GOP's Proposed Tax Plan Changes the Rules for Businesses and IndividualsBy Mark R. Baran | October 2, 2017
After months of speculation, President Trump and Republican congressional leaders have released an outline of their tax reform plan. “Unified Framework for Fixing Our Broken Tax Code” is intended to serve as a template for congressional committees to draft legislation aimed at cutting tax rates, simplifying the tax code and providing a more competitive environment for businesses. The framework addresses tax issues that affect both businesses and individuals.
Many businesses are likely to see large tax cuts under the new unified framework. Proposed changes include:
Corporate tax rate. The framework establishes a corporate tax rate of 20%, down from the current rate of 35%.
Pass-through tax rate. Owners of “pass-through” entities (sole proprietorships, partnerships and S corporations) would pay at a 25% rate on their income generated from these business entities.
Capital investments. Under existing tax law, capital investments generally are depreciated over several years. The framework allows companies to immediately expense such new investments for at least the next five years – with the exception of buildings constructed after September 27, 2017.
Tax credits and deductions. Under the framework, numerous deductions, business credits and special exclusions would be repealed or limited. This includes limiting the net interest expense deduction claimed by C corporations.
Foreign income. The framework envisions a “territorial” taxation system for multinational companies to remove incentives to keep foreign profits and jobs offshore. Foreign profits would be exempt from taxation when repatriated to the US. The framework also grants a 100% exemption for dividends received from foreign subsidiaries in which the US parent company has at least a 10% stake.
To transition into the new system, all accumulated untaxed offshore earnings would be immediately subject to a one-time tax at a fixed rate. While the framework doesn’t specify rates, earnings held in cash or cash equivalents would be subject to different rates. The tax liability would be spread over several years.
Finally, the framework aims to prevent the offshoring of profits to tax havens, and the resulting erosion of the US tax base. The framework taxes the foreign profits of US multinational corporations at a reduced rate and on a global basis. The congressional committees are instructed to incorporate rules that level the playing field between US-headquartered and foreign-headquartered parent companies.
The framework proposes several changes to the existing tax laws for individual taxpayers, including:
Tax rates. The framework reduces the number of tax rates from the current seven to the following three: 12%, 25% and 35%. (The highest rate currently is 39.6%.) The framework also provides that Congress may add a fourth bracket above 35%. While the specific income levels that would trigger each of the rates is still unclear, the framework contemplates using a more accurate measure of inflation to index the tax brackets and other tax parameters.
Estate tax and generation-skipping transfer (GST) tax. The framework repeals two key estate taxes: the 40% top estate tax rate that applies to estates that exceed the $5.49 million gift and estate tax exemption, and the 40% top GST tax rate that generally applies to bequests or gifts that are made to beneficiaries who are more than one generation below the donor and exceed the $5.49 million GST tax exemption.
Personal exemptions and standard deductions. Under current law, the personal exemption is $4,050. The standard deduction is $6,350 for single taxpayers and married couples filing separately, and $12,700 for married couples filing jointly. Under the proposed framework, the personal exemption is eliminated, and the standard deduction is $12,000 for singles and married couples filing separately, and $24,000 for married couples filing jointly.
Child tax credit. The framework promises a “significant increase” in the child tax credit (currently $1,000 per child) but doesn’t specify an amount. It would also increase the income levels at which the credit begins to phase out (currently $75,000 for single parents and $110,000 for married couples filing jointly), making the credit available to more families and eliminating the current “marriage penalty.” The framework also provides a nonrefundable $500 credit for non-child dependents to help offset the expense of caring for other dependents.
Deductions. The deductions available to individual taxpayers would undergo numerous changes. The framework eliminates most itemized deductions but retains the mortgage interest and charitable contribution deductions. (No explicit reference is made to deductions for state and local taxes). It also retains tax incentives for work, higher education and retirement savings, but encourages Congress to simplify such benefits.
Alternative minimum tax (AMT). The AMT was intended to ensure that high-income taxpayers pay at least a minimum amount of tax. The framework eliminates this tax.
What this means for you
While much of this unified framework closely resembles the tax reform proposals hinted at by the administration earlier this year – and by Trump himself along the campaign trail – there are still many questions left unanswered.
We now wait to see what Congress will do with the unified framework. Given the evolving nature of the budget process, it is far from clear whether all or some of the framework’s tax cuts will even be seriously considered without an adequate plan for offsetting the cost of these tax reform proposals.
About Mark R. Baran
Mark Baran, JD LL.M., is a Principal in the Tax Department at Marks Paneth LLP. He has more than 25 years of specialized tax, transactional and legal experience advising publicly-traded and private companies, regulated financial institutions, investors, high net worth individuals, and government agencies. Mr. Baran provides specialized tax consulting and transactional services to a broad spectrum of clients and industries including the public sector. He routinely provides tax opinions on the tax implications of... READ MORE +