Tax reform: House bill revisions include lower pass-through rate for small businesses

An amendment from the chairman of the House tax writing committee modified several provisions of the GOP tax overhaul bill to tweak rules for pass-through businesses, restore the adoption credit, and allow car dealers to write off interest on investory loans, among others.

The last-minute rewrite shows just what a difficult balance House Ways and Means Chairman Kevin Brady and House Speaker Paul Ryan have to strike to incorporate demands from lawmakers and lobbyists, without blowing past the deficit limit of $1.5 trillion.

Here’s an overview of some of the changes:

Pass-Through Businesses

The amendment offers several provisions that it says will make it easier for smaller businesses to succeed and grow. The changes include providing a new tax rate of 9 percent for businesses earning less than $75,000 in income. The benefit is phased out as taxable income exceeds $150,000 and fully phased out at $225,000.

The bill would still limit access to the new 25 percent tax rate. For business owners, just 30 percent of their income would qualify for that rate; the remaining 70 percent would be treated as wages. Or they could use a formula based on their level of capital investment to determine how much income would get the new rate.

Adoption Credit

The new version restores the adoption credit. Originally, the House bill eliminated the credit, which is currently worth as much as $13,750 per eligible child.

Interest Deductions

The amendment says companies that use loans to finance their high-cost inventory — such as car dealers — will be given the ability to completely write off their interest payments. In exchange, those businesses won’t be able to immediately write off their capital investments.

The original House bill hadn’t specified that carve out when it called for limiting interest deductions to 30 percent of a company’s adjusted earnings.

Non-Qualified Deferred Compensation

The amendment scratches the provision that would have accelerated taxation of money put away into non-qualified deferred compensation plans.

The earlier version would have taxed deferrals as soon as they weren’t at risk of forfeiture instead of when they eventually paid out. That likely would have led hundreds of U.S. companies to scrap such programs altogether, affecting scores of top executives who use them to beef up retirement savings.

Repatriation Rates

The amendment would boost proposed rates on trillions of dollars of U.S. companies’ overseas income to 14 percent on income held as cash and 7 percent on non-cash holdings.

The bill that Brady released a week ago proposed rates of 12 percent and 5 percent for companies’ offshore cash piles.