President Trump, working with a group of six administration officials and Republican leaders from Congress (the “Big Six”), announced a 9-page framework for tax cuts on September 27 (the “Framework”), marking the most significant development since the administration’s unveiling of its tax reform outline April 26. Accompanied by a speech in Indiana from President Trump, the Framework capitalizes on many ideas previously endorsed in the President’s Tax Outline and in the House Republican Blueprint. The Framework will still require tremendous work by the Congressional tax writing committees to flesh out the concepts, but it gives us the latest thinking on where tax reform may go.
The Framework calls for changes to business taxation as follows:
The corporate tax rate would be reduced to 20 percent. The President called for a 15 percent rate in his Tax Outline, and in his September 27 speech, he said that the rate would be “not higher than 20 percent.” The House Blueprint proposed a 20 percent corporate tax rate. As a nod to budgetary concerns noted by many, the 15 percent rate was seen under the framework to be prohibitively expensive.
A special 25 percent tax rate would be created for income from small and family-owned pass-through businesses. The House Blueprint also called for a 25 percent rate, while the President’s Tax Outline called for a 15 percent rate. Included in this provision is a promise that anti-abuse provisions will be included to prevent the shifting of wage income to lower taxed business income. In Congressman Renacci’s address, he indicated that they are working on a way to make a percentage of the pass-through entity’s income allocated to working owners subject to ordinary tax rates, but that no solution has received full support yet. The Framework’s proposal also implies that larger pass-through businesses may not qualify for this special rate.
Full expensing of depreciable assets (other than structures) would be provided for five years. The Framework specified an effective date of Sept. 27, 2017, for this full expensing provision, an apparent effort to encourage continued capital investment by the business community. The House Blueprint also called for full expensing, but included real estate. The Tax Outline was silent on this and many other business provisions.
Interest expense deductions for C corporations would be capped. The interest expense deduction would be limited, though no specific amount or percentage was provided. The House Blueprint generally called for an elimination of the interest expense deduction except to the extent of interest income. This was also an area where the Tax Outline was silent.
Tax Credits & Deductions
The Domestic Production Activities Deduction (DPAD) would be eliminated. This has its origins in the House Blueprint, and in fact both state that the deduction would “no longer be necessary” due to lower rates. The R&D credit and the low-income housing credit would be preserved. These could be the only credits that are kept under the framework, as it provides that “the committees may decide to retain some other business credits to the extent budgetary limitations allow.” The R&D credit would be preserved under the House Blueprint, but the low-income housing credit was not mentioned in the House Blueprint. Neither was it mentioned in the President’s Tax Outline.
A territorial tax system would be created. This differs from the now-defunct border adjustment tax included in the House Blueprint. Instead, the more general call for a territorial tax system contained in the Tax Outline is expanded upon by adding that there would be “100 percent exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10 percent stake).”
Paired with this is a one-time tax, to be paid over time, on profits held overseas. The House Blueprint called for two rates; one for cash (and cash equivalents) and a lower one for assets held overseas which is mirrored in the Framework. However, like the Tax Outline, these rates under the framework are not specifically mentioned. The framework also specified that ongoing foreign profits of US multinational corporations would be subject to tax at a reduced rate, in an effort to stop corporations from “shipping jobs and capital overseas.”
Individual taxation would be modified as follows:
Individual Tax Rates
The seven tax brackets under current law would be replaced with three brackets set at 12 percent, 25 percent, and 35 percent. The 12 percent bracket appears to have its origins in the House Blueprint while the 35 percent rate returns to the Tax Outline. The 25 percent bracket appeared in each, though none of the tax plans thus far has stated the income thresholds for these rates. Also, the proposal left open the possibility of a fourth bracket with a higher rate, an apparent concession to the President’s recent comments that the wealthy would not be better off and might even have to pay more.
Child Care Tax Credits
The child tax credit would be increased. This has its origins in the House Blueprint which called for a $1,500 child tax credit, up from the current $1,000. However, the framework does not specify by how much the credit will increase, instead calling for a significant increase to the credit and the income phase-out level. Also, the framework adds a $500 non-refundable credit for non-child dependents, which originated in President Trump’s plan from September 2016.
The standard deduction would be nearly doubled, increasing to $24,000 for married couples filing jointly and $12,000 for single filers. The $24,000 and $12,000 amounts are from the House Blueprint, though all plans have called for increasing the standard deduction. The Blueprint also allowed an additional $6,000 for single individuals with a child in the household, but it appears thus far that it hasn’t made the cut. Congressman Jim Renacci (R-OH), addressing the University of Akron’s National Tax Conference on September 28, stressed that, if enacted, this provision would mean that approximately 95 percent of U.S. taxpayers would not itemize deductions.
Personal exemptions would be eliminated. The increased standard deduction would account for the removal of separate personal exemptions. This proposal was part of the Tax Outline and the House Blueprint. For some large families, the framework’s proposal could lead to a tax increase (tax rate changes notwithstanding).
Capital gains rates were not addressed in the Framework. The House Blueprint called for a 50 percent deduction for capital gains, which if it were applied to the newly proposed individual rates, would make the maximum rate 17.5 percent (unless Congress adopts the fourth bracket for wealthy taxpayers).
The individual AMT would be repealed. This was part of the House Blueprint and the Tax Outline. Eliminating the AMT is seen as a natural consequence of the changes proposed to tax deductions.
The Framework would keep deductions for charitable contributions and home mortgage interest, but would eliminate all others. This means that the state and local tax deduction and most other itemized deductions would be eliminated. Without many of these deductions, the AMT is seen as unnecessary and would only add complexity. It is worth noting that the AMT generally affects wealthy individuals most significantly, though some middle-class taxpayers are affected as well.
The estate and generation-skipping transfer tax would be repealed. This was in both the Tax Outline and the House Blueprint, and would only affect the wealthiest of all taxpayers with fewer than 5,000 estates being subject to the tax in 2013.
Other Tax Benefits
Tax benefits that encourage work, retirement savings, and education would be retained. The Framework calls for retention of tax benefits that encourage these; however, no specifics were given. The House Blueprint sought to simplify and consolidate benefits for education, and also called for the retention of retirement tax savings.
What the Framework Says About Tax Reform
Overall, the framework is an evolution of prior tax proposals, but it is not draft legislation. Certain details in the framework that remain unspecified are to be addressed by the House and Senate tax committees. But as it stands, the framework did provide enough detail for a preliminary revenue estimate from the Committee for a Responsible Federal Budget, which estimated that the framework would result in roughly $5.8 trillion of tax cuts and $3.6 trillion of base broadening, to result in a net tax cut of $2.2 trillion.
For more information on the current framework for tax cuts, please contact your local CBIZ MHM tax professional.
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