated employees.247

The timing of plan amendments must also not have the effect of 

discriminating significantly in favor of highly compensated employees. In addition, in the case of a defined benefit plan, the plan must 

benefit at least the lesser of (1) 50 employees and (2) the greater 

of 40 percent of all employees and two employees (or one employee 

if the employer has only one employee), referred to as the ‘‘minimum participation’’ requirements.248 These nondiscrimination requirements are designed to help ensure that qualified retirement 

plans achieve the goal of retirement security for both lower and 

higher paid employees. 

For nondiscrimination purposes, an employee generally is treated 

as highly compensated if the employee (1) was a five-percent owner 

of the employer at any time during the year or the preceding year, 

or (2) had compensation for the preceding year in excess of 

$120,000 (for 2017).249 Employees who are not highly compensated 

are referred to as nonhighly compensated employees. 

Nondiscriminatory plan coverage 

Whether plan coverage of employees is nondiscriminatory is determined by calculating a plan’s ratio percentage, that is, the ratio 

of the percentage of nonhighly compensated employees covered 

under the plan to the percentage of highly compensated employees 

covered. For this purpose, certain portions of a defined contribution 

plan are treated as separate plans to which the plan coverage requirements are applied separately, referred to as mandatory 

disaggregation. Specifically, the following, if provided under a plan, 

are treated as separate plans: the portion of a plan consisting of 

employee elective deferrals, the portion consisting of employer 

matching contributions, the portion consisting of employer nonelective contributions, and the portion consisting of an employee stock 

ownership plan (‘‘ESOP’’).250 Subject to mandatory disaggregation, 

different qualified retirement plans may otherwise be aggregated 

and tested together as a single plan, provided that they use the 

same plan year. The plan determined under these rules for plan 

coverage purposes generally is also treated as the plan for purposes 

of applying the other nondiscrimination requirements. 

A plan’s coverage is nondiscriminatory if the ratio percentage, as 

determined above, is 70 percent or greater. If a plan’s ratio percentage is less than 70 percent, a multi-part test applies, referred 


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251 Contribution and benefit rates are generally determined under the rules for nondiscriminatory contributions or benefit accruals, described below. These rules are generally based on 

benefit accruals under a defined benefit plan, other than accruals attributable to after-tax employee contributions, and contributions allocated to participants’ accounts under a defined contribution plan, other than allocations attributable to after-tax employee (Under these rules, contributions allocated to a participants accounts are referred to as ‘‘allocations,’’ with the related 

rates referred to as ‘‘allocation rates,’’ but ‘‘contribution rates’’ is used herein for convenience.) 

However, as discussed below, benefit accruals can be converted to actuarially equivalent contributions, and contributions can be converted to actuarially equivalent benefit accruals. 252Sec. 410(b)(6)(C). 253Secs. 401(k) and (m), the latter of which applies also to after-tax employee contributions 

under a defined contribution plan. 254For this purpose, under section 401(a)(17), compensation generally is limited to $265,000 

per year (for 2016). 

to as the average benefit test. First, the plan must meet a ‘‘nondiscriminatory classification requirement,’’ that is, it must cover a 

group of employees that is reasonable and established under objective business criteria and the plan’s ratio percentage must be at or 

above a level specified in the regulations, which varies depending 

on the percentage of nonhighly compensated employees in the employer’s workforce. In addition, the average benefit percentage test 

must be satisfied. 

Under the average benefit percentage test, in general, the average rate of employer-provided contributions or benefit accruals for 

all nonhighly compensated employees under all plans of the employer must be at least 70 percent of the average contribution or 

accrual rate of all highly compensated employees.251 In applying 

the average benefit percentage test, elective deferrals made by employees, as well as employer matching and nonelective contributions, are taken into account. Generally, all plans maintained by 

the employer are taken into account, including ESOPs, regardless 

of whether plans use the same plan year. 

Under a transition rule applicable in the case of the acquisition 

or disposition of a business, or portion of a business, or a similar 

transaction, a plan that satisfied the plan coverage requirements 

before the transaction is deemed to continue to satisfy them for a 

period after the transaction, provided coverage under the plan is 

not significantly changed during that period.252

Nondiscriminatory contributions or benefit accruals 

In general 

There are three general approaches to testing the amount of benefits under qualified retirement plans: (1) design-based safe harbors under which the plan’s contribution or benefit accrual formula 

satisfies certain uniformity standards, (2) a general test, described 

below, and (3) cross-testing of equivalent contributions or benefit 

accruals. Employee elective deferrals and employer matching contributions under defined contribution plans are subject to special 

testing rules and generally are not permitted to be taken into account in determining whether other contributions or benefits are 

nondiscriminatory.253

The nondiscrimination rules allow contributions and benefit accruals to be provided to highly compensated and nonhighly compensated employees at the same percentage of compensation.254

Thus, the various testing approaches described below are generally 

applied to the amount of contributions or accruals provided as a 

percentage of compensation, referred to as a contribution rate or 

accrual rate. In addition, under the ‘‘permitted disparity’’ rules, in 


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255See sections 401(a)(5)(C) and (D) and 401(l) and Treas. Reg. section 1. 401(a)(4)–7 and 

1.401(l)–1 through –6 for rules for determining the amount of contributions or benefits that can 

be attributed to the employer-paid portion of Social Security taxes or benefits. 

calculating an employee’s contribution or accrual rate, credit may 

be given for the employer paid portion of Social Security taxes or 

benefits.255 The permitted disparity rules do not apply in testing 

whether elective deferrals, matching contributions, or ESOP contributions are nondiscriminatory. 

The general test is generally satisfied by measuring the rate of 

contribution or benefit accrual for each highly compensated employee to determine if the group of employees with the same or 

higher rate (a ‘‘rate’’ group) is a nondiscriminatory group, using the 

nondiscriminatory plan coverage standards described above. For 

this purpose, if the ratio percentage of a rate group is less than 70 

percent, a simplified standard applies, which includes disregarding 

the reasonable classification requirement, but requires satisfaction 

of the average benefit percentage test. 

Cross-testing 

Cross-testing involves the conversion of contributions under a defined contribution plan or benefit accruals under a defined benefit 

plan to actuarially equivalent accruals or contributions, with the 

resulting equivalencies tested under the general test. However, employee elective deferrals and employer matching contributions 

under defined contribution plans are not permitted to be taken into 

account for this purpose, and cross-testing of contributions under 

a defined contribution plan, or cross-testing of a defined contribution plan aggregated with a defined benefit plan, is permitted only 

if certain threshold requirements are satisfied. 

In order for a defined contribution plan to be tested on an equivalent benefit accrual basis, one of the following three threshold conditions must be met: • The plan has broadly available allocation rates, that is, each 

allocation rate under the plan is available to a nondiscriminatory group of employees (disregarding certain permitted additional contributions provided to employees as a replacement 

for benefits under a frozen defined benefit plan, as discussed 

below); 

• The plan provides allocations that meet prescribed designs 

under which allocations gradually increase with age or service 

or are expected to provide a target level of annuity benefit; or 

• The plan satisfies a minimum allocation gateway, under 

which each nonhighly compensated employee has an allocation 

rate of (a) at least one-third of the highest rate for any highly 

compensated employee, or (b) if less, at least five percent. 

In order for an aggregated defined contribution and defined benefit plan to be tested on an aggregate equivalent benefit accrual 

basis, one of the following three threshold conditions must be met: 

• The plan must be primarily defined benefit in character, that 

is, for more than fifty percent of the nonhighly compensated 

employees under the plan, their accrual rate under the defined 

benefit plan exceeds their equivalent accrual rate under the defined contribution plan; 

• The plan consists of broadly available separate defined benefit and defined contribution plans, that is, the defined benefit 


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256Sec. 413(c). Multiple-employer status does not apply if the plan is a multiemployer plan, 

defined under sec. 414(f) as a plan maintained pursuant to one or more collective bargaining 

agreements with two or more unrelated employers and to which the employers are required to 

contribute under the collective bargaining agreement(s). Multiemployer plans are also known as 

Taft-Hartley plans. 257Treas. Reg. sec. 1.413–2(a)(3)(ii)–(iii). 258Sec. 403(b). These plans are available to employers that are tax-exempt under section 

501(c)(3), as well as to educational institutions of State or local governments. 259Treas. Reg. sec. 1.410(b)–7(f). 

plan and the defined contribution plan would separately satisfy 

simplified versions of the minimum coverage and nondiscriminatory amount requirements; or 

• The plan satisfies a minimum aggregate allocation gateway, 

under which each nonhighly compensated employee has an aggregate allocation rate (consisting of allocations under the defined contribution plan and equivalent allocations under the 

defined benefit plan) of (a) at least one-third of the highest aggregate allocation rate for any nonhighly compensated employee, or (b) if less, at least five percent in the case of a highest nonhighly compensated employee’s rate up to 25 percent, 

increased by one percentage point for each five-percentagepoint increment (or portion thereof) above 25 percent, subject 

to a maximum of 7.5 percent. 

Benefits, rights, and features 

Each benefit, right, or feature offered under the plan generally 

must be available to a group of employees that has a ratio percentage that satisfies the minimum coverage requirements, including 

the reasonable classification requirement if applicable, except that 

the average benefit percentage test does not have to be met, even 

if the ratio percentage is less than 70 percent. 

Multiple-employer and section 403(b) plans 

A multiple-employer plan generally is a single plan maintained 

by two or more unrelated employers, that is, employers that are 

not treated as a single employer under the aggregation rules for related entities.256 The plan coverage and other nondiscrimination 

requirements are applied separately to the portions of a multipleemployer plan covering employees of different employers.257

Certain tax-exempt charitable organizations may offer their employees a tax-deferred annuity plan (‘‘section 403(b) plan).258 The 

nondiscrimination requirements, other than the requirements applicable to elective deferrals, generally apply to section 403(b) plans 

of private tax-exempt organizations. For purposes of applying the 

nondiscrimination requirements to a section 403(b) plan, subject to 

mandatory disaggregation, a qualified retirement plan may be combined with the section 403(b) plan and treated as a single plan.259

However, a section 403(b) plan and qualified retirement plan may 

not be treated as a single plan for purposes of applying the nondiscrimination requirements to the qualified retirement plan. 

Closed and frozen defined benefit plans 

A defined benefit plan may be amended to limit participation in 

the plan to individuals who are employees as of a certain date. 

That is, employees hired after that date are not eligible to participate in the plan. Such a plan is sometimes referred to as a ‘‘closed’’ 

defined benefit plan (that is, closed to new entrants). In such a 


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260 Notice 2014–5, 2014–2 I.R.B. 276, extended by Notice 2015–28, 2015–14 14 I.R.B. 848, Notice 2016–57, 2016–40 I.R.B. 432, and Notice 2017–45, 2017–38 I.R.B. 232. Proposed regulations 

revising the nondiscrimination requirements for closed plans were also issued earlier this year, 

subject to various conditions. 81 Fed. Reg. 4976 (January 29, 2016). 

case, it is common for the employer also to maintain a defined contribution plan and to provide employer matching or nonelective 

contributions only to employees not covered by the defined benefit 

plan or at a higher rate to such employees. 

Over time, the group of employees continuing to accrue benefits 

under the defined benefit plan may come to consist more heavily 

of highly compensated employees, for example, because of greater 

turnover among nonhighly compensated employees or because increasing compensation causes nonhighly compensated employees to 

become highly compensated. In that case, the defined benefit plan 

may have to be combined with the defined contribution plan and 

tested on a benefit accrual basis. However, under the regulations, 

if none of the threshold conditions is met, testing on a benefits 

basis may not be available. Notwithstanding the regulations, recent 

IRS guidance provides relief for a limited period, allowing certain 

closed defined benefit plans to be aggregated with a defined contribution plan and tested on an aggregate equivalent benefits basis 

without meeting any of the threshold conditions.260 When the 

group of employees continuing to accrue benefits under a closed defined benefit plan consists more heavily of highly compensated employees, the benefits, rights, and features provided under the plan 

may also fail the tests under the existing nondiscrimination rules. 

In some cases, if a defined benefit plan is amended to cease future accruals for all participants, referred to as a ‘‘frozen’’ defined 

benefit plan, additional contributions to a defined contribution plan 

may be provided for participants, in particular for older participants, in order to make up in part for the loss of the benefits they 

expected to earn under the defined benefit plan (‘‘make-whole’’ contributions). As a practical matter, testing on a benefit accrual basis 

may be required in that case, but may not be available because the 

defined contribution plan does not meet any of the threshold conditions. 

REASONS FOR CHANGE

Some employers sponsoring defined benefit plans have determined that new employees prefer other types of compensation to 

defined benefit plans and have therefore closed their plans to new 

entrants. Existing employees continue to earn benefits under the 

plan, consistent with their expectations as to their compensation 

and retirement income, which is particularly important for employees close to retirement. However, without greater flexibility in the 

nondiscrimination rules, employers may be forced to freeze their 

defined benefit plans, thus preventing employees from earning 

their expected benefits. When a defined benefit plan is frozen, 

make-whole contributions can offset some of the resulting benefit 

loss for employees. In that case, too, greater flexibility in the nondiscrimination rules is needed. The Committee wishes to provide 

such flexibility in order to protect benefits for older, longer-service 

employees. 


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261 References under the provision to a closed class of participants and similar references to 

a closed class include arrangements under which one or more classes of participants are closed, 

except that one or more classes of participants closed on different dates are not aggregated for 

purposes of determining the date any such class was closed. 262Other testing options available under present law are also available for this purpose. 263This rule applies also for purposes applying the plan coverage and other nondiscrimination 

requirements to an applicable defined benefit plan and one or more defined contributions that, 

under the provision, may be treated as a single plan as described below. 

EXPLANATION OF PROVISION

Closed or frozen defined benefit plans 

In general 

Under the provision, nondiscrimination relief applies with respect to benefits, rights, and features for a closed class of participants (‘‘closed class’’),261 and with respect to benefit accruals for a 

closed class, under a defined benefit plan that meets the requirements described below (referred to herein as an ‘‘applicable’’ defined benefit plan). In addition, the provision treats a closed or frozen applicable defined benefit plan as meeting the minimum participation requirements if the plan met the requirements as of the 

effective date of the plan amendment by which the plan was closed 

or frozen. 

If a portion of an applicable defined benefit plan eligible for relief 

under the provision is spun off to another employer, and if the 

spun-off plan continues to satisfy any ongoing requirements applicable for the relevant relief as described below, the relevant relief 

for the spun-off plan will continue with respect to the other employer. 

Benefits, rights, or features for a closed class 

Under the provision, an applicable defined benefit plan that provides benefits, rights, or features to a closed class does not fail the 

nondiscrimination requirements by reason of the composition of the 

closed class, or the benefits, rights, or features provided to the 

closed class, if (1) for the plan year as of which the class closes and 

the two succeeding plan years, the benefits, rights, and features 

satisfy the nondiscrimination requirements without regard to the 

relief under the provision, but taking into account the special testing rules described below,262 and (2) after the date as of which the 

class was closed, any plan amendment modifying the closed class 

or the benefits, rights, and features provided to the closed class 

does not discriminate significantly in favor of highly compensated 

employees. 

For purposes of requirement (1) above, the following special testing rules apply: • In applying the plan coverage transition rule for business 

acquisitions, dispositions, and similar transactions, the closing 

of the class of participants is not treated as a significant 

change in coverage; • Two or more plans do not fail to be eligible to be a treated 

as a single plan solely by reason of having different plan 

years;263 and • Changes in employee population are disregarded to the extent attributable to individuals who become employees or cease 

to be employees, after the date the class is closed, by reason 

of a merger, acquisition, divestiture, or similar event. 


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264Other testing options available under present law are also available for this purpose. 

Benefit accruals for a closed class 

Under the provision, an applicable defined benefit plan that provides benefits to a closed class may be aggregated, that is, treated 

as a single plan, and tested on a benefit accrual basis with one or 

more defined contribution plans (without having to satisfy the 

threshold conditions under present law) if (1) for the plan year as 

of which the class closes and the two succeeding plan years, the 

plan satisfies the plan coverage and nondiscrimination requirements without regard to the relief under the provision, but taking 

into account the special testing rules described above,264 and (2) 

after the date as of which the class was closed, any plan amendment modifying the closed class or the benefits provided to the 

closed class does not discriminate significantly in favor of highly 

compensated employees. 

Under the provision, defined contribution plans that may be aggregated with an applicable defined benefit plan and treated as a 

single plan include the portion of one or more defined contribution 

plans consisting of matching contributions, an ESOP, or matching 

or nonelective contributions under a section 403(b) plan. If an applicable defined benefit plan is aggregated with the portion of a defined contribution plan consisting of matching contributions, any 

portion of the defined contribution plan consisting of elective deferrals must also be aggregated. In addition, the matching contributions are treated in the same manner as nonelective contributions, 

including for purposes of permitted disparity. 

Applicable defined benefit plan 

An applicable defined benefit plan to which relief under the provision applies is a defined benefit plan under which the class was 

closed (or the plan frozen) before April 5, 2017, or that meets the 

following alternative conditions: (1) taking into account any predecessor plan, the plan has been in effect for at least five years as 

of the date the class is closed (or the plan is frozen) and (2) under 

the plan, during the five-year period preceding that date, (a) for 

purposes of the relief provided with respect to benefits, rights, and 

features for a closed class, there has not been a substantial increase in the coverage or value of the benefits, rights, or features, 

or (b) for purposes of the relief provided with respect to benefit accruals for a closed class or the minimum participation requirements, there has not been a substantial increase in the coverage 

or benefits under the plan. 

For purposes of (2)(a) above, a plan is treated as having a substantial increase in coverage or value of benefits, rights, or features 

only if, during the applicable five-year period, either the number of 

participants covered by the benefits, rights, or features on the date 

the period ends is more than 50 percent greater than the number 

on the first day of the plan year in which the period began, or the 

benefits, rights, and features have been modified by one or more 

plan amendments in such a way that, as of the date the class is 

closed, the value of the benefits, rights, and features to the closed 

class as a whole is substantially greater than the value as of the 

first day of the five-year period, solely as a result of the amendments. 


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265 Under the funding requirements applicable to defined benefit plans, target normal cost for 

a plan year (defined in section 430(b)(1)(A)(i)) is generally the sum of the present value of the 

benefits expected to be earned under the plan during the plan year plus the amount of planrelated expenses to be paid from plan assets during the plan year. Under the provision, in applying this average benefit rule to certain defined benefit plans maintained by cooperative organizations and charities, referred to as CSEC plans (defined in section 414(y)), which are subject 

to different funding requirements, the CSEC plan’s normal cost under section 433(j)(1)(B) is 

used instead of target normal cost. 

For purposes of (2)(b) above, a plan is treated as having had a 

substantial increase in coverage or benefits only if, during the applicable five-year period, either the number of participants benefiting under the plan on the date the period ends is more than 50 

percent greater than the number of participants on the first day of 

the plan year in which the period began, or the average benefit 

provided to participants on the date the period ends is more than 

50 percent greater than the average benefit provided on the first 

day of the plan year in which the period began. In applying this 

requirement, the average benefit provided to participants under the 

plan is treated as having remained the same between the two relevant dates if the benefit formula applicable to the participants has 

not changed between the dates and, if the benefit formula has 

changed, the average benefit under the plan is considered to have 

increased by more than 50 percent only if the target normal cost 

for all participants benefiting under the plan for the plan year in 

which the five-year period ends exceeds the target normal cost for 

all such participants for that plan year if determined using the 

benefit formula in effect for the participants for the first plan year 

in the five-year period by more than 50 percent.265 In applying 

these rules, a multiple-employer plan is treated as a single plan, 

rather than as separate plans separately covering the employees of 

each participating employer. 

In applying these standards, any increase in coverage or value, 

or in coverage or benefits, whichever is applicable, is generally disregarded if it is attributable to coverage and value, or coverage and 

benefits, provided to employees who (1) became participants as a 

result of a merger, acquisition, or similar event that occurred during the 7-year period preceding the date the class was closed, or (2) 

became participants by reason of a merger of the plan with another 

plan that had been in effect for at least five years as of the date 

of the merger and, in the case of benefits, rights, or features for 

a closed class, under the merger, the benefits, rights, or features 

under one plan were conformed to the benefits, rights, or features 

under the other plan prospectively. 

Make-whole contributions under a defined contribution plan 

Under the provision, a defined contribution plan is permitted to 

be tested on an equivalent benefit accrual basis (without having to 

satisfy the threshold conditions under present law) if the following 

requirements are met: 

• The plan provides make-whole contributions to a closed 

class of participants whose accruals under a defined benefit 

plan have been reduced or ended (‘‘make-whole class’’); 

• For the plan year of the defined contribution plan as of 

which the make-whole class closes and the two succeeding plan 

years, the make-whole class satisfies the nondiscriminatory 


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266For this purpose, consistency is not required with respect to employees who were subject 

to different benefit formulas under the defined benefit plan. 

classification requirement under the plan coverage rules, taking into account the special testing rules described above; • After the date as of which the class was closed, any 

amendment to the defined contribution plan modifying the 

make-whole class or the allocations, benefits, rights, and features provided to the make-whole class does not discriminate 

significantly in favor of highly compensated employees; and • Either the class was closed before April 5, 2017, or the defined benefit plan is an applicable defined benefit plan under 

the alternative conditions applicable for purposes of the relief 

provided with respect to benefit accruals for a closed class. 

With respect to one or more defined contribution plans meeting 

the requirements above, in applying the plan coverage and nondiscrimination requirements, the portion of the plan providing 

make-whole or other nonelective contributions may also be aggregated and tested on an equivalent benefit accrual basis with the 

portion of one or more other defined contribution plans consisting 

of matching contributions, an ESOP, or matching or nonelective 

contributions under a section 403(b) plan. If the plan is aggregated 

with the portion of a defined contribution plan consisting of matching contributions, any portion of the defined contribution plan consisting of elective deferrals must also be aggregated. In addition, 

the matching contributions are treated in the same manner as nonelective contributions, including for purposes of permitted disparity. 

Under the provision, ‘‘make-whole contributions’’ generally 

means nonelective contributions for each employee in the makewhole class that are reasonably calculated, in a consistent manner, 

to replace some or all of the retirement benefits that the employee 

would have received under the defined benefit plan and any other 

plan or qualified cash or deferred arrangement under a section 

401(k) plan if no change had been made to the defined benefit plan 

and other plan or arrangement.266 However, under a special rule, 

in the case of a defined contribution plan that provides benefits, 

rights, or features to a closed class of participants whose accruals 

under a defined benefit plan have been reduced or eliminated, the 

plan will not fail to satisfy the nondiscrimination requirements 

solely by reason of the composition of the closed class, or the benefits, rights, or features provided to the closed class, if the defined 

contribution plan and defined benefit plan otherwise meet the requirements described above but for the fact that the make-whole 

contributions under the defined contribution plan are made in 

whole or in part through matching contributions. 

If a portion of a defined contribution plan eligible for relief under 

the provision is spun off to another employer, and if the spun-off 

plan continues to satisfy any ongoing requirements applicable for 

the relevant relief as described above, the relevant relief for the 

spun-off plan will continue with respect to the other employer. 

EFFECTIVE DATE

The provision is generally effective on the date of enactment 

without regard to whether any plan modifications referred to in the 


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267Sec. 102. 

provision are adopted or effective before, on, or after the date of enactment. However, at the election of a plan sponsor, the provision 

will apply to plan years beginning after December 31, 2013. For 

purposes of the provision, a closed class of participants under a defined benefit plan is treated as being closed before April 5, 2017, 

if the plan sponsor’s intention to create the closed class is reflected 

in formal written documents and communicated to participants before that date. In addition, a plan does not fail to be eligible for 

the relief under the provision solely because (1) in the case of benefits, rights, or features for a closed class under a defined benefit 

plan, the plan was amended before the date of enactment to eliminate one or more benefits, rights, or features and is further amended after the date of enactment to provide the previously eliminated 

benefits, rights, or features to a closed class of participants, or (2) 

in the case of benefit accruals for a closed class under a defined 

benefit plan or application of the minimum benefit requirements to 

a closed or frozen defined benefit plan, the plan was amended before the date of the enactment to cease all benefit accruals and is 

further amended after the date of enactment to provide benefit accruals to a closed class of participants. In either case, the relevant 

relief applies only if the plan otherwise meets the requirements for 

the relief, and, in applying the relevant relief, the date the class 

of participants is closed is the effective date of the later amendment. 

G. ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAXES

1. Increase in estate and gift tax exemption, followed by repeal of 

estate and generation-skipping transfer taxes and reduction in 

gift tax rate (secs. 1601 and 1602 of the bill, secs. 2010, 2056A, 

2502, and 2505 of the Code, and new secs. 2210 and 2664 of the 

Code) 

PRESENT LAW

In general 

A gift tax is imposed on certain lifetime transfers, and an estate 

tax is imposed on certain transfers at death. A generation-skipping 

transfer tax generally is imposed on transfers, either directly or in 

trust or similar arrangement, to a ‘‘skip person’’ (i.e., a beneficiary 

in a generation more than one generation younger than that of the 

transferor). Transfers subject to the generation-skipping transfer 

tax include direct skips, taxable terminations, and taxable distributions. 

Income tax rules determine the recipient’s tax basis in property 

acquired from a decedent or by gift. Gifts and bequests generally 

are excluded from the recipient’s gross income.267


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268Sec. 2010. 269For 2011 and later years, the gift and estate taxes were reunified, meaning that the gift 

tax exemption amount was increased to equal the estate tax exemption amount. 270For 2017, the $5.49 exemption amount results in a unified credit of $2,141,800, after applying the applicable rates set forth in section 2001(c). 271Secs. 2056 and 2523. 

Common features of the estate, gift, and generation-skipping transfer taxes 

Unified credit (exemption) and tax rates 

Unified credit.—A unified credit is available with respect to taxable transfers by gift and at death.268 The unified credit offsets tax, 

computed using the applicable estate and gift tax rates, on a specified amount of transfers, referred to as the applicable exclusion 

amount, or exemption amount. The exemption amount was set at 

$5 million for 2011 and is indexed for inflation for later years.269

For 2017, the inflation-indexed exemption amount is $5.49 million.270 Exemption used during life to offset taxable gifts reduces 

the amount of exemption that remains at death to offset the value 

of a decedent’s estate. An election is available under which exemption that is not used by a decedent may be used by the decedent’s 

surviving spouse (exemption portability). 

Common tax rate table.—A common tax-rate table with a top 

marginal tax rate of 40 percent is used to compute gift tax and estate tax. The 40-percent rate applies to transfers in excess of $1 

million (to the extent not exempt). Because the exemption amount 

currently shields the first $5.49 million in gifts and bequests from 

tax, transfers in excess of the exemption amount generally are subject to tax at the highest marginal rate (40 percent). 

Generation-skipping transfer tax exemption and rate.—The generation-skipping transfer tax is a separate tax that can apply in addition to either the gift tax or the estate tax. The tax rate and exemption amount for generation-skipping transfer tax purposes, 

however, are set by reference to the estate tax rules. Generationskipping transfer tax is imposed using a flat rate equal to the highest estate tax rate (40 percent). Tax is imposed on cumulative generation-skipping transfers in excess of the generation-skipping 

transfer tax exemption amount in effect for the year of the transfer. The generation-skipping transfer tax exemption for a given 

year is equal to the estate tax exemption amount in effect for that 

year (currently $5.49 million). 

Transfers between spouses.—A 100-percent marital deduction 

generally is permitted for the value of property transferred between spouses.271 In addition, transfers of ‘‘qualified terminable interest property’’ also are eligible for the marital deduction. Qualified terminable interest property is property: (1) that passes from 

the decedent, (2) in which the surviving spouse has a ‘‘qualifying 

income interest for life,’’ and (3) to which an election under these 

rules applies. A qualifying income interest for life exists if: (1) the 

surviving spouse is entitled to all the income from the property 

(payable annually or at more frequent intervals) or has the right 

to use the property during the spouse’s life, and (2) no person has 

the power to appoint any part of the property to any person other 

than the surviving spouse. 

A marital deduction generally is denied for property passing to 

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272Secs. 2055 and 2522. 273Sec. 2055(d). 274Secs. 2055(e)(2) and 2522(c)(2). 275Sec. 2001(a). 276More mechanically, the taxable estate is combined with the value of adjusted taxable gifts 

made during the decedent’s life (generally, post-1976 gifts), before applying tax rates to determine a tentative total amount of tax. The portion of the tentative tax attributable to lifetime 

gifts is then subtracted from the total tentative tax to determine the gross estate tax, i.e., the 

amount of estate tax before considering available credits. Credits are then subtracted to determine the estate tax liability. 

This method of computation was designed to ensure that a taxpayer only gets one run up 

through the rate brackets for all lifetime gifts and transfers at death, at a time when the thresholds for applying the higher marginal rates exceeded the exemption amount. However, the higher ($5.49 million) present-law exemption amount effectively renders the lower rate brackets irrelevant, because the top marginal rate bracket applies to all transfers in excess of $1 million. 

In other words, all transfers that are not exempt by reason of the $5.49 million exemption 

amount are taxed at the highest marginal rate of 40 percent. 

ital deduction is permitted, however, for property passing to a 

qualified domestic trust of which the noncitizen surviving spouse is 

a beneficiary. A qualified domestic trust is a trust that has as its 

trustee at least one U.S. citizen or U.S. corporation. No corpus may 

be distributed from a qualified domestic trust unless the U.S. trustee has the right to withhold any estate tax imposed on the distribution. 

Tax is imposed on (1) any distribution from a qualified domestic 

trust before the date of the death of the noncitizen surviving 

spouse and (2) the value of the property remaining in a qualified 

domestic trust on the date of death of the noncitizen surviving 

spouse. The tax is computed as an additional estate tax on the estate of the first spouse to die. 

Transfers to charity.—Contributions to section 501(c)(3) charitable organizations and certain other organizations may be deducted from the value of a gift or from the value of the assets in 

an estate for Federal gift or estate tax purposes.272 The effect of 

the deduction generally is to remove the full fair market value of 

assets transferred to charity from the gift or estate tax base; unlike 

the income tax charitable deduction, there are no percentage limits 

on the deductible amount. For estate tax purposes, the charitable 

deduction is limited to the value of the transferred property that 

is required to be included in the gross estate.273 A charitable contribution of a partial interest in property, such as a remainder or 

future interest, generally is not deductible for gift or estate tax 

purposes.274

The estate tax 

Overview 

The Code imposes a tax on the transfer of the taxable estate of 

a decedent who is a citizen or resident of the United States.275 The 

taxable estate is determined by deducting from the value of the decedent’s gross estate any deductions provided for in the Code. After 

applying tax rates to determine a tentative amount of estate tax, 

certain credits are subtracted to determine estate tax liability.276

Because the estate tax shares a common unified credit (exemption) and tax rate table with the gift tax, the exemption amounts 

and tax rates are described together above, along with certain 

other common features of these taxes. 


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277Sec. 2031(a). 278Sec. 2032. 279Sec. 2033. 280Sec. 2035. 281Sec. 2036. 282Sec. 2037. 283Sec. 2038. 284Sec. 2041. 285Sec. 2042. 286Sec. 2058. 

Gross estate 

A decedent’s gross estate includes, to the extent provided for in 

other sections of the Code, the date-of-death value of all of a decedent’s property, real or personal, tangible or intangible, wherever 

situated.277 In general, the value of property for this purpose is the 

fair market value of the property as of the date of the decedent’s 

death, although an executor may elect to value certain property as 

of the date that is six months after the decedent’s death (the alternate valuation date).278

The gross estate includes not only property directly owned by the 

decedent, but also other property in which the decedent had a beneficial interest at the time of his or her death.279 The gross estate 

also includes certain transfers made by the decedent prior to his 

or her death, including: (1) certain gifts made within three years 

prior to the decedent’s death; 280 (2) certain transfers of property in 

which the decedent retained a life estate; 281 (3) certain transfers 

taking effect at death; 282 and (4) revocable transfers.283 In addition, the gross estate also includes property with respect to which 

the decedent had, at the time of death, a general power of appointment (generally, the right to determine who will have beneficial 

ownership).284 The value of a life insurance policy on the decedent’s 

life is included in the gross estate if the proceeds are payable to 

the decedent’s estate or the decedent had incidents of ownership 

with respect to the policy at the time of his or her death.285

Deductions from the gross estate 

A decedent’s taxable estate is determined by subtracting from the 

value of the gross estate any deductions provided for in the Code. 

Marital and charitable transfers.—As described above, transfers 

to a surviving spouse or to charity generally are deductible for estate tax purposes. The effect of the marital and charitable deductions generally is to remove assets transferred to a surviving 

spouse or to charity from the estate tax base. 

State death taxes.—An estate tax deduction is permitted for 

death taxes (e.g., any estate, inheritance, legacy, or succession 

taxes) actually paid to any State or the District of Columbia, in respect of property included in the gross estate of the decedent.286

Such State taxes must have been paid and claimed before the later 

of: (1) four years after the filing of the estate tax return; or (2) (a) 

60 days after a decision of the U.S. Tax Court determining the estate tax liability becomes final, (b) the expiration of the period of 

extension to pay estate taxes over time under section 6166, or (c) 

the expiration of the period of limitations in which to file a claim 

for refund or 60 days after a decision of a court in which such refund suit has become final. 


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287Sec. 2053. 288Sec. 2054. 289Sec. 2010. 290Sec. 2012. 291Sec. 2013. 292Sec. 2014. In certain cases, an election may be made to deduct foreign death taxes. See 

section 2053(d). 293Sec. 2032A. 

Other deductions.—A deduction is available for funeral expenses, 

estate administration expenses, and claims against the estate, including certain taxes.287 A deduction also is available for uninsured 

casualty and theft losses incurred during the settlement of the estate.288

Credits against tax 

After accounting for allowable deductions, a gross amount of estate tax is computed. Estate tax liability is then determined by 

subtracting allowable credits from the gross estate tax. 

Unified credit.—The most significant credit allowed for estate tax 

purposes is the unified credit, which is discussed in greater detail 

above.289 For 2017, the value of the unified credit is $2,141,800, 

which has the effect of exempting $5.49 million in transfers from 

tax. The unified credit available at death is reduced by the amount 

of unified credit used to offset gift tax on gifts made during the decedent’s life. 

Other credits.—Estate tax credits also are allowed for: (1) gift tax 

paid on certain pre-1977 gifts (before the estate and gift tax computations were integrated); 290 (2) estate tax paid on certain prior 

transfers (to limit the estate tax burden when estate tax is imposed 

on transfers of the same property in two estates by reason of 

deaths in rapid succession); 291 and (3) certain foreign death taxes 

paid (generally, where the property is situated in a foreign country 

but included in the decedent’s U.S. gross estate).292

Provisions affecting small and family-owned businesses and 

farms 

Special-use valuation.—An executor can elect to value for estate 

tax purposes certain ‘‘qualified real property’’ used in farming or 

another qualifying closely-held trade or business at its current-use 

value, rather than its fair market value.293 The maximum reduction in value for such real property is $750,000 (adjusted for inflation occurring after 1997; the inflation-adjusted amount for 2017 is 

$1,120,000). In general, real property generally qualifies for special-use valuation only if (1) at least 50 percent of the adjusted 

value of the decedent’s gross estate (including both real and personal property) consists of a farm or closely-held business property 

in the decedent’s estate and (2) at least 25 percent of the adjusted 

value of the gross estate consists of farm or closely held business 

real property. In addition, the property must be used in a qualified 

use (e.g., farming) by the decedent or a member of the decedent’s 

family for five of the eight years before the decedent’s death. 

If, after a special-use valuation election is made, the heir who acquired the real property ceases to use it in its qualified use within 

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294Prior to 2004, an estate also was permitted to deduct the adjusted value of a qualified family-owned business interest of the decedent, up to $675,000. Sec. 2057. A qualified family-owned 

business interest generally was defined as any interest in a trade or business (regardless of the 

form in which it is held) with a principal place of business in the United States if the decedent’s 

family owns at least 50 percent of the trade or business, two families own 70 percent, or three 

families own 90 percent, as long as the decedent’s family owns at least 30 percent of the trade 

or business. To qualify for the exclusion, the decedent (or a member of the decedent’s family) 

must have owned and materially participated in the trade or business for at least five of the 

eight years preceding the decedent’s date of death. In addition, at least one qualified heir (or 

member of the qualified heir’s family) was required to have materially participated in the trade 

or business for at least 10 years following the decedent’s death. The qualified family-owned business rules provided a graduated recapture based on the number of years after the decedent’s 

death within which a disqualifying event occurred. 

The qualified family-owned business deduction and the unified credit effective exemption amount were coordinated. If the maximum deduction amount of $675,000 is elected, then the 

unified credit effective exemption amount is $625,000, for a total of $1.3 million. If the qualified 

family-owned business deduction is less than $675,000, then the unified credit effective exemption amount is equal to $625,000, increased by the difference between $675,000 and the amount 

of the qualified family-owned business deduction. However, the unified credit effective exemption amount cannot be increased above such amount in effect for the taxable year. Because of 

the coordination between the qualified family-owned business deduction and the unified credit 

effective exemption amount, the qualified family-owned business deduction did not provide a 

benefit in any year in which the applicable exclusion amount exceeded $1.3 million. 295Sec. 6166. 296The interest rate on this portion adjusts with the Federal short-term rate. 297Sec. 2501(a). 

posed to recapture the entire estate-tax benefit of the special-use 

valuation.294

Installment payment of estate tax for closely held businesses.— Under present law, the estate tax generally is due within nine 

months of a decedent’s death. However, an executor generally may 

elect to pay estate tax attributable to an interest in a closely held 

business in two or more installments (but no more than 10).295 An 

estate is eligible for payment of estate tax in installments if the 

value of the decedent’s interest in a closely held business exceeds 

35 percent of the decedent’s adjusted gross estate (i.e., the gross estate less certain deductions). If the election is made, the estate may 

defer payment of principal and pay only interest for the first five 

years, followed by up to 10 annual installments of principal and interest. This provision effectively extends the time for paying estate 

tax by 14 years from the original due date of the estate tax. A special two-percent interest rate applies to the amount of deferred estate tax attributable to the first $1 million (adjusted annually for 

inflation occurring after 1998; the inflation-adjusted amount for 

2017 is $1,490,000) in taxable value of a closely held business. The 

interest rate applicable to the amount of estate tax attributable to 

the taxable value of the closely held business in excess of $1 million (adjusted for inflation) is equal to 45 percent of the rate applicable to underpayments of tax under section 6621 of the Code (i.e., 

45 percent of the Federal short-term rate plus three percentage 

points).296 Interest paid on deferred estate taxes is not deductible 

for estate or income tax purposes. 

The Gift Tax 

Overview 

The Code imposes a tax for each calendar year on the transfer 

of property by gift during such year by any individual, whether a 

resident or nonresident of the United States.297 The amount of taxable gifts for a calendar year is determined by subtracting from the 

total amount of gifts made during the year: (1) the gift tax annual 

exclusion (described below); and (2) allowable deductions. 


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298Sec. 2511(a). 299Sec. 2512(a). 300Sec. 2512(b). 301Sec. 2503(e). 302Sec. 2501(a)(4). 303Sec. 2501(a)(6). 304Sec. 2503(b). 

Gift tax for the current taxable year is determined by: (1) computing a tentative tax on the combined amount of all taxable gifts 

for the current and all prior calendar years using the common gift 

tax and estate tax rate table; (2) computing a tentative tax only on 

all prior-year gifts; (3) subtracting the tentative tax on prior-year 

gifts from the tentative tax computed for all years to arrive at the 

portion of the total tentative tax attributable to current-year gifts; 

and, finally, (4) subtracting the amount of unified credit not consumed by prior-year gifts. 

Because the gift tax shares a common unified credit (exemption) 

and tax rate table with the estate tax, the exemption amounts and 

tax rates are described together above, along with certain other 

common features of these taxes. 

Transfers by gift 

The gift tax applies to a transfer by gift regardless of whether: 

(1) the transfer is made outright or in trust; (2) the gift is direct 

or indirect; or (3) the property is real or personal, tangible or intangible.298 For gift tax purposes, the value of a gift of property is the 

fair market value of the property at the time of the gift.299 Where 

property is transferred for less than full consideration, the amount 

by which the value of the property exceeds the value of the consideration is considered a gift and is included in computing the total 

amount of a taxpayer’s gifts for a calendar year.300

For a gift to occur, a donor generally must relinquish dominion 

and control over donated property. For example, if a taxpayer 

transfers assets to a trust established for the benefit of his or her 

children, but retains the right to revoke the trust, the taxpayer 

may not have made a completed gift, because the taxpayer has retained dominion and control over the transferred assets. A completed gift made in trust, on the other hand, often is treated as a 

gift to the trust beneficiaries. 

By reason of statute, certain transfers are not treated as transfers by gift for gift tax purposes. These include, for example, certain transfers for educational and medical purposes,301 transfers to 

section 527 political organizations,302 and transfers to tax-exempt 

organizations described in sections 501(c)(4), (5), or (6).303

Taxable gifts 

As stated above, the amount of a taxpayer’s taxable gifts for the 

year is determined by subtracting from the total amount of the taxpayer’s gifts for the year the gift tax annual exclusion and any 

available deductions. 

Gift tax annual exclusion.—Under present law, donors of lifetime 

gifts are provided an annual exclusion of $14,000 per donee in 2017 

(indexed for inflation from the 1997 annual exclusion amount of 

$10,000) for gifts of present interests in property during the taxable year.304 If the non-donor spouse consents to split the gift with 

the donor spouse, then the annual exclusion is $28,000 per donee 


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305Sec. 529(c)(2). 306The inclusion ratio is one minus the applicable fraction. The applicable fraction is the 

amount of exemption allocated to a trust (or to a direct skip) divided by the value of assets 

transferred. 

in 2017. In general, unlimited transfers between spouses are permitted without imposition of a gift tax. Special rules apply to the 

contributions to a qualified tuition program (‘‘529 Plan’’) including 

an election to treat a contribution that exceeds the annual exclusion as a contribution made ratably over a five-year period beginning with the year of the contribution.305

Marital and charitable deductions.—As described above, transfers to a surviving spouse or to charity generally are deductible for 

gift tax purposes. The effect of the marital and charitable deductions generally is to remove assets transferred to a surviving 

spouse or to charity from the gift tax base. 

The generation-skipping transfer tax 

A generation-skipping transfer tax generally is imposed (in addition to the gift tax or the estate tax) on transfers, either directly 

or in trust or similar arrangement, to a ‘‘skip person’’ (i.e., a beneficiary in a generation more than one generation below that of the 

transferor). Transfers subject to the generation-skipping transfer 

tax include direct skips, taxable terminations, and taxable distributions. 

Exemption and tax rate 

An exemption generally equal to the estate tax exemption 

amount ($5.49 million for 2017) is provided for each person making 

generation-skipping transfers. The exemption may be allocated by 

a transferor (or his or her executor) to transferred property, and in 

some cases is automatically allocated. The allocation of generationskipping transfer tax exemption effectively reduces the tax rate on 

a generation-skipping transfer. 

The tax rate on generation-skipping transfers is a flat rate of tax 

equal to the maximum estate and gift tax rate (40 percent) multiplied by the ‘‘inclusion ratio.’’ The inclusion ratio with respect to 

any property transferred indicates the amount of ‘‘generation-skipping transfer tax exemption’’ allocated to a trust (or to property 

transferred in a direct skip) relative to the total value of property 

transferred.306 If, for example, a taxpayer transfers $5 million in 

property to a trust and allocates $5 million of exemption to the 

transfer, the inclusion ratio is zero, and the applicable tax rate on 

any subsequent generation-skipping transfers from the trust is zero 

percent (40 percent multiplied by the inclusion ratio of zero). If, 

however, the taxpayer allocated only $2.5 million of exemption to 

the transfer, the inclusion ratio is 0.5, and the applicable tax rate 

on any subsequent generation-skipping transfers from the trust is 

20 percent (40 percent multiplied by the inclusion ratio of 0.5). If 

the taxpayer allocates no exemption to the transfer, the inclusion 

ratio is one, and the applicable tax rate on any subsequent generation-skipping transfers from the trust is 40 percent (40 percent 

multiplied by the inclusion ratio of one). 


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Generation-skipping transfers 

Generation-skipping transfer tax generally is imposed at the 

time of a generation-skipping transfer—a direct skip, a taxable termination, or a taxable distribution. 

A direct skip is any transfer subject to estate or gift tax of an 

interest in property to a skip person. A skip person may be a natural person or certain trusts. All persons assigned to the second or 

more remote generation below the transferor are skip persons (e.g., 

grandchildren and great-grandchildren). Trusts are skip persons if 

(1) all interests in the trust are held by skip persons, or (2) no person holds an interest in the trust and at no time after the transfer 

may a distribution (including distributions and terminations) be 

made to a non-skip person. 

A taxable termination is a termination (by death, lapse of time, 

release of power, or otherwise) of an interest in property held in 

trust unless, immediately after such termination, a non-skip person 

has an interest in the property, or unless at no time after the termination may a distribution (including a distribution upon termination) be made from the trust to a skip person. 

A taxable distribution is a distribution from a trust to a skip person (other than a taxable termination or direct skip). If a transferor 

allocates generation-skipping transfer tax exemption to a trust 

prior to the taxable distribution, generation-skipping transfer tax 

may be avoided. 

Income tax basis in property received 

In general 

Gain or loss, if any, on the disposition of property is measured 

by the taxpayer’s amount realized (i.e., gross proceeds received) on 

the disposition, less the taxpayer’s basis in such property. Basis 

generally represents a taxpayer’s investment in property with certain adjustments required after acquisition. For example, basis is 

increased by the cost of capital improvements made to the property 

and decreased by depreciation deductions taken with respect to the 

property. 

A gift or bequest of appreciated (or loss) property is not an income tax realization event for the transferor. The Code provides 

special rules for determining a recipient’s basis in assets received 

by lifetime gift or from a decedent. 

Basis in property received by lifetime gift 

Under present law, property received from a donor of a lifetime 

gift generally takes a carryover basis. ‘‘Carryover basis’’ means that 

the basis in the hands of the donee is the same as it was in the 

hands of the donor. The basis of property transferred by lifetime 

gift also is increased, but not above fair market value, by any gift 

tax paid by the donor. The basis of a lifetime gift, however, generally cannot exceed the property’s fair market value on the date 

of the gift. If a donor’s basis in property is greater than the fair 

market value of the property on the date of the gift, then, for purposes of determining loss on a subsequent sale of the property, the 

donee’s basis is the property’s fair market value on the date of the 

gift. 


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Basis in property acquired from a decedent 

Property acquired from a decedent’s estate generally takes a 

stepped-up basis. ‘‘Stepped-up basis’’ means that the basis of property acquired from a decedent’s estate generally is the fair market 

value on the date of the decedent’s death (or, if the alternate valuation date is elected, the earlier of six months after the decedent’s 

death or the date the property is sold or distributed by the estate). 

Providing a fair market value basis eliminates the recognition of 

income on any appreciation of the property that occurred prior to 

the decedent’s death and eliminates the tax benefit from any unrealized loss. 

In community property states, a surviving spouse’s one-half 

share of community property held by the decedent and the surviving spouse (under the community property laws of any State, 

U.S. possession, or foreign country) generally is treated as having 

passed from the decedent and, thus, is eligible for stepped-up basis. 

Thus, both the decedent’s one-half share and the surviving spouse’s 

one-half share are stepped up to fair market value. This rule applies if at least one-half of the whole of the community interest is 

includible in the decedent’s gross estate. 

Stepped-up basis treatment generally is denied to certain interests in foreign entities. Stock in a passive foreign investment company (including those for which a mark-to-market election has been 

made) generally takes a carryover basis, except that stock of a passive foreign investment company for which a decedent shareholder 

had made a qualified electing fund election is allowed a steppedup basis. Stock owned by a decedent in a domestic international 

sales corporation (or former domestic international sales corporation) takes a stepped-up basis reduced by the amount (if any) 

which would have been included in gross income under section 

995(c) as a dividend if the decedent had lived and sold the stock 

at its fair market value on the estate tax valuation date (i.e., generally the date of the decedent’s death unless an alternate valuation date is elected). 

REASONS FOR CHANGE

The Committee believes the Federal estate and generation-skipping transfer taxes harm taxpayers and the economy and therefore 

should be repealed. A tax on capital, such as the estate tax, motivates wealth holders to reduce savings and increase spending during life, rather than passing it to the next generation, ultimately 

increasing the consumption gap between the wealthy and poor. A 

tax on capital also causes investors to provide less capital to workers, thereby reducing wages in the long run. 

The Committee is particularly concerned about the effect of the 

estate tax on the owners of farms and family businesses, which create jobs and support our economy. The estate tax hits such entrepreneurs especially hard, forcing families of deceased owners to 

make the difficult decision to sell all or part of the farm or business 

or take out costly loans to satisfy the estate tax liability. 

EXPLANATION OF PROVISION

The provision doubles the estate and gift tax exemption amount 

for decedents dying and gifts made after December 31, 2017. This 


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is accomplished by increasing the basic exclusion amount provided 

in section 2010(c)(3) of the Code from $5 million to $10 million. The 

$10 million amount is indexed for inflation occurring after 2011. 

For estates of decedents dying and generation-skipping transfers 

made after December 31, 2024, the provision repeals the estate tax 

and the generation-skipping transfer tax. The provision includes a 

transition rule for assets placed in a qualified domestic trust by a 

decedent who died before the effective date of the provision. Specifically, estate tax will not be imposed on: (1) distributions before the 

death of a surviving spouse from the trust more than 10 years after 

the date of enactment; or (2) assets remaining in the qualified domestic trust upon the death of the surviving spouse. The top marginal gift tax rate is reduced to 35 percent for gifts made after December 31, 2024. 

The provision generally retains the present law rules for determining the income tax basis of assets acquired by gift and assets 

acquired from a decedent. As a result, property received from a 

donor of a lifetime gift generally will continue to take a carryover 

basis, and property acquired from a decedent’s estate generally will 

continue to take a stepped-up basis. 

EFFECTIVE DATE

The doubling of the estate and gift tax exemption is effective for 

estates of decedents dying, generation-skipping transfers, and gifts 

made after December 31, 2017. The repeal of the estate and generation-skipping transfer taxes, and the reduction in the gift tax 

rate to 35 percent, are effective for estates of decedents dying, generation-skipping transfers, and gifts made after December 31, 2024. 

TITLE II—ALTERNATIVE MINIMUM TAX REPEAL 

1. Repeal of alternative minimum tax (sec. 2001 of the bill and sec. 

55 of the Code) 

PRESENT LAW

Individual alternative minimum tax 

In general 

An alternative minimum tax (‘‘AMT’’) is imposed on an individual, estate, or trust in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. For 

taxable years beginning in 2017, the tentative minimum tax is the 

sum of (1) 26 percent of so much of the taxable excess as does not 

exceed $187,800 ($93,900 in the case of a married individual filing 

a separate return) and (2) 28 percent of the remaining taxable excess. The breakpoints are indexed for inflation. The taxable excess 

is so much of the alternative minimum taxable income (‘‘AMTI’’) as 

exceeds the exemption amount. The maximum tax rates on net capital gain and dividends used in computing the regular tax are used 

in computing the tentative minimum tax. AMTI is the taxable income adjusted to take account of specified tax preferences and adjustments. 

The exemption amounts for taxable years beginning in 2017 are: 

(1) $84,500 in the case of married individuals filing a joint return 

and surviving spouses; (2) $54,300 in the case of other unmarried 


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individuals; (3) $42,250 in the case of married individuals filing 

separate returns; and (4) $24,100 in the case of an estate or trust. 

For taxable years beginning in 2017, the exemption amounts are 

phased out by an amount equal to 25 percent of the amount by 

which the individual’s AMTI exceeds (1) $160,900 in the case of 

married individuals filing a joint return and surviving spouses, (2) 

$120,700 in the case of other unmarried individuals, and (3) 

$80,450 in the case of married individuals filing separate returns 

or an estate or a trust. The amounts are indexed for inflation. 

AMTI is the taxpayer’s taxable income increased by certain preference items and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. 

Preference items in computing AMTI 

The minimum tax preference items are: 

1. The excess of the deduction for percentage depletion over the 

adjusted basis of each mineral property (other than oil and gas 

properties) at the end of the taxable year. 

2. The amount by which excess intangible drilling costs (i.e., expenses in excess the amount that would have been allowable if amortized over a 10-year period) exceed 65 percent of the net income 

from oil, gas, and geothermal properties. This preference applies to 

independent producers only to the extent it reduces the producer’s 

AMTI (determined without regard to this preference and the net 

operating loss deduction) by more than 40 percent. 

3. Tax-exempt interest income on private activity bonds (other 

than qualified 501(c)(3) bonds, certain housing bonds, and bonds 

issued in 2009 and 2010) issued after August 7, 1986. 

4. Accelerated depreciation or amortization on certain property 

placed in service before January 1, 1987. 

5. Seven percent of the amount excluded from income under section 1202 (relating to gains on the sale of certain small business 

stock). 

In addition, losses from any tax shelter farm activity or passive 

activities are not taken into account in computing AMTI. 

Adjustments in computing AMTI 

The adjustments that individuals must make to compute AMTI 

are: 

1. Depreciation on property placed in service after 1986 and before January 1, 1999, is computed by using the generally longer 

class lives prescribed by the alternative depreciation system of section 168(g) and either (a) the straight-line method in the case of 

property subject to the straight-line method under the regular tax 

or (b) the 150-percent declining balance method in the case of other 

property. Depreciation on property placed in service after December 

31, 1998, is computed by using the regular tax recovery periods 

and the AMT methods described in the previous sentence. Depreciation on property acquired after September 10, 2001, which is allowed an additional allowance under section 168(k) for the regular 

tax is computed without regard to any AMT adjustments. 

2. Mining exploration and development costs are capitalized and 

amortized over a 10-year period. 


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3. Taxable income from a long-term contract (other than a home 

construction contract) is computed using the percentage of completion method of accounting. 

4. Depreciation on property placed in service after 1986 and before January 1, 1999, is computed by using the generally longer 

class lives prescribed by the alternative depreciation system of section 168(g) and either (a) the straight-line method in the case of 

property subject to the straight-line method under the regular tax 

or (b) the 150-percent declining balance method in the case of other 

property. Depreciation on property placed in service after December 

31, 1998, is computed by using the regular tax recovery periods 

and the AMT methods described in the previous sentence. Depreciation on property acquired after September 10, 2001, which is allowed an additional allowance under section 168(k) for the regular 

tax is computed without regard to any AMT adjustments. 

5. Mining exploration and development costs are capitalized and 

amortized over a 10-year period. 

6. Taxable income from a long-term contract (other than a home 

construction contract) is computed using the percentage of completion method of accounting. 

7. The amortization deduction allowed for pollution control facilities placed in service before January 1, 1999 (generally determined 

using 60-month amortization for a portion of the cost of the facility 

under the regular tax), is calculated under the alternative depreciation system (generally, using longer class lives and the straight-line 

method). The amortization deduction allowed for pollution control 

facilities placed in service after December 31, 1998, is calculated 

using the regular tax recovery periods and the straight-line method. 

8. Miscellaneous itemized deductions are not allowed. 

9. Itemized deductions for State, local, and foreign real property 

taxes; State and local personal property taxes; State, local, and foreign income, war profits, and excess profits taxes; and State and 

local sales taxes are not allowed. 

10. Medical expenses are allowed only to the extent they exceed 

ten percent of the taxpayer’s adjusted gross income. 

11. Deductions for interest on home equity loans are not allowed. 

12. The standard deduction and the deduction for personal exemptions are not allowed. 

13. The amount allowable as a deduction for circulation expenditures is capitalized and amortized over a three-year period. 

14. The amount allowable as a deduction for research and experimentation expenditures from passive activities is capitalized and 

amortized over a 10-year period. 

15. The regular tax rules relating to incentive stock options do 

not apply. 

Other rules 

The taxpayer’s net operating loss deduction generally cannot reduce the taxpayer’s AMTI by more than 90 percent of the AMTI 

(determined without the net operating loss deduction). 

The alternative minimum tax foreign tax credit reduces the tentative minimum tax. 


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The various nonrefundable business credits allowed under the 

regular tax generally are not allowed against the AMT. Certain exceptions apply. 

If an individual is subject to AMT in any year, the amount of tax 

exceeding the taxpayer’s regular tax liability is allowed as a credit 

(the ‘‘AMT credit’’) in any subsequent taxable year to the extent the 

taxpayer’s regular tax liability exceeds his or her tentative minimum tax liability in such subsequent year. The AMT credit is allowed only to the extent that the taxpayer’s AMT liability is the 

result of adjustments that are timing in nature. The individual 

AMT adjustments relating to itemized deductions and personal exemptions are not timing in nature, and no minimum tax credit is 

allowed with respect to these items. 

An individual may elect to write off certain expenditures paid or 

incurred with respect of circulation expenses, research and experimental expenses, intangible drilling and development expenditures, 

development expenditures, and mining exploration expenditures 

over a specified period (three years in the case of circulation expenses, 60 months in the case of intangible drilling and development expenditures, and 10 years in case of other expenditures). 

The election applies for purposes of both the regular tax and the 

alternative minimum tax. 

Corporate alternative minimum tax 

In general 

An AMT is also imposed on a corporation to the extent the corporation’s tentative minimum tax exceeds its regular tax. This tentative minimum tax is computed at the rate of 20 percent on the 

AMTI in excess of a $40,000 exemption amount that phases out. 

The exemption amount is phased out by an amount equal to 25 

percent of the amount that the corporation’s AMTI exceeds 

$150,000. 

AMTI is the taxpayer’s taxable income increased by certain preference items and adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. 

A corporation with average gross receipts of less than $7.5 million for the prior three taxable years is exempt from the corporate 

minimum tax. The $7.5 million threshold is reduced to $5 million 

for the corporation’s first three-taxable year period. 

Preference items in computing AMTI 

The corporate minimum tax preference items are: 

1. The excess of the deduction for percentage depletion over the 

adjusted basis of the property at the end of the taxable year. This 

preference does not apply to percentage depletion allowed with respect to oil and gas properties. 

2. The amount by which excess intangible drilling costs arising 

in the taxable year exceed 65 percent of the net income from oil, 

gas, and geothermal properties. This preference does not apply to 

an independent producer to the extent the preference would not reduce the producer’s AMTI by more than 40 percent. 


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3. Tax-exempt interest income on private activity bonds (other 

than qualified 501(c)(3) bonds, certain housing bonds, and bonds 

issued in 2009 and 2010) issued after August 7, 1986. 

4. Accelerated depreciation or amortization on certain property 

placed in service before January 1, 1987. 

Adjustments in computing AMTI 

The adjustments that corporations must make in computing 

AMTI are: 

1. Depreciation on property placed in service after 1986 and before January 1, 1999, must be computed by using the generally 

longer class lives prescribed by the alternative depreciation system 

of section 168(g) and either (a) the straight-line method in the case 

of property subject to the straight-line method under the regular 

tax or (b) the 150-percent declining balance method in the case of 

other property. Depreciation on property placed in service after December 31, 1998, is computed by using the regular tax recovery periods and the AMT methods described in the previous sentence. Depreciation on property which is allowed ‘‘bonus depreciation’’ for 

the regular tax is computed without regard to any AMT adjustments. 

2. Mining exploration and development costs must be capitalized 

and amortized over a 10-year period. 

3. Taxable income from a long-term contract (other than a home 

construction contract) must be computed using the percentage of 

completion method of accounting. 

4. The amortization deduction allowed for pollution control facilities placed in service before January 1, 1999 (generally determined 

using 60-month amortization for a portion of the cost of the facility 

under the regular tax), must be calculated under the alternative 

depreciation system (generally, using longer class lives and the 

straight-line method). The amortization deduction allowed for pollution control facilities placed in service after December 31, 1998, 

is calculated using the regular tax recovery periods and the 

straight-line method. 

5. The special rules applicable to Merchant Marine construction 

funds are not applicable. 

6. The special deduction allowable under section 833(b) for Blue 

Cross and Blue Shield organizations is not allowed. 

7. The adjusted current earnings adjustment applies, as described below. 

Adjusted current earning (‘‘ACE’’) adjustment 

The adjusted current earnings adjustment is the amount equal 

to 75 percent of the amount by which the adjusted current earnings 

of a corporation exceed its AMTI (determined without the ACE adjustment and the alternative tax net operating loss deduction). In 

determining ACE the following rules apply: 

1. For property placed in service before 1994, depreciation generally is determined using the straight-line method and the class 

life determined under the alternative depreciation system. 

2. Amounts excluded from gross income under the regular tax 

but included for purposes of determining earnings and profits are 

generally included in determining ACE. 


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3. The inside build-up of a life insurance contract is included in 

ACE (and the related premiums are deductible). 

4. Intangible drilling costs of integrated oil companies must be 

capitalized and amortized over a 60-month period. 

5. The regular tax rules of section 173 (allowing circulation expenses to be amortized) and section 248 (allowing organizational 

expenses to be amortized) do not apply. 

6. Inventory must be calculated using the FIFO, rather than 

LIFO, method. 

7. The installment sales method generally may not be used. 

8. No loss may be recognized on the exchange of any pool of debt 

obligations for another pool of debt obligations having substantially 

the same effective interest rates and maturities. 

9. Depletion (other than for oil and gas properties) must be calculated using the cost, rather than the percentage, method. 

10. In certain cases, the assets of a corporation that has undergone an ownership change must be stepped down to their fair market values. 

Other rules 

The taxpayer’s net operating loss carryover generally cannot reduce the taxpayer’s AMT liability by more than 90 percent of AMTI 

determined without this deduction. 

The various nonrefundable business credits allowed under the 

regular tax generally are not allowed against the AMT. Certain exceptions apply. 

If a corporation is subject to AMT in any year, the amount of 

AMT is allowed as an AMT credit in any subsequent taxable year 

to the extent the taxpayer’s regular tax liability exceeds its tentative minimum tax in the subsequent year. Corporations are allowed to claim a limited amount of AMT credits in lieu of bonus 

depreciation. 

A corporation may elect to write off certain expenditures paid or 

incurred with respect of circulation expenses, research and experimental expenses, intangible drilling and development expenditures, 

development expenditures, and mining exploration expenditures 

over a specified period (three years in the case of circulation expenses, 60 months in the case of intangible drilling and development expenditures, and 10 years in case of other expenditures). 

The election applies for purposes of both the regular tax and the 

alternative minimum tax. 

REASONS FOR CHANGE

The requirement that taxpayers compute their income for purposes of both the regular income tax and the AMT is one of the 

most far-reaching complexities of the Code. The AMT is particularly burdensome for individuals with small businesses, because 

they often do not know whether they will be affected until they file 

their taxes and therefore must maintain a reserve that cannot be 

used to invest in their businesses. 

EXPLANATION OF PROVISION

The provision repeals the individual and corporate alternative 

minimum tax. 


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307Sec. 11(a) and (b)(1). 308Sec. 11(b)(2). 

The provision allows the AMT credit to offset the taxpayer’s regular tax liability for any taxable year. In addition, the AMT credit 

is refundable for any taxable year beginning after 2018 and before 

2023 in an amount equal to 50 percent (100 percent in the case of 

taxable years beginning in 2022) of the excess of the minimum tax 

credit for the taxable year over the amount of the credit allowable 

for the year against regular tax liability. Thus, the full amount of 

the minimum tax credit will be allowed in taxable years beginning 

before 2023. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

In determining the alternative minimum taxable income for taxable years beginning before January 1, 2018, the net operating loss 

deduction carryback from taxable years beginning after December 

31, 2017, are determined without regard to any AMT adjustments 

or preferences. 

The repeal of the election to write off certain expenditures over 

a specified period applies to amounts paid or incurred after December 31, 2017. 

TITLE III—BUSINESS TAX REFORM 

A. TAX RATES

1. Reduction in corporate tax rate (sec. 3001 of the bill and sec. 11 

of the CODE) 

PRESENT LAW

In general 

Corporate taxable income is subject to tax under a four-step 

graduated rate structure.307 The top corporate tax rate is 35 percent on taxable income in excess of $10 million. The corporate taxable income brackets and tax rates are as set forth in the table 

below. 

Taxable Income Tax rate 

(percent) 

Not over $50,000 .................................................................................................................................................. 15 

Over $50,000 but not over $75,000 .................................................................................................................... 25 

Over $75,000 but not over $10,000,000 ............................................................................................................. 34 

Over $10,000,000 ................................................................................................................................................. 35 

An additional five-percent tax is imposed on a corporation’s taxable income in excess of $100,000. The maximum additional tax is 

$11,750. Also, a second additional three-percent tax is imposed on 

a corporation’s taxable income in excess of $15 million. The maximum second additional tax is $100,000. 

Certain personal service corporations pay tax on their entire taxable income at the rate of 35 percent.308


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309Sec. 1201(a). 310Sec. 243(a). Such dividends are taxed at a maximum rate of 10.5 percent (30 percent of 

the top corporate tax rate of 35 percent). 311Sec. 243(c). Such dividends are taxed at a maximum rate of 7 percent (20 percent of the 

top corporate tax rate of 35 percent). 312Sec. 243(a)(3) and (b)(1). For this purpose, the term ‘‘affiliated group’’ generally has the 

meaning given such term by section 1504(a). Sec. 243(b)(2). 313Such dividends would be taxed at a maximum rate of 10 percent (50 percent of the top 

corporate tax rate of 20 percent) and 7 percent (35 percent of the top corporate tax rate of 20 

percent), respectively. 

Present law provides that, if the maximum corporate tax rate exceeds 35 percent, the maximum rate on a corporation’s net capital 

gain will be 35 percent.309

Dividends received deduction 

Corporations are allowed a deduction with respect to dividends 

received from other taxable domestic corporations.310 The amount 

of the deduction is generally equal to 70 percent of the dividend received. 

In the case of any dividend received from a 20-percent owned corporation, the amount of the deduction is equal to 80 percent of the 

dividend received.311 The term ‘‘20-percent owned corporation’’ 

means any corporation if 20 percent or more of the stock of such 

corporation (by vote and value) is owned by the taxpayer. For this 

purpose, certain preferred stock is not taken into account. 

In the case of a dividend received from a corporation that is a 

member of the same affiliated group, a corporation is generally allowed a deduction equal to 100 percent of the dividend received.312

REASONS FOR CHANGE

The United States has one of the highest statutory corporate tax 

rates among developed countries. The Committee believes that lowering the corporate tax rate is necessary to ensure domestic corporations remain globally competitive with their counterparts domiciled in the United States’ largest international competitors. The 

average corporate income tax rate among nations in the 

Organisation for Economic Co-operation and Development is 22.5 

percent. A low competitive corporate tax rate also contributes to 

making the United States an attractive location for foreign corporations to invest. In addition, a lower corporate tax rate means corporations will have more resources to invest in growing their businesses and creating jobs. 

EXPLANATION OF PROVISION

The provision eliminates the graduated corporate rate structure 

and instead taxes corporate taxable income at 20 percent. 

Personal service corporations are taxed at 25 percent. 

The provision repeals the maximum corporate tax rate on net 

capital gain as obsolete. 

The provision reduces the 70 percent dividends received deduction to 50 percent and the 80 percent dividends received deduction 

to 65 percent.313

For taxpayers subject to the normalization method of accounting 

(e.g., regulated public utilities), the provision provides for the normalization of excess deferred tax reserves resulting from the reduction of corporate income tax rates (with respect to prior depreciaVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00238 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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314See secs. 263(a) and 167. However, where property is not used exclusively in a taxpayer’s 

business, the amount eligible for a deduction must be reduced by the amount related to personal 

use. See, e.g., section 280A. 315The applicable recovery period for an asset is determined in part by statute and in part 

by historic Treasury guidance. Exercising authority granted by Congress, the Secretary issued 

Rev. Proc. 87–56, 1987–2 C.B. 674, laying out the framework of recovery periods for enumerated 

classes of assets. The Secretary clarified and modified the list of asset classes in Rev. Proc. 88– 

22, 1988–1 C.B. 785. In November 1988, Congress revoked the Secretary’s authority to modify 

the class lives of depreciable property. Rev. Proc. 87–56, as modified, remains in effect except 

to the extent that the Congress has, since 1988, statutorily modified the recovery period for certain depreciable assets, effectively superseding any administrative guidance with regard to such 

property. 316Sec. 168. 317 As defined in section 168(k)(2)(B). 318 As defined in section 168(k)(2)(C). 319Sec. 168(k). The additional first-year depreciation deduction is generally subject to the 

rules regarding whether a cost must be capitalized under section 263A. 

tion or recovery allowances taken on assets placed in service before 

the date of enactment). 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

B. COST RECOVERY

1. Increased expensing (sec. 3101 of the bill and sec. 168(k) of the 

CODE) 

PRESENT LAW

A taxpayer generally must capitalize the cost of property used in 

a trade or business or held for the production of income and recover 

such cost over time through annual deductions for depreciation or 

amortization.314 Tangible property generally is depreciated under 

the modified accelerated cost recovery system (‘‘MACRS’’), which 

determines depreciation for different types of property based on an 

assigned applicable depreciation method, recovery period,315 and 

convention.316

Bonus depreciation 

An additional first-year depreciation deduction is allowed equal 

to 50 percent of the adjusted basis of qualified property acquired 

and placed in service before January 1, 2020 (January 1, 2021, for 

longer production period property 317 and certain aircraft).318 319

The 50-percent allowance is phased down for property placed in 

service after December 31, 2017 (after December 31, 2018 for 

longer production period property and certain aircraft). The bonus 

depreciation percentage rates are as follows. 


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320 It is intended that for longer production period property placed in service in 2018, 50 percent applies to the entire adjusted basis. Similarly, for longer production period property placed 

in service in 2019, 40 percent applies to the entire adjusted basis. A technical correction may 

be necessary with respect to longer production period property placed in service in 2018 and 

2019 so that the statute reflects this intent. 321 In the case of longer production period property described in section 168(k)(2)(B) and 

placed in service in 2020, 30 percent applies to the adjusted basis attributable to manufacture, 

construction, or production before January 1, 2020, and the remaining adjusted basis does not 

qualify for bonus depreciation. Thirty percent applies to the entire adjusted basis of certain aircraft described in section 168(k)(2)(C) and placed in service in 2020. 322Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)–1(d). 323Sec. 312(k)(3) and Treas. Reg. sec. 1.168(k)–1(f)(7). 324Sec. 168(k)(1)(B). 325 Ibid. 326Sec. 168(k)(7). For the definition of a class of property, see Treas. Reg. sec. 1.168(k)–1(e)(2). 327 Assume that the cost of the property is not eligible for expensing under section 179 or 

Treas. Reg. sec. 1.263(a)–1(f). 328 $1,000 results from the application of the half-year convention and the 200 percent declin- ing balance method to the remaining $5,000. 329 Requirements relating to actions taken before 2008 are not described herein since they 

have little (if any) remaining effect. 330 As defined in section 168(e)(5). 

Placed in Service Year 

Bonus Depreciation Percentage 

Qualified Property in General Longer Production Period Property and Certain 

Aircraft 

2017 ........................................................ 50 percent ............................................. 50 percent 

2018 ........................................................ 40 percent ............................................. 50 percent 320

2019 ........................................................ 30 percent ............................................. 40 percent 

2020 ........................................................ n/a ......................................................... 30 percent 321

The additional first-year depreciation deduction is allowed for 

both the regular tax and the alternative minimum tax (‘‘AMT’’),322

but is not allowed in computing earnings and profits.323 The basis 

of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction.324 The amount of the additional first-year depreciation deduction is not affected by a short 

taxable year.325 The taxpayer may elect out of the additional firstyear depreciation for any class of property for any taxable year.326

The interaction of the additional first-year depreciation allowance with the otherwise applicable depreciation allowance may be 

illustrated as follows. Assume that in 2017 a taxpayer purchases 

new depreciable property and places it in service.327 The property’s 

cost is $10,000, and it is five-year property subject to the 200 percent declining balance method and half-year convention. The 

amount of additional first-year depreciation allowed is $5,000. The 

remaining $5,000 of the cost of the property is depreciable under 

the rules applicable to five-year property. 

Thus, $1,000 also is allowed as a depreciation deduction in 

2017.328 The total depreciation deduction with respect to the property for 2017 is $6,000. The remaining $4,000 adjusted basis of the 

property generally is recovered through otherwise applicable depreciation rules. 

Qualified property 

Property qualifying for the additional first-year depreciation deduction must meet all of the following requirements.329 First, the 

property must be: (1) property to which MACRS applies with an 

applicable recovery period of 20 years or less; (2) water utility property; 330 (3) computer software other than computer software covVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00240 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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331The additional first-year depreciation deduction is not available for any property that is 

required to be depreciated under the alternative depreciation system of MACRS. Sec. 

168(k)(2)(D)(i). 332The term ‘‘original use’’ means the first use to which the property is put, whether or not 

such use corresponds to the use of such property by the taxpayer. If in the normal course of 

its business a taxpayer sells fractional interests in property to unrelated third parties, then the 

original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property). Treas. 

Reg. sec. 1.168(k)–1(b)(3). 333 A special rule applies in the case of certain leased property. In the case of any property 

that is originally placed in service by a person and that is sold to the taxpayer and leased back 

to such person by the taxpayer within three months after the date that the property was placed 

in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback. If property is originally placed 

in service by a lessor, such property is sold within three months after the date that the property 

was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale. Sec. 

168(k)(2)(E)(ii) and (iii). 334Property qualifying for the extended placed-in-service date must have an estimated produc- tion period exceeding one year and a cost exceeding $1 million. Transportation property generally is defined as tangible personal property used in the trade or business of transporting persons or property. Certain aircraft which is not transportation property, other than for agricultural or firefighting uses, also qualifies for the extended placed-inservice date, if at the time of 

the contract for purchase, the purchaser made a nonrefundable deposit of the lesser of 10 percent of the cost or $100,000, and which has an estimated production period exceeding four 

months and a cost exceeding $200,000. 335Sec. 168(k)(2)(E)(i). 336Treas. Reg. sec. 1.168(k)–1(b)(4)(iii). 337Sec. 168(k)(2)(B)(ii). For purposes of determining the amount of eligible progress expenditures, rules similar to section 46(d)(3) as in effect prior to the Tax Reform Act of 1986 apply. 338Sec. 168(k)(3). 

ered by section 197; or (4) qualified improvement property.331 Second, the original use 332 of the property must commence with the 

taxpayer.333 Third, the taxpayer must acquire the property within 

the applicable time period (as described below). Finally, the property must be placed in service before January 1, 2020. As noted 

above, an extension of the placed-in-service date of one year (i.e., 

before January 1, 2021) is provided for certain property with a recovery period of 10 years or longer, certain transportation property, 

and certain aircraft.334

To qualify, property must be acquired (1) before January 1, 2020, 

or (2) pursuant to a binding written contract which was entered 

into before January 1, 2020. With respect to property that is manufactured, constructed, or produced by the taxpayer for use by the 

taxpayer, the taxpayer must begin the manufacture, construction, 

or production of the property before January 1, 2020.335 Property 

that is manufactured, constructed, or produced for the taxpayer by 

another person under a contract that is entered into prior to the 

manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by the taxpayer.336 For property eligible for the extended placed-in-service 

date, a special rule limits the amount of costs eligible for the additional first-year depreciation. With respect to such property, only 

the portion of the basis that is properly attributable to the costs incurred before January 1, 2020 (‘‘progress expenditures’’) is eligible 

for the additional first-year depreciation deduction.337

Qualified improvement property 

Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if 

such improvement is placed in service after the date such building 

was first placed in service.338 Qualified improvement property does 

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339Sec. 168(k)(4). 340Sec. 168(k)(4)(A)(ii). 341For this purpose, bonus depreciation is the difference between (i) the aggregate amount 

of depreciation determined if section 168(k)(1) applied to all qualified property placed in service 

during the taxable year and (ii) the amount of depreciation that would be so determined if section 168(k)(1) did not so apply. This determination is made using the most accelerated depreciation method and the shortest life otherwise allowable for each property. 342Sec. 168(k)(4)(B)(iii). 343Sec. 168(k)(4)(D)(ii). 344Sec. 168(k)(4)(D)(iii). 

utable to the enlargement of the building, any elevator or escalator, 

or the internal structural framework of the building. 

Election to accelerate AMT credits in lieu of bonus depreciation 

A corporation otherwise eligible for additional first-year depreciation may elect to claim additional AMT credits in lieu of claiming 

additional depreciation with respect to qualified property.339 In the 

case of a corporation making this election, the straight line method 

is used for the regular tax and the AMT with respect to qualified 

property.340

A corporation making an election increases the tax liability limitation under section 53(c) on the use of minimum tax credits by the 

bonus depreciation amount. The aggregate increase in credits allowable by reason of the increased limitation is treated as refundable. 

The bonus depreciation amount generally is equal to 20 percent 

of bonus depreciation for qualified property that could be claimed 

as a deduction absent an election under this provision.341 As originally enacted, the bonus depreciation amount for all taxable years 

was limited to the lesser of (1) $30 million or (2) six percent of the 

minimum tax credits allocable to the adjusted net minimum tax 

imposed for taxable years beginning before January 1, 2006. However, extensions of this provision have provided that this limitation 

applies separately to property subject to each extension. 

For taxable years ending after December 31, 2015, the bonus depreciation amount for a taxable year (as defined under present law 

with respect to all qualified property) is limited to the lesser of (1) 

50 percent of the minimum tax credit for the first taxable year ending after December 31, 2015 (determined before the application of 

any tax liability limitation) or (2) the minimum tax credit for the 

taxable year allocable to the adjusted net minimum tax imposed for 

taxable years ending before January 1, 2016 (determined before the 

application of any tax liability limitation and determined on a firstin, first-out basis). 

All corporations treated as a single employer under section 52(a) 

are treated as one taxpayer for purposes of the limitation, as well 

as for electing the application of this provision.342

In the case of a corporation making an election which is a partner in a partnership, for purposes of determining the electing partner’s distributive share of partnership items, bonus depreciation 

does not apply to any qualified property and the straight line method is used with respect to that property.343

In the case of a partnership having a single corporate partner 

owning (directly or indirectly) more than 50 percent of the capital 

and profits interests in the partnership, each partner takes into account its distributive share of partnership depreciation in determining its bonus depreciation amount.344


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345Sec. 168(k)(2)(F). 346Sec. 280F(d)(7). 347See sec. 168(k)(5). 348 Any amount deducted under this election is not subject to capitalization under section 

263A. 349 A specified plant does not include any property that is planted or grafted outside the 

United States. 350Sec. 460. 351Sec. 460(c)(6). Other dates involving prior years are not described herein. 

Special rules 

Passenger automobiles 

The limitation under section 280F on the amount of depreciation 

deductions allowed with respect to certain passenger automobiles is 

increased in the first year by $8,000 for automobiles that qualify 

(and for which the taxpayer does not elect out of the additional 

first-year deduction).345 The $8,000 amount is phased down from 

$8,000 by $1,600 per calendar year beginning in 2018. Thus, the 

section 280F increase amount for property placed in service during 

2018 is $6,400, and during 2019 is $4,800. While the underlying 

section 280F limitation is indexed for inflation,346 the section 280F 

increase amount is not indexed for inflation. The increase does not 

apply to a taxpayer who elects to accelerate AMT credits in lieu of 

bonus depreciation for a taxable year. 

Certain plants bearing fruits and nuts 

A special election is provided for certain plants bearing fruits 

and nuts.347 Under the election, the applicable percentage of the 

adjusted basis of a specified plant which is planted or grafted after 

December 31, 2015, and before January 1, 2020, is deductible for 

regular tax and AMT purposes in the year planted or grafted by 

the taxpayer, and the adjusted basis is reduced by the amount of 

the deduction.348 The percentage is 50 percent for 2017, 40 percent 

for 2018, and 30 percent for 2019. A specified plant is any tree or 

vine that bears fruits or nuts, and any other plant that will have 

more than one yield of fruits or nuts and generally has a 

preproductive period of more than two years from planting or grafting to the time it begins bearing fruits or nuts.349 The election is 

revocable only with the consent of the Secretary, and if the election 

is made with respect to any specified plant, such plant is not treated as qualified property eligible for bonus depreciation in the subsequent taxable year in which it is placed in service. 

Long-term contracts 

In general, in the case of a long-term contract, the taxable income from the contract is determined under the percentage-of-completion method.350 Solely for purposes of determining the percentage of completion under section 460(b)(1)(A), the cost of qualified 

property with a MACRS recovery period of seven years or less is 

taken into account as a cost allocated to the contract as if bonus 

depreciation had not been enacted for property placed in service before January 1, 2020 (January 1, 2021, in the case of longer production period property).351


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352 By reference to section 179(d)(2)(C). See also Treas. Reg. sec. 1.179–4(c)(1)(iv). 353 By reference to section 179(d)(3). See also Treas. Reg. sec. 1.179–4(d). 354 By reference to section 179(d)(2)(A) and (B). See also Treas. Reg. sec. 1.179–4(c). 

REASONS FOR CHANGE

The Committee believes that providing full expensing for certain 

business assets lowers the cost of capital for tangible property used 

in a trade or business. With lower costs of capital, the Committee 

believes that businesses will be encouraged to purchase equipment 

and other assets, which will promote capital investment and provide economic growth. The Committee also believes that full expensing for certain business assets will eliminate depreciation recordkeeping requirements for such assets. 

EXPLANATION OF PROVISION

Full expensing for certain business assets 

The provision extends and modifies the additional first-year depreciation deduction through 2022 (through 2023 for longer production period property and certain aircraft). The 50-percent allowance 

is increased to 100 percent for property acquired and placed in 

service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after September 27, 2017, and before January 1, 2023. 

Special rules 

The $8,000 increase amount in the limitation on the depreciation 

deductions allowed with respect to certain passenger automobiles is 

increased to $16,000 for passenger automobiles acquired and placed 

in service after September 27, 2017, and before January 1, 2023. 

The provision extends the special rule under the percentage-ofcompletion method for the allocation of bonus depreciation to a 

long-term contract for property placed in service before January 1, 

2023 (January 1, 2024, in the case of longer production period 

property). 

