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5 Things Financial Executives Should Know About the Looming Tax Reform Battle

As the Trump Administration approaches the 100-day milestone, the White House is expected to release its own highly anticipated tax reform plan.

It should come as no surprise that tax reform is on the minds of financial executives. A recent survey of Financial Executives International members found that 87 percent of survey respondents support tax reform and simplification of the tax code for businesses and 70 percent of private company respondents indicated that it is important that tax reform put the taxation of pass-through entities on a level playing field with C-corporations.

The survey also supported the idea that tax reform will have a positive impact on the economy, with one-third of respondents indicating a reduction in business tax rates will enable them to increase hiring and more than 52 percent will increase capital expenditures and investment if tax rates are lowered.

Speaker of the House Paul Ryan (R-Wis.) and Ways & Means Committee Chair Kevin Brady (R-Texas) issued a tax reform blueprint last summer and have focused on that proposal as the basis for tax reform legislation in 2017. However, as the Trump Administration approaches the 100-day milestone later this week the White House is expected to release its own highly anticipated tax reform plan on Wednesday.

Both the House blueprint and the Trump plan are designed to lower tax rates for individuals and businesses and simplify the tax code to help U.S. businesses grow and compete globally. The Trump plan is expected to be a broad outline of “governing principles” but will not include specifics. The Administration’s budget director has said that more specific legislative language will likely be released in June, once it has reached agreement with Congressional Republicans on what will be included in the bill.

While the Trump plan released today may be light on details, there are a number of things that financial executives should be aware of as the tax reform debate plays out over the coming months in Washington.

Lower corporate tax rate and establishment of a pass-through rate

The House tax reform blueprint released by House Republicans last year – the plan favored by Ryan and Brady – would lower the corporate tax rate from 35 percent to 20 percent and establish a rate for pass-through income of 25 percent. The tax plan released by the Trump campaign during last year’s election called for an across the board tax on all business income of 15 percent, including pass-throughs.

Given that both the White House and Republican Congressional leadership support establishment of a tax rate for pass-through income, observers widely expect that the plan ultimately adopted will included a pass-through tax rate. In meetings on Capitol Hill with members and staff of the House Ways & Means Committee, FEI private company members made it clear that any pass-through rate should achieve parity with the corporate rate in order to level the playing field and ensure that pass-through entities are not put at a competitive disadvantage with C-corporations.

Immediate expensing/non-deductibility of interest

Both the House blueprint and the Trump campaign plan call for immediate expensing of equipment and a disallowance for deductibility of interest expense. Again, while it remains unclear what specific provisions will be included in the revised Trump Administration proposal, it is expected that immediate expensing and non-deductibility of interest will be included in the legislative proposal that Congress considers later this year. In their recent Capitol Hill meetings, FEI private company members emphasized that many middle market companies rely on working capital and other forms of debt and would be negatively affected by elimination of the interest deduction.

Border adjustment tax

A key component of the House GOP blueprint is a border adjustment tax (BAT) that would impose a 20 percent tax on all goods imported into the U.S.. Speaker Ryan and Chairman Brady have maintained that tax reform must be revenue neutral and the border adjustment proposal – essentially a destination-based cash flow tax — would go a long way to helping offset the estimated $1.2 trillion in revenue lost by lowering tax rates to the level called for in the blueprint. By some estimates, the border adjustment tax would raise about $1 trillion over ten years.

The BAT has generated significant controversy, with companies on both sides of the issue launching vigorous lobbying campaigns in Washington. Senate Republicans have expressed concerns about the impact the tax will have on consumers and import-reliant industries. The White House has not taken a position on BAT and it is not expected to be included in the plan released today and if it is not part of the final legislative proposal, other sources of revenue will have to be found to achieve the rate cuts desired by House leaders and the Administration.

Repatriation

Both the Trump and House Republican plans offer a proposal to enable companies holding profits offshore to return them to the U.S. The House blueprint would tax repatriated foreign earnings at a rate of 8.75 percent to the extent held in cash or cash equivalents or 3.5 percent otherwise. The Trump campaign tax plan called for taxing foreign profits at a one-time rate of 10 percent. With an estimated $2 trillion of earnings sitting offshore, it can be expected that the final tax reform plan will include provisions to enable companies to bring that money home while generating significant revenue that could be tapped to fund tax rate cuts or support an infrastructure program, a top priority of the Trump Administration.

Transition rules

The fundamental changes to the tax code called for in the House blueprint and the Trump plan would require adoption of a variety of transition rules to ease the impact on U.S. businesses. Ways & Means Chair Brady has acknowledged that the Committee is looking at transitions that help accelerate economic growth while taking into account the complexity of changes and their potential impact on taxpayers. In meetings with senior Ways & Means tax counsel, FEI technical committees have been asked to provide feedback on transitions that should be put in place to ease adoption of a new tax regime and responses offering practical transition recommendations are being prepared.

Timeline

Following President Trump’s surprise victory in the November elections, hopes were high that with a Republican-controlled White House and Congress, comprehensive tax reform would happen quickly. Earlier this year, the Treasury Secretary and other senior Administration officials said tax reform would be complete by August but have recently revised their outlook and have expressed hope it will be enacted by the end of the year. It is expected that the White House and Congressional Republicans will work together in the coming weeks to find common ground between the Trump plan and the House blueprint and release a legislative proposal for public consideration in the summer or early fall.

FEI’s technical committees, including the Committee on Private Company Policy (CPC-P) and Committee on Taxation (COT) have offered recommendations to Congressional tax writers and the White House. Part of this effort included the CPC-P’s recent Washington Fly-in that brought 18 FEI private company members to Capitol Hill to advocate for sensible, pro-growth tax reform. CPC-P, COT and FEI’s other relevant technical committees will continue to provide input and feedback to legislators and their staff as the tax reform debate progresses in the coming months.