Understanding H.R.1 Tax Cuts and Jobs Act

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Newer Updates on the Tax Cuts and Jobs Act

For the latest updates on the Tax Cuts and Jobs Act, read New 2018 Tax Law (Tax Cuts and Jobs Act).

On December 7,2017, the Senate passed their version of H.R.1 – Tax Cuts and Jobs Act. Nearly a month earlier on November 16, 2017, the House passed their version of the bill, which means it looks like something from this proposal will become law. Right now, the bill is in committee where the differences are being resolved.

There are many things the two bills agree upon such as:

And there are many things they don’t agree on, such as:

Neither proposal substantially changes our tax code. They change the starting points of various brackets and the value of various reductions. But the progressive tax code will continue to be economically destructive and the effects of that tax will continue to trickle down to everyone in our society.

Oddly this is the greatest criticism of the proposals, that the proposals make the tax code less progressive and hence flatter. Critics calls this a regressive tax cut, but when rates are already highly progressive any movement toward a more equitable percentage will be criticized as regressive. This criticism is based solely on the idea that taxes should be increasingly punitive for the productive until wealth distribution is more uniform. Helping the poor by hurting the productive is never effective. We have critiqued this misguided thinking in a five part series called “Wealth Inequality In America.”

Helping the poor by giving the wealth of the productive to the government is even less effective. The American government has a spending problem and every time government spends money to provide security to a few, it destabilizes the rest of society.

Take a moment to consider what your government does: subsidies for ethanol that distort global corn prices, Social Security that returns a fraction of what would be available to seniors if the accounts were privatized, foreign aid sending billions to buy temporary global influence, public rent-seeking programs, and more. Where does our government’s hunger end?

Despite this criticism, the tax code remains punitive toward the most productive members of society as a progressive income tax rather than a sales tax or flat tax. And there is no bold proposal here in the Tax Cuts and Jobs Act. For all the changes being made, the Republicans missed an opportunity to scrap the tax code, start from scratch, and adopt a tax code that looks like someone designed it on purpose.

Then, there is the pork in the bill. “Pork” is politicians getting tax money to pay for projects that benefit specific areas, industries, or people. I have the table of contents of the Senate bill printed in this post so you can peruse the extra provisions for yourself.

The funniest one is “SEC. 13207. EXPENSING OF CERTAIN COSTS OF REPLANTING CITRUS PLANTS LOST BY REASON OF CASUALTY,” which gives a deduction to owners for the cost of replanting lost or damaged citrus plants through 2026. This is an citrus-plant-only exception to the rule that you cannot deduct expenses for “any plant which has a preproductive period of 2 years or less.” It is a variation of H.R.112 – Emergency Citrus Disease Response Act of 2017, a bill sponsored by 32 representatives, 26 of them (81.25%) from Florida. This section was likely added to the tax bill as a response to Hurricane Irma’s destruction , but that is not why the bill was originally drafted. The initial proposal date for this bill is listed as January 3, 2017. Hurricane Irma did not hurt the Florida crops until September. The actual text of the bill was a response to a citrus disease that came through Florida in 2016.

No matter how deserving you believe Big-Citrus is in deserving a deduction, it is always economically better to work toward general principles rather than the political expedience of working solely for your constituents. Why not give all farmers the exception? No matter the answer, a citrus-plant-only exception is not the solution.

Pork such as this needs to be seen as so socially distasteful that it is grounds for resignation from office. Instead, voters engage in rent seeking and refuse to elect anyone who fails to deliver for their special interests.

Nurses or Teachers or Graduate Students may be admirable, but they do not deserve special tax code provisions. The same goes for Hedge Fund Managers, CEOs, and Politicians. Special treatment, positively or negatively, makes it so people can gain more by trying to appropriate other’s wealth than by producing themselves.

For all of our criticisms of the Obama Administration’s move away from economic freedom and toward socialism, we are also critical of this Republican tax bill. It does not simplify the tax code. It does not work from general principles. It is not mindful of the unintended consequences of making law. It can still be gamed. It does not encourage people to be productive. It does not free capital to be used as investors see fit. And it includes pork provisions for specific constituents.

It is no secret that we lean libertarian and often disagree with both sides. We are glad to talk about politics if only to remember that your financial freedom is in your own control.

H.R.1 – Tax Cuts and Jobs Act of the 115th Congress (2017-2018)

Senate Table of Contents

TITLE I

  • SEC. 11000. SHORT TITLE, ETC.

