With the election of Donald Trump and re-election of Republican majorities to the U.S. House of Representatives and Senate, the likelihood of a major tax reform legislative package has never been higher. The Trump transition team, Republican House Leadership, and key Senate committee chairs have all indicated that tax reform will be part of a “100 Day Agenda”. But what, exactly, does “tax reform” entail? In broad terms, corporate tax reform proposals typically involve lowering the statutory tax rates on corporate income, while eliminating select tax deductions, credits and timing differences, all with the goal of producing a more efficient tax code for businesses and business owners. So what might a tax reform package look like? Both Donald Trump’s campaign and the House of Representatives Ways and Means Committee have released tax reform plans. Comparing the two plans gives us a general idea of what we might expect from tax reform.
- Lower statutory rates on business income. Both the Trump campaign/transition team and House Republicans have called for lower rates on business income; Trump 15% and House 20%. Interestingly, both plans call for the ability for “pass through” business income (S-Corps and partnerships) to be taxed at these preferred rates as well, which are lower than the top proposed rates on individual ordinary income.
- Eliminations and/or reductions of “tax expenditures”. Both plans call for the elimination of most “tax expenditures” – e.g. special credits and deductions for business (though both plans keep the R&D tax credit in place).
- Incentives for investment. Both plans allow “100% expensing” of business investments, except for land and inventory (House plan). Trump’s plan limits this benefit to just manufacturers, whereas the House plan appears to allow all businesses to access this feature. Both plans offset this deduction by eliminating the deduction for interest expense.
- International tax reform. The Trump plan includes a one-time 10% tax on corporate profits held offshore, but largely appears to keep the “worldwide tax” aspect of the current Internal Revenue Code. The House plan differs in that it seeks to convert from “worldwide” to a “territorial” system, coupled with a “border-adjustable” income tax, which would eliminate US income taxes on exports.
It should be emphasized that both of these plans are not actual proposed legislation. The legislative process will reveal more details regarding “revenue offsets” (how the lower rates and new benefits are funded), as well as how the package will be passed through the Senate (through a “budget reconciliation” bill, which only requires 51 votes).
TRCG Advisors will stay on top of the latest developments and provide timely information and analysis as events unfold.