Republicans Reveal Tax Plan – “Tax Cuts and Jobs Act”
November 7, 2017
By Mitchell Kopelman, partner-in-charge of Tax; Robert Steele, tax senior associate; and Steven Gluck, tax associate
On Thursday, Nov. 2, the Republicans released their proposed tax reform bill, officially known as the “Tax Cuts and Jobs Act.” The plan includes changes for almost every level of taxation, from business tax to individual and estate tax. Summarized below are some of the major changes proposed by the bill, many of which have been covered with previous tax reform proposals. Please keep in mind that the bill is not final; we anticipate many changes before it passes. We will continue to monitor the situation and release updates as the bill changes and solidifies.
The bill proposes a permanent tax rate of 20 percent for corporations, a significant decrease from the current rate of 35 percent. The intent of this tax cut is to promote growth in the U.S. economy by providing greater after-tax profits for corporations to reinvest. The hope is that this will not only power job growth, but also attract new and expanding businesses.
The bill promotes increased expensing of business assets, including an expansion of Section 179 for small businesses. “Small businesses” has again been left undefined. Unfortunately, the expensing of business interest has been severely limited in the bill, with special rules for each type of entity.
The bill also proposes a change to the taxation of business income from pass-through activities. Instead of this income being taxed at the individual’s tax rate, the plan proposes a 25 percent tax rate on pass-through income. Additionally, there will be limitations on the types of businesses to which this applies, mainly businesses which provide professional services, in order to avoid abuse of the lower tax rate.
Under the new bill, the tax brackets will be consolidated from seven brackets into four brackets, with tax rates of 12 percent, 25 percent, 35 percent, and 39.6 percent. While the 35 percent bracket would start at $200,000 for single filers and $260,000 for joint filers, the 39.6 percent bracket would apply to taxable income over $500,000 for single taxpayers and $1 million for joint filers. Additionally, the bill has a provision that, along with the 3.8 percent Medicare tax, can result in almost a 50 percent tax rate for some taxpayers on some of their taxable income.
The bill also plans to repeal the alternative minimum tax, or AMT, which affects many high income individuals. The bill proposes to nearly double the standard deduction from $12,700 to $24,000 for married couples, and from $6,350 to $12,000 for individuals.
Several deductions are also being removed, limited or altered. Most itemized deductions will be either eliminated or limited. The state and local tax deduction will be almost entirely removed, the only exception being a deduction for up to $10,000 of state and local property tax. The home mortgage interest deduction is not being eliminated, but will be limited to $500,000 on new home purchases, a decrease of 50 percent from the current limitation of $1,000,000. Charitable contributions will be one of the few remaining itemized deductions. These new changes may in effect remove the ability for taxpayers to itemize their deductions. As a result, owning a house and making charitable donations may have no tax benefit.
The bill also establishes a Family Credit, which expands the Child Tax Credit from $1,000 per child to $1,600 per child and provides a credit of $300 for each parent and non-child dependent.
Under the proposed bill, the estate tax will be modified before being phased out. The proposal doubles the current estate tax exclusion to over $10,000,000 while also specifying a six-year phase-out of the tax altogether.
Other Significant Tax Matters
Deductions for entertainment, amusement or recreation activities as a business expense may be eliminated.
Tax-free exchanges may be eliminated for all asset classes other than real estate.
Net operating losses may no longer be able to carry-back, and only carry-forward.
The ability for companies to use the cash method of accounting may expand for certain-sized companies based on revenue, and the uniform capitalization rules may be relaxed for smaller companies.
With federal business and individual rates possibly decreasing, state income taxes averaging 5 to 15 percent will become a higher percentage of overall tax and should gain more attention.
Taxation of Foreign Income and Foreign Persons
Under the current proposal, if a U.S. company owns 10 percent of a foreign company and receives a dividend from the foreign company, 100 percent of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder would be exempt from U.S. income tax. Effectively, foreign-source dividends will not be subject to U.S. tax upon repatriation like they are under current law.
Even though new foreign income brought into the United States will not be taxable, all accumulated overseas profits held offshore previously by U.S. corporate owners will now be taxed. Generally, deferred foreign income earned offshore under current law is not taxed until repatriated to the United States. This previously untaxed deferred foreign income will be taxed at either 12 percent or 5 percent under the proposed legislation. The 12 percent rate would apply to accumulated overseas profit in liquid assets such as cash, and the 5 percent tax rate would apply to less liquid assets.
In addition, there will be a 20 percent excise tax on payments from domestic corporations to foreign corporations, unless that payment is effectively connected to the domestic company’s trade or business within the United States.
The international-related proposals will significantly impact historical planning for international businesses. If these provisions become law, we will need to carefully evaluate for all of our clients operating in multiple countries whether the parent company is in the U.S. or not.
We expect many changes to this bill before it becomes law, and we will continue to monitor the changes proposed. Your Aprio tax advisor is always available to discuss how these proposals may impact you, your family, or your business.
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.