Subtitle A–Individual Tax Reform

PART I–TAX RATE REFORM

PART II–DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES

  • SEC. 11011. DEDUCTION FOR QUALIFIED BUSINESS INCOME.
  • SEC. 11012. LIMITATION ON LOSSES FOR TAXPAYERS OTHER THAN CORPORATIONS.

PART III–TAX BENEFITS FOR FAMILIES AND INDIVIDUALS

  • SEC. 11021. INCREASE IN STANDARD DEDUCTION.
  • SEC. 11022. INCREASE IN AND MODIFICATION OF CHILD TAX CREDIT.
  • SEC. 11023. INCREASED LIMITATION FOR CERTAIN CHARITABLE CONTRIBUTIONS.
  • SEC. 11024. INCREASED CONTRIBUTIONS TO ABLE ACCOUNTS.
  • SEC. 11025. ROLLOVERS TO ABLE PROGRAMS FROM 529 PROGRAMS.
  • SEC. 11026. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING SERVICES IN THE SINAI PENINSULA OF EGYPT.
  • SEC. 11027. EXTENSION OF WAIVER OF LIMITATIONS WITH RESPECT TO EXCLUDING FROM GROSS INCOME AMOUNTS RECEIVED BY WRONGFULLY INCARCERATED INDIVIDUALS.
  • SEC. 11028. TEMPORARY REDUCTION IN MEDICAL EXPENSE DEDUCTION FLOOR.
  • SEC. 11029. RELIEF FOR 2016 DISASTER AREAS.

PART IV–EDUCATION

PART V–DEDUCTIONS AND EXCLUSIONS

  • SEC. 11041. SUSPENSION OF DEDUCTION FOR PERSONAL EXEMPTIONS.
  • SEC. 11042. SUSPENSION OF DEDUCTION FOR STATE AND LOCAL, ETC. TAXES.
  • SEC. 11043. SUSPENSION OF DEDUCTION FOR HOME EQUITY INTEREST.
  • SEC. 11044. MODIFICATION OF DEDUCTION FOR PERSONAL CASUALTY LOSSES.
  • SEC. 11045. SUSPENSION OF MISCELLANEOUS ITEMIZED DEDUCTIONS.
  • SEC. 11046. SUSPENSION OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.
  • SEC. 11047. MODIFICATION OF EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
  • SEC. 11048. SUSPENSION OF EXCLUSION FOR QUALIFIED BICYCLE COMMUTING REIMBURSEMENT.
  • SEC. 11049. SUSPENSION OF EXCLUSION FOR QUALIFIED MOVING EXPENSE REIMBURSEMENT.
  • SEC. 11050. SUSPENSION OF DEDUCTION FOR MOVING EXPENSES.
  • SEC. 11051. LIMITATION ON WAGERING LOSSES.

PART VI–INCREASE IN ESTATE AND GIFT TAX EXEMPTION

  • SEC. 11061. INCREASE IN ESTATE AND GIFT TAX EXEMPTION.

PART VII–TAXPAYER RIGHTS AND TAX ADMINISTRATION

  • SEC. 11071. EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY.
  • SEC. 11072. MODIFICATION OF USER FEE REQUIREMENTS FOR INSTALLMENT AGREEMENTS.
  • SEC. 11073. ATTORNEYS’ FEES RELATING TO AWARDS TO WHISTLEBLOWERS.
  • SEC. 11074. CLARIFICATION OF WHISTLEBLOWER AWARDS.

PART VIII–INDIVIDUAL MANDATE

Subtitle B–Alternative Minimum Tax

Subtitle C–Business-related Provisions

PART I–CORPORATE PROVISIONS

  • SEC. 13001. 20-PERCENT CORPORATE TAX RATE.
  • SEC. 13002. REDUCTION IN DIVIDEND RECEIVED DEDUCTIONS TO REFLECT LOWER CORPORATE INCOME TAX RATES.

PART II–SMALL BUSINESS REFORMS

  • SEC. 13101. MODIFICATIONS OF RULES FOR EXPENSING DEPRECIABLE BUSINESS ASSETS.
  • SEC. 13102. MODIFICATIONS OF GROSS RECEIPTS TEST FOR USE OF CASH METHOD OF ACCOUNTING BY CORPORATIONS AND PARTNERSHIPS.
  • SEC. 13103. CLARIFICATION OF INVENTORY ACCOUNTING RULES FOR SMALL BUSINESSES.
  • SEC. 13104. MODIFICATION OF RULES FOR UNIFORM CAPITALIZATION OF CERTAIN EXPENSES.
  • SEC. 13105. INCREASE IN GROSS RECEIPTS TEST FOR CONSTRUCTION CONTRACT EXCEPTION TO PERCENTAGE OF COMPLETION METHOD.

