Tax Reform 2017 - Bloomberg BNA

Tax Reform 2017 - Bloomberg BNA

Tax Reform 2017: How the ‘Unified Framework’ Would Change Current Law By Bloomberg BNA Staff Updated September 27, 2017 1 About Bloomberg BNA Bloom...

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Tax Reform 2017: How the ‘Unified Framework’ Would Change Current Law By Bloomberg BNA Staff Updated September 27, 2017

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The shared Republican vision for tax reform was unveiled to the public Sept. 27, with the release of the “Unified Framework for Fixing Our Broken Tax Code” by leadership from the House, Senate, and Trump administration. As had been expected, the proposal focuses more on the big picture than on any specific details, but it sets a series of goals for lawmakers to try to achieve when drafting legislative language and provides a message to the public of what tax reform might actually mean for Americans and their businesses. The framework, while brief, also represents a significant step forward for Republicans. It is the product of months of discussions between not just Congress and the White House, but also outside business and political groups, which had been meeting regularly with lawmakers to identify the central principles that they could all rally behind. Ultimately, even though tax reform efforts may garner some level of bipartisan support, their success will largely depend on how united Republicans can be, particularly after attempts to repeal the Affordable Care Act may have widened and reinforced divisions among party groups. Some signs of fracture may already be evident. Two weeks before the release of the framework, Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) stated in a hearing that the Finance Committee would not simply fall in line behind the proposals of the Trump administration and the House. Not that anyone could have expected otherwise—the framework leaves a lot of details undetermined, and the tax-writing committees will be the ones tasked with making the difficult decisions involved in piecing together actual legislation. For example, the framework isn’t clear on the extent to which a reform package would include revenue raisers to offset the proposed tax cuts. Leaders from the Trump administration and Congress have suggested that increased economic growth could make up the difference, but this will certainly be a point of contention among lawmakers. But tax reform is progressing, and it should pick up speed in the coming months. You can stay informed by following along with Bloomberg BNA through our news coverage in the Daily Tax Report, our timeline of major events in the Tax Reform Tracker, and our in-depth analysis in our journals and comprehensive editorial content. In addition, following each new proposal or bill, we will release a special report—like this one—breaking down the language and explaining how it would change current law. From the House Republicans’ “Blueprint” in 2016 to the “Framework” in 2017, reform efforts have progressed in a winding trail of small steps. Small steps can make for long journeys, but Bloomberg BNA will be there to help you understand what it means for you, your business, and your clients.

What Would Change? Here are some of the major ways the framework would change current law. (For a comprehensive list, see the chart at the end of this report.) •

Lower corporate tax rate. The top corporate tax rate would drop from 35 percent to 20 percent.

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Tax rate for pass-throughs. There would be a maximum tax rate of 25 percent for the business income of small and family-owned businesses conducted as sole proprietorships, partnerships, and S corporations. The proposals says measures would be adopted to prevent wealthy individuals from using this to avoid the top personal income tax rate. Shift to territorial system. The United States would shift from a worldwide to a territorial system. As part of that transition, the proposal would impose a repatriation tax on foreign profits stockpiled overseas, although the framework did not specify the exact rates. Allowance of full expensing. Businesses would be permitted to fully and immediately write off (“expense”) the cost of new investments in depreciable assets other than structures made after Sept. 27, 2017—for at least five years. Estate tax repeal. The estate tax and generation-skipping transfer tax would be repealed. The proposal does not mention the gift tax or income tax basis at death. Reduction in individual tax rates and brackets. The number of individual ordinary income tax rates would be cut from seven to three, and the top ordinary income tax rate would drop from 39.6 percent to 35 percent. However, the framework notes that an “additional top rate” might be added for the highest-income taxpayers. Fewer itemized deductions. All but two itemized deductions would be eliminated— leaving only those for charitable contributions and home mortgage interest. The standard deduction would roughly double, further reducing the incentive for most taxpayers to itemize. One of the chief casualties for itemizers may be the deduction for state and local taxes, which is not mentioned in the framework. And more. The framework lists some other objectives—such as encouraging work, higher education, and retirement security, as well as modernizing the rules that govern the tax treatment of certain industries and sectors—but does not specify exactly how those goals would be achieved.

What Would Stay the Same? The tax reform debate has covered a lot of ground since the House Republicans released their “Better Way” blueprint for tax reform in 2016. Some early reform proposals—while they had their moments in the media spotlight—did not make it into the final framework. This list notes some of the significant reform ideas that were widely discussed but ultimately not included in the unified framework: • •

Border-adjustment tax (BAT). The framework does not include a BAT or any other provision specifically addressing the taxation of imports and exports. Corporate integration. There is no mention of corporate integration, an idea that had been supported by Senate Finance Committee Chairman Orrin G. Hatch, although the framework notes that the committees “may consider methods to reduce the double taxation of corporate earnings.”

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Carried interest. There is no proposal regarding the treatment of carried interest, which Treasury Secretary Steven Mnuchin had previously said would be included in tax reform. Net investment income tax. It appears that the 3.8 percent net investment income tax may remain in the code. The tax was enacted as part of the Affordable Care Act and would have been eliminated by the ACA-repeal bill passed by the House earlier this year. However, that bill stalled in the Senate and did not become law.

The Details The following chart describes how the proposals in the framework would change current law: Topic

Proposal

Current Law

Corporate Tax Rates

20% corporate tax rate.

