22 THE QUEENS COURIER • OCTOBER 12, 2017 FOR BREAKING NEWS VISIT WWW.QNS.COM
Tax reform framework long on rate cuts, short on pay-fors
BY JOHN SAVIGNANO, CPA
Just released a long-awaited tax reform framework
on September 27 that calls for ambitious cuts
to tax rates for corporations, passthrough entities,
and individuals; a more generous – albeit temporary
– expensing regime; significant increases to
the individual standard deduction and the child
tax credit; and repeal of the estate tax and the individual
alternative minimum tax.
Business provisions
In general, the framework calls for restructuring
the business tax rules to create a more competitive
environment for large and small businesses
alike.
Corporate rate reductions: The framework
calls for reducing the US statutory corporate
rate from 35 percent down to 20 percent, which
would place the US below the OECD average of
22.5 percent.
Integration in the mix?: The framework also
leaves the door open for a corporate integration
proposal – an approach favored by Finance
Committee Chairman Hatch – noting that the
congressional taxwriting committees “may consider
methods to reduce the double taxation of
corporate earnings.” (Hatch has developing a
plan that would couple a dividends-paid deduction
with a withholding tax on both interest and
dividend payments, although he has not released
a formal proposal.)
Corporate AMT: Under the framework, the corporate
alternative minimum tax would be repealed,
though no mechanism is specified for dealing with
existing AMT credits.
Passthroughs: The framework calls for a top
rate of 25 percent on “small businesses” – defined
as a business organized as a sole proprietorship,
partnership, or S corporation – which are currently
taxed on the individual side of the code.
Treatment of capital expenditures, net interest
expenses: The framework would allow businesses
to immediately write off 100 percent of
the cost of new capital investments – other than
structures – for “at least five years,” effective for
investments after September 27, 2017.
Changes to business incentives: According to
the framework, the substantial reduction in marginal
business tax rates will eliminate the need
for additional business incentives so many will be
pared back or repealed.
Although it generally does not elaborate on the
fate of specific current-law business tax incentives,
the framework explicitly identifies the section
199 deduction for domestic manufacturing
activity as a target for repeal. It also specifically
calls for retaining current-law credits for research
and development and for low income-housing.
Credits for specific industries: The framework
states without further elaboration that the taxwriting
committees will look to “modernize” rules
governing the tax treatment of “certain industries
and sectors” to ensure “that the tax code better
reflects economic reality and that such rules provide
little opportunity for tax avoidance.”
International taxation
For US multinationals, the framework proposes
switching from a worldwide system, where
all profits are subject to the US statutory rate
upon repatriation regardless of where they were
earned, to a territorial system that provides for a
100 percent exemption for dividends paid by a
foreign subsidiary to a US parent with at least 10
percent ownership.
Deemed repatriation: To transition to the new
system, accumulated overseas earnings would be
deemed repatriated and taxed over an unspecified
period at one of two rates (one for earnings held
in illiquid assets and one for cash or cash equivalents).
The framework does not specify the rates,
but presumably, as in prior proposals, the rate for
cash and cash equivalents will be higher.
Minimum tax: The framework calls for “rules
to protect the US tax base by taxing at a reduced
rate on a global basis the foreign profits of US
multinational corporations,” but leaves the specifics
of those rules – including the applicable rate –
to the taxwriting committees.
Individual provisions
On the individual side, the drafters of the
framework indicate that their primary focus is
on reducing tax burdens on the middle class and
“creating a healthier economy to give American
families greater confidence and help them get
ahead.”
Income tax brackets and rates: The framework
calls for compressing the current seven income
tax rate brackets into three: 12 percent, 25 percent,
and 35 percent.
However, the framework leaves the option
open for Congress to create an additional new
top bracket for “the highest-income taxpayers” –
at an unspecified rate – to ensure the tax code is
“at least as progressive as the current tax code.”
Increased standard deduction: The framework
essentially would double the current-law
standard deduction to $12,000 for single filers
and $24,000 for married filers. The personal
exemption would be repealed as would, presumably,
the “head of household” filing status.
The framework states that the increased standard
deduction is meant to create more taxpayers
within the “zero bracket” as well as address some
concerns over raising the lowest tax rate from 10
percent to 12 percent.
Capital gains rates: The framework does not
mention changes to tax rates on capital gains,
although it notes that the taxwriting committees
will be tasked with examining “additional measures
to meaningfully reduce the tax burden on
the middle class.”
Carried interests: The framework does not
discuss the tax treatment of income from carried
interests.
Estate tax, AMT: The estate tax and the
individual alternative minimum tax would be
repealed.
Individual incentives: To replace the personal
exemptions for dependents, the framework
would increase the child tax credit as well as the
income threshold at which the credit begins to
phase out. (Neither amount is given in the framework,
but it specifies the first $1,000 of the credit
will remain refundable.) There is an additional
nonrefundable credit of $500 for nonchild
dependents.
Itemized deductions: The framework proposes
– largely without elaboration – to eliminate the
vast majority of current-law itemized deductions
other than those for charitable contributions and
mortgage interest payments. However, the deduction
for taxes paid to state and local governments
as a current-law incentive that would be eliminated
under tax reform. This has already been flagged
as an issue by congressional lawmakers in both
parties who represent higher-tax states.
Work, education and retirement savings: The
framework generally calls for retaining current
law incentives that promote work, education,
and retirement savings, but tasks the taxwriting
committees with streamlining them to
increase their efficiency.
Challenges for the taxwriting committees
With the release of the framework, it now
falls to the congressional taxwriting committees
to turn the high-level guidance into legislative
language – filling in the gaps in a way that
ensures the bill meets budgetary requirements
and crafting the complex but crucial transition
rules – something Senate Majority Leader Mitch
McConnell has labeled a “daunting task.”
John Savignano is a partner with Savignano
Accountants & Advisors located at 47-46 Vernon
Blvd., Second Floor, in Long Island City. If you
have any questions or require additional information,
please call John at 718-707-0955.
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