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Current Tax Reform Proposals


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An overview of current tax reform proposals and potential implications. Overview of business implications with Chairman Camp's 2014 discussion draft, Senator Hatch's 2014 report on tax reform, corporate integration, House tax reform task force, and The Trump Plan.

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Current Tax Reform Proposals

  1. 1. IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein. Roger Royse Royse Law Firm, PC Silicon Valley, San Francisco, Los Angeles, Silicon Beach Skype: roger.royse Twitter @rroyse00 Current Tax Reform Proposals
  2. 2. • Last comprehensive tax reform was in 1986 • Tax reform is now seen as essential and the current tax system is described by many as not being fit for its purpose • Prior to recently, the common themes included: – Broadening the tax base – Reducing the headline rates of tax – Simplification • Overview: – Chairman Camp’s 2014 discussion draft – Senator Hatch’s 2014 report on tax reform – Corporate integration – House Tax Reform Task Force (Ryan Plan) – The Trump Plan Overview
  3. 3. • Most comprehensive attempt at tax reform to date – Discussion draft released in February 2014 – Almost 1,000 pages long (not including analysis from the Joint Committee of Taxation) – Proposed a complete overhaul of the US tax system • Business tax rate brought down to 25% but individual tax rate only lowered to 35% • Draft was revenue neutral however it shifted $580 billion of the tax burden from individuals to businesses • Chairman Camp’s proposal expired with the 113th Congress Chairman Camp’s Reform Proposal
  4. 4. Individual Taxation • Three rates of tax for individuals: – 10% tax on income up to $36,900 ($73,800 for married couples filing jointly) – 25% tax on income between $36,901 ($73,801) and $400,000 ($450,000) – 35% tax on income in excess of $400,000 ($450,000) • Eliminates the personal exemption but increases the standard deduction to $11,000 ($22,000) • Eliminate deductions such as state and local taxes, real estate taxes, medical expenses, and tax preparation fees Chairman Camp’s Reform Proposal
  5. 5. Business Taxation • Headline rate of tax decreased to 25% but there is an overall increase to the tax burden for businesses of $580 billion • Depreciation and amortization periods extended • Industry specific deductions such as the Section 199 manufacturing deduction would be eliminated, however the R&D tax credit would be made permanent • Repeal of favorable treatment for small business stock under Sections 1045 and 1202 • Quarterly excise tax on banks of 0.035% of assets in excess of $500 billion • S Corporation income would be taxable as self-employment income • Most carried interest would be taxable as ordinary income Chairman Camp’s Reform Proposal
  6. 6. • In late 2014, the Senate Finance Committee Republican Staff (headed by Senator Hatch) released a 300 page report titled “Comprehensive Tax Reform for 2015 and Beyond” • The report does not put forward specific proposals but rather seeks to highlight the issues policymakers will need to confront in order to reform the tax code • Senator Hatch states that tax reform should abide by seven key principles: 1. Economic growth 2. Fairness 3. Simplicity 4. Permanence 5. Competitiveness 6. Promoting savings and investment 7. Revenue neutrality Senator Hatch’s Report on Tax Reform
  7. 7. • Proposal was sidelined after the 2016 elections • Lower rates and/or consumption taxes • Simplification of deductions • Repeal or reform of big individual tax expenditures • Lower rate for business that approximates top rate for individuals • Corporate integration • Integrating tax treatment of pass through entities • Territorial system Senator Hatch’s Report on Tax Reform
  8. 8. • One level of tax on corporate earnings • Dividends paid deduction • Withholding tax • Similar to Interest • Treaty obligations • Incidence of the Tax • Impact on Tax-Exempted Organizations Corporate Integration
  9. 9. • House Ways and Means Committee Member Nunes drafted the American Business Competitiveness Act (still in discussion draft form) • Only reforms business income tax • Tax rate would be reduced to 25% over ten years • Full and immediate deduction for all expenditure including capital assets such as real property • Eliminates the deduction for interest expense Congressman Nunes’ Proposal
  10. 10. • Economic Growth and Family Fairness Tax Reform Plan – Proposal put forward by Senators Rubio and Lee – Lowers individual tax rates to 15% for the first $75,000 ($150,000 married) and 35% above that – Reduces elements of double taxation by eliminating taxation of dividends, capital gains on sale of stock, and estate taxes – Reduces business income tax to 25% – Allows immediate expensing of investments • Progressive Consumption Tax Act introduced by Senator Cardin – Proposes a broad consumption tax of 10% – Income tax exemptions increased to $50,000 ($100,000 married) to maintain progressivity – Top marginal tax rate would be 28% – Retains deductions for charitable contributions, state and local taxes, and mortgage interest • Patent Box – Senator Schumer has expressed support for a U.S. patent box system which would tax income derived from U.S. intellectual property at lower rates Other Proposals
  11. 11. • The budget proposal for the 2016 fiscal year contains a mixture of old and new proposals • Business taxation – Previous proposal to reduce business tax rate to 28% has been eliminated – Imposes a bank tax of 0.07% of liabilities for banks with assets of over $50 billion – S Corporation income would be taxable as self-employment income – Eliminates oil, gas, and coal provisions – Repeals LIFO – Expands Section 179 to allow expensing of up to $1 million – Makes the R&D tax credit permanent – Retains incentives for renewable energy – Taxes carried interest as ordinary income Previous Administration
