Will 2017 finally bring much needed tax reform for businesses?
Posted on 11.16.16
By L. Michael Gracik, Jr., CPA, Managing Partner
It is no secret to anyone that our Federal income tax system needs substantive reform and overhaul. Keiter has long been and will continue to be a strong proponent for this much needed reform. With the results of the recent election, a Republican President-Elect and Republican control of both houses of Congress, 2017 may be our best chance for Congress to finally make the needed changes to our income tax system. The tax reform proposals put forth by the President-Elect and the reform proposals recently put forward by House Republicans share a lot of common ground as to the type of changes needed to reform our Federal tax system.
As we move into 2017, we will continue to monitor and keep you aware of progress on these much needed reform proposals.
Below is a summary from Thompson-Reuters of the Business proposals of the President-Elect and the House Republicans:
President-Elect Trump Tax Plan for Businesses
- The business tax rate would decrease from 35% to 15%;
- The corporate AMT would be eliminated;
- There would be a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%;
- ”Most corporate tax expenditures,” except for the research and development credit, would be eliminated;
- Firms engaged in manufacturing in the U.S. could elect to expense capital investment and lose the deductibility of corporate interest expense. An election once made could only be revoked within the first three years of election; and
- The annual cap for the business tax credit for on-site childcare would be increased to $500,000 per year (up from $150,000), and the recapture period would be reduced to five years (down from ten years).
The House Republicans’ “A Better Way” Plan
- Creating a new business rate for small businesses that are organized as sole proprietorships or pass-through entities instead of taxing them at individual rates;
- Reducing the corporate tax rate to 20%;
- Repatriation of corporate earnings, taxed at 3.5% rate (up to 8.75% for certain investments)
- Providing for immediate expensing of the cost of business investments;
- Allowing interest expense to be deducted only against interest income, with any net interest expense carried forward and allowed as a deduction against net interest income in future years (with special rules that will apply for financial services companies);
- Allowing net operating losses (NOLs) to be carried forward indefinitely and increased by an interest factor, and eliminating NOL carrybacks;
- Retaining the research credit (but evaluating options to make it more effective);
- Generally eliminating certain (but unspecified) special interest deductions and credits;
- Shifting to a territorial tax system;
- Moving “toward a consumption-based tax approach”;
- Providing a 100% exemption for dividends from foreign subsidiaries; and
- Generally simplifying international tax rules, including elimination of most of the subpart F rules.
Proposed IRS Reform:
- “Streamline” the agency and center it on three major units: one for families and individuals, one for business, and a new “small claims court” unit that would be independent of IRS and designed to allow routine disputes to be resolved more quickly;
- Reform IRS leadership so that it is headed by an Administrator, appointed by the President with the consent and advice of the Senate for a single 3-year term;
- Have a “Service First” mission; and
- Commit to taxpayer assistance.
Proposed Health Care Reform:
- Repeal the Affordable Care Act, including the repeal of the 3.8% NIIT (Net Investment Income Tax)
- Make the following changes to health savings accounts (HSAs): allow spouses to make catch-up contributions to the same HSA account; allow qualified medical expenses incurred before HSA-qualified coverage begins to be reimbursed from an HSA account as long as the account is established within 60 days; set the maximum contribution to an HSA at the maximum combined and allowed annual deductible and out-of-pocket expense limits; and expand accessibility for HSAs to certain groups (e.g., those who get services through the Indian Health Service and TRICARE).
- Allow certain purchasing platforms, like private exchanges, to expand. The plan would encourage the use of direct or “defined contribution” methods, such as health reimbursement accounts (HRAs).
- Encourage the portability of health insurance. Everyone would have access to financial support for an insurance plan chosen by the individual, which could be taken with them job-to-job, to non-work environments and into retirement years. For those who do not have access to job-based coverage, Medicare, or Medicaid, the proposal would provide an advanceable, refundable tax credit. The portable payment would be increased as the recipient aged.
Summary of Proposals for Businesses
- Both the Trump and House Republicans proposals would repeal the Affordable Care Act, significantly lower tax rates on businesses, eliminate some business credits and deductions, and tighten the rules on business interest deductions.
- While the House Republicans’ plan contains, and previous proposals by Trump contained, a special tax rate for businesses that operate as pass-through entities, the current Trump website has no such proposal.
2017: A Year of Tax and Health Care Reform Legislation?
Given the newness of the election and its surprise results, we are pretty far from understanding the dynamics of the workings of the 115th Congress that will begin its work in January—including whether the Republicans will attempt to pass tax legislation in the Senate under the legislative process called “reconciliation” which only requires a simple majority, or will, instead, allow the Senate filibuster rules to apply to the tax legislation. Similarly, we are pretty far from understanding the push and pull between Congressional leaders and President-elect Trump. Thus, even given the large overlap between the proposal of the House Republicans and that of Mr. Trump, we have a long way to go in predicting a lot of the specifics of 2017 tax legislation. However, some significant 2017 tax legislation and some significant health care reform legislation seem quite likely.