Significant policy changes are often expected with a change in presidential administration – especially if the other political party is elected into power. However, new tax policy proposals are rarely enacted into law in their proposed form. This year is not anticipated to be any different, but it’s unclear whether or not the tax reform provisions proposed by president-elect Trump will be enacted into law in their current form.
The Middle Class Tax Relief and Simplification Act
President-elect Donald Trump will take the oath of office on Jan. 20, 2017, becoming the 45th president of the United States. He has outlined his priorities for his first 100 days in office, and one of the many priorities he identified is the introduction and support of tax reform legislation. The provisions specific to tax reform are referred to as “The Middle Class Tax Relief and Simplification Act.”
While Americans are faced with this tax policy that seems to lack clarity, it is clear that Trump intends to reform the tax code in its current form rather than attempt sweeping reform by moving toward a consumption-based or other tax regime. The lack of clarity is largely driven by the reduced focus on tax policy proposals by either candidate over the course of their campaigns. There are currently two tax proposals circulating with fundamentally the same goals: the Trump proposal and the House GOP proposal. Below is a brief overview of provisions specific to Trump’s tax policy proposal:
Key Trump Tax Provisions
- Tax Rates
Trump’s proposed tax rate changes are certainly the most well-known provision of his tax reform proposal. The proposal for business taxation changes includes one tax rate of 15 percent compared to seven brackets under the current law. The current highest corporate tax rate is 35 percent. Trump also proposed a full repeal of corporate alternative minimum tax (AMT).
Paired with the change in rates is a proposed change in permitted deductions and credits. Trump’s plan would eliminate most corporate deductions and credits including the qualified production activities deduction (Sec. 199). The one credit that he has specifically spared is the R&D credit.
- Passthrough Tax
Trump’s proposal includes a single tax rate for passthrough income at 15 percent. The application of this provision is widely unclear and calls for clarification have gone unanswered. What is known is that Trump has proposed a tax passthrough income at a rate much lower than the top 39.6 percent individual ordinary rate that passthrough income is currently subject to, depending on the individual owner’s tax position. What is unclear is how this tax would be applied.
Comments Trump made during his campaign, that were later clarified by members of his staff, seem to point to a corporate-type taxation on passthrough entities in order for them to take advantage of the lower rate. Of course this is unattractive to current investors and owner-operators as a second layer of tax would apply as with corporate taxation in its current form. Trump has also clarified that anti-abuse provisions will be included related to reasonable compensation. Reasonable compensation provisions currently exist for S-corporations but do not exist for other passthrough entities. These provisions would require owner-operators to take compensation and would ensure those amounts are taxed at ordinary rates rather than the lower passthrough rate.
- Asset Expensing
Changes to the way certain businesses account for capital asset purchases could change with the enactment of the president-elect’s reform proposal. Included is a provision for U.S. manufacturers that would allow them to elect to fully expense all capital expenditures in the year incurred. Along with this would come changes to net operating loss (NOL) provisions to increase the number of years NOLs may be carried forward. The trade off to full expensing is that business interest will no longer be deductible. Manufacturing businesses would elect either to deduct business interest OR fully expense capital assets. The election would become permanent after three years. It is important to note that the House GOP proposal extends full expensing provisions to all businesses and would allow the full expensing of capital assets in the year of purchase, only excluding land.
Also included are provisions to increase the Sec. 179 expense limitation to $1 million, a 100 percent increase over the current $500,000 limit. It appears the enhanced Sec. 179 provisions and the full expense provisions are in conflict with each other and it is unclear how Sec. 179 would come into play in a full expensing structure.
- International
Trump believes the reduction of the corporate tax rate will ensure the success of U.S. companies worldwide. His proposal includes a provision for U.S. corporations to repatriate earnings at a one-time lower tax rate of 10 percent.
- Affordable Care Act
Trump’s most well-known campaign focus, second only to lower tax rates, is his promise to repeal the Affordable Care Act (ACA). This would include all taxes associated with the act, comprised of the 3.8 percent net investment income tax and the additional 0.9 percent Medicare tax on wages and self-employment income. The repeal would also remove penalties on individuals and businesses for failure to procure health insurance and failure to offer affordable health insurance, respectively. Finally, the Cadillac tax and medical device excess tax would also disappear.
The overview of President-elect Trump’s tax reform provision proposal above is based on what we know today when looking at what he laid out both in his campaign and in recent weeks as he prepares to take office. As more becomes known about these proposed reforms, we will be sure to communicate any changes that may affect you and your business.
By Christopher Axene, CPA (Dublin office)