Framework, as defined, is a basic structure underlying a system, concept or text. On September 27, 2017, the group of congressional leaders and White House officials known as the “Big Six” released their report titled, “Unified Framework for Fixing our Broken Tax Code.” As the definition suggests, this framework document gives us insight into the basic structural changes and concepts that are expected to be implemented with the forthcoming tax reform act. The report details eight specific individual tax concepts, six concepts for all United States businesses and two international business tax concepts.
Many of these concepts have been consistent throughout all the plans and proposals previously released. We continue to update the comparison chart between the plans and proposals here on the Schneider Downs Tax Reform Page.
The consistency between these plans gives us a good glimpse into the concepts that are destined to be included in the tax reform bill for individuals and businesses. The consistent concepts in all the plans applicable for individuals include the following:
Increasing the standard deduction
Reducing the number of tax brackets
Repealing the Alternative Minimum Tax (AMT)
Reducing the number of itemized deductions
Repealing the estate tax
The consistent concepts in all the plans applicable for businesses, both national and international, include the following:
Reducing the corporate tax rate
Reducing the tax rate associated with business earnings from a pass-through entity
Repealing the Corporate Alternative Minimum Tax (AMT)
Repatriation of accumulated foreign earnings
While these are consistent concepts, the amount of change in many of these areas is subject to future debate. For example, the framework calls for the final number of individual tax brackets to be three, 12%, 25% and 35%. However there is mention that a fourth top rate may apply to the highest-income taxpayers. Another area of probable debate is the corporate tax rate. The framework reduces the corporate tax rate to 20%, however the President previously called for a 15% corporate tax rate and budget committees have suggested that anything lower than 25% would require large revenue raising provisions that have not been popular with the public or congressional members.
The framework document also provides some new insight into tax concepts to be included by the tax writing committees that will develop the legislation. One of the areas that offered new details was the “Enhanced Child Tax Credit and Middle Class Tax Relief.” To compensate for the elimination of the personal exemption deduction, the framework suggests a significant increase to the child tax credit and continues to allow for the first $1,000 of the credit to be refundable. The framework also provides a non-refundable credit of $500 for non-child dependents and will modify the income limits to make the credits more available.
Another area of mention in the framework is that tax reform will not remove the tax benefits that encourage work, higher education and retirement security. The framework encourages tax writing committees to simplify the benefits to improve their effectiveness and to raise retirement plan participation of workers. The tax benefits of saving for retirement will also allow for additional investment into the economy and reduce the reliance on the Social Security fund for retirement of individuals.
The framework also speaks to the repeal of many exemptions, deductions and credits available for individuals, but specifically mentions that the deductions for home interest and charitable contributions will remain available. It does not mention what other deductions, if any, would be saved from repeal. A noted omission from the framework document was the itemized deduction for state taxes paid. The state tax deduction is a major deduction for many individuals that we expect to generate more debate prior to a final tax reform bill is passed.
The framework suggests that the current corporate tax systems are detrimental to U.S. business and consequently U.S. workers. To correct this situation, the framework details several recurring concepts and provides more detail related to these items.
In the past proposals, a corporate rate reduction was always suggested and the framework document is no different. It does call for a reduced corporate tax rate of 20%, which is consistent with the GOP a Better Way Tax Plan previously issued, however the framework suggests the committees take aim at methods to reduce the double taxation on corporate earnings. This reduction may narrow the gap between the effective rates on corporate earnings, with the small business tax rate of pass-through entities suggested to be 25%.
Possibly the most detailed aspect of the framework notes the “expensing” of capital investments. The framework allows businesses to immediately write off the cost of new investments other than structures for at least five years. The document encourages committees to work to enhance the expensing for business investments, particularly for small businesses, and also calls for a limitation of the deduction for net interest expense incurred by C corporations.
Interestingly, the tax framework suggests that the committee must come up with an appropriate way to treat interest paid by non-corporate taxpayers. This treatment may be cause to continue with the current pass-through entity tax structure for many businesses. More definitive advice will be determined once the final bill is enacted.
Something that was expected, and was for the first time specifically addressed in the framework document, was the elimination of the current domestic production (Sec. 199) deduction. There is also mention of other deductions and credits being eliminated, but the document leaves the tax law committees some opportunity to retain business tax incentives to the extent the budget will allow.
In the final section of the framework document, the taxation of global companies is addressed. As expected, the repatriation of current foreign earnings overseas is included to raise revenues to pay for the lower corporate tax rates. However, the framework details that foreign earnings held in cash and cash equivalents are going to be subjected to higher repatriation tax rates than those held in illiquid assets. This may lead to a foreign investment strategy to limit the amount of tax paid on the repatriation event. Once more details are made available, potential planning opportunities may present themselves.
One of the vaguest statements in the framework relates to the rules that will be included to stop U.S. companies from shifting profits to tax havens. The framework suggests that the tax reform should “level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies,” without any specifics regarding how it will do it. Generally it is expected that these rules may be some of the more complex put into place through tax reform. Until the committees provide more information, corporations will have to wait to implement any tax specific planning regarding foreign profits.
This framework document marks the beginning of the drafting process for both the House and Senate tax committees. There is no certainty that this process will be complete anytime in the immediate future. With the requirement that a budget resolution needs to be passed prior to any final tax legislation, there are still many hurdles to clear. As the definition of framework suggests, this document gives us the basics of the underlying structure of tax reform, but as the saying goes, “the devil is in the details.”
Stay tuned to the Schneider Downs Tax Reform Page for more of those forthcoming details.