The Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a “Tax Reform Framework” on Sept. 27, 2017. The framework is supposed to improve the efficiency and effectiveness of federal tax law.
The overriding principles of the tax reform framework consist of making tax compliance simpler and fairer, allowing Americans to keep more of what they make, leveling the playing field for American businesses and workers, and bringing back trillions of dollars that are currently kept offshore to reinvest in the American economy.
The principles sound good, but problems remain. Since the framework was released, adjustments and changes to the framework have been discussed daily (and will continue until enacted). Like Rep. Kevin Brady (R-Texas) told reporters on Oct. 11, 2017, “All this is complicated.”
Overall, it appears that businesses may be the winners, with full and immediate expensing of equipment, the corporate tax rate being reduced from 35 percent to 20 percent, and income from pass-through businesses being taxed at 25 percent.
On the other hand, there is a lot of debate about a tax increase for individuals and families, and the true impact on the ‘middle class.’ The elimination of state and local tax deduction raises $1.3 trillion over 10 years, which helps reduce revenue loss from the tax cuts for businesses.
Where we begin: The framework
Business tax reform
The framework outlines the following business tax changes.
- Cutting C corporation tax rate to 20 percent
- Creating a separate 25-percent rate on business income from pass-through entities with rules to ensure compensation remains taxed as compensation
- Full business expensing for depreciable assets other than structures for at least five years, while limiting interest deduction for C corporations
- Shifting to a territorial tax system with 100-percent dividends received deduction for foreign subs owned at least 10 percent by a U.S. parent
- Deduction for interest expense incurred by C corporations will be partially limited (interest deduction for non-corporate taxpayers to be determined)
- Eliminating corporate AMT and domestic production deduction (Sec. 199)
- R&D credit and low-income housing credit to be continued
- Other credits to be reviewed and status will be based on budgetary limitations
- Tax rules for special industries to be modernized to reflect economic reality and reduce opportunity for tax avoidance
What came next.
House Republicans unveiled their tax reform bill on Nov. 2, 2017 and the Senate revealed their plan last week; however, there are some major differences between the two.
While both cut the corporate tax rate to 20% to incentivize companies to do business in the United States, the Senate pushed back the start date to 2019, a year later than the House. The House plan also calls for four tax brackets for individuals, while the Senate plan calls for seven. The Senate plan allows write offs for major medical expenses, while the House has a firmer line on this.
You can feel confident if you are worried about keeping your 401K plan safe, because both plans agreed on that point. If you have college debt, the Senate bill does allow you to keep student loan deductions. Both plans are causing heartburn for the real estate industry. The House bill only allows mortgage interest to be deducted on the first $500,000 of mortgage debt, but allows property tax up to $10,000 to be deducted (all other state taxes would no longer be deductible). The Senate bill keeps the mortgage interest deduction as it is currently, but fully repeals the state tax deduction; meaning, you would not be able to deduct state income tax, sales tax or property tax.
In essence, both the House bill and the Senate bill appear to increase taxes on the middle class (depending on your definition of ‘middle class’) while cutting taxes for large businesses. The verdict is still out on how either bill will actually impact small businesses and pass-through entities.
The House hopes to vote on their bill this week, and the Senate is expected to continue marking up their bill. The goal is to pass a tax reform bill by Dec. 31, 2017.
Will it pass?
Only time will tell. It’s been 30 years since the last comprehensive tax reform law. The goal is to pass tax reform before Dec. 31. The question remains as to whether tax reform will result in a tax cut for you.
These bills are changing daily and the final provisions may not be what they are today. If tax reform is enacted based on these bills, one thing is for certain – tax reform is picking new winners and losers. Your tax liability and how you structure transactions and entities may change, so keep in touch with your tax provider to help navigate these waters.