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Tax Bill Amendment Extends Carried Interest Holding Period to 3 Years

Posted on November 7, 2017 by Dylan F. Moroses, Asha Glover

House Ways and Means Committee Chair Kevin Brady, R-Texas, introduced a new amendment to the Tax Cuts and Jobs Act (H.R. 1) with several substantial changes just hours after beginning the markup process November 6.

Brady’s amendment, which cleared the committee 24 to 16, makes changes to 10 sections of the tax reform bill, including imposing a three-year holding period requirement for gains on a carried interest in an investment or real estate business, according to a statement. It also provides that the 1.4 percent excise tax on the net investment income of educational institutions applies only to institutions with endowment assets of at least $250,000 per student.

The chair’s amendment includes three new rules for the earned income tax credit requiring claims for the credit to properly reflect any net earnings from self-employment, mandating that employers give additional information on payroll tax returns, and providing the IRS with additional authority regarding substantiation of earned income amounts, according to a summary.

It also modifies the bill’s international base-erosion rules by revising the provision taxing affiliated payments to provide for a foreign tax credit, exempting foreign affiliates’ routine returns, excluding acquisitions of property priced on a public exchange, computing a foreign affiliate’s profits based on foreign profit margins instead of global profit margins, and coordinating with existing withholding tax rules. The amendment also would modify a provision taxing foreign high returns to clarify the scope of existing exceptions for specific local active financing and extraction activities, and would clarify the computation of the deemed repatriation tax on grossed-up foreign taxes deemed paid.

The amendment would allow some employees who receive stock options or restricted stock units as compensation for performance or services and who later exercise such options or units to elect to defer recognition of income for up to 5 years if the corporation’s stock is not publicly traded, would preserve treatment for self-created musical compositions and copyrights in musical works as capital assets, and would continue the exclusion from income for up to $5,000 of employer-provided dependent care assistance through 2022.

Brady suggested that the amendment would not constitute the last changes to the bill. “This is not the last effort to continue to make further improvements on the base bill," he said in the statement.

A House GOP tax aide told Tax Analysts that other issues that could still be addressed through the markup include the elimination of the adoption tax credit and provisions related to the life insurance industry. 

Committee member Kenny Marchant, R-Texas, said House lawmakers don’t anticipate leaving any major issues for the Senate to resolve. “I think we intend to address all those issues; there aren’t any of us on the committee on the fence.”

Democrats are already preparing to push their own changes to the bill. Ways and Means Tax Policy Subcommittee ranking minority member Lloyd Doggett, D-Texas, said he plans to offer several amendments. “At the top of the list is removing incentives in this bill that would encourage the outsourcing of even more American jobs abroad,” Doggett told Tax Analysts.

Doggett also said he expects an amendment will be introduced to compel the House to seek President Trump’s tax returns under section 6103(f)(1), which gives congressional tax committees the power to request individual returns and review the materials in closed session.

Brady said that following consideration of the Tax Cuts and Jobs Act, the House will move on to “temporary and targeted relief” related to healthcare and the taxes associated with the Affordable Care Act, separate from the tax reform debate. He said those proposals include relief from the medical device tax, the health insurance tax, and the tax on over-the-counter medications.

Politics Persist in Markup

In his opening remarks, Brady argued that high-cost states like California and New York would fare well under the proposed GOP tax bill, despite its elimination of the deductibility of state and local taxes. “In California, middle-income families will get an estimated boost to their paychecks of more than $2,900. For my constituents in Texas, it will be more than $2,500. In New York, $2,700,” Brady said.

Democrats and some Republicans in those states have argued that the bill would drastically increase the tax burden on their constituents. Brady has suggested that several provisions would continue to be “fine-tuned” as the legislation moves through Congress.

Ways and Means ranking minority member Richard E. Neal, D-Mass., considered the closed-door process Republicans took to develop the legislation a “missed opportunity” to engage in bipartisan discussion on tax reform. “The legislation that we are marking up today lets the American people down at every step of their life — from birth through retirement,” Neal said in prepared remarks.

Before considering H.R. 1, Doggett offered a motion that was struck down on a party-line vote 16 to 24 that would have delayed the markup for a week, in part in response to the November 5 release of the “Paradise Papers” trove of information on the use of offshore tax havens.

Democrats focused many of their early questions to Joint Committee on Taxation Chief Thomas Barthold on a Joint Committee on Taxation distributional analysis of H.R. 1 (JCX-49-17), arguing that the legislation would force some middle-income families to pay more in taxes while wealthy earners and corporations reap a benefit. Rep. Bill Pascrell Jr. of New Jersey characterized the bill as an “equal-opportunity shaft.”

At press time, the committee had not voted on any additional amendments.

Follow Dylan Moroses (@DMoroses3244) and Asha Glover (@AshaSGlover) on Twitter for real-time updates.