PART III–COST RECOVERY AND ACCOUNTING METHODS

  •  SEC. 13201. TEMPORARY 100-PERCENT EXPENSING FOR CERTAIN BUSINESS ASSETS.
  • SEC. 13202. MODIFICATIONS TO DEPRECIATION LIMITATIONS ON LUXURY AUTOMOBILES AND PERSONAL USE PROPERTY.
  • SEC. 13203. MODIFICATIONS OF TREATMENT OF CERTAIN FARM PROPERTY.
  • SEC. 13204. APPLICABLE RECOVERY PERIOD FOR REAL PROPERTY.
  • SEC. 13205. USE OF ALTERNATIVE DEPRECIATION SYSTEM FOR ELECTING FARMING BUSINESSES.
  • SEC. 13206. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.
  • SEC. 13207. EXPENSING OF CERTAIN COSTS OF REPLANTING CITRUS PLANTS LOST BY REASON OF CASUALTY.
  • SEC. 13221. CERTAIN SPECIAL RULES FOR TAXABLE YEAR OF INCLUSION.

PART IV–BUSINESS-RELATED EXCLUSIONS AND DEDUCTIONS

  • SEC. 13301. LIMITATION ON DEDUCTION FOR INTEREST.
  • SEC. 13302. MODIFICATION OF NET OPERATING LOSS DEDUCTION.
  • SEC. 13303. LIKE-KIND EXCHANGES OF REAL PROPERTY.
  • SEC. 13304. LIMITATION ON DEDUCTION BY EMPLOYERS OF EXPENSES FOR FRINGE BENEFITS.
  • SEC. 13305. REPEAL OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.
  • SEC. 13306. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER AMOUNTS.
  • SEC. 13307. DENIAL OF DEDUCTION FOR SETTLEMENTS SUBJECT TO NONDISCLOSURE AGREEMENTS PAID IN CONNECTION WITH SEXUAL HARASSMENT OR SEXUAL ABUSE.
  • SEC. 13308. REPEAL OF DEDUCTION FOR LOCAL LOBBYING EXPENSES.
  • SEC. 13309. RECHARACTERIZATION OF CERTAIN GAINS IN THE CASE OF PARTNERSHIP PROFITS INTERESTS HELD IN CONNECTION WITH PERFORMANCE OF INVESTMENT SERVICES.
  • SEC. 13310. PROHIBITION ON CASH, GIFT CARDS, AND OTHER NON-TANGIBLE PERSONAL PROPERTY AS EMPLOYEE ACHIEVEMENT AWARDS.
  • SEC. 13311. FLOOR PLAN FINANCING.
  • SEC. 13312. ELIMINATION OF DEDUCTION FOR LIVING EXPENSES INCURRED BY MEMBERS OF CONGRESS.

PART V–BUSINESS CREDITS

  • SEC. 13401. MODIFICATION OF ORPHAN DRUG CREDIT.
  • SEC. 13402. REHABILITATION CREDIT LIMITED TO CERTIFIED HISTORIC STRUCTURES.
  • SEC. 13403. EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL LEAVE.
  • SEC. 13411. TREATMENT OF VETERANS’ PREFERENCE AS NOT VIOLATING GENERAL PUBLIC USE REQUIREMENTS.
  • SEC. 13412. INCREASE IN CREDIT FOR CERTAIN RURAL HOUSING.