Application to used property 

The provision removes the requirement that the original use of 

qualified property must commence with the taxpayer. Thus, the 

provision applies to purchases of used as well as new items. To prevent abuses, the additional first-year depreciation deduction applies only to property purchased in an arm’s-length transaction. It 

does not apply to property received as a gift or from a decedent.352

In the case of trade-ins, like-kind exchanges, or involuntary conversions, it applies only to any money paid in addition to the tradedin property or in excess of the adjusted basis of the replaced property.353 It does not apply to property acquired in a nontaxable exchange such as a reorganization, to property acquired from a member of the taxpayer’s family, including a spouse, ancestors, and lineal descendants, or from another related entity as defined in section 267, nor to property acquired from a person who controls, is 

controlled by, or is under common control with, the taxpayer.354

Thus it does not apply, for example, if one member of an affiliated 

group of corporations purchases property from another member, or 


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355 As defined in section 3301 of the bill (Interest), by cross reference to section 469(c)(7)(C). 

Note that a mortgage broker who is a broker of financial instruments is not in a real property 

trade or business for this purpose. See, e.g., CCA 201504010 (December 17, 2014). 356 As defined in section 3301 of the bill (Interest). 357 As defined in section 3301 of the bill (Interest). 358See section 2001 of the bill (Repeal of alternative minimum tax). 

if an individual who controls a corporation purchases property from 

that corporation. 

Exception for certain businesses not subject to limitation on interest 

expense 

The provision excludes from the definition of qualified property 

any property used in a real property trade or business, i.e., any 

real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, 

leasing, or brokerage trade or business.355

The provision also excludes from the definition of qualified property any property used in the trade or business of certain regulated 

public utilities, i.e., the trade or business of the furnishing or sale 

of (1) electrical energy, water, or sewage disposal services, (2) gas 

or steam through a local distribution system, or (3) transportation 

of gas or steam by pipeline, if the rates for such furnishing or sale, 

as the case may be, have been established or approved by a State 

or political subdivision thereof, by any agency or instrumentality of 

the United States, or by a public service or public utility commission or other similar body of any State or political subdivision 

thereof.356

In addition, the provision excludes from the definition of qualified property any property used in a trade or business that has had 

floor plan financing indebtedness,357 unless the taxpayer with such 

trade or business is not a tax shelter prohibited from using the 

cash method and is exempt from the interest limitation rules in 

section 3301 of the bill by meeting the $25 million gross receipts 

test of section 448(c). 

Election to accelerate AMT credits in lieu of bonus depreciation 

As a conforming amendment to the repeal of AMT,358 the provision repeals the election to accelerate AMT credits in lieu of bonus 

depreciation. 

Transition rule 

The present-law phase-down of bonus depreciation is maintained 

for property acquired before September 28, 2017, and placed in 

service after September 27, 2017. Under the provision, in the case 

of property acquired and adjusted basis incurred before September 

28, 2017, the bonus depreciation rates are as follows. 

PHASE-DOWN FOR PORTION OF BASIS OF QUALIFIED PROPERTY ACQUIRED BEFORE SEPTEMBER 

28, 2017 

Placed in Service Year 

Bonus Depreciation Percentage 

Qualified Property in General Longer Production Period Property and Certain Aircraft 

2017 .............................. 50 percent .......................................................... 50 percent. 

2018 .............................. 40 percent .......................................................... 50 percent. 

2019 .............................. 30 percent .......................................................... 40 percent. 

2020 .............................. n/a ...................................................................... 30 percent. 


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359Property is not treated as acquired after the date on which a written binding contract is 

entered into for such acquisition. 360See section 3302 of the bill (Modification of net operating loss deduction). 361See secs. 263(a) and 167. However, where property is not used exclusively in a taxpayer’s 

business, the amount eligible for a deduction must be reduced by the amount related to personal 

use. See, e.g., section 280A. 362The applicable recovery period for an asset is determined in part by statute and in part 

by historic Treasury guidance. Exercising authority granted by Congress, the Secretary issued 

Rev. Proc. 87–56, 1987–2 C.B. 674, laying out the framework of recovery periods for enumerated 

classes of assets. The Secretary clarified and modified the list of asset classes in Rev. Proc. 88– 

22, 1988–1 C.B. 785. In November 1988, Congress revoked the Secretary’s authority to modify 

the class lives of depreciable property. Rev. Proc. 87–56, as modified, remains in effect except 

to the extent that the Congress has, since 1988, statutorily modified the recovery period for certain depreciable assets, effectively superseding any administrative guidance with regard to such 

property. 363Sec. 168. 364Sec. 179(b)(1). 

Similarly, the section 280F increase amount in the limitation on 

the depreciation deductions allowed with respect to certain passenger automobiles acquired before September 28, 2017, and placed 

in service after September 27, 2017, is $8,000 for 2017, $6,400 for 

2018, and $4,800 for 2019. 

EFFECTIVE DATE

The provision generally applies to property acquired 359 and 

placed in service after September 27, 2017, and to specified plants 

planted or grafted after such date. 

A transition rule provides that, for a taxpayer’s first taxable year 

ending after September 27, 2017, the taxpayer may elect to apply 

section 168 without regard to the amendments made by this provision. 

In the case of any taxable year that includes any portion of the 

period beginning on September 28, 2017, and ending on December 

31, 2017, the amount of any net operating loss for such taxable 

year which may be treated as a net operating loss carryback is determined without regard to the amendments made by this provision.360

C. SMALL BUSINESS REFORMS

1. Expansion of section 179 expensing (sec. 3201 of the bill and sec. 

179 of the CODE) 

PRESENT LAW

A taxpayer generally must capitalize the cost of property used in 

a trade or business or held for the production of income and recover 

such cost over time through annual deductions for depreciation or 

amortization.361 Tangible property generally is depreciated under 

the modified accelerated cost recovery system (‘‘MACRS’’), which 

determines depreciation for different types of property based on an 

assigned applicable depreciation method, recovery period,362 and 

convention.363

Election to expense certain depreciable business assets 

A taxpayer may elect under section 179 to deduct (or ‘‘expense’’) 

the cost of qualifying property, rather than to recover such costs 

through depreciation deductions, subject to limitation. The maximum amount a taxpayer may expense is $500,000 of the cost of 

qualifying property placed in service for the taxable year.364 The 


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365Sec. 179(b)(2). 366Sec. 179(b)(6). 367Passenger automobiles subject to the section 280F limitation are eligible for section 179 

expensing only to the extent of the dollar limitations in section 280F. For sport utility vehicles 

above the 6,000 pound weight rating, which are not subject to the limitation under section 280F, 

the maximum cost that may be expensed for any taxable year under section 179 is $25,000. Sec. 

179(b)(5). 368Sec. 179(d)(1)(A)(ii) and (f). 369Sec. 179(d)(1) flush language. 370Sec. 179(b)(3). 371Sec. 179(d)(9). 372Sec. 312(k)(3)(B). 373Sec. 179(c)(1). 

$500,000 amount is reduced (but not below zero) by the amount by 

which the cost of qualifying property placed in service during the 

taxable year exceeds $2,000,000.365 The $500,000 and $2,000,000 

amounts are indexed for inflation for taxable years beginning after 

2015.366

In general, qualifying property is defined as depreciable tangible 

personal property that is purchased for use in the active conduct 

of a trade or business.367 Qualifying property also includes off-theshelf computer software and qualified real property (i.e., qualified 

leasehold improvement property, qualified restaurant property, and 

qualified retail improvement property).368 Qualifying property excludes any property described in section 50(b) (i.e., certain property 

not eligible for the investment tax credit).369

The amount eligible to be expensed for a taxable year may not 

exceed the taxable income for such taxable year that is derived 

from the active conduct of a trade or business (determined without 

regard to this provision).370 Any amount that is not allowed as a 

deduction because of the taxable income limitation may be carried 

forward to succeeding taxable years (subject to limitations). 

No general business credit under section 38 is allowed with respect to any amount for which a deduction is allowed under section 

179.371 If a corporation makes an election under section 179 to deduct expenditures, the full amount of the deduction does not reduce 

earnings and profits. Rather, the expenditures that are deducted 

reduce corporate earnings and profits ratably over a five-year period.372

An expensing election is made under rules prescribed by the Secretary.373 In general, any election or specification made with respect to any property may not be revoked except with the consent 

of the Commissioner. However, an election or specification under 

section 179 may be revoked by the taxpayer without consent of the 

Commissioner. 

REASONS FOR CHANGE

The Committee believes that section 179 expensing provides two 

important benefits for small businesses. First, it lowers the cost of 

capital for tangible property used in a trade or business. With a 

lower cost of capital, the Committee believes small businesses will 

invest in more equipment and employ more workers. Second, it 

eliminates depreciation recordkeeping requirements with respect to 

expensed property. In order to increase the value of these benefits 

and the number of eligible taxpayers that may receive these benefits, the provision increases both the amount allowed to be expensed under section 179 and the amount of the phase-out threshold. In addition, in order to counteract the negative effect of inflaVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00247 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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374Property is not treated as acquired after the date on which a written binding contract is 

entered into for such acquisition. 375Treas. Reg. sec. 1.446–1(a)(1). 

tion on the limit and phase-out threshold of this provision for small 

businesses, the provision indexes such amounts for inflation. 

The Committee also believes that qualified energy efficient heating and air-conditioning property should be included in the section 

179 expensing provision to facilitate investment by small businesses in this type of real property. 

EXPLANATION OF PROVISION

The provision increases the maximum amount a taxpayer may expense under section 179 to $5,000,000, and increases the phaseout threshold amount to $20,000,000 for five taxable years, i.e., for 

taxable years beginning in 2018, 2019, 2020, 2021 and 2022. Thus, 

the provision provides that the maximum amount a taxpayer may 

expense, for taxable years beginning after 2017 and before 2023, is 

$5,000,000 of the cost of qualifying property placed in service for 

the taxable year. The $5,000,000 amount is reduced (but not below 

zero) by the amount by which the cost of qualifying property placed 

in service during the taxable year exceeds $20,000,000. The 

$5,000,000 and $20,000,000 amounts are indexed for inflation for 

taxable years beginning after 2018. 

The provision also expands the definition of qualified real property under section 179 to include qualified energy efficient heating 

and air-conditioning property acquired and placed in service by the 

taxpayer after November 2, 2017. For purposes of the provision, 

qualified energy efficient heating and air-conditioning property 

means any depreciable section 1250 property that is (i) installed as 

part of a building’s heating, cooling, ventilation, or hot water system, and (ii) within the scope of Standard 90.1–2007 of the American Society of Heating, Refrigerating, and Air-Conditioning Engineers and the Illuminating Engineering Society of North America 

(as in effect on the day before the date of the adoption of Standard 

90.1–2010 of such Societies) or any successor standard. 

EFFECTIVE DATE

The increased dollar limitations under section 179 apply to taxable years beginning after December 31, 2017. 

The expansion of qualified real property to include qualified energy efficient heating and air-conditioning property applies to property acquired 374 and placed in service after November 2, 2017. 

2. Small business accounting method reform and simplification 

(sec. 3202 of the bill and secs. 263A, 448, 460, and 471 of the Code) 

PRESENT LAW

General rule for methods of accounting 

Section 446 generally allows a taxpayer to select the method of 

accounting to be used to compute taxable income, provided that 

such method clearly reflects the income of the taxpayer. The term 

‘‘method of accounting’’ includes not only the overall method of accounting used by the taxpayer, but also the accounting treatment 

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376Sec. 446(c). 377See, e.g., secs. 167 and 168. 378See, e.g., secs. 451 and 460. 379See, e.g., secs. 461 and 467. 380Sec. 446(d); Treas. Reg. sec. 1.446–1(d). 381Treas. Reg. sec. 1.446–1(e)(1). 382Treas. Reg. sec. 1.446–1(e). 383See, e.g., sec. 451. 384See, e.g., sec. 461. 385Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this purpose, a tax shelter includes: 

(1) any enterprise (other than a C corporation) if at any time interests in such enterprise have 

been offered for sale in any offering required to be registered with any Federal or State agency 

having the authority to regulate the offering of securities for sale; (2) any syndicate (within the 

Continued 

clude the cash receipts and disbursements method (‘‘cash method’’), 

an accrual method, or any other method (including a hybrid method) permitted under regulations prescribed by the Secretary.376 Examples of any one item for which an accounting method may be 

adopted include cost recovery,377 revenue recognition,378 and timing of deductions.379 For each separate trade or business, a taxpayer is entitled to adopt any permissible method, subject to certain restrictions.380

A taxpayer filing its first return may adopt any permissible 

method of accounting in computing taxable income for such year.381

Except as otherwise provided, section 446(e) requires taxpayers to 

secure consent of the Secretary before changing a method of accounting. The regulations under this section provide rules for determining: (1) what a method of accounting is, (2) how an adoption 

of a method of accounting occurs, and (3) how a change in method 

of accounting is effectuated.382

Cash and accrual methods 

Taxpayers using the cash method generally recognize items of income when actually or constructively received and items of expense 

when paid. The cash method is administratively easy and provides 

the taxpayer flexibility in the timing of income recognition. It is the 

method generally used by most individual taxpayers, including 

farm and nonfarm sole proprietorships. 

Taxpayers using an accrual method generally accrue items of income when all the events have occurred that fix the right to receive 

the income and the amount of the income can be determined with 

reasonable accuracy.383 Taxpayers using an accrual method of accounting generally may not deduct items of expense prior to when 

all events have occurred that fix the obligation to pay the liability, 

the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred.384 Accrual methods 

of accounting generally result in a more accurate measure of economic income than does the cash method. The accrual method is 

often used by businesses for financial accounting purposes. 

A C corporation, a partnership that has a C corporation as a 

partner, or a tax-exempt trust or corporation with unrelated business income generally may not use the cash method. Exceptions 

are made for farming businesses, qualified personal service corporations, and the aforementioned entities to the extent their average annual gross receipts do not exceed $5 million for all prior 

years (including the prior taxable years of any predecessor of the 

entity) (the ‘‘gross receipts test’’). The cash method may not be used 

by any tax shelter.385 In addition, the cash method generally may 


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meaning of section 1256(e)(3)(B)); or (3) any tax shelter as defined in section 6662(d)(2)(C)(ii). 

In the case of a farming trade or business, a tax shelter includes any tax shelter as defined 

in section 6662(d)(2)(C)(ii) or any partnership or any other enterprise other than a corporation 

which is not an S corporation engaged in the trade or business of farming, (1) if at any time 

interests in such partnership or enterprise have been offered for sale in any offering required 

to be registered with any Federal or State agency having authority to regulate the offering of 

securities for sale or (2) if more than 35 percent of the losses during any period are allocable 

to limited partners or limited entrepreneurs. 386Treas. Reg. secs. 1.446–1(c)(2) and 1.471–1. 387Sec. 471 and Treas. Reg. secs. 1.446–1(c)(2) and 1.471–1. 388Sec. 448(d)(1). 389Sec. 448(d)(2). 390Sec. 471(a) and Treas. Reg. sec. 1.471–1. 391Treas. Reg. sec. 1.446–1(c)(2). 392 Rev. Proc. 2001–10, 2001–1 C.B. 272. 393 Rev. Proc. 2002–28, 2002–1 C.B. 815. 394Treas. Reg. sec. 1.162–3(a)(1). A deduction is generally permitted for the cost of non-incidental materials and supplies in the taxable year in which they are first used or are consumed 

in the taxpayer’s operations. 

not be used if the purchase, production, or sale of merchandise is 

an income producing factor.386 Such taxpayers generally are required to keep inventories and use an accrual method with respect 

to inventory items.387

A farming business is defined as a trade or business of farming, 

including operating a nursery or sod farm, or the raising or harvesting of trees bearing fruit, nuts, or other crops, timber, or ornamental trees.388 Such farming businesses are not precluded from 

using the cash method regardless of whether they meet the gross 

receipts test. However, section 447 generally requires a farming C 

corporation (and any farming partnership if a corporation is a partner in such partnership) to use an accrual method of accounting. 

Section 447 does not apply to nursery or sod farms, to the raising 

or harvesting of trees (other than fruit and nut trees), nor to farming C corporations meeting a gross receipts test with a $1 million 

threshold. For family farm C corporations, the threshold under the 

gross receipts test is $25 million. 

A qualified personal service corporation is a corporation: (1) substantially all of whose activities involve the performance of services 

in the fields of health, law, engineering, architecture, accounting, 

actuarial science, performing arts, or consulting, and (2) substantially all of the stock of which is owned by current or former employees performing such services, their estates, or heirs.389 Qualified personal service corporations are allowed to use the cash method without regard to whether they meet the gross receipts test. 

Accounting for inventories 

In general, for Federal income tax purposes, taxpayers must account for inventories if the production, purchase, or sale of merchandise is an income-producing factor to the taxpayer.390 Treasury regulations also provide that in any case in which the use of 

inventories is necessary to clearly reflect income, the accrual method must be used with regard to purchases and sales.391 However, 

an exception is provided for taxpayers whose average annual gross 

receipts do not exceed $1 million.392 A second exception is provided 

for taxpayers in certain industries whose average annual gross receipts do not exceed $10 million and that are not otherwise prohibited from using the cash method under section 448.393 Such taxpayers may account for inventory as materials and supplies that 

are not incidental (i.e., ‘‘non-incidental materials and supplies’’).394


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395Sec. 263A. 396Sec. 263A(b)(2)(B). No exception is available for small taxpayers who produce property subject to section 263A. However, a de minimis rule under Treasury regulations treats producers with total indirect costs of $200,000 or less as having no additional indirect costs beyond those 

normally capitalized for financial accounting purposes. Treas. Reg. sec. 1.263A–2(b)(3)(iv). 397Sec. 263A(c)(5). 398Sec. 263A(d). 399Sec. 263A(h). Qualified creative expenses are defined as amounts paid or incurred by an 

individual in the trade or business of being a writer, photographer, or artist. However, such 

term does not include any expense related to printing, photographic plates, motion picture files, 

video tapes, or similar items. 400Sec. 460(a). 

In those circumstances in which a taxpayer is required to account for inventory, the taxpayer must maintain inventory records 

to determine the cost of goods sold during the taxable period. Cost 

of goods sold generally is determined by adding the taxpayer’s inventory at the beginning of the period to the purchases made during the period and subtracting from that sum the taxpayer’s inventory at the end of the period. 

Because of the difficulty of accounting for inventory on an itemby-item basis, taxpayers often use conventions that assume certain 

item or cost flows. Among these conventions are the first-in, firstout (‘‘FIFO’’) method, which assumes that the items in ending inventory are those most recently acquired by the taxpayer, and the 

last-in, first-out (‘‘LIFO’’) method, which assumes that the items in 

ending inventory are those earliest acquired by the taxpayer. 

Uniform capitalization 

The uniform capitalization rules require certain direct and indirect costs allocable to real or tangible personal property produced 

by the taxpayer to be included in either inventory or capitalized 

into the basis of such property, as applicable.395 For real or personal property acquired by the taxpayer for resale, section 263A 

generally requires certain direct and indirect costs allocable to such 

property to be included in inventory. 

Section 263A provides a number of exceptions to the general uniform capitalization requirements. One such exception exists for certain small taxpayers who acquire property for resale and have $10 

million or less of average annual gross receipts; 396 such taxpayers 

are not required to include additional section 263A costs in inventory. Another exception exists for taxpayers who raise, harvest, or 

grow trees.397 Under this exception, section 263A does not apply to 

trees raised, harvested, or grown by the taxpayer (other than trees 

bearing fruit, nuts, or other crops, or ornamental trees) and any 

real property underlying such trees. Similarly, the uniform capitalization rules do not apply to any plant having a preproductive period of two years or less or to any animal, which is produced by 

a taxpayer in a farming business (unless the taxpayer is required 

to use an accrual method of accounting under section 447 or 

448(a)(3)).398 Freelance authors, photographers, and artists also are 

exempt from section 263A for any qualified creative expenses.399

Accounting for long-term contracts 

In general, in the case of a long-term contract, the taxable income from the contract is determined under the percentage-of-completion method.400 Under this method, the taxpayer must include 

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401See Treas. Reg. sec. 1.460–4. This calculation is done on a cumulative basis. Thus, the 

amount included in gross income in a particular year is that proportion of the expected contract 

price that the amount of costs incurred through the end of the taxable year bears to the total 

expected costs, reduced by the amounts of gross contract price included in gross income in previous taxable years. 402Sec. 460(b)(1). 403Sec. 460(c). 404Treas. Reg. sec. 1.460–5. 405Treas. Reg. secs. 1.460–4(b)(2)(iv) and 1.460–1(b)(8). 406Secs. 460(e)(1)(B) and (4). 407Since such contracts involve the construction of real property, they are subject to the interest capitalization rules without regard to their duration. See Treas. Reg. sec. 1.263A–8. 408Treas. Reg. sec. 1.460–4(c)(1). 

uct of (1) the gross contract price and (2) the percentage of the contract completed during the taxable year.401 The percentage of the 

contract completed during the taxable year is determined by comparing costs allocated to the contract and incurred before the end 

of the taxable year with the estimated total contract costs.402 Costs 

allocated to the contract typically include all costs (including depreciation) that directly benefit or are incurred by reason of the taxpayer’s long-term contract activities.403 The allocation of costs to a 

contract is made in accordance with regulations.404 Costs incurred 

with respect to the long-term contract are deductible in the year incurred, subject to general accrual method of accounting principles 

and limitations.405

An exception from the requirement to use the percentage-of-completion method is provided for certain construction contracts 

(‘‘small construction contracts’’). Contracts within this exception are 

those contracts for the construction or improvement of real property if the contract: (1) is expected (at the time such contract is entered into) to be completed within two years of commencement of 

the contract and (2) is performed by a taxpayer whose average annual gross receipts for the prior three taxable years do not exceed 

$10 million.406 Thus, long-term contract income from small construction contracts must be reported consistently using the taxpayer’s exempt contract method.407 Permissible exempt contract 

methods include the completed contract method, the exempt-contract percentage-of-completion method, the percentage-of-completion method, or any other permissible method.408

REASONS FOR CHANGE

The Committee believes that the present law accounting method 

rules impose overly complex recordkeeping requirements that increase compliance costs for small businesses, as such rules have 

non-uniform small business exception requirements, rely on varying forms of gross receipts tests with widely different exception 

thresholds, and vary depending on the classification of a taxpayer’s 

business activities. The Committee believes that using an accrual 

method, along with keeping inventory records, applying the uniform capitalization rules, and using the percentage-of-completion 

method, is more complicated than the cash method and any difference in income for a small business may be relatively small, 

such that either method may clearly reflect the income of a small 

business. In addition, the Committee believes that the cash method 

may address liquidity concerns of small businesses in that it measures income when the taxpayer is most likely to have the cash to 

pay any tax. The Committee also believes that the ability of small 

businesses to use simplified methods of accounting for inventory 


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409 Consistent with present law, the cash method generally may not be used by taxpayers, 

other than those that meet the $25 million gross receipts test, if the purchase, production, or 

sale of merchandise is an income-producing factor. In addition, the cash method may not be used 

by a tax shelter. 

and certain construction contracts generally will be practical and 

administratively convenient for such taxpayers. In addition, the 

Committee believes that the uniform capitalization rules are relatively complex and any potential distortion to income caused by 

not applying such rules is not material enough to warrant the application of unduly burdensome rules to small businesses. 

The Committee believes that a uniform definition of small business for determining applicable accounting method rules and consistent application of a gross receipts test will simplify tax administration and taxpayer compliance. An increase in the gross receipts 

test to $25 million will materially increase the number of business 

entities that are able to obtain relief from complex tax accounting 

rules. Many rules under present law prohibit a taxpayer from taking advantage of a small business accounting method exception if 

they ever fail to meet the relevant gross receipts test. The Committee believes that such taxpayers should be allowed to avail 

themselves of simplified accounting methods if they subsequently 

are able to meet the gross receipts test. Finally, the Committee believes that indexing the threshold for inflation will ensure that the 

small business definition remains an accurate reflection of the appropriate level of gross receipts for exempting entities from certain 

tax accounting rules. 

EXPLANATION OF PROVISION

The provision expands the universe of taxpayers that may use 

the cash method of accounting. Under the provision, the cash method of accounting may be used by taxpayers, other than tax shelters, 

that satisfy the gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing 

factor. The gross receipts test allows taxpayers with annual average gross receipts that do not exceed $25 million for the three prior 

taxable-year period (the ‘‘$25 million gross receipts test’’) to use the 

cash method. The $25 million amount is indexed for inflation for 

taxable years beginning after 2018. 

The provision expands the universe of farming C corporations 

(and farming partnerships with a C corporation partner) that may 

use the cash method to include any farming C corporation (or farming partnership with a C corporation partner) that meets the $25 

million gross receipts test. 

The provision retains the exceptions from the required use of the 

accrual method for qualified personal service corporations and taxpayers other than C corporations. Thus, qualified personal service 

corporations, partnerships without C corporation partners, S corporations, and other passthrough entities are allowed to use the 

cash method without regard to whether they meet the $25 million 

gross receipts test, so long as the use of such method clearly reflects income.409

In addition, the provision also exempts certain taxpayers from 

the requirement to keep inventories. Specifically, taxpayers that 

meet the $25 million gross receipts test are not required to account 


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410 In the case of a sole proprietorship, the $25 million gross receipts test is applied as if the 

sole proprietorship is a corporation or partnership. 411 Consistent with present law, a deduction is generally permitted for the cost of non-incidental materials and supplies in the taxable year in which they are first used or are consumed 

in the taxpayer’s operations. See Treas. Reg. sec. 1.162–3(a)(1). 412The taxpayer’s financial accounting treatment of inventories is determined by reference to 

the method of accounting used in the taxpayer’s applicable financial statement (as defined in 

section 3202 of the bill (Small business accounting method reform and simplification)) or, if the 

taxpayer does not have an applicable financial statement, the method of accounting used in the 

taxpayer’s book and records prepared in accordance with the taxpayer’s accounting procedures. 413 In the case of a sole proprietorship, the $25 million gross receipts test is applied as if the 

sole proprietorship is a corporation or partnership. 414 In the case of a sole proprietorship, the $25 million gross receipts test is applied as if the 

sole proprietorship is a corporation or partnership. 

for inventories under section 471,410 but rather may use a method 

of accounting for inventories that either (1) treats inventories as 

non-incidental materials and supplies,411 or (2) conforms to the taxpayer’s financial accounting treatment of inventories.412

The provision expands the exception for small taxpayers from the 

uniform capitalization rules. Under the provision, any producer or 

reseller that meets the $25 million gross receipts test is exempted 

from the application of section 263A.413 The provision retains the 

exemptions from the uniform capitalization rules that are not 

based on a taxpayer’s gross receipts. 

Finally, the provision expands the exception for small construction contracts from the requirement to use the percentage-of-completion method. Under the provision, contracts within this exception are those contracts for the construction or improvement of real 

property if the contract: (1) is expected (at the time such contract 

is entered into) to be completed within two years of commencement 

of the contract and (2) is performed by a taxpayer that (for the taxable year in which the contract was entered into) meets the $25 

million gross receipts test.414

Under the provision, a taxpayer who fails the $25 million gross 

receipts test would not be eligible for any of the aforementioned exceptions (i.e., from the accrual method, from keeping inventories, 

from applying the uniform capitalization rules, or from using the 

percentage-of-completion method) for such taxable year. 

EFFECTIVE DATE

The provisions to expand the universe of taxpayers, including 

farming C corporations, eligible to use the cash method, exempt 

certain taxpayers from the requirement to keep inventories, and 

expand the exception from the uniform capitalization rules apply to 

taxable years beginning after December 31, 2017. Application of 

these rules is a change in the taxpayer’s method of accounting for 

purposes of section 481. 

The provision to expand the exception for small construction contracts from the requirement to use the percentage-of-completion 

method applies to contracts entered into after December 31, 2017, 

in taxable years ending after such date. Application of this rule is 

a change in the taxpayer’s method of accounting for purposes of 

section 481. Application of the exception for small construction contracts from the requirement to use the percentage-of-completion 

method is applied on a cutoff basis for all similarly classified contracts (hence there is no adjustment under section 481(a) for contracts entered into before January 1, 2018). 


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415See, e.g., sec. 451. 416See, e.g., sec. 461. 417 A farming business is defined as a trade or business of farming, including operating a 

nursery or sod farm, or the raising or harvesting of trees bearing fruit, nuts, or other crops, 

timber, or ornamental trees. Sec. 448(d)(1). 418 A qualified personal service corporation is a corporation (1) substantially all of whose activities involve the performance of services in the fields of health, law, engineering, architecture, 

accounting, actuarial science, performing arts, or consulting, and (2) substantially all of the 

stock of which is owned by current or former employees performing such services, their estates, 

or heirs. Sec. 448(d)(2). 419The gross receipts test is modified to apply to taxpayers with annual average gross receipts 

that do not exceed $25 million for the three prior taxable-year period as part of this bill. See 

section 3202 of the bill (Small business accounting method reform and simplification). 420Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this purpose, a tax shelter includes: 

(1) any enterprise (other than a C corporation) if at any time interests in such enterprise have 

been offered for sale in any offering required to be registered with any Federal or State agency 

Continued 

3. Small business exception from limitation on deduction of 

business interest (sec. 3203 of the bill and sec. 163(j) of the Code) 

For present law, reasons for change, explanation of provision, 

and effective date for the small business exception from the limitation on the deduction of business interest, see section 3301 of the 

bill (Interest). 

4. Modification of treatment of S corporation conversions to C corporations (sec. 3204 of the bill and secs. 481 and 1371 of the 

Code) 

PRESENT LAW

Changes in accounting method 

Cash and accrual methods in general 

Taxpayers using the cash method generally recognize items of income when actually or constructively received and items of expense 

when paid. The cash method is administratively easy and provides 

the taxpayer flexibility in the timing of income recognition. It is the 

method generally used by most individual taxpayers, including 

farm and nonfarm sole proprietorships. 

Taxpayers using an accrual method generally accrue items of income when all the events have occurred that fix the right to receive 

the income and the amount of the income can be determined with 

reasonable accuracy.415 Taxpayers using an accrual method of accounting generally may not deduct items of expense prior to when 

all events have occurred that fix the obligation to pay the liability, 

the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred.416 Accrual methods 

of accounting generally result in a more accurate measure of economic income than does the cash method. The accrual method is 

often used by businesses for financial accounting purposes. 

A C corporation, a partnership that has a C corporation as a 

partner, or a tax-exempt trust or corporation with unrelated business income generally may not use the cash method. Exceptions 

are made for farming businesses,417 qualified personal service corporations,418 and the aforementioned entities to the extent their 

average annual gross receipts do not exceed $5 million for all prior 

years (including the prior taxable years of any predecessor of the 

entity) (the ‘‘gross receipts test’’).419 The cash method may not be 

used by any tax shelter.420 In addition, the cash method generally 


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having the authority to regulate the offering of securities for sale; (2) any syndicate (within the 

meaning of section 1256(e)(3)(B)); or (3) any tax shelter as defined in section 6662(d)(2)(C)(ii). 

In the case of a farming trade or business, a tax shelter includes any tax shelter as defined 

in section 6662(d)(2)(C)(ii) or any partnership or any other enterprise other than a corporation 

which is not an S corporation engaged in the trade or business of farming, (1) if at any time 

interests in such partnership or enterprise have been offered for sale in any offering required 

to be registered with any Federal or State agency having authority to regulate the offering of 

securities for sale or (2) if more than 35 percent of the losses during any period are allocable 

to limited partners or limited entrepreneurs. 421Treas. Reg. secs. 1.446–1(c)(2) and 1.471–1. 422Sec. 471 and Treas. Reg. secs. 1.446–1(c)(2) and 1.471–1. However, section 3202 of the bill 

(Small business accounting method reform and simplification) provides an exemption from the 

requirement to use inventories for taxpayers that meet the $25 million gross receipts test provided in such section. Accordingly, under the bill, such taxpayers are thus also eligible to use 

the cash method. 423Treas. Reg. sec. 1.446–1(e)(1). 424Treas. Reg. sec. 1.446–1(e). 425Sec. 481(a)(2) and Treas. Reg. sec. 1.481–1(a)(1). 426Treas. Reg. sec. 1.481–1(a)(1). 427Sec. 481(c). While Treasury regulations generally provide that the entire adjustments required by section 481(a) are taken into account entirely in the year of change, the Secretary 

has provided the Commissioner with the authority to provide additional guidance regarding the 

taxable year or years in which the adjustments are taken into account. See Treas. Reg. sec. 

1.481–1(c)(2). 428See Section 7.03 of Rev. Proc. 2015–13, 2015–5 I.R.B 419. 

may not be used if the purchase, production, or sale of merchandise 

is an income producing factor.421 Such taxpayers generally are required to keep inventories and use an accrual method with respect 

to inventory items.422

Procedures for changing a method of accounting 

A taxpayer filing its first return may adopt any permissible 

method of accounting in computing taxable income for such year.423

Except as otherwise provided, section 446(e) requires taxpayers to 

secure consent of the Secretary before changing a method of accounting. The regulations under this section provide rules for determining: (1) what a method of accounting is, (2) how an adoption 

of a method of accounting occurs, and (3) how a change in method 

of accounting is effectuated.424

Section 481 prescribes the rules to be followed in computing taxable income in cases where the taxable income of the taxpayer is 

computed under a different method than the prior year (e.g., when 

changing from the cash method to an accrual method). In computing taxable income for the year of change, the taxpayer must 

take into account those adjustments which are determined to be 

necessary solely by reason of such change in order to prevent items 

of income or expense from being duplicated or omitted.425 The year 

of change is the taxable year for which the taxable income of the 

taxpayer is computed under a different method than the prior 

year.426 Congress has provided the Secretary with the authority to 

prescribe the timing and manner in which such adjustments are 

taken into account in computing taxable income.427 Net adjustments that decrease taxable income generally are taken into account entirely in the year of change, and net adjustments that increase taxable income generally are taken into account ratably during the four-taxable-year period beginning with the year of 

change.428

Post-termination distributions 

Under present law, in the case of an S corporation that converts 

to a C corporation, distributions of cash by the C corporation to its 


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429Sec. 1371(e)(1). 430Sec. 1377(b). 431Section 3202 of the bill (Small business accounting method reform and simplification) expand the universe of partnerships and C corporations eligible to use the cash method to include 

partnerships or C corporations with annual average gross receipts that do not exceed $25 million for the three prior taxable-year period. Accordingly, an eligible terminated S corporation 

with annual average gross receipts that do not exceed $25 million that used the cash method 

prior to revoking its S corporation election may be eligible to remain on the cash method as 

a C corporation. 

shareholders during the post-termination transition period (to the 

extent of the amount in the accumulated adjustment account) are 

tax-free to the shareholders and reduce the adjusted basis of the 

stock.429 The post-termination transition period is generally the 

one-year period after the S corporation election terminates.430

REASONS FOR CHANGE

The Committee recognizes that, with the significant modifications to the tax code with respect to both S corporations and C corporations in this bill, taxpayers that previously elected to be taxed 

as S corporations may prefer instead to be taxed as C corporations. 

The Committee acknowledges that the revocation of an S election 

may require certain taxpayers to change from the cash method to 

an accrual method, and may have other effects on the taxpayer. Accordingly, the Committee believes that it is important to provide 

rules to ease the transition from S corporation to C corporation for 

the affected taxpayers. 

EXPLANATION OF PROVISION

Under the provision, any section 481(a) adjustment of an eligible 

terminated S corporation attributable to the revocation of its S corporation election (i.e., a change from the cash method to an accrual 

method) is taken into account ratably during the six-taxable-year 

period beginning with the year of change.431 An eligible terminated 

S corporation is any C corporation which (1) is an S corporation the 

day before the enactment of this bill, (2) during the two-year period 

beginning on the date of such enactment revokes its S corporation 

election under section 1362(a), and (3) all of the owners of which 

on the date the S corporation election is revoked are the same owners (and in identical proportions) as the owners on the date of such 

enactment. 

Under the provision, in the case of a distribution of money by an 

eligible terminated S corporation, the accumulated adjustments account shall be allocated to such distribution, and the distribution 

shall be chargeable to accumulated earnings and profits, in the 

same ratio as the amount of the accumulated adjustments account 

bears to the amount the accumulated earnings and profits. 

EFFECTIVE DATE

The provision is effective upon enactment. 


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432Sec. 163(a). In addition to the limitations discussed herein, other limitations include: denial 

of the deduction for the disqualified portion of the original issue discount on an applicable high 

yield discount obligation (sec. 163(e)(5)), denial of deduction for interest on certain obligations 

not in registered form (sec. 163(f)), reduction of the deduction for interest on indebtedness with 

respect to which a mortgage credit certificate has been issued under section 25 (sec. 163(g)), disallowance of deduction for personal interest (sec. 163(h)), disallowance of deduction for interest 

on debt with respect to certain life insurance contracts (sec. 264), and disallowance of deduction 

for interest relating to tax-exempt income (sec. 265). Interest may also be subject to capitalization. See, e.g., sections 263A(f) and 461(g). 433Sec. 163(e). But see section 267 (dealing in part with interest paid to a related or foreign 

party). 434Sec. 163(d). 435Sec. 67(a). 436Miscellaneous itemized deductions include itemized deductions of individuals other than 

certain specific itemized deductions. Sec. 67(b). Miscellaneous itemized deductions generally include, for example, investment management fees and certain employee business expenses, but 

specifically do not include, for example, interest, taxes, casualty and theft losses, charitable contributions, medical expenses, or other listed itemized deductions. 437 H.R. Rep. No. 841, 99th Cong., 2d Sess., p. II–154, Sept. 18, 1986 (Conf. Rep.) (‘‘In computing the amount of expenses that exceed the 2-percent floor, expenses that are not investment 

expenses are intended to be disallowed before any investment expenses are disallowed.’’). 

D. REFORM OF BUSINESS-RELATED EXCLUSIONS, DEDUCTIONS, ETC. 

1. Interest (sec. 3301 of the bill and sec. 163(j) of the Code) 

PRESENT LAW

Interest deduction 

Interest paid or accrued by a business generally is deductible in 

the computation of taxable income subject to a number of limitations.432

Interest is generally deducted by a taxpayer as it is paid or accrued, depending on the taxpayer’s method of accounting. For all 

taxpayers, if an obligation is issued with original issue discount 

(‘‘OID’’), a deduction for interest is allowable over the life of the obligation on a yield to maturity basis.433 Generally, OID arises 

where interest on a debt instrument is not calculated based on a 

qualified rate and required to be paid at least annually. 

Investment interest expense 

In the case of a taxpayer other than a corporation, the deduction 

for interest on indebtedness that is allocable to property held for 

investment (‘‘investment interest’’) is limited to the taxpayer’s net 

investment income for the taxable year.434 Disallowed investment 

interest is carried forward to the next taxable year. 

Net investment income is investment income net of investment 

expenses. Investment income generally consists of gross income 

from property held for investment, and investment expense includes all deductions directly connected with the production of investment income (e.g., deductions for investment management fees) 

other than deductions for interest. Investment income includes only 

so much of the taxpayer’s net capital gain and qualified dividend 

income as the taxpayer elects to take into account as investment 

income. 

The two-percent floor on miscellaneous itemized deductions allows taxpayers to deduct investment expenses connected with investment income only to the extent such deductions exceed two percent of the taxpayer’s adjusted gross income (‘‘AGI’’).435 Miscellaneous itemized deductions 436 that are not investment expenses are 

disallowed first before any investment expenses are disallowed.437


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438Temp. Treas. Reg. sec. 1.163–8T(c). 439 If a tax treaty reduces the rate of tax on interest paid or accrued by the taxpayer, the interest is treated as interest on which no Federal income tax is imposed to the extent of the same 

proportion of such interest as the rate of tax imposed without regard to the treaty, reduced by 

the rate of tax imposed by the treaty, bears to the rate of tax imposed without regard to the 

treaty. Sec. 163(j)(5)(B). 440Sec. 163(j)(3). 441Sec. 163(j)(1)(B). 442Sec. 163(j)(2)(B)(ii). 443For a discussion of effective marginal tax rates on investment, see Joint Committee on 

Taxation, Economic Growth and Tax Policy (JCX–19–17), May 16, 2017, p. 15ff. 

For purposes of the investment interest limitation, debt is allocated under a tracing approach to expenditures in accordance with 

the use of the debt proceeds, and interest on the debt is allocated 

in the same manner.438 Thus, generally, the disallowance of a deduction for investment interest depends on the individual’s use of 

the proceeds of the debt. For example, if an individual pledges corporate stock held for investment as security for a loan and uses the 

debt proceeds to purchase a car for personal use, interest expense 

on the debt is allocated to the personal expenditure to purchase the 

car and is treated as nondeductible personal interest rather than 

investment interest. 

Earnings stripping 

Section 163(j) may disallow a deduction for disqualified interest 

paid or accrued by a corporation in a taxable year if two threshold 

tests are satisfied: the payor’s debt-to-equity ratio exceeds 1.5 to 

1.0 (the safe harbor ratio) and the payor’s net interest expense exceeds 50 percent of its adjusted taxable income (generally, taxable 

income computed without regard to deductions for net interest expense, net operating losses, domestic production activities under 

section 199, depreciation, amortization, and depletion). Disqualified 

interest includes interest paid or accrued to: (1) related parties 

when no Federal income tax is imposed with respect to such interest;439 (2) unrelated parties in certain instances in which a related 

party guarantees the debt; or (3) to a real estate investment trust 

(‘‘REIT’’) by a taxable REIT subsidiary of that trust.440 Interest 

amounts disallowed under these rules can be carried forward indefinitely.441 In addition, any excess limitation (i.e., the excess, if 

any, of 50 percent of the adjusted taxable income of the payor over 

the payor’s net interest expense) can be carried forward three 

years.442

REASONS FOR CHANGE

The Committee believes that the general deductibility of interest 

payments on debt may result in companies undertaking more leverage than they would in the absence of the tax system. The effective 

marginal tax rate on debt-financed investment is lower than that 

on equity-financed investment.443 Limiting the deductibility of interest along with reducing the corporate tax rate narrows the disparity in the effective marginal tax rates based on different sources 

of financing. This leads to a more efficient capital structure for 

firms. The Committee believes that it is necessary to apply the limitation on the deductibility of interest to businesses regardless of 

the form in which such businesses are organized so as not to create 

distortions in the choice of entity. 


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444Section 163(d) applies in the case of a taxpayer other than a corporation. Thus, a corporation has neither investment interest nor investment income within the meaning of section 

163(d). Thus, interest income and interest expense of a corporation is properly allocable to a 

trade or business, unless such trade or business is otherwise explicitly excluded from the application of the provision. 

The Committee believes that limitations on the deductibility of 

interest should be applied to those businesses with the greatest levels of leverage. Such firms may pose the greatest societal costs in 

times of financial distress. Smaller firms are likely to impose smaller costs on the economy than larger firms. Additionally, smaller 

firms have limited access to public equity capital markets as compared to larger firms. Thus, the Committee believes it is appropriate to limit the interest deduction of only the largest taxpayers. 

The Committee understands that some taxpayers who do not 

consistently incur excessive amounts of leverage may nonetheless 

at times incur an amount of interest expense that is large in relation to its taxable income. For instance, a bad year in a business 

cycle might reduce taxable income to the point where a limitation 

based on taxable income takes effect. Furthermore, earnings attributable to investments financed by debt and interest payments associated with such debt may arise in different periods. For that reason, the Committee believes taxpayers should be able to average 

annual results, and so believes the carryforward of denied interest 

deductions is appropriate for a period of time. 

The Committee recognizes that certain types of trades or businesses have particular characteristics that warrant special rules related to interest deductibility. 

EXPLANATION OF PROVISION

In general 

In the case of any taxpayer for any taxable year, the deduction 

for business interest is limited to the sum of (1) business interest 

income; (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year; and (3) the floor plan financing interest 

of the taxpayer for the taxable year. The amount of any business 

interest not allowed as a deduction for any taxable year may be 

carried forward for up to five years beyond the year in which the 

business interest was paid or accrued, treating business interest as 

allowed as a deduction on a first-in, first-out basis. The limitation 

applies at the taxpayer level. In the case of a group of affiliated 

corporations that file a consolidated return, the limitation applies 

at the consolidated tax return filing level. 

Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Any amount treated as interest for purposes of the Internal Revenue Code is interest 

for purposes of the provision. Business interest income means the 

amount of interest includible in the gross income of the taxpayer 

for the taxable year which is properly allocable to a trade or business. Business interest does not include investment interest, and 

business interest income does not include investment income, within the meaning of section 163(d).444

Adjusted taxable income means the taxable income of the taxpayer computed without regard to (1) any item of income, gain, deduction, or loss which is not properly allocable to a trade or business; (2) any business interest or business interest income; (3) the 


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445 Any deduction allowable for depreciation, amortization, or depletion includes any deduction 

allowable for any amount treated as depreciation, amortization, or depletion under present law. 446This amount is the ‘‘Ordinary business income or loss’’ reflected on Form 1065 (U.S. Return 

of Partnership Income). The partner’s distributive share is reflected in Box 1 of Schedule K– 

1 (Form 1065). 

amount of any net operating loss deduction; and (4) any deduction 

allowable for depreciation, amortization, or depletion.445 The Secretary may provide other adjustments to the computation of adjusted taxable income. 

Floor plan financing interest means interest paid or accrued on 

floor plan financing indebtedness. Floor plan financing indebtedness means indebtedness used to finance the acquisition of motor 

vehicles held for sale to retail customers and secured by the inventory so acquired. A motor vehicle means a motor vehicle that is an 

automobile, a truck, a recreational vehicle, a motorcycle, a boat, 

farm machinery or equipment, or construction machinery or equipment. 

By including business interest income and floor plan financing 

interest in the limitation, the rule operates to allow floor plan financing interest to be fully deductible and to limit the deduction 

for net interest expense (less floor plan financing interest) to 30 

percent of adjusted taxable income. That is, a deduction for business interest is permitted to the full extent of business interest income and any floor plan financing interest. To the extent that business interest exceeds business interest income and floor plan financing interest, the deduction for the net interest expense is limited to 30 percent of adjusted taxable income. 

It is generally intended that, similar to present law, section 

163(j) apply after the application of provisions that subject interest 

to deferral, capitalization, or other limitation. Thus, section 163(j) 

applies to interest deductions that are deferred, for example under 

section 163(e) or section 267(a)(3)(B), in the taxable year to which 

such deductions are deferred. Section 163(j) applies after section 

263A is applied to capitalize interest and after, for example, section 

265 or section 279 is applied to disallow interest. 

Application to passthrough entities 

In general 

In the case of any partnership, the limitation is applied at the 

partnership level. Any deduction for business interest is taken into 

account in determining the nonseparately stated taxable income or 

loss of the partnership.446 To prevent double counting, special rules 

are provided for the determination of the adjusted taxable income 

of each partner of the partnership. Similarly, to allow for additional 

interest deduction by a partner in the case of an excess amount of 

unused adjusted taxable income limitation of the partnership, special rules apply. Similar rules apply with respect to any S corporation and its shareholders. 

Double counting rule 

The adjusted taxable income of each partner (or shareholder, as 

the case may be) is determined without regard to such partner’s 

distributive share of the nonseparately stated income or loss of 

such partnership. In the absence of such a rule, the same dollars 

of adjusted taxable income of a partnership could generate addiVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00261 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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tional interest deductions as the income is passed through to the 

partners. 

Example 1.—ABC is a partnership owned 50–50 by XYZ Corporation and an individual. ABC generates $200 of noninterest income. 

Its only expense is $60 of business interest. Under the provision 

the deduction for business interest is limited to 30 percent of adjusted taxable income, that is, 30 percent * $200 = $60. ABC deducts $60 of business interest and reports ordinary business income of $140. XYZ’s distributive share of the ordinary business income of ABC is $70. XYZ has net taxable income of zero from its 

other operations, none of which is attributable to interest income 

and without regard to its business interest expense. XYZ has business interest expense of $25. In the absence of any special rule, the 

$70 of taxable income from its interest in ABC would permit the 

deduction of up to an additional $21 of interest (30 percent * $70 

= $21), resulting in a deduction disallowance of only $4. XYZ’s $100 

share of ABC’s adjusted taxable income would generate $51 of interest deductions. If XYZ were instead a passthrough entity, additional deductions could be available at each tier. 

The double counting rule provides that XYZ has adjusted taxable 

income computed without regard to the $70 distributive share of 

the nonseparately stated income of ABC. As a result, XYZ has adjusted taxable income of $0. XYZ’s deduction for business interest 

is limited to 30 percent * $0 = $0, resulting in a deduction disallowance of $25. 

Additional deduction limit 

The limit on the amount allowed as a deduction for business interest is increased by a partner’s distributive share of the partnership’s excess amount of unused adjusted taxable income limitation. 

The excess amount with respect to any partnership is the excess 

(if any) of 30 percent of the adjusted taxable income of the partnership over the amount (if any) by which the business interest of the 

partnership (reduced by floor plan financing interest) exceeds the 

business interest income of the partnership. This allows a partner 

of a partnership to deduct more interest expense the partner may 

have paid or incurred to the extent the partnership could have deducted more business interest. 

Example 2.—The facts are the same as in Example 1 except ABC 

has only $40 of business interest. As in Example 1, ABC has a 

limit on its interest deduction of $60. The excess amount for ABC 

is $60 ¥$40 = $20. XYZ’s distributive share of the excess amount 

from ABC partnership is $10. XYZ’s deduction for business interest 

is limited to 30 percent of its adjusted taxable income plus its distributive share of the excess amount from ABC partnership (30 

percent * $0 + $10 = $10). As a result of the rule, XYZ may deduct 

$10 of business interest and has an interest deduction disallowance 

of $15. 

Carryforward of disallowed business interest 

The amount of any business interest not allowed as a deduction 

for any taxable year is treated as business interest paid or accrued 

in the succeeding taxable year. Business interest may be carried 

forward for up to five years. Carryforwards are determined on a 


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447See section 4302 of the bill (Limitation on deduction of interest by domestic corporations 

which are members of an international financial reporting group). 448 In the case of a sole proprietorship, the $25 million gross receipts test is applied as if the 

sole proprietorship were a corporation or partnership. 

first-in, first-out basis. It is intended that the provision be administered in a way to prevent trafficking in carryforwards. 

A coordination rule is provided with the limitation on deduction 

of interest by domestic corporations in international financial reporting groups.447 Whichever rule imposes the lower limitation on 

deduction of business interest with respect to the taxable year (and 

therefore the greatest amount of interest to be carried forward) 

governs. 

Any carryforward of disallowed business interest is an item 

taken into account in the case of certain corporate acquisitions described in section 381 and is subject to limitation under section 

382. 

Exceptions 

The limitation does not apply to any taxpayer that meets the $25 

million gross receipts test of section 448(c), that is, if the average 

annual gross receipts for the three-taxable-year period ending with 

the prior taxable year does not exceed $25 million.448 Aggregation 

rules apply to determine the amount of a taxpayer’s gross receipts 

under the gross receipts test of section 448(c). 

The trade or business of performing services as an employee is 

not treated as a trade or business for purposes of the limitation. 

As a result, for example, the wages of an employee are not counted 

in the adjusted taxable income of the taxpayer for purposes of determining the limitation. 

The limitation does not apply to a real property trade or business 

as defined in section 469(c)(7)(C). Any real property development, 

redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or 

business is not treated as a trade or business for purposes of the 

limitation. As a result, for example, interest expense paid or incurred in a real property trade or business is not business interest 

subject to limitation and is generally deductible in the computation 

of taxable income. 

The limitation does not apply to certain regulated public utilities. 

Specifically, the trade or business of the furnishing or sale of (1) 

electrical energy, water, or sewage disposal services, (2) gas or 

steam through a local distribution system, or (3) transportation of 

gas or steam by pipeline, if the rates for such furnishing or sale, 

as the case may be, have been established or approved by a State 

or political subdivision thereof, by any agency or instrumentality of 

the United States, or by a public service or public utility commission or other similar body of any State or political subdivision 

thereof is not treated as a trade or business for purposes of the limitation. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 


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449Sec. 172(c). 450Sec. 172(b)(1)(A). 451Sec. 172(b)(2). 452Sec. 172(b)(1)(C) and (E). 453Sec. 172(b)(1)(D). 454 Notwithstanding the amendments made by the provision and section 1304 of the bill (Repeal of deduction for personal casualty losses), the provision retains the present-law three-year 

carryback for the portion of the NOL for any taxable year which is a net disaster loss to which 

section 504(b) of the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Pub. 

L. No. 115–63) applies (i.e., a net disaster loss arising from hurricane Harvey, Irma, or Maria). 

2. Modification of net operating loss deduction (sec. 3302 of the bill 

and sec. 172 of the Code) 

PRESENT LAW

A net operating loss (‘‘NOL’’) generally means the amount by 

which a taxpayer’s business deductions exceed its gross income.449

In general, an NOL may be carried back two years and carried over 

20 years to offset taxable income in such years.450 NOLs offset taxable income in the order of the taxable years to which the NOL 

may be carried.451

Different carryback periods apply with respect to NOLs arising 

in different circumstances. Extended carryback periods are allowed 

for NOLs attributable to specified liability losses and certain casualty and disaster losses.452 Limitations are placed on the 

carryback of excess interest losses attributable to corporate equity 

reduction transactions.453

REASONS FOR CHANGE

The Committee believes that, except in limited circumstances of 

disaster losses for farms and small businesses, NOLs should be carried forward, but not back. Further, with the elimination of 

carrybacks, the Committee believes that NOL carryovers should be 

adjusted to account for time value of money to preserve its value. 

The Committee also believes that taxpayers should pay some income tax in years in which the taxpayer has taxable income (determined without regard to the NOL deduction). Therefore, the Committee believes that the NOL deduction should be limited to 90 percent of taxable income (determined without regard to the deduction). 

EXPLANATION OF PROVISION

The provision limits the NOL deduction to 90 percent of taxable 

income (determined without regard to the deduction). Carryovers to 

other years are adjusted to take account of this limitation, and may 

be carried forward indefinitely. In addition, NOL carryovers attributable to losses arising in taxable years beginning after December 

31, 2017, are increased annually to take into account the time 

value of money. 

The provision repeals the two-year carryback and the special 

carryback provisions, but provides a one-year carryback in the case 

of certain disaster losses incurred in the trade or business of farming, or by certain small businesses.454 For this purpose, small business means a corporation, partnership, or sole proprietorship whose 

average annual gross receipts for the three taxable-year period 

ending with such taxable year does not exceed $5,000,000. Aggregation rules apply to determine gross receipts. 


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455See section 3101 of the bill (Increased expensing) for a limitation on the amount of any 

NOL which may be treated as an NOL carryback in the case of any year which includes any 

portion of the period beginning September 28, 2017 and ending December 31, 2017. 456Sec. 1031(a)(1). 457Sec. 1031(a)(2). A chose in action is a right that can be enforced by legal action. 458Sec. 1031(e). 459Sec. 1031(h). 460Treas. Reg. sec. 1.1031(a)–1(b). 461For example, an exchange of a personal computer classified under asset class 00.12 of Rev. 

Proc. 87–56, 1987–2 C.B. 674, for a printer classified under the same asset class of Rev. Proc. 

87–56 would be treated as property of a like kind. However, an exchange of an airplane classified under asset class 00.21 of Rev. Proc. 87–56 for a heavy general purpose truck classified 

under asset class 00.242 of Rev. Proc. 87–56 would not be treated as property of a like kind. 

See Treas. Reg. sec. 1.1031(a)–2(b)(7). 462For example, an exchange of a copyright on a novel for a copyright on a different novel 

would be treated as property of a like kind. See Treas. Reg. sec. 1.1031(a)–2(c)(3). However, the 

goodwill or going concern value of one business is not of a like kind to the goodwill or going 

concern value of a different business. See Treas. Reg. sec. 1.1031(a)–2(c)(2). The Internal Revenue Service (‘‘IRS’’) has ruled that intangible assets such as trademarks, trade names, 

mastheads, and customer-based intangibles that can be separately described and valued apart 

from goodwill qualify as property of a like kind under section 1031. See Chief Counsel Advice 

200911006, February 12, 2009. 463Treas. Reg. sec. 1.1031(a)–1(b) and (c). 

EFFECTIVE DATE

The provision allowing indefinite carryovers and modifying 

carrybacks generally applies to losses arising in taxable years beginning after December 31, 2017.455

The provision limiting the NOL deduction applies to taxable 

years beginning after December 31, 2017. 

The annual increase in carryover amounts applies to taxable 

years beginning after December 31, 2017. 

3. Like-kind exchanges of real property (sec. 3303 of the bill and 

sec. 1031 of the Code) 

PRESENT LAW

An exchange of property, like a sale, generally is a taxable event. 

However, no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged for 

property of a ‘‘like kind’’ which is to be held for productive use in 

a trade or business or for investment.456 In general, section 1031 

does not apply to any exchange of stock in trade (i.e., inventory) or 

other property held primarily for sale; stocks, bonds, or notes; other 

securities or evidences of indebtedness or interest; interests in a 

partnership; certificates of trust or beneficial interests; or choses in 

action.457 Section 1031 also does not apply to certain exchanges involving livestock 458 or foreign property.459

For purposes of section 1031, the determination of whether property is of a ‘‘like kind’’ relates to the nature or character of the 

property and not its grade or quality, i.e., the nonrecognition rules 

do not apply to an exchange of one class or kind of property for 

property of a different class or kind (e.g., section 1031 does not 

apply to an exchange of real property for personal property).460 The 

different classes of property are: (1) depreciable tangible personal 

property;461 (2) intangible or nondepreciable personal property;462

and (3) real property.463 However, the rules with respect to whether real estate is ‘‘like kind’’ are applied more liberally than the 

rules governing like-kind exchanges of depreciable, intangible, or 

nondepreciable personal property. For example, improved real estate and unimproved real estate generally are considered to be 


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464Treas. Reg. sec. 1.1031(a)–1(b). 465Treasury Regulation section 1.1031(a)–2(b)(2) provides the following list of General Asset 

Classes, based on asset classes 00.11 through 00.28 and 00.4 of Rev. Proc. 87–56, 1987–2 C.B. 

674: (i) Office furniture, fixtures, and equipment (asset class 00.11), (ii) Information systems 

(computers and peripheral equipment) (asset class 00.12), (iii) Data handling equipment, except 

computers (asset class 00.13), (iv) Airplanes (airframes and engines), except those used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines) 

(asset class 00.21), (v) Automobiles, taxis (asset class 00.22), (vi) Buses (asset class 00.23), (vii) 

Light general purpose trucks (asset class 00.241), (viii) Heavy general purpose trucks (asset 

class 00.242), (ix) Railroad cars and locomotives, except those owned by railroad transportation 

companies (asset class 00.25), (x) Tractor units for use over-the-road (asset class 00.26), (xi) 

Trailers and trailer-mounted containers (asset class 00.27), (xii) Vessels, barges, tugs, and similar water-transportation equipment, except those used in marine construction (asset class 

00.28), and (xiii) Industrial steam and electric generation and/or distribution systems (asset 

class 00.4). 466Property within a product class consists of depreciable tangible personal property that is 

described in a 6-digit product class within Sectors 31, 32, and 33 (pertaining to manufacturing 

industries) of the North American Industry Classification System (‘‘NAICS’’), set forth in Executive Office of the President, Office of Management and Budget, North American Industry Classification System, United States, 2002 (NAICS Manual), as periodically updated. Treas. Reg. sec. 

1.1031(a)–2(b)(3). 467Sec. 1031(b). For example, if a taxpayer holding land A having a basis of $40,000 and a fair market value of $100,000 exchanges the property for land B worth $90,000 plus $10,000 

in cash, the taxpayer would recognize $10,000 of gain on the transaction, which would be includable in income. The remaining $50,000 of gain would be deferred until the taxpayer disposes 

of land B in a taxable sale or exchange. 468Secs. 1245(b)(4) and 1250(d)(4). For example, if a taxpayer holding section 1245 property A with an original cost basis of $11,000, an adjusted basis of $10,000, and a fair market value 

of $15,000 exchanges the property for section 1245 property B with a fair market value of 

$14,000 plus $1,000 in cash, the taxpayer would recognize $1,000 of ordinary income on the 

transaction. The remaining $4,000 of gain would be deferred until the taxpayer disposes of section 1245 property B in a taxable sale or exchange. 469Sec. 1031(c). 470Sec. 1031(d). Thus, in the example noted above, the taxpayer’s basis in B would be $40,000 

(the taxpayer’s transferred basis of $40,000, increased by $10,000 in gain recognized, and decreased by $10,000 in money received). 471Sec. 1223(1). 

property of a ‘‘like kind’’ as this distinction relates to the grade or 

quality of the real estate,464 while depreciable tangible personal 

properties must be either within the same General Asset Class 465

or within the same Product Class.466

The nonrecognition of gain in a like-kind exchange applies only 

to the extent that like-kind property is received in the exchange. 

Thus, if an exchange of property would meet the requirements of 

section 1031, but for the fact that the property received in the 

transaction consists not only of the property that would be permitted to be exchanged on a tax-free basis, but also other nonqualifying property or money (‘‘additional consideration’’), then the 

gain to the recipient of the other property or money is required to 

be recognized, but not in an amount exceeding the fair market 

value of such other property or money.467 Additionally, any such 

gain realized on a section 1031 exchange as a result of additional 

consideration being involved constitutes ordinary income to the extent that the gain is subject to the recapture provisions of sections 

1245 and 1250.468 No losses may be recognized from a like-kind exchange.469

If section 1031 applies to an exchange of properties, the basis of 

the property received in the exchange is equal to the basis of the 

property transferred. This basis is increased to the extent of any 

gain recognized as a result of the receipt of other property or 

money in the like-kind exchange, and decreased to the extent of 

any money received by the taxpayer.470 The holding period of qualifying property received includes the holding period of the qualifying 

property transferred, but the nonqualifying property received is required to begin a new holding period.471


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472Sec. 1031(a)(3). 473Treas. Reg. sec. 1.1031(k)–1(a) through (o). 474See Rev. Proc. 2000–37, 2000–40 I.R.B. 308, as modified by Rev. Proc. 2004–51, 2004–33 

I.R.B. 294. 475See sections 3101 (Increased expensing) and 3201 (Expansion of section 179 expensing) of 

the bill. 476 It is intended that real property eligible for like-kind exchange treatment under present 

law will continue to be eligible for like-kind exchange treatment under the provision. For example, a like-kind exchange of real property includes an exchange of shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) if at the time of the exchange 

such shares have been recognized by the highest court or statute of the State in which the company is organized as constituting or representing real property or an interest in real property. 

Similarly, improved real estate and unimproved real estate are generally considered to be property of a like kind (see Treas. Reg. sec. 1.1031(a)–1(b)). 477Sec. 118(a). 

A like-kind exchange also does not require that the properties be 

exchanged simultaneously. Rather, the property to be received in 

the exchange must be received not more than 180 days after the 

date on which the taxpayer relinquishes the original property (but 

in no event later than the due date (including extensions) of the 

taxpayer’s income tax return for the taxable year in which the 

transfer of the relinquished property occurs). In addition, the taxpayer must identify the property to be received within 45 days 

after the date on which the taxpayer transfers the property relinquished in the exchange.472

The Treasury Department has issued regulations 473 and revenue 

procedures 474 providing guidance and safe harbors for taxpayers 

engaging in deferred like-kind exchanges. 

REASONS FOR CHANGE

The definition of like-kind property has been modified legislatively over the years to address issues relating to targeted types of 

property. With the provisions in the bill of increased and expanded 

expensing under sections 168(k) and 179 for tangible personal 

property and certain building improvements,475 the Committee believes that section 1031 should be limited to exchanges of real property not held primarily for sale. 

EXPLANATION OF PROVISION

The provision modifies the provision providing for nonrecognition 

of gain in the case of like-kind exchanges by limiting its application 

to real property that is not held primarily for sale.476

EFFECTIVE DATE

The provision generally applies to exchanges completed after December 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange 

is disposed of on or before December 31, 2017, or the property received by the taxpayer in the exchange is received on or before 

such date. 

4. Revision of treatment of contributions to capital (sec. 3304 of the 

bill and sec. 118 of the Code) 

PRESENT LAW

The gross income of a corporation does not include any contribution to its capital.477 For purposes of this rule, a contribution to the 


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478Sec. 118(b). 479Sec. 118(c)(1). 480Sec. 118(c)(4). 481Sec. 362(c)(1). 482Sec. 362(c)(2). See also Treas. Reg. sec. 1.362–2. 483Sec. 118(c)(4). 

capital of a corporation does not include any contribution in aid of 

construction or any other contribution from a customer or potential 

customer.478 A special rule allows certain contributions in aid of 

construction received by a regulated public utility that provides 

water or sewerage disposal services to be treated as a tax-free contribution to the capital of the utility.479 No deduction or credit is 

allowed for, or by reason of, any expenditure that constitutes a contribution that is treated as a tax-free contribution to the capital of 

the utility.480

If property is acquired by a corporation as a contribution to capital and is not contributed by a shareholder as such, the adjusted 

basis of the property is zero.481 If the contribution consists of 

money, the corporation must first reduce the basis of any property 

acquired with the contributed money within the following 12-month 

period, and then reduce the basis of other property held by the corporation.482 Similarly, the adjusted basis of any property acquired 

by a utility with a contribution in aid of construction is zero.483

REASONS FOR CHANGE

The Committee believes that a contribution to corporation’s capital is properly treated as income to the recipient unless the contributor receives in exchange an ownership interest of commensurate value to the contribution. The Committee also believes that removing a special rule that applies only to certain contributions to 

a corporation by nonshareholders helps achieve the goal of similar 

treatment of similarly situated taxpayers. The Committee further 

believes that treating contributions to capital by nonshareholders 

as income to the corporation will remove a Federal tax subsidy for 

State and local governments to offer incentives to businesses as a 

way of encouraging them to locate operations in a particular jurisdiction. If taxpayers in a particular State or locality wish to provide 

such financial inducements to businesses, they should be able to do 

so, but they should bear the cost of such financial inducements 

without passing on a portion of those costs to all Federal taxpayers. 

EXPLANATION OF PROVISION

The provision repeals the provision of the Internal Revenue Code 

under which, generally, a corporation’s gross income does not include contributions of capital to the corporation. 

The provision provides that a contribution to capital, other than 

a contribution of money or property made in exchange for stock of 

a corporation or any interest in an entity, is included in gross income of the corporation. For example, a contribution of municipal 

land by a municipality that is not in exchange for stock (or for a 

partnership interest or other interest) of equivalent value is considered a contribution to capital that is includable in gross income. By 

contrast, a municipal tax abatement for locating a business in a 

particular municipality is not considered a contribution to capital. 


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484 Rev. Rul. 64–155, 1964–1 CB 138. 485Sec. 162(a). 486The term ‘‘influencing legislation’’ means any attempt to influence any legislation through 

communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation. The term ‘‘legislation’’ 

includes actions with respect to Acts, bills, resolutions, or similar items by the Congress, any 

State legislature, any local council, or similar governing body, or by the public in a referendum, 

initiative, constitutional amendment, or similar procedure. Secs. 162(e)(4) and 4911(e)(2). 

The provision further provides that a contribution of capital in 

exchange for stock is not includible in the gross income of the corporation to the extent that the fair market value of any money or 

other property contributed does not exceed the fair market value 

of stock received. It is intended that, for this purpose, the fair market value of any property contributed is calculated net of any liabilities to which the property is subject and net of any liabilities or 

obligations of the transferor assumed or taken subject to by the entity in connection with the transaction. When valuing stock or equity received, taxpayers may disregard discounts for lack of control 

and the effect of limited liquidity on valuation. 

The provision does not change the application of the meaningless 

gesture doctrine, described in Lessinger v. Commissioner, 872 F.2d 

519 (2d. Cir. 1989) and related cases, as well as in administrative 

guidance.484 Thus, under the provision, whether incremental 

shares of stock are issued when the existing shareholder or shareholders of a corporation make a pro-rata contribution to the capital 

of the corporation is not determinative of whether the contribution 

is included in income of the corporation. 

The fair market value requirement generally will be satisfied in 

any arm’s length transaction in which stock is issued in consideration for cash. Thus, for example, in a public offering, if the price 

of the stock was determined on an arm’s length basis, the fact the 

stock trades immediately after its issuance at a price below the 

issue price will not result in contribution to capital treatment. 

Finally, the provision provides rules clarifying the contributee’s 

basis in the property contributed. 

EFFECTIVE DATE

The provision applies to contributions made, and transactions entered into, after the date of enactment. 

5. Repeal of deduction for local lobbying expenses (sec. 3305 of the 

bill and sec. 162(e) of the Code) 

PRESENT LAW

In general 

A taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business.485 However, section 162(e) denies a deduction for amounts 

paid or incurred in connection with (1) influencing legislation,486

(2) participation in, or intervention in, any political campaign on 

behalf of (or in opposition to) any candidate for public office, (3) any 

attempt to influence the general public, or segments thereof, with 

respect to elections, legislative matters, or referendums, or (4) any 


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487The term ‘‘covered executive branch official’’ means (1) the President, (2) the Vice President, (3) any officer or employee of the White House Office of the Executive Office of the President, and the two most senior level officers of each of the other agencies in such Executive Office, (4) any individual servicing in a position in level I of the Executive Schedule under section 

5312 of title 5, United States Code, (5) any other individual designated by the President as having Cabinet-level status, and (6) any immediate deputy of an individual described in (4) or (5). 

Sec. 162(e)(6). 488Sec. 162(e)(5)(C). 489Sec. 162(e)(2)(A). 490Sec. 162(e)(2)(B). 491Sec. 162(e)(7). 492Sec. 162(e)(5)(B). 

direct communication with a covered executive branch official 487 in 

an attempt to influence the official actions or positions of such official. Expenses paid or incurred in connection with lobbying and political activities (such as research for, or preparation, planning, or 

coordination of, any previously described activity) also are not deductible.488

Exceptions 

Local legislation 

Notwithstanding the above, a deduction is allowed for ordinary 

and necessary expenses incurred in connection with any legislation 

of any local council or similar governing body (‘‘local legislation’’).489 With respect to local legislation, the exception permits a 

deduction for amounts paid or incurred in carrying on any trade or 

business (1) in direct connection with appearances before, submission of statements to, or sending communications to the committees 

or individual members of such council or body with respect to legislation or proposed legislation of direct interest to the taxpayer, or 

(2) in direct connection with communication of information between 

the taxpayer and an organization of which the taxpayer is a member with respect to any such legislation or proposed legislation 

which is of direct interest to the taxpayer and such organization, 

and (3) that portion of the dues paid or incurred with respect to 

any organization of which the taxpayer is a member which is attributable to the expenses of the activities described in (1) or (2) 

carried on by such organization.490

For purposes of this exception, legislation of an Indian tribal government is treated in the same manner as local legislation.491

De minimis 

For taxpayers with $2,000 or less of in-house expenditures related to lobbying and political activities, a de minimis exception is 

provided that permits a deduction.492

REASONS FOR CHANGE

The Committee believes that Federal tax law should not draw a 

distinction between the deductibility of local and non-local lobbying 

expenses. The Committee further believes that ending the deductibility of local lobbying expenses eliminates a Federal tax subsidy 

for efforts to influence local legislation. Finally, the Committee believes that elimination of this distinction furthers its general goal 

of simplification of Federal tax law. 


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493For this purpose, adjusted gross income is determined after application of sections 86, 135, 

137, 219, 221, 222, and 469, without regard to the section 199 deduction. Sec. 199(d)(2). 494Sec. 199(a). In the case of oil related qualified production activities income, the deduction 

from taxable income is equal to six percent of the lesser of the taxpayer’s oil related qualified 

production activities income, qualified production activities income, or taxable income. Sec. 

199(d)(9). 495This example assumes the deduction does not exceed the wage limitation discussed below. 496Sec. 199(c)(1). In computing qualified production activities income, the domestic production 

activities deduction itself is not an allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs. 

1.199–1 through 1.199–9 where the Secretary has prescribed rules for the proper allocation of 

items of income, deduction, expense, and loss for purposes of determining qualified production 

activities income. 497Qualifying production property generally includes any tangible personal property, computer 

software, and sound recordings. Sec. 199(c)(5). 498When used in the Code in a geographical sense, the term ‘‘United States’’ generally includes only the States and the District of Columbia. Sec. 7701(a)(9). A special rule for determining domestic production gross receipts, however, provides that for taxable years beginning 

after December 31, 2005, and before January 1, 2018, in the case of any taxpayer with gross 

receipts from sources within the Commonwealth of Puerto Rico, the term ‘‘United States’’ includes the Commonwealth of Puerto Rico, but only if all of the taxpayer’s Puerto Rico-sourced 

gross receipts are taxable under the Federal income tax for individuals or corporations for such 

taxable year. Secs. 199(d)(8)(A) and (C), as extended by section 4401 of the bill (Extension of 

Continued 

EXPLANATION OF PROVISION

The provision repeals the exception for amounts paid or incurred 

related to lobbying local councils or similar governing bodies, including Indian tribal governments. Thus, the general disallowance 

rules applicable to lobbying and political expenditures will apply to 

costs incurred related to such local legislation. 

EFFECTIVE DATE

The provision applies to amounts paid or incurred after December 31, 2017. 

6. Repeal of deduction for income attributable to domestic 

production activities (sec. 3306 of the bill and sec. 199 of the Code) 

PRESENT LAW

Section 199 provides a deduction from taxable income (or, in the 

case of an individual, adjusted gross income 493) that is equal to 

nine percent of the lesser of the taxpayer’s qualified production activities income or taxable income (determined without regard to the 

section 199 deduction) for the taxable year.494 For corporations 

subject to the 35-percent corporate income tax rate, the nine-percent deduction effectively reduces the corporate income tax rate to 

slightly less than 32 percent on qualified production activities income.495 A similar reduction applies to the graduated rates applicable to individuals with qualifying domestic production activities income. 

In general, qualified production activities income is equal to domestic production gross receipts reduced by the sum of: (1) the 

costs of goods sold that are allocable to those receipts; and (2) other 

expenses, losses, or deductions which are properly allocable to 

those receipts.496

Domestic production gross receipts generally are gross receipts of 

a taxpayer that are derived from: (1) any sale, exchange, or other 

disposition, or any lease, rental, or license, of qualifying production 

property 497 that was manufactured, produced, grown or extracted 

by the taxpayer in whole or in significant part within the United 

States; 498 (2) any sale, exchange, or other disposition, or any lease, 


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deduction allowable with respect to income attributable to domestic production activities in 

Puerto Rico). In computing the 50-percent wage limitation, the taxpayer is permitted to take 

into account wages paid to bona fide residents of Puerto Rico for services performed in Puerto 

Rico. Sec. 199(d)(8)(B). 499Qualified film includes any motion picture film or videotape (including live or delayed television programming, but not including certain sexually explicit productions) if 50 percent or 

more of the total compensation relating to the production of the film (including compensation 

in the form of residuals and participations) constitutes compensation for services performed in 

the United States by actors, production personnel, directors, and producers. Sec. 199(c)(6). 500Sec. 199(c)(4)(A). 501Sec. 199(b)(1). For purposes of the provision, ‘‘W–2 wages’’ include the sum of the amounts 

of wages as defined in section 3401(a) and elective deferrals that the taxpayer properly reports 

to the Social Security Administration with respect to the employment of employees of the taxpayer during the calendar year ending during the taxpayer’s taxable year. Elective deferrals include elective deferrals as defined in section 402(g)(3), amounts deferred under section 457, and 

designated Roth contributions as defined in section 402A. See sec. 199(b)(2)(A). The wage limitation for qualified films includes any compensation for services performed in the United States 

by actors, production personnel, directors, and producers and is not restricted to W–2 wages. 

Sec. 199(b)(2)(D). 

rental, or license, of qualified film 499 produced by the taxpayer; (3) 

any sale, exchange, or other disposition, or any lease, rental, or license, of electricity, natural gas, or potable water produced by the 

taxpayer in the United States; (4) construction of real property performed in the United States by a taxpayer in the ordinary course 

of a construction trade or business; or (5) engineering or architectural services performed in the United States for the construction 

of real property located in the United States.500

The amount of the deduction for a taxable year is limited to 50 

percent of the W–2 wages paid by the taxpayer, and properly allocable to domestic production gross receipts, during the calendar 

year that ends in such taxable year.501

REASONS FOR CHANGE

The Committee believes the reduction in corporate rate and creation of a maximum rate on business income of individuals will enhance the ability of all domestic businesses to compete in the global 

marketplace and enable small businesses to maintain their position 

as the primary source of new jobs in this country. Therefore, while 

the Committee believes that the deduction for income attributable 

to domestic production activities has generally helped domestic 

manufacturing firms by improving the cash flow of domestic manufacturers and making investments in domestic manufacturing facilities more attractive, there is no longer a need for such deduction. Finally, the Committee believes that elimination of deduction 

for income attributable to domestic production activities furthers 

the Committee’s general goal of simplification of the tax code. 

EXPLANATION OF PROVISION

The provision repeals section 199 for taxable years beginning 

after December 31, 2017. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 


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502Sec. 274(a)(1). 503Sec. 274(n)(1)(B). 504Sec. 274(n)(1)(A). 505Sec. 274(a)(3). 506Sec. 274(e)(2)(A). See below for a discussion of the recent modification of this rule for certain individuals. 507Sec. 274(e)(9). 508Treas. Reg. sec. 1.162–25T(a). 509Sec. 274(e)(3). 510Sec. 274(e)(4). 511Sec. 274(n)(2)(E). 

7. Entertainment, etc. expenses (sec. 3307 of the bill and sec. 274 

of the Code) 

PRESENT LAW

In general 

No deduction is allowed with respect to (1) an activity generally 

considered to be entertainment, amusement, or recreation (‘‘entertainment’’), unless the taxpayer establishes that the item was directly related to (or, in certain cases, associated with) the active 

conduct of the taxpayer’s trade or business, or (2) a facility (e.g., 

an airplane) used in connection with such activity.502 If the taxpayer establishes that entertainment expenses are directly related 

to (or associated with) the active conduct of its trade or business, 

the deduction generally is limited to 50 percent of the amount otherwise deductible.503 Similarly, a deduction for any expense for 

food or beverages generally is limited to 50 percent of the amount 

otherwise deductible.504 In addition, no deduction is allowed for 

membership dues with respect to any club organized for business, 

pleasure, recreation, or other social purpose.505

There are a number of exceptions to the general rule disallowing 

deduction of entertainment expenses and the rules limiting deductions to 50 percent of the otherwise deductible amount. Under one 

such exception, those rules do not apply to expenses for goods, services, and facilities to the extent that the expenses are reported by 

the taxpayer as compensation and as wages to an employee.506

Those rules also do not apply to expenses for goods, services, and 

facilities to the extent that the expenses are includible in the gross 

income of a recipient who is not an employee (e.g., a nonemployee 

director) as compensation for services rendered or as a prize or 

award.507 The exceptions apply only to the extent that amounts are 

properly reported by the company as compensation and wages or 

otherwise includible in income. In no event can the amount of the 

deduction exceed the amount of the taxpayer’s actual cost, even if 

a greater amount (i.e., fair market value) is includible in income.508

Those deduction disallowance rules also do not apply to expenses 

paid or incurred by the taxpayer, in connection with the performance of services for another person (other than an employer), under 

a reimbursement or other expense allowance arrangement if the 

taxpayer accounts for the expenses to such person.509 Another exception applies for expenses for recreational, social, or similar activities primarily for the benefit of employees other than certain 

owners and highly compensated employees.510 An exception applies 

also to the 50 percent deduction limit for food and beverages provided to crew members of certain commercial vessels and certain 

oil or gas platform or drilling rig workers.511


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512Sec. 61(a)(1). 513Treas. Reg. sec. 1.61–21(b)(1). 514Treas. Reg. sec. 1.61–21(g)(5). 515Treas. Reg. sec. 1.61–21(b)(6). 516Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 197 (2000), aff’d, 255 F.3d 

495 (8th Cir. 2001). 517Sec. 274(e)(2)(B)(i). See also Treas. Reg. sec. 1.274–9(a). 518Sec. 274(e)(2)(B)(ii). See also Treas. Reg. sec. 1.274–9(b). 

Expenses treated as compensation 

Except as otherwise provided, gross income includes compensation for services, including fees, commissions, fringe benefits, and 

similar items.512 In general, an employee (or other service provider) 

must include in gross income the amount by which the fair market 

value of a fringe benefit exceeds the sum of the amount (if any) 

paid by the individual and the amount (if any) specifically excluded 

from gross income.513 Treasury regulations provide detailed rules 

regarding the valuation of certain fringe benefits, including flights 

on an employer-provided aircraft. In general, the value of a noncommercial flight generally is determined under the base aircraft 

valuation formula, also known as the Standard Industry Fare Level 

formula or ‘‘SIFL.’’ 514 If the SIFL valuation rules do not apply, the 

value of a flight on an employer-provided aircraft generally is equal 

to the amount that an individual would have to pay in an arm’slength transaction to charter the same or a comparable aircraft for 

that period for the same or a comparable flight.515

In the context of an employer providing an aircraft to employees 

for nonbusiness (e.g., vacation) flights, the exception for expenses 

treated as compensation has been interpreted as not limiting the 

company’s deduction for expenses attributable to the operation of 

the aircraft to the amount of compensation reportable to its employees.516 The result of that interpretation is often a deduction 

several times larger than the amount required to be included in income. Further, in many cases, the individual including amounts attributable to personal travel in income directly benefits from the 

enhanced deduction, resulting in a net deduction for the personal 

use of the company aircraft. 

The exceptions for expenses treated as compensation or otherwise includible income were subsequently modified in the case of 

specified individuals such that the exceptions apply only to the extent of the amount of expenses treated as compensation or includible in income of the specified individual.517 Specified individuals 

are individuals who, with respect to an employer or other service 

recipient (or a related party), are subject to the requirements of 

section 16(a) of the Securities Exchange Act of 1934, or would be 

subject to such requirements if the employer or service recipient (or 

related party) were an issuer of equity securities referred to in section 16(a).518

As a result, in the case of specified individuals, no deduction is 

allowed with respect to expenses for (1) a nonbusiness activity generally considered to be entertainment, amusement or recreation, or 

(2) a facility (e.g., an airplane) used in connection with such activity to the extent that such expenses exceed the amount treated as 

compensation or includible in income to the specified individual. 

