The Trump administration today released a detailed framework of its tax plan, which would make sweeping changes to the U.S. tax system. With the exception of fixed asset expensing provisions, the framework does not provide any effective dates.
- Reduces the top corporate rate from 35 percent to 20 percent.
- Allows for immediate expensing for at least five years for new investments in depreciable assets other than structures purchased after Sept. 27, 2017.
- Partially limits interest deductibility by C corporations. Details on the limitation are not provided.
- Eliminates the corporate alternative minimum tax (AMT).
- Keeps the research credit and low-income housing credit. All other business credits are to be evaluated by Congress as part of the tax reform process.
- Eliminates the Section 199 domestic production activities deduction and eliminates or restricts many industry-specific exclusions and deductions.
- Limitations on interest expense likely will result in an effective tax rate in excess of 20 percent for businesses with significant debt.
- It remains to be seen how businesses will be able to use carryforwards of credits that are eliminated.
Pass-Through Entity Income
- Taxes business income from pass-through entities (partnerships, LLCs, S corporations, and sole proprietorships) at a maximum rate of 25 percent. This income currently is taxed at the individual income tax rate.
- Couples the lower rate on pass-through income with provisions to avoid using pass-through entities to treat wages as business profits.
- Directs Congress to determine whether and to what extent the interest expense disallowance will apply to pass-through entities and sole proprietorships.
- The framework specifically references the reduced rate on pass-through entity income in the context of small and family-owned businesses. It remains to be seen if all pass-through entities will be entitled to the lower rate or if the lower rate will be limited to small businesses.
- Previous comments by Treasury Secretary Steven Mnuchin indicated professional services firms may not be eligible for the lower pass-through rate. The framework does not affirmatively include this proposal, but it could be added as legislation is drafted.
- Adopts a territorial method of international taxation by providing an exemption for dividends from foreign subsidiaries if the U.S. parent owns at least 10 percent of the foreign subsidiary.
- Provides for a deemed repatriation of deferred foreign profits accumulated prior to tax reform. Accumulated foreign earnings held in illiquid assets are subject to a lower tax rate than foreign earnings held in cash or cash equivalents. The framework provides for payment of this tax over a period of time. The tax rate and time period for payment have not been determined.
- Provides for a global minimum tax on foreign profits of U.S. multinational corporations. The framework directs Congress to adopt rules that will level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies. It remains to be seen if this proposal applies to all foreign profits taxed below a yet-to-be-determined rate or if it applies only to foreign profits earned in tax havens.
- The adoption of a territorial system is a favorable development for U.S.-based multinational corporations.
- The proposed current taxation of repatriated foreign profits is a significant departure from historic U.S. taxation of multinational corporations.
- The framework does not indicate if foreign tax credits can be used against repatriated earnings.
- The move to a territorial system will require taxpayers to re-evaluate their transfer pricing policies.
- The global minimum tax is an attempt to prevent base erosion.
Individual Income Taxes
- Creates three tax brackets: 12 percent, 25 percent, and 35 percent. The plan leaves open the possibility of a higher top rate.
- Doubles the standard deduction to $12,000 for individuals and $24,000 for married taxpayers.
- Increases the child tax credit.
- Eliminates personal and dependent exemptions.
- Adds a new $500 credit for nonchild dependents.
- Eliminates all itemized deductions other than charitable contributions and home mortgage interest.
- Repeals the AMT.
- Repeals the estate tax and generation-skipping transfer tax. Notably, the framework does not propose to eliminate the gift tax.
- Notably, the framework does not have any provisions on the favorable treatment of capital gains and dividends. Presumably, the favorable treatment will remain.
- The deduction for state and local taxes, including property taxes, appears to be eliminated. Individuals should consider paying fourth-quarter state estimated payments by Dec. 31, 2017, and accelerating payments of other itemized deduction items that could be eliminated.
- Most individuals will benefit from accelerating itemized deductions to 2017. However, individuals subject to AMT may benefit from deferring charitable deductions to 2018.
It is important to note that the detailed framework still needs to be translated to legislation, and details of the final legislation could differ significantly from the framework. The Trump administration has expressed a desire to have legislation enacted by the end of the year, but that timeline might slip into 2018 as Congress works through the legislative process.