Released: 9/28/2017

President Trump, along with Republican leaders of Congress, released an outline of the President Tax Plan named “Unified Framework for Fixing Our Broken Tax Code.” The intended effective date of the tax plan has not been mentioned; but It is intended to be enacted before the end of this year. The Plan is short on specifics, leaving much wiggle room at this time.

Included in the Tax Plan are the following significant business tax provisions:

  • New top rate for “small” pass-throughs. Under the Plan the maximum tax rate applied to the business income of “small” and family-owned businesses conducted as sole proprietorships, partnerships and S-corporations would be 25%. The framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
  • Reduces the corporate tax rate to 20% (down from the current top rate of 35%). It also “aims” to eliminate the corporate AMT. Further, the committees “also may consider methods to reduce the double taxation of corporate earnings.”
  • Allows businesses to immediately write off (i.e., expense) the cost of new investments in depreciable assets other than structures that are made after Sept. 27, 2017, for at least five years.  Are the write-offs allowed as a current deduction even if the write-offs create a loss? We don’t know.
  • Interest expense deductions. The deduction for net interest expense incurred by
    C- corporations would be “partially limited” under the framework. The tax-writing committees are instructed to consider how interest should be treated by non-corporate taxpayers.
  • Many deductions and credits repealed. Code Sec. 199 domestic production activities deduction (DPAD) would no longer be available.  It also provides that “numerous other special exclusions and deductions” would be repealed or restricted.

The following are significant individual provisions in the framework:

  • AMT repealed. The framework calls for repealing the individual alternative minimum tax (AMT).
  • Increased standard deduction; elimination of personal exemptions and additional standard deductions for older/blind taxpayers. The framework would increase the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers. “The additional standard deduction and personal exemptions for the taxpayer and spouse are consolidated into this larger standard deduction. The additional deductions for “The Blind and elderly taxpayers” will be eliminated.
  • Reduced number of tax brackets. The framework would reduce the number of tax brackets from seven to three: 12%, 25%, and 35%. Under current law, the lowest tax bracket is 10%, and the highest is 39.6%. The framework leaves open the possibility that “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code.”
  • Itemized deductions largely eliminated; home mortgage interest & charitable contributions retained. The framework would eliminate “most” itemized deductions, but would retain tax incentives for home mortgage interest and charitable contributions. The document states that these benefits “help accomplish important goals that strengthen civil society, as opposed to dependence on government.”
  • Estate and generation-skipping transfer taxes repealed. The framework calls for the repeal of both the estate tax and the generation-skipping transfer tax.

Questions that are not answered include:

  • Will 401(k) plans remain vehicles to defer payment of taxes?
  • Will employee health insurance remain a nontaxable fringe benefit?

The above provisions do give a general direction that is headed for tax proposals but leave out much in the way of specifics.

As the Tax Reform process proceeds and specific proposals unfold, your advisors at EFA CPAs will keep you abreast of what’s happening.

Any questions? Contact your EFA tax professional today!