For example, a company’s deduction attributable to aircraft operating costs and other expenses for a specified individual’s vacation 

use of a company aircraft is limited to the amount reported as comVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00274 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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519See Treas. Reg. sec. 1.274–10(a)(2). 520Secs. 132(a), 3121(a)(20), 3231(e)(5), 3306(b)(16), and 3401(a)(19). 521Sec. 132(e)(1). Examples include occasional personal use of an employer’s copying machine, 

occasional parties or meals for employees and their guests, local telephone calls, and coffee, 

doughnuts and soft drinks. Treas. Reg. sec. 1.132–6(e)(1). 522Sec. 132(f)(1), (5). The qualified transportation fringe exclusions are subject to monthly limits. Sec. 132(f)(2). 523Section 132(j)(4). 

pensation to the specified individual. However, in the case of other 

employees or service providers, the company’s deduction is not limited to the amount treated as compensation or includible in income.519

Excludable fringe benefits 

Certain employer-provided fringe benefits are excluded from an 

employee’s gross income and wages for employment tax purposes, 

including de minimis fringes and qualified transportation 

fringes.520 A de minimis fringe generally means any property or 

service the value of which is (taking into account the frequency 

with which similar fringes are provided by the employer) so small 

as to make accounting for it unreasonable or administratively impracticable.521 Qualified transportation fringes include qualified 

parking (i.e., on or near the employer’s business premises or on or 

near a location from which the employee commutes to work by public transit), transit passes, vanpool benefits, and qualified bicycle 

commuting reimbursements.522 On-premises athletic facilities are 

gyms or other athletic facilities located on the employer’s premises, 

operated by the employer, and substantially all the use of which is 

by employees of the employer, their spouses, and their dependent 

children.523

REASONS FOR CHANGE

The Committee believes that the difficulty in determining whether entertainment expenses are directly related to, or associated 

with, a trade or business creates uncertainty for taxpayers and the 

potential for significant abuse. The Committee therefore believes 

that a tax deduction for entertainment-related expenses should be 

permitted only to the extent such items are reported as employee 

compensation. The Committee also aligns the treatment of the employer’s deduction for transportation and gym benefits, and amenities provided to an employee that are primarily personal in nature 

and not directly related to a trade or business, with other similar 

taxable items. 

EXPLANATION OF PROVISION

The provision provides that no deduction is allowed with respect 

to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club 

organized for business, pleasure, recreation or other social purposes, (3) a de minimis fringe that is primarily personal in nature 

and involving property or services that are not directly related to 

the taxpayer’s trade or business, (4) a facility or portion thereof 

used in connection with any of the above items, (5) a qualified 

transportation fringe, including costs of operating a facility used for 

qualified parking, and (6) an on-premises athletic facility provided 

by an employer to its employees, including costs of operating such 


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524 As defined in section 168(h)(2)(A), i.e., Federal, State and local government entities, organizations (other than certain cooperatives) exempt from income tax, any foreign person or entity, 

and any Indian tribal government. 

a facility. Thus, the provision repeals the present-law exception to 

the deduction disallowance for entertainment, amusement, or 

recreation that is directly related to (or, in certain cases, associated 

with) the active conduct of the taxpayer’s trade or business (and 

the related rule applying a 50 percent limit to such deductions). 

The provision also repeals the present-law exception for recreational, social, or similar activities primarily for the benefit of 

employees. However, taxpayers may still, generally, deduct 50 percent of the food and beverage expenses associated with operating 

their trade or business (e.g., meals consumed by employees on work 

travel). 

Under the provision, in the case of all individuals (not just specified individuals), the exceptions to the general entertainment expense disallowance rule for expenses treated as compensation or includible in income apply only to the extent of the amount of expenses treated as compensation or includible in income. Thus, 

under those exceptions, no deduction is allowed with respect to expenses for (1) a nonbusiness activity generally considered to be entertainment, amusement or recreation, or (2) a facility (e.g., an airplane) used in connection with such activity to the extent that such 

expenses exceed the amount treated as compensation or includible 

in income. As under present law, the exceptions apply only if 

amounts are properly reported by the company as compensation 

and wages or otherwise includible in income. 

The provision amends the present-law exception for reimbursed 

expenses. The provision disallows a deduction for amounts paid or 

incurred by a taxpayer in connection with the performance of services for another person (other than an employee) under a reimbursement or other expense allowance arrangement if the person 

for whom the services are performed is a tax-exempt entity 524 or 

the arrangement is designated by the Secretary as having the effect of avoiding the 50 percent deduction disallowance. 

The provision clarifies that the exception to the 50 percent deduction limit for food or beverages applies to any expense excludible from the gross income of the recipient related to meals furnished for the convenience of the employer. The provision thereby 

repeals as deadwood the special exceptions for food or beverages 

provided to crew members of certain commercial vessels and certain oil or gas platform or drilling rig workers. 

EFFECTIVE DATE

The provision applies to amounts paid or incurred after December 31, 2017. 


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525Secs. 511–514. 526Treas. Reg. sec. 1.501(c)(3)–1(e). 527Sec. 512(a). 528Treas. Reg. sec. 1.512(a)–1(a). 

8. Unrelated business taxable income increased by amount of certain fringe benefit expenses for which deduction is disallowed 

(sec. 3308 of the bill and sec. 512 of the Code) 

PRESENT LAW

Tax exemption for certain organizations 

Section 501(a) exempts certain organizations from Federal income tax. Such organizations include: (1) tax-exempt organizations 

described in section 501(c) (including among others section 

501(c)(3) charitable organizations and section 501(c)(4) social welfare organizations); (2) religious and apostolic organizations described in section 501(d); and (3) trusts forming part of a pension, 

profit-sharing, or stock bonus plan of an employer described in section 401(a). 

Unrelated business income tax, in general 

The unrelated business income tax (‘‘UBIT’’) generally applies to 

income derived from a trade or business regularly carried on by the 

organization that is not substantially related to the performance of 

the organization’s tax-exempt functions.525 An organization that is 

subject to UBIT and that has $1,000 or more of gross unrelated 

business taxable income must report that income on Form 990–T 

(Exempt Organization Business Income Tax Return). 

Most exempt organizations may operate an unrelated trade or 

business so long as the organization remains primarily engaged in 

activities that further its exempt purposes. Therefore, an organization may engage in a substantial amount of unrelated business activity without jeopardizing its exempt status. A section 501(c)(3) 

(charitable) organization, however, may not operate an unrelated 

trade or business as a substantial part of its activities.526 Therefore, the unrelated trade or business activity of a section 501(c)(3) 

organization must be insubstantial. 

An organization determines its unrelated business taxable income by subtracting from its gross unrelated business income deductions directly connected with the unrelated trade or business.527

Under regulations, in determining unrelated business taxable income, an organization that operates multiple unrelated trades or 

businesses aggregates income from all such activities and subtracts 

from the aggregate gross income the aggregate of deductions.528 As 

a result, an organization may use a loss from one unrelated trade 

or business to offset gain from another, thereby reducing total unrelated business taxable income. 

Organizations subject to tax on unrelated business income 

Most exempt organizations are subject to the tax on unrelated 

business income. Specifically, organizations subject to the unrelated business income tax generally include: (1) organizations exempt from tax under section 501(a), including organizations described in section 501(c) (except for U.S. instrumentalities and certain charitable trusts); (2) qualified pension, profit-sharing, and 


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529Sec. 511(a)(2). 530Secs. 511–514. 531Sec. 512(b)(13). 

stock bonus plans described in section 401(a); and (3) certain State 

colleges and universities.529

Exclusions from Unrelated Business Taxable Income 

Certain types of income are specifically exempt from unrelated 

business taxable income, such as dividends, interest, royalties, and 

certain rents,530 unless derived from debt-financed property or 

from certain 50-percent controlled subsidiaries.531 Other exemptions from UBIT are provided for activities in which substantially 

all the work is performed by volunteers, for income from the sale 

of donated goods, and for certain activities carried on for the convenience of members, students, patients, officers, or employees of 

a charitable organization. In addition, special UBIT provisions exempt from tax activities of trade shows and State fairs, income 

from bingo games, and income from the distribution of low-cost 

items incidental to the solicitation of charitable contributions. Organizations liable for tax on unrelated business taxable income 

may be liable for alternative minimum tax determined after taking 

into account adjustments and tax preference items. 

REASONS FOR CHANGE

As part of its broader tax reform effort, the Committee believes 

that certain nontaxable fringe benefits should not be deductible by 

employers if not includible in income of employees. The Committee 

believes that aligning the tax treatment between for-profit and taxexempt employers with respect to nontaxable transportation and 

gym benefits provided to employees will make the tax system simpler and fairer for all businesses. In addition, broadening the tax 

base will allow for lower tax rates that will benefit all taxpayers. 

EXPLANATION OF PROVISION

Under the provision, unrelated business taxable income includes 

any expenses paid or incurred by a tax exempt organization for 

qualified transportation fringe benefits (as defined in section 

132(f)), a parking facility used in connection with qualified parking 

(as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)), provided such amounts are 

not deductible under section 274. 

EFFECTIVE DATE

The provision is effective for amounts paid or incurred after December 31, 2017. 

9. limitation on deduction for FDIC premiums (sec. 3309 of the bill 

and sec. 162 of the Code) 

PRESENT LAW

Corporations organized under the laws of any of the 50 States 

(and the District of Columbia) generally are subject to the U.S. corporate income tax on their worldwide taxable income. The taxable 


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532 Corporations subject to tax are commonly referred to as C corporations after subchapter 

C of the Code, which sets forth corporate tax rules. Certain specialized entities that invest primarily in real estate related assets (real estate investment trusts) or in stock and securities 

(regulated investment companies) and that meet other requirements, generally including annual 

distribution of 90 percent of their income, are allowed to deduct their distributions to shareholders, thus generally paying little or no corporate-level tax despite otherwise being subject to 

subchapter C. 533Sec. 162(a). However, certain exceptions apply. No deduction is allowed for (1) any charitable contribution or gift that would be allowable as a deduction under section 170 were it not 

for the percentage limitations, the dollar limitations, or the requirements as to the time of payment, set forth in such section; (2) any illegal bribe, illegal kickback, or other illegal payment; 

(3) certain lobbying and political expenditures; (4) any fine or similar penalty paid to a government for the violation of any law; (5) two-thirds of treble damage payments under the antitrust 

laws; (6) certain foreign advertising expenses; (7) certain amounts paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person; or 

(8) certain applicable employee remuneration. 534Sec. 581. See also Treas. Reg. sec. 1.581–1(a). 535While the general principles for determining the taxable income of a corporation are applicable to a mutual savings bank, a building and loan association, and a cooperative bank, there 

are certain exceptions and special rules for such institutions. Treas. Reg. sec. 1.581–2(a). 536Sec. 1361(b)(2)(A). 

income of a C corporation 532 generally comprises gross income less 

allowable deductions. A taxpayer generally is allowed a deduction 

for ordinary and necessary expenses paid or incurred in carrying 

on any trade or business.533

Corporations that make a valid election pursuant to section 1362 

of subchapter S of the Code, referred to as S corporations, generally 

are not subject to corporate-level income tax on its items of income 

and loss. Instead, an S corporation passes through to shareholders 

its items of income and loss. The shareholders separately take into 

account their shares of these items on their individual income tax 

returns. 

Banks, thrifts, and credit unions 

In general 

Financial institutions are subject to the same Federal income tax 

rules and rates as are applied to other corporations or entities, 

with specified exceptions. 

C corporation banks and thrifts 

A bank is generally taxed for Federal income tax purposes as a 

C corporation. For this purpose a bank generally means a corporation, a substantial portion of whose business is receiving deposits 

and making loans and discounts, or exercising certain fiduciary 

powers.534 A bank for this purpose generally includes domestic 

building and loan associations, mutual stock or savings banks, and 

certain cooperative banks that are commonly referred to as 

thrifts.535

S corporation banks 

A bank is generally eligible to elect S corporation status under 

section 1362, provided it meets the other requirements for making 

this election and it does not use the reserve method of accounting 

for bad debts as described in section 585.536

Special bad debt loss rules for small banks 

Section 166 provides a deduction for any debt that becomes 

worthless (wholly or partially) within a taxable year. The reserve 


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537Tax Reform Act of 1986, Pub. L. No. 99–514. 538Sec. 585(b)(2). 539Sec. 501(c)(14)(A). For a discussion of the history of and reasons for Federal tax exemption, 

see United States Department of the Treasury, Comparing Credit Unions with Other Depository 

Institutions, Report 3070, January 15, 2001, available at https://www.treasury.gov/press-center/ 

press-releases/Documents/report30702.doc. 540The Credit Union Membership Access Act, Pub. L. No. 105–219, allows multiple common 

bond credit unions. The legislation in part responds to National Credit Union Administration 

v. First National Bank & Trust Co., 522 U.S. 479 (1998), which interpreted the permissible 

membership of tax-exempt credit unions narrowly. 541The Treasury Department has concluded that any remaining regulatory differences do not 

raise competitive equity concerns between credit unions and banks. United States Department 

of the Treasury, Comparing Credit Unions with Other Depository Institutions, Report 3070, January 15, 2001, p. 2, available at https://www.treasury.gov/press-center/press-releases/Documents/ 

report30702.doc. 542Technical Advice Memorandum 199924060, March 5, 1999, and Rev. Rul. 80–230, 1980– 

2 C.B. 169, 1980. 

method of accounting for bad debts, repealed in 1986 537 for most 

taxpayers, is allowed under section 585 for any bank (as defined in 

section 581) other than a large bank. For this purpose, a bank is 

a large bank if, for the taxable year (or for any preceding taxable 

year after 1986), the average adjusted basis of all its assets (or the 

assets of the controlled group of which it is a member) exceeds 

$500 million. Deductions for reserves are taken in lieu of a worthless debt deduction under section 166. Accordingly, a small bank is 

able to take deductions for additions to a bad debt reserve. Additions to the reserve are determined under an experience method 

that generally looks to the ratio of (1) the total bad debts sustained 

during the taxable year and the five preceding taxable years to (2) 

the sum of the loans outstanding at the close of such taxable 

years.538

Credit unions 

Credit unions are exempt from Federal income taxation.539 The 

exemption is based on their status as not-for-profit mutual or cooperative organizations (without capital stock) operated for the benefit of their members, who generally must share a common bond. 

The definition of common bond has been expanded to permit greater use of credit unions.540 While significant differences between the 

rules under which credit unions and banks operate have existed in 

the past, most of those differences have disappeared over time.541

FDIC premiums 

The Federal Deposit Insurance Corporation (‘‘FDIC’’) provides deposit insurance for banks and savings institutions. To maintain its 

status as an insured depository institution, a bank must pay semiannual assessments into the deposit insurance fund (‘‘DIF’’). Assessments for deposit insurance are treated as ordinary and necessary business expenses. These assessments, also known as premiums, are deductible once the all events test for the premium is 

satisfied.542

REASONS FOR CHANGE

The Committee believes that this provision is necessary to correct for the fact that, when the FDIC determines the assessments 

necessary to maintain an adequate balance in the DIF, it does so 

on a pretax basis and does not take into account the deductibility 

of the premium payments. These deductions diminish the General 

Fund and effectively result in a General Fund transfer to the DIF. 


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543 12 U.S.C. sec. 1817(b). 544Pub. L. No. 111–203. 545Sec. 1044(a). 546Sec. 1044(b)(1). 547Sec. 1044(b)(2). 

EXPLANATION OF PROVISION

No deduction is allowed for the applicable percentage of any 

FDIC premium paid or incurred by the taxpayer. For taxpayers 

with total consolidated assets of $50 billion or more, the applicable 

percentage is 100 percent. Otherwise, the applicable percentage is 

the ratio of the excess of total consolidated assets over $10 billion 

to $40 billion. For example, for a taxpayer with total consolidated 

assets of $20 billion, no deduction is allowed for 25 percent of FDIC 

premiums. The provision does not apply to taxpayers with total 

consolidated assets (as of the close of the taxable year) that do not 

exceed $10 billion. 

FDIC premium means any assessment imposed under section 

7(b) of the Federal Deposit Insurance Act.543 The term total consolidated assets has the meaning given such term under section 

165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.544

For purposes of determining a taxpayer’s total consolidated assets, members of an expanded affiliated group are treated as a single taxpayer. An expanded affiliated group means an affiliated 

group as defined in section 1504(a), determined by substituting 

‘‘more than 50 percent’’ for ‘‘at least 80 percent’’ each place it appears and without regard to the exceptions from the definition of 

includible corporation for insurance companies and foreign corporations. A partnership or any other entity other than a corporation 

is treated as a member of an expanded affiliated group if such entity is controlled by members of such group. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

10. Repeal of rollover of publicly traded securities gain into specialized small business investment companies (sec. 3310 of the bill 

and sec. 1044 of the Code) 

PRESENT LAW

A corporation or individual may elect to roll over tax-free any 

capital gain realized on the sale of publicly-traded securities to the 

extent of the taxpayer’s cost of purchasing common stock or a partnership interest in a specialized small business investment company within 60 days of the sale.545 The amount of gain that an individual may elect to roll over under this provision for a taxable 

year is limited to (1) $50,000 or (2) $500,000 reduced by the gain 

previously excluded under this provision.546 For corporations, these 

limits are $250,000 and $1 million, respectively.547

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the election described above to roll over tax-free 


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548Sec. 1221(a). 549The net gain from the sale, exchange, or involuntary conversion of certain property used 

in the taxpayer’s trade or business (in excess of depreciation recapture) is treated as long-term 

capital gain. Sec. 1231. However, net gain from such property is treated as ordinary income to 

the extent that losses from such property in the previous five years were treated as ordinary 

losses. Sec. 1231(c). 550Sec. 1221(a)(1)–(8). 551Sec. 1221(a)(3)(A) and (B). 552Sec. 1221(a)(3)(C). 553Sec. 1221(b)(3). Thus, if a taxpayer who owns musical compositions or copyrights in musical works that the taxpayer created (or if a taxpayer to which the musical compositions or copyrights have been transferred by the works’ creator in a substituted basis transaction) elects the 

capital gain realized on the sale of publicly-traded securities, 

makes the system simpler and fairer for all individuals, families, 

and businesses, and allows for lower tax rates. The Committee further believes that the repeal of this provision is a necessary part 

of its larger tax reform effort. 

EXPLANATION OF PROVISION

The provision repeals the election described above to roll over 

tax-free capital gain realized on the sale of publicly-traded securities. 

EFFECTIVE DATE

The provision applies to sales after December 31, 2017. 

11. Certain self-created property not treated as a capital asset (sec. 

3311 of the bill and sec. 1221 of the Code) 

PRESENT LAW

In general, property held by a taxpayer (whether or not connected with his trade or business) is considered a capital asset.548

Certain assets, however, are specifically excluded from the definition of capital asset. Such excluded assets are: inventory property, 

property of a character subject to depreciation (including real property),549 certain self-created intangibles, accounts or notes receivable acquired in the ordinary course of business (e.g., for providing 

services or selling property), publications of the U.S. Government 

received by a taxpayer other than by purchase at the price offered 

to the public, commodities derivative financial instruments held by 

a commodities derivatives dealer unless established to the satisfaction of the Secretary that any such instrument has no connection 

to the activities of such dealer as a dealer and clearly identified as 

such before the close of the day on which it was acquired, originated, or entered into, hedging transactions clearly identified as 

such, and supplies regularly used or consumed by the taxpayer in 

the ordinary course of a trade or business of the taxpayer.550

Self-created intangibles subject to the exception are copyrights, 

literary, musical, or artistic compositions, letters or memoranda, or 

similar property which is held either by the taxpayer who created 

the property, or (in the case of a letter, memorandum, or similar 

property) a taxpayer for whom the property was produced.551 For 

the purpose of determining gain, a taxpayer with a substituted or 

transferred basis from the taxpayer who created the property, or 

for whom the property was created, also is subject to the exception.552 However, a taxpayer may elect to treat musical compositions and copyrights in musical works as capital assets.553


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application of this provision, gain from a sale of the compositions or copyrights is treated as 

capital gain, not ordinary income. 554 Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 52 (1955). 

Since the intent of Congress is that profits and losses arising 

from everyday business operations be characterized as ordinary income and loss, the general definition of capital asset is narrowly 

applied and the categories of exclusions are broadly interpreted.554

REASONS FOR CHANGE

The rationale underlying the treatment of a copyright, artistic 

work, and similar property in the hands of the person who created 

it (or in the possession of a person who received the property as 

a gift from the person who created it) is that the holder of the property is, in effect, engaged in the business of creating and selling the 

copyright or similar property (or is selling the property created by 

the personal efforts of another who gave the individual the property). Thus, gain arising from the sale of such property is treated 

as ordinary income derived as compensation for personal services 

rendered by the person (or the contributor), rather than as capital 

gain from the sale of property held as a capital asset. The Committee believes that a patent, invention, model or design, and a secret formula or process are essentially similar to copyrights and 

similar property created by the personal efforts of the taxpayer (or 

of the person who gave the property to the taxpayer), and should, 

therefore, be classified in the same manner for purposes of the tax 

law. The Committee believes that one who sells a patent, invention, 

model or design, or secret formula or process created by or for the 

person should not be treated as receiving capital gain on the sale 

when the product being sold is, in effect, the result of personal efforts. 

EXPLANATION OF PROVISION

This provision amends section 1221(a)(3), resulting in the exclusion of a patent, invention, model or design (whether or not patented), and a secret formula or process which is held either by the 

taxpayer who created the property or a taxpayer with a substituted 

or transferred basis from the taxpayer who created the property (or 

for whom the property was created) from the definition of a ‘‘capital 

asset.’’ Thus, gains or losses from the sale or exchange of a patent, 

invention, model or design (whether or not patented), or a secret 

formula or process which is held either by the taxpayer who created the property or a taxpayer with a substituted or transferred 

basis from the taxpayer who created the property (or for whom the 

property was created) will not receive capital gain treatment. 

EFFECTIVE DATE

The provision applies to dispositions after December 31, 2017. 


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555 A transfer by gift, inheritance, or devise is not included. 556Sec. 1235(a). 557Sec. 1235(b). 558See also section 3311 of the bill (Certain self-created property not treated as a capital 

asset). 559Sec. 708(b)(1). 560Sec. 708(b)(2). Mergers, consolidations, and divisions of partnerships take either an assetsover form or an assets-up form pursuant to Treas. Reg. sec. 1.708–1(c). 

12. Repeal of special rule for sale or exchange of patents (sec. 3312 

of the bill and sec. 1235 of the Code) 

PRESENT LAW

Section 1235 provides that a transfer 555 of all substantial rights 

to a patent, or an undivided interest therein which includes a part 

of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than one year, regardless 

of whether or not payments in consideration of such transfer are 

(1) payable periodically over a period generally conterminous with 

the transferee’s use of the patent, or (2) contingent on the productivity, use, or disposition of the property transferred.556

A holder is defined as (1) any individual whose efforts created 

such property, or (2) any other individual who has acquired his interest in such property in exchange for consideration in money or 

money’s worth paid to such creator prior to actual reduction to 

practice of the invention covered by the patent, if such individual 

is neither the employer of such creator nor related (as defined) to 

such creator.557

REASONS FOR CHANGE

The Committee believes that certain self-created intangibles 

should not be treated as capital assets and that income derived 

from such intangibles should be ordinary in character. The special 

rule for the sale or exchange of patents, which treats the gain as 

capital, is inconsistent with that belief. 

EXPLANATION OF PROVISION

The provision repeals section 1235. Thus, the holder of a patented invention may not transfer his or her rights to the patent 

and treat amounts received as proceeds from the sale of a capital 

asset. It is intended that the determination of whether a transfer 

is a sale or exchange of a capital asset that produces capital gain, 

or a transaction that produces ordinary income, will be determined 

under generally applicable principles.558

EFFECTIVE DATE

The provision applies to dispositions after December 31, 2017. 

13. Repeal of technical termination of partnerships (sec. 3313 of the 

bill and sec. 708(b) of the Code) 

PRESENT LAW

A partnership is considered as terminated under specified circumstances.559 Special rules apply in the case of the merger, consolidation, or division of a partnership.560


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561Sec. 708(b)(1)(A). 562Sec. 708(b)(1)(B). 563Treas. Reg. sec. 1.708–1(b)(4). 564Sec. 706(c)(1); Treas. Reg. sec. 1.708–1(b)(3). 565Partnership level elections include, for example, the section 754 election to adjust basis on 

a transfer or distribution, as well as other elections that determine the partnership’s tax treatment of partnership items. A list of elections can be found at William S. McKee, William F. Nelson, and Robert L. Whitmire, Federal Taxation of Partnerships and Partners, 4th edition, para. 

9.01[7], pp. 9–42—9–44. 

A partnership is treated as terminated if no part of any business, 

financial operation, or venture of the partnership continues to be 

carried on by any of its partners in a partnership.561

A partnership is also treated as terminated if within any 12- 

month period, there is a sale or exchange of 50 percent or more of 

the total interest in partnership capital and profits.562 This is 

sometimes referred to as a technical termination. Under regulations, the technical termination gives rise to a deemed contribution 

of all the partnership’s assets and liabilities to a new partnership 

in exchange for an interest in the new partnership, followed by a 

deemed distribution of interests in the new partnership to the purchasing partners and the other remaining partners.563

The effect of a technical termination is not necessarily the end 

of the partnership’s existence, but rather the termination of some 

tax attributes. Upon a technical termination, the partnership’s taxable year closes, potentially resulting in short taxable years.564

Partnership-level elections generally cease to apply following a 

technical termination.565 A technical termination generally results 

in the restart of partnership depreciation recovery periods. 

REASONS FOR CHANGE

The Committee is concerned that partnership technical terminations are being used electively to change partnership-level elections and attributes in a way which otherwise would not be permitted. Following these elective terminations, the partnership remains in existence and can continue to do business, but with refreshed tax attributes. Because of the perceived abuse of the technical termination rule, the Committee believes its repeal will improve tax administration and increase taxpayer compliance. 

EXPLANATION OF PROVISION

The provision repeals the section 708(b)(1)(B) rule providing for 

technical terminations of partnerships. The provision does not 

change the present-law rule of section 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried 

on by any of its partners in a partnership. 

EFFECTIVE DATE

The provision applies to partnership taxable years beginning 

after December 31, 2017. 


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566Only a handful of cases have addressed this issue. Though one case required the value to 

be included currently, where value was easily determined by a sale of the profits interest soon 

after receipt (Diamond v. Commissioner, 56 T.C. 530 (1971), aff’d 492 F.2d 286 (7th Cir. 1974)), 

a more recent case concluded that partnership profits interests were not includable on receipt, 

because the profits interests were speculative and without fair market value (Campbell v. Commissioner, 943 F. 2d 815 (8th Cir. 1991)). 567 Rev. Proc. 93–27 (1993–2 C.B. 343), citing the Diamond and Campbell cases, supra. 568 Rev. Proc. 2001–43 (2001–2 C.B. 191). This result applies under the guidance even if the 

interest is substantially nonvested on the date of grant. 569 A similar result would occur under the ‘‘safe harbor’’ election under proposed regulations 

regarding the application of section 83 to the compensatory transfer of a partnership interest. 

REG–105346–03, 70 Fed. Reg. 29675 (May 24, 2005). 570Secs. 61 and 83; Treas. Reg. sec. 1.721–1(b)(1); see U.S. v. Frazell, 335 F.2d 487 (5th Cir. 

1964), cert. denied, 380 U.S. 961 (1965). 571 Rev. Proc. 93–27, 1993–2 C.B. 343. 

14. Recharacterization of certain gains in the case of partnership 

profits interests held in connection with performance of investment services (sec. 3314 of the bill and secs. 1 and 83 of the 

Code) 

PRESENT LAW

Partnership profits interest for services 

A profits interest in a partnership is the right to receive future 

profits in the partnership but does not generally include any right 

to receive money or other property upon the immediate liquidation 

of the partnership. The treatment of the receipt of a profits interest 

in a partnership (sometimes referred to as a carried interest) in exchange for the performance of services has been the subject of controversy. Though courts have differed, in some instances, a taxpayer receiving a profits interest for performing services has not 

been taxed upon the receipt of the partnership interest.566

In 1993, the Internal Revenue Service, referring to the litigation 

of the tax treatment of receiving a partnership profits interest and 

the results in the cases, issued administrative guidance that the 

IRS generally would treat the receipt of a partnership profits interest for services as not a taxable event for the partnership or the 

partner.567 Under this guidance, this treatment does not apply, 

however, if: (1) the profits interest relates to a substantially certain 

and predictable stream of income from partnership assets, such as 

income from high-quality debt securities or a high-quality net 

lease; (2) within two years of receipt, the partner disposes of the 

profits interest; or (3) the profits interest is a limited partnership 

interest in a publicly traded partnership. More recent administrative guidance 568 clarifies that this treatment applies with respect 

to substantially unvested profits interests provided the service 

partner takes into income his distributive share of partnership income, and the partnership does not deduct any amount either on 

grant or on vesting of the profits interest.569

By contrast, a partnership capital interest received for services 

is includable in the partner’s income under generally applicable 

rules relating to the receipt of property for the performance of services.570 A partnership capital interest for this purpose is an interest that would entitle the receiving partner to a share of the proceeds if the partnership’s assets were sold at fair market value and 

the proceeds were distributed in liquidation.571


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572The Department of Treasury has issued proposed regulations regarding the application of 

section 83 to the compensatory transfer of a partnership interest. 70 Fed. Reg. 29675 (May 24, 

2005). The proposed regulations provide that a partnership interest is ‘‘property’’ for purposes 

of section 83. Thus, a compensatory transfer of a partnership interest is includible in the service 

provider’s gross income at the time that it first becomes substantially vested (or, in the case 

of a substantially nonvested partnership interest, at the time of grant if a section 83(b) election 

is made). However, because the fair market value of a compensatory partnership interest is 

often difficult to determine, the proposed regulations also permit a partnership and a partner 

to elect a safe harbor under which the fair market value of a compensatory partnership interest 

is treated as being equal to the liquidation value of that interest. Therefore, in the case of a 

true profits interest in a partnership (one under which the partner would be entitled to nothing 

if the partnership were liquidated immediately following the grant), under the proposed regulations, the grant of a substantially vested profits interest (or, if a section 83(b) election is made, 

the grant of a substantially nonvested profits interest) results in no income inclusion under section 83 because the fair market value of the property received by the service provider is zero. 

The proposed safe harbor is subject to a number of conditions. For example, the election cannot 

be made retroactively and must apply to all compensatory partnership transfers that occur during the period that the election is in effect. 573Sec. 83(h). 

Property received for services under section 83 

In general 

Section 83 governs the amount and timing of income and deductions attributable to transfers of property in connection with the 

performance of services. If property is transferred in connection 

with the performance of services, the person performing the services (the ‘‘service provider’’) generally must recognize income for the 

taxable year in which the property is first substantially vested (i.e., 

transferable or not subject to a substantial risk of forfeiture).572

The amount includible in the service provider’s income is the excess of the fair market value of the property over the amount (if 

any) paid for the property. A deduction is allowed to the person for 

whom such services are performed (the ‘‘service recipient’’) equal to 

the amount included in gross income by the service provider.573

The deduction is allowed for the taxable year of the service recipient in which or with which ends the taxable year in which the 

amount is included in the service provider’s income. 

Property that is subject to a substantial risk of forfeiture and 

that is not transferable is generally referred to as ‘‘substantially 

nonvested.’’ Property is subject to a substantial risk of forfeiture if 

the individual’s right to the property is conditioned on the future 

performance (or refraining from performance) of substantial services. In addition, a substantial risk of forfeiture exists if the right 

to the property is subject to a condition other than the performance 

of services, provided that the condition relates to a purpose of the 

transfer and there is a substantial possibility that the property will 

be forfeited if the condition does not occur. 

Section 83(b) election 

Under section 83(b), even if the property is substantially nonvested at the time of transfer, the service provider may nevertheless elect within 30 days of the transfer to recognize income for the 

taxable year of the transfer. Such an election is referred to as a 

‘‘section 83(b) election.’’ The service provider makes an election by 

filing with the IRS a written statement that includes the fair market value of the property at the time of transfer and the amount 

(if any) paid for the property. The service provider must also provide a copy of the statement to the service recipient. 


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574Sec. 702. 575Sec. 1. Other rates apply to certain types of gain. The unrecaptured section 1250 gain is 

taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate 

of 28 percent. Any amount of unrecaptured section 1250 gain or 28-percent rate gain otherwise 

taxed at a 10- or 15-percent rate is taxed at the otherwise applicable rate. In addition, a tax 

is imposed on net investment income in the case of an individual, estate, or trust. In the case 

of an individual, the tax is 3.8 percent of the lesser of net investment income, which includes 

gains and dividends, or the excess of modified adjusted gross income over the threshold amount. 

The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 

in the case of a married individual filing a separate return, and $200,000 in the case of any 

other individual. 576Sec. 1221. A capital asset generally means any property except (1) inventory, stock in 

trade, or property held primarily for sale to customers in the ordinary course of the taxpayer’s 

trade or business, (2) depreciable or real property used in the taxpayer’s trade or business, (3) 

specified literary or artistic property, (4) business accounts or notes receivable, (5) certain U.S. 

publications, (6) certain commodity derivative financial instruments, (7) hedging transactions, 

and (8) business supplies. In addition, the net gain from the disposition of certain property used 

in the taxpayer’s trade or business is treated as long-term capital gain. Gain from the disposition of depreciable personal property is not treated as capital gain to the extent of all previous 

depreciation allowances. Gain from the disposition of depreciable real property is generally not 

treated as capital gain to the extent of the depreciation allowances in excess of the allowances 

available under the straight-line method of depreciation. 

Passthrough tax treatment of partnerships 

The character of partnership items passes through to the partners, as if the items were realized directly by the partners.574

Thus, for example, long-term capital gain of the partnership is 

treated as long-term capital gain in the hands of the partners. 

A partner holding a partnership interest includes in income its 

distributive share (whether or not actually distributed) of partnership items of income and gain, including capital gain eligible for 

the lower tax rates. A partner’s basis in the partnership interest 

is increased by any amount of gain thus included and is decreased 

by losses. These basis adjustments prevent double taxation of partnership income to the partner, preserving the partnership’s tax status as a passthrough entity. Money distributed to the partner by 

the partnership is taxed to the extent the amount exceeds the partner’s basis in the partnership interest. 

Net long-term capital gain 

In the case of an individual, estate, or trust, any adjusted net 

capital gain which otherwise would be taxed at the 10- or 15-percent rate is not taxed. Any adjusted net capital gain which otherwise would be taxed at rates over 15 percent and below 39.6 percent is taxed at a 15-percent rate. Any adjusted net capital gain 

which otherwise would be taxed at a 39.6-percent rate is taxed at 

a 20-percent rate.575

In general, gain or loss reflected in the value of an asset is not 

recognized for income tax purposes until a taxpayer disposes of the 

asset. On the sale or exchange of a capital asset,576 any gain generally is included in income. 

Short-term capital gain means gain from the sale or exchange of 

a capital asset held for not more than one year, if and to the extent 

such gain is taken into account in computing gross income. Net 

short-term capital loss means the excess of short term capital 

losses for the taxable year over the short-term capital gains for the 

taxable year. 

Net long-term capital gain means the excess of long-term capital 

gains for the taxable year over the long-term capital losses for the 

taxable year. 


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577Sec. 163(d). 

Net capital gain is the excess of the net long-term capital gain 

for the taxable year over the net short-term capital loss for the 

year. Gain or loss is treated as long-term if the asset is held for 

more than one year. 

The adjusted net capital gain of an individual is the net capital 

gain reduced (but not below zero) by the sum of the 28-percent rate 

gain and the unrecaptured section 1250 gain. The net capital gain 

is reduced by the amount of gain that the individual treats as investment income for purposes of determining the investment interest limitation.577

REASONS FOR CHANGE

The Committee is concerned about Federal tax issues arising 

from the use of carried interests in asset management businesses. 

In these arrangements, the investment fund typically is a partnership. The investors are limited partners that contribute capital to 

acquire fund assets, and the fund manager is the general partner 

of the investment fund partnership. The general partner is itself a 

partnership of individuals with investment management expertise. 

The fund manager receives management fees along with a carried 

interest. The arrangement requires the performance of services by 

individuals whose professional skill as fund managers generates 

capital income for investors in the fund. 

Because the character of a partnership’s income passes through 

to partners, income from a carried interest may take the form of 

long-term or short-term capital gain realized by the underlying investment fund as the fund sells off investment assets. Long-term 

capital gain allocated to individual partners may represent compensation for their services as fund managers. 

The Committee believes that the lower rates that apply to longterm capital gain from sales or exchanges of capital assets of partnerships should not be available to holders of applicable partnership interests unless an extended holding period requirement has 

been met. Therefore, the Committee bill imposes a three-year holding period (not the generally applicable one-year holding period) in 

the case of long-term capital gain from applicable partnership interests. If the holder of an applicable partnership interest is allocated gain from the sale of property held for less than three years, 

that gain is treated as short-term capital gain and is subject to tax 

at the rates applicable to ordinary income. The Committee believes 

that providing a three-year holding period requirement on certain 

capital gains for holders of applicable partnership interests strikes 

the right balance for economic growth and fairness without stifling 

investment. 

EXPLANATION OF PROVISION

General rule 

The provision provides for a three-year holding period in the case 

of certain net long-term capital gain with respect to any applicable 

partnership interest held by the taxpayer. 


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578Sec. 318(a)(1). 

Section 83 (relating to property transferred in connection with 

performance of services) does not apply to the transfer of a partnership interest to which the provision applies. 

Short-term capital gain 

The provision treats as short-term capital gain taxed at ordinary 

income rates the amount of the taxpayer’s net long-term capital 

gain with respect to an applicable partnership interest for the taxable year that exceeds the amount of such gain calculated as if a 

three-year (not one-year) holding period applies. In making this 

calculation, the provision takes account of long-term capital losses 

calculated as if a three-year holding period applies. 

A special rule provides that, as provided in regulations or other 

guidance issued by the Secretary, this rule does not apply to income or gain attributable to any asset that is not held for portfolio 

investment on behalf of third party investors. Third party investor 

means a person (1) who holds an interest in the partnership that 

is not property held in connection with an applicable trade or business (defined below) with respect to that person, and (2) who is not 

and has not been actively engaged in directly or indirectly providing substantial services for the partnership or any applicable 

trade or business (and is (or was) not related to a person so engaged). A related person for this purpose is a family member (within the meaning of attribution rules 578) or colleague, that is a person who performed a service within the current calendar year or 

the preceding three calendar years in any applicable trade or business in which or for which the taxpayer performed a service. 

Applicable partnership interest 

An applicable partnership interest is any interest in a partnership that, directly or indirectly, is transferred to (or held by) the 

taxpayer in connection with performance of services in any applicable trade or business. The services may be performed by the taxpayer or by any other related person or persons in any applicable 

trade or business. It is intended that partnership interests shall 

not fail to be treated as transferred or held in connection with the 

performance of services merely because the taxpayer also made 

contributions to the partnership, and the Treasury Department is 

directed to provide guidance implementing this intent. An applicable partnership interest does not include an interest held by a person who is employed by another entity that is conducting a trade 

or business (which is not an applicable trade or business) and who 

provides services only to the other entity. 

An applicable partnership interest does not include an interest in 

a partnership directly or indirectly held by a corporation. For example, if two corporations form a partnership to conduct a joint 

venture for developing and marketing a pharmaceutical product, 

the partnership interests held by the two corporations are not applicable partnership interests. 

An applicable partnership interest does not include any capital 

interest in a partnership giving the taxpayer a right to share in 

partnership capital commensurate with the amount of capital contributed (as of the time the partnership interest was received), or 


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commensurate with the value of the partnership interest that is 

taxed under section 83 on receipt or vesting of the partnership interest. For example, in the case of a partner who holds a capital 

interest in the partnership with respect to capital he or she contributed to the partnership, if the partnership agreement provides 

that the partner’s share of partnership capital is commensurate 

with the amount of capital he or she contributed (as of the time the 

partnership interest was received) compared to total partnership 

capital, the partnership interest is not an applicable partnership 

interest to that extent. 

Applicable trade or business 

An applicable trade or business means any activity (regardless of 

whether the activity are conducted in one or more entities) that 

consists in whole or in part of the following: (1) raising or returning 

capital, and either (2) investing in (or disposing of) specified assets 

(or identifying specified assets for investing or disposition), or (3) 

developing specified assets. 

Developing specified assets takes place, for example, if it is represented to investors, lenders, regulators, or others that the value, 

price, or yield of a portfolio business may be enhanced or increased 

in connection with choices or actions of a service provider or of others acting in concert with or at the direction of a service provider. 

Services performed as an employee of an applicable trade or business are treated as performed in an applicable trade or business for 

purposes of this rule. Merely voting shares owned does not amount 

to development; for example, a mutual fund that merely votes proxies received with respect to shares of stock it holds is not engaged 

in development. 

Specified assets 

Under the provision, specified assets means securities (generally 

as defined under rules for mark-to-market accounting for securities 

dealers), commodities (as defined under rules for mark-to-market 

accounting for commodities dealers), real estate held for rental or 

investment, cash or cash equivalents, options or derivative contracts with respect to such securities, commodities, real estate, 

cash or cash equivalents, as well as an interest in a partnership 

to the extent of the partnership’s proportionate interest in the foregoing. A security for this purpose means any (1) share of corporate 

stock, (2) partnership interest or beneficial ownership interest in a 

widely held or publicly traded partnership or trust, (3) note, bond, 

debenture, or other evidence of indebtedness, (4) interest rate, currency, or equity notional principal contract, (5) interest in, or derivative financial instrument in, any such security or any currency 

(regardless of whether section 1256 applies to the contract), and (6) 

position that is not such a security and is a hedge with respect to 

such a security and is clearly identified. A commodity for this purpose means any (1) commodity that is actively traded, (2) notional 

principal contract with respect to such a commodity, (3) interest in, 

or derivative financial instrument in, such a commodity or notional 

principal contract, or (4) position that is not such a commodity and 

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579Sec. 318(a)(1). 

vestment does not include, for example, real estate on which the 

holder operates an active farm. 

A partnership interest, for purposes of determining the proportionate interest of a partnership in any specified asset, includes 

any partnership interest that is not otherwise treated as a security 

for purposes of the provision (for example, an interest in a partnership that is not widely held or publicly traded). For example, assume that a hedge fund acquires an interest in an operating business conducted in the form of a non-publicly traded partnership 

that is not widely held; the partnership interest is a specified asset 

for purposes of the provision. 

Transfer of applicable partnership interest to related person 

If a taxpayer transfers any applicable partnership interest, directly or indirectly, to a person related to the taxpayer, then the 

taxpayer includes in gross income as short-term capital gain so 

much of the taxpayer’s net long-term capital gain attributable to 

the sale or exchange of an asset held for not more than three years 

as is allocable to the interest. The amount included as short-term 

capital gain on the transfer is reduced by the amount treated as 

short-term capital gain on the transfer for the taxable year under 

the general rule of the provision (that is, amounts are not doublecounted). A related person for this purpose is a family member 

(within the meaning of attribution rules) 579 or colleague, that is a 

person who performed a service within the current calendar year 

or the preceding three calendar years in any applicable trade or 

business in which or for which the taxpayer performed a service. 

Reporting requirement 

The Secretary is directed to require reporting (at the time in the 

manner determined by the Secretary) necessary to carry out the 

purposes of the provision. The penalties otherwise applicable to a 

failure to report to partners under section 6031(b) apply to failure 

to report under this requirement. 

Regulatory authority 

The Treasury Department is directed to issue regulations or 

other guidance necessary to carry out the provision. Such guidance 

is to address prevention of the abuse of the purposes of the provision, including through the allocation of income to tax-indifferent 

parties. Guidance is also to provide for the application of the provision in the case of tiered structures of entities. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

15. Amortization of research and experimental expenditures (sec. 

3315 of the bill and sec. 174 of the Code) 

PRESENT LAW

Business expenses associated with the development or creation of 

an asset having a useful life extending beyond the current year 


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580Secs. 167 and 263(a). 581Secs. 174(a) and (e). 582Sec. 174(b). Taxpayers generating significant short-term losses often choose to defer the deduction for their research and experimentation expenditures under this section. Additionally, 

section 174 amounts are excluded from the definition of ‘‘start-up expenditures’’ under section 

195 (section 195 generally provides that start-up expenditures in excess of $5,000 either are not 

deductible or are amortizable over a period of not less than 180 months once an active trade 

or business begins). So as not to generate significant losses before beginning their trade or business, a taxpayer may choose to defer the deduction and amortize its section 174 costs beginning 

with the month in which the taxpayer first realizes benefits from the expenditures. 583Secs. 174(f)(2) and 59(e). This special 10-year election is available to mitigate the effect of 

the alternative minimum tax adjustment for research expenditures set forth in section 56(b)(2). 

Taxpayers with significant losses also may elect to amortize their otherwise deductible research 

and experimentation expenditures to reduce amounts that could be subject to expiration under 

the net operating loss carryforward regime. 584Sec. 263(a)(1)(B). 585Sec. 263A(c)(2). 586Treas. Reg. sec. 1.174–2(a)(1) and (2). Product is defined to include any pilot model, process, formula, invention, technique, patent, or similar property, and includes products to be used 

by the taxpayer in its trade or business as well as products to be held for sale, lease, or license. 

Treas. Reg. sec. 1.174–2(a)(11), Example 10, provides an example of new process development 

costs eligible for section 174 treatment. 587Treas. Reg. sec. 1.174–2(a)(1). 588 Ibid. 589 See Treas. Reg. sec. 1.174–4(c). The definition of research and experimental expenditures 

also includes the costs of obtaining a patent, such as attorneys’ fees incurred in making and 

perfecting a patent. Treas. Reg. sec. 1.174–2(a)(1). 

generally must be capitalized and depreciated over such useful 

life.580 Taxpayers, however, may elect to deduct currently the 

amount of certain reasonable research or experimentation expenditures paid or incurred in connection with a trade or business.581

Taxpayers may choose to forgo a current deduction, capitalize their 

research expenditures, and recover them ratably over the useful 

life of the research, but in no case over a period of less than 60 

months.582 Taxpayers, alternatively, may elect to amortize their research expenditures over a period of 10 years.583 Research and experimental expenditures deductible under section 174 are not subject to capitalization under either section 263(a) 584 or section 

263A.585

Amounts defined as research or experimental expenditures under 

section 174 generally include all costs incurred in the experimental 

or laboratory sense related to the development or improvement of 

a product.586 In particular, qualifying costs are those incurred for 

activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.587 Uncertainty exists when information available to the taxpayer is not sufficient to ascertain the capability or method for developing, improving, and/or appropriately designing the product.588

The determination of whether expenditures qualify as deductible 

research expenses depends on the nature of the activity to which 

the costs relate, not the nature of the product or improvement 

being developed or the level of technological advancement the product or improvement represents. Examples of qualifying costs include salaries for those engaged in research or experimentation efforts, amounts incurred to operate and maintain research facilities 

(e.g., utilities, depreciation, rent), and expenditures for materials 

and supplies used and consumed in the course of research or experimentation (including amounts incurred in conducting trials).589

In addition, under administrative guidance, the costs of developing 


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590 Rev. Proc. 2000–50, 2000–2 C.B. 601. 591Treas. Reg. sec. 1.174–2(a)(6). 592Treas. Reg. sec. 1.174–2(a)(7). 593Sec. 174(c). 594Sec. 174(d). Special rules apply with respect to geological and geophysical costs (section 

167(h)), qualified tertiary injectant expenses (section 193), intangible drilling costs (sections 

263(c) and 291(b)), and mining exploration and development costs (sections 616 and 617). 595For this purpose, the term ‘‘United States’’ includes the United States, the Commonwealth 

of Puerto Rico, and any possession of the United States. 

computer software have been accorded treatment similar to research expenditures.590

Research or experimental expenditures under section 174 do not 

include expenditures for quality control testing; efficiency surveys; 

management studies; consumer surveys; advertising or promotions; 

the acquisition of another’s patent, model, production or process; or 

research in connection with literary, historical, or similar 

projects.591 For purposes of section 174, quality control testing 

means testing to determine whether particular units of materials 

or products conform to specified parameters, but does not include 

testing to determine if the design of the product is appropriate.592

Generally, no current deduction under section 174 is allowable 

for expenditures for the acquisition or improvement of land or of 

depreciable or depletable property used in connection with any research or experimentation.593 In addition, no current deduction is 

allowed for research expenses incurred for the purpose of 

ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil and gas.594

REASONS FOR CHANGE

The Committee recognizes that research and experimentation expenditures have a useful life beyond the tax year in which the expenditures are incurred, and that the tangible and intangible property created through research and experimentation activities provide value to a business beyond a single tax year. The Committee 

also acknowledges that the costs of developing software closely resemble the types of research and experimental expenditures that 

fall within the purview of section 174, and therefore should be accorded similar treatment. For these reasons, the Committee believes research expenses, including software development costs, 

should be amortized over a period beyond the current year. Further, the Committee believes that research and experimentation expenditures that are attributable to research conducted outside of 

the United States should be amortized over a longer period so as 

to encourage research and experimental activities inside the United 

States. 

EXPLANATION OF PROVISION

Under the provision, amounts defined as specified research or experimental expenditures are required to be capitalized and amortized ratably over a five-year period, beginning with the midpoint 

of the taxable year in which the specified research or experimental 

expenditures were paid or incurred. Specified research or experimental expenditures which are attributable to research that is conducted outside of the United States 595 are required to be capitalized and amortized ratably over a period of 15 years, beginning 

with the midpoint of the taxable year in which such expenditures 


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596See section 2001 of the bill (Repeal of alternative minimum tax). 597Sec. 162(a); Treas. Reg. sec. 1.162–1(a). 598 Charles Baloian Company, Inc. v. Commissioner, 68 T.C. 620, 626, 628 (1977); Manocchio v. Commissioner, 710 F.2d 1400, 1402 (9th Cir. 1983); Glendinning, McLeish & Co. v. Commissioner, 61 F.2d 950, 952 (2d Cir. 1932); Webbe v. Commissioner, T.C. Memo. 1987–426, aff’d, 

902 F.2d 688 (8th Cir. 1990). 599 George K. Herman Chevrolet, Inc. v. Commissioner, 39 T.C. 846, 853 (1963); Allegheny Corporation v. Commissioner, 28 T.C. 298, 305 (1957), acq., 1957–2 C.B. 3; Electric Tachometer Corporation v. Commissioner, 37 T.C. 158, 161–162 (1961), acq., 1962–2 C.B. 4. 

were paid or incurred. Specified research or experimental expenditures subject to capitalization include expenditures for software development. 

Specified research or experimental expenditures do not include 

expenditures for land or for depreciable or depletable property used 

in connection with the research or experimentation, but do include 

the depreciation and depletion allowances of such property. Also 

excluded are exploration expenditures incurred for ore or other 

minerals (including oil and gas). 

In the case of retired, abandoned, or disposed property with respect to which specified research or experimental expenditures are 

paid or incurred, any remaining basis may not be recovered in the 

year of retirement, abandonment, or disposal, but instead must 

continue to be amortized over the remaining amortization period. 

As part of the repeal of the alternative minimum tax, taxpayers 

may no longer elect to amortize their research or experimental expenditures over a period of 10 years.596

It is the intent of the Committee that application of this rule 

shall be treated as a change in the taxpayer’s method of accounting 

for purposes of section 481, initiated by the taxpayer, and made 

with the consent of the Secretary. It is the intent of the Committee 

that this rule be applied on a cutoff basis to research and experimental expenditures paid or incurred in taxable years beginning 

after December 31, 2022 (hence there is no adjustment under section 481(a) for research and experimental expenditures paid or incurred in taxable years beginning before January 1, 2023). 

EFFECTIVE DATE

The provision applies to amounts paid or incurred in taxable 

years beginning after December 31, 2022. 

16. Uniform treatment of expenses in contingency fee cases (sec. 

3316 of the bill and new sec. 162(q) of the Code) 

PRESENT LAW

The Code provides that a taxpayer may deduct all ordinary and 

necessary expenses paid or incurred during the taxable year in carrying on a trade or business.597

A current deduction for an expense for which there is a right or 

expectation of reimbursement may be disallowed because these 

payments are not expenses of the taxpayer and are instead in the 

nature of an advance or a loan. The extent to which the right must 

be established has varied. Some cases have denied the current deduction because the right of reimbursement was fixed,598 others 

have allowed the current deduction because the right of reimbursement was uncertain,599 and other cases have denied the current deVerDate Sep 11 2014 13:49 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00295 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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600 Burnett v. Commissioner, 356 F.2d 755, 760 (5th Cir.), cert. denied, 385 U.S. 832 (1966); 

Herrick v. Commissioner, 63 T.C. 562, 567, 568 (1975); Canelo v. Commissioner, 53 T.C. 217, 

225 (1969), aff’d, 447 F.2d 484 (9th Cir. 1971), acq. 1971–2 C.B. 2, nonacq. in part, 1982–2 C.B. 

2; Silverton v. Commissioner, T.C. Memo. 1977–198, aff’d, 647 F.2d 172 (9th Cir.), cert. denied, 

454 U.S. 1033 (1981); Watts v. Commissioner, T.C. Memo. 1968–183. 601 Boccardo v. Commissioner, 12 Cl Ct. 184 (1987); Boccardo v. Commissioner, 65 T.C.M. 

2739 (1993). 602 Boccardo v. Commissioner, 56 F.3d 1016 (9th Cir. 1995), rev’g 65 T.C.M. 2739 (1993). 603 1997 FSA LEXIS 442 (June 2, 1997). 

duction if the taxpayer’s right to reimbursement was subject to a 

contingency. 

Courts have held that an attorney representing clients on a contingent fee basis may not currently deduct advances to or expenses 

paid on behalf of the clients as ordinary and necessary business expenses.600 The amounts in these cases were to be repaid from any 

recovery. Courts have also held that even if reimbursement is due 

only under certain circumstances, generally no immediate deduction is allowable.601

However, the Ninth Circuit reached the opposite conclusion and 

held that attorneys who represent clients in ‘‘gross fee’’ contingency 

fee cases are not extending loans to clients and therefore may treat 

litigation costs, such as court fees and witness expenses, as deductible business expenses under the Code.602 The IRS does not follow 

this decision, except in the Ninth Circuit, based on the fact that 

amounts advanced by attorneys will be reimbursed by the client 

and therefore are not deductible business expenses.603

REASONS FOR CHANGE

The Committee believes that amounts advanced by attorneys in 

‘‘gross fee’’ cases are loans and therefore should not be treated as 

deductible expenses. The Committee further believes this change is 

necessary to provide uniform treatment of expenses in contingency 

fee cases. 

EXPLANATION OF PROVISION

The provision denies attorneys an otherwise-allowable deduction 

for litigation costs paid under arrangements that are primarily on 

a contingent fee basis until the contingency ends. 

The provision effects a legislative override of the opinion in the 

Ninth Circuit Court of Appeals in Boccardo v. Commissioner, 56 

F.3d 1016 (9th Cir. 1995). No inference regarding the tax treatment of these costs under present law is intended. 

EFFECTIVE DATE

The provision applies to expenses and costs paid or incurred in 

taxable years beginning after the date of enactment. 

E. REFORM OF BUSINESS CREDITS

1. Repeal of credit for clinical testing expenses for certain drugs for 

rare diseases or conditions (sec. 3401 of the bill and sec. 45C of 

the Code) 

PRESENT LAW

Section 45C provides a 50-percent business tax credit for qualified clinical testing expenses incurred in testing of certain drugs for 


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604Sec. 45C(b). 605Sec. 45C(d). 606Sec. 45C(c). 607Sec. 38(b)(15). 608 In addition, a depreciation deduction (or amortization in lieu of depreciation) must be allowable with respect to the property and the property must not be part of the principal residence 

of the taxpayer or any employee of the taxpayer. 

rare diseases or conditions, generally referred to as ‘‘orphan drugs.’’ 

Qualified clinical testing expenses are costs incurred to test an orphan drug after the drug has been approved for human testing by 

the Food and Drug Administration (‘‘FDA’’) but before the drug has 

been approved for sale by the FDA.604 A rare disease or condition 

is defined as one that (1) affects fewer than 200,000 persons in the 

United States, or (2) affects more than 200,000 persons, but for 

which there is no reasonable expectation that businesses could recoup the costs of developing a drug for such disease or condition 

from sales in the United States of the drug.605

Amounts included in computing the credit under this section are 

excluded from the computation of the research credit under section 

41.606

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the orphan drug credit, makes the system simpler and fairer for all individuals, families, and businesses, and allows for lower tax rates. The Committee further believes that the 

repeal of this provision is an important part of its larger tax reform 

effort. 

EXPLANATION OF PROVISION

The provision repeals the credit for qualified clinical testing expenses. 

EFFECTIVE DATE

The provision applies to amounts paid or incurred in taxable 

years beginning after December 31, 2017. 604 Sec. 45C(b). 605 Sec. 

45C(d). 606 Sec. 45C(c). 

2. Repeal of employer-provided child care credit (sec. 3402 of the 

bill and sec. 45F of the Code) 

PRESENT LAW

Taxpayers are eligible for a tax credit equal to 25 percent of 

qualified expenditures for employee child care and 10 percent of 

qualified expenditures for child care resource and referral services. 

The maximum total credit that may be claimed by a taxpayer may 

not exceed $150,000 per taxable year. The credit is part of the general business credit.607

Qualified child care expenditures generally include costs paid or 

incurred: (1) to acquire, construct, rehabilitate, or expand property 

that is to be used as part of the taxpayer’s qualified child care facility; 608 (2) for the operation of the taxpayer’s qualified child care facility, including the costs of training and certain compensation for 

employees of the child care facility, and scholarship programs; or 

(3) under a contract with a qualified child care facility to provide 


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child care services to employees of the taxpayer. To be a qualified 

child care facility, the principal use of the facility must be for child 

care (unless it is the principal residence of the taxpayer), and the 

facility must meet all applicable State and local laws and regulations, including any licensing laws. 

Qualified child care expenditures for resource and referral services include amounts paid under contract to provide child care resource and referral services to a taxpayer’s employees. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the employer-provided child care credit, makes 

the system simpler and fairer for all individuals, families, and businesses, and allows for lower tax rates. The Committee further believes that the repeal of this provision is an important part of its 

larger tax reform effort. 

EXPLANATION OF PROVISION

The provision repeals the credit for qualified child care expenditures and qualified child care expenditures for resource and referral services. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

3. Repeal of rehabilitation credit (sec. 3403 of the bill and sec. 47 

of the Code) 

PRESENT LAW

Section 47 provides a two-tier tax credit for rehabilitation expenditures. 

A 20-percent credit is provided for qualified rehabilitation expenditures with respect to a certified historic structure. For this 

purpose, a certified historic structure means any building that is 

listed in the National Register, or that is located in a registered 

historic district and is certified by the Secretary of the Interior to 

the Secretary of the Treasury as being of historic significance to 

the district. 

A 10-percent credit is provided for qualified rehabilitation expenditures with respect to a qualified rehabilitated building, which 

generally means a building that was first placed in service before 

1936. A pre-1936 building must meet requirements with respect to 

retention of existing external walls and internal structural framework of the building in order for expenditures with respect to it to 

qualify for the 10-percent credit. A building is treated as having 

met the substantial rehabilitation requirement under the 10-percent credit only if the rehabilitation expenditures during the 24- 

month period selected by the taxpayer and ending within the taxable year exceed the greater of (1) the adjusted basis of the building (and its structural components), or (2) $5,000. 

The provision requires the use of straight-line depreciation or the 

alternative depreciation system in order for rehabilitation expenditures to be treated as qualified under the provision. 


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REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the rehabilitation credit, makes the system simpler and fairer for all individuals, families, and businesses, and allows for lower tax rates. The Committee further believes that the 

repeal of this provision is an important part of its larger tax reform 

effort. 

EXPLANATION OF PROVISION

The provision repeals the rehabilitation credit. 

EFFECTIVE DATE

The provision applies to amounts paid or incurred after December 31, 2017. A transition rule provides that in the case of qualified 

rehabilitation expenditures (within the meaning of present law), 

with respect to any building owned or leased by the taxpayer at all 

times on and after January 1, 2018, the 24-month period selected 

by the taxpayer (under section 47(c)(1)(C)) is to begin not later 

than the end of the 180-day period beginning on the date of the enactment of the Act, and the amendments made by the provision 

apply to such expenditures paid or incurred after the end of the 

taxable year in which such 24-month period ends. 

4. Repeal of work opportunity tax credit (sec. 3404 of the bill and 

sec. 51 of the Code) 

PRESENT LAW

In general 

The work opportunity tax credit is available on an elective basis 

for employers hiring individuals from one or more of ten targeted 

groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages attributable to services rendered by a member of a targeted group during the one-year period 

beginning with the day the individual begins work for the employer 

(two years in the case of an individual in the long-term family assistance recipient category). 

Targeted groups eligible for the credit 

Generally, an employer is eligible for the credit only for qualified 

wages paid to members of a targeted group. These targeted groups 

are: (1) Families receiving TANF; (2) Qualified veterans; (3) Qualified ex-felons; (4) Designated community residents; (5) Vocational 

rehabilitation referrals; (6) Qualified summer youth employees; (7) 

Qualified food and nutrition recipients; (8) Qualified SSI recipients; 

(9) Long-term family assistance recipients; and (10) Qualified longterm unemployment recipients. 

Qualified wages 

Generally, qualified wages are defined as cash wages paid by the 

employer to a member of a targeted group. The employer’s deduction for wages is reduced by the amount of the credit. 

For purposes of the credit, generally, wages are defined by reference to the FUTA definition of wages contained in section 3306(b) 


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(without regard to the dollar limitation therein contained). Special 

rules apply in the case of certain agricultural labor and certain 

railroad labor. 

Calculation of the credit 

The credit available to an employer for qualified wages paid to 

members of all targeted groups (except for long-term family assistance recipients and qualified veterans) equals 40 percent (25 percent for employment of 400 hours or less) of qualified first-year 

wages. Generally, qualified first-year wages are qualified wages 

(not in excess of $6,000) attributable to service rendered by a member of a targeted group during the one-year period beginning with 

the day the individual began work for the employer. Therefore, the 

maximum credit per employee is $2,400 (40 percent of the first 

$6,000 of qualified first-year wages). With respect to qualified summer youth employees, the maximum credit is $1,200 (40 percent of 

the first $3,000 of qualified first-year wages). Except for long-term 

family assistance recipients, no credit is allowed for second-year 

wages. 

In the case of long-term family assistance recipients, the credit 

equals 40 percent (25 percent for employment of 400 hours or less) 

of $10,000 for qualified first-year wages and 50 percent of the first 

$10,000 of qualified second-year wages. Generally, qualified secondyear wages are qualified wages (not in excess of $10,000) attributable to service rendered by a member of the long-term family assistance category during the one-year period beginning on the day 

after the one-year period beginning with the day the individual 

began work for the employer. Therefore, the maximum credit per 

employee is $9,000 (40 percent of the first $10,000 of qualified firstyear wages plus 50 percent of the first $10,000 of qualified secondyear wages). 

In the case of a qualified veterans, the credit is calculated as follows: (1) in the case of a qualified veteran who was eligible to receive assistance under a supplemental nutritional assistance program (for at least a three-month period during the year prior to the 

hiring date) the employer is entitled to a maximum credit of 40 

percent of $6,000 of qualified first-year wages; (2) in the case of a 

qualified veteran who is entitled to compensation for a service connected disability, who is hired within one year of discharge, the 

employer is entitled to a maximum credit of 40 percent of $12,000 

of qualified first-year wages; (3) in the case of a qualified veteran 

who is entitled to compensation for a service connected disability, 

and who has been unemployed for an aggregate of at least six 

months during the one-year period ending on the hiring date, the 

employer is entitled to a maximum credit of 40 percent of $24,000 

of qualified first-year wages; (4) in the case of a qualified veteran 

unemployed for at least four weeks but less than six months 

(whether or not consecutive) during the one-year period ending on 

the date of hiring, the maximum credit equals 40 percent of $6,000 

of qualified first-year wages; and (5) in the case of a qualified veteran unemployed for at least six months (whether or not consecutive) during the one-year period ending on the date of hiring, the 

maximum credit equals 40 percent of $14,000 of qualified first-year 

wages. 


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609Sec. 38. 610Sec. 39. 611Sec. 196(d). 

Expiration 

The work opportunity tax credit is not available with respect to 

wages paid to individuals who begin work for an employer after 

December 31, 2019. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the work opportunity tax credit, makes the system simpler and fairer for all individuals, families, and businesses, 

and allows for lower tax rates. The Committee further believes that 

the repeal of this provision is a necessary part of its larger tax reform effort. 

EXPLANATION OF PROVISION

The provision repeals the work opportunity tax credit. 

EFFECTIVE DATE

The provision applies to amounts paid or incurred to individuals 

who begin work for the employer after December 31, 2017. 

5. Repeal of deduction for certain unused business credits (sec. 

3405 of the bill and sec. 196 of the Code) 

PRESENT LAW

The general business credit (‘‘GBC’’) consists of various individual tax credits allowed with respect to certain qualified expenditures and activities.609 In general, the various individual tax credits contain provisions that prohibit ‘‘double benefits,’’ either by denying deductions in the case of expenditure-related credits or by requiring income inclusions in the case of activity-related credits. Unused credits may be carried back one year and carried forward 20 

years.610

Section 196 allows a deduction to the extent that certain portions 

of the GBC expire unused after the end of the carry forward period. 

In general, 100 percent of the unused credit is allowed as a deduction in the taxable year after such credit expired. However, with 

respect to the investment credit determined under section 46 (other 

than the rehabilitation credit) and the research credit determined 

under section 41(a) (for a taxable year beginning before January 1, 

1990), section 196 limits the deduction to 50 percent of such unused credits.611

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the deduction for certain unused business credits, makes the system simpler and fairer for all individuals, families, and businesses, and allows for lower tax rates. The Committee 

further believes that the repeal of this provision is a necessary part 

of its larger tax reform effort. 


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612Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 

2000, Pub. L. No. 106–554. 613Sec. 45D(a)(2). 614Sec. 45D(a)(3). 615Sec. 45D(g). 616Sec. 45D(c). 617Sec. 45D(b). 

EXPLANATION OF PROVISION

This provision repeals the deduction for certain unused business 

credits. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

6. Termination of new markets tax credit (sec. 3406 of the bill and 

sec. 45D of the Code) 

PRESENT LAW

Section 45D provides a new markets tax credit for qualified equity investments made to acquire stock in a corporation, or a capital interest in a partnership, that is a qualified community development entity (‘‘CDE’’).612 The amount of the credit allowable to 

the investor (either the original purchaser or a subsequent holder) 

is (1) a five-percent credit for the year in which the equity interest 

is purchased from the CDE and for each of the following two years, 

and (2) a six-percent credit for each of the following four years.613

The credit is determined by applying the applicable percentage 

(five or six percent) to the amount paid to the CDE for the investment at its original issue, and is available to the taxpayer who 

holds the qualified equity investment on the date of the initial investment or on the respective anniversary date that occurs during 

the taxable year.614 The credit is recaptured if at any time during 

the seven-year period that begins on the date of the original issue 

of the investment the entity (1) ceases to be a qualified CDE, (2) 

the proceeds of the investment cease to be used as required, or (3) 

the equity investment is redeemed.615

A qualified CDE is any domestic corporation or partnership: (1) 

whose primary mission is serving or providing investment capital 

for low-income communities or low-income persons; (2) that maintains accountability to residents of low-income communities by 

their representation on any governing board of or any advisory 

board to the CDE; and (3) that is certified by the Secretary as 

being a qualified CDE.616 A qualified equity investment means 

stock (other than nonqualified preferred stock) in a corporation or 

a capital interest in a partnership that is acquired at its original 

issue directly (or through an underwriter) from a CDE for cash, 

and includes an investment of a subsequent purchaser if such investment was a qualified equity investment in the hands of the 

prior holder.617 Substantially all of the investment proceeds must 

be used by the CDE to make qualified low-income community investments and the investment must be designated as a qualified 

equity investment by the CDE. For this purpose, qualified low-income community investments include: (1) capital or equity investments in, or loans to, qualified active low-income community busiVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00302 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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618Sec. 45D(d). 619Sec. 45D(e). 620Sec. 45D(e)(2). 621Pub. L. No. 103–325. 

nesses; (2) certain financial counseling and other services to businesses and residents in low-income communities; (3) the purchase 

from another CDE of any loan made by such entity that is a qualified low-income community investment; or (4) an equity investment 

in, or loan to, another CDE.618

A ‘‘low-income community’’ is a population census tract with either (1) a poverty rate of at least 20 percent or (2) median family 

income which does not exceed 80 percent of the greater of metropolitan area median family income or statewide median family income (for a non-metropolitan census tract, does not exceed 80 percent of statewide median family income). In the case of a population census tract located within a high migration rural county, 

low-income is defined by reference to 85 percent (as opposed to 80 

percent) of statewide median family income.619 For this purpose, a 

high migration rural county is any county that, during the 20-year 

period ending with the year in which the most recent census was 

conducted, has a net out-migration of inhabitants from the county 

of at least 10 percent of the population of the county at the beginning of such period. 

The Secretary is authorized to designate ‘‘targeted populations’’ 

as low-income communities for purposes of the new markets tax 

credit.620 For this purpose, a ‘‘targeted population’’ is defined by 

reference to section 103(20) of the Riegle Community Development 

and Regulatory Improvement Act of 1994 621 (the ‘‘Act’’) to mean individuals, or an identifiable group of individuals, including an Indian tribe, who are low-income persons or otherwise lack adequate 

access to loans or equity investments. Section 103(17) of the Act 

provides that ‘‘low income’’ means (1) for a targeted population 

within a metropolitan area, less than 80 percent of the area median family income; and (2) for a targeted population within a nonmetropolitan area, less than the greater of 80 percent of the area 

median family income or 80 percent of the statewide non-metropolitan area median family income. A targeted population is not required to be within any census tract. In addition, a population census tract with a population of less than 2,000 is treated as a lowincome community for purposes of the credit if such tract is within 

an empowerment zone, the designation of which is in effect under 

section 1391, and is contiguous to one or more low-income communities. 

A qualified active low-income community business is defined as 

a business that satisfies, with respect to a taxable year, the following requirements: (1) at least 50 percent of the total gross income of the business is derived from the active conduct of trade or 

business activities in any low-income community; (2) a substantial 

portion of the tangible property of the business is used in a lowincome community; (3) a substantial portion of the services performed for the business by its employees is performed in a low-income community; and (4) less than five percent of the average of 

the aggregate unadjusted bases of the property of the business is 


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622Sec. 45D(d)(2). 623Sec. 38(b)(17). 624 As in effect on November 5, 1990. Sec. 44(c)(1). 625These expenditures must be reasonable and necessary, excluding those unnecessary to accomplish listed purposes, and meet standards set forth by the Secretary and the Architectural 

and Transportation Barriers Compliance Board. Sec. 44(c)(3) and (5). 626 Expenses related to this removal are not eligible in connection with facilities placed in 

service after November 5, 1990. Sec. 44(c)(4). 

attributable to certain financial property or to certain collectibles.622

The maximum annual amount of qualified equity investments is 

$3.5 billion for calendar years 2010 through 2019. No amount of 

unused allocation limitation may be carried to any calendar year 

after 2024. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the new markets tax credit, makes the system 

simpler and fairer for all individuals, families, and businesses, and 

allows for lower tax rates. The Committee further believes that the 

repeal of this provision is an important part of its larger tax reform 

effort. 

EXPLANATION OF PROVISION

This provision provides that the new markets tax credit limitation is zero for calendar year 2018 and thereafter and no amount 

of unused allocation limitation may be carried to any calendar year 

after 2022. 

EFFECTIVE DATE

The provision applies to calendar years beginning after December 

31, 2017. 

7. Repeal of credit for expenditures to provide access to disabled 

individuals (sec. 3407 of the bill and sec. 44 of the Code) 

PRESENT LAW

Section 44 provides a 50-percent credit for eligible access expenditures paid or incurred by an eligible small business for the taxable 

year. The credit is limited to eligible access expenditures exceeding 

$250 but not exceeding 10,500. The credit is part of the general 

business credit.623

Eligible access expenditures generally means amounts paid or incurred by an eligible small business to comply with requirements 

under the Americans with Disabilities Act of 1990.624 These expenditures 625 include: (1) removal of architectural, communication, 

physical or transportation barriers which prevent a business from 

being usable or accessible to individuals with disabilities; 626 (2) 

provision of qualified interpreters or other effective methods of 

making aurally-delivered materials available to individuals with 

hearing impairments; (3) provision of qualified readers, taped texts, 

or other effective methods of making visually-delivered materials 

available to individuals with visual impairments; (4) acquisition or 

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627 For this definition, an employee is considered full-time if employed at least 30 hours per 

week for 20 or more calendar weeks in the taxable year. 628FICA taxes consist of social security (OASDI, or old age, survivor, and disability insurance) 

and hospital (Medicare) taxes imposed on employers and employees with respect to wages paid 

to employees under sections 3101–3128. 629Sec. 45B. As of January 1, 2007, the Federal minimum wage under the FLSA was $5.15 

per hour. In the case of tipped employees, the FLSA provided that the minimum wage could 

be reduced to $2.13 per hour (that is, the employer is only required to pay cash equal to $2.13 

per hour) if the combination of tips and cash income equaled the Federal minimum wage. 

ities; or (5) provision of other similar services, modifications, materials, or equipment. 

An eligible small business means any person that elects application of section 44 and, during the preceding taxable year, (1) had 

gross receipts not exceeding $1,000,000 or (2) employed not more 

than 30 full-time employees.627

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the credit for eligible access expenditures, 

makes the system simpler and fairer for all individuals, families, 

and businesses, and allows for lower tax rates. The Committee further believes that the repeal of this provision is an important part 

of its larger tax reform effort. 

EXPLANATION OF PROVISION

The provision repeals the credit for eligible access expenditures. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

8. Modification of credit for portion of employer social security 

taxes paid with respect to employee tips (sec. 3408 of the bill and 

sec. 45B of the Code) 

PRESENT LAW

Credit 

Certain food or beverage establishments may elect to claim a 

business tax credit equal to an employer’s taxes under the Federal 

Insurance Contributions Act (‘‘FICA’’) 628 paid on tips in excess of 

those treated as wages for purposes of meeting the minimum wage 

requirements of the Fair Labor Standards Act (the ‘‘FLSA’’) as in 

effect on January 1, 2007.629 The credit applies only with respect 

to FICA taxes paid on tips received from customers in connection 

with the providing, delivering, or serving of food or beverages for 

consumption if the tipping of employees delivering or serving food 

or beverages by customers is customary. The credit is available 

whether or not the tips are reported or a percentage of gross receipts is allocated (described below). No deduction is allowed for 

any amount taken into account in determining the tip credit. A taxpayer may elect not to have the credit apply for a taxable year. 


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630Sec. 6053(a). 631 A large establishment for this purpose is one which normally employed more than 10 employees on a typical business day during the preceding calendar year. 632Sec. 6053(c). 

Reporting and allocation requirements 

Employees are required to report monthly tips to their employer.630 Certain large 631 food or beverage establishments are required to report to the IRS and employees various information including gross receipts of the establishment, and to allocate among 

employees who customarily receive tip income an amount equal to 

eight percent of gross receipts in excess of the amount of tips reported by such employees.632 Employee tip income that is reported 

by employees is treated as employer-provided wages subject to 

FICA. 

REASONS FOR CHANGE

The Committee believes that updating the minimum wage 

threshold on which the FICA tip credit is determined, as well as 

requiring consistent reporting and tip allocations by businesses eligible for the credit, will encourage compliance and consistency 

among those food or beverage establishments that elect to claim 

the FICA tip credit. 

EXPLANATION OF PROVISION

The provision revises the amount of the credit for FICA taxes an 

employer pays on tips, as an amount equal to the employer’s FICA 

taxes paid on tips in excess of those treated as minimum wages 

under the FLSA without regard to the January 1, 2007 date. For 

2017, this amount is $7.25. In addition, the credit is permitted only 

if the employer satisfies the reporting requirements of section 

6053(c) to the IRS and employees, and allocates among employees 

who customarily receive tip income an amount equal to 10 percent 

(rather than eight percent) of gross receipts in excess of the 

amount of tips reported by such employees. The claiming of the 

credit remains elective. However, if any size eligible food or beverage establishment elects to claim the FICA tip credit for any taxable year after the provision takes effect, the establishment must 

satisfy this reporting and 10-percent allocation requirement for 

that taxable year. Reporting and allocation requirements for food 

and beverage establishments that elect not to claim the credit remain unchanged. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 


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633Sec. 45. In addition to the renewable electricity production credit, section 45 also provides 

income tax credits for the production of Indian coal and refined coal at qualified facilities. 634The most recent inflation adjustment factors can be found in IRS Notice 2017–33, I.R.B. 

2017–22, May 30, 2017. 635Sec. 48(a)(5). 

F. ENERGY CREDITS

1. Modifications to credit for electricity produced from certain 

renewable resources (sec. 3501 of the bill and sec. 45 of the Code) 

PRESENT LAW

In general 

An income tax credit is allowed for the production of electricity 

from qualified energy resources at qualified facilities (the ‘‘renewable electricity production credit’’).633 Qualified energy resources 

comprise wind, closed-loop biomass, open-loop biomass, geothermal 

energy, municipal solid waste, qualified hydropower production, 

and marine and hydrokinetic renewable energy. Qualified facilities 

are, generally, facilities that generate electricity using qualified energy resources. To be eligible for the credit, electricity produced 

from qualified energy resources at qualified facilities must be sold 

by the taxpayer to an unrelated person. 

SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES 

Eligible electricity production activity (sec. 45) 

Credit amount 

for 2017 (cents 

per kilowatthour) 

Expiration 1

Wind ........................................................................................................ 2.4 December 31, 2019. 

Closed-loop biomass ............................................................................... 2.4 December 31, 2016. 

Open-loop biomass (including agricultural livestock waste nutrient 

facilities).

1.2 December 31, 2016. 

Geothermal .............................................................................................. 2.4 December 31, 2016. 

Municipal solid waste (including landfill gas facilities and trash 

combustion facilities).

1.2 December 31, 2016. 

Qualified hydropower ............................................................................... 1.2 December 31, 2016. 

Marine and hydrokinetic ......................................................................... 1.2 December 31, 2016. 

1 Expires for property the construction of which begins after this date. 

The credit rate, initially set at 1.5 cents per kilowatt-hour (reduced by one-half for certain renewable resources) is adjusted annually for inflation.634 In general, the credit is available for electricity produced during the first 10 years after a facility has been 

placed in service. 

Taxpayers may also elect to get a 30-percent investment tax 

credit in lieu of this production tax credit.635

Phase-down for wind facilities 

In the case of wind facilities, the available production tax credit 

or investment tax credit is reduced by 20 percent for facilities the 

construction of which begins in 2017, by 40 percent for facilities the 

construction of which begins in 2018, and by 60 percent for facilities the construction of which begins in 2019. 


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636 IRS Notice 2013–29, 2013–20 I.R.B. 1085, April 14, 2013. 637 Ibid. 638 Ibid. See also, Notice 2016–31, 2016–23 I.R.B. 1025, May 5, 2016. 639 Ibid. 640 Notice 2016–31, 2016–23 I.R.B. 1025, May 5, 2016. 

Special rules for determining when the construction of a facility begins 

In general, a taxpayer may establish the beginning of construction of a facility by beginning physical work of a significant nature 

(the ‘‘physical work test’’).636 Alternatively, a taxpayer may establish the beginning of construction by meeting the safe harbor test 

which generally requires that the taxpayer have paid or incurred 

five percent of the total cost of constructing the facility (the ‘‘five 

percent safe harbor’’).637 Both methods require that a taxpayer 

make continuous progress towards completion once construction 

has begun.638 To demonstrate that continuous progress is being 

made, taxpayers relying on the physical work test must show that 

the project is undergoing ‘‘continuous construction,’’ and taxpayer 

relying on the five percent safe harbor must show ‘‘continuous effort’’ to complete the project.639 Collectively, these two tests are referred to as the ‘‘continuity requirement.’’ 640

REASONS FOR CHANGE

The Committee believes that many existing tax incentives need 

to be repealed or otherwise limited as part of its larger tax reform 

effort to broaden the tax base, close loopholes and grow the economy. With this in mind, the Committee believes that it is appropriate to impose additional limits on the renewable power credit in 

order to make the tax system simpler and fairer for all individuals, 

families, and businesses, and to allow for lower tax rates. In addition, the Committee believes that codifying existing guidance regarding when the construction of a renewable power facility begins 

will provide increased certainty to taxpayers engaging in renewable 

power projects. 

EXPLANATION OF PROVISION

The provision eliminates the inflation adjustment for wind facilities the construction of which begins after the date of enactment. 

Such facilities are entitled to a credit of 1.5 cents per kilowatt-hour 

(i.e., the statutory credit rate unadjusted for inflation). Credits remain subject to the phase-down based on the year construction begins. 

The provision includes a special rule for determining the beginning of construction, which is intended to codify Treasury guidance 

for determining when construction of a facility has begun, including 

the physical work test, the five percent safe harbor, and the continuity requirement. 

EFFECTIVE DATE

The provision terminating the inflation adjustment is effective 

for taxable years ending after the date of enactment. 

The provision codifying existing guidance for determining when 

construction has begun is effective for taxable years beginning before, on, or after the date of enactment. 


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641Sec. 48. 642Sec. 38(b)(1). 643Sec. 39. 

2. Modification of the energy investment tax credit (sec. 3502 of the 

bill and sec. 48 of the Code) 

PRESENT LAW

In general 

A permanent, nonrefundable, 10-percent business energy credit 641 is allowed for the cost of new property that is equipment that 

either (1) uses solar energy to generate electricity, to heat or cool 

a structure, or to provide solar process heat or (2) is used to 

produce, distribute, or use energy derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. Property used to generate energy for the purposes of heating a swimming pool is not eligible solar energy property. 

In addition to the permanent credit, temporary investment credits are available for a variety of renewable and alternative energy 

property. The rules governing these temporary credits are described below. 

The energy credit is a component of the general business credit.642 An unused general business credit generally may be carried 

back one year and carried forward 20 years.643 The taxpayer’s 

basis in the property is reduced by one-half of the amount of the 

credit claimed. For projects whose construction time is expected to 

equal or exceed two years, the credit may be claimed as progress 

expenditures are made on the project, rather than during the year 

the property is placed in service. The credit is allowed against the 

alternative minimum tax. 

