On September 27, an expanded version of the July 27 Joint Statement on Tax Reform was released by the “Big Six,” a group comprising House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch and House Ways and Means Committee Chairman Kevin Brady. While the group defers many of the proposal’s finer points to the tax-writing committees, the framework, Unified Framework for Fixing Our Broken Tax Code, provides a more detailed outline of what the group envisions for tax reform.
The framework calls for a bipartisan effort to simplify the tax code for both individual and business taxpayers. This is a unifying feature between this most recent proposal, the White House’s proposal released earlier this year and the House blueprint from June 2016. For a detailed comparison between these proposals and current tax law, see the Tax Proposals charts on BKD’s Tax Reform Resource Center.
Here’s an outline of the key business and individual proposals of the framework.
For business taxpayers, the framework provides details for some aspects of their tax reform proposals while remaining silent on many of the specifics. The most significant business-related proposals laid out in the framework include:
- Limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25 percent
- Reduces the top corporate tax rate from 35 percent to 20 percent
- Eliminates the corporate alternative minimum tax (AMT)
- Allows immediate expensing of nonstructural depreciable assets for at least five years
- Eliminates the Domestic Production Activities Deduction
- Explicitly preserves the research and development (R&D) tax credit and Low Income Housing Tax Credit
- Partially limits the C corp deduction for net interest expense
The framework recommends ultimate tax reform include additional measures to prohibit wealthy taxpayers from unfairly recharacterizing personal income into business income. A method for reducing the effect of double taxation on corporate earnings also is suggested. The framework further provides that numerous other business deductions, credits and exclusions will be severely limited; however, the “what” and “how” is deferred to the congressional committees.
Finally, the framework builds on the previous proposals’ plans for shifting from the current worldwide tax system to a territorial system and calls for a one-time repatriation of foreign profits, with the tax liability payable over seven years. Unlike the House blueprint that set repatriation rates of 8.75 percent on cash and 3.5 percent on all other assets, the new framework remains silent regarding these rates other than providing for an unspecified lower rate for illiquid assets.
The expanded framework outlines the following proposals affecting individual taxpayers:
- Reduces the number of tax brackets from seven to three, with corresponding rates of 12, 25 and 35 percent
- Increases the standard deduction from $12,600 to $24,000 for married taxpayers filing jointly and from $6,300 to $12,000 for single filers
- Eliminates the individual AMT
- Eliminates all itemized deductions except those for home mortgage interest and charitable contributions
- Repeals the estate and generation-skipping transfer taxes
The framework provides that an additional top rate may apply to the highest-income taxpayers to ensure “the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” Similar to the proposals affecting business taxpayers, the framework also provides more general guidance for other changes affecting individual taxpayers. Proposals such as a “significantly” increased Child Tax Credit and the repeal of numerous other individual-related exemptions, deductions and credits are referenced in the framework. However, as with the business proposals, the hashing out of those areas’ ultimate details has been left to the committees.
While the road ahead for tax reform remains uncertain, this latest glimpse into the potential outcome of reform provides valuable insight for tax planning purposes. Taxpayers should pay particular attention to one consistent theme among the tax proposals released thus far: reduced individual and business income tax rates. For an overview on how to plan for lower rates, see our BKD Thoughtware® article, “Planning for Tax Change & Lower Rates Under the Current Tax Proposals” and be sure to check BKD’s Tax Reform Resource Center often for the latest updates.
To learn more about how the framework and outlook for tax change may affect your tax situation and discuss planning opportunities, contact your trusted BKD advisor.