Administration Releases Long-Awaited Tax Reform Framework

On Wednesday, September 27, the Trump Administration, together with the House Ways and Means Committee and the Senate Finance Committee, released its long awaited “Unified Framework for Fixing Our Broken Tax Code.”  It is indeed a framework, a “template” as the document says, with substantially all of the detail left for the Congressional tax-writing committees to develop and complete.  And no doubt, as the legislative process moves forward, many of its provisions will evolve as the dialogue and debate proceed.  EisnerAmper will monitor developments and will continue to keep our clients and friends informed as circumstances warrant.

Following are the highlights of the framework.

Individual Provisions

Individual Tax Rates.  There will be three tax brackets of 12%, 25% and 35%.  No indication is provided as to the income thresholds for these brackets.  An additional top tax bracket may apply to the highest income taxpayers.  The framework “envisions” the use of a “more accurate” measure of inflation for purposes of indexing the tax brackets and other tax parameters.  The framework makes no reference to the tax rate on capital gains or “carried interests.”

Personal Exemptions and Standard Deduction.  Personal exemptions will be eliminated and consolidated into a larger standard deduction -- $24,000 for married taxpayers filing jointly and $12,000 for single filers.  

Itemized Deductions.  Most itemized deductions will be eliminated, except for home mortgage interest and charitable contributions. 

Individual Alternative Minimum Tax.  The individual alternative minimum tax will be repealed.  

Children and Families.  Personal exemptions for dependents will be repealed, but the child tax credit will be increased.  The first $1,000 of child tax credit will continue to be refundable, and the income levels at which the credit begins to be phased out will be increased.  In addition, a non-refundable credit of $500 for non-child dependents, to help defray the cost of caring for other dependents, will be provided.    

Work, Education and Retirement.  The framework provides that tax benefits that encourage work, higher education and retirement security will be retained.  It further notes that tax reform will aim to “maintain or raise retirement plan participation of workers and the resources available for retirement,” with no further specificity.

Death and Generation-Skipping Transfer Taxes.  The framework repeals the estate tax and the generation-skipping transfer tax.  It is silent as to the gift tax.  

Business Provisions

Tax Rate Structure for Small Businesses.  The maximum tax rate applied to “business income” of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations will be 25%.  Measures to prevent the recharacterization of “personal income” into business income so as to avoid the top personal tax rate will be provided.  What is intended as business income as distinguished from personal income and how this will be determined is not addressed in the framework. 

Tax Rate Structure for Corporations.  The maximum tax rate will be 20%, and the corporate alternative minimum tax (AMT) will be eliminated.  Methods to reduce the double taxation of corporate earnings may also be considered.

Expensing of Capital Investments.   Businesses will be allowed to immediately write off (expense) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years.  

Interest Expense.  The deduction for net interest expense incurred by C corporations will be “partially” limited.  “Partially” is not defined.  The appropriate treatment of interest paid by non-corporate taxpayers will be considered.

Other Business Deductions and Credits.  The current law domestic production activities (IRC Sec. 199) deduction will be repealed.  Many other exclusions and deductions will be repealed or restricted.  However, research and development (R&D) and low-income housing credits will remain.  While other business credits will be repealed, some business credits may be retained to the extent budgetary limitations allow.

Specific Industry Tax Rules.  The rules applicable to specific industries and sectors will be modernized “to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.”

International Provisions

Territorial Taxation of Global American Companies.  The framework adopts a new territorial system exempting foreign profits from taxation when they are repatriated to the United States and provides a 100% exemption for dividends from foreign subsidiaries owned at least 10% by a U.S. parent.

Transitioning to the Territorial System.  In the transition to a territorial system, historical foreign earnings accumulated overseas will be treated as being repatriated.  The framework distinguishes accumulated foreign earnings held in “illiquid” assets as subject to a lower tax rate than repatriated cash or cash equivalents.   Payment of the tax liability will be spread out over “several” years.  The framework does not define illiquid assets, nor are the specific tax rates to be applied to each category provided.  Whether the spread period is intended to be the same for illiquid assets and for cash also is not indicated. 

Stopping Corporations from Shipping Jobs and Capital Overseas.  To prevent companies from shifting profits to “tax havens,” the framework indicates that rules will be included to protect the U.S. tax base by taxing at a reduced rate, and on a global basis, the foreign profits of U.S. multinational corporations.  It also provides that rules will be adopted to “level the playing field” between U.S.-headquartered parent companies and foreign-headquartered parent companies. 

Comparison of Current Law and Tax Reform Framework