Solar energy property 

The credit rate for solar energy property is increased to 30 percent in the case of property the construction of which begins before 

January 1, 2020. The rate is increased to 26 percent in the case 

of property the construction of which begins in calendar year 2020. 

The rate is increased to 22 percent in the case of property the construction of which begins in calendar year 2021. To qualify for the 

enhanced credit rates, the property must be placed in service before 

January 1, 2024. 

Additionally, equipment that uses fiber-optic distributed sunlight 

(‘‘fiber optic solar’’) to illuminate the inside of a structure is solar 

energy property eligible for the 30-percent credit, but only for property placed in service before January 1, 2017. 

Fuel cell property and microturbine property 

The energy credit applies to qualified fuel cell power plant property, but only for periods prior to January 1, 2017. The credit rate 

is 30 percent. 

A qualified fuel cell power plant is an integrated system composed of a fuel cell stack assembly and associated balance of plant 

components that (1) converts a fuel into electricity using electrochemical means, and (2) has an electricity-only generation efficiency of greater than 30 percent and a capacity of at least one-half 


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kilowatt. The credit may not exceed $1,500 for each 0.5 kilowatt of 

capacity. 

The energy credit applies to qualifying stationary microturbine 

power plant property for periods prior to January 1, 2017. The 

credit is limited to the lesser of 10 percent of the basis of the property or $200 for each kilowatt of capacity. 

A qualified stationary microturbine power plant is an integrated 

system comprised of a gas turbine engine, a combustor, a 

recuperator or regenerator, a generator or alternator, and associated balance of plant components that converts a fuel into electricity and thermal energy. Such system also includes all secondary 

components located between the existing infrastructure for fuel delivery and the existing infrastructure for power distribution, including equipment and controls for meeting relevant power standards, 

such as voltage, frequency, and power factors. Such system must 

have an electricity-only generation efficiency of not less than 26 

percent at International Standard Organization conditions and a 

capacity of less than 2,000 kilowatts. 

Geothermal heat pump property 

The energy credit applies to qualified geothermal heat pump 

property placed in service prior to January 1, 2017. The credit rate 

is 10 percent. Qualified geothermal heat pump property is equipment that uses the ground or ground water as a thermal energy 

source to heat a structure or as a thermal energy sink to cool a 

structure. 

Small wind property 

The energy credit applies to qualified small wind energy property 

placed in service prior to January 1, 2017. The credit rate is 30 

percent. Qualified small wind energy property is property that uses 

a qualified wind turbine to generate electricity. A qualifying wind 

turbine means a wind turbine of 100 kilowatts of rated capacity or 

less. 

Combined heat and power property 

The energy credit applies to combined heat and power (‘‘CHP’’) 

property placed in service prior to January 1, 2017. The credit rate 

is 10 percent. 

CHP property is property: (1) that uses the same energy source 

for the simultaneous or sequential generation of electrical power, 

mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy (including 

heating and cooling applications); (2) that has an electrical capacity 

of not more than 50 megawatts or a mechanical energy capacity of 

not more than 67,000 horsepower or an equivalent combination of 

electrical and mechanical energy capacities; (3) that produces at 

least 20 percent of its total useful energy in the form of thermal 

energy that is not used to produce electrical or mechanical power, 

and produces at least 20 percent of its total useful energy in the 

form of electrical or mechanical power (or a combination thereof); 

and (4) the energy efficiency percentage of which exceeds 60 percent. CHP property does not include property used to transport the 

energy source to the generating facility or to distribute energy produced by the facility. 


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The otherwise allowable credit with respect to CHP property is 

reduced to the extent the property has an electrical capacity or mechanical capacity in excess of any applicable limits. Property in excess of the applicable limit (15 megawatts or a mechanical energy 

capacity of more than 20,000 horsepower or an equivalent combination of electrical and mechanical energy capacities) is permitted to 

claim a fraction of the otherwise allowable credit. The fraction is 

equal to the applicable limit divided by the capacity of the property. For example, a 45 megawatt property would be eligible to 

claim 15/45ths, or one third, of the otherwise allowable credit. 

Again, no credit is allowed if the property exceeds the 50 megawatt 

or 67,000 horsepower limitations described above. 

Additionally, systems whose fuel source is at least 90 percent 

open-loop biomass and that would qualify for the credit but for the 

failure to meet the efficiency standard are eligible for a credit that 

is reduced in proportion to the degree to which the system fails to 

meet the efficiency standard. For example, a system that would 

otherwise be required to meet the 60-percent efficiency standard, 

but which only achieves 30-percent efficiency, would be permitted 

a credit equal to one-half of the otherwise allowable credit (i.e., a 

5-percent credit). 

Election of energy credit in lieu of section 45 production tax 

credit 

A taxpayer may make an irrevocable election to have the property used in certain qualified renewable power facilities be treated 

as energy property eligible for a 30-percent investment credit under 

section 48. For this purpose, qualified facilities are facilities otherwise eligible for the renewable electricity production tax credit with 

respect to which no credit under section 45 has been allowed. A 

taxpayer electing to treat a facility as energy property may not 

claim the production credit under section 45. The 30-percent credit 

rate phases down in calendar years 2017, 2018, and 2019. 

REASONS FOR CHANGE

In an effort to harmonize existing energy credits as part of tax 

reform, the Committee believes that the energy investment tax 

credit should have the same phase-down period and expiration date 

for otherwise credit-eligible property. 

EXPLANATION OF PROVISION

The provision extends the energy credit for fiber optic solar, fuel 

cell, microturbine, geothermal heat pump, small wind, and combined heat and power property. In each case, the credit is extended 

for property the construction of which begins before January 1, 

2022. In the case of fiber optic solar, fuel cell, and small wind property, the credit rate is reduced to 26 percent for property the construction of which begins in calendar year 2020 and to 22 percent 

for property the construction of which begins in calendar year 2021. 

Qualified property must be placed in service before January 1, 

2024. 

The provision terminates the permanent credits for solar and 

geothermal property the construction of which begins after December 31, 2027. 


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The provision adds a special rule for determining the beginning 

of construction of qualified property. Under the provision, the construction of any facility, modification, improvement, addition, or 

other property is not treated as beginning before any date unless 

there is a continuous program of construction which begins before 

such date and ends on the date that such property is placed in 

service. 

EFFECTIVE DATE

The provision generally applies to periods after December 31, 

2016, under rules similar to the rules of section 48(m), as in effect 

on the day before the date of enactment of the Revenue Reconciliation Act of 1990. The extension of the credit for combined heat 

and power system property applies to property placed in service 

after December 31, 2016. The reduced credit rates and the termination of the permanent credits are effective on the date of the enactment of the provision. The special rule for determining the beginning of construction of qualified property applies to taxable 

years beginning before, on, or after the date of enactment of the 

provision. 

3. Extension and phaseout of residential energy efficient property 

credit (sec. 3503 of the bill and sec. 25D of the Code) 

PRESENT LAW

In general 

Section 25D provides a personal tax credit for the purchase of 

qualified solar electric property and qualified solar water heating 

property that is used exclusively for purposes other than heating 

swimming pools and hot tubs. The credit is equal to 30 percent of 

qualifying expenditures. 

Section 25D also provides a 30 percent credit for the purchase of 

qualified geothermal heat pump property, qualified small wind energy property, and qualified fuel cell power plants. The credit for 

any fuel cell may not exceed $500 for each 0.5 kilowatt of capacity. 

The credit is nonrefundable. The credit with respect to all qualifying property may be claimed against the alternative minimum 

tax. 

With the exception of solar property, the credit expires for property placed in service after December 31, 2016. In the case of qualified solar electric property and solar water heating property, the 

credit expires for property placed in service after December 31, 

2021. In addition, the credit rate for such solar property is reduced 

to 26 percent for property placed in service in calendar year 2020 

and to 22 percent for property placed in service in calendar year 

2021. 

Qualified property 

Qualified solar electric property is property that uses solar energy to generate electricity for use in a dwelling unit. Qualifying 

solar water heating property is property used to heat water for use 

in a dwelling unit located in the United States and used as a residence if at least half of the energy used by such property for such 

purpose is derived from the sun. 


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A qualified fuel cell power plant is an integrated system comprised of a fuel cell stack assembly and associated balance of plant 

components that (1) converts a fuel into electricity using electrochemical means, (2) has an electricity-only generation efficiency of 

greater than 30 percent, and (3) has a nameplate capacity of at 

least 0.5 kilowatt. The qualified fuel cell power plant must be installed on or in connection with a dwelling unit located in the 

United States and used by the taxpayer as a principal residence. 

Qualified small wind energy property is property that uses a 

wind turbine to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer. 

Qualified geothermal heat pump property means any equipment 

which (1) uses the ground or ground water as a thermal energy 

source to heat the dwelling unit or as a thermal energy sink to cool 

such dwelling unit, (2) meets the requirements of the Energy Star 

program which are in effect at the time that the expenditure for 

such equipment is made, and (3) is installed on or in connection 

with a dwelling unit located in the United States and used as a 

residence by the taxpayer. 

Additional rules 

The depreciable basis of the property is reduced by the amount 

of the credit. Expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the 

credit are eligible expenditures. 

Special proration rules apply in the case of jointly owned property, condominiums, and tenant-stockholders in cooperative housing corporations. If less than 80 percent of the property is used for 

nonbusiness purposes, only that portion of expenditures that is 

used for nonbusiness purposes is taken into account. 

REASONS FOR CHANGE

In an effort to harmonize existing energy credits as part of tax 

reform, the Committee believes that the residential energy efficient 

property credit should have the same phase-down period and expiration date for all otherwise credit-eligible property. 

EXPLANATION OF PROVISION

The provision extends the residential energy efficient property 

credit with respect to non-solar qualified property through December 31, 2021. The credit rate for such property is reduced to 26 percent for property placed in service in calendar year 2020 and to 22 

percent for property placed in service in calendar year 2021. 

EFFECTIVE DATE

The provision applies to property placed in service after December 31, 2016. 

4. Repeal of enhanced oil recovery credit (sec. 3504 of the bill and 

sec. 43 of the Code) 

PRESENT LAW

Section 43 provides a 15-percent credit for expenses associated 

with an enhanced oil recovery (‘‘EOR’’) project. Qualified EOR costs 


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consist of the following designated expenses associated with an 

EOR project: (1) amounts paid for depreciable tangible property; (2) 

intangible drilling and development expenses; (3) tertiary injectant 

expenses; and (4) construction costs for certain Alaskan natural gas 

treatment facilities. An EOR project is generally a project that involves increasing the amount of recoverable domestic crude oil 

through the use of one or more tertiary recovery methods (as defined in section 193(b)(3)), such as injecting steam or carbon dioxide into a well to effect oil displacement. The credit is reduced as 

the price of oil exceeds a certain threshold. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the enhanced oil recovery credit, makes the system simpler and fairer for all individuals, families, and businesses, 

and allows for lower tax rates. The Committee further believes that 

the repeal of this provision is an important part of its larger tax 

reform effort. 

EXPLANATION OF PROVISION

The provision repeals the enhanced oil recovery credit. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

5. Repeal of credit for producing oil and gas from marginal wells 

(sec. 3505 of the bill and sec. 45I of the Code) 

PRESENT LAW

Section 45I provides a $3-per-barrel credit for the production of 

crude oil and a $0.50 credit per 1,000 cubic feet of qualified natural 

gas production. In both cases, the credit is available only for production from a ‘‘qualified marginal well.’’ 

A qualified marginal well is defined as a domestic well: (1) production from which is treated as marginal production for purposes 

of the Code’s percentage depletion rules; or (2) that during the taxable year had average daily production of not more than 25 barrel 

equivalents and produces water at a rate of not less than 95 percent of total well effluent. The maximum amount of production on 

which credit could be claimed is 1,095 barrels or barrel equivalents. 

The credit is not available to production occurring if the reference price of oil exceeds $18 ($2.00 for natural gas). The credit 

is reduced proportionately for reference prices between $15 and $18 

($1.67 and $2.00 for natural gas). 

The credit is treated as a general business credit. Unused credits 

can be carried back for up to five years rather than the generally 

applicable carryback period of one year. The credit is indexed for 

inflation. 

REASONS FOR CHANGE

The Committee believes that the repeal of many existing tax incentives, including the credit for producing oil and gas from marginal wells, makes the system simpler and fairer for all individuals, 


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644Sec. 45J. The 1.8-cents credit amount is reduced, but not below zero, if the annual average 

contract price per kilowatt-hour of electricity generated from advanced nuclear power facilities 

in the preceding year exceeds eight cents per kilowatt-hour. The eight-cent price comparison 

level is indexed for inflation after 1992 (12.6 cents for 2017). 645 I.R.S. Notice 2013–68. 

families, and businesses, and allows for lower tax rates. The Committee further believes that the repeal of this provision is an important part of its larger tax reform effort. 

EXPLANATION OF PROVISION

The provision repeals the credit for producing oil and gas from 

marginal wells. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

6. Modification of credit for production from advanced nuclear 

power facilities (sec. 3506 of the bill and sec. 45J of the Code) 

PRESENT LAW

Taxpayers producing electricity at a qualifying advanced nuclear 

power facility may claim a credit equal to 1.8 cents per kilowatthour of electricity produced for the eight-year period starting when 

the facility is placed in service.644 The aggregate amount of credit 

that a taxpayer may claim in any year during the eight-year period 

is subject to limitation based on allocated capacity and an annual 

limitation as described below. 

An advanced nuclear facility is any nuclear facility for the production of electricity, the reactor design for which was approved 

after 1993 by the Nuclear Regulatory Commission. For this purpose, a qualifying advanced nuclear facility does not include any facility for which a substantially similar design for a facility of comparable capacity was approved before 1994. 

A qualifying advanced nuclear facility is an advanced nuclear facility for which the taxpayer has received an allocation of megawatt 

capacity from the Secretary of the Treasury (‘‘the Secretary’’) and 

is placed in service before January 1, 2021. The taxpayer may only 

claim credit for production of electricity equal to the ratio of the allocated capacity that the taxpayer receives from the Secretary to 

the rated nameplate capacity of the taxpayer’s facility. For example, if the taxpayer receives an allocation of 750 megawatts of capacity from the Secretary and the taxpayer’s facility has a rated 

nameplate capacity of 1,000 megawatts, then the taxpayer may 

claim three-quarters of the otherwise allowable credit, or 1.35 cents 

per kilowatt-hour, for each kilowatt-hour of electricity produced at 

the facility (subject to the annual limitation described below). The 

credit is restricted to 6,000 megawatts of national capacity. Once 

that limitation has been reached, the Secretary may make no additional allocations. Treasury guidance required allocation applications to be filed before February 1, 2014.645

A taxpayer operating a qualified facility may claim no more than 

$125 million in tax credits per 1,000 megawatts of allocated capacity in any one year of the eight-year credit period. If the taxpayer 

operates a 1,350 megawatt rated nameplate capacity system and 


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646 7 U.S.C. sec. 901 et seq. 

has received an allocation from the Secretary for 1,350 megawatts 

of capacity eligible for the credit, the taxpayer’s annual limitation 

on credits that may be claimed is equal to 1.35 times $125 million, 

or $168.75 million. If the taxpayer operates a facility with a nameplate rated capacity of 1,350 megawatts, but has received an allocation from the Secretary for 750 megawatts of credit eligible capacity, then the two limitations apply such that the taxpayer may 

claim a credit effectively equal to one cent per kilowatt-hour of 

electricity produced (calculated as described above) subject to an 

annual credit limitation of $93.75 million in credits (three-quarters 

of $125 million). 

The credit is part of the general business credit. 

REASONS FOR CHANGE

The Committee is concerned that some advanced nuclear power 

credits that would otherwise be available to taxpayers may go unused. Specifically, the Committee wants to ensure the full utilization of all 6,000 megawatts of credit-eligible advanced nuclear 

power national capacity by requiring unutilized capacity to be reallocated. In addition, the Committee wants to ensure that tax-exempt entities receiving credit allocations may elect to transfer 

those credits to other participants in an advanced nuclear power 

project. The Committee therefore believes that some modifications 

to the advanced nuclear power credit are necessary. 

EXPLANATION OF PROVISION

The provision modifies the national megawatt capacity limitation 

for the advanced nuclear power production credit. To the extent 

any amount of the 6,000 megawatts of authorized capacity remains 

unutilized, the provision requires the Secretary to allocate such capacity first to facilities placed in service before the year 2021, to 

the extent such facilities did not receive an allocation equal to their 

full nameplate capacity, and then to facilities placed in service 

after such date in the order in which such facilities are placed in 

service. The provision provides that the present-law placed-in-service sunset date of January 1, 2021, does not apply with respect to 

allocations of such unutilized national megawatt capacity. 

The provision also allows qualified public entities to elect to forgo 

credits to which they otherwise would be entitled in favor of an eligible project partner. Qualified public entities are defined as (1) a 

Federal, State, or local government of any political subdivision, 

agency, or instrumentality thereof; (2) a mutual or cooperative electric company; or (3) a not-for-profit electric utility which has or had 

received a loan or loan guarantee under the Rural Electrification 

Act of 1936.646 An eligible project partner under the provision generally includes any person who designed or constructed the nuclear 

power plant, participates in the provision of nuclear steam or nuclear fuel to the power plant, or has an ownership interest in the 

facility. In the case of a facility owned by a partnership, where the 

credit is determined at the partnership level, any electing qualified 

public entity is treated as the taxpayer with respect to such entity’s 


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647Sec. 103. 

distributive share of such credits, and any other partner is an eligible project partner. 

EFFECTIVE DATE

The provision requiring the allocation of unutilized national 

megawatt capacity limitation is effective on the date of enactment. 

The provision allowing an election by qualified public entities to 

forgo credits in favor of an eligible project partner is effective for 

taxable years beginning after the date of enactment. 

G. BOND REFORMS

1. Termination of private activity bonds (sec. 3601 of the bill and 

sec. 103 of the Code) 

PRESENT LAW

In general 

Under present law, gross income generally does not include interest paid on State or local bonds.647 State and local bonds are classified generally as either governmental bonds or private activity 

bonds. Governmental bonds are bonds which are primarily used to 

finance governmental functions or that are repaid with governmental funds. Private activity bonds are bonds with respect to 

which the State or local government serves as a conduit providing 

financing to nongovernmental persons (e.g., private businesses or 

individuals). The exclusion from income for State and local bonds 

only applies to private activity bonds if the bonds are issued for 

certain permitted purposes (‘‘qualified private activity bonds’’). 

Private activity bonds 

Present law provides three main tests for determining whether 

a State or local bond is in substance a private activity bond, the 

two-part private business test, the five-percent unrelated or disproportionate use test, and the private loan test. 

Private business test 

Private business use and private payments result in State and 

local bonds being private activity bonds if both parts of the twopart private business test are satisfied— 

1. More than 10 percent of the bond proceeds is to be used 

(directly or indirectly) by a private business (the ‘‘private business use test’’); and 

2. More than 10 percent of the debt service on the bonds is 

secured by an interest in property to be used in a private business use or to be derived from payments in respect of such 

property (the ‘‘private payment test’’). 

Private business use generally includes any use by a business entity (including the Federal government), which occurs pursuant to 

terms not generally available to the general public. For example, 

if bond-financed property is leased to a private business (other than 

pursuant to certain short-term leases for which safe harbors are 

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648Sec. 141(b)(4). 649Sec. 141(b)(5). 

and rental payments are treated as securing the payment of the 

bonds. Private business use also can arise when a governmental 

entity contracts for the operation of a governmental facility by a 

private business under a management contract that does not satisfy Treasury regulatory safe harbors regarding the types of payments made to the private operator and the length of the contract. 

Five-percent unrelated or disproportionate business use test 

A second standard to determine whether a bond is to be treated 

as a private activity bond is the five percent unrelated or disproportionate business use test. Under this test the private business use and private payment test (described above) are separately 

applied substituting five percent for 10 percent and generally only 

taking into account private business use and private payments that 

are not related or not proportionate to the government use of the 

bond proceeds. For example, while a bond issue that finances a new 

State or local government office building may include a cafeteria, 

the issue may become a private activity bond if the size of the cafeteria is excessive (as determined under this rule). 

Private loan test 

The third standard for determining whether a State or local bond 

is a private activity bond is whether an amount exceeding the lesser of (1) five percent of the bond proceeds or (2) $5 million is used 

(directly or indirectly) to finance loans to private persons. Private 

loans include both business and other (e.g., personal) uses and payments by private persons; however, in the case of business uses 

and payments, all private loans also constitute private business 

uses and payments subject to the private business test. Present law 

provides that the substance of a transaction governs in determining 

whether the transaction gives rise to a private loan. In general, any 

transaction which transfers tax ownership of property to a private 

person is treated as a private loan. 

Special limit on certain output facilities 

A special rule for output facilities treats bonds as private activity 

bonds if more than $15 million of the proceeds of the bond issue 

are used to finance an output facility (an output facility includes 

electric and gas generation, transmission and related facilities but 

not a facility for the furnishing of water).648

Special volume cap requirement for larger transactions 

A special volume cap requirement for larger transactions treats 

bonds as private activity bonds if the nonqualified amount of private business use or private payments exceeds $15 million (even if 

that amount is within the general 10-percent private business limitation for governmental bonds) unless the issuer obtains a private 

activity bond volume allocation.649

Qualified private activity bonds 

As stated, interest on private activity bonds is taxable unless the 

bonds meet the requirements for qualified private activity bonds. 


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650Sec. 141(e). 651Sec. 142(a). 652Sec. 3.20 of Rev. Proc. 2016–55, 2016–2 C.B. 707. 653The provisions do not apply to any previously issued bond, nor would the provisions prevent State and local governments from issuing private activity bonds in the future; the provisions merely remove the Federal tax subsidy for newly issued bonds. The bill also terminates 

section 25 of the Code as it relates to credits associated with mortgage credit certificates issued 

after December 31, 2017. See section 1102 of the bill (Repeal of nonrefundable credits). 

Qualified private activity bonds permit States or local governments 

to act as conduits providing tax-exempt financing for certain private activities. The definition of qualified private activity bonds includes an exempt facility bond, or qualified mortgage, veterans’ 

mortgage, small issue, redevelopment, 501(c)(3), or student loan 

bond.650 The definition of exempt facility bond includes bonds 

issued to finance certain transportation facilities (airports, ports, 

mass commuting, and high-speed intercity rail facilities); qualified 

residential rental projects; privately owned and/or operated utility 

facilities (sewage, water, solid waste disposal, and local district 

heating and cooling facilities, certain private electric and gas facilities, and hydroelectric dam enhancements); public/private educational facilities; qualified green building and sustainable design 

projects; and qualified highway or surface freight transfer facilities.651

In most cases, the aggregate volume of these tax-exempt private 

activity bonds is restricted by annual aggregate volume limits imposed on bonds issued by issuers within each State. For 2017, the 

State volume limit is the greater of $100 multiplied by the State 

population, or $305.32 million.652

REASONS FOR CHANGE

The Committee believes that the Federal government should not 

subsidize the borrowing costs of private businesses, allowing them 

to pay lower interest rates, while competitors with similar creditworthiness that are unable to avail themselves of qualified private 

activity bonds must pay a higher interest rate on the debt they 

issue. The Committee believes that if taxpayers in a State or locality decide to subsidize private businesses those taxpayers should 

bear the cost of those subsidies, instead of all Federal taxpayers 

bearing a portion of the cost. 

EXPLANATION OF PROVISION

The provision repeals the exception from the exclusion from gross 

income for interest paid on qualified private activity bonds issued 

after December 31, 2017. Thus, such interest on private activity 

bond issued after such date is includible in the gross income of the 

taxpayer.653

EFFECTIVE DATE

The provision applies to bonds issued after December 31, 2017. 

2. Repeal of advance refunding bonds (sec. 3602 of the bill and sec. 

149(d) of the Code) 

PRESENT LAW

Section 103 generally provides that gross income does not include 

interest received on State or local bonds. State and local bonds are 


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654Sec. 141. 655Sec. 149(d)(5). 656Sec. 149(d)(3). Bonds issued before 1986 and pursuant to certain transition rules contained 

in the Tax Reform Act of 1986 may be advance refunded more than one time in certain cases. 657Sec. 149(d)(2). 658Sec. 149(d)(3)(A)(iii) and (B); Treas. Reg. sec. 1.149(d)–1(f)(3). A ‘‘call’’ provision provides 

the issuer of a bond with the right to redeem the bond prior to the stated maturity. 

classified generally as either governmental bonds or private activity bonds. Governmental bonds are bonds the proceeds of which are 

primarily used to finance governmental facilities or the debt is repaid with governmental funds. Private activity bonds are bonds in 

which the State or local government serves as a conduit providing 

financing to nongovernmental persons (e.g., private businesses or 

individuals).654 Bonds issued to finance the activities of charitable 

organizations described in section 501(c)(3) (‘‘qualified 501(c)(3) 

bonds’’) are one type of private activity bond. The exclusion from 

income for interest on State and local bonds only applies if certain 

Code requirements are met. 

The exclusion for income for interest on State and local bonds applies to refunding bonds but there are limits on advance refunding 

bonds. A refunding bond is defined as any bond used to pay principal, interest, or redemption price on a prior bond issue (the refunded bond). Different rules apply to current as opposed to advance refunding bonds. A current refunding occurs when the refunded bond is redeemed within 90 days of issuance of the refunding bonds. Conversely, a bond is classified as an advance refunding 

if it is issued more than 90 days before the redemption of the refunded bond.655 Proceeds of advance refunding bonds are generally 

invested in an escrow account and held until a future date when 

the refunded bond may be redeemed. 

Although there is no statutory limitation on the number of times 

that tax-exempt bonds may be currently refunded, the Code limits 

advance refundings. Generally, governmental bonds and qualified 

501(c)(3) bonds may be advance refunded one time.656 Private activity bonds, other than qualified 501(c)(3) bonds, may not be advance refunded at all.657 Furthermore, in the case of an advance 

refunding bond that results in interest savings (e.g., a high interest 

rate to low interest rate refunding), the refunded bond must be redeemed on the first call date 90 days after the issuance of the refunding bond that results in debt service savings.658

REASONS FOR CHANGE

The ability to issue advance refunding bonds allows State and 

local governments to issue and have outstanding two sets of Federally subsidized debt associated with the same activity. The Committee believes that a single activity should have a maximum of 

only one set of Federally subsidized debt, and so believes removing 

the ability to issue tax-advantaged advance refunding bonds is appropriate. 

EXPLANATION OF PROVISION

The provision repeals the exclusion from gross income for interest on a bond issued to advance refund another bond. 


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659The authority to issue two other types of tax-credit bonds, recovery zone economic development bonds and Build America Bonds, expired on January 1, 2011. 660 Certain other rules apply to qualified tax credit bonds, such as maturity limitations, reporting requirements, spending rules, and rules relating to arbitrage. Separate rules apply in 

the case of tax-credit bonds which are not qualified tax-credit bonds (i.e., ‘‘recovery zone economic development bonds,’’ and ‘‘Build America Bonds’’). 661 However, for new clean renewable energy bonds and qualified energy conservation bonds, 

the applicable credit rate is 70 percent of the otherwise applicable rate. 662Sec. 54C. 

EFFECTIVE DATE

The provision applies to advance refunding bonds issued after 

December 31, 2017. 

3. Repeal of tax credit bonds (sec. 3603 of the bill and secs. 54A, 

54B, 54C, 54D, 54E, 54F and 6431 of the Code) 

PRESENT LAW

In general 

Tax-credit bonds provide tax credits to investors to replace a prescribed portion of the interest cost. The borrowing subsidy generally is measured by reference to the credit rate set by the Treasury Department. Current tax-credit bonds include qualified tax 

credit bonds, which have certain common general requirements, 

and include new clean renewable energy bonds, qualified energy 

conservation bonds, qualified zone academy bonds, and qualified 

school construction bonds.659

Qualified tax-credit bonds 

General rules applicable to qualified tax-credit bonds 660

Unlike tax-exempt bonds, qualified tax-credit bonds generally are 

not interest-bearing obligations. Rather, the taxpayer holding a 

qualified tax-credit bond on a credit allowance date is entitled to 

a tax credit. The amount of the credit is determined by multiplying 

the bond’s credit rate by the face amount on the holder’s bond. The 

credit rate for an issue of qualified tax credit bonds is determined 

by the Secretary and is estimated to be a rate that permits 

issuance of the qualified tax-credit bonds without discount and interest cost to the qualified issuer.661 The credit accrues quarterly 

and is includible in gross income (as if it were an interest payment 

on the bond), and can be claimed against regular income tax liability and alternative minimum tax liability. Unused credits may be 

carried forward to succeeding taxable years. In addition, credits 

may be separated from the ownership of the underlying bond similar to how interest coupons can be stripped for interest-bearing 

bonds. 

New clean renewable energy bonds 

New clean renewable energy bonds (‘‘New CREBs’’) may be 

issued by qualified issuers to finance qualified renewable energy facilities.662 Qualified renewable energy facilities are facilities that: 

(1) qualify for the tax credit under section 45 (other than Indian 

coal and refined coal production facilities), without regard to the 

placed-in-service date requirements of that section; and (2) are 


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663Given the differences in credit quality and other characteristics of individual issuers, the 

Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit 

bonds at par. 664 Capital expenditures to implement green community programs include grants, loans, and 

other repayment mechanisms to implement such programs. For example, States may issue these 

tax credit bonds to finance retrofits of existing private buildings through loans and/or grants 

to individual homeowners or businesses, or through other repayment mechanisms. Other repayment mechanisms can include periodic fees assessed on a government bill or utility bill that approximates the energy savings of energy efficiency or conservation retrofits. Retrofits can include 

heating, cooling, lighting, water-saving, storm water-reducing, or other efficiency measures. 

owned by a public power provider, governmental body, or cooperative electric company. 

The term ‘‘qualified issuers’’ includes: (1) public power providers; 

(2) a governmental body; (3) cooperative electric companies; (4) a 

not-for-profit electric utility that has received a loan or guarantee 

under the Rural Electrification Act; and (5) clean renewable energy 

bond lenders. There was originally a national limitation for New 

CREBs of $800 million. The national limitation was then increased 

by an additional $1.6 billion in 2009. As with other tax credit 

bonds, a taxpayer holding New CREBs on a credit allowance date 

is entitled to a tax credit. However, the credit rate on New CREBs 

is set by the Secretary at a rate that is 70 percent of the rate that 

would permit issuance of such bonds without discount and interest 

cost to the issuer.663

Qualified energy conservation bonds 

Qualified energy conservation bonds may be used to finance 

qualified conservation purposes. 

The term ‘‘qualified conservation purpose’’ means: 

1. Capital expenditures incurred for purposes of: (a) reducing 

energy consumption in publicly owned buildings by at least 20 

percent; (b) implementing green community programs; 664 (c) 

rural development involving the production of electricity from 

renewable energy resources; or (d) any facility eligible for the 

production tax credit under section 45 (other than Indian coal 

and refined coal production facilities); 

2. Expenditures with respect to facilities or grants that support research in: (a) development of cellulosic ethanol or other 

nonfossil fuels; (b) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels; 

(c) increasing the efficiency of existing technologies for producing nonfossil fuels; (d) automobile battery technologies and 

other technologies to reduce fossil fuel consumption in transportation; and (e) technologies to reduce energy use in buildings; 

3. Mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting; 

4. Demonstration projects designed to promote the commercialization of: (a) green building technology; (b) conversion of 

agricultural waste for use in the production of fuel or otherwise; (c) advanced battery manufacturing technologies; (d) 

technologies to reduce peak-use of electricity; and (e) technologies for the capture and sequestration of carbon dioxide 

emitted from combusting fossil fuels in order to produce electricity; and 


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665Given the differences in credit quality and other characteristics of individual issuers, the 

Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit 

bonds at par. 

5. Public education campaigns to promote energy efficiency 

(other than movies, concerts, and other events held primarily 

for entertainment purposes). 

There was originally a national limitation on qualified energy conservation bonds of $800 million. The national limitation was 

then increased by an additional $2.4 billion in 2009. As with other 

qualified tax credit bonds, the taxpayer holding qualified energy 

conservation bonds on a credit allowance date is entitled to a tax 

credit. The credit rate on the bonds is set by the Secretary at a rate 

that is 70 percent of the rate that would permit issuance of such 

bonds without discount and interest cost to the issuer.665

Qualified zone academy bonds 

Qualifies zone academy bonds (‘‘QZABs’’) are defined as any bond 

issued by a State or local government, provided that (1) at least 95 

percent of the proceeds are used for the purpose of renovating, providing equipment to, developing course materials for use at, or 

training teachers and other school personnel in a ‘‘qualified zone 

academy,’’ and (2) private entities have promised to contribute to 

the qualified zone academy certain equipment, technical assistance 

or training, employee services, or other property or services with a 

value equal to at least 10 percent of the bond proceeds. A total of $400 million of QZABs has been authorized to be 

issued annually in calendar years 1998 through 2008. The authorization was increased to $1.4 billion for calendar year 2009, and 

also for calendar year 2010. For each of the calendar years 2011 

through 2016, the authorization was set at $400 million. 

Qualified school construction bonds 

Qualified school construction bonds must meet three requirements: (1) 100 percent of the available project proceeds of the bond 

issue is used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a 

bond-financed facility is to be constructed; (2) the bonds are issued 

by a State or local government within which such school is located; 

and (3) the issuer designates such bonds as a qualified school construction bond. 

There is a national limitation on qualified school construction bonds of $11 billion for calendar years 2009 and 2010, and zero 

after 2010. If an amount allocated is unused for a calendar year, 

it may be carried forward to the following and subsequent calendar 

years. Under a separate special rule, the Secretary of the Interior 

may allocate $200 million of school construction bond authority for 

Indian schools. 

Direct-pay bonds and expired tax-credit bond provisions 

The Code provides that an issuer may elect to issue certain tax 

credit bonds as ‘‘direct-pay bonds.’’ Instead of a credit to the holder, 

with a ‘‘direct-pay bond’’ the Federal government pays the issuer 

a percentage of the interest on the bonds. The following tax credit 

bonds may be issued as direct-pay bonds: new clean renewable energy bonds, qualified energy conservation bonds, and qualified 


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666Sec. 141. 

school construction bonds. Qualified zone academy bonds may not 

be issued as direct-pay using any national zone academy bond allocation for calendar years after 2011 or any carryforward of such allocations. The ability to issue Build America Bonds and Recovery 

Zone bonds, which have direct-pay features, has expired. 

REASONS FOR CHANGE

The Committee believes that some tax credit bond programs 

allow for financing of activities that may be of questionable value 

to Federal taxpayers. In any case, the Committee believes that sufficient time has passed to allow full use of the allocations provided 

for under tax-credit bond programs and that terminating the 

issuance of new tax credit bonds is appropriate. 

EXPLANATION OF PROVISION

The provision prospectively repeals authority to issue tax-credit 

bonds and direct-pay bonds. 

EFFECTIVE DATE

The provision applies to bonds issued after December 31, 2017. 

4. No tax-exempt bonds for professional stadiums (sec. 3604 of the 

bill and sec. 103 of the Code) 

PRESENT LAW

In general 

Section 103 generally provides gross income does not include interest on State or local bonds. State and local bonds are classified 

generally as either governmental bonds or private activity bonds. 

Governmental bonds are bonds the proceeds of which are primarily 

used to finance governmental facilities or the debt is repaid with 

governmental funds. Private activity bonds are bonds in which the 

State or local government serves as a conduit providing financing 

to nongovernmental persons (e.g., private businesses or individuals). The exclusion from income for State and local bonds does not 

apply to private activity bonds, unless the bonds are issued for certain purposes (‘‘qualified private activity bonds’’) permitted by the 

Code and other Code requirements are met. 

Private activity bond tests 

In general 

A private activity bond includes any bond that satisfies (1) the 

‘‘private business test’’ (consisting of two components: a private 

business use test and a private security or payment test); or (2) 

‘‘the private loan financing test.’’ 666

Two-part private business test 

Under the private business test, a bond is a private activity bond 

if it is part of an issue in which: 

(1) More than 10 percent of the proceeds of the issue (including use of the bond-financed property) are to be used in the 


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667The 10-percent private business test is reduced to five percent in the case of private business uses (and payments with respect to such uses) that are unrelated to any governmental use 

being financed by the issue. 668Treas. Reg. sec. 1.141–4(c)(3). 669Sec. 141(e). 670Sec. 1301 of the Tax Reform Act of 1986 (Pub. L. 99–514, 1986) (prior to amendment, sec. 

103(b)(4)(B) of the Internal Revenue Code of 1954 permitted tax-exempt financing for sports facilities). 

trade or business of any person other than a governmental unit 

(‘‘private business use test’’); and 

(2) More than 10 percent of the payment of principal or interest on the issue is, directly or indirectly, secured by (a) property used or to be used for a private business use or (b) to be 

derived from payments in respect of property, or borrowed 

money, used or to be used for a private business use (‘‘private 

payment test’’).667

A bond is not a private activity bond unless both parts of the private business test (i.e., the private business use test and the private payment test) are met. For purposes of the private payment 

test, both direct and indirect payments made by any private person 

treated as using the financed property are taken into account. Payments by a person for the use of proceeds generally do not include 

payments for ordinary and necessary expenses (within the meaning 

of section 162) attributable to the operation and maintenance of financed property.668

Private loan financing test 

A bond issue satisfies the private loan financing test if proceeds 

exceeding the lesser of $5 million or five percent of such proceeds 

are used directly or indirectly to finance loans to one or more nongovernmental persons. 

Types of qualified private activity bonds 

The interest of qualified private activity bonds is tax exempt. A 

qualified private activity bond is a qualified mortgage, veterans’ 

mortgage, small issue, student loan, redevelopment, 501(c)(3), or 

exempt facility bond.669 To qualify as an exempt facility bond, 95 

percent of the net proceeds must be used to finance: (1) airports; 

(2) docks and wharves; (3) mass commuting facilities; (4) highspeed intercity rail facilities; (5) facilities for the furnishing of 

water; (6) sewage facilities; (7) solid waste disposal facilities; (8) 

hazardous waste disposal facilities; (9) qualified residential rental 

projects; (10) facilities for the local furnishing of electric energy or 

gas; (11) local district heating or cooling facilities; (12) environmental enhancements of hydroelectric generating facilities; (13) 

qualified public educational facilities; or (14) qualified green building and sustainable design projects. 

Financing of sports facilities with governmental bonds 

In 1986, Congress eliminated a provision expressly allowing taxexempt financing for sports facilities.670 Nevertheless, professional 

sports facilities continue to be financed with tax-exempt bonds despite the fact that privately owned sports teams are the primary 

(if not exclusive) users of such facilities. Present law permits the 

use of tax-exempt bond proceeds for private activities if either part 

of the two-part private business test is not met. Only if both parts 


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671Sec. 172(b)(2). 672Sec. 56(d). 673Secs. 810, 805(a)(5). 

of the private business test (private use and private payment) are 

met will the interest on such bonds be taxable. In the case of bondfinanced professional sports facilities, issuers have intentionally 

structured the tax-exempt bond issuance and related transactions 

to fail the private payment test. In most of these transactions, the 

professional sports team is not required to pay for more than a 

small portion of its use of the sports facility. As a result, the private payment test is not met and the bonds financing the facility 

are not treated as private activity bonds, despite the existence of 

substantial private business use. 

REASONS FOR CHANGE

Congress attempted to eliminate tax-exempt financing for sports 

facilities in the Tax Reform Act of 1986. Despite that effort, however, such financings have continued, and the Committee believes 

it is appropriate to close the loophole that allows tax-exempt financing of stadiums for the benefit of professional sports teams. 

EXPLANATION OF PROVISION

The provision provides that the interest on bonds, the proceeds 

of which are to be used to finance or refinance capital expenditures 

allocable to a professional sports stadium, is not tax-exempt. The 

term ‘‘professional sports stadium’’ means any facility (or appurtenant real property) which during at least five days during any 

calendar year is used as a stadium or arena for professional sports, 

exhibitions, games, or training. 

EFFECTIVE DATE

The provision applies to bonds issued after November 2, 2017. 

H. INSURANCE

1. Net operating losses of life insurance companies (sec. 3701 of the 

bill and sec. 810 of the Code) 

PRESENT LAW

A net operating loss (‘‘NOL’’) generally means the amount by 

which a taxpayer’s business deductions exceed its gross income. In 

general, an NOL may be carried back two years and carried over 

20 years to offset taxable income in such years. NOLs offset taxable 

income in the order of the taxable years to which the NOL may be 

carried.671

For purposes of computing the alternative minimum tax (‘‘AMT’’), 

a taxpayer’s NOL deduction cannot reduce the taxpayer’s alternative minimum taxable income (‘‘AMTI’’) by more than 90 percent 

of the AMTI.672

In the case of a life insurance company, a deduction is allowed 

in the taxable year for operations loss carryovers and carrybacks, 

in lieu of the deduction for net operation losses allowed to other 

corporations.673 A life insurance company is permitted to treat a 

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674Sec. 810(b)(1). 

able year as an operations loss carryback to each of the three taxable years preceding the loss year and an operations loss carryover 

to each of the 15 taxable years following the loss year.674

REASONS FOR CHANGE

The Committee believes that the treatment of loss carryovers of 

life insurance companies should not differ from the treatment of 

NOL carryovers of other corporations. Consequently, the Committee bill eliminates the separate life insurer carryover rules and 

applies the generally applicable NOL rules to life insurance companies. 

EXPLANATION OF PROVISION

The provision repeals the operations loss deduction for life insurance companies and allows the NOL deduction under section 172. 

This provides the same treatment for losses of life insurance companies as for losses of property and casualty insurance companies 

and of other corporations. The provision thus limits the companies’ 

NOL deduction to 90 percent of taxable income (determined without regard to the deduction), provides that carryovers to other 

years are adjusted to take account of this limitation and may be 

carried forward indefinitely with interest, and repeals the presentlaw three-year carryback. The NOL deduction of a life insurance 

company is determined by treating the NOL for any taxable year 

generally as the excess of the life insurance deductions for such 

taxable year over the life insurance gross income for such taxable 

year. 

EFFECTIVE DATE

The provision applies to losses arising in taxable years beginning 

after December 31, 2017. 

2. Repeal of small life insurance company deduction (sec. 3702 of 

the bill and sec. 806 of the Code) 

PRESENT LAW

The small life insurance company deduction for any taxable year 

is 60 percent of so much of the tentative life insurance company 

taxable income (‘‘LICTI’’) for such taxable year as does not exceed 

$3 million, reduced by 15 percent of the excess of tentative LICTI 

over $3 million. The maximum deduction that can be claimed by 

a small company is $1.8 million, and a company with a tentative 

LICTI of $15 million or more is not entitled to any small company 

deduction. A small life insurance company for this purpose is one 

with less than $500 million of assets. 

REASONS FOR CHANGE

The Committee believes that the small life insurance company 

deduction may have served as a transition rule effectively providing a corporate tax rate reduction to small life insurers in connection with 1984 changes to the rules governing life insurance 

company taxation. However, that purpose has been obviated by the 


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675Sec. 807. 

passage of time. The Committee believes that in light of the reduction in the corporate income tax rate to 20 percent, it is appropriate to eliminate the small life insurance company deduction. 

EXPLANATION OF PROVISION

The provision repeals the small life insurance company deduction. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

3. Surtax on life insurance company taxable income (sec. 3703 of 

the bill and sec. 801 of the Code) 

PRESENT LAW

Tax on life insurance company taxable income 

In the case of a life insurance company, income tax is imposed 

on life insurance company taxable income at the rate applicable to 

taxable income of a corporation. 

Reserves 

In determining life insurance company taxable income, a life insurance company includes in gross income any net decrease in reserves, and deducts a net increase in reserves.675 Methods for determining reserves for tax purposes generally are based on reserves 

prescribed by the National Association of Insurance Commissioners 

for purposes of financial reporting under State regulatory rules. 

In computing the net increase or net decrease in reserves, six 

items are taken into account. These are (1) life insurance reserves; 

(2) unearned premiums and unpaid losses included in total reserves; (3) amounts that are discounted at interest to satisfy obligations under insurance and annuity contracts that do not involve 

life, accident, or health contingencies when the computation is 

made; (4) dividend accumulations and other amounts held at interest in connection with insurance and annuity contracts; (5) premiums received in advance and liabilities for premium deposit 

funds; and (6) reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance that are held for retired lives, premium stabilization, or a 

combination of both. 

Life insurance reserves for any contract are the greater of the 

net surrender value of the contract or the reserves determined 

under Federally prescribed rules, but may not exceed the statutory 

reserve with respect to the contract (for regulatory reporting). In 

computing the Federally prescribed reserve for any type of contract, the taxpayer must use the tax reserve method applicable to 

the contract, an interest rate for discounting of reserves to take account of the time value of money, and the prevailing commissioners’ standard tables for mortality or morbidity. The assumed 

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676Secs. 807(a)(2)(B) and (b)(1)(B). 677Secs. 805(a)(4), 812. 678Sec. 812(a). 679Sec. 812(c). 680Sec. 812(d). 

serve is the greater of the applicable Federal interest rate or the 

prevailing State assumed interest rate. 

Proration rules 

A life insurance company is subject to proration rules in calculating life insurance company taxable income. 

The proration rules reduce the company’s deductions, including 

reserve deductions and dividends received deductions, if the life insurance company has tax-exempt income, deductible dividends received, or other similar untaxed income items, because deductible 

reserve increases can be viewed as being funded proportionately 

out of taxable and tax-exempt income. 

Under the proration rules, the net increase and net decrease in 

reserves are computed by reducing the ending balance of the reserve items by the policyholders’ share of tax-exempt interest.676

Similarly, under the proration rules, a life insurance company is 

allowed a dividends-received deduction for intercorporate dividends 

from nonaffiliates only in proportion to the company’s share of such 

dividends,677 but not for the policyholders’ share. Fully deductible 

dividends from affiliates are excluded from the application of this 

proration formula, if such dividends are not themselves distributions from tax-exempt interest or from dividend income that would 

not be fully deductible if received directly by the taxpayer. In addition, the proration rule includes in prorated amounts the increase 

for the taxable year in policy cash values of life insurance policies 

and annuity and endowment contracts. 

Company’s share and policyholder’s share under proration 

rules 

The life insurance company proration rules provide that the company’s share, for this purpose, means the percentage obtained by 

dividing the company’s share of the net investment income for the 

taxable year by the net investment income for the taxable year.678

Net investment income means 95 percent of gross investment income, in the case of assets held in segregated asset accounts under 

variable contracts, and 90 percent of gross investment income in 

other cases.679

Gross investment income includes specified items.680 The specified items include interest (including tax-exempt interest), dividends, rents, royalties and other related specified items, short-term 

capital gains, and trade or business income. Gross investment income does not include gain (other than short-term capital gain to 

the extent it exceeds net long-term capital loss) that is, or is considered as, from the sale or exchange of a capital asset. Gross investment income also does not include the appreciation in the value 

of assets that is taken into account in computing the company’s tax 

reserve deduction under section 817. 

The company’s share of net investment income, for purposes of 

this calculation, is the net investment income for the taxable year, 

reduced by the sum of (a) the policy interest for the taxable year 


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681Sec. 812(b)(1). This portion is defined as gross investment income’s share of policyholder 

dividends. 682Legislative history of section 812 mentions that the general concept that items of investment yield should be allocated between policyholders and the company was retained from prior 

law. H. Rep. 98–861. Conference Report to accompany H.R. 4170, the Deficit Reduction Act of 

1984, 98th Cong., 2d Sess., 1065 (June 23, 1984). This concept is referred to in Joint Committee 

on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 

1984, JCS–41–84, p. 622, stating, ‘‘[u]nder the Act, the formula used for purposes of determining 

the policyholders’ share in based generally on the proration formula used under prior law in 

computing gain or loss from operations (i.e., by reference to ‘required interest’).’’ This may imply 

that a reference to pre-1984-law regulations may be appropriate. See Rev. Rul 2003-120, 2003- 

2 C.B. 1154, and Technical Advice Memoranda 20038008 and 20339049. 683 2007–38 I.R.B. 604. 684 2007–42 I.R.B. 799. 685Sec. 848. 

and (b) a portion of policyholder dividends.681 Policy interest is defined to include required interest at the greater of the prevailing 

State assumed rate or the applicable Federal rate (plus some other 

interest items). Present law provides that in any case where neither the prevailing State assumed interest rate nor the applicable 

Federal rate is used, ‘‘another appropriate rate’’ is used for this calculation. No statutory definition of ‘‘another appropriate rate’’ is 

provided; the law is unclear as to what rate or rates are appropriate for this purpose.682

In 2007, the IRS issued Rev. Rul. 2007–54,683 interpreting required interest under section 812(b) to be calculated by multiplying 

the mean of a contract’s beginning-of-year and end-of-year reserves 

by the greater of the applicable Federal interest rate or the prevailing State assumed interest rate, for purposes of determining 

separate account reserves for variable contracts. However, Rev. 

Rul. 2007–54 was suspended by Rev. Rul. 2007–61, in which the 

IRS and the Treasury Department stated that the issues would 

more appropriately be addressed by regulation.684 No regulations 

have been issued to date. 

Capitalization of policy acquisition expenses 

In the case of an insurance company, specified policy acquisition 

expenses for any taxable year are required to be capitalized, and 

generally are amortized over the 120-month period beginning with 

the first month in the second half of the taxable year.685

Specified policy acquisition expenses are determined as that portion of the insurance company’s general deductions for the taxable 

year that does not exceed a specific percentage of the net premiums 

for the taxable year on each of three categories of insurance contracts. For annuity contracts, the percentage is 1.75; for group life 

insurance contracts, the percentage is 2.05; and for all other specified insurance contracts, the percentage is 7.7. 

With certain exceptions, a specified insurance contract is any life 

insurance, annuity, or noncancellable accident and health insurance contract or combination thereof. A group life insurance contract is any life insurance contract that covers a group of individuals defined by reference to employment relationship, membership 

in an organization, or similar factor, the premiums for which are 

determined on a group basis, and the proceeds of which are payable to (or for the benefit of) persons other than the employer of 

the insured, an organization to which the insured belongs, or other 

similar person. 


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686See, e.g., Rev. Proc. 2015–13, 2015–5 I.R.B. 419, and Rev. Proc. 2017–30, 2017–18 I.R.B. 

1131. 

REASONS FOR CHANGE

The Committee bill provides for a reduction to 20 percent of the 

rate of tax applicable to corporations, including to life insurance 

companies. In connection with the reduction in the corporate tax 

rate, the Committee believes it is timely and appropriate to update 

present-law tax provisions governing life insurers, including those 

relating to computation of life insurance tax reserves, life insurance 

proration for purposes of determining the dividends received deduction, and capitalization of policy acquisition expenses. The Committee is concerned that these provisions are out of date and do not 

reflect recent developments. The Committee is continuing to develop reforms to these provisions. In the meantime, the bill includes a surtax on life insurance company taxable income that is 

intended to have the same overall revenue consequences as reforms 

that were proposed in these three areas in the introduced version 

of the bill. The surtax is intended only as placeholder and the Committee intends to develop reforms in these three areas as the bill 

moves through the legislative process. 

EXPLANATION OF PROVISION

The provision imposes an additional eight-percent income tax on 

life insurance company taxable income. 

EFFECTIVE DATE

The placeholder provision is intended to apply to taxable years 

beginning after December 31, 2017. 

4. Adjustment for change in computing reserves (sec. 3704 of the 

bill and sec. 807 of the Code) 

PRESENT LAW

Change in method of accounting 

In general, a taxpayer may change its method of accounting 

under section 446 with the consent of the Secretary (or may be required to change its method of accounting by the Secretary). In 

such instances, a taxpayer generally is required to make an adjustment (a ‘‘section 481(a) adjustment’’) to prevent amounts from 

being duplicated in, or omitted from, the calculation of the taxpayer’s income. Pursuant to IRS procedures, negative section 

481(a) adjustments generally are deducted from income in the year 

of the change whereas positive section 481(a) adjustments generally are required to be included in income ratably over four taxable years.686

However, section 807(f) explicitly provides that changes in the 

basis for determining life insurance company reserves are to be 

taken into account ratably over 10 years. 

10-year spread for change in computing life insurance company reserves 

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687Sec. 807. 688Sec. 807(f). 

a net increase in reserves.687 Methods for determining reserves for 

tax purposes generally are based on reserves prescribed by the National Association of Insurance Commissioners for purposes of financial reporting under State regulatory rules. 

Income or loss resulting from a change in the method of computing reserves is taken into account ratably over a 10-year period.688 The rule for a change in basis in computing reserves applies only if there is a change in basis in computing the Federally 

prescribed reserve (as distinguished from the net surrender value). 

Although life insurance tax reserves require the use of a Federally 

prescribed method, interest rate, and mortality or morbidity table, 

changes in other assumptions for computing statutory reserves 

(e.g., when premiums are collected and claims are paid) may cause 

increases or decreases in a company’s life insurance reserves that 

must be spread over a 10-year period. Changes in the net surrender value of a contract are not subject to the 10-year spread because, apart from its use as a minimum in determining the amount 

of life insurance tax reserves, the net surrender value is not a reserve but a current liability. 

If for any taxable year the taxpayer is not a life insurance company, the balance of any adjustments to reserves is taken into account for the preceding taxable year. 

REASONS FOR CHANGE

The Committee believes that the treatment of changes to the 

method of computing reserves of life insurance companies should 

not differ from the treatment of changes to the method of accounting in the case of other corporations. Consequently, the Committee 

bill eliminates the separate rule providing a 10-year period for taking into account a change in the method of computing reserves of 

a life insurer. 

EXPLANATION OF PROVISION

Income or loss resulting from a change in method of computing 

life insurance company reserves is taken into account consistent 

with IRS procedures, generally ratably over a four-year period, instead of over a 10-year period. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

5. Repeal of special rule for distributions to shareholders from pre1984 policyholders surplus account (sec. 3705 of the bill and sec. 

815 of the Code) 

PRESENT AND PRIOR LAW

Under the law in effect from 1959 through 1983, a life insurance 

company was subject to a three-phase taxable income computation 

under Federal tax law. Under the three-phase system, a company 

was taxed on the lesser of its gain from operations or its taxable 

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689Pub. L. No. 98–369. 690Sec. 815. 

ceeded its taxable investment income, 50 percent of such excess 

(Phase II). Federal income tax on the other 50 percent of the gain 

from operations was deferred, and was accounted for as part of a 

policyholder’s surplus account and, subject to certain limitations, 

taxed only when distributed to stockholders or upon corporate dissolution (Phase III). To determine whether amounts had been distributed, a company maintained a shareholders surplus account, 

which generally included the company’s previously taxed income 

that would be available for distribution to shareholders. Distributions to shareholders were treated as being first out of the shareholders surplus account, then out of the policyholders surplus account, and finally out of other accounts. 

The Deficit Reduction Act of 1984 689 included provisions that, for 

1984 and later years, eliminated further deferral of tax on amounts 

(described above) that previously would have been deferred under 

the three-phase system. Although for taxable years after 1983, life 

insurance companies may not enlarge their policyholders surplus 

account, the companies are not taxed on previously deferred 

amounts unless the amounts are treated as distributed to shareholders or subtracted from the policyholders surplus account.690

Any direct or indirect distribution to shareholders from an existing policyholders surplus account of a stock life insurance company 

is subject to tax at the corporate rate in the taxable year of the distribution. Present law (like prior law) provides that any distribution to shareholders is treated as made (1) first out of the shareholders surplus account, to the extent thereof, (2) then out of the 

policyholders surplus account, to the extent thereof, and (3) finally, 

out of other accounts. 

For taxable years beginning after December 31, 2004, and before 

January 1, 2007, the application of the rules imposing income tax 

on distributions to shareholders from the policyholders surplus account of a life insurance company were suspended. Distributions in 

those years were treated as first made out of the policyholders surplus account, to the extent thereof, and then out of the shareholders surplus account, and lastly out of other accounts. 

REASONS FOR CHANGE

The Committee believes it is appropriate to require life insurers 

with a policyholders surplus account to be subject to current income taxation on any remaining amounts of income deferred from 

periods before 1984. 

EXPLANATION OF PROVISION

The provision repeals section 815, the rules imposing income tax 

on distributions to shareholders from the policyholders surplus account of a stock life insurance company. 

In the case of any stock life insurance company with an existing 

policyholders surplus account (as defined in section 815 before its 

repeal), tax is imposed on the balance of the account as of December 31, 2017. A life insurance company is required to pay tax on 

the balance of the account ratably over the first eight taxable years 

beginning after December 31, 2017. 


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691Sec. 832(b)(5). 

Specifically, the tax imposed on a life insurance company is the 

tax on the sum of life insurance company taxable income for the 

taxable year (but not less than zero) plus 1/8 of the balance of the 

existing policyholders surplus account as of December 31, 2017. 

Thus, life insurance company losses are not allowed to offset the 

amount of the policyholders surplus account balance subject to tax. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

6. Modification of proration rules for property and casualty 

insurance companies (sec. 3706 of the bill and sec. 832 of the Code) 

Present Law The taxable income of a property and casualty insurance company is determined as the sum of its gross income from 

underwriting income and investment income (as well as gains and 

other income items), reduced by allowable deductions. 

A proration rule applies to property and casualty insurance companies. In calculating the deductible amount of its reserve for 

losses incurred, a property and casualty insurance company must 

reduce the amount of losses incurred by 15 percent of (1) the insurer’s tax-exempt interest, (2) the deductible portion of dividends received (with special rules for dividends from affiliates), and (3) the 

increase for the taxable year in the cash value of life insurance, endowment, or annuity contracts the company owns.691 This proration rule reflects the fact that reserves are generally funded in part 

from tax-exempt interest, from deductible dividends, and from 

other untaxed amounts. 

REASONS FOR CHANGE

The Committee believes that the rate of proration applicable to 

property and casualty insurers with respect to untaxed income 

should be adjusted to take account of the tax rate reduction to 20 

percent that applies to income of corporations, including property 

and casualty insurers. The Committee bill therefore modifies the 

percentage applicable under the proration rule. 

EXPLANATION OF PROVISION

The provision replaces the 15-percent reduction under present 

law with a 26.25-percent reduction under the proration rule for 

property and casualty insurance companies. This change in the 

percentage takes into account the reduction in the corporate tax 

rate from 35 to 20 percent under section 3001 of the bill (reduction 

in corporate tax rate). 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 


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692Sec. 831(a). 693Sec. 832. 694The most recent property and casualty reserve discount factors published by Treasury are 

in Rev. Proc. 2016–58, 2016–51 I.R.B. 839, and see Rev. Proc. 2012–44, 2012–49 I.R.B. 645. 

7. Modification of discounting rules for property and casualty 

insurance companies (sec. 3707 of the bill and sec. 832 of the Code) 

PRESENT LAW

A property and casualty insurance company generally is subject 

to tax on its taxable income.692 The taxable income of a property 

and casualty insurance company is determined as the sum of its 

underwriting income and investment income (as well as gains and 

other income items), reduced by allowable deductions.693 Among 

the items that are deductible in calculating underwriting income 

are additions to reserves for losses incurred and expenses incurred. 

To take account of the time value of money, discounting of unpaid losses is required. All property and casualty loss reserves (unpaid losses and unpaid loss adjustment expenses) for each line of 

business (as shown on the annual statement) are required to be 

discounted for Federal income tax purposes. 

The discounted reserves are calculated using a prescribed interest rate which is based on the applicable Federal mid-term rate 

(‘‘mid-term AFR’’). The discount rate is the average of the mid-term 

AFRs effective at the beginning of each month over the 60-month 

period preceding the calendar year for which the determination is 

made. 

To determine the period over which the reserves are discounted, 

a prescribed loss payment pattern applies. The prescribed length of 

time is either the accident year and the following three calendar 

years, or the accident year and the following 10 calendar years, depending on the line of business. In the case of certain ‘‘long-tail’’ 

lines of business, the 10-year period is extended, but not by more 

than five additional years. Thus, present law limits the maximum 

duration of any loss payment pattern to the accident year and the 

following 15 years. The Treasury Department is directed to determine a loss payment pattern for each line of business by reference 

to the historical loss payment pattern for that line of business 

using aggregate experience reported on the annual statements of 

insurance companies, and is required to make this determination 

every five years, starting with 1987. 

Under the discounting rules, an election is provided permitting 

a taxpayer to use its own (rather than an industry-wide) historical 

loss payment pattern with respect to all lines of business, provided 

that applicable requirements are met. 

Treasury publishes discount factors for each line of business to 

be applied by taxpayers for discounting reserves.694 The discount 

factors are published annually, based on (1) the interest rate applicable to the calendar year, and (2) the loss payment pattern for 

each line of business as determined every five years. 

REASONS FOR CHANGE

The Committee believes that the loss payment patterns prescribed by present law for property and casualty insurers do not accurately reflect the duration of these liabilities and should be extended. To ensure that the length of the period is reasonable from 


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695This rule adopts the definition found in section 430(h)(2)(D)(i) of the term ‘‘corporate bond 

yield curve.’’ Section 430, which relates to minimum funding standards for single-employer defined benefit pension plans, includes other rules for determining an ‘‘effective interest rate,’’ 

such as segment rate rules. The term ‘‘effective interest rate’’ along with these other rules, including the segment rate rules, do not apply for purposes of property and casualty insurance 

reserve discounting. 

a record-keeping perspective, the period is not indefinite, but rather, is limited to 18 years after the accident year, or 25 years after 

the accident year for long-tail lines of business. In the interests of 

neutrality of the tax law across taxpayers, the Committee bill repeals the election of a property and casualty insurer to use its own 

loss payment pattern rather than an industry loss payment pattern 

for purposes of the loss reserve discounting rules. The Committee 

believes that the interest rate applicable today for purposes of the 

loss reserve discounting rules does not accurately take account of 

the time value of money. In order to more accurately measure income, the rate should be based on a rate more closely related to 

property and casualty companies’ yield on assets. Therefore, the 

Committee bill provides for an interest rate based on the corporate 

bond yield curve. 

EXPLANATION OF PROVISION

The provision modifies the reserve discounting rules applicable to 

property and casualty insurance companies. In general, the provision modifies the prescribed interest rate, extends the periods applicable under the loss payment pattern, and repeals the election 

to use a taxpayer’s historical loss payment pattern. 

Interest rate 

The provision provides that the interest rate is an annual rate 

for any calendar year to be determined by Treasury based on the 

corporate bond yield curve (rather than the mid-term AFR as 

under present law). For this purpose, the corporate bond yield 

curve means, with respect to any month, a yield curve that reflects 

the average, for the preceding 24-month period, of monthly yields 

on investment grade corporate bonds with varying maturities and 

that are in the top three quality levels available.695 Because the 

corporate bond yield curve provides for 24-month averaging, the 

present-law rule providing for 60-month averaging to determine the 

interest rate is repealed under the provision. It is expected that 

Treasury will determine a 24-month average for the 24 months preceding the first month of the calendar year for which the determination is made. 

Loss payment patterns 

The provision extends the periods applicable for determining loss 

payment patterns. Under the provision, the maximum duration of 

the loss payment pattern is determined by the amount of losses remaining unpaid using aggregate industry experience for each line 

of business, rather than by a set number of years as under present 

law. 

Like present law, the provision provides that Treasury determines a loss payment pattern for each line of business by reference 

to the historical loss payment pattern for that line of business 

using aggregate experience reported on the annual statements of 


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insurance companies, and is required to make this determination 

every five years. 

Under the provision, the present-law three-year and 10-year periods following the accident year are extended up to a maximum of 

15 more years for the lines of business to which each period applies. For lines of business to which the three-year period applies, 

the amount of losses that would have been treated as paid in the 

third year after the accident year is treated as paid in that year 

and each subsequent year in an amount equal to the average of the 

amounts treated as paid in the first and second years (or, if less, 

the remaining amount). To the extent these unpaid losses have not 

been treated as paid before the 18th year after the accident year, 

they are treated as paid in that 18th year. 

Similarly, for lines of business to which the 10-year period applies, the amount of losses that would have been treated as paid 

in the 10th year following the accident year is treated as paid in 

that year and each subsequent year in an amount equal to the average of the amounts treated as paid in the seventh, eighth, and 

ninth years (or if less, the remaining amount). To the extent these 

unpaid losses have not been treated as paid before the 25th year 

after the accident year, they are treated as paid in that 25th year. 

The provision repeals the present-law rule providing that in the 

case of certain ‘‘long-tail’’ lines of business, the 10-year period is extended, but not by more than five additional years. The provision 

does not change the lines of business to which the three-year, and 

10-year, periods, respectively, apply. 

Election to use own historical loss payment pattern 

The provision repeals the present-law election permitting a taxpayer to use its own (rather than an aggregate industry-experiencebased) historical loss payment pattern with respect to all lines of 

business. 

EFFECTIVE DATE

The provision generally applies to taxable years beginning after 

December 31, 2017. Under a transitional rule for the first taxable 

year beginning in 2018, the amount of unpaid losses and expenses 

unpaid (under section 832(b)(5)(B) and (6)) and the unpaid losses 

(under sections 807(c)(2) and 805(a)(1)) at the end of the preceding 

taxable year are determined as if the provision had applied to these 

items in such preceding taxable year, using the interest rate and 

loss payment patterns for accident years ending with calendar year 

2018. Any adjustment is spread over eight taxable years, i.e., is included in the taxpayer’s gross income ratably in the first taxable 

year beginning in 2018 and the seven succeeding taxable years. For 

taxable years subsequent to the first taxable year beginning in 

2018, the provision applies to such unpaid losses and expenses unpaid (i.e., unpaid losses and expenses unpaid at the end of the taxable year preceding the first taxable year beginning in 2018) by 

using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2018. 


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696Sec. 847. 

8. Repeal of special estimated tax payments (sec. 3708 of the bill 

and sec. 847 of the Code) 

PRESENT LAW

Allowance of additional deduction and establishment of special loss 

discount account 

Present law allows an insurance company required to discount 

its reserves an additional deduction that is not to exceed the excess 

of (1) the amount of the undiscounted unpaid losses over (2) the 

amount of the related discounted unpaid losses, to the extent the 

amount was not deducted in a preceding taxable year.696 The provision imposes the requirement that a special loss discount account 

be established and maintained, and that special estimated tax payments be made. Unused amounts of special estimated tax payments are treated as a section 6655 estimated tax payment for the 

16th year after the year for which the special estimated tax payment was made. 

The total payments by a taxpayer, including section 6655 estimated tax payments and other tax payments, together with special 

estimated tax payments made under this provision, are generally 

the same as the total tax payments that the taxpayer would make 

if the taxpayer did not elect to have this provision apply, except to 

the extent amounts can be refunded under the provision in the 

16th year. 

Calculation of special estimated tax payments based on tax benefit 

attributable to deduction 

More specifically, present law imposes a requirement that the 

taxpayer make special estimated tax payments in an amount equal 

to the tax benefit attributable to the additional deduction allowed 

under the provision. If amounts are included in gross income as a 

result of a reduction in the taxpayer’s special loss discount account 

or the liquidation or termination of the taxpayer’s insurance business, and an additional tax is due for any year as a result of the 

inclusion, then an amount of the special estimated tax payments 

equal to such additional tax is applied against such additional tax. 

If there is an adjustment reducing the amount of additional tax 

against which the special estimated tax payment was applied, then 

in lieu of any credit or refund for the reduction, a special estimated 

tax payment is treated as made in an amount equal to the amount 

that would otherwise be allowable as a credit or refund. 

The amount of the tax benefit attributable to the deduction is to 

be determined (under Treasury regulations (which have not been 

promulgated)) by taking into account tax benefits that would arise 

from the carryback of any net operating loss for the year as well 

as current year benefits. In addition, tax benefits for the current 

and carryback years are to take into account the benefit of filing 

a consolidated return with another insurance company without regard to the consolidation limitations imposed by section 1503(c). 

The taxpayer’s estimated tax payments under section 6655 are to 

be determined without regard to the additional deduction allowed 

under this provision and the special estimated tax payments. LegVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00338 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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697See H.R. Rep. No. 100–1104, Conference Report to accompany H.R. 4333, the Technical 

and Miscellaneous Revenue Act of 1988, October 21, 1988, p. 174. 

islative history 697 indicates that it is intended that the taxpayer 

may apply the amount of an overpayment of any section 6655 estimated tax payments for the taxable year against the amount of the 

special estimated tax payment required under this provision. The 

special estimated tax payments under this provision are not treated as estimated tax payments for purposes of section 6655 (e.g., for 

purposes of calculating penalties or interest on underpayments of 

estimated tax) when such special estimated tax payments are 

made. 

Refundable amount 

To the extent that a special estimated tax payment is not used 

to offset additional tax due for any of the first 15 taxable years beginning after the year for which the payment was made, such special estimated tax payment is treated as an estimated tax payment 

made under section 6655 for the 16th year after the year for which 

the special estimated tax payment was made. If the amount of such 

deemed section 6655 payment, together with the taxpayer’s other 

payments credited against tax liability for such 16th year, exceeds 

the tax liability for such year, then the excess (up to the amount 

of the deemed section 6655 payment) may be refunded to the taxpayer to the same extent provided under present law with respect 

to overpayments of tax. 

Regulatory authority 

In addition to the regulatory authority to adjust the amount of 

special estimated tax payments in the event of a change in the corporate tax rate, authority is provided to Treasury to prescribe regulations necessary or appropriate to carry out the purposes of the 

provision. 

Such regulations include those providing for the separate application of the provision with respect to each accident year. Separate 

application of the provision with respect to each accident year (i.e., 

applying a vintaging methodology) may be appropriate under regulations to determine the amount of tax liability for any taxable year 

against which special estimated tax payments are applied, and to 

determine the amount (if any) of special estimated tax payments 

remaining after the 15th year which may be available to be refunded to the taxpayer. 

Regulatory authority is also provided to make such adjustments 

in the application of the provision as may be necessary to take into 

account the corporate alternative minimum tax. Under this regulatory authority, rules similar to those applicable in the case of a 

change in the corporate tax rate are intended to apply to determine 

the amount of special estimated tax payments that may be applied 

against tax calculated at the corporate alternative minimum tax 

rate. The special estimated tax payments are not treated as payments of regular tax for purposes of determining the taxpayer’s alternative minimum tax liability. 

Regulations have not been promulgated under section 847. 


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698 A corporation is treated as publicly held if it has a class of common equity securities that 

is required to be registered under section 12 of the Securities Exchange Act of 1934. Section 

162(m)(2). 699Sec. 162(m). This deduction limitation applies for purposes of the regular income tax and 

the alternative minimum tax. 700Sec. 162(m)(3). 

REASONS FOR CHANGE

The Committee believes that the special estimated tax payment 

rules add complexity to the tax law and do not improve the accuracy of income measurement of property and casualty insurers. The 

Committee bill therefore repeals these rules. 

EXPLANATION OF PROVISION

The provision repeals section 847. Thus, the election to apply section 847, the additional deduction, special loss discount account, 

special estimated tax payment, and refundable amount rules of 

present law are eliminated. 

The entire balance of an existing account is included in income 

of the taxpayer for the first taxable year beginning after 2017, and 

the entire amount of existing special estimated tax payments are 

applied against the amount of additional tax attributable to this inclusion. Any special estimated tax payments in excess of this 

amount are treated as estimated tax payments under section 6655. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

I. COMPENSATION

1. Modification of limitation on excessive employee remuneration 

(sec. 3801 of the bill and sec. 162(m) of the Code) 

PRESENT LAW

In general 

An employer generally may deduct reasonable compensation for 

personal services as an ordinary and necessary business expense. 

Section 162(m) provides an explicit limitation on the deductibility 

of compensation expenses in the case of publicly traded corporate 

employers. The otherwise allowable deduction for compensation 

with respect to a covered employee of a publicly held corporation 698

is limited to no more than $1 million per year.699 The deduction 

limitation applies when the deduction attributable to the compensation would otherwise be taken. 

Covered employees 

Section 162(m) defines a covered employee as (1) the chief executive officer of the corporation (or an individual acting in such capacity) as of the close of the taxable year and (2) any employee 

whose total compensation is required to be reported to shareholders 

under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) by reason of being among the corporation’s four most highly compensated 

officers for the taxable year (other than the chief executive officer).700 Treasury regulations under section 162(m) provide that 


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701 Notice 2007–49, 2007–25 I.R.B. 1429. 702 By reason of being among the officers whose total compensation is required to be reported 

to shareholders under the Securities Exchange Act of 1934. 703Treas. Reg. sec. 1.162–27(c)(2). 704Sec. 162(m)(2). 

whether an employee is the chief executive officer or among the 

four most highly compensated officers should be determined pursuant to the executive compensation disclosure rules promulgated 

under the Exchange Act. 

In 2006, the Securities and Exchange Commission amended certain rules relating to executive compensation, including which officers’ compensation must be disclosed under the Exchange Act. 

Under the new rules, such officers are (1) the principal executive 

officer (or an individual acting in such capacity), (2) the principal 

financial officer (or an individual acting in such capacity), and (3) 

the three most highly compensated officers, other than the principal executive officer or principal financial officer. 

In response to the Securities and Exchange Commission’s new 

disclosure rules, the Internal Revenue Service issued updated guidance on identifying which employees are covered by section 

162(m).701 The new guidance provides that ‘‘covered employee’’ 

means any employee who is (1) as of the close of the taxable year, 

the principal executive officer (or an individual acting in such capacity) defined in reference to the Exchange Act, or (2) among the 

three most highly compensated officers 702 for the taxable year 

(other than the principal executive officer or principal financial officer), again defined by reference to the Exchange Act. Thus, under 

current guidance, only four employees are covered under section 

162(m) for any taxable year. Under Treasury regulations, the requirement that the individual meet the criteria as of the last day 

of the taxable year applies to both the principal executive officer 

and the three highest compensated officers.703

Definition of publicly held corporation 

For purposes of the deduction disallowance of section 162(m), a 

publicly held corporation means any corporation issuing any class 

of common equity securities required to be registered under section 

12 of the Securities Exchange Act of 1934.704 All U.S. publicly traded companies are subject to this registration requirement, including their foreign affiliates. A foreign company publicly traded 

through American depository receipts (‘‘ADRs’’) is also subject to 

this registration requirement if more than 50 percent of the 

issuer’s outstanding voting securities are held, directly or indirectly, by residents of United States and either (i) the majority of 

the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States. Other foreign companies are not subject to the registration requirement. 

Remuneration subject to the deduction limitation 

In general 

Unless specifically excluded, the deduction limitation applies to 

all remuneration for services, including cash and the cash value of 

all remuneration (including benefits) paid in a medium other than 


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705Sec. 162(m)(4)(F). 706Sec. 162(m)(4)(B). 707Sec. 162(m)(4)(C). 708Secs. 105, 106, and 132. 709 A director is considered an outside director if he or she is not a current employee of the 

corporation (or related entities), is not a former employee of the corporation (or related entities) 

who is receiving compensation for prior services (other than benefits under a qualified retirement plan), was not an officer of the corporation (or related entities) at any time, and is not 

currently receiving compensation for personal services in any capacity (e.g., for services as a consultant) other than as a director. 

cash. If an individual is a covered employee for a taxable year, the 

deduction limitation applies to all compensation not explicitly excluded from the deduction limitation, regardless of whether the 

compensation is for services as a covered employee and regardless 

of when the compensation was earned. The $1 million cap is reduced by excess parachute payments (as defined in section 280G) 

that are not deductible by the corporation.705

Certain types of compensation are not subject to the deduction 

limit and are not taken into account in determining whether other 

compensation exceeds $1 million. The following types of compensation are not taken into account: (1) remuneration payable on a commission basis; 706 (2) remuneration payable solely on account of the 

attainment of one or more performance goals if certain outside director and shareholder approval requirements are met (‘‘performance-based compensation’’); 707 (3) payments to a tax-favored retirement plan (including salary reduction contributions); (4) amounts 

that are excludable from the executive’s gross income (such as employer-provided health benefits and miscellaneous fringe benefits); 708 and (5) any remuneration payable under a written binding 

contract which was in effect on February 17, 1993. In addition, remuneration does not include compensation for which a deduction is 

allowable after a covered employee ceases to be a covered employee. 

Thus, the deduction limitation often does not apply to deferred 

compensation that is otherwise subject to the deduction limitation 

(e.g., is not performance-based compensation) because the payment 

of compensation is deferred until after termination of employment. 

Performance-based compensation 

Compensation qualifies for the exception for performance-based 

compensation only if (1) it is paid solely on account of the attainment of one or more performance goals, (2) the performance goals 

are established by a compensation committee consisting solely of 

two or more outside directors,709 (3) the material terms under 

which the compensation is to be paid, including the performance 

goals, are disclosed to and approved by the shareholders in a separate majority-approved vote prior to payment, and (4) prior to payment, the compensation committee certifies that the performance 

goals and any other material terms were in fact satisfied. 

Compensation (other than stock options or other stock appreciation rights (‘‘SARs’’)) is not treated as paid solely on account of the 

attainment of one or more performance goals unless the compensation is paid to the particular executive pursuant to a pre-established objective performance formula or standard that precludes 

discretion. A stock option or SAR with an exercise price not less 

than the fair market value, on the date the option or SAR is granted, of the stock subject to the option or SAR, generally is treated 

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vided that the requirements for outside director and shareholder 

approval are met (without the need for certification that the performance standards have been met). This is the case because the 

amount of compensation attributable to the options or SARs received by the executive is based solely on an increase in the corporation’s stock price. Stock-based compensation is not treated as 

performance-based if it depends on factors other than corporate 

performance. 

REASONS FOR CHANGE

The Committee believes that the significant exceptions to the 

limit on deductible executive compensation by publicly traded corporations have resulted in a shift away from cash compensation 

paid to senior executives in favor of stock options and other forms 

of performance pay. The Committee further believes this shift has 

led to perverse consequences resulting from the focus of such executives and businesses on quarterly results, rather than the longterm success of the company and its rank-and-file workers. Additionally, the Committee believes that aligning the deductibility 

limit between domestically traded publicly traded corporations and 

all foreign companies that trade ADRs in the United States, as well 

as certain private C corporations and S corporations, promotes fair 

tax treatment across similarly situated businesses. The Committee 

believes the law should be clarified to override administrative guidance, Notice 2007–49, 2007–25 I.R.B. 1429, which, contrary to the 

statute, limits the number of covered employees to four. 

EXPLANATION OF PROVISION

Definition of covered employee 

The provision revises the definition of covered employee to include both the principal executive officer and the principal financial 

officer. Further, an individual is a covered employee if the individual holds one of these positions at any time during the taxable 

year. The provision also defines as a covered employee the three 

(rather than four) most highly compensated officers for the taxable 

year (other than the principal executive officer or principal financial officer) who are required to be reported on the company’s proxy 

statement (i.e., the statement required pursuant to executive compensation disclosure rules promulgated under the Exchange Act) 

for the taxable year (or who would be required to be reported on 

such a statement for a company not required to make such a report 

to shareholders). This includes such officers of a corporation not required to file a proxy statement but which otherwise falls within 

the revised definition of a publicly held corporation, as well as such 

officers of a publicly traded corporation that would otherwise have 

been required to file a proxy statement for the year (for example, 

but for the fact that the corporation delisted its securities or underwent a transaction that resulted in the nonapplication of the proxy 

statement requirement). 

In addition, if an individual is a covered employee with respect 

to a corporation for a taxable year beginning after December 31, 

2016, the individual remains a covered employee for all future 

years. Thus, an individual remains a covered employee with respect to compensation otherwise deductible for subsequent years, 


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710Sec. 162(a)(1). 711Sec. 162(m)(1). Under section 162(m)(6), limits apply to deductions for compensation of individuals performing services for certain health insurance providers. 712 Notice 2007–49, 2007–2 I.R.B. 1429. 

including for years during which the individual is no longer employed by the corporation and years after the individual has died. 

Compensation does not fail to be compensation with respect to a 

covered employee and thus subject to the deduction limit for a taxable year merely because the compensation is includible in the income of, or paid to, another individual, such as compensation paid 

to a beneficiary after the employee’s death, or to a former spouse 

pursuant to a domestic relations order. 

Definition of publicly held corporation 

The provision extends the applicability of section 162(m) to include all domestic publicly traded corporations and all foreign companies publicly traded through ADRs. The proposed definition may 

include certain additional corporations that are not publicly traded, 

such as large private C or S corporations. 

Performance-based compensation and commissions exceptions 

The provision eliminates the exceptions for commissions and performance-based compensation from the definition of compensation 

subject to the deduction limit. Thus, such compensation is taken 

into account in determining the amount of compensation with respect to a covered employee for a taxable year that exceeds $1 million and is thus not deductible under section 162. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

2. Excise tax on excess tax-exempt organization executive 

compensation (sec. 3802 of the bill and sec. 4960 of the Code) 

PRESENT LAW

Taxable employers and other service recipients generally may deduct reasonable compensation expenses.710 However, in some cases, 

compensation in excess of specific levels is not deductible. 

A publicly held corporation generally cannot deduct more than $1 

million of compensation (that is not compensation otherwise excepted from this limit) in a taxable year for each ‘‘covered employee.’’ 711 For this purpose, a covered employee is the corporation’s principal executive officer (or an individual acting in such capacity) defined in reference to the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) as of the close of the taxable year, or any employee whose total compensation is required to be reported to 

shareholders under the Exchange Act by reason of being among the 

corporation’s three most highly compensated officers for the taxable 

year (other than the principal executive officer or principal financial officer).712

Unless an exception applies, generally a corporation cannot deduct that portion of the aggregate present value of a ‘‘parachute 

payment’’ which equals or exceeds three times the ‘‘base amount’’ 

of certain service providers. The nondeductible excess is an ‘‘excess 


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713Sec. 280G(a) and (b)(1). 714Sec. 280G(b)(2) and (c). 715Sec. 280G(b)(3). 716Secs. 401(a), 403(a), 408(k), and 408(p). 717Sec. 521(b). 

parachute payment.’’ 713 A parachute payment is generally a payment of compensation that is contingent on a change in corporate 

ownership or control made to certain officers, shareholders, and 

highly compensated individuals.714 An individual’s base amount is 

the average annualized compensation includible in the individual’s 

gross income for the five taxable years ending before the date on 

which the change in ownership or control occurs.715 Certain 

amounts are not considered parachute payments, including payments under a qualified retirement plan, a simplified employee 

pension plan, or a simple retirement account.716

These deduction limits generally do not affect a tax-exempt organization. 

