Presidential Tax Reform Framework

New Presidential Tax Reform Framework

Tax Reform Framework Released by Trump Administration and its Congressional Allies

On September 27th, the Trump administration, the House Committee on Ways and Means, and the Senate Finance Committee released a unified framework with the stated intent to achieve “pro-American, fiscally-responsible tax reform.” The framework expounds upon the four principles of tax reform released by the White House in April: (1) creating a simpler and more equitable tax code; (2) increasing American workers’ after-tax income; (3) increasing the competitiveness of American business; and (4) and encouraging corporations to repatriate offshore earnings with the expectation that these funds will result in an increase in business investment. In general, the proposal sets forth the changes in a relatively broad outline format and thus defers many of the details for further analysis, discussion, and negotiation.

The proposal states a number of specific goals including middle-class tax-relief and simplicity that will allow most Americans to file their taxes on a “postcard.” In addition, the proposal intends to provide tax relief for businesses (especially small businesses) and eliminate incentives to ship jobs, capital, and tax revenue overseas. Finally, the framework proposes a broader tax base and a reduction in tax breaks and loopholes.

Proposed Changes to Corporate and Business Taxes

The unified framework will dramatically lower the maximum tax rate applicable to small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%. Notably, the proposal intends to adopt measures preventing wealthy individuals from reporting personal income as business income in order to avoid the top personal tax rate.

The framework proposes to lower the statutory corporate tax rate to 20%, a rate 2.5% lower than the industrialized country average of 22.5%. It also will eliminate the corporate alternative minimum tax.

The framework proposes greatly expanded deductions related to capital investments. In particular, the framework will allow the immediate deduction of amounts incurred to acquire depreciable assets (other than buildings and structures) for at least the ensuing five years. The proposal intends to make this provision retroactive to September 27th of this year.

The framework intends to at least partially limit the deduction for net interest expense by C corporations although the proposal does not provide details.

The framework intends to repeal numerous special exclusions, credits, and deductions in order to broaden the tax base. For example, it will eliminate the domestic production deduction (IRC §199) as a revenue offset to the proposed decreased effective tax rate applicable to domestic manufacturers. However, it intends to retain the research and development and low income housing credits and possibly other business credits to the extent budget limits allow. Finally, it will modernize special tax regimes governing certain industries to better reflect economic reality.

Proposed Changes to the International Tax System

The proposal intends to replace the current international tax system with a “territorial” system. This will include a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least 10%). In the transition to the new system foreign earnings that currently reside overseas will be repatriated. The accumulated earnings held in illiquid assets will be subject to a lower rate than earnings held in cash. The framework defers the payment of the repatriation tax over several years.

To prevent companies from shifting profits to tax havens, the framework includes rules that will protect the American tax base by taxing at a reduced rate, and on a global basis, the foreign profits of U.S. multinationals. The committees also intend to incorporate rules that will eliminate the incentives for corporate inversions.

Other Proposed Changes

The proposal contains changes to the individual tax system such as collapsing the tax rate brackets to three levels, almost doubling the standard deduction, and eliminating many deductions (other than the mortgage interest and charitable contribution deductions). It would also repeal the estate tax.

Look for more articles in the future as tax reform develops. Stay tuned!

About The Author

Daniel Quintana

Daniel Quintana of Kurtz & Company, P.C. in Dallas Texas.