Howard Wagner, Crowe Horwath LLP National Tax Services Managing Director, provides commentary on tax reform proposals across the areas of corporate, international, and individual taxation.
In late April, Treasury Secretary Steven Mnuchin and Senior Economic Advisor Gary Cohn presented an outline for President Donald Trump’s tax reform plan, which largely followed the president’s campaign proposals. The plan highlights the following principles:
- Reduces the top corporate rate from 35 percent to 15 percent
- Eliminates the corporate alternative minimum tax
President Trump’s campaign tax proposals included provisions that allow for immediate expensing of purchases of capital assets and limitations on interest expense. Those proposals were not included in the framework presented by Mr. Mnuchin and Mr. Cohn. Alternatively, the House Ways and Means committee blueprint provides for immediate expensing for purchases of capital assets, and effectively eliminates deductions for interest expense. For many businesses, the time value of money benefit from accelerating deductions will not offset the loss of interest expense deductions.
President Trump’s plan also extends the 15 percent corporate rate to income from pass-through entities (partnerships, LLCs and S corporations) and sole proprietorships. This change raises interesting opportunities as employees might prefer to be independent contractors subject to the 15 percent rate rather than employees subject to the higher individual tax rate (35 percent under Trump’s proposals and 33 percent under the blueprint). Treasury Secretary Mnuchin acknowledged the potential for employees to lower their tax bill and indicated that some measures might need to be taken to prevent system manipulation.
The Trump plan and the blueprint provide for a significant overhaul of the current international tax system. Today, the U.S. uses a worldwide tax system under which U.S. corporations pay tax on their worldwide income (generally when repatriated), with a credit for taxes paid to foreign countries at the U.S. corporate rate of 35 percent. Both Trump’s plan and the blueprint scrap the worldwide system and replace it with a territorial tax system. Under the territorial system as proposed, income is taxed in the country in which it is earned, with foreign income not taxed subsequently in the U.S. when profits are repatriated. Along with the implementation of a territorial system, Trump’s plan and the blueprint provide for a deemed repatriation of foreign profits that have not been subject to U.S. taxation at a favorable rate that would be payable over time.
Notably, Trump’s international tax plan does not include the controversial border adjustment tax from the House Ways and Means Committee blueprint. Under the border adjustment provisions, export sales are exempt from income and no cost of goods sold deduction is allowed for imports.
- Reduces the top individual rate from 39.6 percent to 35 percent
- Taxes income from pass-through entities at 15 percent
- Eliminates the 3.8 percent tax on net investment income
- Eliminates the individual alternative minimum tax
- Eliminates all itemized deductions with the exception of mortgage interest and the charitable contribution deduction
- Doubles the standard deduction
- Repeals the estate tax
To learn more, download the Crowe Horwath LLP Tax Reform Guide. The Tax Reform Guide is specifically designed to help you understand the key tax proposals from the Trump Administration and the House Ways and Means Committee and what to watch for as new tax policy is determined.