REASONS FOR CHANGE

The Committee believes that tax-exempt organizations enjoy a 

tax subsidy from the Federal government because contributions to 

such organizations are generally deductible and such organizations 

are generally not subject to tax (except on unrelated business income). As a result, such organizations are subject to the requirement that they use their resources for specific purposes, and the 

Committee believes that excessive compensation (including excessive severance packages) paid to senior executives of such organizations diverts resources from those particular purposes. The Committee further believes that alignment of the tax treatment of excessive executive compensation (as top executives may inappropriately divert organizational resources into excessive compensation) 

between for-profit and tax-exempt employers furthers the Committee’s larger tax reform effort of making the system fairer for all 

businesses. 

EXPLANATION OF PROVISION

Under the provision, an employer is liable for an excise tax equal 

to 20 percent of the sum of (1) any remuneration (other than an 

excess parachute payment) in excess of $1 million paid to a covered 

employee by an applicable tax-exempt organization for a taxable 

year, and (2) any excess parachute payment (under a new definition for this purpose that relates solely to separation pay) paid by 

the applicable tax-exempt organization to a covered employee. Accordingly, the excise tax applies as a result of an excess parachute 

payment, even if the covered employee’s remuneration does not exceed $1 million. 

For purposes of the provision, a covered employee is an employee 

(including any former employee) of an applicable tax-exempt organization if the employee is one of the five highest compensated employees of the organization for the taxable year or was a covered 

employee of the organization (or a predecessor) for any preceding 

taxable year beginning after December 31, 2016. An ‘‘applicable 

tax-exempt organization’’ is an organization exempt from tax under 

section 501(a), an exempt farmers’ cooperative,717 a Federal, State 


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718Sec. 115(1). 719Sec. 527(e)(1). 720Sec. 3401(a). 721 Under section 402A(c), a designated Roth contribution is an elective deferral (that is, a contribution to a tax-favored employer-sponsored retirement plan made at the election of an employee) that the employee designates as not being excludable from income. 722Sec. 509(f)(3). A technical amendment to the provision is needed to reflect the correct statutory citation. 723Sec. 509(a)(3). 724Sec. 501(c)(9). A technical amendment to the provision is needed to reflect the correct statutory citation. 725Sec. 403(b). 726Sec. 457(b). 

or local governmental entity with excludable income,718 or a political organization.719

Remuneration means wages as defined for income tax withholding purposes,720 but does not include any designated Roth contribution.721 Remuneration of a covered employee includes any remuneration paid with respect to employment of the covered employee by any person or governmental entity related to the applicable tax-exempt organization. A person or governmental entity is 

treated as related to an applicable tax-exempt organization if the 

person or governmental entity (1) controls, or is controlled by, the 

organization, (2) is controlled by one or more persons that control 

the organization, (3) is a supported organization 722 during the taxable year with respect to the organization, (4) is a supporting organization 723 during the taxable year with respect to the organization, or (5) in the case of a voluntary employees’ beneficiary association (‘‘VEBA’’),724 establishes, maintains, or makes contributions 

to the VEBA. However, remuneration of a covered employee that 

is not deductible by reason of the $1 million limit on deductible 

compensation is not taken into account for purposes of the provision. 

Under the provision, an excess parachute payment is the amount 

by which any parachute payment exceeds the portion of the base 

amount allocated to the payment. A parachute payment is a payment in the nature of compensation to (or for the benefit of) a covered employee if the payment is contingent on the employee’s separation from employment and the aggregate present value of all 

such payments equals or exceeds three times the base amount. The 

base amount is the average annualized compensation includible in 

the covered employee’s gross income for the five taxable years ending before the date of the employee’s separation from employment. 

Parachute payments do not include payments under a qualified retirement plan, a simplified employee pension plan, a simple retirement account, a tax-deferred annuity,725 or an eligible deferred 

compensation plan of a State or local government employer.726

The employer of a covered employee is liable for the excise tax. 

If remuneration of a covered employee from more than one employer is taken into account in determining the excise tax, each employer is liable for the tax in an amount that bears the same ratio 

to the total tax as the remuneration paid by that employer bears 

to the remuneration paid by all employers to the covered employee. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 


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727Sec. 83. Section 83 applies generally to transfers of any property, not just employer stock, 

in connection with the performance of services by any service provider, not just an employee. 

However, the provision described herein applies only with respect to certain employer stock 

transferred to employees. 728 Under Treas. Reg. sec. 1.83–2, the employee makes an election by filing with the Internal 

Revenue Service a written statement that includes the fair market value of the property at the 

time of transfer and the amount (if any) paid for the property. The employee must also provide 

a copy of the statement to the employer. 729See section 83(c)(1) and Treas. Reg. sec. 1.83–3(c) for the definition of substantial risk of 

forfeiture. 

3. Treatment of qualified equity grants (sec. 3803 of the bill and 

secs. 83, 3401, and 6051 of the Code) 

PRESENT LAW

Income tax treatment of employer stock transferred to an employee 

Specific rules apply to property, including employer stock, transferred to an employee in connection with the performance of services.727 These rules govern the amount and timing of income inclusion by the employee and the amount and timing of the employer’s 

compensation deduction. 

Under these rules, an employee generally must recognize income 

in the taxable year in which the employee’s right to the stock is 

transferable or is not subject to a substantial risk of forfeiture, 

whichever occurs earlier (referred to herein as ‘‘substantially vested’’). Thus, if the employee’s right to the stock is substantially vested when the stock is transferred to the employee, the employee recognizes income in the taxable year of such transfer, in an amount 

equal to the fair market value of the stock as of the date of transfer 

(less any amount paid for the stock). If at the time the stock is 

transferred to the employee, the employee’s right to the stock is not 

substantially vested (referred to herein as ‘‘nonvested’’), the employee does not recognize income attributable to the stock transfer 

until the taxable year in which the employee’s right becomes substantially vested. In this case, the amount includible in the employee’s income is the fair market value of the stock as of the date that 

the employee’s right to the stock is substantially vested (less any 

amount paid for the stock). However, if the employee’s right to the 

stock is nonvested at the time the stock is transferred to employee, 

under section 83(b), the employee may elect within 30 days of 

transfer to recognize income in the taxable year of transfer, referred to as a ‘‘section 83(b)’’ election.728 If a proper and timely 

election under section 83(b) is made, the amount of compensatory 

income is capped at the amount equal to the fair market value of 

the stock as of the date of transfer (less any amount paid for the 

stock). A section 83(b) election is available with respect to grants 

of ‘‘restricted stock’’ (nonvested stock), and does not generally apply 

to the grant of options. 

In general, an employee’s right to stock or other property is subject to a substantial risk of forfeiture if the employee’s right to full 

enjoyment of the property is subject to a condition, such as the future performance of substantial services.729 An employee’s right to 

stock or other property is transferable if the employee can transfer 

an interest in the property to any person other than the transferor 


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730Treas. Reg. sec. 1.83–3(d). In addition, under section 83(c)(2), the right to stock is transferable only if any transferee’s right to the stock would not be subject to a substantial risk of forfeiture. 731Sec. 83(h). 732Treas. Reg. sec. 1.83–6. 733See section 83(e)(3) and Treas. Reg. sec. 1.83–7. A nonqualified option is an option on employer stock that is not a statutory option, discussed below. 734Treas. Reg. sec. 1.83–6(a)(3). 735Secs. 3101–3128 (FICA), 3301–3311 (FUTA), and 3401–3404 (income tax withholding). Instead of FICA taxes, railroad employers and employees are subject, under the Railroad Retirement Tax Act (‘‘RRTA’’), sections 3201–3241, to taxes equivalent to FICA taxes with respect to 

compensation as defined for RRTA purposes. Sections 3501–3510 provide additional rules relating to all these taxes. 736Sec. 3121(v); Treas. Reg. sec. 31.3121(v)(2). 

of the property.730 Thus, generally, employer stock transferred to 

an employee by an employer is not transferable merely because the 

employee can sell it back to the employer. 

In the case of stock transferred to an employee, the employer is 

allowed a deduction (to the extent a deduction for a business expense is otherwise allowable) equal to the amount included in the 

employee’s income as a result of transfer of the stock.731 The employer deduction generally is permitted in the employer’s taxable 

year in which or with which ends the employee’s taxable year when 

the amount is included and properly reported in the employee’s income.732

These rules do not apply to the grant of a nonqualified option on 

employer stock unless the option has a readily ascertainable fair 

market value.733 Instead, these rules apply to the transfer of employer stock by the employee on exercise of the option. That is, if 

the right to the stock is substantially vested on transfer (the time 

of exercise), income recognition applies for the taxable year of 

transfer. If the right to the stock is nonvested on transfer, the timing of income inclusion is determined under the rules applicable to 

the transfer of nonvested stock. In either case, the amount includible in income by the employee is the fair market value of the stock 

as of the required time of income inclusion, less the exercise price 

paid by the employee. A section 83(b) election generally does not 

apply to the grant of options. If upon the exercise of an option, nonvested stock is transferred to the employee, a section 83(b) election 

may apply. The employer’s deduction is generally determined 

under the rules that apply to transfers of restricted stock, but a 

special accrual rule may apply under Treasury regulations when 

the transferred stock is substantially vested.734

Employment taxes and reporting 

Employment taxes generally consist of taxes under the Federal 

Insurance Contributions Act (‘‘FICA’’), tax under the Federal Unemployment Tax Act (‘‘FUTA’’), and income taxes required to be 

withheld by employers from wages paid to employees (‘‘income tax 

withholding’’).735 Unless an exception applies under the applicable 

rules, compensation provided to an employee constitutes wages 

subject to these taxes. 

FICA imposes tax on employers and employees, generally based 

on the amount of wages paid to an employee during the year. Special rules as to the timing and amount of FICA taxes apply in the 

case of nonqualified deferred compensation, as defined for FICA 

purposes.736


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737The employee portion of the HI tax under FICA (not the employer portion) is increased 

by an additional tax of 0.9 percent on wages received in excess of a threshold amount. The 

threshold amount is $250,000 in the case of a joint return, $125,000 in the case of a married 

individual filing a separate return, and $200,000 in any other case. 738 Under section 3501(b), employment taxes with respect to noncash fringe benefits are to be 

collected (or paid) by the employer at the time and in the manner prescribed by the Secretary 

of the Treasury (‘‘Treasury’’). Announcement 85–113, 1985–31 I.R.B. 31, provides guidance on 

the application of employment taxes with respect to noncash fringe benefits. 739Sec. 3402. Specific withholding rates apply in the case of supplemental wages. 740Secs. 6041 and 6051. 741 Employers send Form W–2 information to the Social Security Administration, which 

records information relating to Social Security and Medicare and forwards the Form W–2 information to the IRS. Employees include a copy of Form W–2 with their income tax returns. 742Sections 421–424 govern statutory options. Section 423(b)(5) requires that, under the terms 

of an ESPP, all employees granted options generally must have the same rights and privileges. 743 Under section 56(b)(3), this income tax treatment with respect to stock received on exercise 

of an ISO does not apply for purposes of the alternative minimum tax under section 55. 

The tax imposed on the employer and on the employee is each 

composed of two parts: (1) the Social Security or old age, survivors, 

and disability insurance (‘‘OASDI’’) tax equal to 6.2 percent of covered wages up to the OASDI wage base ($127,200 for 2017); and 

(2) the Medicare or hospital insurance (‘‘HI’’) tax equal to 1.45 percent of all covered wages.737 The employee portion of FICA tax generally must be withheld and, along with the employer portion, remitted to the Federal government by the employer. FICA tax withholding applies regardless of whether compensation is provided in 

the form of cash or a noncash form, such as a transfer of property 

(including employer stock) or in-kind benefits.738

FUTA imposes a tax on employers of six percent of wages up to the FUTA wage base of $7,000. 

Income tax withholding generally applies when wages are paid 

by an employer to an employee, based on graduated withholding 

rates set out in tables published by the Internal Revenue Service 

(‘‘IRS’’).739 Like FICA tax withholding, income tax withholding applies regardless of whether compensation is provided in the form 

of cash or a noncash form, such as a transfer of property (including 

employer stock) or in-kind benefits. 

An employer is required to furnish each employee with a statement of compensation information for a calendar year, including 

taxable compensation, FICA wages, and withheld income and FICA 

taxes.740 In addition, information relating to certain nontaxable 

items must be reported, such as certain retirement and health plan 

contributions. The statement, made on Form W–2, Wage and Tax 

Statement, must be provided to each employee by January 31 of 

the succeeding year.741

Statutory options 

Two types of statutory options apply with respect to employer 

stock: incentive stock options (‘‘ISOs’’) and options provided under 

an employee stock purchase plan (‘‘ESPP’’).742 Stock received pursuant to a statutory option is subject to special rules, rather than 

the rules for nonqualified options, discussed above. No amount is 

includible in an employee’s income on the grant, vesting, or exercise of a statutory option.743 In addition, generally no deduction is 

allowed to the employer with respect to the option or the stock 

transferred to an employee. 

If a holding requirement is met with respect to the stock transferred on exercise of a statutory option and the employee later disposes of the stock, the employee’s gain generally is treated as capVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00349 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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744Secs. 3121(a)(22), 3306(b)(19), and the last sentence of section 421(b). 745 Compensation earned by an employee is generally paid to the employee shortly after being 

earned. However, in some cases, payment is deferred to a later period, referred to as ‘‘deferred 

compensation.’’ Deferred compensation may be provided through a plan that receives tax-favored 

treatment, such as a qualified retirement plan under section 401(a). Deferred compensation provided through a plan that is not eligible for tax-favored treatment is referred to as ‘‘nonqualified’’ deferred compensation. 746Treas. Reg. sec. 1.409A–1(d). 747Section 409A and the regulations thereunder provide rules for nonqualified deferred compensation. Compensation that fails to meet the requirements of section 409A is also subject to 

an additional income tax of 20% on amounts includible in income, and, along with a potential 

interest factor tax, applies to increases in the value of the failed compensation each year until 

it is paid. 748Treas. Reg. sec. 1.409A–1(b)(6). 749Treas. Reg. sec. 1.409A–1(b)(5). In addition, statutory option arrangements are not nonqualified deferred compensation arrangements. 

ital gain rather than ordinary income. Under the holding requirement, the employee must not dispose of the stock within two years 

after the date the option is granted and also must not dispose of 

the stock within one year after the date the option is exercised. If 

a disposition occurs before the end of the required holding period 

(a ‘‘disqualifying disposition’’), the employee recognizes ordinary income in the taxable year in which the disqualifying disposition occurs and the employer may be allowed a corresponding deduction 

in the taxable year in which such disposition occurs. The amount 

of ordinary income recognized when a disqualifying disposition occurs generally equals the fair market value of the stock on the date 

of exercise (that is, when the stock was transferred to the employee) less the exercise price paid. 

Employment taxes do not apply with respect to the grant or vesting of a statutory option, transfer of stock pursuant to the option, 

or a disposition (including a disqualifying disposition) of the 

stock.744 However, certain special reporting requirements apply. 

Nonqualified deferred compensation 

Compensation is generally includible in an employee’s income 

when paid to the employee. However, in the case of a nonqualified 

deferred compensation plan,745 unless the arrangement either is 

exempt from or meets the requirements of section 409A, the 

amount of deferred compensation is first includible in income for 

the taxable year when not subject to a substantial risk of forfeiture 

(as defined),746 even if payment will not occur until a later year.747

In general, to meet the requirements of section 409A, the time 

when nonqualified deferred compensation will be paid, as well as 

the amount, must be specified at the time of deferral with limits 

on further deferral after the time for payment. Various other requirements apply, including that payment can only occur on specific defined events. 

Various exemptions from section 409A apply, including transfers 

of property subject to section 83.748 Nonqualified options are not 

automatically exempt from section 409A, but may be structured so 

as not to be considered nonqualified deferred compensation.749 A 

restricted stock unit (‘‘RSU’’) is a term used for an arrangement 

under which an employee has the right to receive at a specified 

time in the future an amount determined by reference to the value 

of one or more shares of employer stock. An employee’s right to receive the future amount may be subject to a condition, such as continued employment for a certain period or the attainment of certain 

performance goals. The payment to the employee of the amount 


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750Sec. 404(a)(5). 751Thus, for this purpose, the qualified stock is considered transferable if the employee has 

the ability to sell the stock to the employer (or any other person). 752 An established securities market is determined for this purpose by the Secretary, but does 

not include any market unless the market is recognized as an established securities market for 

purposes of another Code provision. 

due under the arrangement is referred to as settlement of the RSU. 

The arrangement may provide for the settlement amount to be paid 

in cash or as a transfer of employer stock (or either). An arrangement providing RSUs is generally considered a nonqualified deferred compensation plan and is subject to the rules, including the 

limits, of section 409A. The employer deduction generally is permitted in the employer’s taxable year in which or with which ends 

the employee’s taxable year when the amount is included and properly reported in the employee’s income.750

REASONS FOR CHANGE

Employer stock may provide a valuable form of employee compensation. In some cases, the transfer of employer stock with a 

high fair market value may result in compensation income, and a 

related tax liability, that is disproportionately large in comparison 

to an employee’s regular salary or wages. In the case of publicly 

traded employer stock, an employee may sell some of the stock to 

provide funds to cover that tax liability. However, that approach 

often is not available in the case of a closely held company that restricts the transferability of its stock. This may make employer 

stock a less attractive form of compensation. In the case of stock 

options, the inability to pay the tax liability that would result from 

the stock received on exercise of the option may mean employees 

let options lapse, thus losing compensation they have already 

earned. The Committee wishes to address these situations by allowing employees to elect to defer recognition of income attributable to stock received on exercise of an option or settlement of 

an RSU until an opportunity to sell some of the stock arises, but 

in no event longer than five years from the date that the employee’s right to the stock becomes substantially vested. 

EXPLANATION OF PROVISION

In general 

The provision allows a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount of income 

attributable to qualified stock transferred to the employee by the 

employer. An election to defer income inclusion (‘‘inclusion deferral 

election’’) with respect to qualified stock must be made no later 

than 30 days after the first time the employee’s right to the stock 

is substantially vested or is transferable, whichever occurs earlier. 

If an employee elects to defer income inclusion under the provision, the income must be included in the employee’s income for the 

taxable year that includes the earliest of (1) the first date the 

qualified stock becomes transferable, including, solely for this purpose, transferable to the employer; 751 (2) the date the employee 

first becomes an excluded employee (as described below); (3) the 

first date on which any stock of the employer becomes readily 

tradable on an established securities market; 752 (4) the date five 


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753 An inclusion deferral election is revoked at the time and in the manner as the Secretary 

provides. 754Thus, as in the case of a section 83(b) election under present law, the employee must provide a copy of the inclusion deferral election to the employer. 755This requirement is met if the stock purchased by the corporation includes all the corporation’s outstanding deferral stock. 756For purposes of the requirement that an ESPP provide employees with the same rights 

and privileges, the rules of the provision apply in determining which employees have the right 

to make an inclusion deferral election with respect to stock received under the ESPP. 

years after the first date the employee’s right to the stock becomes 

substantially vested; or (5) the date on which the employee revokes 

her inclusion deferral election.753

An inclusion deferral election is made in a manner similar to the 

manner in which a section 83(b) election is made.754 The provision 

does not apply to income with respect to nonvested stock that is includible as a result of a section 83(b) election. The provision clarifies that Section 83 (other than the provision), including subsection 

(b), shall not apply to RSUs. Therefore, RSUs are not eligible for 

a section 83(b) election. This is the case because, absent this provision, RSUs are nonqualified deferred compensation and therefore 

subject to the rules that apply to nonqualified deferred compensation. 

An employee may not make an inclusion deferral election for a 

year with respect to qualified stock if, in the preceding calendar 

year, the corporation purchased any of its outstanding stock unless 

at least 25 percent of the total dollar amount of the stock so purchased is stock with respect to which an inclusion deferral election 

is in effect (‘‘deferral stock’’) and the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.755 For purposes of this requirement, stock purchased 

from an individual is not treated as deferral stock (and the purchase is not treated as a purchase of deferral stock) if, immediately 

after the purchase, the individual holds any deferral stock with respect to which an inclusion deferral election has been in effect for 

a longer period than the election with respect to the purchased 

stock. Thus, in general, in applying the purchase requirement, an 

individual’s deferral stock with respect to which an inclusion deferral election has been in effect for the longest periods must be purchased first. A corporation that has deferral stock outstanding as 

of the beginning of any calendar year and that purchases any of 

its outstanding stock during the calendar year must report on its 

income tax return for the taxable year in which, or with which, the 

calendar year ends the total dollar amount of the outstanding stock 

purchased during the calendar year and such other information as 

the Secretary may require for purposes of administering this requirement. 

A qualified employee may make an inclusion deferral election 

with respect to qualified stock attributable to a statutory option.756

In that case, the option is not treated as a statutory option and the 

rules relating to statutory options and related stock do not apply. 

In addition, an arrangement under which an employee may receive 

qualified stock is not treated as a nonqualified deferred compensation plan solely because of an employee’s inclusion deferral election 

or ability to make an election. 

Deferred income inclusion applies also for purposes of the employer’s deduction of the amount of income attributable to the 

qualified stock. That is, if an employee makes an inclusion deferral 


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757One-percent owner status is determined under the top-heavy rules for qualified retirement 

plans, that is, section 416(i)(1)(B)(ii). 758 In the case of one-percent owners, this results from application of the attribution rules of 

section 318 under section 416(i)(1)(B)(i)(II). Family members are determined under section 

318(a)(1) and generally include an individual’s spouse, children, grandchildren and parents. 759These officers are determined on the basis of shareholder disclosure rules for compensation 

under the Securities Exchange Act of 1934, as if such rules applied to the corporation. 760This requirement continues to apply up to the time an inclusion deferral election is made. 

That is, under the provision, no inclusion deferral election may be made with respect to qualified 

stock if any stock of the corporation is readily tradable on an established securities market at 

any time before the election is made. 761 In applying the requirement that 80 percent of employees receive stock options or RSUs, 

excluded employees and part-time employees are not taken into account. For this purpose, partContinued 

election, the employer’s deduction is deferred until the employer’s 

taxable year in which or with which ends the taxable year of the 

employee for which the amount is included in the employee’s income as described in (1)–(5) above. 

Qualified employee and qualified stock 

Under the provision, a qualified employee means an individual 

who is not an excluded employee and who agrees, in the inclusion 

deferral election, to meet the requirements necessary (as determined by the Secretary) to ensure the income tax withholding requirements of the employer corporation with respect to the qualified stock (as described below) are met. For this purpose, an excluded employee with respect to a corporation is any individual (1) 

who was a one-percent owner of the corporation at any time during 

the 10 preceding calendar years,757 (2) who is, or has been at any 

prior time, the chief executive officer or chief financial officer of the 

corporation or an individual acting in either capacity, (3) who is a 

family member of an individual described in (1) or (2),758 or (4) who 

has been one of the four highest compensated officers of the corporation for any of the 10 preceding taxable years.759

Qualified stock is any stock of a corporation if— • an employee receives the stock in connection with the exercise of an option or in settlement of an RSU, and 

• the option or RSU was granted by the corporation to the 

employee in connection with the performance of services and in 

a year in which the corporation was an eligible corporation (as 

described below). 

However, qualified stock does not include any stock if, at the 

time the employee’s right to the stock becomes substantially vested, 

the employee may sell the stock to, or otherwise receive cash in 

lieu of stock from, the corporation. Qualified stock can only be such 

if it relates to stock received in connection with options or RSUs, 

and does not include stock received in connection with other forms 

of equity compensation, including stock appreciation rights or restricted stock. 

A corporation is an eligible corporation with respect to a calendar 

year if (1) no stock of the employer corporation (or any predecessor) 

is readily tradable on an established securities market during any 

preceding calendar year,760 and (2) the corporation has a written 

plan under which, in the calendar year, not less than 80 percent 

of all employees who provide services to the corporation in the 

United States (or any U.S. possession) are granted stock options, 

or restricted stock units (‘‘RSUs’’), with the same rights and privileges to receive qualified stock (‘‘80-percent requirement’’).761 For 


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time employee is defined under section 4980G(d)(4), as an employee who is customarily employed for fewer than 30 hours per week. (A technical amendment to the provision is needed 

to reflect the correct statutory citation defining part-time employees.) 762Sec. 423(b)(5). 763 Under a transition rule, in the case of a calendar year beginning before January 1, 2018, 

the 80-percent requirement is applied without regard to whether the rights and privileges with 

respect to the qualified stock are the same. 764 As defined in sec. 1563(a). 

this purpose, in general, the determination of rights and privileges 

with respect to stock is determined in a similar manner as provided under the present-law ESPP rules.762 However, employees 

will not fail to be treated as having the same rights and privileges 

to receive qualified stock solely because the number of shares available to all employees is not equal in amount, provided that the 

number of shares available to each employee is more than a de 

minimis amount. In addition, rights and privileges with respect to 

the exercise of a stock option are not treated for this purpose as 

the same as rights and privileges with respect to the settlement of 

an RSU.763

For purposes of the provision, corporations that are members of 

the same controlled group 764 are treated as one corporation. 

Notice, withholding and reporting requirements 

Under the provision, a corporation that transfers qualified stock 

to a qualified employee must provide a notice to the qualified employee at the time (or a reasonable period before) the employee’s 

right to the qualified stock is substantially vested (and income attributable to the stock would first be includible absent an inclusion 

deferral election). The notice must (1) certify to the employee that 

the stock is qualified stock, and (2) notify the employee (a) that the 

employee may (if eligible) elect to defer income inclusion with respect to the stock and (b) that, if the employee makes an inclusion 

deferral election, the amount of income required to be included at 

the end of the deferral period will be based on the value of the 

stock at the time the employee’s right to the stock first becomes 

substantially vested, notwithstanding whether the value of the 

stock has declined during the deferral period (including whether 

the value of the stock has declined below the employee’s tax liability with respect to such stock), and the amount of income to be included at the end of the deferral period will be subject to withholding as provided under the provision, as well as of the employee’s responsibilities with respect to required withholding. Failure to 

provide the notice may result in the imposition of a penalty of $100 

for each failure, subject to a maximum penalty of $50,000 for all 

failures during any calendar year. 

An inclusion deferral election applies only for income tax purposes. The application of FICA and FUTA are not affected. The 

provision includes specific income tax withholding and reporting requirements with respect to income subject to an inclusion deferral 

election. 

For the taxable year for which income subject to an inclusion deferral election is required to be included in income by the employee 

(as described above), the amount required to be included in income 

is treated as wages with respect to which the employer is required 

to withhold income tax at a rate not less than the highest income 


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765That is, the maximum rate of tax in effect for the year under section 1. The provision specifies that qualified stock is treated as a noncash fringe benefit for income tax withholding purposes. 

tax rate applicable to individual taxpayers.765 The employer must 

report on Form W–2 the amount of income covered by an inclusion 

deferral election (1) for the year of deferral and (2) for the year the 

income is required to be included in income by the employee. In addition, for any calendar year, the employer must report on Form 

W–2 the aggregate amount of income covered by inclusion deferral 

elections, determined as of the close of the calendar year. 

EFFECTIVE DATE

The provision generally applies with respect to stock attributable 

to options exercised or RSUs settled after December 31, 2017. 

Under a transition rule, until the Secretary (or the Secretary’s delegate) issues regulations or other guidance implementing the 80- 

percent and employer notice requirements under the provision, a 

corporation will be treated as complying with those requirements 

(respectively) if it complies with a reasonable good faith interpretation of the requirements. The penalty for a failure to provide the 

notice required under the provision applies to failures after December 31, 2017. 

TITLE IV—TAXATION OF FOREIGN INCOME AND 

FOREIGN PERSONS 

PRESENT LAW

The following discussion of present law provides an overview of 

general principles of taxation of cross-border activity as well as a 

detailed explanation of provisions in present law that are relevant 

to the provisions included in Title IV of the bill as reported out of 

Committee. 

Present law combines taxation of all U.S. persons on their worldwide income, whether derived in the United States or abroad, with 

limited deferral of taxation of income earned by foreign subsidiaries 

of U.S. companies and source-based taxation of the U.S.-source income of nonresident aliens and foreign entities. Under this system 

(sometimes described as the U.S. hybrid system), the application of 

the Code differs depending on whether income arises from outbound investment or inbound investment. Outbound investment refers to the foreign activities of U.S. persons, while inbound investment is investment by foreign persons in U.S. assets or activities, 

although certain rules are common to both inbound and outbound 

activities. 

A. PRINCIPLES COMMON TO INBOUND AND OUTBOUND TAXATION

Although the U.S. tax rules differ depending on whether the activity in question is inbound or outbound, there are certain concepts that apply to both inbound and outbound investment. Such 

areas include the transfer pricing rules, entity classification, the 

rules for determination of source, and whether a corporation is foreign or domestic. 


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766Sec. 7701(a)(30). 767Sec. 7701(b). 768Sec. 7701(a)(4). 769Secs. 7701(a)(5) and 7701(a)(9). Entities organized in a possession or territory of the United 

States are not considered to have been organized under the laws of the United States. 770 ‘‘The notion of corporate residence is an important touchstone of taxation, however, in 

many foreign income tax systems[,]’’ with the result that the bilateral treaties are often relied 

upon to resolve conflicting claims of taxing jurisdiction. Joseph Isenbergh, Vol. 1 U.S. Taxation 

of Foreign Persons and Foreign Income, Para. 7.1 (Fourth Ed. 2016). 771Sec. 7874. 772Sec. 7874(a). In addition, an excise tax may be imposed on certain stock compensation of 

executives of companies that undertake inversion transactions. Sec. 4985. 

1. Residence 

U.S. persons are subject to tax on their worldwide income. The 

Code defines U.S. person to include all U.S. citizens and residents 

as well as domestic entities such as partnerships, corporations, estates and certain trusts.766 The term ‘‘resident’’ is defined only with 

respect to natural persons. Noncitizens who are lawfully admitted 

as permanent residents of the United States in accordance with immigration laws (colloquially referred to as green card holders) are 

treated as residents for tax purposes. In addition, noncitizens who 

meet a substantial presence test and are not otherwise exempt 

from U.S. taxation are also taxable as U.S. residents.767

For legal entities, the Code determines whether an entity is subject to U.S. taxation on its worldwide income on the basis of its 

place of organization. For purposes of U.S. tax law, a corporation 

or partnership is treated as domestic if it is organized or created 

under the laws of the United States or of any State, unless, in the 

case of a partnership, the Secretary prescribes otherwise by regulation.768 Other partnerships and corporations (that is, those organized under the laws of foreign countries) are generally treated as 

foreign.769 In contrast, place of organization is not determinative of 

residence under taxing jurisdictions that use factors such as situs, 

management and control to determine residence. As a result, legal 

entities may have more than one tax residence, or, in some case, 

no residence.770 Only domestic corporations are subject to U.S. tax 

on a worldwide basis. Foreign corporations are taxed only on income that has a sufficient connection with the United States. 

Tax benefits otherwise available to a domestic corporation that 

migrates its tax home from the United States to foreign jurisdiction 

may be denied to such corporation for ten years following such migration.771 These sanctions generally apply to a transaction in 

which, pursuant to a plan or a series of related transactions: (1) a 

domestic corporation becomes a subsidiary of a foreign-incorporated 

entity or otherwise transfers substantially all of its properties to 

such an entity in a transaction completed after March 4, 2003; (2) 

the former shareholders of the domestic corporation hold (by reason 

of the stock they had held in the domestic corporation) at least 60 

percent but less than 80 percent (by vote or value) of the stock of 

the foreign-incorporated entity after the transaction (this stock 

often being referred to as ‘‘stock held by reason of’’); and (3) the foreign-incorporated entity, considered together with all companies 

connected to it by a chain of greater than 50 percent ownership 

(that is, the ‘‘expanded affiliated group’’), does not have substantial 

business activities in the entity’s country of incorporation, compared to the total worldwide business activities of the expanded affiliated group.772


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773 Notice 2015–79, 2015 I.R.B. LEXIS 583 (Nov. 19, 2015), which announced their intent to 

issue further regulations to limit cross-border merger transactions, expanding on the guidance 

issued in Notice 2014–52. On April 4, 2016, Treasury and the IRS issued proposed and temporary regulations (T.D. 9761) that incorporate the rules previously announced in Notice 2014– 

52 and Notice 2015–79 and a new multiple domestic entity acquisition rule. On January 13, 

2017, Treasury and the IRS issued final and temporary regulations under section 7874 (T.D. 

9812), which adopt, with few changes, prior temporary and proposed regulations, which identify 

certain stock of an acquiring foreign corporation that is disregarded in calculating the ownership 

of the foreign corporation for purposes of section 7874. 774T.D. 9761, April 4, 2016. But see, Chamber of Commerce v Internal Revenue Service, Cause 

No 1:16–CV–944–LY (W.D. Tex. Sept. 29, 2017), granting summary judgment to plaintiff in 

challenge to temporary regulations based on lack of compliance with Administrative Procedure 

Requirements. 775T.D. 9812, January 13, 2017. 776Treas. Reg. sec. 301.7701–1, et seq. 777The check-the-box regulations replaced Treas. Reg. sec. 301.7701–2, as in effect prior to 

1997, under which the classification of unincorporated entities for Federal tax purposes was determined on the basis of a four characteristics indicative of status as a corporation: continuity 

of life, centralization of management, limited liability, and free transferability of interests. An 

entity that possessed three or more of these characteristics was treated as a corporation; if it 

possessed two or fewer, then it was treated as a partnership. Thus, to achieve characterization 

as a partnership under this system, taxpayers needed to arrange the governing instruments of 

an entity in such a way as to eliminate two of these corporate characteristics. The advent and 

proliferation of limited liability companies (‘‘LLCs’’) under State laws allowed business owners 

to create customized entities that possessed a critical common feature—limited liability for investors—as well as other corporate characteristics the owners found desirable. As a consequence, 

classification was effectively elective for well-advised taxpayers. 

The Treasury Department and the IRS have promulgated detailed guidance, through both regulations and several notices, addressing these requirements under section 7874 since the section 

was enacted in 2004,773 and have sought to expand the reach of the 

section or reduce the tax benefits of inversion transactions. For example, Notice 2014–52 announced Treasury’s and the IRS’s intention to issue regulations and took a two-pronged approached. First, 

it addressed the treatment of cross-border combination transactions 

themselves. Second, it addressed post-transaction steps that taxpayers may undertake with respect to U.S.-owned foreign subsidiaries making it more difficult to access foreign earnings without incurring added U.S. tax. On November 19, 2015, Treasury and the 

IRS issued Notice 2015–79, which announced their intent to issue 

further regulations to limit cross-border merger transactions, expanding on the guidance issued in Notice 2014–52. In 2016, Treasury and the IRS issued proposed and temporary regulations that 

incorporate the rules previously announced in Notice 2014–52 and 

Notice 2015–79 and a new multiple domestic entity acquisition 

rule.774

In early 2017, Treasury issued final and temporary regulations 775 that adopt, with few changes, the prior temporary and proposed regulations. 

2. Entity classification 

Certain entities are eligible to elect their classification for Federal tax purposes under the ‘‘check-the-box’’ regulations adopted in 

1997.776 Those regulations simplified the entity classification process for both taxpayers and the IRS by making the entity classification of unincorporated entities explicitly elective in most instances.777 The eligibility to elect and the breadth of an entity’s 

choices depend upon whether it is a ‘‘per se corporation’’ and its 

number of beneficial owners. Foreign as well as domestic entities 

may make the election. As a result, it is possible for an entity that 

operates across countries to be treated as a hybrid entity. A hybrid 

entity is one which is treated as a flow-through or disregarded entiVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00357 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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778See, e.g., Hunt v. Commissioner, 90 T.C. 1289 (1988). 779Sec. 861(a)(1); Treas. Reg. sec. 1.861–2(a)(1). 780Secs. 861(a)(1) and 862(a)(1). For purposes of certain reporting and withholding obligations 

the source rule in section 861(a)(1)(B) does not apply to interest paid by the foreign branch of 

a domestic financial institution. This results in the payment being treated as a withholdable 

payment. Sec. 1473(1)(C). 781Sec. 884(f)(1). 782Secs. 861(a)(2), 862(a)(2). 783Sec. 861(a)(2)(B). 784Sec. 861(a)(4). 

ty for U.S. tax purposes but as a corporation for foreign tax purposes. For ‘‘reverse hybrid entities,’’ the opposite is true. The election can affect the determination of the source of the income, availability of tax credits, and other tax attributes. 

3. Source of income rules 

The rules for determining the source of certain types of income 

are specified in the Code and described briefly below. Various factors determine the source of income for U.S. tax purposes, including the status or nationality of the payor, the status or nationality 

of the recipient, the location of the recipient’s activities that generate the income, and the location of the assets that generate the 

income. To the extent that the source of income is not specified by 

statute, the Treasury Secretary may promulgate regulations that 

explain the appropriate treatment. However, many items of income 

are not explicitly addressed by either the Code or Treasury regulations, sometimes resulting in nontaxation of the income. On several 

occasions, courts have determined the source of such items by applying the rule for the type of income to which the disputed income 

is most closely analogous, based on all facts and circumstances.778

Interest 

Interest is derived from U.S. sources if it is paid by the United 

States or any agency or instrumentality thereof, a State or any political subdivision thereof, or the District of Columbia. Interest is 

also from U.S. sources if it is paid by a resident or a domestic corporation on a bond, note, or other interest-bearing obligation.779

Special rules apply to treat as foreign-source certain amounts paid 

on deposits with foreign commercial banking branches of U.S. corporations or partnerships and certain other amounts paid by foreign branches of domestic financial institutions.780 Interest paid by 

the U.S. branch of a foreign corporation is also treated as U.S.- 

source income.781

Dividends 

Dividend income is generally sourced by reference to the payor’s 

place of incorporation.782 Thus, dividends paid by a domestic corporation are generally treated as entirely U.S.-source income. Similarly, dividends paid by a foreign corporation are generally treated 

as entirely foreign-source income. Under a special rule, dividends 

from certain foreign corporations that conduct U.S. businesses are 

treated in part as U.S.-source income.783

Rents and royalties 

Rental income is sourced by reference to the location or place of 

use of the leased property.784 The nationality or the country of resiVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00358 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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785 Ibid. 786Sec. 865(a). 787Sec. 865(g)(1)(B). 788Sec. 865(g)(1)(A). 789Sec. 865(g). 790Secs. 865(b), 861(a)(6), 862(a)(6); Treas. Reg. sec. 1.861–7(c). 791Sec. 865(e)(2). 792Sec. 863(b). A taxpayer may elect one of three methods for allocating and apportioning income as U.S.-or foreign-source: (1) the 50–50 method under which 50 percent of the income from 

the sale of inventory property in such a situation is attributable to the production activities and 

50 percent to the sales activities, with the income sourced based on the location of those activities; (2) independent factory price (‘‘IFP’’) method under which, in certain circumstances, an IFP 

may be established by the taxpayer to determine income from production activities; (3) the books 

and records method under which, with advance permission, the taxpayer may use books of account to detail the allocation of receipts and expenditures between production and sales activities. Treas. Reg. sec. 1.863–3(b), (c). If production activity occurs only within the United States, 

or only within foreign countries, then all income is sourced to where the production activity occurs; when production activities occur in both the United States and one or more foreign countries, the income attributable to production activities must be split between U.S. and foreign 

sources. Treas. Reg. sec. 1.863–3(c)(1). The sales activity is generally sourced based on where 

title to the property passes. Treas. Reg. secs. 1.863–3(c)(2), 1.861–7(c). 

dence of the lessor or lessee does not affect the source of rental income. Rental income from property located or used in the United 

States (or from any interest in such property) is U.S.-source income, regardless of whether the property is real or personal, intangible or tangible. 

Royalties are sourced in the place of use of (or the place of privilege to use) the property for which the royalties are paid.785 This 

source rule applies to royalties for the use of either tangible or intangible property, including patents, copyrights, secret processes, 

formulas, goodwill, trademarks, trade names, and franchises. 

Income from sales of personal property 

Subject to significant exceptions, income from the sale of personal property is sourced on the basis of the residence of the seller.786 For this purpose, special definitions of the terms ‘‘U.S. resident’’ and ‘‘nonresident’’ are provided. A nonresident is defined as 

any person who is not a U.S. resident,787 while the term ‘‘U.S. resident’’ comprises any juridical entity which is a U.S. person, all U.S. 

citizens, as well as any individual who is a U.S. resident without 

a tax home in a foreign country or a nonresident alien with a tax 

home in the United States.788 As a result, nonresident includes any 

foreign corporation.789

Several special rules apply. For example, income from the sale of 

inventory property is generally sourced to the place of sale, which 

is determined by where title to the property passes.790 However, if 

the sale is by a nonresident and is attributable to an office or other 

fixed place of business in the United States, the sale is treated as 

income from U.S. sources without regard to the place of sale, unless it is sold for use, disposition, or consumption outside the 

United States and a foreign office materially participates in the 

sale.791 Income from the sale of inventory property that a taxpayer 

produces (in whole or in part) in the United States and sells outside the United States, or that a taxpayer produces (in whole or in 

part) outside the United States and sells in the United States, is 

treated as partly U.S.-source and partly foreign-source.792

In determining the source of gain or loss from the sale or exchange of an interest in a foreign partnership, the IRS has taken 

the position that to the extent that there is unrealized gain attributable to partnership assets that are effectively connected with the 


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793 Rev. Rul. 91–32, 1991–1 C.B. 107. But see, Grecian Magnesite Mining, Industrial & Shipping Co. SA v Commissioner, 149 T.C. No. 3 (2017). 794Sec. 865(c). 795Sec. 865(d). 796Sec. 861(a)(3). Gross income of a nonresident alien individual, who is present in the United 

States as a member of the regular crew of a foreign vessel, from the performance of personal 

services in connection with the international operation of a ship is generally treated as foreignsource income. 797Treas. Reg. sec. 1.861–4(b). 798Sec. 861(a)(7). 799Sec. 863(c). 800 U.S. law on navigation is codified in U.S. Code at title 33, and is consistent with the body 

of international maritime law. The normative principles of international maritime law for determining the maritime zones and territorial sovereignty over seas are embodied in the United Nations Convention on the Law of the Sea, first opened for signature in 1982. Since 1983, the Executive Branch has agreed that the treaty is generally consistent with existing international 

norms of the law of the sea and that the United States would act in conformity to the principles 

of the treaty other than those portions regarding deep seabed exploitation, even in the absence 

of ratification of the treaty. 

U.S. business, the foreign person’s gain or loss from the sale or exchange of a partnership interest is effectively connected gain or loss 

to the extent of the partner’s distributive share of such unrealized 

gain or loss, and not capital gain or loss. Similarly, to the extent 

that the partner’s distributive share of unrealized gain is attributable to a permanent establishment of the partnership under an 

applicable treaty provision, it may be subject to U.S. tax under a 

treaty.793

Gain on the sale of depreciable property is divided between U.S.- 

source and foreign-source in the same ratio that the depreciation 

was previously deductible for U.S. tax purposes.794 Payments received on sales of intangible property are sourced in the same manner as royalties to the extent the payments are contingent on the 

productivity, use, or disposition of the intangible property.795

Personal services income 

Compensation for labor or personal services is generally sourced 

to the place-of-performance. Thus, compensation for labor or personal services performed in the United States generally is treated 

as U.S.-source income, subject to an exception for amounts that 

meet certain de minimis criteria.796 Compensation for services performed both within and without the United States is allocated between U.S.- and foreign-source.797

Insurance income 

Underwriting income from issuing insurance or annuity contracts 

generally is treated as U.S.-source income if the contract involves 

property in, liability arising out of an activity in, or the lives or 

health of residents of, the United States.798

Transportation income 

Sources rules generally provide that income from furnishing 

transportation that both begins and ends in the United States is 

U.S.-source income,799 and 50-percent of income attributable to 

transportation that either begins or ends in the United States is 

treated as U.S.-source income. However, to the extent that the operator of a shipping or cruise line is foreign, its ownership structure and the maritime law 800 applicable for determining what constitutes international shipping, as well as specific income tax proviVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00360 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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801Due to the regulatory framework for aviation, an international flight must either originate 

or conclude in the country of residence of the airline’s owner, where income tax for the international flight is assessed. In contrast to international shipping, international aviation cannot 

be carried out using flags-of-convenience. Thus, although tax law treats shipping and aviation 

similarly, the differences between the two industries and the applicable regulatory regimes 

produce different tax outcomes. Full territorial sovereignty applies within 12 nautical miles of 

one’s coast; the contiguous waters beyond 12 nautical miles but up to 24 nautical miles are subject to some regulation. Within 200 nautical miles, a country may assert an economic zone for 

exploitation of living marine resources and some minerals. Beyond 200 nautical miles are the 

‘‘high seas’’ in which no sovereign state may assert exclusive jurisdiction. 802Sec. 863(d). 803Sec. 863(e). 804Sec. 861(a)(9). This provision effects a legislative override of the opinion in Container Corp. 

v. Commissioner, 134 T.C. 122 (February 17, 2010), aff’d 2011 WL1664358, 107 A.F.T.R.2d 

2011–1831 (5th Cir. May 2, 2011), in which the Tax Court held that fees paid by a domestic 

corporation to its foreign parent with respect to guarantees issued by the parent for the debts 

of the domestic corporation were more closely analogous to compensation for services than to 

interest, and determined that the source of the fees should be determined by reference to the 

residence of the foreign parent-guarantor. As a result, the income was treated as income from 

foreign sources. 

sions, combine to create an industry-specific departure from the 

rules generally applicable.801

Income from space or ocean activities or international communications 

In the case of a foreign person, generally no income from a space 

or ocean activity or from international communications is treated 

as U.S.-source income.802 With respect to the latter, an exception 

is provided if the foreign person maintains an office or other fixed 

place of business in the United States, in which case the international communications income attributable to such fixed place of 

business is treated as U.S.-source income.803 For U.S. persons, all 

income from space or ocean activities and 50 percent of income 

from international communications is treated as U.S.-source income. 

Amounts received with respect to guarantees of indebtedness 

Amounts received, directly or indirectly, from a noncorporate 

resident or from a domestic corporation for the provision of a guarantee of indebtedness of such person are income from U.S. 

sources.804 This includes payments that are made indirectly for the 

provision of a guarantee. For example, U.S.-source income under 

this rule includes a guarantee fee paid by a foreign bank to a foreign corporation for the foreign corporation’s guarantee of indebtedness owed to the bank by the foreign corporation’s domestic subsidiary, where the cost of the guarantee fee is passed on to the domestic subsidiary through, for instance, additional interest charged 

on the indebtedness. In this situation, the domestic subsidiary has 

paid the guarantee fee as an economic matter through higher interest costs, and the additional interest payments made by the subsidiary are treated as indirect payments of the guarantee fee and, 

therefore, as income from U.S. sources. 

Such U.S.-source income also includes amounts received from a 

foreign person, whether directly or indirectly, for the provision of 

a guarantee of indebtedness of that foreign person if the payments 

received are connected with income of such person that is effectively connected with the conduct of a U.S. trade or business. 

Amounts received from a foreign person, whether directly or indirectly, for the provision of a guarantee of that person’s debt, are 


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805For a detailed description of the U.S. transfer pricing rules, see Joint Committee on Taxation, Present Law and Background Related to Possible Income Shifting and Transfer Pricing 

(JCX–37–10), July 20, 2010, pp. 18–50. 806The term ‘‘related’’ as used herein refers to relationships described in section 482, which 

refers to ‘‘two or more organizations, trades or businesses (whether or not incorporated, whether 

or not organized in the United States, and whether or not affiliated) owned or controlled directly 

or indirectly by the same interests.’’ 807Section 1059A buttresses section 482 by limiting the extent to which costs used to determine custom valuation can also be used to determine basis in property imported from a related 

party. A taxpayer that imports property from a related party may not assign a value to the 

property for cost purposes that exceeds its customs value. 808 H.R. Rep. No. 99–426, p. 423. 

treated as foreign-source income if they are not from sources within 

the United States under section 861(a)(9). 

4. Intercompany transfers 

Transfer pricing 

A basic U.S. tax principle applicable in dividing profits from 

transactions between related taxpayers is that the amount of profit 

allocated to each related taxpayer must be measured by reference 

to the amount of profit that a similarly situated taxpayer would realize in similar transactions with unrelated parties. The transfer 

pricing rules of section 482 and the accompanying Treasury regulations are intended to preserve the U.S. tax base by ensuring that 

taxpayers do not shift income properly attributable to the United 

States to a related foreign company through pricing that does not 

reflect an arm’s-length result.805 Similarly, the domestic laws of 

most U.S. trading partners include rules to limit income shifting 

through transfer pricing. The arm’s-length standard is difficult to 

administer in situations in which no unrelated party market prices 

exist for transactions between related parties. When a foreign person with U.S. activities has transactions with related U.S. taxpayers, the amount of income attributable to U.S. activities is determined in part by the same transfer pricing rules of section 482 

that apply when U.S. persons with foreign activities transact with 

related foreign taxpayers. 

Section 482 authorizes the Secretary of the Treasury to allocate 

income, deductions, credits, or allowances among related business 

entities 806 when necessary to clearly reflect income or otherwise 

prevent tax avoidance, and comprehensive Treasury regulations 

under that section adopt the arm’s-length standard as the method 

for determining whether allocations are appropriate.807 The regulations generally attempt to identify the respective amounts of taxable income of the related parties that would have resulted if the 

parties had been unrelated parties dealing at arm’s length. For income from intangible property, section 482 provides ‘‘in the case of 

any transfer (or license) of intangible property (within the meaning 

of section 936(h)(3)(B)), the income with respect to such transfer or 

license shall be commensurate with the income attributable to the 

intangible.’’ By requiring inclusion in income of amounts commensurate with the income attributable to the intangible, Congress was 

responding to concerns regarding the effectiveness of the 

arm’s-length standard with respect to intangible property—including, in particular, high-profit-potential intangibles.808


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809Sec. 367(d). 810See, T.D. 9803, 81 F.R. 91012 (December 17, 2016). Treas. Reg. sec. 1.367(d)–1(b) now provides that the rules of section 367(d) apply to transfers of intangible property as defined under 

Treas. Sec. 1.367(a)–1(d)(5) after September 14, 2015, and to any transfers occurring before that 

date resulting from entity classification elections filed on or after September 15, 2015. Noting 

that commenters on the regulations had cited legislative history that contemplated active business exceptions, Treasury announced the reconsideration of the rule. U.S. Treasury Department, 

Second Report to the President on Identifying and Reducing Tax Regulatory Burdens, Executive 

Order 13789 October 2, 2017, TNT Doc 2017–72131. The relevant legislative history is found 

at in H.R. Rep. No. 98–432, 98th Cong., 2d Sess. 1318–1320 (March 5, 1984) and Conference 

Report, H.R. Rep. No. 98–861, 98th Cong. 2d Sess. 951–957 (June 23, 1984). 811 E.g., the portfolio interest exception in section 871(h) (discussed below). 812 Because each treaty reflects considerations unique to the relationship between the two 

treaty countries, treaty withholding tax rates on each category of income are not uniform across 

treaties. 

Gain recognition on outbound transfers 

If a transfer of intangible property to a foreign affiliate occurs in 

connection with certain corporate transactions, nonrecognition 

rules that may otherwise apply are suspended. The transferor of 

intangible property must recognize gain from the transfer as 

though he had sold the intangible (regardless of the stage of development of the intangible property) in exchange for payments contingent on the use, productivity or disposition of the transferred 

property in amounts that would have been received either annually 

over the useful life of the property or upon disposition of the property after the transfer.809 The appropriate amounts of those imputed payments are determined using transfer-pricing principles. 

Final regulations issued in 2016 eliminate an exception under temporary regulations that permitted nonrecognition of gain from outbound transfers of foreign goodwill and going concern value. However, the Secretary announced that reinstatement of an exception 

for active trades or businesses is under consideration for cases with 

little potential for abuse and administrative difficulties.810

B. U.S. TAX RULES APPLICABLE TO NONRESIDENT ALIENS AND

FOREIGN CORPORATIONS (INBOUND) 

Nonresident aliens and foreign corporations are generally subject 

to U.S. tax only on their U.S.-source income. Thus, the source and 

type of income received by a foreign person generally determines 

whether there is any U.S. income tax liability and the mechanism 

by which it is taxed. The U.S. tax rules for U.S. activities of foreign 

taxpayers apply differently to two broad types of income: U.S.- 

source income that is ‘‘fixed or determinable annual or periodical 

gains, profits, and income’’ (‘‘FDAP income’’) or income that is ‘‘effectively connected with the conduct of a trade or business within 

the United States’’ (‘‘ECI’’). FDAP income generally is subject to a 

30-percent gross-basis tax withheld at its source, while ECI is generally subject to the same U.S. tax rules that apply to business income derived by U.S. persons. That is, deductions are permitted in 

determining taxable ECI, which is then taxed at the same rates applicable to U.S. persons. Much FDAP income and similar income is, 

however, exempt from tax or is subject to a reduced rate of tax 

under the Code 811 or a bilateral income tax treaty.812

1. Gross-basis taxation of U.S.-source income 

Non-business income received by foreign persons from U.S. 

sources is generally subject to tax on a gross basis at a rate of 30 


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813Secs. 871(a), 881. If the FDAP income is also ECI, it is taxed on a net basis, at graduated 

rates. 814 Commissioner v. Wodehouse, 337 U.S. 369, 388–89 (1949). After reviewing legislative history of the Revenue Act of 1936, the Supreme Court noted that Congress expressly intended 

to limit taxes on nonresident aliens to taxes that could be readily collectible, i.e., subject to withholding, in response to ‘‘a theoretical system impractical of administration in a great number 

of cases. H.R. Rep. No. 2475, 74th Cong., 2d Sess. 9–10 (1936).’’ In doing so, the Court rejected 

P.G. Wodehouse’s arguments that an advance royalty payment was not within the purview of 

the statutory definition of FDAP income. 815 815Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949). 816Sec. 887. 817Sec. 883(a)(1). In addition, to the extent provided in regulations, income from shipping and 

aviation is not subject to the four-percent gross basis tax if the income is of a type that is not 

subject to the reciprocal exemption for net basis taxation. See sec. 887(b)(1). Comparable rules 

under section 872(b)(1) apply to income of nonresident alien individuals from shipping operations. 818 Although technically insurance premiums paid to a foreign insurer or reinsurer are FDAP 

income, they are exempt from withholding under Treas. Reg. sec. 1.1441–2(a)(7) if the insurance 

contract is subject to the excise tax under section 4371. Treas. Reg. secs. 1.1441–2(b)(1)(i) and 

1.1441–2(b)(2). 

percent, which is collected by withholding at the source of the payment. As explained below, the categories of income subject to the 

30-percent tax and the categories for which withholding is required 

are generally coextensive, with the result that determining the 

withholding tax liability determines the substantive liability. 

The income of non-resident aliens or foreign corporations that is 

subject to tax at a rate of 30-percent includes FDAP income that 

is not effectively connected with the conduct of a U.S. trade or business.813 The items enumerated in defining FDAP income are illustrative; the common characteristic of types of FDAP income is that 

taxes with respect to the income may be readily computed and collected at the source, in contrast to the administrative difficulty involved in determining the seller’s basis and resulting gain from 

sales of property.814 The words ‘‘annual or periodical’’ are ‘‘merely 

generally descriptive’’ of the payments that could be within the 

purview of the statute and do not preclude application of the withholding tax to one-time, lump sum payments to nonresident 

aliens.815

With respect to income from shipping, the gross basis tax potentially applicable is four percent,816 unless the income is effectively 

connected with a U.S. trade or business, and thus subject to the 

graduated rates, as determined under rules specific to U.S.-source 

gross transportation income rather than the more broadly applicable rules defining effectively connected income in section 864(c). 

Even if the income is within the purview of those special rules, it 

may nevertheless be exempt if the income is derived from the international operation of a ship or aircraft by a foreign entity organized 

in a jurisdiction which provides a reciprocal exemption to U.S. entities.817

Types of FDAP income 

FDAP income encompasses a broad range of types of gross income, but has limited application to gains on sales of property, including market discount on bonds and option premiums.818 Capital 

gains received by nonresident aliens present in the United States 

for fewer than 183 days are generally treated as foreign source and 

are thus not subject to U.S. tax, unless the gains are effectively 

connected with a U.S. trade or business; capital gains received by 

nonresident aliens present in the United States for 183 days or 


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819For purposes of this rule, whether a person is considered a resident in the United States 

is determined by application of the rules under section 7701(b). 820Sec. 871(a)(2). In addition, certain capital gains from sales of U.S. real property interests 

are subject to tax as effectively connected income (or in some instances as dividend income) 

under the Foreign Investment in Real Property Tax Act of 1980 (‘‘FIRPTA’’). 821Secs. 871(a)(1)(D), 881(a)(4). 822Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441–1(b)(4)(ii). 823Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441–1(b)(4)(iii). 824Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 1.1441–1(b)(4)(iv). 825Treas. Reg. sec. 1.1461–1(c)(2)(ii)(A), (B). Regulations require a bank to report interest if 

the recipient is a nonresident alien who resides in a country with which the United States has 

a satisfactory exchange of information program under a bilateral agreement and the deposit is 

maintained at an office in the United States. Treas. Reg. secs. 1.6049–4(b)(5) and 1.6049–8. The 

IRS publishes lists of the countries whose residents are subject to the reporting requirements, 

and those countries with respect to which the reported information will be automatically exchanged. Rev. Proc. 2017–31, available at https://www.irs.gov/pub/irs-drop/rp-17–31.pdf, 

supplementing Rev. Proc. 2014–64. 826Sec. 871(h)(2). 827Sec. 163(f)(2)(B). The exception to the registration requirements for foreign targeted securities was repealed in 2010, effective for obligations issued two years after enactment, thus narrowing the portfolio interest exemption for obligations issued after March 18, 2012. See Hiring 

Incentives to Restore Employment Law of 2010, Pub. L. No. 111–147, sec. 502(b). 828Sec. 871(h)(3). 829Sec. 871(h)(4). 830Sec. 881(c)(3)(C). 

more 819 that are treated as income from U.S. sources are subject 

to gross-basis taxation.820 In contrast, U.S-source gains from the 

sale or exchange of intangibles are subject to tax and withholding 

if they are contingent upon the productivity of the property sold 

and are not effectively connected with a U.S. trade or business.821

Interest on bank deposits may qualify for exemption on two 

grounds, depending on where the underlying principal is held on 

deposit. Interest paid with respect to deposits with domestic banks 

and savings and loan associations, and certain amounts held by insurance companies, are U.S.-source income but are not subject to 

the U.S. tax when paid to a foreign person, unless the interest is 

effectively connected with a U.S. trade or business of the recipient.822 Interest on deposits with foreign branches of domestic 

banks and domestic savings and loan associations is not treated as 

U.S.-source income and is thus exempt from U.S. tax (regardless of 

whether the recipient is engaged in a U.S. trade or business).823

Similarly, interest and original issue discount on certain short-term 

obligations is also exempt from U.S. tax when paid to a foreign person.824 Additionally, there is generally no information reporting required with respect to payments of such amounts.825

Although FDAP income includes U.S.-source portfolio interest, 

such interest is specifically exempt from the 30-percent gross-basis 

tax. Portfolio interest is any interest (including original issue discount) that is paid on an obligation that is in registered form and 

for which the beneficial owner has provided to the U.S. withholding 

agent a statement certifying that the beneficial owner is not a U.S. 

person.826 For obligations issued before March 19, 2012, portfolio 

interest also includes interest paid on an obligation that is not in 

registered form, provided that the obligation is shown to be targeted to foreign investors under the conditions sufficient to establish deductibility of the payment of such interest.827 Portfolio interest, however, does not include interest received by a 10-percent 

shareholder,828 certain contingent interest,829 interest received by 

a controlled foreign corporation from a related person,830 or interest received by a bank on an extension of credit made pursuant to 


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831Sec. 881(c)(3)(A). 832Secs. 1441, 1442. 833Withholding agent is defined broadly to include any U.S. or foreign person that has the 

control, receipt, custody, disposal, or payment of an item of income of a foreign person subject 

to withholding. Treas. Reg. sec. 1.1441–7(a). 834Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441–1(b). 835 A reduced rate of withholding of 14 percent applies to certain scholarships and fellowships 

paid to individuals temporarily present in the United States. Sec. 1441(b). In addition to statutory exemptions, the 30percent tax with respect to interest, dividends and royalties may be reduced or eliminated by a tax treaty between the United States and the country in which the 

recipient of income otherwise subject to tax is resident. 836Treas. Reg. sec. 1.1461–1(b), (c). 837See Treas. Reg. sec. 1.1441–7(a) (definition of withholding agent includes foreign persons). 838Sec. 1462. 839Secs. 4371–4374. 

a loan agreement entered into in the ordinary course of its trade 

or business.831

Imposition of gross-basis tax and reporting by U.S. withholding 

agents 

The 30-percent tax on FDAP income is generally collected by 

means of withholding.832 Withholding on FDAP payments to foreign payees is required unless the withholding agent,833 i.e., the 

person making the payment to the foreign person receiving the income, can establish that the beneficial owner of the amount is eligible for an exemption from withholding or a reduced rate of withholding under an income tax treaty.834 The principal statutory exemptions from the 30-percent tax apply to interest on bank deposits, and portfolio interest, described above.835

In many instances, the income subject to withholding is the only 

income of the foreign recipient that is subject to any U.S. tax. No 

U.S. Federal income tax return from the foreign recipient is generally required with respect to the income from which tax was 

withheld, if the recipient has no ECI income and the withholding 

is sufficient to satisfy the recipient’s liability. Accordingly, although 

the 30-percent gross-basis tax is a withholding tax, it is also generally the final tax liability of the foreign recipient (unless the foreign recipients files for a refund). 

A withholding agent that makes payments of U.S.-source 

amounts to a foreign person is required to report and pay over any 

amounts of U.S. tax withheld. The reports are due to be filed with 

the IRS by March 15 of the calendar year following the year in 

which the payment is made. Two types of reports are required: (1) 

a summary of the total U.S.-source income paid and withholding 

tax withheld on foreign persons for the year and (2) a report to 

both the IRS and the foreign person of that person’s U.S.-source income that is subject to reporting.836 The nonresident withholding 

rules apply broadly to any financial institution or other payor, including foreign financial institutions.837

To the extent that the withholding agent deducts and withholds 

an amount, the withheld tax is credited to the recipient of the income.838 If the agent withholds more than is required, and results 

in an overpayment of tax, the excess may be refunded to the recipient of the income upon filing of a timely claim for refund. 

Excise tax on foreign reinsurance premiums 

An excise tax applies to premiums paid to foreign insurers and 

reinsurers covering U.S. risks.839 The excise tax is imposed on a 


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840Generally, when a foreign person qualifies for benefits under such a treaty, the United 

States is not permitted to collect the insurance premiums excise tax from that person. 841 In Rev. Rul. 2008–15, 2008–1 C.B. 633, the IRS provided guidance to the effect that the 

excise tax is imposed separately on each reinsurance policy covering a U.S. risk. Thus, if a U.S. 

insurer or reinsurer reinsures a U.S. risk with a foreign reinsurer, and that foreign reinsurer 

in turn reinsures the risk with a second foreign reinsurer, the excise tax applies to both the 

premium to the first foreign reinsurer and the premium to the second foreign reinsurer. In addition, if the first foreign reinsurer is resident in a jurisdiction with a tax treaty containing an 

excise tax exemption, the revenue ruling provides that the excise tax still applies to both payments to the extent that the transaction violates an anti-conduit rule in the applicable tax treaty. Even if no violation of an anti-conduit rule occurs, under the revenue ruling, the excise tax 

still applies to the premiums paid to the second foreign reinsurer, unless the second foreign reinsurer is itself entitled to an excise tax exemption. 842Secs. 871(b), 882. 843Secs. 871(b)(2), 882(a)(2). 844Sec. 875. 

gross basis at the rate of one percent on reinsurance and life insurance premiums, and at the rate of four percent on property and 

casualty insurance premiums. The excise tax does not apply to premiums that are effectively connected with the conduct of a U.S. 

trade or business or that are exempted from the excise tax under 

an applicable income tax treaty. The excise tax paid by one party 

cannot be credited if, for example, the risk is reinsured with a second party in a transaction that is also subject to the excise tax. 

Many U.S. tax treaties provide an exemption from the excise tax, 

including the treaties with Germany, Japan, Switzerland, and the 

United Kingdom.840 To prevent persons from inappropriately obtaining the benefits of exemption from the excise tax, the treaties 

generally include an anti-conduit rule. The most common anti-conduit rule provides that the treaty exemption applies to the excise 

tax only to the extent that the risks covered by the premiums are 

not reinsured with a person not entitled to the benefits of the treaty (or any other treaty that provides exemption from the excise 

tax).841

2. Net-basis taxation of U.S.-source income 

The United States taxes on a net basis the income of foreign persons that is ‘‘effectively connected’’ with the conduct of a trade or 

business in the United States.842 Any gross income derived by the 

foreign person that is not effectively connected with the person’s 

U.S. business is not taken into account in determining the rates of 

U.S. tax applicable to the person’s income from the business.843

U.S. trade or business 

A foreign person is subject to U.S. tax on a net basis if the person is engaged in a U.S. trade or business. Partners in a partnership and beneficiaries of an estate or trust are treated as engaged 

in the conduct of a trade or business within the United States if 

the partnership, estate, or trust is so engaged.844

The question whether a foreign person is engaged in a U.S. trade 

or business is factual and has generated much case law. Basic 

issues include whether the activity constitutes business rather 

than investing, whether sufficient activities in connection with the 

business are conducted in the United States, and whether the relationship between the foreign person and persons performing functions in the United States in respect of the business is sufficient 

to attribute those functions to the foreign person. 


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845Sec. 864(b). 846Sec. 864(b)(1). 847Sec. 864(b)(2). 848Sec. 864(c). 849Sec. 864(c)(2). 850Sec. 864(c)(3). 

The trade or business rules differ from one activity to another. 

The term ‘‘trade or business within the United States’’ expressly includes the performance of personal services within the United 

States.845 If, however, a nonresident alien individual performs personal services for a foreign employer, and the individual’s total 

compensation for the services and period in the United States are 

minimal ($3,000 or less in total compensation and 90 days or fewer 

of physical presence in a year), the individual is not considered to 

be engaged in a U.S. trade or business.846 Detailed rules govern 

whether trading in stocks or securities or commodities constitutes 

the conduct of a U.S. trade or business.847 A foreign person who 

trades in stock or securities or commodities in the United States 

through an independent agent generally is not treated as engaged 

in a U.S. trade or business if the foreign person does not have an 

office or other fixed place of business in the United States through 

which trades are carried out. A foreign person who trades stock or 

securities or commodities for the person’s own account also generally is not considered to be engaged in a U.S. business so long 

as the foreign person is not a dealer in stock or securities or commodities. 

For eligible foreign persons, U.S. bilateral income tax treaties restrict the application of net-basis U.S. taxation. Under each treaty, 

the United States is permitted to tax business profits only to the 

extent those profits are attributable to a U.S. permanent establishment of the foreign person. The threshold level of activities that 

constitute a permanent establishment is generally higher than the 

threshold level of activities that constitute a U.S. trade or business. 

For example, a permanent establishment typically requires the 

maintenance of a fixed place of business over a significant period 

of time. 

Effectively connected income 

A foreign person that is engaged in the conduct of a trade or 

business within the United States is subject to U.S. net-basis taxation on the income that is ‘‘effectively connected’’ with the business. Specific statutory rules govern whether income is ECI.848

In the case of U.S.-source capital gain and U.S.-source income of 

a type that would be subject to gross basis U.S. taxation, the factors taken into account in determining whether the income is ECI 

include whether the income is derived from assets used in or held 

for use in the conduct of the U.S. trade or business and whether 

the activities of the trade or business were a material factor in the 

realization of the amount (the ‘‘asset use’’ and ‘‘business activities’’ 

tests).849 Under the asset use and business activities tests, due regard is given to whether the income, gain, or asset was accounted 

for through the U.S. trade or business. All other U.S.-source income 

is treated as ECI.850

A foreign person who is engaged in a U.S. trade or business may 

have limited categories of foreign-source income that are considered 


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851This income is subject to net-basis U.S. taxation after allowance of a credit for any foreign 

income tax imposed on the income. Sec. 906. 852Sec. 864(c)(4)(B). 853Sec. 864(c)(4)(D)(i). 854Sec. 864(c)(5)(A). 855Sec. 864(c)(5)(B). 856Sec. 864(c)(4)(C). 857Sec. 864(c)(1)(B). 

to be ECI.851 Foreign-source income not included in one of these 

categories (described next) generally is exempt from U.S. tax. 

A foreign person’s income from foreign sources generally is considered to be ECI only if the person has an office or other fixed 

place of business within the United States to which the income is 

attributable and the income is in one of the following categories: (1) 

rents or royalties for the use of patents, copyrights, secret processes 

or formulas, good will, trade-marks, trade brands, franchises, or 

other like intangible properties derived in the active conduct of the 

trade or business; (2) interest or dividends derived in the active 

conduct of a banking, financing, or similar business within the 

United States or received by a corporation the principal business 

of which is trading in stocks or securities for its own account; or 

(3) income derived from the sale or exchange (outside the United 

States), through the U.S. office or fixed place of business, of inventory or property held by the foreign person primarily for sale to 

customers in the ordinary course of the trade or business, unless 

the sale or exchange is for use, consumption, or disposition outside 

the United States and an office or other fixed place of business of 

the foreign person in a foreign country participated materially in 

the sale or exchange.852 Foreign-source dividends, interest, and 

royalties are not treated as ECI if the items are paid by a foreign 

corporation more than 50 percent (by vote) of which is owned directly, indirectly, or constructively by the recipient of the income.853

In determining whether a foreign person has a U.S. office or 

other fixed place of business, the office or other fixed place of business of an agent generally is disregarded. The place of business of 

an agent other than an independent agent acting in the ordinary 

course of business is not disregarded, however, if the agent either 

has the authority (regularly exercised) to negotiate and conclude 

contracts in the name of the foreign person or has a stock of merchandise from which he regularly fills orders on behalf of the foreign person.854 If a foreign person has a U.S. office or fixed place 

of business, income, gain, deduction, or loss is not considered attributable to the office unless the office was a material factor in the 

production of the income, gain, deduction, or loss and the office regularly carries on activities of the type from which the income, gain, 

deduction, or loss was derived.855

Special rules apply in determining the ECI of an insurance company. The foreign-source income of a foreign corporation that is 

subject to tax under the insurance company provisions of the Code 

is treated as ECI if the income is attributable to its United States 

business.856

Income, gain, deduction, or loss for a particular year generally is 

not treated as ECI if the foreign person is not engaged in a U.S. 

trade or business in that year.857 If, however, income or gain taken 

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858Sec. 864(c)(6). 859Sec. 864(c)(7). 860Sec. 887(b)(4). 861The most recent compilation of countries that the United States recognizes as providing 

exemptions lists countries in three groups: Twenty-seven countries are eligible for exemption on 

the basis of a review of the legislation in the foreign jurisdiction; 39 nations exchanged diplomatic notes with the United States that grant exemption to some extent; and more than 50 nations are parties with the United States to bilateral income tax treaties that include a shipping 

article. Rev. Rul. 2008–17, 2008–1 C.B. 626, modified by Ann. 2008–57, 2008–C.B. 1192, 2008. 862Sec. 883(c) and regulations thereunder. 

change of property, the performance of services, or any other transaction that occurred in a prior taxable year, the determination 

whether the income or gain is taxable on a net basis is made as 

if the income were taken into account in the earlier year and without regard to the requirement that the taxpayer be engaged in a 

trade or business within the United States during the later taxable 

year.858 If any property ceases to be used or held for use in connection with the conduct of a U.S. trade or business and the property 

is disposed of within 10 years after the cessation, the determination whether any income or gain attributable to the disposition of 

the property is taxable on a net basis is made as if the disposition 

occurred immediately before the property ceased to be used or held 

for use in connection with the conduct of a U.S. trade or business 

and without regard to the requirement that the taxpayer be engaged in a U.S. business during the taxable year for which the income or gain is taken into account.859

Transportation income from U.S. sources is treated as effectively 

connected with a foreign person’s conduct of a U.S. trade or business only if the foreign person has a fixed place of business in the 

United States that is involved in the earning of such income and 

substantially all of such income of the foreign person is attributable 

to regularly scheduled transportation.860 If the transportation income is effectively connected with conduct of a U.S. trade or business, the transportation income, along with transportation income 

that is from U.S. sources because the transportation both begins 

and ends in the United States, may be subject to net-basis taxation. Income from the international operation of a ship or aircraft 

may be eligible for an exemption under section 883, provided that 

the foreign jurisdiction has extended reciprocity for U.S. businesses; 861 whether the party claiming an exemption is eligible for 

the tax relief; 862 and the activities that give rise to the income 

qualify under relevant regulations. 

Allowance of deductions 

Taxable ECI is computed by taking into account deductions associated with gross ECI. For this purpose, the apportionment and allocation of deductions is addressed in detailed regulations. The regulations applicable to deductions other than interest expense set 

forth general guidelines for allocating deductions among classes of 

income and apportioning deductions between ECI and non-ECI. In 

some circumstances, deductions may be allocated on the basis of 

units sold, gross sales or receipts, costs of goods sold, profits contributed, expenses incurred, assets used, salaries paid, space used, 

time spent, or gross income received. More specific guidelines are 

provided for the allocation and apportionment of research and experimental expenditures, legal and accounting fees, income taxes, 

losses on dispositions of property, and net operating losses. DeVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00370 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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863Sec. 897(a). 864Sec. 1445 and Treasury regulations thereunder. 865See Treas. Reg. sec. 1.884–1(g), –5. 866Sec. 884(a). 867Sec. 884(b). 868See sec. 884(d)(2) (excluding, for example, earnings and profits attributable to gain from 

the sale of domestic corporation stock that constitutes a U.S. real property interest described 

in section 897). 

tailed regulations under section 861 address the allocation and apportionment of interest deductions. In general, interest is allocated 

and apportioned based on assets rather than income. 

3. Special rules 

FIRPTA 

A foreign person’s gain or loss from the disposition of a U.S. real 

property interest (‘‘USRPI’’) is treated as ECI and, therefore, as 

taxable at the income tax rates applicable to U.S. persons, including the rates for net capital gain. A foreign person subject to tax 

on this income is required to file a U.S. tax return under the normal rules relating to receipt of ECI.863 In the case of a foreign corporation, the gain from the disposition of a USRPI may also be subject to the branch profits tax at a 30-percent rate (or lower treaty 

rate). 

The payor of income that FIRPTA treats as ECI (‘‘FIRPTA income’’) is generally required to withhold U.S. tax from the payment.864 The foreign person can request a refund with its U.S. tax 

return, if appropriate, based on that person’s total ECI and deductions (if any) for the taxable year. 

Branch profits taxes 

A domestic corporation owned by foreign persons is subject to 

U.S. income tax on its net income. The earnings of the domestic 

corporation are subject to a second tax, this time at the shareholder 

level, when dividends are paid. As described previously, when the 

shareholders are foreign, the second-level tax is imposed at a flat 

rate and collected by withholding. Unless the portfolio interest exemption or another exemption applies, interest payments made by 

a domestic corporation to foreign creditors are likewise subject to 

U.S. tax. To approximate these second-level withholding taxes imposed on payments made by domestic subsidiaries to their foreign 

parent corporations, the United States taxes a foreign corporation 

that is engaged in a U.S. trade or business through a U.S. branch 

on amounts of U.S. earnings and profits that are shifted out of, or 

amounts of interest that are deducted by, the U.S. branch of the 

foreign corporation. These branch taxes may be reduced or eliminated under an applicable income tax treaty.865

Under the branch profits tax, the United States imposes a tax of 

30 percent on a foreign corporation’s ‘‘dividend equivalent 

amount.’’ 866 The dividend equivalent amount generally is the earnings and profits of a U.S. branch of a foreign corporation attributable to its ECI.867 Limited categories of earnings and profits attributable to a foreign corporation’s ECI are excluded in calculating 

the dividend equivalent amount.868

In arriving at the dividend equivalent amount, a branch’s effectively connected earnings and profits are adjusted to reflect 


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869Sec. 884(b). 870Sec. 884(f)(1)(A). 871Sec. 884(f)(1)(B). 872Sec. 163(j). 873 If a tax treaty reduces the rate of tax on interest paid or accrued by the taxpayer, the interest is treated as interest on which no Federal income tax is imposed to the extent of the same 

proportion of such interest as the rate of tax imposed without regard to the treaty, reduced by 

the rate of tax imposed under the treaty, bears to the rate of tax imposed without regard to 

the treaty. Sec. 163(j)(5)(B). 

changes in a branch’s U.S. net equity (that is, the excess of the 

branch’s assets over its liabilities, taking into account only 

amounts treated as connected with its U.S. trade or business).869

The first adjustment reduces the dividend equivalent amount to 

the extent the branch’s earnings are reinvested in trade or business 

assets in the United States (or reduce U.S. trade or business liabilities). The second adjustment increases the dividend equivalent 

amount to the extent prior reinvested earnings are considered remitted to the home office of the foreign corporation. 

Interest paid by a U.S. trade or business of a foreign corporation 

generally is treated as if paid by a domestic corporation and therefore is subject to U.S. 30-percent withholding tax (if the interest is 

paid to a foreign person and a Code or treaty exemption or reduction would not be available if the interest were actually paid by a 

domestic corporation).870 Certain ‘‘excess interest’’ of a U.S. trade 

or business of a foreign corporation is treated as if paid by a U.S. 

corporation to a foreign parent and, therefore, is subject to U.S. 30- 

percent withholding tax.871 For this purpose, excess interest is the 

excess of the interest expense of the foreign corporation apportioned to the U.S. trade or business over the amount of interest 

paid by the trade or business. 

Earnings stripping 

Taxpayers are limited in their ability to reduce the U.S. tax on 

the income derived from their U.S. operations through certain 

earnings stripping transactions involving interest payments. If the 

payor’s debt-to-equity ratio exceeds 1.5 to 1 (a debt-to-equity ratio 

of 1.5 to 1 or less is considered a ‘‘safe harbor’’), a deduction for disqualified interest paid or accrued by the payor in a taxable year is 

generally disallowed to the extent of the payor’s excess interest expense.872 Disqualified interest includes interest paid or accrued to 

related parties when no Federal income tax is imposed with respect 

to such interest; 873 to unrelated parties in certain instances in 

which a related party guarantees the debt (‘‘guaranteed debt’’); or 

to a REIT by a taxable REIT subsidiary of that REIT. Excess interest expense is the amount by which the payor’s net interest expense (that is, the excess of interest paid or accrued over interest 

income) exceeds 50 percent of its adjusted taxable income (generally taxable income computed without regard to deductions for 

net interest expense, net operating losses, domestic production activities under section 199, depreciation, amortization, and depletion). Interest amounts disallowed under these rules can be carried 

forward indefinitely and are allowed as a deduction to the extent 

of excess limitation in a subsequent tax year. In addition, any excess limitation (that is, the excess, if any, of 50 percent of the adjusted taxable income of the payor over the payor’s net interest expense) can be carried forward three years. 


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874 A U.S. citizen or resident living abroad may be eligible to exclude from U.S. taxable income 

certain foreign earned income and foreign housing costs under section 911. For a description 

of this exclusion, see Present Law and Issues in U.S. Taxation of Cross-Border Income (JCX– 

42–11), September 6, 2011, p. 52. 875Secs. 951–964. 876Secs. 1291–1298. 877Secs. 901, 902, 960, 1293(f). 878Secs. 951–964. 879Secs. 951(b), 957, 958. The term ‘‘United States shareholder’’ is used interchangeably herein with ‘‘U.S. shareholder.’’ 880Sec. 951(a). 

C. U.S. TAX RULES APPLICABLE TO FOREIGN ACTIVITIES OF U.S. 

PERSONS (OUTBOUND) 

1. In general 

In general, income earned directly by a U.S. person from the conduct of a foreign business is taxed on a current basis,874 but income 

earned indirectly from a separate legal entity operating the foreign 

business is not. Instead, active foreign business income earned by 

a U.S. person indirectly through an interest in a foreign corporation generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. person. Certain anti-deferral regimes 

may cause the U.S. owner to be taxed on a current basis in the 

United States on certain categories of passive or highly mobile income earned by the foreign corporation regardless of whether the 

income has been distributed as a dividend to the U.S. owner. The 

main anti-deferral regimes that provide such exceptions are the 

controlled foreign corporation (‘‘CFC’’) rules of subpart F 875 and the 

passive foreign investment company (‘‘PFIC’’) rules.876 A foreign 

tax credit generally is available to offset, in whole or in part, the 

U.S. tax owed on foreign-source income, whether the income is 

earned directly by the domestic corporation, repatriated as an actual dividend, or included in the domestic parent corporation’s income under one of the anti-deferral regimes.877

2. Anti-deferral regimes 

Subpart F 

Subpart F,878 applicable to CFCs and their shareholders, is the 

main anti-deferral regime of relevance to a U.S.-based multinational corporate group. A CFC generally is defined as any foreign 

corporation if U.S. persons own (directly, indirectly, or constructively) more than 50 percent of the corporation’s stock (measured 

by vote or value), taking into account only those U.S. persons that 

are within the meaning of the term ‘‘United States shareholder,’’ 

which refers only to those U.S. persons who own at least 10 percent 

of the stock (measured by vote only).879

Subpart F income 

Under the subpart F rules, the United States generally taxes the 

10-percent U.S. shareholders of a CFC on their pro rata shares of 

certain income of the CFC (referred to as ‘‘subpart F income’’), 

without regard to whether the income is distributed to the shareholders.880 In effect, the United States treats the 10-percent U.S. 

shareholders of a CFC as having received a current distribution of 

the corporation’s subpart F income. With exceptions described 

below, subpart F income generally includes passive income and 


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881Sec. 954. 882Sec. 953. 883Sec. 952(a)(3)–(5). 884Sec. 954. 885Sec. 953(c). Related person insurance income is defined for this purpose to mean any insurance income attributable to a policy of insurance or reinsurance with respect to which the primary insured is either a U.S. shareholder (within the meaning of the provision) in the foreign 

corporation receiving the income or a person related to such a shareholder. 886 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986 (JCS– 

10–87), May 4, 1987, p. 968. 887Secs. 951(a)(1)(B), 956. 888Sec. 956(c)(1). 889Sec. 956(c)(2). 

other income that is readily movable from one taxing jurisdiction 

to another. Subpart F income consists of foreign base company income,881 insurance income,882 and certain income relating to international boycotts and other violations of public policy.883

Foreign base company income consists of foreign personal holding 

company income, which includes passive income such as dividends, 

interest, rents, and royalties, and a number of categories of income 

from business operations, including foreign base company sales income, foreign base company services income, and foreign base company oil-related income.884

Insurance income subject to current inclusion under the subpart 

F rules includes any income of a CFC attributable to the issuing 

or reinsuring of any insurance or annuity contract in connection 

with risks located in a country other than the CFC’s country of organization. Subpart F insurance income also includes income attributable to an insurance contract in connection with risks located 

within the CFC’s country of organization as the result of an arrangement under which another corporation receives a substantially equal amount of consideration for insurance of other country 

risks. Finally, special rules apply under subpart F with respect to 

related person insurance income 885 in order to address captive insurance companies.886 Under these rules, the threshold for determining control is reduced to 25 percent, and any level of stock ownership by a U.S. person in such corporation is sufficient for the person to be treated as a U.S. shareholder. 

