Our attention now turns to corporate tax reform. As things continue to heat up in Washington many are questioning if it is even possible for the President to be able to address this campaign promise before the end of the year. If the stock market is any indication, there is still hope that legislation will be passed within the next 12 months. We will focus on the elements of the recent “core reform” principals provided by Treasury Secretary Steven Mnuchin and US National Economic Director Gary Cohn on behalf of the President. We will also draw upon information released during the campaign and from the House Ways and Means Committee “Blueprint” for tax reform.
What Has Been Proposed
The proposed tax reform has the stated purpose of growing the US economy and discouraging US businesses from moving jobs out of the country. The President’s plan reduces the corporate tax rate from 35% to 15%. The Blueprint has proposed a rate of 20%. The President’s plan calls for the elimination of the corporate alternative minimum tax as well as the elimination of all credits, except the R&D credit. He also calls for the elimination of tax breaks for “special interest” but provided no detail of what that might look like. Likely examples are qualified production deduction, oil and gas depletion and interest deduction (except for US manufacturing businesses). His plan also carries a one-time repatriation tax on foreign profits brought back into the US at a rate of 10% as proposed by the President as compared to 8.75% as suggested by the Blueprint for cash and 3% for property. The plan also calls for a shift from our current worldwide system of taxation to a territorial system. A worldwide system of taxation generally applies to the taxpayer’s worldwide income regardless of where it is earned. Where a territorial system of taxation is generally applied to the country where the income is earned. Noticeable missing from the presentation of the Treasury Secretary and Economic Director was any discussion of a border adjustment tax or new tariffs. The Blueprint has supported a border adjustment tax. Their proposal would apply a 20% flat tax on imports and exempt US export revenue from this tax. Finally, the plan calls for reduction of income tax on pass-through entities to a maximum rate of 15%. The Blueprint has proposed 25% rate. What are yet to be seen are the mechanisms that will need to be put in place to prevent individuals from using pass-through entities to avoid higher individual tax rates on compensation.
So will corporate tax reform pass?
As stated in our last article sweeping tax reform is unlikely this year. Any legislative changes we see during the year will undoubtedly contain sunset provision in order to meet passage requirements in the Senate. In addition, the new rate enacted is a tossup for the simple reason of the business lobby. The House leadership knows that by eliminating deductions and credits for some business you’re increasing their effective tax rate. Many of whom are paying far less than 20% now. These groups are clashing with those businesses that are paying closer to 35% and are clamoring for relief to be more competitive. At least the fate of the border adjustment tax is becoming clearer. In recent comments by Senator Orrin Hatch, Chair of the Senate Finance Committee, the 20% border adjustment tax favored by the House Republicans is going to be tough to pass and he does not see a way to get it through his committee. He stated after a meeting with Secretary Mnuchin, that the administration also opposes the tax. However, without this revenue raiser, future economic growth alone will not be able to finance this tax cut. And using deficit-financed tax cuts is sure to meet with budget hawks displeasure. According to Senator Hatch, “we have to raise revenue. There’s no question about that. And we will. We know where it all is anyway.” Obviously this story is not over. We will keep you updated on the latest information as it becomes available.
About the Author
James Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.