A summary of recent (and not recent) tax reform proposals and efforts and what is likely to happen this year

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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
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Roger Royse
Royse Law Firm, PC
Silicon Valley, San Francisco, Los Angeles, Silicon Beach
rroyse@rroyselaw.com
www.rogerroyse.com
www.rroyselaw.com
Skype: roger.royse
Twitter @rroyse00
Current Tax Reform Proposals

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 (as released in April 2017)
Overview

3. Major Tax Reform Proposals
General Trump plan
(April 2017)
House GOP Blueprint (2016) Camp Bill (2014) Nunes Bill Hatch Report (2014)
The 1-page
White House
handout on
Trump's tax
proposal
A Better Way,” Blueprint
released June 24, 2016
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
Almost 1,000 pages long
(not including analysis from
the Joint Committee of
Taxation)
Proposed a complete
overhaul of the US tax
system
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
House Ways and
Means Committee
Member Nunes
drafted the American
Business
Competitiveness Act
(still in discussion draft
form)
Only reforms business
income tax
“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:
Economic growth
Fairness
Simplicity
Permanence
Competitiveness
Promoting savings and investment
Revenue neutrality
Proposal was sidelined after the 2016
elections

4. Individual
Provisions
Trump plan (April
2017)
Ryan Plan
(2016)
Camp Bill
(2014)
Hatch Report (2014)
Tax Rates Reducing 7
brackets to 3
10%
25%
35%
12%,25%,33% 10%, 25%,35% (10% surtax on modified
adjusted income exceeding $450,000 (joint)
or $400,00 (single).
Lower rates and/or consumption taxes
AMT Repeal Repeal Repeal
Standard
Deduction,
personal
exemption
Double the
standard deduction
Consolidate standard
deduction and personal
exemption into a larger
standard deduction
(single $12k, married 24k)
Standard deduction single $11k, married
22k with phase out if AGI exceeds
$513,600;
Personal exemption repealed
Repeal or reform of big individual tax
expenditures
State and Local
Tax Deductions
Eliminate itemized
deductions other
than home
mortgage intertest
and charitable
deductions
Eliminated Repealed for taxes not incurred in a trade
or business
Charitable
Contribution
Deductions
Keep Only contributions above 2% of adjusted
gross income deductible
Mortgage
Interest
Deductions
keep Principle cap on deductible home mortgage
interest for new mortgages reduced to
$500,000 in increments; deduction for
interest on home equity debt repealed
Major Tax Reform Proposals

5. Major Tax Reform Proposals
Individual
Provisions
Trump plan (April
2017)
Ryan Plan
(2016)
Camp Bill
(2014)
Hatch Report (2014)
Capital Gains and
Dividends
NIIT repealed 50% deduction for capital
gains, interest, and
dividends (6%, 12.5%,
16.5%)
Deduction of 40% of adjusted net capital
gain
Implementation of a full or partial
dividend participation exemption
Carried Interest Not mentioned Not mentioned Certain partnership interests connected to
performance of service (except for real
estate) subject to a rule characterizing a
portion of any capital gains as ordinary
income
Dependent Care
Expenses
Provide tax relief to
help families with
child and
dependent care
expenses
Eliminate various
unspecified exemptions,
deductions and credits
Simplify and consolidate
existing incentives for
education
Provide enhanced child
and dependent care tax
credit
Repeal the dependent care credit, the
health care credit and certain other
individual credits
Modify earned income tax credit (EITC)
Estate Tax Repeal Repeal Keep
Gift Tax Not mentioned Not clear Keep

6. Major Tax Reform Proposals
Business
Provisions
Trump plan (April
2017)
House GOP
Blueprint (2016)
Camp Bill (2014) Nunes Bill Hatch Report (2014)
Top corporate
rate
15%
Not clear whether
to repeal corporate
AMT (reference to
repealing AMT
appeared to relate
to individual AMT)
20%; corporate AMT
eliminated
25% phased in over five years; corporate
AMT eliminated
S Corp. income would be taxed as self-
employment income.
25% phased in
over ten years
Overall lower corporate tax rate
+ integrated system :
One level of tax on corporate
earnings
1) Dividends paid deduction
2) Withholding tax
3) Similar to Interest
4) Treaty obligations
5) Incidence of the Tax
6) Impact on Tax-Exempted
Organizations
Top Pass Through
Rate
15%, possibly
limited to “small”
and “medium”
business
25% for “active
business income”
35%; 25% top rate on income from pass-
throughs engaged in qualified domestic
manufacturing
Harmonization of the tax
treatment of certain pass-
through entities
Cost Recovery Not mentioned Immediate expensing
(except land)
Current accelerated depreciation rules
repealed, new rules generally would
lengthen class lives
Bonus depreciation and other special
provisions for depreciation repealed.
Full and
immediate
deduction for all
expenditure
including capital
assets such as
real property
Interest Expenses Not mentioned Deduction for net
interest expense
eliminated
Deduction generally retained, except for
imposing thin capitalization rules on US
taxpayers
Would amend Section 163(j) by reducing
the threshold for excess interest expense
form 50% to 40% of adjusted taxable
income and by eliminating the ability to
carry forward any excess interest
Eliminate the
deduction for
interest expense

