After months of anticipation, House Republicans released the Tax Cuts and Jobs Act (H.R. 1) on Thursday. This legislation would represent the largest overhaul of the U.S. Tax Code in three decades. Provisions included in the bill that would have a major impact on the business community include the following:

• Taxation of Pass-Through Entity Business Income – The “business income” of individual owners of pass-through entities – such as LLCs, limited partnerships, and S corporations – would be subject to a top federal income tax rate of 25 percent. Income not qualifying as “business income” would be subject to ordinary individual income tax rates, with a top rate of 39.6 percent. The bill includes a mechanism for classifying income as either business income or compensation.
   
• Corporate Rate Reduction – The bill would replace the current corporate income tax rate (35 percent) with a flat 20 percent rate for tax years beginning after 2017. 
   
• Expensing of Capital Expenditures – Taxpayers would be allowed to immediately expense 100 percent of the cost of certain “qualified property” (generally including tangible personal property with a recovery period of 20 years or less) placed in service after September 27, 2017, and before January 1, 2023.
   
• Foreign Income – The bill would shift the U.S. international tax regime toward a territorial tax system. Under the bill, the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder owning 10 percent or more of the foreign corporation would be exempt from U.S. income tax.
   
• Interest Deductions – The bill would limit the amount of interest that can be deducted to 30 percent of a company’s adjusted taxable income.
   
• Net Operating Losses – The bill would limit the net operating loss deduction to 90 percent of a taxpayer’s taxable income.
   
• Tax Credits – The bill would repeal or significantly modify many federal income tax credits.

With the release of the first draft of the Tax Cuts and Jobs Act, Republicans are pushing to pass tax legislation by Thanksgiving. As legislation makes its way through the House and Senate, however, changes are inevitable. We will be tracking the various iterations of the bill and anticipate this to be the first of a series of client alerts on federal tax reform.