Tax Reform Watch: Release of New Plan Offers Initial Insights into Year-End Planning – September 29, 2017 by Tracy Monroe

At long last the Unified Framework for Fixing our Broken Tax Code (Unified Framework) was released by the Trump Administration, House Ways and Means Committee and Senate Finance Committee on Wednesday September 27, 2017. Now the leaders of the tax reform crusade and President Trump will commence on a promotional tour to make their case for adopting the plan.
 
The problem is that the Unified Framework is just that — a framework to build upon through the committee review process. While some questions were answered in the proposal, many other details still need to be disclosed. What was released, however, did not contain any surprises and was consistent with previous discussions on tax reform. 

The Details

Specifically, the Unified Framework addresses individuals, and domestic and international businesses. 

Individuals

  • Sets the standard deduction for married taxpayers to $24,000 and $12,000 for single filers.
  • Reduces the number of tax brackets from seven to three (possibly four):  12%, 25% and 35%.
  • Removes dependency exemptions and significantly increases the child tax credit, increasing the income limit at which the credit is phased out.
  • Adds a new $500 tax credit to help defray the cost of caring for non-child dependents.
  • Repeals the Alternative Minimum Tax (AMT).
  • Eliminates itemized deductions, other than mortgage interest and charitable contributions.
  • Retains tax benefits that encourage work, higher education and retirement security. The committees are encouraged to simplify these benefits to improve efficiency and effectiveness.
  • Repeals the estate tax. 

Domestic Businesses

  • Reduces the top corporate tax rate to 20%. The committee also may consider methods to reduce the double taxation of corporate earnings.
  • Applies a maximum tax rate of 25% to S Corporations, partnerships and sole proprietorships. Measures would be adopted to prevent the re-characterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.
  • Allows for immediate expensing of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years.
  • Partially limits the deduction of interest expenses by a C Corporation. The committee will consider the appropriate treatment of interest paid by non-corporate taxpayers.
  • Eliminates the domestic production deduction as well as other non-specific tax credits. The R&D credit and Low Income Housing Credit will stay. 

International Businesses

  • Replaces the existing worldwide tax system for U.S. businesses with a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake. To transition to this new system, the Unified Framework treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.
  • To prevent companies from shifting profits to tax havens, the Unified Framework includes rules 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. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies. 

Questions & Planning

There are several very important questions that remain unanswered, including what date these provisions will be effective — January 1, 2017, or January 1, 2018? The changes above would certainly require tax laws to be written and adopted, and IRS forms and instructions to be updated. Even though the goal is for most individuals to file on a postcard, many will still rely on computer programs. Those programs would need to be updated to address the new set of rules as well. Another very important question is at what taxable income levels do the new rate brackets apply? 
 
Without answers yet to these initial key questions, another question arises:  What planning options are available now? Here is what we will be telling our clients until more details are available: 

  • Don’t get caught on your heels. The basic planning premise of deferring income and accelerating deductions still applies. Even though the specifics on the tax rates and what the income tax brackets are have not been released, the assumption is that everyone will be paying a lower tax rate.
  • Since charitable donations will remain deductible and the stock market is high, individuals should consider donating appreciated securities.
  • Businesses should consider purchasing capital equipment, since at a minimum they should qualify for bonus depreciation or Section 179 expensing under the provisions of the PATH Act. Under the Unified Framework, the entire cost may be deductible.

  • Since the R&D credit will remain in place, businesses should consider evaluating their qualifying activities. 

We’ll keep watching as more details unfold.
 
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Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.