7. Major Tax Reform Proposals
Business Provisions Trump plan
(April 2017)
House GOP Blueprint (2016) Camp Bill (2014) Nunes Bill Hatch Report (2014)
Net Operating
Losses (NOLs)
Not mentioned Allow NOLs to be carried
forward indefinitely and
indexed to inflation, but not
carry back. Carryforwards
limited to 90% of the net
taxable amount for the year
determined without regard
to the carryforward
Limit a corporation’s NOL deduction to
90% of taxable income
Repeal special NOL carryback provisions
Other Business
Preference
Eliminate tax
breaks for
special interests
Calls for them to generally
be eliminated, excepted the
R&D credit and last in, first
out method of accounting
Eliminate most business preferences
except R&D credit and the low-income
housing tax credit
Repeal 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
Simplification of
deductions

8. Major Tax Reform Proposals
Business Provisions Trump plan
(April 2017)
House GOP Blueprint (2016) Camp Bill (2014) Nunes Bill Hatch Report (2014)
Territorial System Territorial Territorial, 100% exemption
for dividends paid from
foreign subsidiaries
Territorial, 95% exemption for
dividends paid from foreign
subsidiaries.
Territorial Territorial
Border
Adjustments/anti-
base erosion
Not mentioned Destination based border
adjustability system
Exempts exports from tax
while taxing imports
Repeals subpart F base
company rules
Applies to services and
tangible and intangible
property
No border adjustment provision
Anti-base erosion: taxes intangible-
related income from US sales at 25%
and form foreign sales at 15%,
regardless of whether the income is
sourced to the US taxpayer or its
foreign subsidiaries.
Implementing a patent
box
Reduction of the
current incentives for
corporate inversions by
limiting earnings
stripping of foreign
corporation
Deemed
repatriation tax on
untaxed
accumulated
foreign earnings
Taxed at
unspecified rate
8.75% for cash and/or cash
equivalents, 3.5% otherwise
Payable over 8 years
8.75% for cash and/or cash equivalents,
3.5% otherwise
Payable over 8 years
Pre-enactment earnings
should be taxed at a
reduced rate

9. • 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

10. • 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

11. • 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

12. • 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

13. • 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

14. • 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

15. • Deemed repatriation of corporate profits
held offshore at 10% rate
• Retribution tariff for companies that move
jobs offshore
Trump Plan - International

16. • Ryan Plan would reduce federal revenue by $3.1
trillion in 10 years
• A 15% tax rate for passthrough business proposed
by Trump administration would reduce federal
revenue by $2 trillion over a decade, according to
the Tax Policy Center
Revenue Neutrality?

17. • 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

18. • 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

19. • 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

20. • 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

21. – Nuclear Production Tax Credit: The House passed H.R. 1551 on June 20
to extend unused production tax credit for new nuclear reactors past
the sunset date of 2021
– Renewable Energy Tax Credit: Proponents are pushing to include the
tax code Section 48 credits for renewable energy in any legislation with
a tax title
– Partnership Audit Modification: Interested parties are urging Congress
to either delay or modify the new regime for partnership tax audits,
which is set to start next year by Bipartisan Budget Act of 2015
– Expiring Extenders
• the deduction for mortgage insurance premiums
• above-the-line deduction for college tuition
• the exclusion for forgiven debt on principle home
• the credit for non-business energy-efficient property
• the Section 179D deduction for energy-efficient commercial buildings
• Nuclear power tax credit extension bill passes House
Four Non-Tax Reform Bills That Could Move This Year

22. • President Trump has issued an Executive Order on April 21, 2017
“Identifying and Reducing Tax Regulatory Burdens”, which directs the
Secretary of Treasury to review all significant tax regulations issued
since January 1, 2016, and do something about the tax regulations that
are:
1) impose an undue financial burden on US taxpayers;
2) add undue complexity to the Federal tax laws; or
3) exceed the statutory authority of the Internal Revenue Service
– The U.S. Chamber of Commerce is recommending the Treasury Department withdraw
several tax regulations that disliked by the business community, including: rules
overseeing tax-free spinoffs, leveraged partnership transactions and intercompany
loans
– The American Institute of CPAs is recommending the Treasury Department to review:
1) proposed rules limiting the liquidation of a business interest for estate, gift and
generation-skipping transfer tax purposes; 2) the serial inverter regulations; and 3) the
rules regarding transfers to foreign corporations that eliminate the goodwill exception
Identifying and Reducing Tax Regulatory Burdens

23. • 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

24. • On May 4, 2017, the House passed the American Health Care Act (AHCA) to overhaul the
Accordable Care Act
• on June 26, 2017, Senate Republicans released their draft version, renamed as the “Better
Care Reconciliation Act of 2017” (BCRA)
• Both Acts Repeal:
– Repeals the 10 percent tax on indoor tanning services
– Repeals prohibition on using tax-advantage funds for over-the counter medication
– Reduces the tax rate for distributions from Archer MSAs from 20 percent to 15 percent
and HSAs from 20 percent to 10 percent
– Repeals tax on certain manufacturers or importers of branded prescription drugs
– Repeals the 3.8 percent net investment tax
– Repeals the 2.3 percent medical device tax
– Repeals health FSA maximum contribution limit
– Repeals the annual fee on certain health care insurers
– Repeals the elimination of employer deduction for expenses allocable to Medicare Part
D subsidy
ACA Repeal

25. • 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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