  12. 12. • Individual taxation – Increases capital gains tax to 28% and eliminates step up in basis on death – Introduces a “Fair Share Tax” (a.k.a. Buffet Rule) to ensure a 30% minimum tax on high earners – Increases estate tax rate to 45% and reduces the exemption to $3.5 million – Increases and expands Child Tax Credit (CTC) and American Opportunity Tax Credit – Expands Earned Income Tax Credit (EITC) Previous Administration
  13. 13. • Working Families Tax Relief Act – Would make the EITC and CTC permanent, expand EITC for workers without children, and index CTC to inflation • Early Refund Tax Credit – Proposal to make up to $500 of the EITC payable in advance of tax return filing – Workers would enroll through their employer half-way through the year to request early payment • American Opportunity Tax Credit – Proposal to make the AOTC permanent and expand the maximum credit to $3,000 up from $2,500 Tax Credit Proposals
  14. 14. • Although many plans do not have the following elements, commonalities among the plans include: – Ending capitalization in favor of instant expensing – Ending the estate tax – Ending the AMT – Ending the marriage penalty – Reducing taxation on investment income – Reducing tax rates and number of brackets – Increasing exemptions and credits, or even giving prepayments, to lower earners – Eliminating state-and-local tax deductions Republican Candidate Tax Plans
  15. 15. • Whether and to what extent to keep the home mortgage interest deduction; Huckabee and Bush want to eliminate or limit • Whether to move from a worldwide international tax regime to a territorial regime, and how to handle the deemed repatriation • To what extent the IRS ought to be reduced or eliminated • Whether to have a “business tax” instead of a corporate tax, thereby eliminating the distortion in favor of pass-throughs • Whether to have a flat tax or just reduce the number of brackets • It is not clear what many think of the R&E credit; some certainly want to expand or keep it Republican Tax Areas of Disagreement
  16. 16. • Rand Paul wishes to end corporate tax in favor of a VAT. He also wants to end payroll taxes, excise taxes, and most tariffs • Jeb Bush would end bias favoring debt over equity, by generally making interest non-deductible and taxed at dividend rates. – Rubio wishes to end this bias too • Trump would keep a worldwide regime and end deferral; his very low business tax rates plus the foreign tax credit would minimize this change’s impact • Santorum’s old tax plan included 0% tax rate for U.S. manufacturers • Rubio’s system integrates the corporate tax with the individual income tax via an international dividend exemption system • Huckabee would end the income tax in favor of a large national federal retail sales tax (the “Fair Tax”) • Carson would base his still-vague tax system around tithing Republican Tax: Most Unique Features
  17. 17. • The Democrats have not issued comprehensive tax reform plans • Hillary Clinton’s ideas include: – New tax credits and expenditures (to encourage training new workers, expanding into underserved communities, etc.) – New 6 year holding period for capital gains, beginning at 39.6% tax and steadily dropping each year until 20% tax at year 6 – Making permanent the 0% rate on 5 year old qualified small business stock • Bernie Sanders’s ideas include expanding the estate tax, and taxing investment income of top 2% of earners at ordinary rates Democratic Candidate Tax Proposals
  18. 18. “A Better Way,” Blueprint released June 24, 2016: • Lower ordinary rates and reduce brackets (12% / 25% / 33%) • Eliminate all itemized deductions – Except charity and mortgage interest • Enhance child and dependent care tax credits • Consolidate personal exemption and standard deduction into a larger standard deduction (single $12k, married $24k) • 50% deduction of net capital gains, dividends, and interest • Repeal taxes enacted under the ACA, including 3.8% NIIT • Repeal individual AMT and corporate AMT • Repeal estate tax and generation-skipping transfer tax • Move towards consumption-based tax system Ryan Plan
  19. 19. • Pass through and individual business income taxed at a maximum rate of 25% – Reasonable comp taxed at individual rates – C corporations taxed at maximum rate of 20% • Eliminate “special interest deductions and credits” – Except R&D and LIFO • Full, immediate write-off of business investments • No net interest deduction, but indefinite carryforward • No carrybacks for NOLs, but indefinite carryforward Ryan Plan – Business provisions
  20. 20. • Destination-based, territorial, tax system • Border adjustable and similar to a VAT • Imports subject to U.S. tax, exports exempt • Repatriation tax of 8.75% on cash and 3.5% on other property, payable over 8 years • 100% exemption for dividends from foreign subsidiaries • Will eliminate the bulk of subpart F Ryan Plan – International provisions
  21. 21. • Restructure IRS into 3 divisions – Families and individuals; – Businesses; and – Small claims court • Goal to transform the IRS into an agency focused on customer service • IRS Administrator—New presidential appointment to manage the agency and administer the new tax code for a term of three years; eligible for a single reappointment Ryan Plan – Administrative provisions
  22. 22. • Lower rates/reduce number of brackets • Cap itemized deductions at $100k/$200k married • Simplify standard deduction and personal exemption • Replace child and dependent tax credit with spending rebate for child care expenses • Tax carried interest as ordinary income • Repeal individual AMT • Repeal ACA tax provisions, including NIIT • Repeal the estate tax Trump Plan - Individuals
  23. 23. • 15% rate on business income of pass-throughs and C corporations • 18% differential between business and wage income • Eliminate most deductions and credits, retain R&D credit • Repeal corporate AMT • Full, immediate write-off of business investments • Interest expense not deductible if full expensing of capital investment • Business Tax Credit for on site day care Trump Plan - Businesses
  24. 24. • Deemed repatriation of corporate profits held offshore at 10% rate • Retribution tariff for companies that move jobs offshore Trump Plan - International
  25. 25. • Ryan Plan would reduce federal revenue by $3.1 trillion in 10 years • Trump Plan would reduce federal revenue by $6.2 trillion in 10 years Revenue Neutrality?