Graduated rate schedule with maximum rate of 35%.

AMT

Corporate AMT to be eliminated.

20% of income above $40,000 (small corporations exempt).

Double Taxation of Corporate Income

May consider methods to reduce double taxation of corporate earnings.

Taxation of corporation and shareholders.

Tax Rate on PassThrough Entities

25% maximum tax rate on sole proprietorships, partnerships, and S corporations. Measures will be adopted to prevent recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.

Income earned through partnerships and S corporations passed through to partner/shareholder and taxed at ordinary income rates.

Depreciation/ Expensing

The proposal would allow business to immediately expense the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least 5 years.

The cost of capital investments generally is deducted from income over multiple years through a depreciation deduction. Taxpayers, other than trusts or estates, may elect to treat up $510,000 (in 2017) of the aggregate cost of qualified property placed in service during the tax year as a current expense rather than as a capital expenditure.

Domestic Production Deduction

The proposal would repeal the domestic production (“section 199”) deduction.

Nine percent deduction for qualified production activities income under IRC §199.

Research and Development Credit

The proposal would explicitly preserve the Research and Development Credit while repealing most other business credits.

A credit is available equal to 20% of qualified research expenses.

Interest Expense Deduction

The proposal would partially limit the deduction for net interest expense incurred by C corporations.

C corporations may deduct interest paid or accrued within a tax year on indebtedness.

Low Income Housing Credit

The proposal would explicitly preserve the Low Income Housing Credit while repealing most other business credits.

A credit is available to developers of low-income housing projects (new construction and rehabilitation projects) based on the number of low-income units in a property. The credit is taken over a 10-year period with a 15-year compliance period.

(Corporate)

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Topic

Proposal

Current Law

Taxation of Foreign Income

Territorial system with 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least 10%.

Worldwide tax system.

Repatriation

Deemed repatriation of accumulated foreign earnings. At least two different tax rates are contemplated for earnings held in illiquid assets (lower rate) and in cash or cash equivalents (higher rate). Payment of tax liability would be spread out over several years. The rates and the period of time for payment are not specified.

No provision.

Inversions

Protection of U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. Proposal contemplates rules to “level the playing field” between companies with a U.S. parent and those with a foreign parent.

A domestic corporation or domestic partnership that “inverts” into a foreign corporation or the subsidiary of a foreign corporation is subject to certain adverse U.S. tax rules.

Individual Income Tax Rates

Under the proposal, the existing 7 tax brackets would be consolidated into three brackets:

10%, 15%, 25%, 28%, 33%, 35%, 39.6%.

12%, 25%, 35% The proposal allows for the possibility of an additional top rate that would apply to the highestincome taxpayers. The proposal also calls for a more accurate measure of inflation to be used for purposes of indexing the tax brackets and other tax parameters. Standard Deduction

Personal Exemptions

The proposal would increase the standard deduction to:

2017:

$24,000 for married taxpayers filing jointly, and

Head of household: $9,350

$12,000 for single filers.

Married filing jointly: $12,700

The proposal would also consolidate the additional standard deduction and personal exemptions for the taxpayer and the spouse into this larger standard deduction.

Additional standard deduction of $1,250 for aged or blind.

The proposal would consolidate the personal exemptions for the taxpayer and the spouse into the new larger standard deduction.

$4,050 (for 2017) per individual (taxpayer and dependents)

Single individuals and married filing separately: $6,350

The proposal would also repeal personal exemptions for dependents (in favor of the increased Child Tax Credit). Itemized Deductions

The proposal would eliminate most itemized deductions, but retain tax incentives for home mortgage interest and charitable contributions.

Mortgage interest payments up to $1 million in acquisition debt and up to $100,000 in home equity debt deductible. Charitable contributions allowed subject to specified income percentage limitations. Taxpayers can deduct state and local income tax as an itemized deduction.

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Topic

Proposal

AMT

The proposal would repeal the existing individual AMT.

(Individual)

Current Law

The sum of— 26% of so much of the taxable excess as does not exceed $187,800 (for 2017), plus 28% of so much of the taxable excess as exceeds $187,800 (for 2017).

Child-Related Expenses

The proposal would significantly increase the Child Tax Credit. The first $1,000 of the credit would be refundable. The proposal would also increase the income levels at which the Child Tax Credit begins to phase out.

$1,000 credit for each qualifying child under the age of 17. Phase-out begins for taxpayers with modified adjusted gross income (MAGI) over $75,000 for single filers, $110,000 for joint filers, and $55,000 for married taxpayers filing separately. A portion of the credit may be refundable. Credit for certain dependent care expenses incurred to allow the taxpayer to be gainfully employed. Amount of credit varies depending on amount of expenses, income and number of qualifying dependents. Dependent children must be under age 13 unless physically or mentally incapable of caring for themselves.

Adult-Care Expenses

The proposal would provide for a non-refundable credit of $500 for non-child dependents. Under the proposal, the deduction for medical expenses would presumably be eliminated (see “Itemized Deductions,” above).

A dependency exemption is allowed for a qualifying relative. Medical expenses paid for an adult dependent qualify for deduction.

Estate Tax

The proposal would repeal the federal estate tax.

For 2017, rate is 40% with unified credit exclusion amount of $5,490,000.

Generation-Skipping Transfer Tax

The proposal would repeal the federal generationskipping transfer tax.

For 2017, rate is 40% with GST exemption amount of $5,490,000.

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