Investments in U.S. property 

The 10-percent U.S. shareholders of a CFC also are required to 

include currently in income for U.S. tax purposes their pro rata 

shares of the corporation’s untaxed earnings invested in certain 

items of U.S. property.887 This U.S. property generally includes 

tangible property located in the United States, stock of a U.S. corporation, an obligation of a U.S. person, and certain intangible assets, such as patents and copyrights, acquired or developed by the 

CFC for use in the United States.888 There are specific exceptions 

to the general definition of U.S. property, including for bank deposits, certain export property, and certain trade or business obligations.889 The inclusion rule for investment of earnings in U.S. property is intended to prevent taxpayers from avoiding U.S. tax on 

dividend repatriations by repatriating CFC earnings through nondividend payments, such as loans to U.S. persons. 

Subpart F exceptions 

Several exceptions to the broad definition of subpart F income 

permit continued deferral for income from certain transactions, 


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890Sec. 954(c)(3). 891Sec. 954(b)(4). 892Sec. 954(c)(6). 893See section 144 of the Protecting Americans from Tax Hikes Act of 2015 (Division Q of 

Pub. L. No. 114–113), H.R. 2029 (‘‘the PATH Act of 2015’’), which extended section 954(c)(6) for 

five years. Congress has previously extended the application of section 954(c)(6) several times, 

most recently in the Tax Increase Prevention Act of 2014, Pub. L. No. 113–295; Pub. L. No. 107– 

147, sec. 614, 2002; Pub. L. No. 106–170, sec. 503, 1999; Pub. L. No. 105–277, 1998. 894Sec. 954(h). See section 128 of the PATH Act of 2015, which made the active financing exception permanent. 

dividends, interest and certain rents and royalties received by a 

CFC from a related corporation organized and operating in the 

same foreign country in which the CFC is organized.890 The samecountry exception is not available to the extent that the payments 

reduce the subpart F income of the payor. A second exception from 

foreign base company income and insurance income is available for 

any item of income received by a CFC if the taxpayer establishes 

that the income was subject to an effective foreign income tax rate 

greater than 90 percent of the maximum U.S. corporate income tax 

rate (that is, more than 90 percent of 35 percent, or 31.5 percent).891

A provision colloquially referred to as the ‘‘CFC look-through’’ 

rule excludes from foreign personal holding company income dividends, interest, rents, and royalties received or accrued by one CFC 

from a related CFC (with relation based on control) to the extent 

attributable or properly allocable to non-subpart-F income of the 

payor.892 The look-through rule applies to taxable years of foreign 

corporations beginning before January 1, 2020, and to taxable 

years of U.S. shareholders with or within which such taxable years 

of foreign corporations end.893

There is also an exclusion from subpart F income for certain income of a CFC that is derived in the active conduct of banking or 

financing business (‘‘active financing income’’), which applies to all 

taxable years of the foreign corporation beginning after December 

31, 2014, and for taxable years of the shareholders that end during 

or within such taxable years of the corporation.894 With respect to 

income derived in the active conduct of a banking, financing, or 

similar business, a CFC is required to be predominantly engaged 

in such business and to conduct substantial activity with respect to 

such business in order to qualify for the active financing exceptions. In addition, certain nexus requirements apply, which provide 

that income derived by a CFC or a qualified business unit (‘‘QBU’’) 

of a CFC from transactions with customers is eligible for the exceptions if, among other things, substantially all of the activities in 

connection with such transactions are conducted directly by the 

CFC or QBU in its home country, and such income is treated as 

earned by the CFC or QBU in its home country for purposes of 

such country’s tax laws. Moreover, the exceptions apply to income 

derived from certain cross border transactions, provided that certain requirements are met. 

In the case of a securities dealer, an exception from foreign personal holding company income applies to any interest or dividend 

(or certain equivalent amounts) from any transaction, including a 

hedging transaction or a transaction consisting of a deposit of collateral or margin, entered into in the ordinary course of the dealer’s trade or business as a dealer in securities within the meaning 


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895Sec. 954(c)(2)(C). 896Sec. 954(h)(3)(E). 897Subject to approval by the IRS, a taxpayer may establish that the reserve of a life insurance company for life insurance and annuity contracts is the amount taken into account in determining the foreign statement reserve for the contract (reduced by catastrophe, equalization, 

or deficiency reserve or any similar reserve). IRS approval is to be based on whether the method, the interest rate, the mortality and morbidity assumptions, and any other factors taken into 

account in determining foreign statement reserves (taken together or separately) provide an appropriate means of measuring income for Federal income tax purposes. 898Sec. 959(a)(1). 899Sec. 959(a)(2). 900Sec. 959(c). 

of section 475.895 In the case of a QBU of the dealer, the income 

is required to be attributable to activities of the QBU in the country of incorporation, or to a QBU in the country in which the QBU 

both maintains its principal office and conducts substantial business activity. A coordination rule provides that, for securities dealers, this exception generally takes precedence over the exception 

for active financing income. 

Income is treated as active financing income only if, among other 

requirements, it is derived by a CFC or by a QBU of that CFC. 

Certain activities conducted by persons related to the CFC or its 

QBU are treated as conducted directly by the CFC or QBU.896 An 

activity qualifies under this rule if the activity is performed by employees of the related person and if the related person is an eligible 

CFC, the home country of which is the same as the home country 

of the related CFC or QBU; the activity is performed in the home 

country of the related person; and the related person receives 

arm’s-length compensation that is treated as earned in the home 

country. Income from an activity qualifying under this rule is excluded from subpart F income so long as the other active financing 

requirements are satisfied. 

Certain income of a qualifying branch of a qualifying insurance 

company with respect to risks located within the home country of 

the branch or within the CFC’s country of creation or organization 

are also excepted from foreign personal holding company income, 

provided that certain requirements are met. Further, additional exceptions from insurance income and from foreign personal holding 

company income apply for certain income of certain CFCs or 

branches with respect to risks located in a country other than the 

United States, provided that the requirements for these exceptions, 

including reserve requirements, are met.897

Exclusion of previously taxed earnings and profits 

A 10-percent U.S. shareholder of a CFC may exclude from its income actual distributions of earnings and profits from the CFC that 

were previously included in the 10-percent U.S. shareholder’s income under subpart F.898 Any income inclusion (under section 956) 

resulting from investments in U.S. property may also be excluded 

from the 10-percent U.S. shareholder’s income when such earnings 

are ultimately distributed.899 Ordering rules provide that distributions from a CFC are treated as coming first out of earnings and 

profits of the CFC that have been previously taxed under subpart 

F, then out of other earnings and profits.900


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901Sec. 961(a). 902Sec. 961(b). 903Pub. L. No. 99–514. 904Sec. 1297. 905Secs. 1293–1295. 906Sec. 1291. 907Sec. 1296. 908Sec. 1297(b)(2)(B). 

Basis adjustments 

In general, a 10-percent U.S. shareholder of a CFC receives a 

basis increase with respect to its stock in the CFC equal to the 

amount of the CFC’s earnings that are included in the 10-percent 

U.S. shareholder’s income under subpart F.901 Similarly, a 10-percent U.S. shareholder of a CFC generally reduces its basis in the 

CFC’s stock in an amount equal to any distributions that the 10- 

percent U.S. shareholder receives from the CFC that are excluded 

from its income as previously taxed under subpart F.902

Passive foreign investment companies 

The Tax Reform Act of 1986 903 established the PFIC anti-deferral regime. A PFIC is generally defined as any foreign corporation 

if 75 percent or more of its gross income for the taxable year consists of passive income, or 50 percent or more of its assets consists 

of assets that produce, or are held for the production of, passive income.904 Alternative sets of income inclusion rules apply to U.S. 

persons that are shareholders in a PFIC, regardless of their percentage ownership in the company. One set of rules applies to 

PFICs that are qualified electing funds, under which electing U.S. 

shareholders currently include in gross income their respective 

shares of the company’s earnings, with a separate election to defer 

payment of tax, subject to an interest charge, on income not currently received.905 A second set of rules applies to PFICs that are 

not qualified electing funds, under which U.S. shareholders pay tax 

on certain income or gain realized through the company, plus an 

interest charge that is attributable to the value of deferral.906 A 

third set of rules applies to PFIC stock that is marketable, under 

which electing U.S. shareholders currently take into account as income (or loss) the difference between the fair market value of the 

stock as of the close of the taxable year and their adjusted basis 

in such stock (subject to certain limitations), often referred to as 

‘‘marking to market.’’ 907 Under the PFIC regime, passive income is 

any income which is of a kind that would be foreign personal holding company income, including dividends, interest, royalties, rents, 

and certain gains on the sale or exchange of property, commodities, 

or foreign currency. 

However, among other exceptions, passive income does not include any income derived in the active conduct of an insurance 

business by a corporation that is predominantly engaged in an insurance business and that would be subject to tax under subchapter L if it were a domestic corporation.908 In applying the insurance exception, the IRS analyzes whether risks assumed under 

contracts issued by a foreign company organized as an insurer are 

truly insurance risks, whether the risks are limited under the 


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909 Notice 2003–34, 2003–C.B. 1 990, June 9, 2003. See also, Prop. Treas. Reg. sec. 1.1297– 

4, 26 CFR Part 1, REG–108214–15, April 24, 2015. 910Secs. 531–537. 911Secs. 901, 902, 960, 1291(g). 912Secs. 901, 904. 913Sec. 904(c). 914Treas. Reg. sec. 1.861–8(b), Temp. Treas. Reg. sec. 1.861–8T(c). 

terms of the contracts, and the status of the company as an insurance company.909

Other anti-deferral rules 

The subpart F and PFIC rules are not the only anti-deferral regimes. Other rules that impose current U.S. taxation on income 

earned through corporations include the accumulated earnings tax 

rules 910 and the personal holding company rules. 

Rules for coordination among the anti-deferral regimes are provided to prevent U.S. persons from being subject to U.S. tax on the 

same item of income under multiple regimes. For example, a corporation generally is not treated as a PFIC with respect to a particular shareholder if the corporation is also a CFC and the shareholder is a 10-percent U.S. shareholder. Thus, subpart F is allowed 

to trump the PFIC rules. 

3. Foreign tax credit 

Subject to certain limitations, U.S. citizens, resident individuals, 

and domestic corporations are allowed to claim credit for foreign income taxes they pay. A domestic corporation that owns at least 10 

percent of the voting stock of a foreign corporation is allowed a 

‘‘deemed-paid’’ credit for foreign income taxes paid by the foreign 

corporation that the domestic corporation is deemed to have paid 

when the related income is distributed as a dividend or is included 

in the domestic corporation’s income under the anti-deferral 

rules.911

The foreign tax credit generally is limited to a taxpayer’s U.S. 

tax liability on its foreign-source taxable income (as determined 

under U.S. tax accounting principles). This limit is intended to ensure that the credit serves its purpose of mitigating double taxation 

of foreign-source income without offsetting U.S. tax on U.S.-source 

income.912 The limit is computed by multiplying a taxpayer’s total 

U.S. tax liability for the year by the ratio of the taxpayer’s foreignsource taxable income for the year to the taxpayer’s total taxable 

income for the year. If the total amount of foreign income taxes 

paid and deemed paid for the year exceeds the taxpayer’s foreign 

tax credit limitation for the year, the taxpayer may carry back the 

excess foreign taxes to the previous year or carry forward the excess taxes to one of the succeeding 10 years.913

The computation of the foreign tax credit limitation requires a 

taxpayer to determine the amount of its taxable income from foreign sources in each limitation category (described below) by allocating and apportioning deductions between U.S.-source gross income, on the one hand, and foreign-source gross income in each 

limitation category, on the other. In general, deductions are allocated and apportioned to the gross income to which the deductions 

factually relate.914 However, subject to certain exceptions, deductions for interest expense and research and experimental expenses 


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915Temp. Treas. Reg. sec. 1.861–9T, Treas. Reg. sec. 1.861–17. 916Sec. 864(e)(1), (6); Temp. Treas. Reg. sec. 1.861–14T(e)(2). 917Secs. 864(e)(5), 1504. 918Sec. 1504(b)(3). 919Sec. 864(f); ‘‘American Jobs Creation Act of 2004’’ (‘‘AJCA’’), Pub. L. 108–357, sec. 401(a). 920 Hiring Incentives to Restore Employment Act, Pub. L. No. 111–147, sec. 551(a). 921Sec. 904(d). AJCA generally reduced the number of income categories from nine to two, 

effective for tax years beginning in 2006. Before AJCA, the foreign tax credit limitation was applied separately to the following categories of income: (1) passive income, (2) high withholding 

tax interest, (3) financial services income, (4) shipping income, (5) certain dividends received 

from noncontrolled section 902 foreign corporations (also known as ‘‘10/50 companies’’), (6) certain dividends from a domestic international sales corporation or former domestic international 

sales corporation, (7) taxable income attributable to certain foreign trade income, (8) certain distributions from a foreign sales corporation or former foreign sales corporation, and (9) any other 

income not described in items (1) through (8) (so-called ‘‘general basket’’ income). A number of 

other provisions of the Code, including several enacted in 2010 as part of Pub. L. No. 111–226, 

create additional separate categories in specific circumstances or limit the availability of the foreign tax credit in other ways. See, e.g., secs. 865(h), 901(j), 904(d)(6), 904(h)(10). 922Sec. 904(d)(3). The subpart F rules applicable to CFCs and their 10-percent U.S. shareholders are described below. 

are apportioned based on taxpayer ratios.915 In the case of interest 

expense, this ratio is the ratio of the corporation’s foreign or domestic (as applicable) assets to its worldwide assets. In the case of research and experimental expenses, the apportionment ratio is 

based on either sales or gross income. All members of an affiliated 

group of corporations generally are treated as a single corporation 

for purposes of determining the apportionment ratios.916

The term ‘‘affiliated group’’ is determined generally by reference 

to the rules for determining whether corporations are eligible to file 

consolidated returns.917 These rules exclude foreign corporations 

from an affiliated group.918 Interest expense allocation rules permitting a U.S. affiliated group to apportion the interest expense of 

the members of the U.S. affiliated group on a worldwide-group 

basis were modified in 2004, and initially effective for taxable years 

beginning after December 31, 2008.919 The effective date of the 

modified rules has been delayed to January 1, 2021.920 A result of 

this rule is that interest expense of foreign members of a U.S. affiliated group is taken into account in determining whether a portion of the interest expense of the domestic members of the group 

must be allocated to foreign-source income. An allocation to foreignsource income generally is required only if, in broad terms, the domestic members of the group are more highly leveraged than is the 

entire worldwide group. The new rules are generally expected to reduce the amount of the U.S. group’s interest expense that is allocated to foreign-source income. 

The foreign tax credit limitation is applied separately to passive 

category income and to general category income.921 Passive category income includes passive income, such as portfolio interest 

and dividend income, and certain specified types of income. All 

other income is in the general category. Passive income is treated 

as general category income if it is earned by a qualifying financial 

services entity. Passive income is also treated as general category 

income if it is highly taxed (that is, if the foreign tax rate is determined to exceed the highest rate of tax specified in Code section 

1 or 11, as applicable). Dividends (and subpart F inclusions), interest, rents, and royalties received by a 10-percent U.S. shareholder 

from a CFC are assigned to a separate limitation category by reference to the category of income out of which the dividends or other 

payments were made.922 Dividends received by a 10-percent corVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00379 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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923Sec. 904(d)(4). 924Secs. 904(f), (g). 925Secs. 904(f)(1), (g)(1). 926Sec. 909. 927Sec. 1503(d). 928Treas. Reg. sec. 1.1503(d)–6(d). 929 See Treas. Reg. sec. 1.1503(d)–6(e)(1). 

porate shareholder of a foreign corporation that is not a CFC are 

also categorized on a look-through basis.923

Special rules apply to the allocation of income and losses from 

foreign and U.S. sources within each category of income.924 Foreign 

losses from one category will first be used to offset income from foreign sources of other categories. If there remains an overall foreign 

loss, it will be deducted against income from U.S. sources. The 

same principle applies to losses from U.S. sources. In subsequent 

years, the losses that were deducted against another category or 

source of income will be recaptured. That is, an equal amount of 

income from the same category or source that generated a loss in 

the prior year will be recharacterized as income from the other category or source against which the loss was deducted. Up to 50 percent of income from one source in any subsequent year will be recharacterized as income from the other source, whereas foreignsource income in a particular category can be fully recharacterized 

as income in another category until the losses from prior years are 

fully recaptured.925

In addition to the foreign tax credit limitation just described, a 

taxpayer’s ability to claim a foreign tax credit may be further limited by a matching rule that prevents the separation of creditable 

foreign taxes from the associated foreign income. Under this rule, 

a foreign tax generally is not taken into account for U.S. tax purposes, and thus no foreign tax credit is available with respect to 

that foreign tax, until the taxable year in which the related income 

is taken into account for U.S. tax purposes.926

4. Special rules 

Dual consolidated loss rules 

Under the rules applicable to corporations filing consolidated returns, a dual consolidated loss (‘‘DCL’’) is any net operating loss of 

a domestic corporation if the corporation is subject to an income tax 

of a foreign country without regard to whether such income is from 

sources in or outside of such foreign country, or if the corporation 

is subject to such a tax on a residence basis (a ‘‘dual resident corporation’’).927 A DCL generally cannot be used to reduce the taxable income of any member of the corporation’s affiliated group. 

Losses of a separate unit of a domestic corporation (a foreign 

branch or an interest in a hybrid entity owned by the corporation) 

are subject to this limitation in the same manner as if the unit 

were a wholly owned subsidiary of such corporation. An exemption 

is available under Treasury regulations in the case of DCLs for 

which a domestic use election (that is, an election to use the loss 

only for domestic, and not foreign, tax purposes) has been made.928

Recapture is required, however, upon the occurrence of certain triggering events, including the conversion of a separate unit to a foreign corporation and the transfer of 50 percent or more of the assets of a separate unit within a twelve-month period.929


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930Section 965(b)(4). The plan was required to provide for the reinvestment of the repatriated 

dividends in the United States, including as a source for the funding of worker hiring and training, infrastructure, research and development, capital investments, and the financial stabilization of the corporation for the purposes of job retention or creation. 931Sec. 965(d)(1). 932 Accordingly, taxpayers generally were expected to pay regular dividends out of high-taxed 

CFC earnings (thereby generating deemed-paid credits available to offset foreign-source income) 

and section 965 dividends out of low-taxed CFC earnings (thereby availing themselves of the 

85-percent deduction). 933Sec. 965(d)(2). 

Temporary dividends-received deduction for repatriated foreign earnings 

AJCA section 421 added to the Code section 965, a temporary 

provision intended to encourage U.S. multinational companies to 

repatriate foreign earnings. Under section 965, for one taxable year 

certain dividends received by a U.S. corporation from its CFCs 

were eligible for an 85-percent dividends-received deduction. At the 

taxpayer’s election, this deduction was available for dividends received either during the taxpayer’s first taxable year beginning on 

or after October 22, 2004, or during the taxpayer’s last taxable year 

beginning before such date. 

The temporary deduction was subject to a number of general limitations. First, it applied only to cash repatriations generally in excess of the taxpayer’s average repatriation level calculated for a 

three-year base period preceding the year of the deduction. Second, 

the amount of dividends eligible for the deduction was generally 

limited to the amount of earnings shown as permanently invested 

outside the United States on the taxpayer’s recent audited financial 

statements. Third, to qualify for the deduction, dividends were required to be invested in the United States according to a domestic 

reinvestment plan approved by the taxpayer’s senior management 

and board of directors.930

No foreign tax credit (or deduction) was allowed for foreign taxes 

attributable to the deductible portion of any dividend.931 For this 

purpose, the taxpayer was permitted to specifically identify which 

dividends were treated as carrying the deduction and which dividends were not. In other words, the taxpayer was allowed to choose 

which of its dividends were treated as meeting the base-period repatriation level (and thus carry foreign tax credits, to the extent 

otherwise allowable), and which of its dividends were treated as 

part of the excess eligible for the deduction (and thus subject to 

proportional disallowance of any associated foreign tax credits).932

Deductions were disallowed for expenses that were directly allocable to the deductible portion of any dividend.933

Domestic international sales corporations 

A domestic international sales corporations (‘‘DISC’’) is a domestic corporation that satisfies the following conditions: 95 percent of 

its gross receipts must be qualified export receipts; 95 percent of 

the sum of the adjusted bases of all its assets must be attributable 

to the sum of the adjusted bases of qualified export assets; the corporation must have no more than one class of stock; the par or 

stated value of the outstanding stock must be at least $2,500 on 

each day of the taxable year; and an election must be in effect to 


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934Secs. 992(a) and (b). If a corporation fails to satisfy either or both of the 95-percent tests, 

it is deemed to satisfy such tests if it makes a pro rata distribution of its gross receipts which 

are not qualified export receipts and the fair market value of its assets which are not qualified 

export assets. Sec. 992(c). 935Sec. 991. Prior to the 1984 Revenue Act (Pub. L. 98–369), DISCs were eligible for more 

generous tax benefits that were eliminated in favor of the since-repealed foreign sales corporation regime (‘‘FSC’’). An overview of the history of the DISCs and FSCs regimes is provided in 

Joseph Isenbergh, Vol. 3 U.S. Taxation of Foreign Persons and Foreign Income, Para. 81. 

(Fourth Ed. 2016). 936The rate is the average of one-year constant maturity Treasury yields. The deferral benefit 

is the excess of the amount of tax for which the shareholder would be liable if deferred DISC 

income were included as ordinary income over the actual tax liability of such shareholder. Sec. 

995(f). 937The amount of the deemed distribution is the sum of several items, including qualified export receipts in excess of $10 million. See sec. 955(b). 938Sec. 995(c). 

be taxed as a DISC.934 In general, a DISC is not subject to corporate-level tax and offers limited deferral of tax liability to its 

shareholders.935 DISC income attributable to a maximum of $10 

million annually of qualified export receipts is generally exempt 

from income tax at both the corporate and shareholder level. 

Shareholders must pay interest to account for the benefit of deferring the tax liability on undistributed DISC income related to this 

$10 million maximum annual amount.936 Such entities are also referred to as interest charge DISCs, or IC–DISCs. Shareholders of 

a DISC are deemed to receive a dividend out of current earnings 

and profits from qualified export receipts in excess of $10 million.937 Gain on the sale of DISC stock is treated as a dividend to 

the extent of accumulated DISC income.938 The shareholders of a 

corporation which is not a DISC, but was a DISC in a previous taxable year, and which has previously taxed income or accumulated 

DISC income, are also required to pay interest on the deferral benefit, and gain on the sale or exchange of stock in such corporation 

is treated as a dividend. 

TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS 

A. ESTABLISHMENT OF PARTICIPATION EXEMPTION SYSTEM FOR

TAXATION OF FOREIGN INCOME

1. Deduction for foreign-source portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations (sec. 4001 of the bill and new sec. 245A of the Code) 

REASONS FOR CHANGE

The Committee believes that the current tax system puts American workers and companies at a severe disadvantage to foreign 

workers and companies. This is primarily because the United 

States is one of the few industrialized countries with a worldwide 

system of taxation and has the highest corporate tax rate among 

OECD member countries. The worldwide system of taxation with 

deferral provides perverse incentives to keep funds offshore because dividends from foreign subsidiaries are not taxed until repatriated to the United States. The Committee believes that a territorial system with appropriate anti-base erosion safeguards, combined with a lower corporate tax rate, will make American workers 

and companies competitive again, and also will remove tax-driven 

incentives to keep funds offshore. 


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939 Under section 951(b), a domestic corporation is a United States shareholder of a foreign 

corporation if it owns, within the meaning of section 958(a), or is considered as owning by applying the rules of section 958(b), 10 percent or more of the voting stock of the foreign corporation. 940 Consequently, for example, gain included in gross income as a dividend under section 

1248(a) or 964(e) would constitute a dividend received for which the deduction under section 

245A may be available. 941Pursuant to section 959(d), a distribution of previously taxed income does not constitute 

a dividend even if it reduces earnings and profits. 

EXPLANATION OF PROVISION

In general 

The provision generally establishes a participation exemption 

system for foreign income. This exemption is provided for by means 

of a 100-percent deduction for the foreign-source portion of dividends received from specified 10-percent owned foreign corporations by domestic corporations that are United States shareholders 

of those foreign corporations within the meaning of section 951(b) 

(referred to here as ‘‘participation DRD’’).939

A specified 10-percent owned foreign corporation is any foreign 

corporation with respect to which any domestic corporation is a 

United States shareholder. The phrase does not include a passive 

foreign investment company within the meaning of subpart D of 

part VI of subchapter P. 

The term ‘‘dividend received’’ is intended to be interpreted broadly, consistently with the meaning of the phrases ‘‘amount received 

as dividends’’ and ‘‘dividends received’’ under sections 243 and 245, 

respectively.940 Under proposed section 245A(e), the Secretary of 

the Treasury may prescribe such regulations or other guidance as 

may be necessary or appropriate to carry out the rules of section 

245A, including clarifying the intended broad scope of the term 

‘‘dividend received.’’ 

For example, if a domestic corporation indirectly owns stock of a 

foreign corporation through a foreign partnership and the domestic 

corporation would qualify for the participation DRD with respect to 

dividends from the foreign corporation if the domestic corporation 

owned such stock directly, the domestic corporation would be allowed a participation DRD with respect to its distributive share of 

the partnership’s dividend from the foreign corporation. 

Foreign-source portion of a dividend 

The participation DRD is available only for the foreign-source 

portion of dividends received from specified 10-percent owned foreign corporations. The foreign-source portion of any dividend is the 

amount that bears the same ratio to the dividend as the specified 

foreign corporation’s post-1986 undistributed foreign earnings bears 

to the corporation’s total post-1986 undistributed earnings. Post1986 undistributed earnings are the amount of the earnings and 

profits of a specified 10-percent owned foreign corporation accumulated in taxable years beginning after December 31, 1986, as of the 

close of the taxable year of the foreign corporation in which the dividend is distributed and not reduced by dividends 941 distributed 

during that year. Post-1986 undistributed foreign earnings are, in 

general, the portion of post-1986 undistributed earnings that is not 

attributable to post-1986 undistributed U.S. earnings. Post-1986 

undistributed U.S. earnings are, in general, undistributed earnings 

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942 Called a ‘‘nimble dividend.’’ See, Boris I. Bittker and James S. Eustice, Federal Income Taxation of Corporations and Shareholders, (7th ed. 2016) para. 8–12. 

nected with the conduct of a trade or business within the United 

States, or (b) any dividend received (directly or through a wholly 

owned foreign corporation) from an 80-percent-owned (by vote or 

value) domestic corporation. 

Rules similar to the rules described above apply when a dividend 

is paid out of earnings and profits of a specified 10-percent owned 

foreign corporation accumulated in taxable years beginning before 

January 1, 1987. As a consequence, the participation exemption 

system is available for both post-1986 and pre-1987 foreign earnings. An ordering rule provides that dividends are treated as first 

being paid out of post-1986 undistributed earnings to the extent of 

those earnings. 

An additional rule provides for the treatment of distributions of 

a specified 10-percent owned foreign corporation in excess of undistributed earnings. Under section 316(a)(2), a distribution of earnings and profits of a corporation in the taxable year of the distribution is treated as a dividend even if the distribution exceeds accumulated earnings and profits.942 The determination of the foreignsource portion of such a distribution is calculated in a similar manner as for other types of dividends. 

Foreign tax credit disallowance; foreign tax credit limitation 

No foreign tax credit or deduction is allowed for any taxes (including withholding taxes) paid or accrued with respect to a dividend that qualifies for the participation DRD. 

For purposes of computing the section 904(a) foreign tax credit 

limitation, a domestic corporation that is a United States shareholder of a specified 10-percent owned foreign corporation must 

compute its foreign-source taxable income (and entire taxable income) by disregarding the foreign-source portion of any dividend received from that foreign corporation for which the participation 

DRD is taken, as well as and any deductions properly allocable or 

apportioned to that foreign-source portion or the stock with respect 

to which it is paid. 

Six-month holding period requirement 

A domestic corporation is not permitted a participation DRD in 

respect of any dividend on any share of stock that is held by the 

domestic corporation for 180 days or less during the 361-day period 

beginning on the date that is 180 days before the date on which 

the share becomes ex-dividend with respect to the dividend. For 

this purpose, a domestic corporation is treated as holding a share 

of stock for any period only if the corporation is a specified 10-percent owned foreign corporation and the taxpayer is a United States 

shareholder with respect to such corporation during that period. 

EFFECTIVE DATE

The provision applies to distributions made (and for purposes of 

determining a taxpayer’s foreign tax credit limitation under section 

904, deductions in taxable years beginning) after December 31, 

2017. 


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943See, e.g., secs. 367(a)(3)(C), 904(f)(3), 1503(d). 

2. Application of participation exemption to investments in United 

States property (sec. 4002 of the bill sec. 956 of the Code) 

REASONS FOR CHANGE

The Committee believes that including amounts that a CFC invests in United States property in a domestic corporate shareholder’s gross income would be the wrong result under a participation exemption system, when the CFC could otherwise pay a dividend or distribute property to the domestic corporate shareholder 

in a manner that would be tax-free. The Committee further believes that retention of such a rule would needlessly discourage investment in the United States. However, because the participation 

exemption does not extend to individuals, section 956 should remain in effect with respect to individuals who are United States 

shareholders of CFCs. 

EXPLANATION OF PROVISION

Under the provision, the amount determined under section 956 

(relating to CFC investments in United States property) with respect to a domestic corporation is zero. A similar rule is intended 

for domestic corporations that own a CFC through a domestic partnership. The provision includes a specific grant of authority to the 

Secretary to issue regulations to effect that intent. 

EFFECTIVE DATE

The provision applies to taxable years of foreign corporations beginning after December 31, 2017. 

3. Limitation on losses with respect to specified 10-percent owned 

foreign corporations (sec. 4003 of the bill secs. 367(a)(3)(C) and 

961 of the Code, and new sec. 91 of the Code) 

REASONS FOR CHANGE

The Committee is concerned that a participation exemption system could provide inappropriate double benefits in certain circumstances. In particular, a distribution from a foreign subsidiary 

that is eligible for a participation DRD would reduce the value of 

the foreign subsidiary, thereby reducing any built-in gain or increasing any built-in loss in the shareholder’s stock of the subsidiary. Reducing gain in this manner is consistent with the application of section 1248(a) (or section 964(e)) to recharacterize gain 

as a dividend for which a participation DRD may be permitted. Increasing loss in this manner, however, creates an inappropriate 

and double U.S. tax benefit for receiving a tax-free distribution 

from a foreign subsidiary. 

Separately, the Committee is concerned that taxpayers may wish 

to arbitrage the application of the participation exemption system 

to foreign subsidiaries but not foreign branches. Specifically, a taxpayer may deduct losses from a foreign branch operation against 

U.S. taxable income and then incorporate that branch once it becomes profitable. Present law provides an array of loss recapture 

rules to address such a fact pattern,943 but those rules generally 


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rely on the worldwide system of taxation to recapture losses in excess of built-in gains by taxing future earnings when repatriated. 

Instead of only recapturing such losses upon later repatriation of 

earning, the Committee wishes to recapture the U.S. tax benefits 

of these losses immediately upon the incorporation of a foreign 

branch that has generated losses. This is so that the repatriation 

of foreign earnings will not carry negative tax consequences thereby discouraging such repatriation, which is one of the reasons for 

moving to a participation exemption system of taxation. 

EXPLANATION OF PROVISION

Reduction in basis of certain foreign stock 

Under the provision, solely for the purpose of determining a loss, 

a domestic corporate shareholder’s adjusted basis in the stock of a 

specified 10-percent owned foreign corporation (as defined in new 

section 245A) is reduced by an amount equal to the portion of any 

dividend received with respect to such stock from such foreign corporation that was not taxed by reason of a dividends received deduction allowable under section 245A in any taxable year of such 

domestic corporation. This rule applies in coordination with section 

1059, such that any reduction in basis required pursuant to this 

provision will be disregarded, to the extent the basis in the 10-percent owned foreign corporation’s stock has already been reduced 

pursuant to section 1059. 

Inclusion of transferred loss amount in certain assets transfers 

Under the provision, if a domestic corporation transfers substantially all of the assets of a foreign branch (within the meaning of 

section 367(a)(3)(C)) to a foreign corporation which, after such 

transfer, is a specified 10-percent owned foreign corporation with 

respect to which the domestic corporation is a United States shareholder, the domestic corporation includes in gross income an 

amount equal to the transferred loss amount, subject to certain 

limitations. 

The transferred loss amount is the excess of: (1) losses incurred 

by the foreign branch after December 31, 2017 for which a deduction was allowed to the domestic corporation, over (2) the sum of 

taxable income earned by the foreign branch and gain recognized 

by reason of an overall foreign loss recapture arising out of disposition of assets on account of the underlying transfer. For the purposes of (2), only taxable income of the foreign branch in taxable 

years after the loss is incurred through the close of the taxable 

year of the transfer is included. 

For transfers not covered by section 367(a)(3)(C), the transferred 

loss amount is reduced by the amount of gain recognized by the domestic corporation on the transfer (other than gains recognized by 

reason of overall foreign loss recapture). For transfers covered by 

section 367(a)(3)(C), the transferred loss amount is reduced by the 

amount of gain recognized by reason of such subparagraph. 

Amounts included in gross income by reason of the provision or 

by reason of section 367(a)(3)(C) are treated as derived from 

sources within the United States. 

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ments to the adjusted basis of the specified 10 percent owned foreign corporation to which the transfer is made, and to the adjusted 

basis of the property transferred, to reflect amounts included in 

gross income under the provision. 

EFFECTIVE DATE

The provision relating to reduction of basis in certain foreign 

stock for the purposes of determining a loss is effective for distributions made after December 31, 2017. 

The provision relating to transfer of loss amounts from foreign 

branches to certain foreign corporations is effective for transfers 

after December 31, 2017. 

4. Treatment of deferred foreign income upon transition to participation exemption system of taxation (sec. 4004 of the bill and 

secs. 78, 904, 907, and 965 of the Code) 

REASONS FOR CHANGE

In transitioning to a new participation exemption system, the 

Committee seeks to enhance both the global competitiveness of 

U.S. businesses and to encourage investment in the United States. 

The Committee believes that many domestic companies were reluctant to reinvest foreign earnings in the United States, when doing 

so would subject those earnings to high rates of corporate income 

tax rates. Accordingly, the Committee is aware that such companies have accumulated significant untaxed and undistributed foreign earnings as a result. 

The Committee is also aware that such companies are eligible for 

a 100-percent dividend-received deduction with respect to any distributions made under the new participation exemption system. To 

avoid a potential windfall for corporations that deferred income, 

and to ensure that all distributions from foreign subsidiaries are 

treated in the same manner under the participation exemption system, the Committee believes that it is appropriate to tax such earnings as if they had been repatriated under present law, but at a 

reduced rate. 

The Committee believes the tax on accumulated foreign earnings 

should apply without requiring an actual distribution of earnings, 

and further believes that the tax rate should take into account the 

liquidity of the accumulated earnings. Accordingly, the provision 

establishes a bifurcated rate, i.e., 14 percent for earnings held in 

liquid form and 7 percent for accumulated foreign earnings that 

have been reinvested in the foreign subsidiary’s business. Finally, 

the Committee has provided procedures for payment and collection 

of the transition tax that mitigate the burden on taxpayers. 

EXPLANATION OF PROVISION

In general 

The provision generally requires that, for the last taxable year 

beginning before January 1, 2018, a U.S. shareholders of any CFC 

or other foreign corporation that is at least 10-percent U.S.-owned 

but not controlled (other than a PFIC) must include in income its 

pro rata share of the accumulated post-1986 deferred foreign income which was not previously taxed. A portion of that pro rata 


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944Foreign corporations no longer in existence and for which there is no taxable year beginning or ending in 2017 are not within the scope of this provision. 545Sec. 951(b), which defines United States shareholder as any U.S. person that owns 10 percent or more of the voting classes of stock of a foreign corporation. 546Taxation of income earned by PFICs remains subject to the antideferral PFIC regime and 

dividends received from non-CFC PFICs are ineligible for the dividend received deduction under 

new section 245A. 547For purposes of taking into account its subpart F income under this rule, a noncontrolled 

10/50 corporation is treated as a CFC. 

share of deferred foreign income is deductible; the amount deductible varies depending upon whether the deferred foreign income is 

held in the form of liquid or illiquid assets. The deduction results 

in a reduced rate of tax of 14 percent for the included deferred foreign income held in liquid form and 7 percent for the remaining deferred foreign income. A corresponding portion of the credit for foreign taxes is disallowed, thus limiting the credit to the taxable portion of the included income. The increased tax liability generally 

may be paid over an eight-year period. 

Subpart F inclusion of deferred foreign income 

The mechanism for the mandatory inclusion of pre-effective date 

foreign earnings is subpart F. The provision provides that the subpart F income of a specified foreign corporation is increased for the 

last taxable year 944 that begins before January 1, 2018, by its accumulated post-1986 deferred foreign income. In contrast to the 

participation exemption deduction available only to domestic corporations that are U.S. shareholders under subpart F, the transition rule plies to all U.S. shareholders 945 of a specified foreign corporation. A specified foreign corporation means (1) a CFC or (2) 

any foreign corporation in which a domestic corporation is a U.S. 

shareholder (determined without regard to the special attribution 

rules of section 958(b)(4)), other than a PFIC that is not a CFC.946

A specified foreign corporation that has deferred foreign income is 

a deferred foreign income corporation. Consistent with the general 

operation of subpart F, each U.S. shareholder of a specified foreign 

corporation must include in income its pro rata share of the foreign 

corporation’s subpart F income attributable to its accumulated deferred foreign income.947

Accumulated post-1986 deferred foreign income 

Accumulated post-1986 deferred foreign income of a specified foreign corporation that is the subject to mandatory inclusion under 

this provision is the greater of the accumulated post-1986 deferred 

foreign income determined as of November 2, 2017 (the date of introduction of the bill) or as of December 31, 2017. The includible 

portion of the accumulated post-1986 deferred foreign income is all 

post-1986 earnings and profits (‘‘E&P’’) that are not (1) attributable 

to income that is effectively connected with the conduct of a trade 

or business in the United States and thus subject to current U.S. 

income tax, or (2) when distributed, excludible from the gross income of a U.S. shareholder as previously taxed income under section 959. 

Post-1986 earnings and profits are those earnings that accumulated in taxable years beginning after 1986, computed in accordance with sections 964(a) and 986, even if arising from periods during which the U.S. shareholder did not own stock of the foreign corporation. Post-1986 earnings are not reduced by dividends during 


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948Sec. 952(c)(1)(B)(ii). 949For example, assume that a foreign corporation organized after December 31, 1986 has $100 of accumulated earnings and profits as of November 1, 2017, and December 31, 2017 (determined without diminution by reason of dividends distributed during the taxable year and 

after any increase for qualified deficits), which consist of $120 general limitation earnings and 

profits and a $20 passive limitation deficit, the foreign corporation’s post-1986 earnings and 

profits would be $100, even if the $20 passive limitation deficit was a hovering deficit described 

in Treas. Reg. sec. 1.367(b)-17(d)(2). Foreign income taxes related to the hovering deficit, however, would not be deemed paid by the U.S. shareholder recognizing an incremental income inclusion. The same would be true of a hovering deficit in the general limitation category. 950See Treas, Reg, 301.7701–3(c), under which an election may specify an effective date up 

to 75 days prior to the date on which the election is filed. 

the taxable year in which measurement occurs. Such earnings are 

increased by the amount of qualified deficits 948 that arose in a taxable year beginning before January 1, 2018, if such deficit is also 

treated as a qualified deficit for purposes of taxable years beginning after December 31, 2017. Finally, the post-1986 earnings and 

profits are determined by reference to the foreign corporation’s 

total earnings and profits, irrespective of the foreign tax credit separate category limitations.949

The Secretary may prescribe regulations or other guidance regarding the treatment of accumulated post-1986 foreign deferred 

income of specified foreign corporations that have shareholders who 

are not U.S. shareholders. Such rules may also include rules that 

are appropriate to implement the intent of the revised section 965 

and the use of the date of introduction as one of the measurement 

dates in order to establish a floor for determining the post-1986 deferred foreign earnings and profits. For example, guidance may address the extent to which retroactive effective dates selected in entity classification elections filed after introduction of the bill will be 

permitted.950

Reductions of amounts included in income of U.S. shareholder of foreign corporations with deficits in E&P 

The income inclusion required of a U.S. shareholder under this 

transition rule is reduced by the portion of aggregate foreign earnings and profits deficit allocated to that person by reason of that 

person’s interest in one or more E&P deficit foreign corporations. 

An E&P deficit foreign corporation is defined as any specified foreign corporation owned by the U.S. shareholder as of the date on 

which accumulated earnings and profits are measure for that corporation (November 2, 2017 or December 31, 2017, as the case may 

be) and which also has a deficit in post-1986 earnings and profits 

as of that date. Accordingly, the deficits of a foreign subsidiary that 

accumulated prior to its acquisition by the U.S. shareholder may 

be taken into account in determining the aggregate foreign earnings and profits deficit of a U.S. shareholder. 

The U.S. shareholder aggregates its pro rata share in the foreign 

E&P deficits of each such company and allocates such aggregate 

amount among the deferred foreign income corporations in which 

the shareholder is a U.S. shareholder. The aggregate foreign E&P 

deficit is allocable to a specified foreign corporation in the same 

ratio as the U.S. shareholder’s pro rata share of post-1986 deferred 

income in that corporation bears to the U.S. shareholder’s pro rata 

share of accumulated post-1986 deferred foreign income from all 

deferred income companies of such shareholder. 

To illustrate the ratio, assume that Z, a domestic corporation, is 

a U.S. shareholder with respect to each of four specified foreign 


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corporations, two of which are E&P deficit foreign corporations. Assume further the foreign companies have the following accumulated post-1986 deferred foreign income or foreign E&P deficits as 

of November 2, 2017 and December 31, 2017: 

Example 

Specified Foreign Corp. Percentage Owned Post-1986 profit/deficit USD Pro Rata Share 

A .................................... 60% ($1,000) ($600) 

B .................................... 10% ($200) ($20) 

C .................................... $2,000 $1,400 70% 

D .................................... 100% $1,000 $1,000 

The aggregate foreign E&P deficit of the U.S. shareholder is ($620), and the aggregate share of accumulated post-1986 deferred 

foreign income is $2,400. Thus, the portion of the aggregate foreign 

E&P deficit allocable to Corporation C is ($362), that is, ($620) × 

1400/2400. The remainder of the aggregate foreign E&P deficit is 

allocable to Corporation D. The U.S. shareholder has a net surplus 

of E&P in the amount of $1,780. 

The provision also permits intragroup netting among U.S. shareholders in an affiliated group in which there is at least one U.S. 

shareholder with a net E&P surplus and another with a net E&P 

deficit. The net E&P surplus shareholder may reduce its net surplus by the shareholder’s applicable share of aggregate unused 

E&P deficit, based on the group’s ownership percentage of the 

members. For example, assume that a U.S. corporation has two domestic subsidiaries, X and Y, each of which it owns 100 percent 

and 80 percent, respectively. If X has a $1,000 net E&P surplus, 

and Y has $1,000 net E&P deficit, X is an E&P net surplus shareholder, and Y is an E&P net deficit shareholder. The net E&P surplus of X is reduced by the net E&P deficit of Y to the extent of 

the group’s ownership percentage in Y, which is 80-percent. The remaining net E&P deficit of Y is unused. If the U.S. shareholder Z 

is also a wholly owned subsidiary of the same U.S. parent as X and 

Y, the group ownership percentage of Y is unchanged, and the surpluses of X and Z are reduced ratably by 800 of the net E&P deficit 

of Y. 

Participation exemption applied to accumulated post-1986 deferred foreign income 

A U.S. shareholder of a specified foreign corporation is allowed 

a deduction of a portion of the increased subpart F income attributable to the inclusion of pre-effective date deferred foreign income. 

The amount of the deduction is the sum of the 14-percent rate 

equivalent percentage of the inclusion amount that is the shareholder’s aggregate cash position and the 7 percent rate equivalent 

percentage of the portion of the inclusion that exceeds the aggregate cash position. By stating the permitted deduction in the form 

of a tax rate equivalent percentage, the provision ensures that all 

pre-effective date accumulated post-1986 deferred foreign income is 

subject to either a 7-percent or 14-percent rate of tax, depending 

on the underlying assets as of the measurement date, without regard to the corporate tax rate that may be in effect at the time of 

the inclusion. For example, corporate taxpayers that use a fiscal 

year as the taxable year may report the increased subpart F inVerDate Sep 11 2014 13:49 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00390 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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951 1ASec. 964(b) and regulations thereunder. 

come in a taxable year for which a reduced corporate tax rate 

would otherwise apply (on a pro-rated basis under section 15), but 

the allowable deduction would be reduced such that the rate of 

U.S. tax on the income inclusion would be 7 or 14 percent. 

Aggregate cash position 

The aggregate cash position of a U.S. shareholder is the average 

of the shareholder’s pro rata share of the cash position of each 

specified foreign corporation with respect to which that shareholder 

is a U.S. shareholder on each of three dates: date of introduction 

(November 2, 2017) and the last day of the two most recent taxable 

years ending before the date of introduction. Appropriate adjustments are made if a specified foreign corporation is not in existence 

on one or more of those dates. By using a three-year average as the 

aggregate cash position for a U.S. shareholders, the effect of unusual or anomalous transactions is muted. 

For purposes of this computation, the cash position of certain 

non-corporate entities that would be treated as specified foreign 

corporations if they were foreign corporations is also included. The 

cash position of an entity consists of all cash, net accounts receivables, and the fair market value of similarly liquid assets, specifically including personal property that is actively traded on an established financial market, government securities, certificates of 

deposit, commercial paper, foreign currency, and short-term obligations. In addition, the Secretary may identify other assets that are 

economically equivalent to the enumerated assets that are treated 

as cash. 

Certain reductions from the aggregate cash position are specified 

in the provision. First, rules are provided to avoid the double 

counting of cash positions of specified foreign corporations in an affiliated group, while ensuring that all of the cash position is taken 

into account. Second, regardless of the form in which a specified 

foreign corporation holds earnings, to the extent the earnings constitute blocked income that could not be distributed by the corporation due to local jurisdiction restrictions,951 such earnings are not 

included in the cash position of that specified foreign corporation. 

The blocked income remains within the scope of the accumulated 

post-1986 deferred foreign income that is subject to inclusion under 

this provision. 

In addition to the authority to identify other assets that are subject to the cash position determination by regulation, the provision 

also authorizes the Secretary to disregard transactions that are determined to have the principal purpose of reducing the aggregate 

foreign cash position. 

Foreign tax credits reduced 

A portion of foreign income taxes deemed paid or accrued with 

respect to the increased subpart F income attributable to the inclusion of pre-effective date deferred foreign income is not creditable 

against the Federal income tax attributable to the inclusion, nor 

are they deductible. The disallowed portion of foreign tax credits is 

60 percent of foreign taxes paid attributable to the portion of the 

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952Other foreign tax credits used by a taxpayer against tax liability resulting from the deemed 

inclusion apply in full. 953 1ASec. 78. 

cent of foreign taxes paid attributable to the remaining portion of 

the section 965 inclusion.952

The provision coordinates the disallowance of foreign tax credits 

described above with the requirement 953 that a domestic corporate 

shareholder is deemed to receive a dividend in an amount equal to 

foreign taxes it is deemed to have paid and for which it claimed 

a credit. Under the coordination rule, the foreign taxes treated as 

paid or accrued by a domestic corporation as a result of the inclusion are limited to those taxes in proportion to the taxable portion 

of the section 965 inclusion. The gross-up amount equals the total 

foreign income taxes multiplied by a fraction, the numerator of 

which is taxable portion of the increased subpart F income under 

this provision and the denominator of which is the total increase 

in subpart F income under this provision. 

The amount of deferred foreign income required to be included 

in subpart F income under this provision is disregarded for purposes of determining the amount of income from foreign sources 

and the combined foreign oil and gas income that a U.S. shareholder has for purposes of the recapture rules applicable to overall 

foreign losses, separate limitation losses, and foreign oil and gas 

losses under sections 904(f)(1) and 907(c)(4). 

The foreign income taxes deemed paid with respect to the inclusion required by the provision and for which no credit is allowed 

in the year of inclusion by reason of section 904 limitations (e.g., 

because part or all of the inclusion required by the provision is offset by a net operating loss deduction) are eligible for a special 20 

year carry-forward period, rather than the otherwise applicable 10 

year carry-forward period. 

Installment payments 

A U.S. shareholder may elect to pay the net tax liability resulting from the mandatory inclusion of pre-effective-date undistributed CFC earnings in eight equal installments. The net tax liability that may be paid in installments is the excess of the U.S. shareholder’s net income tax for the taxable year in which the pre-effective-date undistributed CFC earnings are included in income over 

the taxpayer’s net income tax for that year determined without regard to the inclusion. Net income tax means net income tax as defined for purposes of the general business credit, but reduced by 

the amount of that credit. 

An election to pay tax in installments must be made by the due 

date for the tax return for the taxable year in which the pre-effective-date undistributed CFC earnings are included in income. The 

Treasury Secretary has authority to prescribe the manner of making the election. The first installment must be paid on the due date 

(determined without regard to extensions) for the tax return for the 

taxable year of the income inclusion. Succeeding installments must 

be paid annually no later than the due dates (without extensions) 

for the income tax return of each succeeding year. If a deficiency 

is later determined with respect to the net tax liability, the additional tax due may be prorated among all installment payments in 

most circumstances. The portions of the deficiency prorated to an 


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954Section 1361 defines an S corporation as a domestic small business corporation that has 

an election in effect for status as an S corporation, with fewer than 100 shareholders, none of 

whom are nonresident aliens, and all of whom are individuals, estates, trusts or certain exempt 

organizations. 

installment that was due before the deficiency was assessed must 

be paid upon notice and demand. The portion prorated to any remaining installment is payable with the timely payment of that installment payment, unless the deficiency is attributable to negligence, intentional disregard of rules or regulations, or fraud with 

intent to evade tax, in which case the entire deficiency is payable 

upon notice and demand. 

The timely payment of an installment does not incur interest. If 

a deficiency is determined that is attributable to an understatement of the net tax liability due under this provision, the deficiency 

is payable with underpayment interest for the period beginning on 

the date on which the net tax liability would have been due, without regard to an election to pay in installments, and ending with 

the payment of the deficiency. Furthermore, any amount of deficiency prorated to a remaining installment also bears interest on 

the deficiency, but not on the original installment amount. 

The provision also includes an acceleration rule. If (1) there is a 

failure to pay timely any required installment, (2) there is a liquidation or sale of substantially all of the U.S. shareholder’s assets 

(including in a bankruptcy case), (3) the U.S. shareholder ceases 

business, or (4) another similar circumstance arises, the unpaid 

portion of all remaining installments is due on the date of the 

event (or, in a title 11 or similar case, the day before the petition 

is filed). 

Special rule for S corporations 

A special rule permits deferral of the transition net tax liability 

for shareholders of a U.S. shareholder that is a flow-through entity 

known as an S corporation.954 The S corporation is required to report on its income tax return the amount includible in gross income 

by reason of this provision, as well as the amount of deduction that 

would be allowable, and provide a copy of such information to its 

shareholders. Any shareholder of the S corporation may elect to 

defer his portion of the net tax liability at transition to the participation exemption system until the shareholder’s taxable year in 

which a triggering event occurs. The election to defer the tax is due 

not later than the due date for the return of the S corporation for 

its last taxable year that begins before January 1, 2018. 

Three types of events may trigger an end to deferral of the net 

tax liability. The first type of triggering event is a change in the 

status of the corporation as an S corporation. The second category 

includes liquidation, sale of substantially all corporate assets, termination of the company or end of business, or similar event, including reorganization in bankruptcy. The third type of triggering 

event is a transfer of shares of stock in the S corporation by the 

electing taxpayer, whether by sale, death or otherwise, unless the 

transferee of the stock agrees with the Secretary to be liable for net 

tax liability in the same manner as the transferor. Partial transfers 

trigger the end of deferral only with respect to the portion of tax 

properly allocable to the portion of stock sold. 


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If a shareholder of an S corporation has elected deferral under 

the special rule for S corporation shareholders and a triggering 

event occurs, the S corporation and the electing shareholder are 

jointly and severally liable for any net tax liability and related interest or penalties. The period within which the IRS may collect 

such liability does not begin before the date of an event that triggers the end of the deferral. If an election to defer payment of the 

net tax liability is in effect for a shareholder, that shareholder 

must report the amount of the deferred net tax liability on each income tax return due during the period that the election is in effect. 

Failure to include that information with each income tax return 

will result in a penalty equal to five-percent of the amount that 

should have been reported. 

After a triggering event occurs, a shareholder is the S corporation may elect to pay the net tax liability in eight equal installments, subject to rules similar to those generally applicable absent 

deferral. Whether a shareholder may elect to pay in installments 

depends upon the type of event that triggered the end of deferral. 

If the triggering event is a liquidation, sale of substantially all corporate assets, termination of the company or end of business, or 

similar event, the installment payment election is not available. Instead, the entire net tax liability is due upon notice and demand. 

The installment election is due with the timely return for the year 

in which the triggering event occurs. The first installment payment 

is required by the due date of the same return, determined without 

regard to extensions of time to file. 

Future considerations 

The Committee is aware that certain aspects of this section require additional attention. For example, the Committee recognizes 

that the definition of post-1986 earnings and profits could operate 

to count the same earnings twice where a specified foreign corporation makes a distribution to another specified foreign corporation 

on or after November 2, 2017, but prior to the end of the taxable 

year to which section 965 applies. The Committee intends to correct this inappropriate result. Additionally, the Committee is aware 

that the definition of post-1986 earnings and profits in this section 

includes a provision that increases post-1986 earnings and profits 

by the amount of any qualified deficit, within the meaning of section 952 of the Code. The Committee intends to revise this provision to allow qualified deficits to reduce post-1986 earnings and 

profits for purposes of section 965 and to ensure that qualified deficits taken into account under section 965 cannot be used to reduce 

future subpart F income. The Committee also understands that the 

existing net operating loss (NOL), overall domestic loss (ODL), and 

foreign tax credit carry-forward rules may interact with income inclusions arising from section 965 in ways that may not be appropriate and that require additional consideration. 

EFFECTIVE DATE

The provision is effective for the last taxable year of a foreign 

corporation that begins before January 1, 2018, and with respect 

to U.S. shareholders, for the taxable years in which or with which 

such taxable years of the foreign corporations end, and subsequent 

years. 


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955See Treas. Reg. sec. 1.904–6(a). 

B. MODIFICATIONS RELATED TO FOREIGN TAX CREDIT SYSTEM

1. Repeal of section 902 indirect foreign tax credits; determination 

of section 960 credit on current year basis (sec. 4101 of the bill 

and secs. 78, 902 and 960 of the Code) 

REASONS FOR CHANGE

The Committee believes that a section 902 credit is not appropriate in a participation exemption system under which 100 percent of dividends received by certain domestic corporate shareholders of specified foreign corporations are exempt from U.S. taxation. To continue to offer section 902 credits for taxes deemed paid 

would result in a double benefit to the U.S. shareholder, by first 

allowing a dividend to be recognized in income with no U.S. tax liability associated therewith, and by further reducing existing U.S. 

tax liability with a credit for taxes paid on foreign source income. 

Rather, offering deemed paid foreign tax credits on a current year 

basis solely under section 960 reflects what the Committee believes 

to be a simpler and more appropriate application of the foreign tax 

credit regime in a 100 percent participation exemption system. 

EXPLANATION OF PROVISION

The provision repeals the deemed-paid credit with respect to dividends received by a domestic corporation that owns 10 percent or 

more of the voting stock of a foreign corporation. 

A deemed-paid credit is provided with respect to any income inclusion under subpart F. The deemed-paid credit is limited to the 

amount of foreign income taxes properly attributable to the subpart 

F inclusion. Foreign income taxes under the provision include income, war profits, or excess profits taxes paid or accrued by the 

CFC to any foreign country or possession of the United States. The 

provision eliminates the need for computing and tracking cumulative tax pools. 

Additionally, the provision provides rules applicable to foreign 

taxes attributable to distributions from previously taxed earnings 

and profits, including distributions made through tiered-CFCs. 

The Secretary is granted authority under the provision to provide 

regulations and other guidance as may be necessary and appropriate to carry out the purposes of this provision. It is anticipated 

that the Secretary would provide regulations with rules for allocating taxes similar to rules in place for purposes of determining 

the allocation of taxes to specific foreign tax credit baskets.955

Under such rules, taxes are not attributable to an item of subpart 

F income if the base upon which the tax was imposed does not include the item of subpart F income. For example, if foreign law exempts a certain type of income from its tax base, no deemed-paid 

credit results from the inclusion of such income as subpart F. Tax 

imposed on income that is not included in subpart F income, is not 

considered attributable to subpart F income. 

In addition to the rules described in this section, the provision 

makes several conforming amendments to various other sections of 

the Code reflecting the repeal of section 902 and the modification 

of section 960. These conforming amendments include amending 


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the section 78 gross-up provision to apply solely to taxes deemed 

paid under the amended section 960. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

2. Source of income from sales of inventory determined solely on 

basis of production activities (sec. 4102 of the bill and sec. 863 

of the Code) 

REASONS FOR CHANGE

The Committee acknowledges that current administrative guidance, which sources sales income, in part, based on the place of 

destination rather than the place of production, may be appropriate 

in the context of our current tax system. However, the Committee 

believes this approach is not appropriate under a participation exemption system with lower tax rates. Rather than providing targeted relief to particular kinds of income, the Committee is instead 

reducing tax rates for all taxpayers, while also modernizing the 

U.S. system for taxing cross-border income. Therefore, the Committee believes changing present law in this area will more accurately measure foreign-source taxable income as part of providing 

a flatter, fairer, and simpler tax system. 

EXPLANATION OF PROVISION

Under this provision, gains, profits, and income from the sale or 

exchange of inventory property produced partly in, and partly outside, the United States is allocated and apportioned on the basis 

of the location of production with respect to the property. For example, income derived from the sale of inventory property to a foreign jurisdiction is sourced wholly within the United States if the 

property was produced entirely in the United States, even if title 

passage occurred elsewhere. Likewise, income derived from inventory property sold in the United States, but produced entirely in 

another country, is sourced in that country even if title passage occurs in the United States. If the inventory property is produced 

partly in, and partly outside, the United States, however, the income derived from its sale is sourced partly in the United States. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

C. MODIFICATIONS OF SUBPART F PROVISIONS

1. Repeal of inclusion based on withdrawal of previously excluded 

subpart F income from qualified investment (sec. 4201 of the bill 

and sec. 955 of the Code) 

REASONS FOR CHANGE

In the transition to a participation exemption system, foreign 

earned income that is not subject to immediate inclusion in the 

U.S. shareholder’s gross income under the subpart F regime will 

generally be exempt from U.S. taxation upon repatriation through 


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956 American Jobs Creation Act, Pub. L 108–357, 118 Stat. 1511 (Oct. 22, 2004). 

a dividend paid from a specified foreign corporation to its U.S. 

shareholder. Foreign base company shipping income was repealed 

as a type of foreign base company income (and therefore, subpart 

F income) in 2004.956 The Committee believes that since a CFC’s 

foreign base shipping company income is no longer subject to immediate inclusion in its U.S. shareholder’s gross income, a corresponding decrease in the CFC’s investment in that otherwise exempt income should not trigger an immediate income inclusion to 

its U.S. shareholder. 

EXPLANATION OF PROVISION

The provision repeals section 955. As a result, a U.S. shareholder 

in a CFC that invested its previously excluded subpart F income 

in qualified foreign base company shipping operations is no longer 

required to include in income a pro rata share of the previously excluded subpart F income when the CFC decreases such investments. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2017, and to taxable years of U.S. 

shareholders within which or with which such taxable years of foreign corporations end. 

2. Repeal of treatment of foreign base company oil related income 

as subpart F income (sec. 4202 of the bill and sec. 954(a) of the 

Code) 

REASONS FOR CHANGE

The move to a participation exemption system and the repeal of 

section 902 are expected to result in the loss of a significant 

amount of foreign tax credits that are attributable to foreign oil 

and gas operations and that are available to offset U.S. tax liability 

imposed on current inclusions of foreign base company oil related 

income. Consequently, the Committee is concerned that moving to 

a participation exemption system could undermine the intended application of those rules and put U.S. oil and gas companies at a 

competitive disadvantage relative to their foreign peers. Furthermore, the Committee believes the introduction of additional antibase erosion rules under the bill obviates the need for separate 

anti-base erosion rules with respect to foreign oil and gas operations. Therefore, the Committee believes the foreign base company 

oil related income rules are not necessary in the context of the 

international tax reforms made in the bill. 

EXPLANATION OF PROVISION

The provision eliminates foreign base company oil related income 

as a category of foreign base company income. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2017, and for taxable years of U.S. 


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shareholders in which or with which such taxable years of foreign 

corporations end. 

3. Inflation adjustment of de minimis exception for foreign base 

company income (sec. 4203 of the bill and sec. 954(b)(3) of the 

Code) 

REASON FOR CHANGE

The de minimis exception contained in current section 

954(b)(3)(A) has not been adjusted for inflation since its enactment 

in 1986. The Committee believes that indexing the de minimis 

amount to inflation is warranted so that it serves as a more accurate reflection of the changing economic environment. 

EXPLANATION OF PROVISION

The provision amends the de minimis exception of present law, 

which permits a CFC to exclude its foreign base company income 

if the sum of its total foreign base company income and gross insurance income is the lesser of 5 percent of its gross income or 

$1,000,000. In the case of any taxable year beginning after 2017, 

the provision indexes for inflation the $1,000,000 de minimis 

amount for foreign base company income, with all increases rounded to the nearest multiple of $50,000. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2017, and for taxable years of U.S. 

shareholders in which or with which such taxable years of foreign 

corporations end. 

4. Look-thru rule for related controlled foreign corporations made 

permanent (sec. 4204 of the bill and sec. 954(c)(6) of the Code) 

REASONS FOR CHANGE

As was the case when section 954(c)(6) was originally enacted, 

today most countries allow their companies to redeploy active foreign earnings with no additional tax burden. The Committee believes that this provision will make U.S. companies and U.S. workers more competitive with respect to such countries. By allowing 

U.S. companies to reinvest their active foreign earnings where they 

are most needed without incurring additional tax that companies 

based in many other countries never incur, the Committee believes 

that the provision will continue to enable U.S. companies to make 

more sales overseas and thus produce more goods in the United 

States. These benefits should be enhanced by making this provision 

permanent, thereby eliminating uncertainty as to its future application. 

EXPLANATION OF PROVISION

The provision makes the exclusion from foreign personal holding 

company income for certain dividends, interest (including factoring 

income that is treated as equivalent to interest under section 

954(c)(1)(E)), rents, and royalties received or accrued by one CFC 

from a related CFC permanent. 


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EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2019, and for taxable years of U.S. 

shareholders in which or with which such taxable years of foreign 

corporations end. 

5. Modification of stock attribution rules for determining status as 

a controlled foreign corporation (sec. 4205 of the bill secs. 318, 

958 and 6038 of the Code). 

REASONS FOR CHANGE

The Committee is aware of certain transactions used to avoid 

subpart F provisions. One such transaction involves effectuating 

‘‘de-control’’ of a foreign subsidiary, by taking advantage of the section 958(b)(4) rule that effectively turns off the constructive stock 

ownership rules of 318(a)(3) when to do otherwise would result in 

a U.S. person being treated as owning stock owned by a foreign 

person. Accordingly, such a transaction converts former CFCs to 

non-CFCs, despite continuous ownership by U.S. shareholders. The 

Committee believes this provision is necessary to render de-controlling transactions ineffective as a means of avoiding the subpart F 

provisions. 

EXPLANATION OF PROVISION

The provision amends the ownership attribution rules of section 

958(b) so that certain stock of a foreign corporation owned by a foreign person is attributed to a related U.S. person for purposes of 

determining whether the related U.S. person is a U.S. shareholder 

of the foreign corporation and, therefore, whether the foreign corporation is a CFC. In other words, the provision provides ‘‘downward attribution’’ from a foreign person to a related U.S. person in 

circumstances in which present law does not so provide. The pro 

rata share of a CFC’s subpart F income that a U.S. shareholder is 

required to include in gross income, however, continues to be determined based on direct or indirect ownership of the CFC, without 

application of the new downward attribution rule. The Secretary is 

granted authority to alleviate any unnecessary reporting burdens 

that may be triggered by the provision. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2017, and for taxable years of U.S. 

shareholders in which or with which such taxable years of foreign 

corporations end. 

6. Elimination of requirement that corporation must be controlled 

for 30 days before subpart F inclusions apply (sec. 4206 of the 

bill and 951(a)(1) of the Code) 

REASONS FOR CHANGE

The Committee believes the original purpose for the 30-day rule 

to facilitate tax administration—is no longer necessary in light of 

the availability of technology to track owner and corporate attributes on a daily basis. At the same time, the Committee believes 


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957See generally Treas. Reg. sec. 1.482–1 et seq. 

the 30-day rule under present law provides inappropriate opportunities for taxpayers to structure transactions to avoid U.S. tax. 

EXPLANATION OF PROVISION

The provision eliminates the requirement that a corporation 

must be controlled for an uninterrupted period of 30 days before 

subpart F inclusions apply. 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2017, and for taxable years of U.S. 

shareholders with or within which such taxable years of foreign 

corporations end. 

D. PREVENTION OF BASE EROSION

1. Current year inclusion by United States shareholders with foreign high returns (sec. 4301 of the bill and secs. 78 and 960 and 

new sec. 951A of the Code) 

REASONS FOR CHANGE

Under present law, multinational enterprises have flexibility to 

attribute profits to low-tax jurisdictions because each enterprise 

can structure transactions between affiliates in a manner that 

minimizes overall tax liability. The arm’s length standard, which 

the Committee believes continues to be the best standard for determining the appropriate pricing of a transaction between affiliates, 

provides that profits are attributable based on the functions performed, the assets employed, and the risks assumed by the relevant parties.957 To the extent that these functions, assets, and 

risks are mobile, taxpayers may seek to situate them in, or relocate 

them to, low-tax jurisdictions. 

Changing the U.S. international tax system from a worldwide 

system of taxation to a participation exemption system of taxation 

exacerbates the incentive under present law to shift profits abroad. 

Specifically, under present law, most foreign profits earned through 

a subsidiary are not subject to current taxation but will eventually 

be subject to U.S. taxation upon repatriation. Under the participation exemption system provided for in the bill, however, foreign 

profits earned through a subsidiary generally will never be subject 

to U.S. taxation. Accordingly, new measures to protect against the 

erosion of the U.S. tax base are warranted. 

One common form of erosion is the concentration of a multinational enterprise’s high-value functions, assets, and risks abroad 

in low-tax jurisdictions in order to generate profits offshore. The internal supply chain giving rise to these profits may or may not involve U.S. activities, although the existence of a U.S. shareholder 

may indicate some U.S. connection (e.g., U.S. research and development, U.S.-sourced capital, etc.). The concentration of these functions, assets, and risks may occur through the relocation of employees, the acquisition or development of intellectual property offshore, or the contractual allocation of risk within the enterprise. 

Although present law addresses transfers of property from a U.S. 


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958See, e.g., secs. 367(d) and 482. 959See secs. 951–964; see also sec. 367(a)(3)(B). 960For example, the Tax Court has concluded a foreign subsidiary’s use of its U.S. parent’s 

business opportunities or employees does not necessarily constitute a compensable transfer of 

property. See Hospital Corp. v. Commissioner, 81 T.C. 520 (1983), nonacq. 1987–2 C.B. 1; 

Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009), nonacq. AOD–2010–05. Additionally, the Tax Court has concluded that a foreign subsidiary’s use of its own resources, even if 

originating from or connected with its U.S. parent’s resources, does not necessarily result in taxable income of the U.S. parent. See, e.g., Amazon.com, Inc. v. Commissioner, 148 T.C. No. 8 

(2017); Eaton Corp. v. Commissioner, T.C. Memo. 2017–147; Medtronic Inc. v. Commissioner, 

T.C. Memo. 2016–112. The Committee does not believe the U.S. tax base would be adequately 

protected from erosion under a participation exemption system if these opportunities for concentrating high returns abroad remained available to taxpayers. 961See, e.g., Ways and Means Discussion Draft, 112th Cong, 1st Sess. (October 26, 2011), 

available at https://waysandmeans.house.gov/UploadedFiles/Discussion_Draft.pdf. 962See the Tax Reform Act of 2014, H.R. 1 (113th Cong., 2nd Sess., February 26, 2014). The 

Committee has also considered and continues to consider moving to a destination-based system 

of taxation, although the bill does not do so. 963The Committee also believes that looking to a normal equity-holder’s return—i.e., by excluding creditors’ returns paid through interest—will prevent distortions that would otherwise 

arise if taxpayers could obtain a tax advantage by acquiring depreciable tangible property with 

debt that is not expected to produce a return in excess of the financing costs. 

shareholder to its foreign subsidiary 958 and subjects certain forms 

of passive or highly mobile income to current U.S. taxation,959

present law does not adequately address the actions described in 

the preceding sentence.960

The Committee recognizes that multinational companies concentrate valuable functions, assets, and risks for reasons other 

than tax savings. For example, centralizing decision-making, quality control, and brand management into regional centers of excellence can provide significant value to an enterprise. This may result in the concentration of complex functions, valuable intellectual 

property, and entrepreneurial risk in a particular principal affiliate 

in a particular country, entirely independent of tax considerations. 

This also results, however, in significant profits being attributable 

to a single entity, which may result in significant tax savings if 

that entity is subject to a low effective tax rate. The Committee believes that the ability to obtain this result provides significant financial incentive for companies to structure in this manner in 

order to concentrate profits in low-tax jurisdictions, ultimately 

leading to the migration of valuable jobs and property from the 

United States. 

Therefore, the Committee has studied various mechanisms for 

taxing high returns concentrated in U.S. shareholders’ foreign subsidiaries. Other proposals, including those released by the Committee, have considered approaches based on specific transfers of 

intellectual property, foreign earnings attributable to all foreign activities, and foreign earnings attributable only to intellectual property.961 These proposals have fallen short conceptually and administratively, leading the Committee to focus on foreign high returns.962 Specifically, the Committee believes that foreign high returns attributable to mobile functions, assets, and risks are best 

measured as the excess of foreign earnings over a normal equityholder’s return on assets with limited mobility—i.e., depreciable 

tangible property.963 In making this measurement, the Committee 

recognizes the integrated nature of modern supply chains and believes it is more appropriate to look at a multinational enterprise’s 

foreign operations on an aggregate basis, rather than by entity or 

by country. 

Notwithstanding these considerations, certain kinds of income 

are not appropriately subject to scrutiny under additional anti-base 


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erosion rules. Subpart F income and ECI are already subject to full 

U.S. taxation and need not be subject to this provision’s anti-base 

erosion rules. Income from the redeployment of active foreign earnings should not be subject to additional U.S. tax for the same reasons that section 954(c)(6) is made permanent under section 4204 

of the bill—i.e., to make U.S. companies and U.S. workers more 

competitive globally. Income subject to the active financing exception rules of sections 954(c)(2)(C), (h), and (i) have already passed 

scrutiny under existing anti-base erosion rules based on local presence and are unlikely to be the mobile income with which the Committee is concerned. And profits from the disposition of marketpriced commodities generally do not relate to functions, assets, or 

risks easily relocated within a multinational group. Accordingly, 

these categories of income generally can be excluded in computing 

foreign high returns. 

As previously mentioned, the Committee does not believe the 

concentration of high returns abroad by itself is a sufficient indicium of erosion of the U.S. tax base. Where those returns are subject to a low effective tax rate that achieves significant tax savings, 

however, the Committee believes base erosion may have been a 

consideration and that U.S. taxation is appropriate. 

Conditioning the application of an anti-base erosion rule on low 

effective tax rates can be accomplished through a low-tax test or 

a reduced U.S. tax rate with a credit. Under the former approach, 

foreign earnings would be subject to U.S. tax only if the effective 

foreign tax rate is below a certain threshold, leading to a cliff effect 

and the potential for significant double taxation if credits are not 

allowed. Under the latter approach, U.S. tax is imposed at a reduced rate with a credit allowed for foreign taxes paid, which is 

more complex and encourages foreign jurisdictions to raise taxes to 

‘‘soak up’’ the credit, but which also applies more smoothly to companies near the effective tax rate threshold. The Committee believes the latter approach is more favorable both to the competitiveness of U.S. workers and companies and the U.S. fisc. Furthermore, the Committee believes that relying on the framework of existing law can mitigate complexity and that partially disallowing 

foreign tax credits, combined with measuring foreign high return 

income and foreign taxes on such income on a global basis, will protect against foreign soak-up taxes. Determining the appropriate 

threshold for a low effective tax rate requires a balance between 

protecting the U.S. tax base and promoting the global competitiveness of U.S. workers and companies. 

EXPLANATION OF PROVISION

In general 

Under the provision, a U.S. shareholder of any CFC must include 

in gross income for a taxable year an amount equal to 50 percent 

of its foreign high return amount (‘‘FHRA’’) in a manner generally 

similar to inclusions of subpart F income. FHRA means, with respect to any U.S. shareholder for the shareholder’s taxable year, 

the shareholder’s net CFC tested income less an amount equal to 

the excess (if any) of (1) the applicable percentage of the aggregate 

of the shareholder’s pro rata share of the qualified business asset 

investment (‘‘QBAI’’) of each CFC with respect to which it is a U.S. 


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964 If the amount of interest expense exceeds [(7% + AFR) x QBAI], then the quantity in 

brackets in the formula equals zero in the determination of FHRA. 965 ECI includes income that is treated as ECI under a section 882(g) election. As a result, 

income that a CFC derives from certain sales to the U.S. market is excluded from the FHRA 

calculation and is subject to new section 4491, to the extent that the sales are made to a related 

party. 

shareholder over (2) the amount of interest expense taken into account in determining the shareholder’s net CFC tested income. The 

applicable percentage is the Federal short-term rate (determined 

under section 1274(d) for the month in which such shareholder’s 

taxable year ends) plus seven percentage points. 

The formula for FHRA, which is calculated at the U.S. shareholder level, is generally: 964

FHRA = Net CFC Tested Income ¥ [(7% + AFR) x QBAI 

¥ Interest Expense] 

where AFR is the short-term Federal rate. 

Net CFC tested income 

Net CFC tested income means, with respect to any U.S. shareholder, the excess of the aggregate of its pro rata share of the tested income of each CFC with respect to which it is a U.S. shareholder over the aggregate of its pro rata share of the tested loss 

of each CFC with respect to which it is a U.S. shareholder. Pro rata 

shares are determined under the rules of section 951(a)(2). 

The formula for net CFC tested income, which is calculated at 

the U.S. shareholder level, is: 

Net CFC Tested Income = Sum of CFC Tested Income ¥ 

Sum of CFC Tested Loss 

The tested income of a CFC means the excess (if any) of the 

gross income of the corporation determined without regard to 

amounts excluded from tested income, over deductions (including 

taxes) properly allocable to such gross income. The amounts excluded from test income are: (1) the corporation’s ECI if the income 

is subject to tax; 965 (2) any gross income taken into account in determining the corporation’s subpart F income; (3) any amount, except as otherwise provided by the Secretary, that qualifies for CFC 

look-through treatment, but only to the extent that any deduction 

allowable for the payment or accrual of such amount does not result in a reduction of the FHRA of any U.S. shareholder (determined without regard to such amount); (4) any gross income excluded as foreign personal holding company income by reason of 

the exceptions for active financing income and active insurance income, as well as the exception for dealers under section 

954(c)(2)(C); (5) any gross income excluded from foreign base company income or insurance income by reason of the high-tax exception under section 954(b)(4); (6) any dividend received from a related person (as defined in section 954(d)(3)); and (7) any commodities gross income. 

Commodities gross income means (1) gross income of a corporation (or of a partnership in which the corporation is a partner) from 

the disposition of commodities that it has produced or extracted 

and that are commodities described in sections 475(e)(2)(A) and 

475(e)(2)(D), and (2) the gross income of the corporation from the 

disposition of property that gives rise to income described in (1). 


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966 Sec. 907(c)(1). 967 Sec. 907(c)(2). 

Commodities income is intended to include any foreign oil and gas 

extraction income 966 and any foreign oil related income.967

The tested loss of a CFC means the excess (if any) of the deductions (including taxes) properly allocable to the corporation’s gross 

income determined without regard to the tested income exceptions 

over the amount of such gross income. 

Qualified business asset investment 

QBAI means, with respect to any CFC for a taxable year, the aggregate of its adjusted bases (determined as of the close of the taxable year and after any adjustments with respect to such taxable 

year) in specified tangible property used in its trade or business 

and with respect to which a deduction is allowable under section 

168. Specified tangible property means any tangible property to the 

extent such property is used in the production of tested income or 

tested loss. The adjusted basis in any property is determined without regard to any provision of law that is enacted after the date 

of enactment of this provision, unless such law specifically and directly amends this provision’s definition. 

If a CFC holds an interest in a partnership as of the close of the 

corporation’s taxable year, the corporation takes into account its 

distributive share of the aggregate of the partnership’s adjusted 

bases (determined as of such date in the hands of the partnership) 

in tangible property held by the partnership to the extent that such 

property is used in the trade or business of the partnership, is of 

a type with respect to which a deduction is allowable under section 

168, and is used in the production of tested income or tested loss 

(determined with respect to the corporation’s distributive share of 

income or loss with respect to such property). The corporation’s distributive share of the adjusted basis of any property is the corporation’s distributive share of income and loss with respect to such 

property. 

For purposes of determining QBAI, the Secretary is authorized 

to issue anti-avoidance regulations or other guidance as the Secretary determines appropriate, including regulations or other guidance that provide for the treatment of property if the property is 

transferred or held temporarily, or if avoidance was a factor in the 

transfer or holding of the property. 

Foreign tax credits and coordination with subpart F 

Deemed-paid credit for taxes properly attributable to tested 

income 

For any FHRA included in the gross income of a domestic corporation, the corporation is deemed to have paid foreign income 

taxes equal to 80 percent of its foreign high return percentage multiplied by the aggregate tested foreign income taxes paid or accrued 

by each CFC with respect to which the corporation is a U.S. shareholder. The foreign high return percentage is the corporation’s 

FHRA divided by the aggregate amount of its pro rata share of the 

tested income of each CFC with respect to which it is a U.S. shareholder. Tested foreign income taxes are the foreign income taxes 

paid or accrued by a CFC that are properly attributable to gross 


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income taken into account in determining tested income or tested 

loss. 

The provision creates a separate foreign tax credit basket for the 

FHRA inclusion, with no carryforward or carryback available for 

excess credits. For purpose of determining the foreign tax credit 

limitation, any FHRA is not general category income, and income 

that can be classified as both a FHRA and passive category income 

is considered passive category income. The taxes deemed to have 

been paid are treated as an increase in the FHRA for purposes of 

section 78, determined by taking into account 100 percent of its foreign high return percentage multiplied by the the aggregate tested 

foreign income taxes. 

Coordination with subpart F 

Although FHRA inclusions do not constitute subpart F income, 

FHRA inclusions are generally treated similarly to subpart F inclusions. Thus, with respect to any CFC any pro rata amount from 

which is taken into account in determining the FHRA included in 

gross income of a U.S. shareholder, such amount, except as otherwise provided by the Secretary, is treated in the same manner as 

an amount included under section 951(a)(1)(A) for purposes of applying sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 

962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 

6654(d)(2)(D), and 6655(e)(4). 

The provision requires that the amount of FHRA included by a 

U.S. corporation be allocated across each CFC with respect to 

which it is a U.S. shareholder. The portion of the FHRA treated as 

being with respect to a CFC equals zero for a foreign corporation 

with tested loss and, for a foreign corporation with tested income, 

the portion of the FHRA which bears the same ratio to the total 

FHRA as the shareholder’s pro rata amount of the tested income 

of the foreign corporation bears to the aggregate amount of the 

shareholder’s pro rata share of the tested income of each CFC with 

respect to which it is a U.S. shareholder. 

Tested losses taken into account in determining a U.S. shareholder’s FHRA cannot also reduce the shareholder’s inclusions in 

gross income under section 951(a)(1)(A) by reason of the earnings 

and profits limitation in section 952(c). Accordingly, a U.S. shareholder’s amount included in gross income under section 

951(a)(1)(A) with respect to a CFC is determined by increasing the 

earnings and profits of such corporation (solely for purposes of determining such amount) by an amount that bears the same ratio 

(not greater than 1) to the shareholder’s pro rata share of the tested loss of such CFC as (1) the aggregate amount of the shareholder’s pro rata share of the tested income of each CFC with respect to which it is a U.S. shareholder bears to (2) the aggregate 

amount of the shareholder’s tested loss of each CFC with respect 

to which it is a U.S. shareholder. If this increase in earnings and 

profits results in an incremental inclusion under section 

951(a)(1)(A), the CFC will increases its earnings and profits described in section 959(c)(2) by that amount and decrease its earnings and profits in section 959(c)(3) by that amount (even if that 

results in, or increases, a deficit). 


