Last week, President Trump released an outline of his tax plan. Many of you have probably seen or heard a few different snippets from it. While it was written very broadly, it is instructive on the administration’s thinking. It follows the House Republican “Better Way” plan in some respects but also has some major differences.
On the business side, the proposals would bring the top corporate tax rate down from 35% to 15%. That rate would become effective for business income generated by flow through entities, such as partnerships, LLCs, S-Corps, Schedule C and F, etc., in addition to C-Corps. Some business tax credits and deductions would be repealed, but those were not detailed. International tax changes as well. It calls for a “territorial tax system to level the playing field for American companies.” The House GOP’s proposal for a “border adjustment tax” was notably left out. That component of the House plan would generate up to $1 trillion in tax revenue that could help pay for tax cuts over 10 years.
The president’s proposal calls for three tax brackets for individuals versus the current seven. They would be 10%, 25%, and 35%, thus lowering the top rate from 39.6% to 35%. The outline did not specify where each bracket would begin and end. The president proposes repealing all individual deductions except those for mortgage interest and charitable contributions. The standard deduction would double, and the alternative minimum tax and estate tax would be repealed. The top rate on capital gains and dividends would remain at 20%, and the 3.8% net investment income tax, enacted under the Affordable Care Act (ACA), would be repealed.
As for timing, the Treasury secretary said that they would hold listening sessions with stakeholders during the month of May. In the House, the leadership would like to take another shot at repealing the ACA first to free up some savings to pay for these tax cuts. Even if that happens, the chances of ACA repeal passage in the Senate are dicey, at best.
Many are excited that flow through business income might be taxed at 15% versus 39.6%, but the likelihood of those rates actually being enacted is pretty small. On the upside, now both the president’s plan and the House plan are calling for a similar lowering of individual and business tax rates, including this flow through provision. When the Senate pulls together their plan, indications are that they, too, will have such a proposal. If so, a possible lowering of business rates to somewhere between 20-28% maximum, is potentially doable.
Any tax reform will take time to wind through the legislative process. At this point, some are starting to wonder if it can be completed this year. The schedule is very uncertain right now. Even if reform is passed, the effective dates will dictate the timing/nature of tax planning.
We’ll post updates as details become clearer and offer planning ideas when available.
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