Last week, Republican Congressional and Trump Administration leaders proposed a tax reform outline that is only nine pages, compared to the 73, 954 in the current tax code. Below are the highlights of the new tax plan. According to the U.S. Chamber of Commerce, “This week was an important step in getting our country the tax reform it needs. Both Washington and the business community are focused on achieving this once-in-a-generation goal [the last tax overhaul was over 30 years ago].”
The Upstate Chamber Coalition has a diverse membership of manufacturers, small retailers, restaurants, professional firms, and even farms. We know there will be winners and losers amongst our members, but we want Congress to focus on the “one simple test” that U.S. Chamber President Tom Donohue outlined in his open letter to Congress, “… will it spur economic growth? If it does, we will be for it. I encourage members of Congress – all of whom have their pet issues on tax reform – to judge proposed legislation based on growth.”
· Corporate tax rate reduced to 20 percent. As was expected, the corporate tax rate was lowered to 20 percent, as opposed to the current rate of 35 percent. This would save time and money in relation to compliance coasts.
· Maximum tax rate for small and family-owned businesses conducted as sole proprietorships, partnerships, and S corporations to 25 percent. In committee, restrictions are expected to be implemented in order to prevent the re-characterization of income in order for wealthy individuals to avoid the top individual tax rate.
· Businesses can write off (expense) cost of new investments for at least five years. Starting a business is no easy task, so in order to assist business owners, new investments in depreciatable assets (not building structures) made after September 27, 2017 can be expensed for at least five years.
· Deduction for net interest by C corporations partially limited. The committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.
· Elimination of “Section 199” business deductions and repeal or restriction of special exclusions and deductions. Tax incentives remain in effect for Research and Development and low-income housing. Since this overall framework significantly reduces the tax rates for businesses, special deductions or exclusions are no longer necessary. This has the intended effect of “leveling the playing field.” The reason for retaining incentives for Research, Development and low-income housing is because they have been proven to be effective. At the discretion of the committees – allowable by budgetary restrictions – other incentives may be retained.
· Modernize the tax rules for specific industries to reflect economic reality and to prevent tax avoidance.
· Territorial system with a 100 percent exemption for dividends from foreign subsidiaries (in which a U.S. company owns at least a 10 percent stake). Under the current law, the United States taxes the worldwide income of resident corporations. If a corporation is considered a resident in the United States, all of its earnings are subject to a tax of at least 35 percent regardless of the location of those earnings. Foreign earnings are not taxed until they are repatriated (brought back) to the United States. Here lies the major concern – the “lock-out effect.” This is the idea that companies won’t bring back earnings to the United States to avoid the tax. The new framework provides that the earnings would be taxed in the jurisdiction that the earnings were made. In order to eliminate the “lock-out effect,” the framework would implement a territorial system, which would encourage companies to bring their earnings back to the United States.
· Include rules to protect the United States tax base by taxing at a reduced rate the foreign profits of U.S. multinational corporations. Committees will incorporate rules to “level the playing field” between United States-headquartered parent companies and foreign-headquartered parent companies. This is being done to prevent profits from being shifted to tax-havens.
· Instead of having seven different tax brackets, the new framework reduces the brackets to just three at 12, 25 and 35 percent. People in the current 10 percent bracket are expected to be better off due to larger standard deductions, larger child tax credit, and additional tax relief to be included during the committee process.
· Eliminate the Alternative Minimum Tax (AMT). According to the IRS, certain tax benefits can significantly reduce a taxpayer’s regular tax amount. The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax.
· Eliminate most itemized deductions, EXCEPT: incentives for home mortgages and donations to charity. Tax time is stressful for a lot of us. Having to keep up with receipts for an entire fiscal year just to sit around the table for hours to itemize everything is a major hassle. Under the new framework, most itemized deductions are eliminated. The only exceptions will be deductions for home mortgages and charitable donations. The idea is to encourage home ownership and charitable giving, according to the framework.
· Double the standard deduction. In lieu of itemizing, you can choose to take the standard deduction, which currently stands at $6,000 for individuals and $12,000 for married couples filing jointly. The new framework would give you more income that is not subject to taxes, $12,000 for individuals and $24,000 for married couples filing jointly, which is expected to create a larger “zero tax bracket” for those with lower income.
· Retain tax benefits that encourage work, higher education and retirement security. The specific details of these benefits will be hammered out by committee and will simplify the tax code to make it easier to file and receive these benefits.
· Repeal of the Estate tax. According to the IRS, the Estate tax, or the “death tax,” is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. This includes cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Opinions on the new proposal are varied:
We encourage you to contact your representatives to let them know how you feel about this initial framework.