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Taxable years for which persons are treated as U.S. shareholders of a CFC 

For purposes of the FHRA inclusion, a U.S. shareholder of a CFC 

is treated as a U.S. shareholder of the corporation for any taxable 

year of the shareholder if a taxable year of the corporation ends in 

or with the taxable year of such person and the person owns (within the meaning of section 958(a)) stock in the corporation on the 

last day in the taxable year of the corporation on which the corporation is a CFC. A corporation is generally treated as a CFC for 

any taxable year if the corporation is a CFC at any time during the 

taxable year. 

Examples 

The following examples illustrate how FHRA is calculated. The 

examples are highly stylized and are not meant to represent actual 

taxpayer scenarios. 

Example 1: Two Wholly Owned CFCs, Each with Tested Income 

Assume a domestic corporation, US1, wholly owns two CFCs, 

CFC1 and CFC2. These are the only CFCs with respect to which 

US1 is a U.S. shareholder. Assume that the applicable percentage 

to be applied to QBAI is 10 percent. The following table includes 

more information about CFC1 and CFC2. Assume that their foreign sales income are items of gross income included in the computation of tested income, and that all expenses are allocable to 

their foreign sales income. Also assume a U.S. corporate tax rate 

of 20 percent, and that the foreign tax rates faced by CFC1 and 

CFC2 are applied evenly across each of its sources of income. 

FACTS FOR EXAMPLE 1 

CFC1 CFC2 

GROSS INCOME 

Foreign Sales Income .................................................................................................. $300 $2,000 

Subpart F Income ........................................................................................................ $100 $0

Commodities Income ................................................................................................... $600 $0 

EXPENSES 

Operating Expenses ..................................................................................................... $200 $300 

NET INCOME $800 $1,700 

Foreign Tax Rate .......................................................................................................... 20 percent 5 percent 

QBAI ............................................................................................................................. $500 $0 

CFC-level calculations of tested income and QBAI 

CFC1 has foreign sales income of $300 (assumed to be included in the tested income calculation) and expenses of $220 (including 

$20 of taxes, computed below) allocable to its foreign sales income. 

Therefore, it has tested income of $80 (= $300¥$220) and tested 

foreign income tax of $20 (= 20% × $100). CFC1 has QBAI of $500. 

CFC2 has foreign sales income of $2,000 (assumed to be included 

in the tested income calculation) and expenses of $385 (including 

$85 of taxes, computed below) allocable to its foreign sales income. 

Therefore, it has tested income of $1,615 (= $2,000¥$385) and tested foreign income tax of $85 (= 5% × $1,700). CFC2 has QBAI of 

$0. 


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968The section 78 gross-up amount = 100 percent × 97.1 percent × $105 = 101.90 969The section 78 gross-up amount = 100 percent × 5 percent × $105 = $5.25 

U.S.-shareholder-level calculation of FHRA and tax liability 

US1 has net CFC tested income of $1,695, which is the sum of 

CFC1’s tested income of $80 and CFC2’s tested income of $1,615. 

Its pro rata share of QBAI is $500 (= [100% × $500] + [100% × $0]). 

No interest expense is taken into account in determining US1’s net 

CFC tested income. Therefore, US1’s FHRA = $1,695¥([10% × 

$500]¥$0) = $1,645. 

US1 receives a deemed-paid credit equal to 80 percent of its foreign high return percentage multiplied by the aggregate tested foreign income taxes paid or accrued by CFC1 and CFC2. Its foreign 

high return percentage is 97.1 percent (= FHRA/Aggregate Tested 

Income = $1,645/$1,695). The aggregate tested foreign income taxes 

paid or accrued by CFC1 and CFC2 is $105 (= $20 + $85). Therefore, US1’s deemed-paid credit is 80 percent × 97.1 percent × $105 

= $81.52. 

US1 includes 50 percent of its FHRA and 50 percent of its section 78 gross-up in gross income, or $873.45 (= 50% × [$1,645 × 

$101.90]).968 The tentative U.S. tax owed on this income is the U.S. 

corporate tax rate of 20 percent applied to the total inclusion of 

$873.45, or $174.69. 

The residual U.S. tax paid by US1 on its FHRA is its tentative 

U.S. tax of $174.69 less its deemed-paid credit of $81.52, or $93.17, 

for an effective U.S. tax rate (after foreign tax credits) of 5.7 percent on its FHRA of $1,645. 

Example 2: Variant of Example 1, With Tested Loss 

Example 2 generally has the same facts as example 1, except 

that CFC2 has foreign sales of $360. This means that CFC2 has 

tested income (before taking into account taxes) of $60. Assume, for 

simplicity, that it still pays foreign taxes of $85 with respect to the 

$360 of foreign sales, so that its tested loss is $25 (= $60¥$85) and 

its tested foreign income tax is $85. 

Like in Example 1, CFC1 has tested income of $80 and tested 

foreign income tax of $20. 

U.S.-shareholder-level calculation of FHRA and tax liability 

US1 has net CFC tested income of $55, which is CFC1’s tested 

income of $80 less CFC2’s tested loss of $25. Its pro rata share of 

QBAI is $500 (= [100% × $500] + [100% × $0]). No interest expense 

is taken into account in determining US1’s net CFC tested income. 

Therefore, US1’s FHRA = $55¥(10% × $500)¥$0 = $5. 

US1 receives a deemed-paid credit equal to 80 percent of its foreign high return percentage multiplied by the aggregate tested foreign income taxes paid or accrued by CFC1 and CFC2. Its foreign 

high return percentage is 5 percent (= FHRA/Aggregate Tested Income = $5/$100). The aggregate tested foreign income taxes paid or 

accrued by CFC1 and CFC2 is $105 (= $20 + $85). Therefore, US1’s 

deemed-paid credit is 80 percent × 5 percent × $105 = $4.20. 

US1 includes 50 percent of its FHRA in gross income and 50 percent of its section 78 gross-up in gross income, or $5.13 (= 50% × 

[$5 + $5.25]).969 The tentative U.S. tax owed on this income is the 


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U.S. corporate tax rate of 20 percent applied to the total inclusion 

of $5.13, or $1.03. 

The residual U.S. tax paid by US1 on its FHRA is its tentative 

U.S. tax of $1.03 less its deemed-paid credit of $5.25, or $0, for an 

effective U.S. tax rate of 0% on its FHRA of $5. The amount of 

US1’s deemed-paid credit that is unused, $4.22, may not be carried 

back or carried forward. 

Example 3: CFC Look-Through Payment 

Example 3 illustrates how the FHRA calculation is applied when 

there are payments that qualify for CFC look-through treatment. 

Example 3 is limited to the calculation of the FHRA and does not 

provide calculations of the amount of U.S. or foreign income tax related to the FHRA. 

USCo, a domestic corporation, wholly owns US1 and US2, each 

a domestic corporation. US1 wholly owns CFC1, and US2 wholly 

owns CFC2. These are the only CFCs with respect to which either 

US1 or US2 is a U.S. shareholder. Assume the applicable percentage for QBAI is 10 percent. 

CFC1 has total gross income of $100, none of which qualifies for 

a tested income exception, and has interest expense of $30, which 

it pays to CFC2. CFC1 has no other deductions and has QBAI of 

$200. As a result, CFC1 has tested income of $70 (= $100 of gross 

income less $30 of interest expense). US1’s net CFC tested income 

is $70 and the applicable percentage of its pro rata share of QBAI 

is $20 (= 10% × $200). As CFC1’s interest expense of $30 was taken 

into account in determining its tested income of $70, the excess of 

US1’s applicable percentage of QBAI over this amount of interest 

expense is $0. As a result, US1’s FHRA is $70 (= $70¥$0). 

CFC2 has $30 of interest income, all of which qualifies for CFC 

look-through treatment because CFC1 has no subpart F income. 

Assume CFC2 has no other gross income, no deductions, and no 

QBAI. CFC2’s interest income is not includible in its tested income, 

but only to the extent a deduction for its payment or accrual does 

not reduce the FHRA of any U.S. shareholder. Absent the $30 interest expense deduction used in determining its net CFC tested income, US1’s net CFC tested income would have been $100, and 

US1’s FHRA would have been $80 (= $100¥$20). With the $30 deduction, US1’s net CFC’s tested income is $70. Therefore, the deduction allowable for the payment or accrual of the interest reduced the FHRA of US1 by $10, so only $20 of CFC2’s interest income is excluded from tested income. As a result, CFC2 has tested 

income of $10 (= $30¥$20), and US2 has net CFC tested income 

of $10 (= $10¥$0). 

EFFECTIVE DATE

The provision is effective for taxable years of foreign corporations 

beginning after December 31, 2017, and for taxable years of U.S. 

shareholders in which or with which such taxable years of foreign 

corporations end. 


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970With respect to the former concern, interest expense allocation rules generally limit the 

availability of foreign tax credits to the extent a U.S. shareholder deducts interest to fund the 

operations of its foreign subsidiaries. See Treas. Reg. secs. 1.861–8 through ¥13T. With respect 

to the latter concern, sections 163(j), 267(a)(3), and 482 limit the deductibility of related-party 

interest payments in certain circumstances, and the subpart F rules limit the U.S. tax benefits 

of issuing debt to a foreign subsidiary. Additionally, recent regulations issued under section 385 

limit the deductibility of related-party interest payments in certain cases by recharacterizing 

intercompany debt instruments as equity. 

2. Limitation on deduction of interest by domestic corporations 

which are members of an international financial reporting group 

(sec. 4302 of the bill and sec. 163 of the Code) 

REASONS FOR CHANGE

The Committee believes that it is important to provide measures 

to discourage excessive leverage directly in conjunction with the 

adoption of a participation exemption system. The Committee further believes that the provision would prevent multinational companies from generating excessive interest deductions in the United 

States on debt that is issued to foreign affiliates or that is incurred 

to produce exempt foreign income in a dividend exemption system 

in a manner that applies equally to foreign and U.S. companies in 

order to provide a level playing field while recognizing standard 

non-tax business practices that involve parent corporations incurring debt to finance the acquisition or establishment of subsidiaries. The fungibility of money and the ease with which multinational enterprises may generally redeploy capital among affiliates within the group provides multinational enterprises with significant flexibility in locating interest expense within the group. 

Under present law, this enables multinational enterprises to locate 

significant interest expense in high-tax jurisdictions such as the 

United States in order to maximize the tax benefits of interest deductions, irrespective of the location of the operations funded by 

the debt proceeds. Furthermore, U.S. subsidiaries of foreign-parented multinationals have an incentive to issue related-party debt 

to increase the interest deductions allowed against U.S. taxable income. Present law provides a limited set of rules to combat these 

concerns.970

Therefore, the Committee believes it is necessary to restrict the 

deductibility of interest by a U.S. taxpayer to the extent to which 

the interest expense gives rise to U.S. taxable income. Similarly, 

the Committee does not believe interest expense should be deductible to the extent it gives rise to foreign earnings, whether of a foreign subsidiary or of a non-subsidiary foreign affiliate, that will 

never be subject to U.S. tax. 

In applying such a limitation, the Committee is cognizant of the 

imperative to provide U.S. and foreign companies with a level playing field. Accordingly, the Committee’s approach applies equally to 

U.S.- and foreign-parented multinationals. In order for such an approach to be administrable, it is appropriate to look at information 

readily available to U.S. and foreign companies alike, as well as the 

IRS, such as financial accounting information, so as to minimize 

the need for burdensome calculations and record-keeping specific to 

U.S. tax considerations. 


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971The International Financial Reporting Standards are a set of accounting standards commonly used for the preparation of financial statements of public companies listed in countries 

outside the United States. 

EXPLANATION OF PROVISION

The provision limits the amount of U.S. interest expense that a 

domestic corporation which is a member of an international financial reporting group can deduct to the sum of the member’s interest 

income plus the allowable percentage of 110 percent of net interest 

expense. An international financial reporting group is a group that: 

(1) includes at least one foreign corporation engaged in a U.S. trade 

or business or at least one domestic corporation and one foreign 

corporation at any time during the group’s reporting year, (2) prepares consolidated financial statements in accordance with U.S. 

Generally Accepted Accounting Principles (‘‘GAAP’’), International 

Financial Reporting Standards (‘‘IFRS’’), or any other comparable 

method identified by the Secretary,971 and (3) reports in such statements average annual gross receipts in excess of $100,000,000 (determined in the aggregate with respect to all entities which are 

part of such group) for the three-reporting-year period ending with 

such reporting year. 

The allowable percentage is the ratio of a corporation’s allocable 

share of the international financial reporting group’s net interest 

expense over such corporation’s reported net interest expense. A 

corporation’s allocable share of an international financial reporting 

group’s net interest expense is determined based on the corporation’s share of the group’s earnings (computed by adding back net 

interest expense, taxes, depreciation, and amortization) as reflected 

in the group’s consolidated financial statements. A corporation’s reported net interest expense is its net interest expense reported in 

the books and records used to prepare the group’s consolidated financial statements. For international financial reporting groups 

that do not prepare consolidated financial statements under U.S. 

GAAP, IFRS, or any other comparable method identified by the 

Secretary and which are filed with the United States Securities 

and Exchange Commission, the provision provides a hierarchy of 

other audited consolidated financial statements that may be relied 

upon by such group. 

The provision applies to partnerships at the partnership level 

under rules similar to the rules of section 3301 of the bill. The provision also applies to foreign corporations engaged in a U.S. trade 

or business. A U.S. consolidated group is considered a single corporation under this provision. 

The amount of any interest not allowed as a deduction for any 

taxable year by reason of this provision or section 3301 of the bill 

(depending on whichever imposes the lower limitation for the 

amount allowed as an interest deduction with respect to such taxable year) can be carried forward as interest (and as business interest for purposes of section 3301 of the bill) for up to five years. 

The following example illustrates the coordination of this provision with section 3301 of the bill in a context involving a partnership. 


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Example 

FP, a foreign corporation, wholly owns USS, a domestic corporation. FP and USS each own 50 percent of PS, a partnership. FP, USS, and PS prepare audited consolidated financial 

statements in accordance with U.S. GAAP that are used for internal management purposes and under which average annual 

gross receipts for the 3-reporting-year period ending with the 

current reporting year in excess of $100 million are reported. 

During the current reporting year, the FP–USS–PS group has 

consolidated EBITDA of 300 and consolidated interest expense 

of 50. During that period, USS has EBITDA of 50 (determined 

without regard to distributions from PS), reported interest expense of 25, business interest of 30, and adjusted taxable income (determined without regard to USS’s distributive share of 

PS’s non-separately stated taxable income or loss) of 40. Also 

during that period, PS has EBITDA of 150, reported interest 

expense of 15, business interest of 20, and adjusted taxable income of 120. 

PS’s business interest is deductible only to the extent it does 

not exceed the limitations in each of section 163(j) (as provided 

in section 3301 of the bill) and section 163(n) (as provided in 

section 4302 of the bill). PS’s limitation under section 163(j) is 

36, which equals 30 percent of its adjusted taxable income of 

120 (i.e., 30% × 120 = 36). PS’s limitation under section 163(n) 

is 22, which equals the allowable percentage (i.e., 160% = 50 

× 150/300/15, not greater than 100%) of 110 percent of PS’s 

business interest (i.e., 22 = 110% × 20). Therefore, all 20 of 

PS’s business interest is deductible. PS’s excess amount under 

section 163(j) (i.e., 36¥20 = 16) and excess EBITDA under section 163(n) (i.e., 150¥300 × 15/50 = 60) flow through to its 

partners. 

Similarly, USS’s business interest is deductible only to the 

extent it does not exceed the limitations in each of section 

163(j) and section 163(n). USS’s limitation under section 163(j) 

is 20, which equals 30 percent of the sum of its adjustable taxable income of 40 (determined without regard to USS’s distributive share of PS’s non-separately stated taxable income or 

loss) or 12 (i.e., 30% × 40 = 12) plus USS’s distributive share 

of PS’s excess amount under section 163(j)(3)(B) (i.e., 50% × 16 

= 8). USS’s limitation under section 163(n) is 17.60, which 

equals the allowable percentage (i.e., 53% = 50 × (50 + 30)/300/ 

25) of 110 percent of USS’s business interest (i.e., 33 = 110% 

× 30) after taking into account USS’s distributive share of PS’s 

excess EBITDA under section 163(n) (i.e., 50% × 60 = 30). 

Therefore, USS may deduct 17.60 of its 30 of business interest 

in the current year. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 


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3. Excise tax on certain payments from domestic corporations to related foreign corporations; election to treat such payments as effectively connected income (sec. 4303 of the bill and secs. 882, 

4491, 6038C, and 6038E of the Code) 

REASONS FOR CHANGE

The Committee recognizes that, under the current system, companies have been able to base erode by making outbound, relatedparty deductible payments. This is true for both foreign-and U.S.- 

parented multinationals, the former of which often make outbound 

royalty or interest payments, and the latter of which make outbound payments to remunerate foreign affiliates for tangible goods 

or intercompany services. There is no reason to believe such behavior would not continue in the future. The Committee is not persuaded by arguments that once the United States has a competitive corporate tax rate, multinationals will have no incentive to 

base erode. Indeed, in a participation exemption system, the need 

for anti-base erosion measures remains critical as long as there are 

foreign jurisdictions in which corporations can achieve effective tax 

rates lower than that which they can achieve in the United States. 

That is to say, until the United States has a corporate tax rate of 

zero, there will be a need for anti-base erosion measures. The Committee believes it is of paramount importance that anti-base erosion measures designed to address this problem apply equally to 

U.S. and foreign multinationals. 

In the context of this provision, it is critical to note that the 

Committee views base erosion in the truest, most fundamental 

sense of the term—U.S. taxpayers reducing their base of U.S. taxable income by making certain payments to foreign affiliates. The 

Committee recognizes the importance and vitality of transfer pricing generally, and of section 482, its regulations, and the vast body 

of case law and administrative guidance issued to date specifically. 

The Committee affirms its belief that the arm’s length standard 

continues to be the foundational principle underpinning the pricing 

of intercompany transactions. However, the role transfer pricing 

plays in the larger base erosion problem cannot be ignored. 

The basic tenets of transfer pricing rules—in the United States 

and worldwide—operate on the premise that related entities are to 

be remunerated for their activities on the basis of the functions 

performed, assets owned, and risks undertaken. Within these parameters, multinationals have the unique ability to determine 

which entities will be endowed with the high value assets, complex 

functions and risk-bearing activities within the supply chain, and 

thereby justify the higher profits these entities are rightfully 

deemed to earn under even the most accurate application of section 

482 principles. The Committee is concerned that these entities are 

often, and increasingly, overseas. Thus, the base erosion problem 

remains and is exacerbated; whether the price is arm’s length or 

not, multinationals are permitted to send payments to foreign affiliates to compensate them for their activities. In the course of so 

doing, the U.S. affiliate enjoys a deduction (or another tax benefit 

to reduce its U.S. taxable income), while the foreign affiliate generates foreign source income that will never be subject to U.S. tax. 

Accordingly, rather than implementing a provision to combat perceived transfer pricing abuses, the Committee instead seeks to adVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00412 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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972This term is defined in new section 163(n)(4) as a financial statement certified as being 

prepared in accordance with generally accepted accounting principles, international financial reporting standards, or any other comparable method of accounting identified by the Secretary of 

the Treasury and which is: (i) a 10–K (or successor form), or annual statement to shareholders 

required to be filed with the United States Securities and Exchange Commission, or, if this is 

not available, (ii) an audited financial statement used for (1) credit purposes, (2) reporting to 

shareholders, partners or other proprietors, or to beneficiaries, or (3) any other substantial 

nontax purpose, or, if (i) and (ii) are not available, (iii) filed with any other Federal or State 

agency for nontax purposes, or, if (i), (ii), or (iii) are not available, a financial statement used 

for a purpose described in (ii)(1), (2) and (3), or filed with any regulatory or governmental body, 

within or outside the United States, specified by the Secretary of the Treasury. 

dress the mismatch created by the reduction to U.S. taxable income 

via outbound, related-party payments and the recognition of foreign 

income that is attributable to those payments and never subject to 

U.S. tax. 

The Committee recognizes that instances of double taxation are 

possible when the corresponding foreign jurisdiction also taxes the 

foreign-earned income. Relief is provided through the allowance of 

a partial foreign tax credit. 

EXPLANATION OF PROVISION

In general 

This provision imposes an excise tax on certain amounts paid by 

U.S. payors to certain related foreign recipients to the extent the 

amounts are deductible by the U.S. payor. However, the excise tax 

does not apply if the foreign recipient elects to be subject to U.S. 

income tax on the amounts received. In calculating the U.S. income 

tax liability imposed under such an election, deemed expenses are 

allowed as a deduction. A foreign tax credit of 80% of applicable 

foreign credits are allowed against the U.S. tax liability imposed by 

this provision if an election is made. 

Excise tax 

The provision provides for an excise tax on specified amounts 

paid or incurred by a domestic corporation to a foreign corporation 

if both the foreign and domestic corporations are members of the 

same international financial reporting group. The amount of the 

tax is equal to 20 percent of the specified amounts paid or incurred. 

The excise tax is not imposed with respect to amounts that are or 

are deemed to be effectively connected with a U.S. trade or business of the foreign corporation. The excise tax imposed is neither 

deductible nor creditable. 

A specified amount is any amount which is allowable by the 

payor as a deduction or includible in costs of goods sold, or inventory, or in the basis of an amortizable or depreciable asset. A specified amount does not include: (i) interest, (ii) an amount paid or incurred for the acquisition of a security defined in section 475(c)(2) 

(without regard to the last sentence thereof) or a commodity defined in sections 475(e)(2), that is, a commodity actively traded 

within the meaning of section 1092(d)(1) or an identified hedge of 

such commodity, or, (iii) for a payor which has elected to use a 

services cost method under section 482, an amount paid or incurred 

for services if such amount is the total services cost with no markup. 

An international financial reporting group is any group of entities that prepares consolidated financial statements 972 if the averVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00413 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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age annual aggregate payment amount for the group for the threeyear period ending in the reporting year exceeds $100,000,000. The 

annual aggregate payment amount means the aggregate of the 

specified amounts made by U.S. members of the group to foreign 

members of the group during the reporting year. 

Partnerships and branches 

For purposes of this provision, a partnership is treated as an aggregate of its partners. Accordingly, a payment made to a partnership is treated as a payment to the partners, and a payment from 

a partnership is treated as a payment from the partners, in an 

amount equal to the partner’s distributive share of the relevant 

item of income, gain, deduction, or loss. 

For purposes of this provision, U.S. branches are treated as separate entities for purposes of determining the treatment of payments 

between a branch and entities other than its owner and for purposes of deemed payments between a branch and its owner. 

Election to treat payments as effectively connected income 

If a specified amount is paid or incurred by a domestic corporation with respect to a foreign corporation and both the foreign and 

domestic corporations are members of the same international financial reporting group, the foreign corporation may elect to take 

into account all such specified amounts as if the foreign corporation 

were engaged in a U.S. trade or business and had a permanent establishment and as if the payment were effectively connected with 

that U.S. trade or business and were attributable to the permanent 

establishment, irrespective of any otherwise applicable treaty. If 

the foreign corporation makes such election, the excise tax is not 

imposed and tax is imposed on a net basis on such specified 

amounts less deemed expenses. The election applies for the taxable 

year for which the election is made and all subsequent taxable 

years unless revoked with consent of the Secretary of the Treasury. 

In general, the amount treated as effectively connected income 

under this provision is treated as such for all purposes of the Code. 

For example, it is subject to the branch profit tax (unless otherwise 

reduced, such as by an applicable treaty) and is not subject to the 

excise tax under section 4371. However, for purposes of section 245 

and new section 245A, these amounts are not treated as effectively 

connected income. Therefore, a distribution of earnings attributable 

to the amounts described in this provision is eligible for the participation DRD under new section 245A. 

The deemed expenses with respect to any specified amount received by a foreign corporation during any reporting year is the 

amount of expenses such that the net income ratio of the foreign 

corporation with respect to the specified amount (taking into account only such specified amounts and such deemed expenses) is 

equal to the net income ratio of the international financial reporting group determined for the reporting year with respect to the 

product line to which the specified amount relates. The net income 

ratio is the ratio of net income determined without regard to income taxes, interest income, and interest expense, divided by revenue. The net income ratio is calculated in accordance with the 

books and records used in preparing the group’s consolidated financial statements. The net income ratio is determined by taking into 


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account only revenues and expenses of the foreign members of the 

international financial reporting group (other than the members of 

the group that are or are treated as domestic corporations for purposes of the provision) derived from, or incurred with respect to, 

persons that are not members of the group or members of the 

group that are or are treated as domestic corporations for purposes 

of the provision. 

The following example illustrates the determination of a foreign 

affiliate’s deemed expenses under the provision: 

According to the books and records (after taking into account 

intercompany transactions otherwise eliminated in consolidation) of 

an international financial reporting group consisting of US, FS1, 

and FS2, a domestic corporation, US has third-party revenues of 

$1000, incurs third-party expenses of $500, and makes a $300 payment for intercompany services to its foreign affiliate, FS1. FS1 has 

revenues of $500 ($200 of which are third-party) and incurs thirdparty expenses of $250. US’s other foreign affiliate, FS2, has $300 

of revenues, incurs $150 of third-party expenses, and makes a $100 

intercompany payment to US. US’s entire payment to FS1 is deductible for Federal income tax purposes, and FS1 elects to treat 

the $300 amount as subject to section 882(g)(1). On a consolidated 

basis, the US–FS1–FS2 group has revenues of $1500 and incurs 

third-party expenses of $900. 

To determine the foreign affiliate’s deemed expenses, its foreign 

profit margin will be determined by reference to ratio of the foreign 

earnings before interest and taxes (‘‘EBIT’’) against the foreign revenues, with adjustments for related party inbound and outbound 

payments. In other words, the foreign affiliate’s profit margin can 

be determined as follows: 

(GEBIT ¥ USEBIT + RPOP ¥ RPIP) ÷ (GREV ¥ 

USREV ¥ USREV + RPOP) 

GEBIT is global EBIT (determined on a consolidated basis), 

USEBIT is the domestic corporation’s EBIT (without regard to related party transactions), RPOP is the group’s related party outbound payments made from domestic corporations to foreign affiliates, and RPIP is the group’s related party inbound payments 

made from foreign affiliates to domestic corporations. 

In the denominator, GREV is global revenues (determined on a 

consolidated basis) and USREV is the domestic corporation’s revenues (without regard to related party transactions). 

Under the aforementioned facts, the foreign affiliate’s profit margin would be 37.5%, or 

(600 ¥ 500 + 300 ¥ 100) ÷ (1500 ¥ 1000 + 300) 

Accordingly, of the $300 payment from U.S. to FS1, $112.50 

would be deemed to be income effectively connected to a U.S. trade 

or business, and subject to corporate tax. The remaining $187.50 

of the payment would be deemed expenses for which FSI would be 

allowed a deduction. 

Coordination with FDAP 

Amounts treated as effectively connected income under this provision are not excluded from the definition of fixed or determinable 

annual or periodical (‘‘FDAP’’) income. Payments subject to tax 


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under section 881 do not constitute specified payments under this 

provision except to the extent that the rate of tax imposed under 

section 881 is reduced by a bilateral income tax treaty. 

Joint and several liability 

If there is an underpayment with respect to any taxable year of 

an electing foreign corporation which is a member of an international financial accounting group, each domestic corporation in 

the group is jointly and severally liable for as much of the underpayment as does not exceed the excess of such underpayment over 

the amount of such underpayment determined without regard to 

this rule and any penalty, addition to tax, or additional amount attributable to the above amount. 

Foreign tax credit 

The foreign tax credit allowed under section 906(a) with respect 

to amounts taken into account as effectively connected income is 

limited to 80 percent of the amount of taxes paid or accrued (and 

determined without regard to section 906(b)(1)). These foreign tax 

credits are effectively separately basketed and may not be carried 

backwards or forwards. 

Reporting 

An electing foreign corporation that receives a specified amount 

is required to report, with respect to each member of the international financial reporting group from which any such amount is 

received: (i) the name and taxpayer identification number of each 

member, (ii) the aggregate amounts received from each member, 

(iii) the product lines to which such amounts relate, the aggregate 

amounts relating to each product line, and the net income ratio for 

each product line, and (iv) a summary of changes in financial accounting methods that affect the computation of any net income 

ratio described above. 

A domestic corporation that pays or accrues a specified amount 

with respect to which a foreign corporation has made the election 

is required to make a return according to the forms and regulations 

prescribed by the Secretary of the Treasury containing certain information and to maintain sufficient records to determine the tax 

liability imposed by this provision. The information required to be 

provided is as follows: (1) the name and taxpayer identification 

number of the common parent of the international financial reporting group of which the domestic corporation is a member, and (2) 

with respect to a specified amount: (A) the name and taxpayer 

identification number of the recipient of the amount, (B) the aggregate amounts received by the recipient, (C) the product lines to 

which the amounts relate and the aggregate amounts for each 

product line, and the net income ratio for each product line, and 

(D) a summary of any changes in financial accounting methods 

that affect the computation of any net income ratio described in 

(C). 

Treasury may prescribe regulations or other guidance that address reporting requirements of foreign affiliates under this provision, such as allowing reporting or elections on a group basis. 


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973Qualifying production property generally includes any tangible personal property, computer 

software, and sound recordings. 974Qualified film includes any motion picture film or videotape (including live or delayed television programming, but not including certain sexually explicit productions) if 50 percent or 

more of the total compensation relating to the production of the film (including compensation 

in the form of residuals and participations) constitutes compensation for services performed in 

the United States by actors, production personnel, directors, and producers. 975For purposes of the provision, ‘‘wages’’ include the sum of the amounts of wages as defined 

in section 3401(a) and elective deferrals that the taxpayer properly reports to the Social Security 

Administration with respect to the employment of employees of the taxpayer during the calendar year ending during the taxpayer’s taxable year. 

EFFECTIVE DATE

The provisions of this section apply to amounts paid or incurred 

after December 31, 2018. 

E. PROVISIONS RELATED TO POSSESSIONS OF THE UNITED STATES

1. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (sec. 4401 

of the bill and sec. 199 of the Code) 

PRESENT LAW

In general 

Present law generally provides a deduction from taxable income 

(or, in the case of an individual, adjusted gross income) that is 

equal to nine percent of the lesser of the taxpayer’s qualified production activities income or taxable income for the taxable year. 

For taxpayers subject to the 35-percent corporate income tax rate, 

the nine-percent deduction effectively reduces the corporate income 

tax rate to slightly less than 32 percent on qualified production activities income. 

In general, qualified production activities income is equal to domestic production gross receipts reduced by the sum of: (1) the 

costs of goods sold that are allocable to those receipts; and (2) other 

expenses, losses, or deductions which are properly allocable to 

those receipts. 

Domestic production gross receipts generally are gross receipts of 

a taxpayer that are derived from: (1) any sale, exchange, or other 

disposition, or any lease, rental, or license, of qualifying production 

property 973 that was manufactured, produced, grown or extracted 

by the taxpayer in whole or in significant part within the United 

States; (2) any sale, exchange, or other disposition, or any lease, 

rental, or license, of qualified film 974 produced by the taxpayer; (3) 

any lease, rental, license, sale, exchange, or other disposition of 

electricity, natural gas, or potable water produced by the taxpayer 

in the United States; (4) construction of real property performed in 

the United States by a taxpayer in the ordinary course of a construction trade or business; or (5) engineering or architectural services performed in the United States for the construction of real 

property located in the United States. 

The amount of the deduction for a taxable year is limited to 50 

percent of the wages paid by the taxpayer, and properly allocable 

to domestic production gross receipts, during the calendar year that 

ends in such taxable year.975 Wages paid to bona fide residents of 


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976Section 3401(a)(8)(C) excludes wages paid to United States citizens who are bona fide residents of Puerto Rico from the term wages for purposes of income tax withholding. 977Sec. 7701(a)(9). 978Sec. 199(d)(8)(A). 979Sec. 199(d)(8)(B). 980 A proof gallon is a liquid gallon consisting of 50 percent alcohol. See secs. 5002(a)(10) and 

(11). 981Sec. 5001(a)(1). 982Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c). 

Puerto Rico generally are not included in the definition of wages 

for purposes of computing the wage limitation amount.976

Rules for Puerto Rico 

When used in the Code in a geographical sense, the term ‘‘United 

States’’ generally includes only the States and the District of Columbia.977 A special rule for determining domestic production gross 

receipts, however, provides that in the case of any taxpayer with 

gross receipts from sources within the Commonwealth of Puerto 

Rico, the term ‘‘United States’’ includes the Commonwealth of 

Puerto Rico, but only if all of the taxpayer’s Puerto Rico-sourced 

gross receipts are taxable under the Federal income tax for individuals or corporations.978 In computing the 50-percent wage limitation, the taxpayer is permitted to take into account wages paid to 

bona fide residents of Puerto Rico for services performed in Puerto 

Rico.979

The special rules for Puerto Rico apply only with respect to the 

first 11 taxable years of a taxpayer beginning after December 31, 

2005, and before January 1, 2017. 

REASONS FOR CHANGE

The Committee recognizes the importance of supporting manufacturing activities in Puerto Rico, as such activities promote employment and investment. 

EXPLANATION OF PROVISION

The provision extends the special domestic production activities 

rules for Puerto Rico to apply for the first 12 taxable years of a taxpayer beginning after December 31, 2005 and before January 1, 

2018. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2016. 

2. Extension of temporary increase in limit on cover over of rum 

excise taxes to Puerto Rico and the Virgin Islands (sec. 4402 of 

the bill and sec. 119(d) of the Code) 

PRESENT LAW

A $13.50 per proof gallon 980 excise tax is imposed on distilled 

spirits produced in or imported into the United States.981 The excise tax does not apply to distilled spirits that are exported from 

the United States, including exports to U.S. possessions (e.g., Puerto Rico and the Virgin Islands).982

The Code provides for cover over (payment) to Puerto Rico and 

the Virgin Islands of the excise tax imposed on rum imported (or 


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983Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the amount of excise tax collected from 

imports into the United States of articles produced in the Virgin Islands is retained by the 

United States under section 7652(b)(3). 984Sec. 7652(e)(2). 985Secs. 7652(a)(3), (b)(3), and (e)(1). 

brought) into the United States, without regard to the country of 

origin.983 The amount of the cover over is limited under Code section 7652(f) to $10.50 per proof gallon ($13.25 per proof gallon before January 1, 2017). 

Tax amounts attributable to shipments to the United States of 

rum produced in Puerto Rico are covered over to Puerto Rico. Tax 

amounts attributable to shipments to the United States of rum produced in the Virgin Islands are covered over to the Virgin Islands. 

Tax amounts attributable to shipments to the United States of rum 

produced in neither Puerto Rico nor the Virgin Islands are divided 

and covered over to the two possessions under a formula.984

Amounts covered over to Puerto Rico and the Virgin Islands are deposited into the treasuries of the two possessions for use as those 

possessions determine.985 All of the amounts covered over are subject to the limitation. 

REASONS FOR CHANGE

The Committee recognizes the importance of providing dedicated 

revenue sources to Puerto Rico and the Virgin Islands in order to 

fund their economic development and infrastructure. 

EXPLANATION OF PROVISION

The provision suspends for six years the $10.50 per proof gallon 

limitation on the amount of excise taxes on rum covered over to 

Puerto Rico and the Virgin Islands. Under the provision, the coverover limitation of $13.25 per proof gallon is extended for rum 

brought into the United States after December 31, 2016, and before 

January 1, 2023. After December 31, 2022, the cover over amount 

reverts to $10.50 per proof gallon. 

EFFECTIVE DATE

The provision applies to distilled spirits brought into the United 

States after December 31, 2016. 

3. Extension of American Samoa economic development credit (sec. 

4403 of the bill and sec. 119 of Pub. L. No. 109–432) 

PRESENT LAW

A domestic corporation that was an existing credit claimant with 

respect to American Samoa and that elected the application of section 936 for its last taxable year beginning before January 1, 2006 

is allowed a credit based on the corporation’s economic activitybased limitation with respect to American Samoa. The credit is not 

part of the Code but is computed based on the rules of sections 30A 

and 936. The credit is allowed for the first eleven taxable years of 

a corporation that begin after December 31, 2005, and before January 1, 2017. 

A corporation was an existing credit claimant with respect to a 

American Samoa if (1) the corporation was engaged in the active 

conduct of a trade or business within American Samoa on October 


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986For taxable years beginning before January 1, 2006, certain domestic corporations with 

business operations in the U.S. possessions were eligible for the possession tax credit. Secs. 

27(b) and 936. This credit offset the U.S. tax imposed on certain income related to operations 

in the U.S. possessions. Subject to certain limitations, the amount of the possession tax credit 

allowed to any domestic corporation equaled the portion of that corporation’s U.S. tax that was 

attributable to the corporation’s non-U.S. source taxable income from (1) the active conduct of 

a trade or business within a U.S. possession, (2) the sale or exchange of substantially all of the 

assets that were used in such a trade or business, or (3) certain possessions investment. No deduction or foreign tax credit was allowed for any possessions or foreign tax paid or accrued with 

respect to taxable income that was taken into account in computing the credit under section 

936. Under the economic activity-based limit, the amount of the credit could not exceed an 

amount equal to the sum of (1) 60 percent of the taxpayer’s qualified possession wages and allocable employee fringe benefit expenses, (2) 15 percent of depreciation allowances with respect 

to short-life qualified tangible property, plus 40 percent of depreciation allowances with respect 

to medium-life qualified tangible property, plus 65 percent of depreciation allowances with respect to long-life qualified tangible property, and (3) in certain cases, a portion of the taxpayer’s 

possession income taxes. A taxpayer could elect, instead of the economic activity-based limit, a 

limit equal to the applicable percentage of the credit that otherwise would have been allowable 

with respect to possession business income, beginning in 1998, the applicable percentage was 

40 percent. 

To qualify for the possession tax credit for a taxable year, a domestic corporation was required 

to satisfy two conditions. First, the corporation was required to derive at least 80 percent of its 

gross income for the three-year period immediately preceding the close of the taxable year from 

sources within a possession. Second, the corporation was required to derive at least 75 percent 

of its gross income for that same period from the active conduct of a possession business. Sec. 

936(a)(2). The section 936 credit generally expired for taxable years beginning after December 

31, 2005. 987 A corporation will qualify as an existing credit claimant if it acquired all the assets of a 

trade or business of a corporation that (1) actively conducted that trade or business in a possession on October 13, 1995, and (2) had elected the benefits of the possession tax credit in an election in effect for the taxable year that included October 13, 1995. 

13, 1995, and (2) the corporation elected the benefits of the possession tax credit 986 in an election in effect for its taxable year that 

included October 13, 1995.987 A corporation that added a substantial new line of business (other than in a qualifying acquisition of 

all the assets of a trade or business of an existing credit claimant) 

ceased to be an existing credit claimant as of the close of the taxable year ending before the date on which that new line of business 

was added. 

The amount of the credit allowed to a qualifying domestic corporation under the provision is equal to the sum of the amounts 

used in computing the corporation’s economic activity-based limitation with respect to American Samoa, except that no credit is allowed for the amount of any American Samoa income taxes. Thus, 

for any qualifying corporation the amount of the credit equals the 

sum of (1) 60 percent of the corporation’s qualified American 

Samoa wages and allocable employee fringe benefit expenses and 

(2) 15 percent of the corporation’s depreciation allowances with respect to short-life qualified American Samoa tangible property, plus 

40 percent of the corporation’s depreciation allowances with respect 

to medium-life qualified American Samoa tangible property, plus 

65 percent of the corporation’s depreciation allowances with respect 

to long-life qualified American Samoa tangible property. 

The section 936(c) rule denying a credit or deduction for any possessions or foreign tax paid with respect to taxable income taken 

into account in computing the credit under section 936 does not 

apply with respect to the credit allowed by the provision. 

For taxable years beginning after December 31, 2016, the credit 

rules are modified in two ways. First, domestic corporations with 

operations in American Samoa are allowed the credit even if those 

corporations are not existing credit claimants. Second, the credit is 

available to a domestic corporation (either an existing credit claimant or a new credit claimant) only if, in addition to satisfying all 


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988Tax Relief and Health Care Act of 2006, Pub. L. No. 109–432, sec. 119. 989For a description of present law, see the description in part C.2 above relating to passive 

foreign investment companies. 

the present law requirements for claiming the credit, the corporation also has qualified production activities income (as defined in 

section 199(c) by substituting ‘‘American Samoa’’ for ‘‘the United 

States’’ in each place that latter term appears). 

In the case of a corporation that is an existing credit claimant 

with respect to American Samoa and that elected the application 

of section 936 for its last taxable year beginning before January 1, 

2006, the credit applies to the first nine taxable years of the corporation which begin after December 31, 2005, and before January 

1, 2017. For any other corporation, the credit applies to the first 

three taxable years of that corporation which begin after December 

31, 2011 and before January 1, 2017. 

REASON FOR CHANGE

The Committee recognizes the importance of providing incentives 

to stimulate economic development, create jobs, and fund infrastructure in American Samoa. 

EXPLANATION OF PROVISION

The provision extends the credit for five years to apply (a) in the 

case of a corporation that is an existing credit claimant with respect to American Samoa and that elected the application of section 

936 for its last taxable year beginning before January 1, 2006, to 

the first 17 taxable years of the corporation which begin after December 31, 2005, and before January 1, 2023, and (b) in the case 

of any other corporation, to the first 11 taxable years of the corporation which begin after December 31, 2011, and before January 

1, 2023. 

For purposes of this provision, section 119(e) of division A of the 

Tax Relief and Health Care Act of 2006 988 is amended to indicate 

that any reference to section 199 of the Code is to be treated as 

a reference to section 199 as in effect before its repeal by this bill. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2016. 

F. OTHER INTERNATIONAL REFORMS

1. Restriction on insurance business exception to the passive foreign investment company rules (sec. 4501 of the bill and sec. 

1297 of the Code) 989

REASONS FOR CHANGE

The Committee is concerned about a lack of clarity and precision 

in the exception to the passive foreign investment company rules 

for income derived in the active conduct of an insurance business 

by a corporation that is predominantly engaged in an insurance 

business. This lack of clarity and precision makes the scope of the 

exception difficult to ascertain and to enforce. In particular, the 

Committee is concerned about the lack of precision regarding how 


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990The hedge fund reinsurance arrangement is said to provide indefinite deferral of U.S. taxation of the hedge fund’s investment earnings, such as interest and dividends. At the time the 

taxpayer liquidates the investment, ordinary investment earnings are said to be converted to 

capital gains, which are subject to a lower rate of tax. Press reports have discussed the arrangements. See, e.g., Hal Lux, ‘‘The Great Hedge Fund Reinsurance Tax Game,’’ Institutional Investor, April 2001, pages 52–58, http://www.institutionalinvestor.com/Article/1027978/The-Greathedge-fund-reinsurance-tax-ame.html; Steven Davidoff Solomon, ‘‘With Lax Regulation, a Risky 

Industry Flourishes Offshore,’’ Deal Book, New York Times, September 4 2012, http:// 

dealbook.nytimes.com/2012/09/04/with-lax-regulation-a-risky-industryflourishes-offshore/ 

?_php=true&_type=blogs&_r=0. 991Treasury regulations proposed in 2015 have taken a different approach that is based on 

the current statutory rule. Prop. Treas. Reg. sec. 1.1297–4, 26 CFR Part 1, REG–108214–15, 

April 24, 2015. The proposed regulations provide that ‘‘the term insurance business means the 

business of issuing insurance and annuity contracts and the reinsuring of risks underwritten 

by insurance companies, together with those investment activities and administrative services 

that are required to support or are substantially related to insurance and annuity contracts 

issued or reinsured by the foreign corporation.’’ The proposed regulations provide that an investment activity is an activity producing foreign personal holding company income, and that is ‘‘required to support or [is] substantially related to insurance and annuity contracts issued or reinsured by the foreign corporation to the extent that income from the activities is earned from 

assets held by the foreign corporation to meet obligations under the contracts.’’ The preamble 

to the proposed regulations specifically requests comments on the proposed regulations ‘‘with regard to how to determine the portion of a foreign insurance company’s assets that are held to 

meet obligations under insurance contracts issued or reinsured by the company,’’ for example, 

if the assets ‘‘do not exceed a specified percentage of the corporation’s total insurance liabilities 

for the year.’’ Ibid. 

much insurance or reinsurance business the company must do to 

qualify under the exception. The Committee has been informed of 

offshore arrangements applying the present-law exception that reinsure risks and that invest in U.S. hedge funds, and that have 

been structured in a manner that raises concerns about the potential for base erosion.990 The Committee believes that a more mechanical, formulaic rule that is more straightforward to enforce and 

to apply is appropriate while still preserving the opportunity for a 

corporation to present facts and circumstances showing it is predominantly engaged in the insurance business, provided the corporation’s applicable insurance liabilities are at least 10 percent of 

its total assets. The Committee also believes that it is important 

to separately treat different categories of reserves to more accurately determine whether a company meets the insurance exception. 

EXPLANATION OF PROVISION

The provision modifies the requirements for a corporation the income of which is not included in passive income for purposes of the 

PFIC rules. The provision replaces the test based on whether a corporation is predominantly engaged in an insurance business with 

a test based on the corporation’s insurance liabilities.991 The requirement that the foreign corporation would be subject to tax 

under subchapter L if it were a domestic corporation is retained. 

Under the provision, passive income for purposes of the PFIC 

rules does not include income derived in the active conduct of an 

insurance business by a corporation (1) that would be subject to tax 

under subchapter L if it were a domestic corporation; and (2) the 

applicable insurance liabilities of which constitute more than 25 

percent of its total assets as reported on the company’s applicable 

financial statement for the last year ending with or within the taxable year. 

For the purpose of the provision’s exception from passive income, 

applicable insurance liabilities means, with respect to any property 

and casualty or life insurance business (1) loss and loss adjustment 

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earned premium reserves) for life and health insurance risks and 

life and health insurance claims with respect to contracts providing 

coverage for mortality or morbidity risks. This includes loss reserves for property and casualty, life, and health insurance contracts and annuity contracts. Unearned premium reserves with respect to any type of risk are not treated as applicable insurance liabilities for purposes of the provision. For purposes of the provision, the amount of any applicable insurance liability may not exceed the lesser of such amount (1) as reported to the applicable insurance regulatory body in the applicable financial statement (or, 

if less, the amount required by applicable law or regulation), or (2) 

as determined under regulations prescribed by the Secretary. 

An applicable financial statement is a statement for financial reporting purposes that (1) is made on the basis of generally accepted 

accounting principles, (2) is made on the basis of international financial reporting standards, but only if there is no statement made 

on the basis of generally accepted accounting principles, or (3) except as otherwise provided by the Secretary in regulations, is the 

annual statement required to be filed with the applicable insurance 

regulatory body, but only if there is no statement made on either 

of the foregoing bases. Unless otherwise provided in regulations, it 

is intended that generally accepted accounting principles means 

U.S. GAAP. 

The applicable insurance regulatory body means, with respect to 

any insurance business, the entity established by law to license, 

authorize, or regulate such insurance business and to which the applicable financial statement is provided. For example, in the United 

States, the applicable insurance regulatory body is the State insurance regulator to which the corporation provides its annual statement. 

If a corporation fails to qualify solely because its applicable insurance liabilities constitute 25 percent or less of its total assets, 

a United States person who owns stock of the corporation may elect 

in such manner as the Secretary prescribes to treat the stock as 

stock of a qualifying insurance corporation if (1) the corporation’s 

applicable insurance liabilities constitute at least 10 percent of its 

total assets, and (2) based on the applicable facts and circumstances, the corporation is predominantly engaged in an insurance business, and its failure to qualify under the 25 percent 

threshold is due solely to runoff-related or rating-related circumstances involving such insurance business. 

Facts and circumstances that tend to show the firm may not be 

predominantly engaged in an insurance business include a small 

number of insured risks with low likelihood but large potential 

costs; workers focused to a greater degree on investment activities 

than underwriting activities; and low loss exposure. Additional relevant facts for determining whether the firm is predominantly engaged in an insurance business include: claims payment patterns 

for the current and prior years; the firm’s loss exposure as calculated for a regulator such as the SEC or for a rating agency, or 

if those are not calculated, for internal pricing purposes; the percentage of gross receipts constituting premiums for the current and 

prior years; and the number and size of insurance contracts issued 

or taken on through reinsurance by the firm. The fact that a firm 


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has been holding itself out as an insurer for a long period is not 

determinative either way. 

Runoff-related or rating-related circumstances include, for example, the fact that the company is in runoff, that is, it is not taking 

on new insurance business (and consequently has little or no premium income), and is using its remaining assets to pay off claims 

with respect to pre-existing insurance risks on its books. Such circumstances also include, for example, the application to the company of specific requirements with respect to capital and surplus 

relating to insurance liabilities imposed by a rating agency as a 

condition of obtaining a rating necessary to write new insurance 

business for the current year. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2017. 

TITLE V—EXEMPT ORGANIZATIONS 

A. UNRELATED BUSINESS INCOME TAX

1. Clarification of unrelated business income tax treatment of entities exempt from tax under section 501(a) (sec. 5001 of the bill 

and sec. 511 of the Code) 

PRESENT LAW

Tax exemption for certain organizations 

Section 501(a) exempts certain organizations from Federal income tax. Such organizations include: (1) tax-exempt organizations 

described in section 501(c) (including among others section 

501(c)(3) charitable organizations and section 501(c)(4) social welfare organizations); (2) religious and apostolic organizations described in section 501(d); and (3) trusts forming part of a pension, 

profit-sharing, or stock bonus plan of an employer described in section 401(a). 

Section 115 excludes from gross income certain income of entities 

that perform an essential government function. The exemption applies to: (1) income derived from any public utility or the exercise 

of any essential governmental function and accruing to a State or 

any political subdivision thereof, or the District of Columbia; or (2) 

income accruing to the government of any possession of the United 

States, or any political subdivision thereof. 

Unrelated business income tax, in general 

An exempt organization generally may have revenue from four 

sources: contributions, gifts, and grants; trade or business income 

that is related to exempt activities (e.g., program service revenue); 

investment income; and trade or business income that is not related to exempt activities. The Federal income tax exemption generally extends to the first three categories, and does not extend to 

an organization’s unrelated trade or business income. In some 


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992This is the case for social clubs (sec. 501(c)(7)), voluntary employees’ beneficiary associations (sec. 501(c)(9)), and organizations and trusts described in sections 501(c)(17) and 

501(c)(20). Sec. 512(a)(3). 993Secs. 511–514. 994Treas. Reg. sec. 1.501(c)(3)–1(e). 995Sec. 511(a)(2)(A). 996Sec. 511(a)(2)(A). 997Sec. 511(a)(2)(B). 

cases, however, the investment income of an organization is taxed 

as if it were unrelated trade or business income.992

The unrelated business income tax (‘‘UBIT’’) generally applies to 

income derived from a trade or business regularly carried on by the 

organization that is not substantially related to the performance of 

the organization’s tax-exempt functions.993 An organization that is subject to UBIT and that has $1,000 or more of gross unrelated 

business taxable income must report that income on Form 990–T 

(Exempt Organization Business Income Tax Return). 

Most exempt organizations may operate an unrelated trade or 

business so long as the organization remains primarily engaged in 

activities that further its exempt purposes. Therefore, an organization may engage in a substantial amount of unrelated business activity without jeopardizing exempt status. A section 501(c)(3) (charitable) organization, however, may not operate an unrelated trade 

or business as a substantial part of its activities.994 Therefore, the 

unrelated trade or business activity of a section 501(c)(3) organization must be insubstantial. 

Organizations subject to tax on unrelated business income 

Most exempt organizations are subject to the tax on unrelated 

business income. Specifically, organizations subject to the unrelated business income tax generally include: (1) organizations exempt from tax under section 501(a), including organizations described in section 501(c) (except for U.S. instrumentalities and certain charitable trusts); 995 (2) qualified pension, profit-sharing, and 

stock bonus plans described in section 401(a); 996 and (3) certain 

State colleges and universities.997

REASONS FOR CHANGE

The Committee believes it is necessary and desirable to clarify 

the applicability of the UBIT rules to certain tax-exempt organizations. The UBIT rules, by their express terms, apply to most organizations described in section 401(a) and 501(c) and do not exclude 

section 115 organizations that are also described in section 401(a) 

or 501(c). The Committee understands, however, that certain organizations (such as State pension funds) that are described in section 401(a) or 501(c) of the Code take the position that they are not 

subject to UBIT because their income is derived from the exercise 

of an essential government function as described in section 115 of 

the Code. This provision clarifies that organizations with income 

described in section 115 are not exempt from application of the 

UBIT rules. 

EXPLANATION OF PROVISION

The provision clarifies that an organization does not fail to be 

subject to tax on its unrelated business income as an organization 

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998Secs. 511–514. 999Treas. Reg. sec. 1.501(c)(3)–1(e). 

tion also is exempt, or excludes amounts from gross income, by reason of another provision of the Code. For example, if an organization is described in section 401(a) (and thus is exempt from tax 

under section 501(a)) and its income also is described in section 115 

(relating to the exclusion from gross income of certain income derived from the exercise of an essential governmental function), its 

status under section 115 does not cause it to be exempt from tax 

on its unrelated business income. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

2. Exclusion of research income from unrelated business taxable income limited to publicly available research (sec. 5002 of the bill 

and sec. 512(b)(9) of the Code) 

PRESENT LAW

Tax exemption for certain organizations 

Section 501(a) exempts certain organizations from Federal income tax. Such organizations include: (1) tax-exempt organizations 

described in section 501(c) (including among others section 

501(c)(3) charitable organizations and section 501(c)(4) social welfare organizations); (2) religious and apostolic organizations described in section 501(d); and (3) trusts forming part of a pension, 

profit-sharing, or stock bonus plan of an employer described in section 401(a). 

Unrelated business income tax, in general 

The unrelated business income tax (‘‘UBIT’’) generally applies to 

income derived from a trade or business regularly carried on by the 

organization that is not substantially related to the performance of 

the organization’s tax-exempt functions.998 An organization that is 

subject to UBIT and that has $1,000 or more of gross unrelated 

business taxable income must report that income on Form 990–T 

(Exempt Organization Business Income Tax Return). 

Most exempt organizations may operate an unrelated trade or 

business so long as the organization remains primarily engaged in 

activities that further its exempt purposes. Therefore, an organization may engage in a substantial amount of unrelated business activity without jeopardizing exempt status. A section 501(c)(3) (charitable) organization, however, may not operate an unrelated trade 

or business as a substantial part of its activities.999 Therefore, the 

unrelated trade or business activity of a section 501(c)(3) organization must be insubstantial. 

Organizations subject to tax on unrelated business income 

Most exempt organizations are subject to the tax on unrelated 

business income. Specifically, organizations subject to the unrelated business income tax generally include: (1) organizations exempt from tax under section 501(a), including organizations described in section 501(c) (except for U.S. instrumentalities and cerVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00426 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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1000Sec. 511(a)(2)(A). 1001Sec. 511(a)(2)(A). 1002Sec. 511(a)(2)(B). 1003Secs. 511–514. 1004Sec. 512(b)(13). 1005Sec. 512(b)(7). 1006Sec. 512(b)(8). 1007Sec. 512(b)(9). 

tain charitable trusts); 1000 (2) qualified pension, profit-sharing, and 

stock bonus plans described in section 401(a); 1001 and (3) certain 

State colleges and universities.1002

Exclusions from unrelated business taxable income 

In general 

Certain types of income are specifically exempt from unrelated 

business taxable income, such as dividends, interest, royalties, and 

certain rents,1003 unless derived from debt-financed property or 

from certain 50-percent controlled subsidiaries.1004 Other exemptions from UBIT are provided for activities in which substantially 

all the work is performed by volunteers, for income from the sale 

of donated goods, and for certain activities carried on for the convenience of members, students, patients, officers, or employees of 

a charitable organization. In addition, special UBIT provisions exempt from tax activities of trade shows and State fairs, income 

from bingo games, and income from the distribution of low-cost 

items incidental to the solicitation of charitable contributions. Organizations liable for tax on unrelated business taxable income 

may be liable for alternative minimum tax determined after taking 

into account adjustments and tax preference items. 

Research income 

Certain income derived from research activities of exempt organizations is excluded from unrelated business taxable income. For example, income derived from research performed for the United 

States, a State, and certain agencies and subdivisions is excluded.1005 Income from research performed by a college, university, or hospital for any person also is excluded.1006 Finally, if an 

organization is operated primarily for purposes of carrying on fundamental research the results of which are freely available to the 

general public, all income derived by research performed by such 

organization for any person, not just income derived from research 

available to the general public, is excluded.1007

REASONS FOR CHANGE

The Committee believes it is desirable to carefully tailor the exclusions from the UBIT rules to better encourage tax-exempt organizations to engage in fundamental research the results of which 

are made available to the general public. 

EXPLANATION OF PROVISION

The provision modifies the exclusion of income from research performed by an organization operated primarily for purposes of carrying on fundamental research the results of which are freely available to the general public (section 512(b)(9)). Under the provision, 

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1008Sec. 4940(d)(1). Exempt operating foundations generally include organizations such as museums or libraries that devote their assets to operating charitable programs but have difficulty 

meeting the ‘‘public support’’ tests necessary not to be classified as a private foundation. To be 

an exempt operating foundation, an organization must: (1) be an operating foundation (as defined in section 4942(j)(3)); (2) be publicly supported for at least 10 taxable years; (3) have a 

governing body no more than 25 percent of whom are disqualified persons and that is broadly 

representative of the general public; and (4) have no officers who are disqualified persons. Sec. 

4940(d)(2). 1009Sec. 4942(g). 1010Sec. 4940(e). 

come under section 512(b)(9) only income from such fundamental 

research the results of which are freely available to the general 

public. 

EFFECTIVE DATE

The proposal is effective for taxable years beginning after December 31, 2017. 

B. EXCISE TAXES

1. Simplification of excise tax on private foundation investment 

income (sec. 5101 of the bill and sec. 4940 of the Code) 

PRESENT LAW

Excise tax on the net investment income of private foundations 

Under section 4940(a), private foundations that are recognized as 

exempt from Federal income tax under section 501(a) (other than 

exempt operating foundations1008) are subject to a two-percent excise tax on their net investment income. Net investment income 

generally includes interest, dividends, rents, royalties (and income 

from similar sources), and capital gain net income, and is reduced 

by expenses incurred to earn this income. The two-percent rate of 

tax is reduced to one-percent in any year in which a foundation exceeds the average historical level of its charitable distributions. 

Specifically, the excise tax rate is reduced if the foundation’s qualifying distributions (generally, amounts paid to accomplish exempt 

purposes)1009 equal or exceed the sum of (1) the amount of the 

foundation’s assets for the taxable year multiplied by the average 

percentage of the foundation’s qualifying distributions over the five 

taxable years immediately preceding the taxable year in question, 

and (2) one percent of the net investment income of the foundation 

for the taxable year.1010 In addition, the foundation cannot have 

been subject to tax in any of the five preceding years for failure to 

meet minimum qualifying distribution requirements in section 

4942. 

Private foundations that are not exempt from tax under section 

501(a), such as certain charitable trusts, are subject to an excise 

tax under section 4940(b). The tax is equal to the excess of the sum 

of the excise tax that would have been imposed under section 

4940(a) if the foundation were tax exempt and the amount of the 

tax on unrelated business income that would have been imposed if 

the foundation were tax exempt, over the income tax imposed on 

the foundation under subtitle A of the Code. 

Private foundations are required to make a minimum amount of 

qualifying distributions each year to avoid tax under section 4942. 

The minimum amount of qualifying distributions a foundation has 


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1011Sec. 4942(d)(2). 1012The Code does not expressly define the term ‘‘public charity,’’ but rather provides exceptions to those entities that are treated as private foundations. 

to make to avoid tax under section 4942 is reduced by the amount 

of section 4940 excise taxes paid.1011

REASONS FOR CHANGE

Under the present-law, two-tier private foundation excise tax 

rate structure, a foundation must carefully manage the timing and 

amount of its grant making to minimize its excise tax burden. 

Compliance can be costly and consume resources that otherwise 

would have been used for grant making or other charitable activity. 

In addition, to qualify for the lower tax rate in a year, a foundation must ensure that its distributions for the year exceed a historical, average level of distributions. This structure creates an incentive for foundations to limit distributions in any one year, because 

a significant increase in distributions will raise the foundation’s average level of distributions, making it more difficult to qualify for 

the reduced rate in future years. As a result, a foundation that 

might have been inclined to distribute a larger amount in a time 

of public need, such as during the response to a natural disaster, 

has a disincentive to do so. 

For these reasons, the Committee believes it is appropriate to replace the present-law, two-tier private foundation excise tax rate 

structure with a simplified structure that uses a single tax rate of 

1.4 percent. 

EXPLANATION OF PROVISION

The provision replaces the two rates of excise tax on tax-exempt 

private foundations with a single rate of tax of 1.4 percent. Thus, 

under the provision, a tax-exempt private foundation generally is 

subject to an excise tax of 1.4 percent on its net investment income. 

A taxable private foundation is subject to an excise tax equal to the 

excess (if any) of the sum of the 1.4 percent net investment income 

excise tax and the amount of the tax on unrelated business income 

(both calculated as if the foundation were tax-exempt), over the income tax imposed on the foundation. The provision repeals the special reduced excise tax rate for private foundations that exceed 

their historical level of qualifying distributions. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

2. Private operating foundation requirements relating to operation 

of an art museum (sec. 5102 of the bill and sec. 4942(j) of the Code) 

PRESENT LAW

Public charities and private foundations 

An organization qualifying for tax-exempt status under section 

501(c)(3) is further classified as either a public charity or a private 

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1013Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through (iv) for a description of these 

organizations). 1014Treas. Reg. sec. 1.170A–9(f)(2). Failing this mechanical test, the organization may qualify 

as a public charity if it passes a ‘‘facts and circumstances’’ test. Treas. Reg. sec. 1.170A–9(f)(3). 1015To meet this requirement, the organization must normally receive more than one-third 

of its support from a combination of (1) gifts, grants, contributions, or membership fees and (2) 

certain gross receipts from admissions, sales of merchandise, performance of services, and furnishing of facilities in connection with activities that are related to the organization’s exempt 

purposes. Sec. 509(a)(2)(A). In addition, the organization must not normally receive more than 

one-third of its public support in each taxable year from the sum of (1) gross investment income 

and (2) the excess of unrelated business taxable income as determined under section 512 over 

the amount of unrelated business income tax imposed by section 511. Sec. 509(a)(2)(B). 1016Sec. 509(a)(3). Supporting organizations are further classified as Type I, II, or III depending on the relationship they have with the organizations they support. Supporting organizations 

must support public charities listed in one of the other categories (i.e., per se public charities, 

broadly supported public charities, or revenue generating public charities), and they are not permitted to support other supporting organizations or testing for public safety organizations. 

Organizations organized and operated exclusively for testing for public safety also are classified as public charities. Sec. 509(a)(4). Such organizations, however, are not eligible to receive 

deductible charitable contributions under section 170. 1017 Unlike public charities, private foundations are subject to tax on their net investment income at a rate of two percent (one percent in some cases). Sec. 4940. Private foundations also 

are subject to more restrictions on their activities than are public charities. For example, private 

foundations are prohibited from engaging in self-dealing transactions (sec. 4941), are required 

to make a minimum amount of charitable distributions each year, (sec. 4942), are limited in the 

extent to which they may control a business (sec. 4943), may not make speculative investments 

(sec. 4944), and may not make certain expenditures (sec. 4945). Violations of these rules result 

in excise taxes on the foundation and, in some cases, may result in excise taxes on the managers 

of the foundation. 1018Sec. 4942. 

ities per se, regardless of their sources of support. These include 

churches, certain schools, hospitals and other medical organizations, certain organizations providing assistance to colleges and 

universities, and governmental units.1013 Other organizations qualify as public charities because they are broadly publicly supported. 

First, a charity may qualify as publicly supported if at least onethird of its total support is from gifts, grants, or other contributions 

from governmental units or the general public.1014 Alternatively, it 

may qualify as publicly supported if it receives more than one-third 

of its total support from a combination of gifts, grants, and contributions from governmental units and the public plus revenue 

arising from activities related to its exempt purposes (e.g., fee for 

service income). In addition, this category of public charity must 

not rely excessively on endowment income as a source of support.1015 A supporting organization, i.e., an organization that provides support to another section 501(c)(3) entity that is not a private foundation and meets certain other requirements of the Code, 

also is classified as a public charity.1016

A section 501(c)(3) organization that does not fit within any of 

the above categories is a private foundation. In general, private 

foundations receive funding from a limited number of sources (e.g., 

an individual, a family, or a corporation). 

The deduction for charitable contributions to private foundations 

is in some instances less generous than the deduction for charitable 

contributions to public charities. In addition, private foundations 

are subject to a number of operational rules and restrictions that 

do not apply to public charities.1017

Tax on failure to distribute income by private nonoperating foundations 

Private nonoperating foundations are required to pay out a minimum amount each year as qualifying distributions.1018 In general, 

a qualifying distribution is an amount paid to accomplish one or 


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1019Sec. 4942(g)(1)(A). 1020Sec. 4942(a) and (b). Taxes imposed may be abated if certain conditions are met. Secs. 

4961 and 4962. 1021Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an organization is permitted to adjust the 

distributable amount in those cases where distributions during the five preceding years have 

exceeded the payout requirements. Sec. 4942(i). 1022Sec. 4942(a)(1). 1023Sec. 4942(j)(3)(A); Treas. Reg. sec. 53.4942(b)–1(c). 1024Sec. 4942(j)(3)(B). 

more of the organization’s exempt purposes, including reasonable 

and necessary administrative expenses.1019 Failure to pay out the 

minimum required amount results in an initial excise tax on the 

foundation of 30 percent of the undistributed amount. An additional tax of 100 percent of the undistributed amount applies if an 

initial tax is imposed and the required distributions have not been 

made by the end of the applicable taxable period.1020 A foundation 

may include as a qualifying distribution the salaries, occupancy expenses, travel costs, and other reasonable and necessary administrative expenses that the foundation incurs in operating a grant 

program. A qualifying distribution also includes any amount paid 

to acquire an asset used (or held for use) directly in carrying out 

one or more of the organization’s exempt purposes and certain 

amounts set aside for exempt purposes.1021

Private operating foundations 

The tax on failure to distribute income does not apply to the undistributed income of a private foundation for any taxable year for 

which it is an operating foundation.1022 Private operating foundations generally operate their own charitable programs directly, 

rather than serving primarily as a grantmaking entity. 

Private operating foundations must satisfy several tests designed 

to distinguish them from nonoperating (grantmaking) foundations. 

First, an operating foundation generally must make qualifying distributions for the direct conduct of activities that are related to its 

exempt purpose (as opposed to making such distributions in the 

form of grants to other charities) equal to 85 percent of the lesser 

of its adjusted net income or its minimum investment return, each 

as defined under section 4942.1023 In addition, an operating foundation must satisfy one of the following three alternative tests: (1) 

an asset test, under which substantially more than half of the organization’s assets (generally, 65 percent) are devoted to the direct 

conduct of exempt activities or to functionally related businesses; 

(2) an endowment test, under which the organization normally 

makes qualifying distributions for the direct conduct of activities 

related to its exempt purpose in an amount not less than twothirds of its minimum investment return; or (3) a support test, 

under which the organization must meet certain measures to show 

that it receives public support.1024

REASONS FOR CHANGE

Because private operating foundations run their own charitable 

programs (rather than serving primarily as grant makers to operating charities), private operating foundations are given preferential treatment under Code. It has come to the attention of the 

Committee, however, that certain private operating foundations 

that operate art museums severely restrict public access to their 


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1025The Code does not expressly define the term ‘‘public charity,’’ but rather provides exceptions to those entities that are treated as private foundations. 1026Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through (iv) for a description of these 

organizations). 1027Treas. Reg. sec. 1.170A–9(f)(2). Failing this mechanical test, the organization may qualify 

as a public charity if it passes a ‘‘facts and circumstances’’ test. Treas. Reg. sec. 1.170A–9(f)(3). 1028To meet this requirement, the organization must normally receive more than one-third 

of its support from a combination of (1) gifts, grants, contributions, or membership fees and (2) 

certain gross receipts from admissions, sales of merchandise, performance of services, and furnishing of facilities in connection with activities that are related to the organization’s exempt 

purposes. Sec. 509(a)(2)(A). In addition, the organization must not normally receive more than 

one-third of its public support in each taxable year from the sum of (1) gross investment income 

and (2) the excess of unrelated business taxable income as determined under section 512 over 

the amount of unrelated business income tax imposed by section 511. Sec. 509(a)(2)(B). 

collections, raising the question whether the museums are operated 

for a public or a private purpose. For this reason, the Committee 

believes that an organization that operates an art museum as a 

substantial activity should not qualify for private operating foundation status unless it offers meaningful access to the public during 

normal business hours. 

EXPLANATION OF PROVISION

Under the provision, an organization that operates an art museum as a substantial activity does not qualify as a private operating foundation unless the museum is open during normal business hours to the public for at least 1,000 hours during the taxable 

year. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

3. Excise tax based on investment income of private colleges and 

universities (sec. 5103 of the bill and new sec. 4969 of the Code) 

PRESENT LAW

Public charities and private foundations 

An organization qualifying for tax-exempt status under section 

501(c)(3) is further classified as either a public charity or a private 

foundation. An organization may qualify as a public charity in several ways.1025 Certain organizations are classified as public charities per se, regardless of their sources of support. These include 

churches, certain schools, hospitals and other medical organizations, certain organizations providing assistance to colleges and 

universities, and governmental units.1026 Other organizations qualify as public charities because they are broadly publicly supported. 

First, a charity may qualify as publicly supported if at least onethird of its total support is from gifts, grants, or other contributions 

from governmental units or the general public.1027 Alternatively, it 

may qualify as publicly supported if it receives more than one-third 

of its total support from a combination of gifts, grants, and contributions from governmental units and the public plus revenue 

arising from activities related to its exempt purposes (e.g., fee for 

service income). In addition, this category of public charity must 

not rely excessively on endowment income as a source of support.1028 A supporting organization, i.e., an organization that provides support to another section 501(c)(3) entity that is not a priVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00432 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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1029Sec. 509(a)(3). Supporting organizations are further classified as Type I, II, or III depending on the relationship they have with the organizations they support. Supporting organizations 

must support public charities listed in one of the other categories (i.e., per se public charities, 

broadly supported public charities, or revenue generating public charities), and they are not permitted to support other supporting organizations or testing for public safety organizations. 

Organizations organized and operated exclusively for testing for public safety also are classified as public charities. Sec. 509(a)(4). Such organizations, however, are not eligible to receive 

deductible charitable contributions under section 170. 1030 Unlike public charities, private foundations are subject to tax on their net investment income at a rate of two percent (one percent in some cases). Sec. 4940. Private foundations also 

are subject to more restrictions on their activities than are public charities. For example, private 

foundations are prohibited from engaging in self-dealing transactions (sec. 4941), are required 

to make a minimum amount of charitable distributions each year, (sec. 4942), are limited in the 

extent to which they may control a business (sec. 4943), may not make speculative investments 

(sec. 4944), and may not make certain expenditures (sec. 4945). Violations of these rules result 

in excise taxes on the foundation and, in some cases, may result in excise taxes on the managers 

of the foundation. 1031 Exempt operating foundations are exempt from the section 4940 tax. Sec. 4940(d)(1). Exempt operating foundations generally include organizations such as museums or libraries that 

devote their assets to operating charitable programs but have difficulty meeting the ‘‘public support’’ tests necessary not to be classified as a private foundation. To be an exempt operating 

foundation, an organization must: (1) be an operating foundation (as defined in section 

4942(j)(3)); (2) be publicly supported for at least 10 taxable years; (3) have a governing body 

no more than 25 percent of whom are disqualified persons and that is broadly representative 

of the general public; and (4) have no officers who are disqualified persons. Sec. 4940(d)(2). 1032Sec. 4942(g). 1033Sec. 4940(e). 1034 Under a separate provision, the private foundation excise tax would be simplified by replacing the two-tier rate structure with a single-rate tax set at 1.4 percent. 

vate foundation and meets the requirements of the Code, also is 

classified as a public charity.1029

A section 501(c)(3) organization that does not fit within any of 

the above categories is a private foundation. In general, private 

foundations receive funding from a limited number of sources (e.g., 

an individual, a family, or a corporation). 

The deduction for charitable contributions to private foundations 

is in some instances less generous than the deduction for charitable 

contributions to public charities. In addition, private foundations 

are subject to a number of operational rules and restrictions that 

do not apply to public charities.1030

Excise tax on investment income of private foundations 

Under section 4940(a), private foundations that are recognized as 

exempt from Federal income tax under section 501(a) (other than 

exempt operating foundations) 1031 are subject to a two-percent excise tax on their net investment income. Net investment income 

generally includes interest, dividends, rents, royalties (and income 

from similar sources), and capital gain net income, and is reduced 

by expenses incurred to earn this income. The two-percent rate of 

tax is reduced to one-percent in any year in which a foundation exceeds the average historical level of its charitable distributions. 

Specifically, the excise tax rate is reduced if the foundation’s qualifying distributions (generally, amounts paid to accomplish exempt 

purposes) 1032 equal or exceed the sum of (1) the amount of the 

foundation’s assets for the taxable year multiplied by the average 

percentage of the foundation’s qualifying distributions over the five 

taxable years immediately preceding the taxable year in question, 

and (2) one percent of the net investment income of the foundation 

for the taxable year.1033 In addition, the foundation cannot have 

been subject to tax in any of the five preceding years for failure to 


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1031 Exempt operating foundations are exempt from the section 4940 tax. Sec. 4940(d)(1). Exempt operating foundations generally include organizations such as museums or libraries that 

devote their assets to operating charitable programs but have difficulty meeting the ‘‘public support’’ tests necessary not to be classified as a private foundation. To be an exempt operating 

foundation, an organization must: (1) be an operating foundation (as defined in section 

4942(j)(3)); (2) be publicly supported for at least 10 taxable years; (3) have a governing body 

no more than 25 percent of whom are disqualified persons and that is broadly representative 

of the general public; and (4) have no officers who are disqualified persons. Sec. 4940(d)(2). 1032Sec. 4942(g). 1033Sec. 4940(e). 1034 Under a separate provision, the private foundation excise tax would be simplified by replacing the two-tier rate structure with a single-rate tax set at 1.4 percent. 

meet minimum qualifying distribution requirements in section 

4942.1034

Private foundations that are not exempt from tax under section 

501(a), such as certain charitable trusts, are subject to an excise 

tax under section 4940(b). The tax is equal to the excess of the sum 

of the excise tax that would have been imposed under section 

4940(a) if the foundation were tax exempt and the amount of the 

tax on unrelated business income that would have been imposed if 

the foundation were tax exempt, over the income tax imposed on 

the foundation under subtitle A of the Code. 

Private foundations are required to make a minimum amount of 

qualifying distributions each year to avoid tax under section 4942. 

The minimum amount of qualifying distributions a foundation has 

to make to avoid tax under section 4942 is reduced by the amount 

of section 4940 excise taxes paid.1035

Private colleges and universities 

Private colleges and universities generally are treated as public 

charities rather than private foundations 1036 and thus are not subject to the private foundation excise tax on net investment income. 

REASONS FOR CHANGE

In recent years, the endowment balances at many private colleges and universities have increased dramatically. At the same 

time, college tuition has risen at rates in excess of the rate of inflation. Where the endowment of a private college or university has 

grown so large that it is not commensurate with the scope of the 

institution’s activities in educating students, the Committee believes it is appropriate to impose a modest excise tax on the investment income derived from the endowment. 

EXPLANATION OF PROVISION

The provision imposes an excise tax on an applicable educational 

institution for each taxable year equal to 1.4 percent of the net investment income of the institution for the taxable year. Net investment income is determined using rules similar to the rules of section 4940(c) (relating to the net investment income of a private 

foundation). 

For purposes of the provision, an applicable educational institution is an institution: (1) that has at least 500 students during the 

preceding taxable year; (2) that is an eligible education institution 

as described in section 25A of the Code; 1037 (3) that is not described in the first section of section 511(a)(2)(B) of the Code (generally describing State colleges and universities); and (4) the aggregate fair market value of the assets of which at the end of the preVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00434 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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1037Section 25A defines an eligible educational institution as an institution (1) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. sec. 1088), as in effect 

on August 5, 1977, and (2) which is eligible to participate in a program under title IV of such 

Act. 1038 Assets used directly in carrying out the institution’s exempt purpose include, for example, 

classroom buildings and physical facilities used for educational activities and office equipment 

or other administrative assets used by employees of the institution in carrying out exempt activities, among other assets. 1039 Secs. 509(f)(3). 1040 Secs. 509(a)(3). 1039Secs. 509(f)(3). 1040Secs. 509(a)(3). 1041The Code does not expressly define the term ‘‘public charity,’’ but rather provides exceptions to those entities that are treated as private foundations. 1042Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through (iv) for a description of these 

organizations). 

ceding taxable year (other than those assets that are used directly 

in carrying out the institution’s exempt purpose) 1038 is at least 

$250,000 per student. For these purposes, the number of students 

of an institution is based on the daily average number of full-time 

students attending the institution, with part-time students being 

taken into account on a full-time student equivalent basis. 

For purposes of determining whether an institution meets the 

asset-per-student threshold and determining net investment income, assets and net investment income include amounts with respect to an organization that is related to the institution. An organization is treated as related to the institution for this purpose if 

the organization: (1) controls, or is controlled by, the institution; (2) 

is controlled by one or more persons that control the institution; or 

(3) is a supported organization 1039 or a supporting organization 1040

during the taxable year with respect to the institution. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

4. Provide an exception to the private foundation excess business 

holdings rules for philanthropic business holdings (sec. 5104 of 

the bill and sec. 4943 of the Code) 

PRESENT LAW

Public charities and private foundations 

An organization qualifying for tax-exempt status under section 

501(c)(3) is further classified as either a public charity or a private 

foundation. An organization may qualify as a public charity in several ways.1041 Certain organizations are classified as public charities per se, regardless of their sources of support. These include 

churches, certain schools, hospitals and other medical organizations 

(including medical research organizations), certain organizations 

providing assistance to colleges and universities, and governmental 

units.1042 Other organizations qualify as public charities because 

they are broadly publicly supported. First, a charity may qualify as 

publicly supported if at least one-third of its total support is from 

gifts, grants, or other contributions from governmental units or the 

general public.1043 Alternatively, it may qualify as publicly supported if it receives more than one-third of its total support from 

a combination of gifts, grants, and contributions from governmental 

units and the public plus revenue arising from activities related to 

its exempt purposes (e.g., fee for service income). In addition, this 


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1043Treas. Reg. sec. 1.170A–9(f)(2). Failing this mechanical test, the organization may qualify 

as a public charity if it passes a ‘‘facts and circumstances’’ test. Treas. Reg. sec. 1.170A–9(f)(3). 1044To meet this requirement, the organization must normally receive more than one-third 

of its support from a combination of (1) gifts, grants, contributions, or membership fees and (2) 

certain gross receipts from admissions, sales of merchandise, performance of services, and furnishing of facilities in connection with activities that are related to the organization’s exempt 

purposes. Sec. 509(a)(2)(A). In addition, the organization must not normally receive more than 

one-third of its public support in each taxable year from the sum of (1) gross investment income 

and (2) the excess of unrelated business taxable income as determined under section 512 over 

the amount of unrelated business income tax imposed by section 511. Sec. 509(a)(2)(B). 1045Sec. 509(a)(3). Organizations organized and operated exclusively for testing for public safety also are classified as public charities. Sec. 509(a)(4). Such organizations, however, are not eligible to receive deductible charitable contributions under section 170. 1046 Unlike public charities, private foundations are subject to tax on their net investment income at a rate of two percent (one percent in some cases). Sec. 4940. Private foundations also 

are subject to more restrictions on their activities than are public charities. For example, private 

foundations are prohibited from engaging in self-dealing transactions (sec. 4941), are required 

to make a minimum amount of charitable distributions each year (sec. 4942), are limited in the 

extent to which they may control a business (sec. 4943), may not make speculative investments 

(sec. 4944), and may not make certain expenditures (sec. 4945). Violations of these rules result 

in excise taxes on the foundation and, in some cases, may result in excise taxes on the managers 

category of public charity must not rely excessively on endowment 

income as a source of support.1044 A supporting organization, i.e., 

an organization that provides support to another section 501(c)(3) 

entity that is not a private foundation and meets certain other requirements of the Code, also is classified as a public charity.1045

A section 501(c)(3) organization that does not fit within any of 

the above categories is a private foundation. In general, private 

foundations receive funding from a limited number of sources (e.g., an individual, a family, or a corporation). 

The deduction for charitable contributions to private foundations 

is in some instances less generous than the deduction for charitable 

contributions to public charities. In addition, private foundations 

are subject to a number of operational rules and restrictions that 

do not apply to public charities, as well as a tax on their net investment income.1046

Excess business holdings of private foundations 

Private foundations are subject to tax on excess business holdings.1047 In general, a private foundation is permitted to hold 20 

percent of the voting stock in a corporation, reduced by the amount 

of voting stock held by all disqualified persons (as defined in section 4946). If it is established that no disqualified person has effective control of the corporation, a private foundation and disqualified persons together may own up to 35 percent of the voting stock 

of a corporation. A private foundation shall not be treated as having excess business holdings in any corporation if it owns (together 

with certain other related private foundations) not more than two 

percent of the voting stock and not more than two percent in value 

of all outstanding shares of all classes of stock in that corporation. 

