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October 3, 2017Client Alert

Big Six Tax Framework Issued

Last week President Donald Trump and the Republican leadership announced their long-awaited tax reform framework. The release means the beginning of a process that will pit Democrats and some Republicans who disagree on key elements of the framework against the plan’s supporters.

The next step in the process is to see if both chambers can pass a budget resolution. According to Senate leadership staff, the issuance of the Big 6 plan was to provide enough information to facilitate the passage of the House and Senate Budget resolution that will contain Reconciliation instructions. Reconciliation is the vehicle that will allow the Senate to pass tax reform with a simple majority. Action on the Senate Budget resolution is expected in the next several weeks. Importantly, the Senate Budget resolution is expected to make room for a net tax cut in the range of $1.5 trillion over the next ten years, whereas the estimated cost of the Big 6’s tax plan is expected to be around $4.5 trillion. In order for the “numbers to work,” the tax plan will: 

  • have to be scaled back significantly,
  • the revenue estimates rejiggered to be scored more dynamically,
  • the 10-year revenue window extended to 20 or 25 years,
  • revenue offsets will be used, or
  • a combination of all of these options.

While the FY 2018 budget resolution is being brought to the floor, both the House and Senate will be readying their separate schedules for marking up a bill in committee. House Ways & Means Committee Chairman Brady has long advocated permanent changes to the tax code in order to achieve economic growth, but if the numbers don’t add up to meet the requirements under Reconciliation, some provisions may be permanent, but others might be temporary.   

The Big 6 said that their timeline for finishing the bill was still by years-end. If the process bleeds into 2018, though, they can always make some or all of the provisions retroactive just as President George W. Bush did with the tax cut bill he signed that sent refund checks to millions of taxpayers across the country.   

President Trump is keeping his negotiating options open. Reportedly, he was concerned with several aspects of the plan, including questioning the lowest rate being set at 12% versus 10% and setting the corporate rate at 20% versus the 15% rate he has long advocated. He also left open the possibility of establishing a fourth, top rate for the wealthy, but letting Congress decide on where the threshold for the rate should be set. As part of the “Art of the Deal,” the President is presumably signaling that he is willing to roll up his sleeves and start negotiating with any and all parties in order to get a robust tax cut plan enacted.

Coming out in support of the framework and the budget resolution was the important conservative House Freedom Caucus. They were joined by many others, including The Club for Growth and the U.S. Chamber of Commerce.    

MBS has prepared a comparison of various plans that have been considered previously, but not passed. Those proposals include the work done by the Ways and Means Committee under former Chairman Dave Camp and the House “Better Way” Plan prepared by the Ways and Means Committee under Chairman Brady. And as a point of personal privilege, included is our previously published MBS “Guesstimate,” which came pretty close to the mark.

Click to view information on Corporate Tax Package & Individual Tax Package.

Corporate Tax Package

  Current Law Camp Tax Reform Act of 2014 House Blueprint Latest Big 6 Framework MBS Projection
Tax Rates
  • 35%
  • 25%
  • 20%
  • 20%
  • 22%

Pass-through Tax Rates

  • Taxed at individual owners’ rates
  • Taxed at individual owners’ rates
  • Maximum rate of 25% on domestic manufacturing income
  • 25% Business
  • Max of 25% for small businesses
    • Partners pay individual rate
  • 22% for pass through entities, but not for PSC which will be taxed at individual rate
Capital Gains/Dividend Paid Deduction
  • 0%/15%/20% on capital gains and qualified dividends
  • 3.8% net investment income tax for highest earners
  • 40% deduction of adjusted net capital gain
  • 50% deduction for capital gains, dividends, and interest income
  • Repeal net investment income tax
  • "The Committees also may consider methods to reduce the double taxation of corporate earnings."
  • 40% deduction of adjusted net capital gain
  • 40% dividends paid deduction  Hatch Corporate Integration (Note: As an example, if a corporation had $100 in earnings and paid all of its earnings in dividends to its shareholders, it would then get taxed on $60.  If the corporate tax rate is 22%, the effective rate would then be 13.2 percent.  If it were 25%, it would then be 15% -- the corporate tax rate President Trump has advocated.)
Cost Recovery of Capital Investments
  • Depreciation deductions over time
  • Extends cost recovery periods
  • Maximum $250k on expensing of business property
    • Reduced as total investment exceeds $800k
  • 100% expensing
  • 5 year allowance for 100% expensing
    • Not just physical capital expensing, also human capital expensing
  • Business equipment and property: up to $2M
  • Make ‘bonus’ depreciation: permanent at 50% (possibly 70% expensing)
  • Reduce farm machinery depreciation to 5yrs

Based off of the INVEST Act of 2017 (S. 1144) sponsored by Senator John Thune (R-SD)