  26. 26. • Ryan’s plan would charge U.S. companies’ domestic sales and imports at a new 20% rate; Exports exempt • Supporters argue it will end advantage for foreign-made products • Opponents say it will lead to higher prices for consumers • The plan may conflict with WTO and GATT rules • Trump has released conflicting statements, but generally approves of the policy rationale to “create a level playing field” for American companies and workers Border Adjustment
  27. 27. • Under a territorial tax system, corporate profits earned from production abroad are not subject to U.S. tax • Instead, tax is based on the location of consumption, i.e., where goods are sold or services are performed • Shifting from a worldwide-based system to a territorial system will be disruptive and require many changes to the tax code • Key territorial components of the GOP Blueprint: – Border adjustment – Exemption for dividends from foreign subsidiaries – Streamlining anti-deferral rules to apply to passive income only Territoriality
  28. 28. • Generally, a 60-vote supermajority is needed to advance legislation in the Senate • By contrast, budget reconciliation bills cannot be filibustered and require a simple 51-vote majority to pass – Republicans currently have a 52-seat majority in the Senate • Republicans have indicated they are prepared to use the budget reconciliation process to repeal the ACA tax provisions and to pass comprehensive tax reform • The Trump administration and congressional Republicans have made it their goal to pass tax reform by August 2017 Budget Reconciliation
  29. 29. • Tax reform legislation can apply to the existing tax year even though the year is nearly complete • Too soon to tell what the effective dates will be • The blueprint indicates that Ways and Means will craft clear rules to serve as an appropriate bridge from the current tax system to the new tax system, with particular attention given to comments received by stakeholders • There will likely be grandfather provisions for debt and special carve-outs for financial institutions and insurance companies which may have a broad impact Retroactivity
  30. 30. • Is Death a Taxable Event? Trump Plan: “…capital gains held until death and valued over ten million dollars will be subject to tax to exempt small business and family farms.” ‒ In the absence of an estate tax, Trump would treat death as a recognition event and tax capital gains on death ‒ No indication that the $10 million exemption would apply only to businesses and farms The House Plan: The blueprint does not yet mention eliminating the step-up in basis, nor suggest that a capital gains tax should apply at death in lieu of the estate tax ‒ This proposal will probably be fleshed out over time Estate Tax
  31. 31. • Repeal: $500k limit on deduction of insurer’s comp; NIIT (3.8 and .9% Medicare tax); Higher floor for medical expense deductions (7.5% restored); Individual and employer mandate penalties; Cadillac tax on health plans; Limitation on FSA contributions; Medical device excise tax; Tanning tax; Over-the-counter exclusion from qualified medical expenses under FSAs/HSAs/MSAs; Annual fee imposed on branded prescription drugs sales • Cost: of $600 billion over 10 years – NIIT repeal alone is a cost of $157 billion • Economic substance rules not repealed (tax shelter legislation) ACA Repeal
  32. 32. • Replace: New refundable advance tax credit for health insurance coverage • Generally, for state-approved major medical health insurance and unsubsidized COBRA coverage • Credit equals the annual sum of monthly credit amounts; or, if less, amount paid for “eligible health insurance” -Min $2,000/year credit for each individual under 30 -Max $4,000/year for each individual age 60 and older Excess credits can be rolled over into an HSA • Income-based phase out • Effective months beginning after Dec. 31, 2019 ACA Replacement
  33. 33. • Tax reform is a hot-topic item for 2017 • Most of the focus is on lowering rates and broadening the base • Current proposals attempt to simplify the tax system and eliminate many existing deductions/credits • Some key deductions look set to remain e.g., mortgage interest deduction • Estate tax appears to be history • New health care coverage credit • Border adjustability is big unknown Conclusion
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