The tax plan proposed in Congress last week includes many features that could help small businesses. It also calls for big changes to the individual income tax system.

For example, the number of individual tax brackets would go from seven to four, with tax rates of 12 percent, 25 percent, 35 percent and 36.9 percent. The standard deduction would double to $12,000 for individuals and to $24,000 for married couples filing jointly. The estate tax and the alternative minimum tax would go away as well.

However, the legislation also includes a controversial provision to limit the popular mortgage interest deduction, which could harm the homebuilding industry.

A Boost for Businesses

Large corporations would see the corporate tax rate fall from 35 percent to 20 percent, which is lower than the 22.5-percent average of the industrialized world.

The tax plan would also create a 25-percent tax rate for so-called pass-through businesses, most of which are set up as sole proprietorships or partnerships. In 2014, about 95 percent of the 26 million businesses in the U.S. were pass-throughs, according to the Brookings Institution. They’re called that because the income they generate “passes through” to their owners, who are then taxed under the individual income tax system.

However, the bill would limit the kind of income that would fall under the 25-percent rate, as some professional services wouldn’t automatically qualify for it. This has drawn criticism from design and engineering groups.

Other business owners could choose a 70-30 split on their income, in which 70 percent is wages taxed at the individual rate and 30 percent is business income taxed at the pass-through rate of 25 percent. Another option allows companies to create a ratio of wage income to business income based on how much they’re spending on capital investments.

The guidelines are aimed at preventing high-earning individuals from gaming the system by declaring themselves corporations.

Another part of the plan would allow businesses to immediately write-off the cost of new investments in depreciable assets other than structures for at least five years.

The commercial construction and manufacturing industries expressed general support for the tax plan.

“The tax proposal released today provides a much-needed framework that will provoke important debate about the best way to improve the tax environment for employers and workers,” said Stephen E. Sandherr, the CEO of the Associated General Contractors of America. “In particular, we will work to ensure that pass-through businesses, including the majority of construction firms, also benefit from tax reform.”

Michael D. Bellaman, president and CEO of Associated Builders and Contractors (ABC), added that the tax reform bill was “long overdue.”

“Our members will feel the direct positive impact of this bill with another dollar in their paychecks, allowing them to create jobs and drive growth,” he said. “We also applaud measures in the bill that eliminate the alternative minimum tax and expand options to invest in education. We look forward to working with Congress and our colleagues in the business community to deliver a final tax reform package that meets the goal of a simpler, fairer tax code not just for merit shop construction businesses, but all Americans.”

Added National Association of Manufacturers (NAM) president and CEO Jay Timmons: “[These] tax cuts will make a real and positive difference for middle class Americans, creating more wealth for higher wages, to reduce the cost of living and to increase savings for retirement and the future. … Manufacturers look forward to continuing to work closely with the Ways and Means Committee and House leadership to advance these reforms so that manufacturers and manufacturing workers in the United States win against their global competitors.”

Meanwhile, design groups such as the American Council of Engineering Companies and the American Institute of Architects (AIA) came out in opposition of the bill, pointing out that their members may fall into the professional services category that could be exempt from the 25-percent tax rate for pass-through companies.

“The House Ways and Means Committee proposal, as drafted, will unfairly damage the thousands of small and family-owned businesses that organize as pass-through entities,” AIA president Thomas Vonier said. “This includes the majority of U.S. architecture firms. It undercuts the design and construction sector’s role as a primary catalyst of job growth in the American economy. The American Institute of Architects cannot support it as drafted.”

Multifamily Worries

The multifamily housing sector could also be affected by the bill. The National Association of Local Housing Finance Agencies (NALHFA) is strongly opposed to the tax reform legislation, which the association says would devastate the housing production at a time when the country faces an affordable-housing crisis.

The group is especially concerned with the termination of the tax exemption on private activity bonds (PABs). This includes multifamily housing bonds, which are critical to the Low Income Housing Tax Credit (Housing Credit) program. According to NALHFA, 40 percent of all Housing Credit developments nationwide use private activity tax-exempt bond financing and the 4-percent credits they generate. The association says the loss of PABs would decimate the production of affordable housing across the country.

“Private activity tax-exempt bonds are an indispensable affordable housing resource for local HFAs,” said NALHFA president Ron Williams. “Close to half of all Housing Credit developments utilize this financing source, and its elimination would cripple the affordable-housing industry.”

In addition, the corporate tax rate drop from 35 percent to 20 percent would likely make investment in Housing Credits less appealing to developers and investors, NALHFA said. When an investor purchases tax credits from a developer under the Housing Credit program, the investor can use those credits to lower their annual federal tax bill. If an investor has a lower tax bill, they will not be willing to pay as much for these tax credits. While the Housing Credit is preserved under this legislation, the lowered corporate tax rate would be devastating to the program.

Lastly, under the proposal the New Markets Tax Credit (NMTC), allocation authority would be eliminated after 2017. The NMTC has been authorized through 2019, so this legislation would get rid of two years’ worth of allocation that has already been authorized. The historic rehabilitation credit would be repealed beginning in 2018, and energy credits would be phased out.

Mortgage Meltdown?

The proposal to cap the mortgage-interest deduction on future home sales at $500,000 has grabbed a lot of attention. The current cap is $1 million for couples filing jointly. (Existing mortgages would not be affected.) That could potentially slow the U.S. housing market, which is finally recovering from the great recession that began in 2008. The tax-reform bill would also disallow the deduction for home equity loans, which could harm the remodeling market as well.

The Window and Door Manufacturers Association (WDMA) is especially concerned about this part of the tax plan.

“While WDMA is pleased that the House tax reform bill includes several beneficial provisions such as lowering the corporate tax rate, we have serious concerns regarding the weakening of the mortgage interest deduction (MID),” said Michael O’Brien, WDMA president and CEO.  “The MID not only helps consumers, particularly middle-class taxpayers, buy a home, but also allows them to deduct interest on home equity loans, which are frequently used to replace windows and doors with energy-efficient replacements. … this bill makes several changes that could undermine this cornerstone of American housing policy. We remain opposed to attempts to weaken the MID and will be working to ensure this popular and beneficial tax deduction remains intact as currently written in the tax code.”

What’s Next              

The bill should go through House committees this week before going to a vote. (It’s expected to pass easily.) After that, it’ll go to the Senate, where it should face strong resistance.