Similar rules apply with respect to holdings in a partnership (substituting ‘‘profits interest’’ for ‘‘voting stock’’ and ‘‘capital interest’’ 

for ‘‘nonvoting stock’’) and to other unincorporated enterprises (by 

substituting ‘‘beneficial interest’’ for ‘‘voting stock’’). Private foundations are not permitted to have holdings in a proprietorship. Foundations generally have a five-year period to dispose of excess business holdings (acquired other than by purchase) without being subject to tax.1048 This five-year period may be extended an additional 

five years in limited circumstances.1049 The excess business holdings rules do not apply to holdings in a functionally related business or to holdings in a trade or business at least 95 percent of the 

gross income of which is derived from passive sources.1050


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The initial tax is equal to five percent of the value of the excess 

business holdings held during the foundation’s applicable taxable 

year. An additional tax is imposed if an initial tax is imposed and 

at the close of the applicable taxable period, the foundation continues to hold excess business holdings. The amount of the additional tax is equal to 200 percent of such holdings. 

REASONS FOR CHANGE

In recent years, a new type of philanthropy has combined private 

sector entrepreneurship with charitable giving, such as through the 

donation of a private company’s after-tax profits to charity. The 

Committee believes it is appropriate to encourage this form of philanthropy by eliminating certain legal impediments to its use, 

while also ensuring that private individuals cannot improperly benefit from amounts intended for a charitable purpose or inappropriately manage a taxable business. The Committee therefore believes 

it is appropriate to create an exception to the present-law private 

foundation excess business holdings rules for certain philanthropic 

business holdings. By so doing, the law will permit private philanthropists to bequeath an entire business to a private foundation, 

provided that the after-tax profits of the business will be paid to 

the foundation and certain other requirements are satisfied, while 

also ensuring that the donor’s heirs cannot improperly benefit from 

the arrangement. 

EXPLANATION OF PROVISION

The provision creates an exception to the excess business holdings rules for certain philanthropic business holdings. Specifically, 

the tax on excess business holdings does not apply with respect to 

the holdings of a private foundation in any business enterprise 

that, for the taxable year, satisfies the following requirements: (1) 

the ownership requirements; (2) the ‘‘all profits to charity’’ distribution requirement; and (3) the independent operation requirements. 

The ownership requirements are satisfied if: (1) all ownership interests in the business enterprise are held by the private foundation at all times during the taxable year; and (2) all the private 

foundation’s ownership interests in the business enterprise were 

acquired not by purchase. 

The ‘‘all profits to charity’’ distribution requirement is satisfied 

if the business enterprise, not later than 120 days after the close 

of the taxable year, distributes an amount equal to its net operating income for such taxable year to the private foundation. For 

this purpose, the net operating income of any business enterprise 

for any taxable year is an amount equal to the gross income of the 

business enterprise for the taxable year, reduced by the sum of: (1) 

the deductions allowed by chapter 1 of the Code for the taxable 

year that are directly connected with the production of the income; 

(2) the tax imposed by chapter 1 on the business enterprise for the 

taxable year; and (3) an amount for a reasonable reserve for working capital and other business needs of the business enterprise. 

The independent operation requirements are met if, at all times 

during the taxable year, the following three requirements are satisfied. First, no substantial contributor to the private foundation, or 

family member of such a contributor, is a director, officer, trustee, 

manager, employee, or contractor of the business enterprise (or an 


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1051Treas. Reg. sec. 1.501(c)(3)–1(c)(1). 1052Treas. Reg. sec. 1.501(c)(3)–1(d)(2). 1053Treas. Reg. sec. 1.501(c)(3)–1(d)(1)(ii). 1054Treas. Reg. sec. 1.501(c)(3)–1(e)(1). Conducting a certain level of unrelated trade or business activity will not jeopardize tax-exempt status. 

individual having powers or responsibilities similar to any of the 

foregoing). Second, at least a majority of the board of directors of 

the private foundation are not also directors or officers of the business enterprise or members of the family of a substantial contributor to the private foundation. Third, there is no loan outstanding 

from the business enterprise to a substantial contributor to the private foundation or a family member of such contributor. For purposes of the independent operation requirements, ‘‘substantial contributor’’ has the meaning given to the term under section 

4958(c)(3)(C), and family members are determined under section 

4958(f)(4). 

The provision does not apply to the following organizations: (1) 

donor advised funds or supporting organizations that are subject to 

the excess business holdings rules by reason of section 4943(e) or 

(f); (2) any trust described in section 4947(a)(1) (relating to charitable trusts); or (3) any trust described in section 4947(a)(2) (relating to split-interest trusts). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2017. 

C. REQUIREMENTS FOR ORGANIZATIONS EXEMPT FROM TAX

1. Section 501(c)(3) organizations permitted to make statements relating to political campaign in ordinary course of activities in carrying out exempt purpose (sec. 5201 of the bill and sec. 501 of 

the Code) 

PRESENT LAW

Section 501(c)(3) organizations 

Charitable organizations, i.e., organizations described in section 

501(c)(3), generally are exempt from Federal income tax and are eligible to receive tax deductible contributions. A charitable organization must operate primarily in pursuance of one or more tax-exempt purposes constituting the basis of its tax exemption.1051 The 

Code specifies such purposes as religious, charitable, scientific, 

testing for public safety, literary, or educational purposes, or to foster international amateur sports competition, or for the prevention 

of cruelty to children or animals.1052 In general, an organization is 

organized and operated for charitable purposes if it provides relief 

for the poor and distressed or the underprivileged. In order to qualify as operating primarily for a purpose described in section 

501(c)(3), an organization must satisfy the following operational requirements: (1) its net earnings may not inure to the benefit of any 

person in a position to influence the activities of the organization; 

(2) it must operate to provide a public benefit, not a private benefit; 1053 (3) it may not be operated primarily to conduct an unrelated trade or business; 1054 (4) it may not engage in substantial 


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1055Sec. 509(a). 1056Secs. 4940–4945. 1057Sec. 501(c)(3). 1058 Internal Revenue Code of 1954, sec. 501(c)(3), Pub. L. No. 591 (August 16, 1954). 1059Sec. 4955. 1060Sec. 6852(a)(1). 1061Sec. 7409. 

legislative lobbying; and (5) it may not participate or intervene in 

any political campaign. 

Section 501(c)(3) organizations are classified either as ‘‘public 

charities’’ or ‘‘private foundations.’’ 1055 Private foundations generally are defined under section 509(a) as all organizations described in section 501(c)(3) other than an organization granted public charity status by reason of: (1) being a specified type of organization (i.e., churches, educational institutions, hospitals and certain 

other medical organizations, certain organizations providing assistance to colleges and universities, or a governmental unit); (2) receiving a substantial part of its support from governmental units 

or direct or indirect contributions from the general public; or (3) 

providing support to another section 501(c)(3) entity that is not a 

private foundation. In contrast to public charities, private foundations generally are funded from a limited number of sources (e.g., an individual, family, or corporation). Donors to private foundations and persons related to such donors together often control the 

operations of private foundations. 

Because private foundations receive support from, and typically 

are controlled by, a small number of supporters, private foundations are subject to a number of anti-abuse rules and excise taxes 

not applicable to public charities.1056 Public charities also have certain advantages over private foundations regarding the deductibility of contributions. 

Political campaign activities 

Charitable organizations may not participate in, or intervene in 

(including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for 

public office.1057 The prohibition on such political campaign activity 

is absolute and, in general, includes activities such as making contributions to a candidate’s political campaign, endorsements of a 

candidate, lending employees to work in a political campaign, or 

providing facilities for use by a candidate. The absolute prohibition 

on campaign activities was added in 1954 by the so called ‘‘Johnson 

amendment.’’ 1058 Many other activities may constitute political 

campaign activity, depending on the facts and circumstances. The 

sanction for a violation of the prohibition is loss of the organization’s tax-exempt status. 

For organizations that engage in prohibited political campaign 

activity, the Code provides three penalties that may be applied either as alternatives to revocation of tax exemption or in addition 

to loss of tax-exempt status: an excise tax on political expenditures,1059 termination assessment of all taxes due,1060 and an injunction against further political expenditures.1061

REASONS FOR CHANGE

The Committee believes that the Johnson amendment’s prohibition on the making of candidate-related statements creates an 


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1062Sec. 170(c)(2). 1063Sec. 2522. 1064Secs. 2055 and 2106. 1065Sec. 4955. 1066 Contributions to a sponsoring organization for maintenance in a donor advised fund are 

not eligible for a charitable deduction for income tax purposes if the sponsoring organization is 

a veterans’ organization described in section 170(c)(3), a fraternal society described in section 

170(c)(4), or a cemetery company described in section 170(c)(5); for gift tax purposes if the sponsoring organization is a fraternal society described in section 2522(a)(3) or a veterans’ organization described in section 2522(a)(4); or for estate tax purposes if the sponsoring organization is 

undue chilling effect on free speech by curtailing charity employees’—including ministers’ and other religious leaders’—expression 

of their political opinions. The Committee therefore believes that 

the restriction should be modified to permit charities to engage in 

certain candidate-related speech in the course of their exempt activities in a manner that would not fundamentally change the nature of what makes them charities under the Code. 

EXPLANATION OF PROVISION

The provision modifies the present-law rules relating to political 

campaign activity by section 501(c)(3) organizations for the following purposes: (1) section 501(c)(3) tax-exempt status; (2) qualifying as an eligible recipient of tax-deductible contributions for income,1062 gift,1063 and estate tax 1064 purposes; and (3) application 

of the excise tax on political expenditures by section 501(c)(3) organizations.1065

For such purposes, an organization shall not fail to be treated as 

organized and operated exclusively for a purpose described in section 501(c)(3), nor shall it be deemed to have participated in, or intervened in any political campaign on behalf of (or in opposition to) 

any candidate for public office, solely because of the content of any 

statement that: (A) is made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt 

purpose; and (B) results in the organization incurring not more 

than de minimis incremental expenses. 

The provision does not apply to taxable years beginning after December 31, 2023. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2018. 

2. Additional reporting requirements for donor advised fund sponsoring organizations (sec. 5202 of the bill and sec. 6033 of the 

Code) 

PRESENT LAW

Overview 

Some charitable organizations (including community foundations) 

establish accounts to which donors may contribute and thereafter 

provide nonbinding advice or recommendations with regard to distributions from the fund or the investment of assets in the fund. 

Such accounts are commonly referred to as ‘‘donor advised funds.’’ 

Donors who make contributions to charities for maintenance in a 

donor advised fund generally claim a charitable contribution deduction at the time of the contribution.1066 Although sponsoring charVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00440 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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a fraternal society described in section 2055(a)(3) or a veterans’ organization described in section 

2055(a)(4). In addition, contributions to a sponsoring organization for maintenance in a donor 

advised fund are not eligible for a charitable deduction for income, gift, or estate tax purposes 

if the sponsoring organization is a Type III supporting organization (other than a functionally 

integrated Type III supporting organization). In addition to satisfying generally applicable substantiation requirements under section 170(f), a donor must obtain, with respect to each charitable contribution to a sponsoring organization to be maintained in a donor advised fund, a contemporaneous written acknowledgment from the sponsoring organization providing that the 

sponsoring organization has exclusive legal control over the assets contributed. 1067See sec. 4966(d)(2)(A). A donor advised fund does not include a fund or account that 

makes distributions only to a single identified organization or governmental entity. A donor advised fund also does not include certain funds or accounts with respect to which a donor or 

donor advisor provides advice as to which individuals receive grants for travel, study, or other 

similar purposes. In addition, the Secretary may exempt a fund or account from treatment as 

a donor advised fund if such fund or account is advised by a committee not directly or indirectly 

controlled by a donor, donor advisor, or persons related to a donor or donor advisor. The Secretary also may exempt a fund or account from treatment as a donor advised fund if such fund 

or account benefits a single identified charitable purpose. Secs. 4966(d)(2)(B) and (C). 1068Section 170(c) describes organizations to which charitable contributions that are deductible for income tax purposes can be made. 1069See sec. 170(c)(2)(A). 1070Sec. 4966(d)(1). 1071Sec. 6033(k). 

ities frequently permit donors (or other persons appointed by donors) to provide nonbinding recommendations concerning the distribution or investment of assets in a donor advised fund, sponsoring charities generally must have legal ownership and control of 

such assets following the contribution. If the sponsoring charity 

does not have such control (or permits a donor to exercise control 

over amounts contributed), the donor’s contributions may not qualify for a charitable deduction, and, in the case of a community 

foundation, the contribution may be treated as being subject to a 

material restriction or condition by the donor. 

Statutory definition of a donor advised fund 

The Code defines a ‘‘donor advised fund’’ as a fund or account 

that is: (1) separately identified by reference to contributions of a 

donor or donors; (2) owned and controlled by a sponsoring organization; and (3) with respect to which a donor (or any person appointed or designated by such donor (a ‘‘donor advisor’’)) has, or 

reasonably expects to have, advisory privileges with respect to the 

distribution or investment of amounts held in the separately identified fund or account by reason of the donor’s status as a donor. All 

three prongs of the definition must be met in order for a fund or 

account to be treated as a donor advised fund.1067

A ‘‘sponsoring organization’’ is an organization that: (1) is described in section 170(c) 1068 (other than a governmental entity described in section 170(c)(1), and without regard to any requirement 

that the organization be organized in the United States 1069); (2) is 

not a private foundation (as defined in section 509(a)); and (3) 

maintains one or more donor advised funds.1070

Reporting and disclosure 

Each sponsoring organization must disclose on its information return: (1) the total number of donor advised funds it owns; (2) the 

aggregate value of assets held in those funds at the end of the organization’s taxable year; and (3) the aggregate contributions to 

and grants made from those funds during the year.1071 In addition, 

when seeking recognition of its tax-exempt status, a sponsoring orVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00441 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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1072Sec. 508(f). 

ganization must disclose whether it intends to maintain donor advised funds.1072

REASONS FOR CHANGE

Organizations that sponsor donor advised funds are now among 

the largest charities in the United States. To better understand the 

operations of donor advised funds and to enhance public oversight 

of the tax-exempt sector, the Committee believes it is in the interest of the public and policymakers to require sponsoring organizations to report on their annual information returns additional information regarding levels of grant making from donor advised funds 

and policies implemented by the sponsoring organization relating 

to distributions from donor advised funds. 

EXPLANATION OF PROVISION

The provision requires a sponsoring organization to report additional information on its annual information return (Form 990). 

Sponsoring organizations must indicate: (1) the average amount of 

grants made from donor advised funds during the taxable year (expressed as a percentage of the value of assets held in such funds 

at the beginning of the taxable year), and (2) whether the organization has a policy with respect to donor advised funds relating to the 

frequency and minimum level of distributions from donor advised 

funds. The sponsoring organization must include with its return a 

copy of any such policy. 

EFFECTIVE DATE

The provision is effective for returns filed for taxable years beginning after December 31, 2017. 

III. VOTES OF THE COMMITTEE 

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 6, 2017. 

The vote on Mr. Doggett’s motion to postpone consideration of 

H.R. 1 was not agreed to by a roll call vote of 16 yeas to 24 nays 

(with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 6, 2017. 

The vote on the amendment offered by Mr. Brady to the amendment in the nature of a substitute to H.R. 1, which would make 

modifications to several tax provisions including administration of 

the earned income tax credit program, the exclusion from gross income for dependent care assistance, the tax on investment income 

on endowments, the tax treatment of musical compositions, stock 

option compensation, carried interest, and the rules on international base erosion, was agreed to by a roll call vote of 24 yeas 

to 16 nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. X ......... ............. Mr. Neal ................................... ......... X .............

Mr. Johnson ............................... X ......... ............. Mr. Levin .................................. ......... X .............

Mr. Nunes ................................. X ......... ............. Mr. Lewis .................................. ......... X .............

Mr. Tiberi .................................. X ......... ............. Mr. Doggett .............................. ......... X .............

Mr. Reichert .............................. X ......... ............. Mr. Thompson .......................... ......... X .............

Mr. Roskam ............................... X ......... ............. Mr. Larson ................................ ......... X .............

Mr. Buchanan ........................... X ......... ............. Mr. Blumenauer ....................... ......... X .............

Mr. Smith (NE) .......................... X ......... ............. Mr. Kind ................................... ......... X .............

Ms. Jenkins ............................... X ......... ............. Mr. Pascrell .............................. ......... X .............

Mr. Paulsen ............................... X ......... ............. Mr. Crowley .............................. ......... X .............

Mr. Marchant ............................ X ......... ............. Mr. Davis .................................. ......... X .............

Ms. Black .................................. X ......... ............. Ms. Sanchez ............................. ......... X .............

Mr. Reed ................................... X ......... ............. Mr. Higgins .............................. ......... X .............

Mr. Kelly .................................... X ......... ............. Ms. Sewell ................................ ......... X .............

Mr. Renacci ............................... X ......... ............. Ms. DelBene ............................. ......... X .............

Mr. Meehan ............................... X ......... ............. Ms. Chu .................................... ......... X .............

Ms. Noem .................................. X .........

Mr. Holding ............................... X ......... .............

Mr. Smith (MO) ......................... X ......... .............

Mr. Rice .................................... X ......... .............

Mr. Schweikert .......................... X ......... .............

Ms. Walorski ............................. X ......... .............

Mr. Curbelo ............................... X ......... .............

Mr. Bishop ................................ X ......... .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Mr. Blumenauer to the 

amendment in the nature of a substitute to H.R. 1, which would 

sunset H.R. 1 in the event the deficit increases, was not agreed to 

by a roll call vote of 16 yeas to 23 nays (with a quorum being 

present). The vote was as follows: 


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... ......... .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Mr. Pascrell to the 

amendment in the nature of a substitute to H.R. 1, which would 

strike the changes to the state and local deduction, was not agreed 

to by a roll call vote of 16 yeas to 23 nays (with a quorum being 

present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... ......... ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the ComVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00444 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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mittee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Mr. Kind to the amendment in the nature of a substitute to H.R. 1, which would repeal 

the state and local tax deduction for all business organizations, was 

not agreed to by a roll call vote of 15 yeas to 23 nays (with a 

quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... ......... ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. ......... ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Mr. Kind to the amendment in the nature of a substitute to H.R. 1, which would restore 

the Work Opportunity Tax Credit, was not agreed to by a roll call 

vote of 16 yeas to 23 nays (with a quorum being present). The vote 

was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... ......... ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Ms. Sanchez to the 

amendment in the nature of a substitute to H.R. 1, which would 

expand the Child Tax Credit and make permanent the $300 ‘‘family flexibility’’ credit, was not agreed to by a roll call vote of 16 yeas 

to 23 nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... ......... ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Mr. Davis to the amendment in the nature of a substitute to H.R. 1, which would reinstate 

the Adoption Tax Credit, the exclusion for employer-related dependent care, and the exclusion for employer-related adoption assistance and expand the Child and Dependent Care Tax Credit, 

was not agreed to by a roll call vote of 16 yeas to 23 nays (with 

a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... ......... ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Mr. Doggett to the 

amendment in the nature of a substitute to H.R. 1, which would 

include in gross income the net controlled foreign corporation income of United States shareholders in controlled foreign corporations, was not agreed to by a roll call vote of 16 yeas to 23 nays 

(with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... ......... ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 7, 2017. 

The vote on the amendment offered by Ms. Sewell to the amendment in the nature of a substitute to H.R. 1, which would provide 


rfrederick on DSKBCBPHB2PROD with HEARING
436 

a tax credit to qualified apprenticeship programs, was not agreed 

to by a roll call vote of 16 yeas to 23 nays (with a quorum being 

present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... ......... ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Larson to the amendment in the nature of a substitute to H.R. 1, which would strike 

section 1308 and raise the corporate rate, was not agreed to by a 

roll call vote of 16 yeas to 24 nays (with a quorum being present). 

The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Lewis to the amendment in the nature of a substitute to H.R. 1, which would strike 

section 5201, was not agreed to by a roll call vote of 16 yeas to 23 

nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... ......... ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Doggett to the 

amendment in the nature of a substitute to H.R. 1, which would 

restore the above-and-line deductions for interest payments on 

qualified education loans and tuition and related expenses, the exclusions for interest on United States savings bonds used to pay for 

tuition, qualified tuition reductions, and employer-provided education assistance, and reinstate the above-the-line-deduction for 

out-of-pocket teacher expenses, and expand the American Opportunity Tax Credit, was not agreed to by a roll call vote of 16 yeas 

to 24 nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Thompson to the 

amendment in the nature of a substitute to H.R. 1, which would 

retroactively extend and make permanent the exclusion from income on mortgage debt forgiveness, and repeal the limitations on 

the exclusion from capital gain on the sale of a taxpayer’s principal 

residence, with an offset, was not agreed to by a roll call vote of 

16 yeas to 24 nays (with a quorum being present). The vote was 

as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 


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The vote on the amendment offered by Ms. Chu to the amendment in the nature of a substitute to H.R. 1, which would expand 

the Earned Income Tax Credit, and provide for an offset, was not 

agreed to by a roll call vote of 16 yeas to 24 nays (with a quorum 

being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Ms. DelBene to the 

amendment in the nature of a substitute to H.R. 1, which would 

strike section 3601, and expand low income housing tax credits, 

was not agreed to by a roll call vote of 16 yeas to 24 nays (with 

a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............


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Representative Yea Nay Present Representative Yea Nay Present 

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on Mr. Nunes’ motion to table Mr. Pascrell’s appeal of 

the ruling of the Chair was agreed to by a roll call vote of 23 yeas 

to 16 nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. X ......... ............. Mr. Neal ................................... ......... X .............

Mr. Johnson ............................... X ......... ............. Mr. Levin .................................. ......... X .............

Mr. Nunes ................................. X ......... ............. Mr. Lewis .................................. ......... X .............

Mr. Tiberi .................................. X ......... ............. Mr. Doggett .............................. ......... X .............

Mr. Reichert .............................. X ......... ............. Mr. Thompson .......................... ......... X .............

Mr. Roskam ............................... X ......... ............. Mr. Larson ................................ ......... X .............

Mr. Buchanan ........................... X ......... ............. Mr. Blumenauer ....................... ......... X .............

Mr. Smith (NE) .......................... X ......... ............. Mr. Kind ................................... ......... X .............

Ms. Jenkins ............................... X ......... ............. Mr. Pascrell .............................. ......... X .............

Mr. Paulsen ............................... X ......... ............. Mr. Crowley .............................. ......... X .............

Mr. Marchant ............................ X ......... ............. Mr. Davis .................................. ......... X .............

Ms. Black .................................. X ......... ............. Ms. Sanchez ............................. ......... X .............

Mr. Reed ................................... X ......... ............. Mr. Higgins .............................. ......... X .............

Mr. Kelly .................................... X ......... ............. Ms. Sewell ................................ ......... X .............

Mr. Renacci ............................... X ......... ............. Ms. DelBene ............................. ......... X .............

Mr. Meehan ............................... X ......... ............. Ms. Chu .................................... ......... X .............

Ms. Noem .................................. X ......... .............

Mr. Holding ............................... X ......... .............

Mr. Smith (MO) ......................... ......... ......... .............

Mr. Rice .................................... X ......... .............

Mr. Schweikert .......................... X ......... .............

Ms. Walorski ............................. X ......... .............

Mr. Curbelo ............................... X ......... .............

Mr. Bishop ................................ X ......... .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Ms. Sewell to the amendment in the nature of a substitute to H.R. 1, which would strike 

section 3602, was not agreed to by a roll call vote of 16 yeas to 24 

nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Crowley to the 

amendment in the nature of a substitute to H.R. 1, which would 

restore the expired credit in section 36, add a new credit for renters 

purchasing their first home, and provide a credit for taxpayers who 

rent their homes and for whom their rent exceeds 30 percent of 

their income, was not agreed to by a roll call vote of 16 yeas to 24 

nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ X ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Pascrell to the 

amendment in the nature of a substitute to H.R. 1, which would 

add a new title relating to disaster tax relief, was not agreed to by 

a roll call vote of 15 yeas to 24 nays (with a quorum being present). 

The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .................................. ......... X ............. Mr. Neal ................................... X ......... .............


rfrederick on DSKBCBPHB2PROD with HEARING
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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Johnson ............................... ......... X ............. Mr. Levin .................................. X ......... .............

Mr. Nunes ................................. ......... X ............. Mr. Lewis .................................. X ......... .............

Mr. Tiberi .................................. ......... X ............. Mr. Doggett .............................. X ......... .............

Mr. Reichert .............................. ......... X ............. Mr. Thompson .......................... X ......... .............

Mr. Roskam ............................... ......... X ............. Mr. Larson ................................ ......... ......... .............

Mr. Buchanan ........................... ......... X ............. Mr. Blumenauer ....................... X ......... .............

Mr. Smith (NE) .......................... ......... X ............. Mr. Kind ................................... X ......... .............

Ms. Jenkins ............................... ......... X ............. Mr. Pascrell .............................. X ......... .............

Mr. Paulsen ............................... ......... X ............. Mr. Crowley .............................. X ......... .............

Mr. Marchant ............................ ......... X ............. Mr. Davis .................................. X ......... .............

Ms. Black .................................. ......... X ............. Ms. Sanchez ............................. X ......... .............

Mr. Reed ................................... ......... X ............. Mr. Higgins .............................. X ......... .............

Mr. Kelly .................................... ......... X ............. Ms. Sewell ................................ X ......... .............

Mr. Renacci ............................... ......... X ............. Ms. DelBene ............................. X ......... .............

Mr. Meehan ............................... ......... X ............. Ms. Chu .................................... X ......... .............

Ms. Noem .................................. ......... X .............

Mr. Holding ............................... ......... X .............

Mr. Smith (MO) ......................... ......... X .............

Mr. Rice .................................... ......... X .............

Mr. Schweikert .......................... ......... X .............

Ms. Walorski ............................. ......... X .............

Mr. Curbelo ............................... ......... X .............

Mr. Bishop ................................ ......... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Ms. DelBene to the 

amendment in the nature of a substitute to H.R. 1, which would 

prevent the High Cost Plan Excise Tax from going into effect as 

scheduled, was not agreed to by a roll call vote of 16 yeas to 24 

nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... X ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... X ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... X ........... .............

Mr. Marchant ........................ ........... X ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the ComVerDate Sep 11 2014 13:15 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00454 Fmt 6659 Sfmt 6602 E:\HR\OC\HR409.XXX HR409

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443 

mittee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on Mr. Reichert’s motion to table Mr. Higgins’ appeal 

of the ruling of the Chair was agreed to by a roll call vote of 22 

yeas to 16 nays (with a quorum being present). The vote was as 

follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Nunes ............................. X ........... ............. Mr. Lewis .............................. ........... X .............

Mr. Tiberi .............................. X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. Reichert .......................... X ........... ............. Mr. Thompson ...................... ........... X .............

Mr. Roskam ........................... X ........... ............. Mr. Larson ............................ ........... X .............

Mr. Buchanan ....................... ........... ........... ............. Mr. Blumenauer ................... ........... X .............

Mr. Smith (NE) ...................... X ........... ............. Mr. Kind ............................... ........... X .............

Ms. Jenkins ........................... X ........... ............. Mr. Pascrell .......................... ........... X .............

Mr. Paulsen ........................... X ........... ............. Mr. Crowley .......................... ........... X .............

Mr. Marchant ........................ X ........... ............. Mr. Davis .............................. ........... X .............

Ms. Black .............................. X ........... ............. Ms. Sanchez ......................... ........... X .............

Mr. Reed ............................... X ........... ............. Mr. Higgins .......................... ........... X .............

Mr. Kelly ................................ X ........... ............. Ms. Sewell ............................ ........... X .............

Mr. Renacci ........................... X ........... ............. Ms. DelBene ......................... ........... X .............

Mr. Meehan ........................... X ........... ............. Ms. Chu ................................ ........... X .............

Ms. Noem .............................. X ........... .............

Mr. Holding ........................... X ........... .............

Mr. Smith (MO) ..................... X ........... .............

Mr. Rice ................................ ........... ........... .............

Mr. Schweikert ...................... X ........... .............

Ms. Walorski ......................... X ........... .............

Mr. Curbelo ........................... X ........... .............

Mr. Bishop ............................ X ........... .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Doggett to the 

amendment in the nature of a substitute to H.R. 1, which would 

strike the repeal of the Alternative Minimum Tax, was not agreed 

to by a roll call vote of 16 yeas to 24 nays (with a quorum being 

present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... X ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... X ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... X ........... .............

Mr. Marchant ........................ ........... X ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Levin to the amendment in the nature of a substitute to H.R. 1, which would provide 

a different method of taxing carried interest compensation as ordinary income, was not agreed to by a roll call vote of 16 yeas to 24 

nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... X ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... X ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... X ........... .............

Mr. Marchant ........................ ........... X ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 8, 2017. 

The vote on the amendment offered by Mr. Lewis to the amendment in the nature of a substitute to H.R. 1, which would delay the 

effective date of all revenue-reducing provisions until the United 

States withdraws from current wars in Afghanistan, Iraq, and 

Syria, and the deficit is zero, was not agreed to by a roll call vote 

of 16 yeas to 24 nays (with a quorum being present). The vote was 

as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... X ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... X ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... X ........... .............

Mr. Marchant ........................ ........... X ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 9, 2017. 

The vote on the amendment offered by Mr. Blumenauer to the 

amendment in the nature of a substitute to H.R. 1, which would 

maintain the wind energy production tax credit as under current 

law, was not agreed to by a roll call vote of 15 yeas to 22 nays 

(with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... ........... ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... X ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... ........... ........... .............

Mr. Marchant ........................ ........... ........... ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 9, 2017. 

The vote on the amendment offered by Ms. Chu to the amendment in the nature of a substitute to H.R. 1, which would strike 

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ping Transfer Taxes, was not agreed to by a roll call vote of 14 yeas 

to 24 nays (with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... X ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... ........... ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... ........... ........... .............

Mr. Marchant ........................ ........... X ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 9, 2017. 

The vote on the amendment offered by Mr. Kind to the amendment in the nature of a substitute to H.R. 1, which would create 

a tax deduction for domestic production in excess of current Section 

199, was not agreed to by a roll call vote of 16 yeas to 24 nays 

(with a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... X ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... X ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... X ........... .............

Mr. Marchant ........................ ........... X ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............


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In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 9, 2017. 

The vote on the amendment offered by Mr. Pascrell to the 

amendment in the nature of a substitute to H.R. 1, which would 

require the disclosure to the Ways and Means Committee of the income tax returns of the President, was not agreed to by a roll call 

vote of 16 yeas to 24 nays (with a quorum being present). The vote 

was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Nunes ............................. ........... X ............. Mr. Lewis .............................. X ........... .............

Mr. Tiberi .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Reichert .......................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Roskam ........................... ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Buchanan ....................... ........... X ............. Mr. Blumenauer ................... X ........... .............

Mr. Smith (NE) ...................... ........... X ............. Mr. Kind ............................... X ........... .............

Ms. Jenkins ........................... ........... X ............. Mr. Pascrell .......................... X ........... .............

Mr. Paulsen ........................... ........... X ............. Mr. Crowley .......................... X ........... .............

Mr. Marchant ........................ ........... X ............. Mr. Davis .............................. X ........... .............

Ms. Black .............................. ........... X ............. Ms. Sanchez ......................... X ........... .............

Mr. Reed ............................... ........... X ............. Mr. Higgins .......................... X ........... .............

Mr. Kelly ................................ ........... X ............. Ms. Sewell ............................ X ........... .............

Mr. Renacci ........................... ........... X ............. Ms. DelBene ......................... X ........... .............

Mr. Meehan ........................... ........... X ............. Ms. Chu ................................ X ........... .............

Ms. Noem .............................. ........... X .............

Mr. Holding ........................... ........... X .............

Mr. Smith (MO) ..................... ........... X .............

Mr. Rice ................................ ........... X .............

Mr. Schweikert ...................... ........... X .............

Ms. Walorski ......................... ........... X .............

Mr. Curbelo ........................... ........... X .............

Mr. Bishop ............................ ........... X .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 9, 2017. 

The vote on the amendment offered by Mr. Brady to the amendment in the nature of a substitute to H.R. 1, which would make 

improvements relating to the maximum rate on business income of 

individuals, preserve the adoption tax credit, improve the program 

integrity of the Child Tax Credit, improve the consolidation of education savings rules, preserve the above-the-line deduction for moving expenses of a member of the Armed Forces on active duty, preserve the current law effective tax rates on C corporation dividends 

subject to the dividends received deduction, improve interest expense rules with respect to accrued interest on floor plan financing 

indebtedness, modify the treatment of S corporation conversions 

into C corporations, modify the tax treatment of research and experimentation expenditures, modify the treatment of expenses in 

contingent fee cases, modify the transition rules on the treatment 

of deferred foreign income, improve the excise tax on investment 

income of private colleges and universities, and modify rules with 

respect to political statements made by certain tax-exempt entities, 

was agreed to by a roll call vote of 24 yeas to 16 nays (with a 

quorum being present). The vote was as follows: 


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Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Nunes ............................. X ........... ............. Mr. Lewis .............................. ........... X .............

Mr. Tiberi .............................. X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. Reichert .......................... X ........... ............. Mr. Thompson ...................... ........... X .............

Mr. Roskam ........................... X ........... ............. Mr. Larson ............................ ........... X .............

Mr. Buchanan ....................... X ........... ............. Mr. Blumenauer ................... ........... X .............

Mr. Smith (NE) ...................... X ........... ............. Mr. Kind ............................... ........... X .............

Ms. Jenkins ........................... X ........... ............. Mr. Pascrell .......................... ........... X .............

Mr. Paulsen ........................... X ........... ............. Mr. Crowley .......................... ........... X .............

Mr. Marchant ........................ X ........... ............. Mr. Davis .............................. ........... X .............

Ms. Black .............................. X ........... ............. Ms. Sanchez ......................... ........... X .............

Mr. Reed ............................... X ........... ............. Mr. Higgins .......................... ........... X .............

Mr. Kelly ................................ X ........... ............. Ms. Sewell ............................ ........... X .............

Mr. Renacci ........................... X ........... ............. Ms. DelBene ......................... ........... X .............

Mr. Meehan ........................... X ........... ............. Ms. Chu ................................ ........... X .............

Ms. Noem .............................. X ........... .............

Mr. Holding ........................... X ........... .............

Mr. Smith (MO) ..................... X ........... .............

Mr. Rice ................................ X ........... .............

Mr. Schweikert ...................... X ........... .............

Ms. Walorski ......................... X ........... .............

Mr. Curbelo ........................... X ........... .............

Mr. Bishop ............................ X ........... .............

In compliance with the Rules of the House of Representatives, 

the following statement is made concerning the vote of the Committee on Ways and Means during the markup consideration of 

H.R. 1, ‘‘Tax Cuts and Jobs Act,’’ on November 9, 2017. 

H.R. 1 was ordered favorably reported to the House of Representatives as amended by a roll call vote of 24 yeas to 16 nays (with 

a quorum being present). The vote was as follows: 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Brady .............................. X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Nunes ............................. X ........... ............. Mr. Lewis .............................. ........... X .............

Mr. Tiberi .............................. X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. Reichert .......................... X ........... ............. Mr. Thompson ...................... ........... X .............

Mr. Roskam ........................... X ........... ............. Mr. Larson ............................ ........... X .............

Mr. Buchanan ....................... X ........... ............. Mr. Blumenauer ................... ........... X .............

Mr. Smith (NE) ...................... X ........... ............. Mr. Kind ............................... ........... X .............

Ms. Jenkins ........................... X ........... ............. Mr. Pascrell .......................... ........... X .............

Mr. Paulsen ........................... X ........... ............. Mr. Crowley .......................... ........... X .............

Mr. Marchant ........................ X ........... ............. Mr. Davis .............................. ........... X .............

Ms. Black .............................. X ........... ............. Ms. Sanchez ......................... ........... X .............

Mr. Reed ............................... X ........... ............. Mr. Higgins .......................... ........... X .............

Mr. Kelly ................................ X ........... ............. Ms. Sewell ............................ ........... X .............

Mr. Renacci ........................... X ........... ............. Ms. DelBene ......................... ........... X .............

Mr. Meehan ........................... X ........... ............. Ms. Chu ................................ ........... X .............

Ms. Noem .............................. X ........... .............

Mr. Holding ........................... X ........... .............

Mr. Smith (MO) ..................... X ........... .............

Mr. Rice ................................ X ........... .............

Mr. Schweikert ...................... X ........... .............

Ms. Walorski ......................... X ........... .............

Mr. Curbelo ........................... X ........... .............

Mr. Bishop ............................ X ........... .............


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IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d) of rule XIII of the Rules of the 

House of Representatives, the following statement is made concerning the effects on the budget of the bill, H.R. 1, as reported. 

The bill, as reported, is estimated to have the following effect on 

Federal fiscal year budget receipts for the period 2018–2027: 


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Clause 8 of rule XIII of the Rules of the House of Representatives 

requires that an estimate provided by the Joint Committee on Taxation to the Director of the Congressional Budget Office under section 201(f) of the Congressional Budget Act of 1974 for any major 

legislation shall, to the extent practicable, incorporate the budgetary effects of changes in economic output, employment, capital 

stock, and other macroeconomic variables resulting from such legislation. Major legislation is defined as legislation having a gross 

budgetary effect (before incorporating macroeconomic effects) that 

is greater in any fiscal year than 0.25 percent of the current projected gross domestic product of the United States for that fiscal 

year. The bill meets this definition of major legislation. 

The staff of the Joint Committee on Taxation is currently analyzing changes in economic output, employment, capital stock, and 

other macroeconomic variables resulting from the bill for purposes 

of determining these budgetary effects. However, it was not practicable to complete this analysis, which requires accounting for the 

effects of each provision in this bill, along with interactions between these provisions, by the filing of this report. 

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue-reducing provisions of the bill include 

increased tax expenditures. 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, requiring a cost estimate prepared by 

the CBO, the following statement by CBO is provided. 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, November 13, 2017. 

Hon. KEVIN BRADY, 

Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 1, a bill to provide for reconciliation pursuant to titles II and V of the Concurrent Resolution 

on the Budget for Fiscal Year 2018. It contains the revenue estimates prepared by the staff of the Joint Committee on Taxation. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Cecilia Pastrone. 

Sincerely, 

KEITH HALL, 

Director. 

Enclosure. 


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H.R. 1—A bill to provide for reconciliation pursuant to titles II and 

V of the Concurrent Resolution on the Budget for Fiscal Year 

2018 

Summary: H.R. 1, the Tax Cuts and Jobs Act, would amend numerous provisions of U.S. tax law. The bill would modify the individual income tax brackets and tax rates in effect under current 

law. The bill also would increase the standard deduction and the 

child tax credit. Deductions for personal exemptions and certain 

itemized deductions would be repealed, along with the individual 

and corporate alternative minimum tax (AMT) and, starting in 

2025, the estate tax. H.R. 1 would replace the structure of corporate income tax rates, which has a top rate of 35 percent under 

current law, with a single 20 percent rate, and would establish a 

maximum tax rate of 25 percent for qualified business income of 

an individual from certain pass-through entities. Among other 

changes, the bill would also substantially alter the current system 

under which U.S. corporations are subject to taxation on their 

worldwide income. 

The staff of the Joint Committee on Taxation (JCT) estimates 

that enacting the bill would reduce revenues by about $1,438 billion over the 2018–2027 period, and decrease outlays by $2 billion 

over the same period, leading to an increase in the deficit of $1,437 

billion over the next 10 years. A portion of the changes in revenues 

would be from Social Security payroll taxes, which are off-budget. 

Excluding the estimated $19 billion increase in off-budget revenues 

over the next 10 years, JCT estimates that H.R. 1 would increase 

on-budget deficits by about $1,456 billion over the period from 2018 

to 2027. Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues. 

JCT estimates that enacting the legislation would not increase 

net direct spending by more than $2.5 billion in any of the four 

consecutive 10-year periods beginning in 2028. 

Because of the magnitude of the estimated budgetary effects, this 

bill is considered to be ‘‘major legislation,’’ as defined in section 

5107 of H. Con. Res. 71, the Concurrent Resolution on the Budget 

for Fiscal Year 2018. Hence, it triggers the requirement that the 

cost estimate, to the extent practicable, include the budgetary impact of its macroeconomic effects. The staff of the Joint Committee 

on Taxation is currently analyzing changes in economic output, employment, capital stock, and other macroeconomic variables resulting from the bill for purposes of determining these budgetary effects. However, JCT indicates it is not practicable for a macroeconomic analysis to incorporate the full effects of all of the provisions in the bill, including interactions between these provisions, 

within the very short time available between completion of the bill 

and the filing of the committee report. 

JCT has determined that the tax provisions of the bill contain no 

intergovernmental or private sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). 

Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 1 is shown in the following table. 


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BASIS OF ESTIMATE

Revenues and direct spending 

The Congressional Budget Act of 1974, as amended, stipulates 

that revenue estimates provided by the staff of the Joint Committee on Taxation will be the official estimates for all tax legislation considered by the Congress. As such, CBO incorporates those 

estimates into its cost estimates of the effects of legislation. Virtually all of the estimates for the provisions of H.R. 1 were provided by JCT. The date of enactment is generally assumed to be 

December 1, 2017. 

JCT estimates that, together, the provisions contained in H.R. 1 would decrease federal revenues on net by about $118 billion in 

2018, by $937 billion over the period from 2018 to 2022, and by 

$1,438 billion over the period from 2018 to 2027. Net outlays would 

decrease by $9 billion in 2018, increase by $13 billion from 2018 

to 2022, and decrease by $2 billion over the period from 2018 to 

2027. On net, deficits would increase by $108 billion in 2018, by 

$950 billion from 2018 to 2022, and by $1,437 billion from 2018 to 

2027. A portion of those effects reflect changes to revenues from Social Security taxes, which are off-budget. Over the 2018 to 2027 period, the bill would increase on-budget deficits by $1,456 billion and 

reduce off-budget deficits by $19 billion, as estimated by JCT. 


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By fiscal year, in billions of dollars— 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018–2022 2018–2027 

CHANGES IN REVENUES 

Tax Reform for Individuals ................................................................... ¥64.2 ¥134.3 ¥124.5 ¥123.8 ¥123.3 ¥88.9 ¥69.1 ¥70.4 ¥88.8 ¥88.4 ¥569.6 ¥975.9 

Business Tax Reform ............................................................................ ¥124.3 ¥129.3 ¥116.3 ¥101.6 ¥89.0 ¥24.8 2.4 ¥27.0 ¥55.0 ¥80.4 ¥560.4 ¥744.5 

Taxation of Foreign Income and Foreign Persons ................................ 70.7 42.2 24.4 27.2 27.6 28.6 28.3 28.1 10.4 ¥7.2 191.9 279.3 Exempt Organizations ........................................................................... 0.3 0.4 * 0.1 0.2 0.2 0.5 0.5 0.5 0.5 1.1 2.7 

Total Estimated Changes in Revenues ....................................... ¥117.6 ¥221.0 ¥216.5 ¥198.2 ¥184.5 ¥84.9 ¥37.9 ¥68.8 ¥132.9 ¥175.4 ¥937.1 ¥1,438.4 

On-Budget .......................................................................... ¥116.7 ¥220.6 ¥216.3 ¥198.2 ¥185.0 ¥88.8 ¥43.0 ¥73.0 ¥136.6 ¥178.7 ¥936.0 ¥1,457.7 

Off-Budget a ........................................................................ ¥0.9 ¥0.4 ¥0.2 * 0.5 3.9 5.1 4.2 3.7 3.3 ¥1.1 19.3 

CHANGES IN DIRECT SPENDING 

Tax Reform for Individuals: 

Estimated Budget Authority ........................................................ ¥11.7 3.6 3.4 3.1 2.5 3.5 ¥3.4 ¥4.3 ¥4.8 ¥4.2 1.6 ¥12.2 

Estimated Outlays ....................................................................... ¥11.7 3.6 3.4 3.1 2.5 3.5 ¥3.4 ¥4.3 ¥4.8 ¥4.2 1.6 ¥12.2 

Business Tax Reform: 

Estimated Budget Authority ........................................................ 2.2 2.3 1.7 1.9 1.8 ¥0.1 ¥0.1 ¥0.1 ¥0.1 ¥0.1 10.1 9.7 

Estimated Outlays ....................................................................... 2.2 2.3 1.7 1.9 1.8 ¥0.1 ¥0.1 ¥0.1 ¥0.1 ¥0.1 10.1 9.7 

Taxation of Foreign Income and Foreign Persons: 

Estimated Budget Authority ........................................................ 0.3 0.1 0.1 0.1 0.1 * 0 0 0 0 0.8 0.9 Estimated Outlays ....................................................................... 0.3 0.1 0.1 0.1 0.1 * 0 0 0 0 0.8 0.9 Total Changes in Direct Spending 

Estimated Budget Authority ............................................... ¥9.2 6.0 5.2 5.1 4.4 3.4 ¥3.5 ¥4.4 ¥4.9 ¥4.3 12.5 ¥1.6 

Estimated Outlays .............................................................. ¥9.2 6.0 5.2 5.1 4.4 3.4 ¥3.5 ¥4.4 ¥4.9 ¥4.3 12.5 ¥1.6 

NET INCREASE OR DECREASE (¥) IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES 

Impact on Deficit ................................................................................. 108.4 227.0 221.7 203.3 188.9 88.3 34.4 64.4 128.0 171.1 949.6 1,436.8 

On-Budget Deficit ............................................................... 107.5 226.6 221.5 203.3 189.4 92.2 39.5 68.6 131.7 174.4 948.5 1,456.1 Off-Budget Deficit .............................................................. 0.9 0.4 0.2 * ¥0.5 ¥3.9 ¥5.1 ¥4.2 ¥3.7 ¥3.3 1.1 ¥19.3 

Source: Staff of the Joint Committee on Taxation. Note: Components may not add to totals due to rounding; * = between ¥$50 million and $50 million. a. Off-budget revenues result from changes in Social Security payroll tax receipts. 


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Tax Reform for Individuals. H.R. 1 would make numerous 

changes to tax law pertaining to individuals. Provisions in this section include all of those in Title I of the bill and the part of Title 

II pertaining to the individual alternative minimum tax. Such provisions estimated to reduce revenues over the 2018 to 2027 period 

include the following changes, which would take effect in 2018 unless otherwise noted: • Establish four brackets instead of the seven in place under 

current law, with tax rates of 12 percent, 25 percent, 35 percent, and 39.6 percent, plus a phase out of the 12 percent tax 

bracket for taxpayers with taxable income above $1 million 

($1.2 million for joint filers); • Increase the standard deduction; • Repeal the alternative minimum tax on individuals; • Establish a maximum tax rate of 25 percent for qualified 

business income of an individual from certain pass-through entities, namely partnerships, S corporations, and sole proprietorships; • Increase the child tax credit, which would be consolidated 

into a new family tax credit that would also include a temporary $300 credit for each taxpayer (including both spouses 

for joint filers) and nonchild dependents; and • Double the exemption amount allowed under estate and 

gift taxes, and, starting in 2025, repeal the estate tax and the 

generation-skipping transfer tax. 

Provisions estimated to increase revenues over the 2018 to 2027 

period include the following changes: • Repeal deductions for personal exemptions; • Repeal and limit certain itemized deductions, including repealing the deductions for state and local income and sales 

taxes, limiting the deduction for real property taxes, and limiting the deductions for mortgage interest; and • Index tax parameters by the chained consumer price index 

instead of the traditional consumer price index. 

JCT estimates that the individual tax provisions would, on net, 

reduce revenues by $976 billion from 2018 to 2027. In addition, the 

provisions would affect outlays for refundable tax credits, decreasing them by an estimated $12 billion over the 2018 to 2027 period. 

Some of the provisions in this section would affect off-budget revenues, increasing them by $15 billion over the period from 2018 to 

2027, JCT estimates. On-budget revenues would decrease by an estimated $991 billion. 

The largest revenue reductions would result from the provision 

to establish a new income tax rate and bracket structure, which 

JCT estimates would reduce revenues by $1,104 billion over the period from 2018 to 2027 and reduce outlays for refundable tax credits by $15 billion over the same period. In addition, the increase 

in the standard deduction would reduce revenues by $819 billion 

over the period from 2018 to 2027 and increase outlays for refundable tax credits by $103 billion over the same period, according to 

JCT’s estimates. The repeal of the alternative minimum tax on individuals would reduce revenues by $696 billion from 2018 to 2027. 

JCT also estimates that the provisions providing a maximum tax 

rate for pass-through entities would reduce revenues by $597 billion over the period from 2018 to 2027, and that modifications to 


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the child tax credit and the new family tax credit would, over the 

same 10-year period, reduce revenues by $504 billion and increase 

outlays for refundable tax credits by $136 billion. JCT estimates 

that additional revenue reductions, totaling $151 billion from 2018 

to 2027, would result from the modifications to estate and gift 

taxes. 

The largest revenue increases would result from the provision to 

repeal deductions for personal exemptions, which JCT estimates 

would increase revenues by $1,383 billion and reduce outlays for 

refundable credits by $179 billion over the 2018 to 2027 period. In 

addition, JCT estimates that the repeal and limitation of certain 

itemized deductions would increase revenues by $1,258 billion and 

reduce outlays for refundable credits by $4 billion from 2018 to 

2027. The change in the inflation measure used to index tax parameters would increase revenues by $109 billion and reduce outlays for refundable credits by $19 billion over the 2018 to 2027 period, according to JCT estimates. 

Business Tax Reform. The bill would make many changes to 

business taxes. Provisions in this section include all of Title III and 

the part of Title II pertaining to the corporate alternative minimum tax. The ones with the largest effects on revenues, as estimated by JCT, are the following: 

• Replace with a single 20 percent rate the graduated structure of income tax rates for corporations under current law 

that has a top rate of 35 percent; 

• Limit the amount of deductions for net interest expenses 

to the sum of business interest income and 30 percent of an adjusted measure of taxable income; and 

• Limit the deduction for past net operating losses to 90 percent of current taxable income and generally repeal the twoyear period over which losses may be carried back to previous 

tax years. 

JCT estimates that the business tax provisions would, on net, reduce revenues by $745 billion from 2018 to 2027. In addition, the 

provisions would increase outlays for refundable tax credits by an 

estimated $10 billion over the 2018 to 2027 period. 

JCT estimates that the modifications to the corporate tax rate 

structure, including reducing the top tax rate from 35 percent that 

is assessed on most taxable income to a 20 percent rate that would 

apply to all amounts of taxable income, would reduce revenues by 

$1,456 billion over the 2018–2027 period. JCT further estimates 

that limiting the deductions for interest expenses would increase 

revenues by $172 billion over the same 10-year period. In addition, 

limiting the use of net operating losses would raise revenues by 

$156 billion over the period from 2018 to 2027. 

Other changes to business taxes, including the following ones, 

would increase revenues, on net, according to JCT: 

• Requiring that certain research or experimental expenditures be amortized over a five-year period or longer, starting 

in 2023, would increase revenues by $109 billion over the period from 2023 to 2027. 

• Repealing the deduction for income attributable to domestic production activities would increase revenues by $95 billion 

over the 2018 to 2027 period; 


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• Repealing the tax credit for clinical testing expenses for 

certain drugs for rare diseases or conditions would increase 

revenues by $54 billion over the same period; and • Terminating private activity bonds would increase reve- nues by $39 billion over the next 10 years. 

Those increases in revenues would be partially offset by the repeal of the alternative minimum tax on corporations, which JCT 

estimates would reduce revenues by $30 billion from 2018 to 2027 

and increase outlays for refundable credits by $10 billion over the 

same period. 

Taxation of Foreign Income and Foreign Persons. Changes to 

taxes pertaining to foreign income and foreign persons are contained in Title IV of H.R. 1. The bill would substantially modify the 

current system under which U.S. corporations are subject to taxation on their worldwide income, generally including foreign earnings in taxable income when paid to them as dividends by their foreign subsidiaries and with an allowance for tax credits for certain 

foreign taxes paid. The system under H.R. 1 would provide an exemption for dividends paid by a foreign corporation to its U.S. parent, with no foreign tax credits allowed for taxes paid on the 

amount of such dividends. A number of other changes would also 

be implemented by Title IV. 

The provisions in Title IV with the largest estimated effects on 

revenues are the following: • Require that certain untaxed foreign income of U.S. corporations be deemed to be immediately paid to them as dividends and included in taxable income, subject to taxation at a 

14 percent rate (or 7 percent for certain illiquid assets), and 

with an option to spread the resulting tax amounts equally 

over an eight-year period; • Provide a deduction for the foreign-source portion of dividends received by domestic corporations from certain foreign 

corporations; • Impose an excise tax of 20 percent on certain payments to 

related foreign corporations; and 

• Require that U.S. corporations include in taxable income a 

portion of a specified high income amount earned by their foreign subsidiaries. 

JCT estimates that the provisions related to foreign taxation 

would, on net, increase revenues by $279 billion from 2018 to 2027. 

The provisions would also increase outlays by $1 billion over the 

2018 to 2027 period, resulting from an extension of certain payments to Puerto Rico and the Virgin Islands of rum excise taxes, 

as estimated by CBO. 

JCT estimates that the deduction for dividends received from foreign corporations would reduce revenues by $205 billion over the 

2018–2027 period. Other provisions would result in revenue increases from 2018 to 2027 as estimated by JCT: requiring a 

deemed repatriation of untaxed foreign income ($293 billion); imposing an excise tax on certain payments ($95 billion); and requiring the inclusion in taxable income of certain foreign earned high 

returns ($68 billion). The additional revenue from the provision regarding deemed repatriations would be concentrated earlier in the 

ten-year period: it would increase revenues by an estimated $79 

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lion per year from 2020 through 2025, and $9 billion in 2026, before resulting in a reduction in revenue of $8 billion in 2027. 

Exempt Organizations. Title V of H.R. 1 would make several 

changes to the tax treatment of tax-exempt organizations. Those 

changes include the following: imposing an excise tax based on the 

investment income of private colleges and universities; revising the 

unrelated business income tax; and modifying restrictions on political campaign activity for certain tax-exempt organizations. JCT estimates that the changes from Title V would, on net, increase revenues by $0.5 billion or less in each year of the 2018 to 2027 period, 

for a total increase of $3 billion over the 10-year period. No single 

provision would have an effect of greater than $0.5 billion in any 

year, according to JCT estimates. 

Pay-As-You-Go considerations: The Statutory Pay-As-You-Go Act 

of 2010 establishes budget-reporting and enforcement procedures 

for legislation affecting direct spending or revenues. The net 

changes in outlays and revenues that are subject to those pay-asyou-go procedures are shown in the following table. Only on-budget 

changes to outlays or revenues are subject to pay-as-you-go procedures. 


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CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 1, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 9, 2017 

By fiscal year, in billions of dollars— 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018–2022 2018–2027 

NET INCREASE OR DECREASE (¥) IN THE ON-BUDGET DEFICIT 

Statutory Pay-As-You-Go Effects .............................................................................. 107.5 226.6 221.5 203.3 189.4 92.2 39.5 68.6 131.7 174.4 948.5 1,456.1 Memorandum: a

Change in Outlays ........................................................................................... ¥9.2 6.0 5.2 5.1 4.4 3.4 ¥3.5 ¥4.4 ¥4.9 ¥4.3 12.5 ¥1.6 

Change in On-Budget Revenues ..................................................................... 116.7 ¥220.6 ¥216.3 ¥198.2 ¥185.0 ¥88.8 ¥43.0 ¥73.0 ¥136.6 ¥178.7 ¥936.0 ¥1,457.7 

Source: Staff of the Joint Committee on Taxation. a A positive sign for outlays indicates an increase in outlays. A negative sign for revenues indicates a reduction in revenues. 

Note: Components do not add to totals due to rounding. 


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Increase in long term direct spending: JCT estimates that enacting the legislation would not increase net direct spending by more 

than $2.5 billion in any of the four consecutive 10-year periods beginning in 2028. 

Mandates: JCT has determined that H.R. 1 contains no privatesector or intergovernmental mandates as defined by UMRA. 

Estimate prepared by: Staff of the Joint Committee on Taxation 

and Cecilia Pastrone from the Congressional Budget Office. 

Estimate approved by: John McClelland, Assistant Director for 

Tax Analysis. 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives, the Committee made findings and recommendations that are reflected in this report. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

C. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

D. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Restructuring 

and Reform Act of 1998 (‘‘IRS Reform Act’’) requires the staff of the 

Joint Committee on Taxation (in consultation with the Internal 

Revenue Service and the Treasury Department) to provide a tax 

complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue Code of 1986 and has widespread applicability to individuals or small businesses. 

Pursuant to clause 3(h)(1) of rule XIII of the Rules of the House 

of Representatives, for each such provision identified by the staff 

of the Joint Committee on Taxation, a summary description of the 

provision is provided below along with an estimate of the number 

and type of affected taxpayers, and a discussion regarding the relevant complexity and administrative issues. 

Following the analysis of the staff of the Joint Committee on 

Taxation are the comments of the IRS and Treasury regarding each 

provision included in the complexity analysis. 


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1. Simplification of rates, standard deduction, personal exemption 

(secs. 1001, 1002, 1003 and 1004 of the bill) 

Summary description of the provisions 

The bill changes the structure of the individual income tax by 

modifying the rate structure such that there are only four tax 

brackets (12-percent, 25-percent, 35-percent and 39.6-percent), significantly increasing the size of the standard deduction (for 2018 

the standard deduction is $24,400 for joint filers, $18,300 for heads 

of household and $12,200 for other filers), and eliminating personal 

exemptions. 

Number of affected taxpayers 

It is estimated that the provision will affect approximately 120 

million tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional 

records due to these provisions. It should not result in an increase 

in disputes with the IRS, nor will regulatory guidance be necessary 

to implement this provision. 

The IRS will need to adjust its wage withholding tables to reflect 

the repeal of personal exemptions. Because revised wage withholding will occur within the first month of 2018, this would require employers to switch to new withholding tables somewhat 

quickly, which can be expected to result in a one-time additional 

burden for employers (or potential additional costs for employers 

that rely on a bookkeeping or payroll service). 

Some taxpayers who currently itemize deductions may respond to 

the provision by claiming the increased standard deduction in lieu 

of itemizing. According to estimates by the staff of the Joint Committee on Taxation, approximately 94 percent of taxpayers will 

claim the standard deduction under the bill, up from approximately 

70 percent under present law. These taxpayers will no longer have 

to file Schedule A to Form 1040, a significant number of which will 

no longer need to engage in the record keeping inherent in 

itemizing below-the-line deductions. Moreover, by claiming the 

standard deduction, such taxpayers may qualify to use simpler 

versions of the Form 1040 (i.e., Form 1040EZ or Form 1040A) that 

are not available to individuals who itemize their deductions. These 

forms simplify the return preparation process by eliminating from 

the Form 1040 those items that do not apply to particular taxpayers. 

This reduction in complexity and record keeping also may result 

in a decline in the number of individuals using a tax preparation 

service, or tax preparation software, or a decline in the cost of such 

service or software. The provision also should reduce the number 

of disputes between taxpayers and the IRS regarding the substantiation of itemized deductions. 

2. Reduced rate for small businesses with net active business 

income 

Under the bill, a special rule provides a reduced tax rate of 11, 

10, or nine percent in the case of an individual’s qualified active 

business income below an indexed threshold of $75,000 (in the case 


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of a joint return or a surviving spouse). The indexed $75,000 

threshold is three quarters of that amount for individuals filing as 

head of household and half that amount for other individuals. The 

reduced rate is not available to estates and trusts. 

The reduced rate is phased in. The reduced rate is 11 percent 

(that is, one percentage point below the 12 percent rate) for taxable 

years beginning in 2018 and 2019, and is 10 percent (that is, two 

percentage points below the 12 percent rate) in 2020 and 2021. For 

taxable years beginning in 2022 and thereafter the reduced rate is 

nine percent. 

The reduced tax rate applies to the least of three amounts, the 

taxpayer’s: (1) qualified active business income, (2) taxable income 

reduced by net capital gain, or (3) 9-percent bracket threshold 

amount (described above). Qualified active business income means 

the excess of the taxpayer’s net business income from any active 

business activity over his or her net business loss from any active 

business activity. Qualified active business income includes income 

from any trade or business activity, including service businesses. 

No capital percentage limitation applies in determining qualified 

active business income. 

A phase-out applies to the amount subject to the 11-, 10-, or 

nine-percent rate. The amount taxed at one of these rates is reduced by the excess of taxable income over an indexed applicable 

threshold amount, $150,000 in the case of married individuals filing jointly. The applicable threshold amount is three quarters of 

that amount for individuals filing as head of household and half 

that amount for other individuals. 

An active business activity is an activity that involves the conduct of any trade or business and that is not a passive activity for 

purposes of the passive loss rules of section 469 (that is, generally, 

the taxpayer materially participates in the trade or business activity). 

Number of affected taxpayers 

It is estimated that the provision will affect over ten percent of 

small business tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional 

records due to this provision. It should not result in an increase in 

disputes with the IRS, nor will regulatory guidance be necessary to 

implement this provision. It may, however, increase the number of 

questions that taxpayers ask the IRS, such as how to calculate 

qualified active business income. This increased volume of questions could have an adverse impact on other elements of IRS’ operation, such as the levels of taxpayer service. The provision should 

not increase the tax preparation costs for most individuals. 

The IRS will need to add to the individual income tax forms 

package a new worksheet so that taxpayers can calculate their 

qualified active business income. This worksheet will require a series of calculations. 


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3. Increase in child tax credit and addition of new family credit 

exemption (sec. 1101 of the bill) 

Summary description of the provisions 

The bill increases the value of the child tax credit to $1,600, providing that no more than $1,000 per child shall be refundable. This 

$1,000 limitation is indexed and rounded up, such that in 2018 it 

is $1,100. In order to qualify for the child tax credit, a Social Security number must be provided for the qualifying child. The bill also 

provides a $300 nonrefundable tax credit for the taxpayer, the taxpayer’s spouse, and any dependent other than a qualifying child. 

This credit expires for taxable years beginning after December 31, 

2022. 

Number of affected taxpayers 

It is estimated that the provision will affect approximately 90 

million tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional 

records due to these provisions. It should not result in an increase 

in disputes with the IRS, nor will regulatory guidance be necessary 

to implement this provision. The provision may, however, increase 

the number of questions that taxpayers ask the IRS, such as 

whether they may claim the new family credit for certain members 

of their household, or whether and to what extent the combined tax 

credit is refundable. 

The IRS will need to modify its forms and publications to reflect 

this change. 

4. Repeal of the deduction for State and local income taxes (sec. 

1303 of the bill) 

Summary description of the provisions 

Under the provision, in the case of an individual, as a general 

matter, State, local and foreign property taxes and State and local 

sales taxes are allowed as a deduction only when paid or accrued 

in carrying on a trade or business or an activity described in section 212 (relating to expenses for the production of income). Thus, 

the provision allows only those deductions for State, local and foreign property taxes, and sales taxes, that are presently deductible 

in computing income on an individual’s Schedule C, Schedule E, or 

Schedule F on such individual’s tax return. 

The provision contains an exception to the above-stated rule in 

the case of real property taxes. Under this exception, an individual 

may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for property taxes paid or 

accrued in the taxable year, in addition to any property taxes deducted in carrying on a trade or business or an activity described 

in section 212. Foreign real property taxes may not be deducted 

under this exception. 

Under the provision, in the case of an individual, State and local 

income, war profits, and excess profits taxes are not allowable as 

a deduction. 


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Number of affected taxpayers 

It is estimated that the provision will affect approximately 44 

million tax returns. 

Discussion 

It is not anticipated that individuals will need to keep additional 

records due to this provision. Because the deduction for State and 

local taxes has been longstanding in the Code, its repeal may require regulatory guidance, so as to provide guidance for taxpayers 

regarding which taxes remain properly deductible on an individual’s Schedule C, Schedule E or Schedule F. This may also result 

in an increase in disputes with the IRS. 

Additionally, if a technical correction is made to remove the reporting requirement regarding State and local refunds of income 

tax, this would relieve those jurisdictions with a reporting obligation of the cost of complying with this obligation, as well as reduce 

the need for taxpayers to retain such reports for their books and 

records. 

The IRS will need to modify its forms and publications to reflect 

this change 

5. Increased expensing 

The bill extends and modifies the additional first-year depreciation deduction through 2022 (through 2023 for longer production 

period property and certain aircraft). The 50-percent allowance is 

increased to 100 percent for property acquired and placed in service 

after September 27, 2017, and before January 1, 2023 (January 1, 

2024, for longer production period property and certain aircraft), as 

well as for specified plants planted or grafted after September 27, 

2017, and before January 1, 2023. The $8,000 increase amount in 

the limitation on the depreciation deductions allowed with respect 

to certain passenger automobiles is increased to $16,000 for passenger automobiles acquired and placed in service after September 

27, 2017, and before January 1, 2023. 

The bill maintains the present law phase-down of bonus depreciation and the section 280F increase amount for property acquired 

before September 28, 2017, and placed in service after September 

27, 2017. 

The bill extends the special rule under the percentage-of-completion method for the allocation of bonus depreciation to a long-term 

contract for property placed in service before January 1, 2023 (January 1, 2024, in the case of longer production period property). 

The bill removes the requirement that the original use of qualified property must commence with the taxpayer. Thus, the additional first-year depreciation deduction applies to purchases of used 

as well as new items. 

The bill excludes from the definition of qualified property any 

property used (i) in a real property trade or business, (ii) in the 

trade or business of certain regulated public utilities, and (iii) in 

a trade or business that has had floor plan financing indebtedness 

unless the taxpayer with such trade or business is not a tax shelter 

precluded from using the cash method and is exempt from the interest limitation rules in section 3301 of the bill by satisfying the 

$25 million gross receipts test of section 448(c). 


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As a conforming amendment to the repeal of AMT, the bill repeals the election to accelerate AMT credits in lieu of bonus depreciation. 

Number of affected taxpayers 

It is estimated that the provision will affect over ten percent of 

small business tax returns. 

Discussion 

The reporting requirements are unchanged by this provision. 

Capital assets purchased during the tax year will still need to be 

reported on Form 4562, Depreciation and Amortization (Including 

Information on Listed Property); however, the current year tax deduction associated with such assets will increase. 

6. Expansion of section 179 expensing 

The bill increases the maximum amount a taxpayer may expense under section 179 to $5 million and increases the phase-out threshold amount to $20 million for five taxable years (i.e., for taxable 

years beginning in 2018, 2019, 2020, 2021, and 2022). The 

$5,000,000 and $20,000,000 amounts are indexed for inflation for 

taxable years beginning after 2018. 

The bill expands the definition of qualified real property under 

section 179 to include qualified energy efficient heating and airconditioning property acquired and placed in service by the taxpayer after November 2, 2017. 

Number of affected taxpayers 

It is estimated that the provision will affect over ten percent of 

small business tax returns. 

Discussion 

While taxpayers purchasing section 179 property will still be required to complete and file Form 4562, Depreciation and Amortization (Including Information on Listed Property), significantly less 

detail is required to be included on such form. Accordingly, the 

compliance burden of many taxpayers will be reduced. 

E. CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND

LIMITED TARIFF BENEFITS

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

F. DUPLICATION OF FEDERAL PROGRAMS

In compliance with clause 3(c)(5) of Rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program; 

(2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public 

Law 111–139; or (3) a program related to a program identified in 


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the most recent Catalog of Federal Domestic Assistance, published 

pursuant to the Federal Program Information Act (Pub. L. No. 95– 

220, as amended by Pub. L. No. 98–169). 

G. DISCLOSURE OF DIRECTED RULE MAKINGS

In compliance with Sec. 3(i) of H. Res. 5 (115th Congress), the 

bill contains the following directed rulemakings: 

Section 1311 directs the Secretary of the Treasury to issue regulations related to the termination of deduction and exclusions for 

contributions to medical savings accounts. 

Section 1503 directs the Secretary of the Treasury to modify 

Treasury Regulation section 1.401(k)–1(d)(3)(iv)(E). 

Section 3307 directs the Secretary of the Treasury to issue regulations relating to entertainment and fringe-benefit expenses. 

Section 3314 directs the Secretary of the Treasury to issue regulations to the recharacterization of certain gains in the case of partnership profits interests held in connection with performance of investment services. 

Section 3802, addressing an excise tax on excess tax-exempt organization executive compensation, directs the Secretary of the 

Treasury to issue regulations as necessary to prevent avoidance of 

the purposes of this section through the performances of services 

other than as an employee. 

Section 4301, addressing current year inclusion by United States 

shareholders with foreign high returns, directs the Secretary of the 

Treasury to issue regulations as the Secretary determines appropriate to prevent the avoidance of the purposes of this section. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

With respect to clause 3(e) of rule XIII of the Rules of the House 

of Representatives, the Committee advises that compliance prior to 

consideration was not possible. 


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VII. DISSENTING VIEWS 

The Tax Cuts and Jobs Act, H.R. 1, is a bad deal for millions of 

Americans, particularly the middle class. The legislation puts the 

wealthy and well-connected first, while forcing millions of American families to watch as their taxes go up at every stage of their 

lives—from childhood to retirement. That’s simply not what the 

American people asked us to do, and it is not something that the 

Democrats on this Committee can support. 

Committee Democrats unanimously opposed H.R. 1 at the markup, because the legislation disproportionately benefits the wealthy 

and big corporations over hardworking taxpayers who are struggling with the rising costs of education, housing, and other expenses, not to mention the challenges of saving for retirement. 

Under H.R. 1, nearly one-half of all middle-class families would pay 

more taxes in 2026 than they would under current law, and about 

one-third would pay more in 2018. As the Wall Street Journal said 

this week, this is ‘‘a middle class tax cut that is really a hike.’’ 

The Tax Cuts and Jobs Act would hurt middle-class families with 

children 

Rather than provide meaningful assistance to families with children through a much-needed expansion to the Child Tax Credit 

(CTC), the Republican bill prioritizes tax cuts to wealthy individuals. In fact, the Center on Budget and Policy Priorities estimated 

that the expanded CTC contained in H.R. 1 would leave out 10 million children in low-wage working families and another roughly 13 

million children in low- and modest-income working families would 

receive something less than the full $600 per-child credit increase. 

By making the CTC increase nonrefundable, many families would 

simply not benefit. 

The Tax Cuts and Jobs Act would hurt students and teachers 

Our schools are woefully underfunded and students suffer because of it. When their supplies budgets run out (often well before 

securing essential items like books and paper), many teachers buy 

supplies for their classrooms with money out of their own pockets. 

H.R. 1 removes the tax credit these teachers receive for buying 

these classroom supplies. A survey conducted during the 2015–16 

school year found that teachers spend an average of $600 on classroom supplies and materials every year. The current law above-theline deduction gives them some of that money back. While corporations can deduct the costs of paper and pencils as necessary business expenses, H.R. 1 would take away that ability from teachers 

across America. 

H.R. 1 also harms students. It would repeal two tax credits for 

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income students $17 billion over the next decade. While the bill 

does put into place a one-year extension of the American Opportunity Tax Credit (AOTC), it is less generous than the two tax 

credits lost plus the extension is only temporary. Under H.R. 1, the 

AOTC is cut in one-half after four years, which would make the 

maximum credit $1,250 for the fifth year of education. 

Once out of school, H.R. 1 also removes the student loan interest 

deduction. Currently, student loan borrowers can deduct up to 

$2,500 of interest paid on student loans. In 2015, more than 12 

million people claimed the student loan interest deduction. 

For students who work, the bill eliminates the tax-free status of 

employer tuition reimbursements. A 2013 employer survey found 

that 61 percent of companies make available some type of tuitionassistance program. While H.R. 1 provides big corporations with 

extensive tax breaks, the Republicans chose to tax middle-class 

workers when they benefit from tuition reimbursement programs. 

The Tax Cuts and Jobs Act would hurt middle-class Americans and 

threaten state and local government services 

H.R. 1 harms middle-class Americans by repealing the state and 

local tax (SALT) deduction for individuals, except for a property tax 

deduction capped at $10,000. The SALT deduction prevents taxpayers from owing federal taxes on the income they pay in taxes 

to state and local governments. State and local tax payments are 

not disposable income, and it is unfair to treat them as such. The 

SALT deduction is so common-sense that it has been in force since 

the first federal income tax, adopted more than a century ago, 

when the whole federal income tax law was three pages long. 

Ironically, H.R. 1 would allow corporations to continue deducting 

state and local taxes, while eliminating much of the benefit for individuals and families. 

Currently, more than 100 million Americans in 44 million households claim the SALT deduction. Almost 40 percent of taxpayers 

earning between $50,000 and $75,000 claim SALT, and over 70 

percent of taxpayers making $100,000 to $200,000 use it. Over onehalf the value of the deduction went to households with incomes 

below $200,000. People living in every congressional district in 

every state in the country use this deduction, and it benefits taxpayers of all income levels, directly or indirectly. 

Two-thirds of state and local government spending comes from 

its income and sales taxes. These revenues support essential public 

services investments, like schools, local law enforcement, fire fighters, road construction and maintenance, and health care. Nearly 

everyone who itemizes claims the SALT deduction; therefore, repealing SALT would raise the cost of state and local services on a 

wide swath of taxpayers. This would pressure state and local governments to reduce revenues and cut crucial public investments. 

The Tax Cuts and Jobs Act would hurt homeowners and home values 

H.R. 1 would hurt homeowners. The American Dream has long 

included the idea of home ownership but H.R. 1 scales back the tax 

benefit of buying a new home. It also eliminates private activity 

bonds, which are key for financing affordable housing. That’s why 


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groups like the National Association of Home Builders (NAHB) oppose this bill. H.R. 1 depresses home ownership and home values. 

The bill cuts the amount people can claim as mortgage interest deductions so that only those people who can afford large down payments can afford to buy homes—especially in coastal cities where 

home prices are very high. Also, because the bill discourages 

itemized deductions, many who can now deduct modest mortgage 

interest will see no tax benefit from that deduction. For many potential homeowners, buying a home will be no better than renting, 

and they will leave the market. Current home owners will have a 

smaller pool of buyers to sell to and their home values—the primary source of wealth for middle-class Americans—will decline. According to NAHB President Granger MacDonald, ‘‘The House Republican tax reform plan abandons middle-class taxpayers in favor 

of high-income Americans and wealthy corporations. The bill eviscerates existing housing tax benefits by drastically reducing the 

number of home owners who can take advantage of mortgage interest and property tax incentives.’’ National Association of Realtors 

President William E. Brown agreed, ‘‘The nation’s 1.3 million Realtors cannot support a bill that takes homeownership off the table 

for millions of middle-class families.’’ 

The Tax Cuts and Jobs Act would hurt older Americans 

H.R. 1 repeals the medical expense deduction, effectively creating 

a new Health Tax on older and sick Americans. This Health Tax 

would result in a tax increase for millions of Americans with high 

medical costs, especially older Americans. The end result is a massive tax increase for older Americans and individuals living with 

expensive illnesses—like cancer, Alzheimer’s, or a rare disease—to 

pay for corporate tax cuts. 

The medical expense deduction is particularly important for older 

Americans. Over 73 percent of those claiming the tax credit are 

over 50 years old, and 55 percent are over 65 years old. One-half 

of those claiming the tax credit have incomes below $50,000. 

The Affordable Care Act helped lower the number of Americans 

facing medical debt by giving millions health insurance coverage 

for the first time. However, a severe illness or even medical bills 

from a car accident, can still mount to thousands of dollars. For the 

family caring for a premature child, the couple trying to conceive, 

or the husband caring for a wife diagnosed with Alzheimer’s, this 

deduction is one way to help prevent medical bills from crushing 

families in debt. 

For all of these reasons and more, we oppose The Tax Cuts and 

Jobs Act 

The middle class in this country are struggling. In passing tax 

reform, we must take those Americans who feel forgotten and left 

behind into consideration and build a tax code founded on fairness. 

This bill simply does not. 

Instead, H.R. 1 lets the American people down at every step of 

their life—from birth through retirement. It fails to provide the 

needed improvements to the tax code that could assist the hopeful 

young family trying to keep their head above water; the student 

trying to do the right thing by getting an education; and the factory 


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worker at the end of a long career just hoping to have enough left 

over to retire with dignity. Democrats believe that instead of pulling down the ladder of opportunity for those in the middle class, 

and the millions who aspire to it, we should expand it to make sure 

that everyone has a fair shot. 

The secret, closed door negotiations produced a deeply flawed bill 

that will hurt the teacher that spends her own money to buy school 

supplies for their students; students trying to responsibly pay back 

their student loans; the wife trying to afford her husband’s Alzheimer’s care; and the janitor who wants to retire with dignity so 

he can spoil his grandchildren. 

American families should not be forced watch as the rich get 

richer, and they fall further and further behind. H.R. 1 would do 

just that. 

RICHARD E. NEAL, 

Ranking Member. 


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ADDITIONAL VIEWS 

In addition to the facts outlined by the Ranking Member, the 

record must be clear: H.R. 1 is not long-awaited, once-in-a-generation, bipartisan tax reform. This bill ignores long-standing inequities in tax law and fails to simplify the tax code. Instead, this legislation meticulously selects winners and losers. Simply said, H.R. 1 

robs poor Peter to pay billionaire Paul. 

H.R. 1 features deficit-creating tax cuts and irresponsible policy 

changes. Some proposals are straightforward. For example, the assault on the elderly, disabled, teachers, caretakers, and immigrant 

families is a flagrant and heartless attempt to find revenue to pay 

for corporate tax cuts. Workers would lose employer-supported 

training and education benefits. Changes to the mortgage interest 

deduction and the deductibility of state and local taxes would cause 

unnecessary harm to both taxpayers and local governments. 

Unfortunately, the impact of other amendments in this bill are 

much more difficult to decipher. H.R. 1 shifts tax provisions and 

timelines in a manner that will force individuals and communities 

to spend hours, days, weeks, months, and resources calculating 

their real losses and gains. Sadly, this bill neglects Congress’ core 

constitutional responsibility to develop sound fiscal policy, which 

serve all American taxpayers, not just a select few. There are serious challenges facing our country like affordable housing, veterans’ 

services, transportation financing, and student debt, which should 

be core components of any legislation intended to serve as a compass for a generation of policy makers. 

An example of how H.R. 1 further complicates the tax code is the 

bill’s impact on those seeking to improve their lives through the 

pursuit of higher education. As students of all ages struggle to compete in a 21st Century workforce and face increased burden of debt, 

the education tax provisions of this bill create an additional and 

perhaps insurmountable hurdle; it exacerbates an already dire situation. As graduate students in Metro Atlanta and across the country began to review H.R. 1, they learned the tax changes would 

only exacerbate their financial woes. This is a grave and serious 

issue for my Congressional District, which has many outstanding 

colleges and universities. One student calculated her individual net 

loss to be at least $550 per month. Many others fear that if Congress passes this legislation, a graduate degree would no longer be 

within their reach. This is unconscionable and unacceptable. 

It is also important to examine the holistic impact of this legislation on aging cities and counties that are struggling to revitalize 

their communities. Notably, the effect of eliminating the new markets tax credit and the historic rehabilitation tax credit—combined 

with changes to private activity bonds and limitations on the ability of State and local governments to offer incentives to recruit new 

businesses—would devastate major community development, housVerDate Sep 11 2014 13:49 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00493 Fmt 6604 Sfmt 6604 E:\HR\OC\HR409.XXX HR409

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ing, transportation, water and sewer, and health initiatives. Make 

no mistake—H.R. 1 will cripple policy makers at every level of government. 

Finally, this bill is a disservice to the role of Congress and the 

legacy of our predecessors who put the good of our nation ahead 

of a select few. In 1913, the United States ratified the Sixteenth 

Amendment to the U.S. Constitution; this amendment allowed 

Congress to develop legislation to tax income. Congress developed 

subsequent revenue bills—the Revenue Act of 1913 and the War 

Revenue Act of 1917—that featured core standards. These included 

encouraging the best of humanity through charitable and philanthropic endeavors and ensuring that future generations did not 

bear the burden of the financial costs of war. H.R. 1 undermines 

both of these principles. 

Since the Republican Majority developed and rushed this bill 

through committee without congressional review or bipartisan 

input, certain provisions are untested and could cause irreparable 

damage. Upon examining H.R. 1, the non-partisan Joint Committee 

on Taxation reported the bill would result in $94.8 billion less in 

charitable contribution deductions. This legislation pays tribute to 

the 100th anniversary of the charitable contribution deduction by 

proposing policies that will result in a 40 percent decline of its 

usage. This bill turns the clock back on a century of progress. 

Some of the most blatant examples of dangerous, undemocratic 

policy include this bill’s impact on charitable and faith-based institutions. Alarmingly, section 5201 of H.R. 1 would repeal the ‘‘Johnson Amendment,’’ a 53-year standard that prohibits religious and 

philanthropic organizations from engaging in political activities. 

The Joint Committee on Taxation estimates this policy change 

would increase the deficit by $2.1 billion. The bill would create a 

loophole in campaign finance laws and increase tax-exempt political contributions. Not only did the Majority reject efforts to strip 

this costly provision, but the Chair also expanded section 5201 to 

include all 501(c)3 (e.g. religious, nonprofit, and charitable) organizations at the end of the Committee markup. Faith-based, philanthropic, charitable, and transparency groups in every State of our 

country overwhelmingly oppose this dangerous policy change. 

H.R. 1 ignores the grave reality that the United States is engaged in the longest wars in history, for which sadly there is no 

end in sight. Last week, Brown University’s Cost of War Project reported that the current wars in Afghanistan, Iraq, Syria, and Pakistan cost at least $5.6 trillion or $23,386 per taxpayer. Never before has Congress directly and repeatedly shirked its responsibility 

to finance U.S. participation in war. For 16 years, brave service 

members put their lives on the line and their families on hold to 

protect and serve our nation, as Congress fails to do our part. Instead, H.R. 1 continues to pay for these wars on a credit card. Not 

only does H.R. 1 neglect to address this grave matter, but it will 

also finance these irresponsible corporate tax cuts through massive 

reductions to safety net programs and non-defense discretionary 

programs upon which all Americans—including veterans and military families—rely. 

The record must be clear; H.R. 1 is not tax reform. This legislation does not simplify the tax code. It does not give hope and opporVerDate Sep 11 2014 13:49 Nov 14, 2017 Jkt 027533 PO 00000 Frm 00494 Fmt 6604 Sfmt 6604 E:\HR\OC\HR409.XXX HR409

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tunity to those who strive to realize the American dream. It does 

not rectify long-standing injustices within U.S. tax law. Instead, 

this unprecedented and negligent legislation puts the gains of a select few ahead of the best interests of our children, grandchildren, 

and generations yet unborn. 

JOHN LEWIS. 

Æ 


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