PART VI–PROVISIONS RELATED TO SPECIFIC ENTITIES AND INDUSTRIES

  • SEC. 13501. TREATMENT OF GAIN OR LOSS OF FOREIGN PERSONS FROM SALE OR EXCHANGE OF INTERESTS IN PARTNERSHIPS ENGAGED IN TRADE OR BUSINESS WITHIN THE UNITED STATES.
  • SEC. 13502. MODIFY DEFINITION OF SUBSTANTIAL BUILT-IN LOSS IN THE CASE OF TRANSFER OF PARTNERSHIP INTEREST.
  • SEC. 13503. CHARITABLE CONTRIBUTIONS AND FOREIGN TAXES TAKEN INTO ACCOUNT IN DETERMINING LIMITATION ON ALLOWANCE OF PARTNER’S SHARE OF LOSS.
  • SEC. 13511. NET OPERATING LOSSES OF LIFE INSURANCE COMPANIES.
  • SEC. 13512. REPEAL OF SMALL LIFE INSURANCE COMPANY DEDUCTION.
  • SEC. 13513. ADJUSTMENT FOR CHANGE IN COMPUTING RESERVES.
  • SEC. 13514. REPEAL OF SPECIAL RULE FOR DISTRIBUTIONS TO SHAREHOLDERS FROM PRE-1984 POLICYHOLDERS SURPLUS ACCOUNT.
  • SEC. 13515. MODIFICATION OF PRORATION RULES FOR PROPERTY AND CASUALTY INSURANCE COMPANIES.
  • SEC. 13516. REPEAL OF SPECIAL ESTIMATED TAX PAYMENTS.
  • SEC. 13517. COMPUTATION OF LIFE INSURANCE TAX RESERVES.
  • SEC. 13518. MODIFICATION OF RULES FOR LIFE INSURANCE PRORATION FOR PURPOSES OF DETERMINING THE DIVIDENDS RECEIVED DEDUCTION.
  • SEC. 13519. CAPITALIZATION OF CERTAIN POLICY ACQUISITION EXPENSES.
  • SEC. 13520. TAX REPORTING FOR LIFE SETTLEMENT TRANSACTIONS.
  • SEC. 13521. CLARIFICATION OF TAX BASIS OF LIFE INSURANCE CONTRACTS.
  • SEC. 13522. EXCEPTION TO TRANSFER FOR VALUABLE CONSIDERATION RULES.
  • SEC. 13531. LIMITATION ON DEDUCTION FOR FDIC PREMIUMS.
  • SEC. 13532. REPEAL OF ADVANCE REFUNDING BONDS.
  • SEC. 13533. COST BASIS OF SPECIFIED SECURITIES DETERMINED WITHOUT REGARD TO IDENTIFICATION.
  • SEC. 13541. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL BUSINESS TRUST.
  • SEC. 13542. CHARITABLE CONTRIBUTION DEDUCTION FOR ELECTING SMALL BUSINESS TRUSTS.
  • SEC. 13543. MODIFICATION OF TREATMENT OF S CORPORATION CONVERSIONS TO C CORPORATIONS.

PART VII–EMPLOYMENT

PART VIII–EXEMPT ORGANIZATIONS

  • SEC. 13701. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES AND UNIVERSITIES.
  • SEC. 13702. UNRELATED BUSINESS TAXABLE INCOME SEPARATELY COMPUTED FOR EACH TRADE OR BUSINESS ACTIVITY.
  • SEC. 13703. REPEAL OF DEDUCTION FOR AMOUNTS PAID IN EXCHANGE FOR COLLEGE ATHLETIC EVENT SEATING RIGHTS.
  • SEC. 13704. REPEAL OF SUBSTANTIATION EXCEPTION IN CASE OF CONTRIBUTIONS REPORTED BY DONEE.

PART IX–OTHER PROVISIONS

  • SEC. 13801. PRODUCTION PERIOD FOR BEER, WINE, AND DISTILLED SPIRITS.
  • SEC. 13802. REDUCED RATE OF EXCISE TAX ON BEER.
  • SEC. 13803. TRANSFER OF BEER BETWEEN BONDED FACILITIES.
  • SEC. 13804. REDUCED RATE OF EXCISE TAX ON CERTAIN WINE.
  • SEC. 13805. ADJUSTMENT OF ALCOHOL CONTENT LEVEL FOR APPLICATION OF EXCISE TAX RATES.
  • SEC. 13806. DEFINITION OF MEAD AND LOW ALCOHOL BY VOLUME WINE.
  • SEC. 13807. REDUCED RATE OF EXCISE TAX ON CERTAIN DISTILLED SPIRITS.
  • SEC. 13808. BULK DISTILLED SPIRITS.
  • SEC. 13821. MODIFICATION OF TAX TREATMENT OF ALASKA NATIVE CORPORATIONS AND SETTLEMENT TRUSTS.
  • SEC. 13822. AMOUNTS PAID FOR AIRCRAFT MANAGEMENT SERVICES.
  • SEC. 13823. OPPORTUNITY ZONES.

