On September 27, Republican leadership from the House, Senate, and the Trump administration released the “Unified Framework for Fixing Our Broken Tax Code” (the “Framework”). The Framework outlines, in largely broad, general terms, the Republican goals and vision for comprehensive tax reform. The reform’s stated goals include increasing simplicity, providing tax relief for businesses and middle-class families, and ending incentives to ship jobs, capital, and tax revenue overseas.
While much of the details surrounding proposed reforms were not included in the Framework, it is expected that Congress and committee members will work through the particulars in the coming weeks and months. Predicting the eventual outcome of the Framework’s proposals and tax reform as a whole is, as with any type of legislation, nearly impossible in today’s ever evolving political climate. Nonetheless, the Framework provides an important insight into the Republican leadership’s preferred template for tax reform.
With comprehensive tax reform at the forefront of the legislative agenda, it is important that individuals and businesses alike keep a watchful eye on tax legislation. If robust tax legislation such as that proffered by the Framework is ultimately signed into law, virtually all taxpayers are expected to be impacted. We will keep you apprised of significant tax reform developments. In the meantime, a summary of the Framework’s key proposals follows.
- Repeal of estate tax and generation skipping transfer tax. The estate tax (referred to in the Framework as the “death tax”) and the generation skipping transfer tax would be repealed. Since the Framework does not address the repeal of the gift tax, it is expected that it would remain in effect.
- Reduction in individual tax rates and brackets. The number of tax brackets would be consolidated from seven to three: 12 percent, 25 percent, and 35percent. An additional top rate may apply to the highest income taxpayers. Currently, the top ordinary income tax tax rate for individuals is 39.6 percent.
- Elimination of alternative minimum tax. The individual alternative minimum tax (AMT) would be repealed.
- Increase the standard deduction. The standard deduction and personal exemptions would be consolidated into a larger standard deduction. Under the Framework, the standard deduction would be increased to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
- Fewer itemized deductions. Itemized deductions, other than the home mortgage interest and charitable contribution deductions, would be eliminated, including the deduction for state income taxes and sales tax.
- Tax rate on pass through entities. A maximum tax rate of 25 percent would apply to business income of pass through entities, including sole proprietorships, partnerships, and S corporations. The Framework also contemplates that measures will be adopted to prevent the recharacterization of personal income into business income for wealthy individuals subject to the top personal tax rate.
- Lower corporate tax rate. The top corporate tax rate would be reduced from 35 percent to 20 percent. In addition, the corporate AMT would be eliminated under the Framework. The Framework also provides that the committees should contemplate reducing double taxation of corporate earnings.
- Allowance of full expensing. Businesses would be permitted 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.
- Business deductions and credits. The deduction for net interest expense incurred by C corporations would be partially limited and the deduction for domestic production (Internal Revenue Code Section 199) would be eliminated. Conversely, the research and development and low-income housing credit would be preserved.
- Shift to territorial system. The current worldwide tax system would be replaced by a territorial system. The territorial system would include a 100 percent exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least 10 percent.
- Repatriation of foreign earnings Accumulated foreign earnings would be deemed repatriated, with accumulated earnings held in illiquid assets subject to a lower tax rate than earnings held in cash or cash equivalents. Payment of tax liability would be spread over several years under the Framework regime.
- Curbing inversions. In an effort to prevent companies from shifting profits offshore, the Framework includes rules to protect the U.S. tax base by taxing the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.