An overview of current tax reform proposals and potential implications. Overview of business implications with Chairman Camp's 2014 discussion draft, Senator Hatch's 2014 report on tax reform, corporate integration, House tax reform task force, and The Trump Plan.

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Roger Royse
Royse Law Firm, PC
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Current Tax Reform Proposals

2. • Last comprehensive tax reform was in 1986
• Tax reform is now seen as essential and the current tax system
is described by many as not being fit for its purpose
• Prior to recently, the common themes included:
– Broadening the tax base
– Reducing the headline rates of tax
– Simplification
• Overview:
– Chairman Camp’s 2014 discussion draft
– Senator Hatch’s 2014 report on tax reform
– Corporate integration
– House Tax Reform Task Force (Ryan Plan)
– The Trump Plan
Overview

3. • Most comprehensive attempt at tax reform to date
– Discussion draft released in February 2014
– Almost 1,000 pages long (not including analysis from the
Joint Committee of Taxation)
– Proposed a complete overhaul of the US tax system
• Business tax rate brought down to 25% but individual
tax rate only lowered to 35%
• Draft was revenue neutral however it shifted $580
billion of the tax burden from individuals to
businesses
• Chairman Camp’s proposal expired with the 113th
Congress
Chairman Camp’s Reform Proposal

4. Individual Taxation
• Three rates of tax for individuals:
– 10% tax on income up to $36,900 ($73,800 for married
couples filing jointly)
– 25% tax on income between $36,901 ($73,801) and
$400,000 ($450,000)
– 35% tax on income in excess of $400,000 ($450,000)
• Eliminates the personal exemption but increases the
standard deduction to $11,000 ($22,000)
• Eliminate deductions such as state and local taxes, real
estate taxes, medical expenses, and tax preparation fees
Chairman Camp’s Reform Proposal

5. Business Taxation
• Headline rate of tax decreased to 25% but there is an overall increase
to the tax burden for businesses of $580 billion
• Depreciation and amortization periods extended
• Industry specific deductions such as the Section 199 manufacturing
deduction would be eliminated, however the R&D tax credit would be
made permanent
• Repeal of favorable treatment for small business stock under Sections
1045 and 1202
• Quarterly excise tax on banks of 0.035% of assets in excess of $500
billion
• S Corporation income would be taxable as self-employment income
• Most carried interest would be taxable as ordinary income
Chairman Camp’s Reform Proposal

6. • In late 2014, the Senate Finance Committee Republican Staff
(headed by Senator Hatch) released a 300 page report titled
“Comprehensive Tax Reform for 2015 and Beyond”
• The report does not put forward specific proposals but rather
seeks to highlight the issues policymakers will need to confront in
order to reform the tax code
• Senator Hatch states that tax reform should abide by seven key
principles:
1. Economic growth
2. Fairness
3. Simplicity
4. Permanence
5. Competitiveness
6. Promoting savings and investment
7. Revenue neutrality
Senator Hatch’s Report on Tax Reform

7. • Proposal was sidelined after the 2016 elections
• Lower rates and/or consumption taxes
• Simplification of deductions
• Repeal or reform of big individual tax expenditures
• Lower rate for business that approximates top rate
for individuals
• Corporate integration
• Integrating tax treatment of pass through entities
• Territorial system
Senator Hatch’s Report on Tax Reform

8. • One level of tax on corporate earnings
• Dividends paid deduction
• Withholding tax
• Similar to Interest
• Treaty obligations
• Incidence of the Tax
• Impact on Tax-Exempted Organizations
Corporate Integration

9. • House Ways and Means Committee Member Nunes
drafted the American Business Competitiveness Act
(still in discussion draft form)
• Only reforms business income tax
• Tax rate would be reduced to 25% over ten years
• Full and immediate deduction for all expenditure
including capital assets such as real property
• Eliminates the deduction for interest expense
Congressman Nunes’ Proposal

10. • Economic Growth and Family Fairness Tax Reform Plan
– Proposal put forward by Senators Rubio and Lee
– Lowers individual tax rates to 15% for the first $75,000 ($150,000 married)
and 35% above that
– Reduces elements of double taxation by eliminating taxation of dividends,
capital gains on sale of stock, and estate taxes
– Reduces business income tax to 25%
– Allows immediate expensing of investments
• Progressive Consumption Tax Act introduced by Senator Cardin
– Proposes a broad consumption tax of 10%
– Income tax exemptions increased to $50,000 ($100,000 married) to
maintain progressivity
– Top marginal tax rate would be 28%
– Retains deductions for charitable contributions, state and local taxes, and
mortgage interest
• Patent Box
– Senator Schumer has expressed support for a U.S. patent box system which
would tax income derived from U.S. intellectual property at lower rates
Other Proposals

11. • The budget proposal for the 2016 fiscal year contains a
mixture of old and new proposals
• Business taxation
– Previous proposal to reduce business tax rate to 28% has been
eliminated
– Imposes a bank tax of 0.07% of liabilities for banks with assets
of over $50 billion
– S Corporation income would be taxable as self-employment
income
– Eliminates oil, gas, and coal provisions
– Repeals LIFO
– Expands Section 179 to allow expensing of up to $1 million
– Makes the R&D tax credit permanent
– Retains incentives for renewable energy
– Taxes carried interest as ordinary income
Previous Administration

