The U.S. House of Representatives passed H.R. 1, the “Tax Cuts and Jobs Act,” this afternoon by a vote of 227-205 along party lines. The U.S. Senate Finance Committee is also in the process of marking up its own version of tax reform legislation and is expected to finish by the end of the week.

Once the legislation passes the Finance Committee, the Senate is expected to consider it on the floor starting the week after Thanksgiving. However, because Senate Republicans only have a narrow majority, finding a legislative compromise may prove more difficult in the upper chamber. Any differences between the final versions of the House and Senate bills would have to be reconciled, either through a formal conference committee or via informal negotiations, before tax reform legislation could go to the President.

The Big “I” analysis of the House and Senate tax bills is available to members on the government affairs webpage (log in to view).

The centerpiece of both the House and Senate tax reform bills is a large cut to the corporate tax rate. The current tax rate imposed on C corporations is tiered, with the highest possible rate at 35%. The House bill would generally impose a 20% flat tax on C corporations.

However, businesses engaging in “specified services” activities would be subject to a flat tax of 25%. Specified services activities include financial services and most, if not all, activities related to the sale and servicing of insurance—which means insurance agencies that are organized as C corporations would be subject to a 25% tax rate under the House bill. The Senate bill does not make such a distinction and imposes a 20% flat tax on all businesses organized as C corporations, but the cut would not take effect until 2019. 

For the two-thirds of Big “I” members organized as subchapter S corporations, partnerships and sole proprietorships, both the House and Senate proposals make changes to tax rates for pass-through entities. The House bill creates special tax rates for pass-through entities depending on the type and level of income and business activities. The Senate takes a different approach, creating a tax deduction for certain pass-through small businesses. The result is that some insurance agencies organized as pass-throughs would continue to be taxed at the applicable individual rates, as revised by both bills.

Throughout the process, the Big “I” has led a coalition including the National Association of Insurance and Financial Advisors and the Council of Insurance Agents & Brokers in sending letters to the House and Senate to express concerns regarding the bill’s treatment of some small businesses. Since that effort began, both the House and Senate bills have been significantly improved to allow more small businesses to receive tax relief but the Big “I” believes that more revisions should be made to provide tax relief to a larger subset of our members. At this point, the disparity between C Corporations and many professional services pass-throughs is still significant.

In addition to concerns regarding the impact of tax reform on Big “I” members, the legislation includes a provision to subject royalty income derived from the licensing of a tax-exempt organization’s name or logo to the unrelated business income tax. This tax would leave the Big “I” and its state associations with a significant new financial burden. Royalties have historically been treated as passive income, meaning the organization has entered into a licensing arrangement for use of its name or logo but is not actively involved in the marketing or administration of the product or service connected with the arrangement.

Wyatt Stewart is Big “I” senior director of federal government affairs. Jennifer Webb is Big “I” federal government affairs counsel.