Interest Expense
  • Deductible
  • Limits interest deduction of US corporate shareholder of a CFC that is part of the same worldwide affiliated group
  • Eliminate the deduction for net interest expense
  • Limit the deduction for net interest expense
  • Options
    • Limited to a percentage (maybe 66%) of an entity’s interest expense
  • Limited to a percentage (maybe 33%) of entity’s EBIDTA
Deductions and Credits
  • Numerous deductions and credits
  • Eliminate most deductions and credits
  • Eliminates AMT
  • Permanent R&D incentive
  • Make alternative simplified R&D credit permanent
  • Eliminate all except R&D credit
  • AMT repealed
  • Section 199 repealed
  • R&D tax credit retained
  • AMT repealed
  • Streamlined R&D tax credit
  • Numerous deductions and credits will be repealed or phased-out.  Those include:
  • Section 199 repealed
  • Current deductions for oil and gas and renewables will be equalized. Changes will be phased-in as industries are transitioned to a level playing field
NOLs
  • NOLs carried back 2 years and forward 20 years
  • NOLs limited to 90% of taxable income; repeals special carryback rules
  • NOLs carried forward indefinitely with interest factor
    • Limited to 90% of net taxable amount
  • No NOL carrybacks

 

  • NOLs limited to 90% of taxable income
  • Repeal of special carryback rule
International Operations
  • Tax worldwide profits (tax deferred on active foreign earnings until repatriated to US)
  • 95% exemption for dividends from 10% subsidiaries
  • Tax only US sales, services, and intangibles (based on destination)
  • 100% exemptions for dividends
  • Switch to a territorial system
  • 100% exemption for dividends from ‘foreign subsidiaries (in which the US parent owns at least a 10% stake)
  • Switch to a territorial system
    • 10% minimum tax on global income
  • (Note: If the budget window is moved from 10 years to 25 years, the 10% global minimum tax might be eliminated.)

Imports/Exports
  • Included in corporate tax base if company is subject to US tax

 

  • Border adjustments
    • Imports are taxed
  • Exports are exempt
  • No border adjustment tax
  • No border adjustment tax
Deemed Rapatriation
  • No current provision (voluntary holiday in 2004)
  • Mandatory tax on previously untaxed foreign earnings
    • 8.75% cash
    • 3.5% other assets
  • Less proportional foreign tax credit
  • Payable over 8 years
  • Mandatory tax on previously untaxed foreign earnings
    • 8.75% cash
  • 3.5% other assets
  • Payable over 8 years
  • Two-tier system
  • No rates specified
  • Mandatory tax on previously untaxed foreign earnings
    • 8.75% or 10% cash
    • 3.5% other assets
  • Less proportional foreign tax credit
  • Payable over 8 years


Individual Tax Package

  Current Law Camp Tax Reform Act of 2014 House Blueprint Latest Big 6 Framework MBS Projection
Rate
  • 7 brackets
  • 39.6% top rate
  • 35%
  • 25%
  • 10%
  • 33%
  • 25%
  • 12%
  • Top rate: up to Congress to decide whether there would be a higher tax bracket for top income individuals
  • 35%
  • 25%
  • 12%
  • Top rate: applied to very high income individuals
  • 28%
  • 25%
  • 15%
Standard Deduction
  • Individuals: $6,300
  • Joint Filers: $12,600
  • Individuals: $11,000
  • Joint Filers: $22,000
  • Individuals: 12,000
  • Joint Filers: $24,000
  • Individual: $12,000
  • Joint Filers: $24,000
  • Individuals: $6,300 - $12,600
  • Joint Filers: $12,600 - $25,200
Credits and Deductions
  • SALT deductions are an itemized deduction for taxes paid
  • $1,000 per child tax credit
  • Deduct up to $1M in mortgage principal
  • SALT deductions eliminated
  • Child tax credit increased
  • Repealed most itemized deductions
  • Eliminated the mortgage interest deduction
  • Modify EITC
  • Eliminate SALT deductions
  • Create consolidated $1,500 credit for child tax credit
  • Retain mortgage interest principal
  • Eliminated most itemized deductions
  • Eliminate SALT deductions
  • Raise ‘significantly’ the child tax credit
  • Retain mortgage interest principal
  • Eliminated most itemized deductions
  • Low-income housing credits retained
  • Child tax credit increased
  • EITC retained
  • Mortgage interest deduction cap reduced to $500k
    • Deduction for foreign-owned properties repealed
  • Charitable contribution deduction retained
  • SALT deduction repealed
Alternative Minimum Tax (AMT)
  • Separate tax calculations on some returns
  • Repealed
  • Repealed
  • Repealed
  • Repealed
Capital Gains and Dividend Income
  • 0%/15%/20% on capital gains and qualified dividends
  • 3.8% net investment income tax for highest earners
  • 40% deduction of adjusted net capital gain
  • 50% deduction for capital gains, dividends, and interest income
  • Repeal net investment income tax

 

  • 20% rate
Estate and Gift Tax
  • Applies to $5.49M single or $10.98M couple
  • Repealed
  • Repealed
  • Estate Tax Repealed; Silent on Gift Tax Repeal
  • Retained, but the current $5.49M exemption will be increased and/or the rate reduced

 

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