Subtitle D–International Tax Provisions

PART I–OUTBOUND TRANSACTIONS

  • SEC. 14101. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS.
  • SEC. 14102. SPECIAL RULES RELATING TO SALES OR TRANSFERS INVOLVING SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS.
  • SEC. 14103. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF TAXATION.
  • SEC. 14201. CURRENT YEAR INCLUSION OF GLOBAL INTANGIBLE LOW-TAXED
    INCOME BY UNITED STATES SHAREHOLDERS.
  • SEC. 14202. DEDUCTION FOR FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL INTANGIBLE LOW-TAXED INCOME.
  • SEC. 14203. SPECIAL RULES FOR TRANSFERS OF INTANGIBLE PROPERTY FROM CONTROLLED FOREIGN CORPORATIONS TO UNITED STATES SHAREHOLDERS.
  • SEC. 14211. ELIMINATION OF INCLUSION OF FOREIGN BASE COMPANY OIL
    RELATED INCOME.
  • SEC. 14212. INFLATION ADJUSTMENT OF DE MINIMIS EXCEPTION FOR FOREIGN BASE COMPANY INCOME.
  • SEC. 14213. REPEAL OF INCLUSION BASED ON WITHDRAWAL OF PREVIOUSLY EXCLUDED SUBPART F INCOME FROM QUALIFIED INVESTMENT.
  • SEC. 14214. MODIFICATION OF STOCK ATTRIBUTION RULES FOR DETERMINING STATUS AS A CONTROLLED FOREIGN CORPORATION.
  • SEC. 14215. MODIFICATION OF DEFINITION OF UNITED STATES SHAREHOLDER.
  • SEC. 14216. ELIMINATION OF REQUIREMENT THAT CORPORATION MUST BE CONTROLLED FOR 30 DAYS BEFORE SUBPART F INCLUSIONS APPLY.
  • SEC. 14217. LOOK-THRU RULE FOR RELATED CONTROLLED FOREIGN CORPORATIONS MADE PERMANENT.
  • SEC. 14218. CORPORATIONS ELIGIBLE FOR DEDUCTION FOR DIVIDENDS FROM CONTROLLED FOREIGN CORPORATIONS EXEMPT FROM SUBPART F INCLUSION FOR INVESTMENT IN UNITED STATES PROPERTY.
  • SEC. 14221. DENIAL OF DEDUCTION FOR INTEREST EXPENSE OF UNITED STATES SHAREHOLDERS WHICH ARE MEMBERS OF WORLDWIDE AFFILIATED GROUPS WITH EXCESS DOMESTIC INDEBTEDNESS.
  • SEC. 14222. LIMITATIONS ON INCOME SHIFTING THROUGH INTANGIBLE PROPERTY TRANSFERS.
  • SEC. 14223. CERTAIN RELATED PARTY AMOUNTS PAID OR ACCRUED IN HYBRID TRANSACTIONS OR WITH HYBRID ENTITIES.
  • SEC. 14224. SHAREHOLDERS OF SURROGATE FOREIGN CORPORATIONS NOT ELIGIBLE FOR REDUCED RATE ON DIVIDENDS.
  • SEC. 14301. REPEAL OF SECTION 902 INDIRECT FOREIGN TAX CREDITS; DETERMINATION OF SECTION 960 CREDIT ON CURRENT YEAR BASIS.
  • SEC. 14302. SEPARATE FOREIGN TAX CREDIT LIMITATION BASKET FOR FOREIGN BRANCH INCOME.
  • SEC. 14303. ACCELERATION OF ELECTION TO ALLOCATE INTEREST, ETC., ON A WORLDWIDE BASIS.
  • SEC. 14304. SOURCE OF INCOME FROM SALES OF INVENTORY DETERMINED SOLELY ON BASIS OF PRODUCTION ACTIVITIES.
  • SEC. 14305. ELECTION TO INCREASE PERCENTAGE OF DOMESTIC TAXABLE INCOME OFFSET BY OVERALL DOMESTIC LOSS TREATED AS FOREIGN SOURCE.

PART II–INBOUND TRANSACTIONS

  • SEC. 14401. BASE EROSION AND ANTI-ABUSE TAX.

PART III–OTHER PROVISIONS

  • SEC. 14501. RESTRICTION ON INSURANCE BUSINESS EXCEPTION TO PASSIVE FOREIGN INVESTMENT COMPANY RULES.
  • SEC. 14502. REPEAL OF FAIR MARKET VALUE METHOD OF INTEREST EXPENSE APPORTIONMENT.
  • SEC. 14503. MODIFICATION TO SOURCE RULES INVOLVING POSSESSIONS.

TITLE II

  • SEC. 20001. OIL AND GAS PROGRAM.
  • SEC. 20002. LIMITATIONS ON AMOUNT OF DISTRIBUTED QUALIFIED OUTER CONTINENTAL SHELF REVENUES.
  • SEC. 20003. STRATEGIC PETROLEUM RESERVE DRAWDOWN AND SALE.

Photo by Matt Artz on Unsplash

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.