On April 26, 2017, President Trump unveiled his outline of tax reform for individuals and businesses (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 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.

5 Major Themes in President Trump’s Fact Sheet and 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’

5 Major Differences

The House Blueprint proposes 5 major changes that President Trump 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 7 tax brackets to only 3 brackets: 10%, 25% and 35%.
  • 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% net investment income tax, reducing the maximum capital gains rate to 20%[1]

The House Blueprint proposes the following:

  • Reducing the current 7 tax brackets to only 3 brackets: 12%, 25% and 33%
  • Consolidate personal exemption/standard deduction into larger standard deduction
  • Eliminate itemized deductions other than home mortgage interest and charitable deductions
  • Eliminate, consolidate, simplify and reform a variety of exemptions, deductions and credits
  • Repeal the alternative minimum tax
  • Repeal the estate tax
  • Does not propose repealing the 3.8% net investment income tax, but may repeal as part of healthcare legislation
  • Ability to deduct 50% of net capital gains, interest and dividends lowering the rates on such income to 6%, 12.5% and 16.5% depending on the individual’s tax bracket[2]

Business Tax

President Trump’s Fact Sheet proposes the following changes:

  • Lowering the income tax rate on corporations to 15% (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% on corporations; active business income of owners of pass-through entities capped at 25%; other ordinary income could be subject to tax at up to 33%.
  • Move towards 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% 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% to the extent held in cash or cash equivalents or 3.5% 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 to be carried forward indefinitely and indexed for inflation, but no carryback; Carryforwards are limited to 90% 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 will 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, and we are happy to help you do that; however, 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.