12. • Individual taxation
– Increases capital gains tax to 28% and eliminates
step up in basis on death
– Introduces a “Fair Share Tax” (a.k.a. Buffet Rule)
to ensure a 30% minimum tax on high earners
– Increases estate tax rate to 45% and reduces the
exemption to $3.5 million
– Increases and expands Child Tax Credit (CTC) and
American Opportunity Tax Credit
– Expands Earned Income Tax Credit (EITC)
Previous Administration

13. • Working Families Tax Relief Act
– Would make the EITC and CTC permanent, expand EITC
for workers without children, and index CTC to inflation
• Early Refund Tax Credit
– Proposal to make up to $500 of the EITC payable in
advance of tax return filing
– Workers would enroll through their employer half-way
through the year to request early payment
• American Opportunity Tax Credit
– Proposal to make the AOTC permanent and expand the
maximum credit to $3,000 up from $2,500
Tax Credit Proposals

14. • Although many plans do not have the following
elements, commonalities among the plans include:
– Ending capitalization in favor of instant expensing
– Ending the estate tax
– Ending the AMT
– Ending the marriage penalty
– Reducing taxation on investment income
– Reducing tax rates and number of brackets
– Increasing exemptions and credits, or even giving
prepayments, to lower earners
– Eliminating state-and-local tax deductions
Republican Candidate Tax Plans

15. • Whether and to what extent to keep the home mortgage
interest deduction; Huckabee and Bush want to eliminate or
limit
• Whether to move from a worldwide international tax
regime to a territorial regime, and how to handle the
deemed repatriation
• To what extent the IRS ought to be reduced or eliminated
• Whether to have a “business tax” instead of a corporate tax,
thereby eliminating the distortion in favor of pass-throughs
• Whether to have a flat tax or just reduce the number of
brackets
• It is not clear what many think of the R&E credit; some
certainly want to expand or keep it
Republican Tax Areas of Disagreement

16. • Rand Paul wishes to end corporate tax in favor of a VAT. He also wants to
end payroll taxes, excise taxes, and most tariffs
• Jeb Bush would end bias favoring debt over equity, by generally making
interest non-deductible and taxed at dividend rates.
– Rubio wishes to end this bias too
• Trump would keep a worldwide regime and end deferral; his very low
business tax rates plus the foreign tax credit would minimize this change’s
impact
• Santorum’s old tax plan included 0% tax rate for U.S. manufacturers
• Rubio’s system integrates the corporate tax with the individual income tax
via an international dividend exemption system
• Huckabee would end the income tax in favor of a large national federal
retail sales tax (the “Fair Tax”)
• Carson would base his still-vague tax system around tithing
Republican Tax: Most Unique Features

17. • The Democrats have not issued comprehensive tax
reform plans
• Hillary Clinton’s ideas include:
– New tax credits and expenditures (to encourage training new
workers, expanding into underserved communities, etc.)
– New 6 year holding period for capital gains, beginning at
39.6% tax and steadily dropping each year until 20% tax at
year 6
– Making permanent the 0% rate on 5 year old qualified small
business stock
• Bernie Sanders’s ideas include expanding the estate tax,
and taxing investment income of top 2% of earners at
ordinary rates
Democratic Candidate Tax Proposals

18. “A Better Way,” Blueprint released June 24, 2016:
• Lower ordinary rates and reduce brackets (12% / 25% / 33%)
• Eliminate all itemized deductions
– Except charity and mortgage interest
• Enhance child and dependent care tax credits
• Consolidate personal exemption and standard deduction into a
larger standard deduction (single $12k, married $24k)
• 50% deduction of net capital gains, dividends, and interest
• Repeal taxes enacted under the ACA, including 3.8% NIIT
• Repeal individual AMT and corporate AMT
• Repeal estate tax and generation-skipping transfer tax
• Move towards consumption-based tax system
Ryan Plan

19. • Pass through and individual business income taxed at a
maximum rate of 25%
– Reasonable comp taxed at individual rates
– C corporations taxed at maximum rate of 20%
• Eliminate “special interest deductions and credits”
– Except R&D and LIFO
• Full, immediate write-off of business investments
• No net interest deduction, but indefinite carryforward
• No carrybacks for NOLs, but indefinite carryforward
Ryan Plan – Business provisions

20. • Destination-based, territorial, tax system
• Border adjustable and similar to a VAT
• Imports subject to U.S. tax, exports exempt
• Repatriation tax of 8.75% on cash and 3.5% on other
property, payable over 8 years
• 100% exemption for dividends from foreign subsidiaries
• Will eliminate the bulk of subpart F
Ryan Plan – International provisions

