The White House released its promised tax reform agenda, known as the “September Framework.” While longer than the previous version, and relying on Congress to fill in much of the detail, it is generally similar to the one-page plan released earlier this year and the House GOP 2016 Blueprint for America.
Here is a first look at highlights from the nine-page document:
- Corporate tax rate: The tax rate would be 20%, the same rate proposed by the House GOP last year. Originally, President Trump had called for a 15% rate. The current top rate for corporations is 35%. The framework also “aims” to eliminate the corporate Alternative Minimum Tax (“AMT”) and the double taxation of corporate earnings.
- Business income: The rate for the business income of sole proprietorships, partnerships and S Corporations – so-called pass-through entities – would be 25%. Again, the same rate as the GOP Blueprint and higher than the 15% championed by the President.
- Tax write offs for depreciable assets: Businesses that invest in depreciable assets, other than structures, after September 27, 2017 would write them off immediately (at least during the next five years). As a tradeoff, the tax-deductibility of interest expense incurred by most taxable corporations would be partially limited.
- Deductions and tax credits: Most special deductions and tax credits, other than the R&D credit and the low income housing tax credit, would be eliminated. Some credits may be retained if budgetary considerations allow. Notably, “special tax regimes” for certain industries and sectors will be modernized so that the tax code better reflects economic realities. The specific provisions affected have not been identified.
In an effort to move the U.S. toward a territorial tax system, as opposed to the current worldwide tax system, the following provisions are also included:
- Exemption of dividends from certain foreign subsidiaries;
- A transition period for taxing offshore earnings, which will all be deemed repatriated, at a reduced rate over several years;
- Taxing foreign profits of U.S. multinational corporations on a global basis at a reduced rate.
- Proposed tax brackets: Instead of the current law’s seven brackets, the proposed Framework highlights three: 12%, 25% and 35%. There is also a provision to add an additional unspecified top rate for the highest income taxpayers to prevent shifting the overall tax burden to lower- and middle-income taxpayers. The Framework anticipates a “more accurate measure of inflation” to index the brackets. The individual AMT would be repealed.
- Current standard deduction and personal exemption: Both would be replaced by a standard deduction of $12,000 for single filers and $24,000 for married taxpayers who file a joint return. This is being billed as creating a “zero tax bracket” for the lowest earners. In lieu of the personal exemption, the child tax credit would be “significantly” increased and a new, non-refundable credit of $500 for those caring for non-child dependents would be added.
- Estate tax and generation-skipping transfer: Both would be repealed under the proposed Framework. Other provisions which create exemptions, deductions and credits for individuals would be repealed to make the system simpler and fairer, although the specific provisions affected are not identified.
- Itemized deductions: Most itemized deductions, other than home mortgage interest and charitable contributions, would be eliminated. Tax benefits encouraging work, higher education and retirement savings would be retained.
Much remains to be done before tax reform is enacted, and we expect to see draft legislation later this fall. One estimate already published by a nonpartisan group suggested that the policies in the framework would cost about $2.2 trillion over 10 years. We will be closely monitoring any and all upcoming Framework developments. In the interim, contact your Friedman LLP professionals with any questions you have regarding the September Framework.
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