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President's tax reform fact sheet v. House blueprint

05/31/2017  |  By: Brian McCuller, JD, CPA, Shareholder, Practice Leader Tax

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On April 26, 2017, President Trump unveiled his outline of tax reform for individuals and businesses (a one-page fact sheet) with the goals of growing the economy, creating millions of jobs, simplifying our burdensome tax code, providing tax relief to American families (especially middle-income families) and lowering the business tax rate from one of the highest in the world to one of the lowest.

The President’s very high-level outline covers many of the items included in the House blueprint plan, but not everything. What does this mean?

The good news is that the President and the House agree on many of the items that need to be changed. The bad news is that questions remain on the details of how those items should be changed.

We may not know what the exact changes will be, but we know what items are being discussed. Middle-market companies and individuals must monitor the process to be prepared for the impact when legislation is enacted.

Five major themes in President’s fact sheet & House blueprint

  1. Reduce individual and business tax rates
  2. Increase individual standard deductions and reduce itemized deductions
  3. Repeal the individual alternative minimum tax and estate tax
  4. Move to a territorial tax system and impose a one-time low rate tax on foreign earnings accumulated overseas and brought home
  5. Eliminate tax breaks for “special interests”

Five major differences

The House blueprint proposes five major changes that President Trump’s fact sheet does not:

1. A destination-based “border adjustment” tax
2. Full and immediate expensing of investments
3. Limiting the ability to deduct interest expense
4. Changes to net operating losses
5. Eliminating the Domestic Production Activities Deduction

Individual tax   

President Trump’s fact sheet proposes the following changes:

  • Reducing the current seven tax brackets to only three brackets: 10 percent, 25 percent and 35 percent.
  • Doubling the standard deduction
  • Providing tax relief to help families with child and dependent-care expenses
  • Eliminating most tax breaks that benefit high-income individuals, protecting home ownership and charitable giving
  • Repealing the alternative minimum tax
  • Repealing the estate tax
  • Repealing the 3.8 percent net investment income tax
  • Reducing the maximum capital gains rate to 20 percent

The House blueprint proposes the following:

  • Reducing the current seven tax brackets to only three brackets: 12 percent, 25 percent and 33 percent
  • Consolidating personal exemption/standard deduction into larger standard deduction
  • Eliminating itemized deductions other than home mortgage interest and charitable deductions
  • Eliminating, consolidating, simplifying and reforming a variety of exemptions, deductions and credits
  • Repealing the alternative minimum tax
  • Repealing the estate tax
  • Does not propose repealing the 3.8 percent net investment income tax but may repeal it as part of health-care legislation
  • Ability to deduct 50 percent of net capital gains, interest and dividends, lowering the rates on such income to 6 percent, 12.5 percent and 16.5 percent, depending on the individual’s tax bracket

Business tax

President Trump’s fact sheet proposes the following changes:

  • Lowering the income tax rate on corporations to 15 percent (supposedly this also includes pass-throughs that are small or medium in size)
  • Moving from a worldwide to a territorial tax system
  • Imposing a one-time tax on trillions of dollars held overseas
  • Eliminating tax breaks for special interests

The House blueprint proposes the following:

  • Flat rate of 20 percent on corporations; active business income of owners of pass-through entities capped at 25 percent; other ordinary income could be subject to tax at up to 33 percent.
  • Move toward a destination-based tax system under which the taxing jurisdiction for business income would be based on the location of consumption — where goods are sold or services are performed — rather than the location of production. Border adjustments generally would provide for no tax on exports and no deductions for imports.
  • Replace current system of taxing U.S. persons on their worldwide income with a territorial tax system; 100-percent exemption for dividends received from foreign subsidiaries; repeal most of current subpart F regime but retain foreign personal holding company rules for passive foreign income
  • Foreign earnings accumulated under old system repatriated by paying tax of 8.75 percent to the extent held in cash or cash equivalents or 3.5 percent otherwise
  • Allow businesses to fully and immediately expense the cost of investments in tangible property and intangible assets — but not land
  • Allow businesses to deduct interest expense only against interest income
  • Allow NOLs (net operating loss) to be carried forward indefinitely and indexed for inflation, but no carryback; carryforwards are limited to 90 percent of the net taxable amount
  • Repeal corporate alternative minimum tax
  • Eliminate “special interest deductions and credits,” including Section 199 (Domestic Production Activities deduction); R&D credit is NOT eliminated

Monitor and prepare

At this point, no one can accurately predict what changes will get enacted.

If you search the Internet, you’ll find article after article about tax reform — articles talking about the pros and cons of the proposed changes, articles providing the author’s opinion on the chances the proposals have of actually passing. There is a great deal of speculation on what might happen.

Some firms have convinced companies to model out scenarios to determine what the potential impact of the proposals (such as tax rate changes, the move to a territorial tax system, etc.) may have on their company. Modeling out scenarios and being prepared is a good thing to do. The question is: What changes should you model, and is it worth doing?

We recommend staying aware of the federal tax reform process and the items being discussed. Comparing your current tax positions with the proposed changes (at a high level) can give you an idea of what the impact may be. A tax professional can help you do that; but keep in mind that what gets enacted could be far different from what is currently being discussed.

We are monitoring the federal tax reform process and will keep you up to date. Stay tuned.

Brian McCuller is shareholder in charge of the tax practice at LBMC, a Tennessee-based professional services firm. Contact Brian at bmcculler@lbmc.com or 615-690-1971.