Congressional tax negotiators released the final version of tax reform on December 15.  The previous versions passed by the House and Senate were largely a mixed bag of results for the convenience retailing industry.  The Conference report, at least at first glance, appears to be mostly positive. 

The bottom line for many companies is the new tax rates. For corporations, the package reduces the tax rate to 21%. That’s up 1% from both the previous House and Senate versions but goes into effect immediately next year rather than being delayed by a year as the Senate bill had done.

For their part, pass-through entities seem to fare pretty well in the final version. The bill follows the previous Senate version more closely than the House’s in that it provides a deduction for qualified business income for pass-through taxpayers. The deduction is down to 20% from the 23% found in the Senate bill, however, the final version also lowers the top personal income tax rate to 37%.  The result should put the marginal tax rates paid by pass-throughs fairly close to on par with the marginal tax rates paid by corporations.  It’s also important to point out that pass-throughs formally owned by estates and trusts are eligible for the tax deduction under the final version, marking a significant change from the Senate version.

Here is a quick rundown of how some of the other issues important to our industry fare in the final package:

• Work Opportunity Tax Credit: The House version repealed WOTC while the Senate preserved it.  Fortunately, the final version follows the Senate and preserves the tax credit going forward.
• Last-In First-Out Accounting: LIFO has been a popular target for raising revenue in recent tax proposals. Fortunately, like both previous versions, LIFO is left intact.
• Estate Tax:  While the House bill would have ultimately repealed the estate tax, the final package leaves it intact but does double the exemption amounts protecting many small businesses.
• Alternative Minimum Tax:  For individuals, the AMT is left in place but the thresholds are doubled.  The Corporate AMT is repealed.
• Individual Tax Rates: The final package follows closer to the Senate bill, setting up the following rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
• State and Local Tax Deduction: Both previous versions ended up with a deduction limit of $10,000 for local property taxes. The final package includes the same monetary limit but allows for deduction of property taxes along with income or sales taxes.
• Standard Deduction: Is roughly doubled, just like both previous versions had done.

Much like in the Senate bill, all of the individual tax reform changes are technically temporary. They are scheduled to expire after 2025. This was done to satisfy Senate procedural rules that do not allow bills considered under the reconciliation process to project to cause federal deficits beyond a 10-year budget window.  Republican leaders have argued that it is very unlikely that a future Congress would let these changes actually expire (much like the 2001 and 2003 tax cuts were ultimately renewed a few years ago—though not without some drama).

Passage of the tax bill moves Congress onto the next major legislative deadline, which is funding the federal government beyond Friday night. There remains some negotiations and gamesmanship to take place there over the next couple of days. Republican leaders in the House have already abandoned plans to pass a bill that would fund the Defense Department for a full year, but the rest of the government just until January 19. It appears that they will pass a bill to fund the government until January 19 today, and then leave town for the holidays. Passage is not entirely assured in the Senate, where they will need 60 votes, and thus help from the Democrats, to avoid a government shutdown. While a shutdown remains unlikely, we never know in this political environment.