21. • Restructure IRS into 3 divisions
– Families and individuals;
– Businesses; and
– Small claims court
• Goal to transform the IRS into an agency
focused on customer service
• IRS Administrator—New presidential
appointment to manage the agency and
administer the new tax code for a term of three
years; eligible for a single reappointment
Ryan Plan – Administrative provisions

22. • Lower rates/reduce number of brackets
• Cap itemized deductions at $100k/$200k married
• Simplify standard deduction and personal exemption
• Replace child and dependent tax credit with spending
rebate for child care expenses
• Tax carried interest as ordinary income
• Repeal individual AMT
• Repeal ACA tax provisions, including NIIT
• Repeal the estate tax
Trump Plan - Individuals

23. • 15% rate on business income of pass-throughs and C
corporations
• 18% differential between business and wage income
• Eliminate most deductions and credits, retain R&D credit
• Repeal corporate AMT
• Full, immediate write-off of business investments
• Interest expense not deductible if full expensing of capital
investment
• Business Tax Credit for on site day care
Trump Plan - Businesses

24. • Deemed repatriation of corporate profits
held offshore at 10% rate
• Retribution tariff for companies that move
jobs offshore
Trump Plan - International

25. • Ryan Plan would reduce federal revenue by
$3.1 trillion in 10 years
• Trump Plan would reduce federal revenue by
$6.2 trillion in 10 years
Revenue Neutrality?

26. • Ryan’s plan would charge U.S. companies’ domestic sales
and imports at a new 20% rate; Exports exempt
• Supporters argue it will end advantage for foreign-made
products
• Opponents say it will lead to higher prices for consumers
• The plan may conflict with WTO and GATT rules
• Trump has released conflicting statements, but generally
approves of the policy rationale to “create a level playing
field” for American companies and workers
Border Adjustment

27. • Under a territorial tax system, corporate profits earned from
production abroad are not subject to U.S. tax
• Instead, tax is based on the location of consumption, i.e., where
goods are sold or services are performed
• Shifting from a worldwide-based system to a territorial system
will be disruptive and require many changes to the tax code
• Key territorial components of the GOP Blueprint:
– Border adjustment
– Exemption for dividends from foreign subsidiaries
– Streamlining anti-deferral rules to apply to passive income only
Territoriality

28. • Generally, a 60-vote supermajority is needed to advance
legislation in the Senate
• By contrast, budget reconciliation bills cannot be
filibustered and require a simple 51-vote majority to pass
– Republicans currently have a 52-seat majority in the Senate
• Republicans have indicated they are prepared to use the
budget reconciliation process to repeal the ACA tax
provisions and to pass comprehensive tax reform
• The Trump administration and congressional Republicans
have made it their goal to pass tax reform by August 2017
Budget Reconciliation

29. • Tax reform legislation can apply to the existing tax year
even though the year is nearly complete
• Too soon to tell what the effective dates will be
• The blueprint indicates that Ways and Means will craft
clear rules to serve as an appropriate bridge from the
current tax system to the new tax system, with particular
attention given to comments received by stakeholders
• There will likely be grandfather provisions for debt and
special carve-outs for financial institutions and insurance
companies which may have a broad impact
Retroactivity

30. • Is Death a Taxable Event?
Trump Plan: “…capital gains held until death and valued
over ten million dollars will be subject to tax to exempt
small business and family farms.”
‒ In the absence of an estate tax, Trump would treat death
as a recognition event and tax capital gains on death
‒ No indication that the $10 million exemption would
apply only to businesses and farms
The House Plan: The blueprint does not yet mention
eliminating the step-up in basis, nor suggest that a capital
gains tax should apply at death in lieu of the estate tax
‒ This proposal will probably be fleshed out over time
Estate Tax

31. • Repeal: $500k limit on deduction of insurer’s comp; NIIT
(3.8 and .9% Medicare tax); Higher floor for medical
expense deductions (7.5% restored); Individual and
employer mandate penalties; Cadillac tax on health plans;
Limitation on FSA contributions; Medical device excise tax;
Tanning tax; Over-the-counter exclusion from qualified
medical expenses under FSAs/HSAs/MSAs; Annual fee
imposed on branded prescription drugs sales
• Cost: of $600 billion over 10 years
– NIIT repeal alone is a cost of $157 billion
• Economic substance rules not repealed (tax shelter
legislation)
ACA Repeal

32. • Replace: New refundable advance tax credit for
health insurance coverage
• Generally, for state-approved major medical health
insurance and unsubsidized COBRA coverage
• Credit equals the annual sum of monthly credit amounts; or,
if less, amount paid for “eligible health insurance”
-Min $2,000/year credit for each individual under 30
-Max $4,000/year for each individual age 60 and older
Excess credits can be rolled over into an HSA
• Income-based phase out
• Effective months beginning after Dec. 31, 2019
ACA Replacement

33. • Tax reform is a hot-topic item for 2017
• Most of the focus is on lowering rates and broadening the base
• Current proposals attempt to simplify the tax system and
eliminate many existing deductions/credits
• Some key deductions look set to remain e.g., mortgage interest
deduction
• Estate tax appears to be history
• New health care coverage credit
• Border adjustability is big unknown
Conclusion

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