Unified Framework for Fixing Our Broken Tax Code
On Wednesday September 29, 2017, President Trump unveiled a framework for his tax policy reform, entitled the “Unified Framework for Fixing Our Broken Tax Code”. If the tax overhaul takes place as planned, this will be the country’s largest tax reform since 1986. A summary of the proposed major changes follows:
Income Tax Brackets
The framework collapses the seven current individual income tax brackets into three brackets at 12%, 25% and 35%.
The framework proposes doubling the standard deduction to $24,000 for married taxpayers filing jointly and $12,000 for single filers. President Trump’s plan additionally eliminates most itemized tax deductions, except for the deduction for mortgage interest payments and charitable deductions.
Estate/Generating Skipping Tax
The framework proposes repealing the estate tax and generation-skipping tax, but does not give any further details of how that will be accomplished.
Alternative Minimum Tax
The framework also proposes repealing the individual alternative minimum tax.
New Tax Structure for Small Businesses
The framework creates a new tax rate structure for small businesses. For small businesses organized as sole proprietorships, partnerships, or S corporations, the maximum tax rate on any business income will be 25%. Individuals owning interests in these pass-through businesses are currently taxed on any business profits at their own individual income tax rates.
The framework proposes to lower the top federal tax rate for corporations from 35% to 20%. The corporate alternative minimum tax will also be eliminated. Although no details were provided, the framework suggests that future efforts may be made to reduce the double taxation of corporate earnings.
Elimination of Certain Business Deductions and Credits
The framework expresses the goal of limiting the number of business deductions and credits. The domestic production deduction will be eliminated. The net interest expense deduction taken by C corporations will be partially limited. Although the framework discusses the goal of limiting business credits, the business credits for research and development and low-income housing will be retained.
Immediate Deduction for Purchased Depreciable Assets
Under the framework, companies will be able to immediately write off the entire cost of investments in depreciable assets purchased after September 27, 2017. Companies will be able to take advantage of this immediate deduction for at least the next five years. Companies can currently deduct the cost of depreciable assets over a period of years.
Repatriation of Foreign Profits
To avoid paying the corporate tax on profits earned outside of the United States, United States-owned multinational companies have opted to keep these foreign earnings in overseas tax havens. This framework encourages these multinational companies to return foreign earnings and illiquid assets to the United States. The framework proposes that the United States switch to a territorial tax system, meaning that multinational companies would no longer pay taxes in the United States on any foreign earnings. These multinational companies will only pay taxes to the government of the country where the money was earned. However, multinational companies would be required to pay a one-time repatriation tax on their existing foreign earnings. All foreign earnings will then be treated as repatriated (or returned) to the United States. Foreign earnings will be taxed at different tax rates depending on if the foreign earnings are in cash or illiquid assets. If a company has earnings invested in illiquid assets, the repatriated illiquid assets will be taxed at a lower rate than cash or cash equivalents. Companies will be able to pay this proposed repatriation tax over an unspecified number of years. The framework does not specify the proposed repatriation tax rate.