Global Tax Insights
How GOP Tax Reform Proposal Could Impact Businesses and MultinationalsNovember 07, 2017
Here is what’s currently on the negotiating table for businesses and entities with foreign operations.
President Trump and GOP lawmakers recently released the “Unified Framework for Fixing Our Broken Tax Code.” This nine-page update is designed to serve as a template for congressional efforts to simplify the tax code and grow the U.S. economy. Unfortunately, the framework provides only limited details and faces an uphill battle to gain bipartisan support. Here is what’s currently on the negotiating table for businesses and entities with foreign operations.
One of the framework’s key principles is “leveling the playing field” for American businesses and workers. Currently, the average corporate tax rate for the industrialized world is 22.5%. The GOP framework calls for reducing business tax rates to 20% for corporations and 25% for pass-through entities. (Currently, the top rate for corporations is 35%, and the top tax rate for individuals is 39.6%.)
Congressional tax-writing committees are also tasked with adopting measures to prevent wealthy individuals from recharacterizing personal income into business income. (The framework tentatively calls for a top tax rate of 35% for individual taxpayers, and it provides flexibility for lawmakers to introduce an even higher tax rate for the wealthiest individuals.)
The plan would also allow companies to immediately write off the cost of new capital expenditures (except buildings). This tax break would be available for at least five years.
How does this proposal differ from today’s Section 179 and bonus depreciation deductions? Although the PATH Act permanently extended the Sec. 179 deduction, it’s subject to a phaseout limit that prevents many large businesses from claiming it. For 2017, companies can generally deduct $510,000 in qualified purchases, but there’s a $2,030,000 phaseout limit. So, after a company’s purchases hit $2,030,000, the amount it can deduct is reduced by one dollar for every dollar spent. (Both the amount of the Sec. 179 deduction and the phaseout limit are indexed for inflation annually.)
Although the bonus depreciation program isn’t subject to a phaseout limit, it allows companies to deduct only half of qualified purchases in 2017. Moreover, the deduction drops to 40% in 2018 and 30% in 2019 for most qualifying assets. After 2019, the bonus depreciation program is set to expire, unless Congress extends it.
In essence, the framework’s plan is more extensive than the current Sec. 179 and bonus depreciation programs. The theory behind lowering tax rates and allowing immediate expensing of most capital expenditures is that businesses will have extra cash on hand to invest in growth opportunities — such as hiring new workers, opening new plants and launching new products.
As part of its efforts to simplify the tax code, the framework also eliminates various business tax provisions, including the:
- Section 199 domestic production activities deduction (DPAD),
- Alternative minimum tax (AMT), and
- Double taxation of corporate earnings.
In addition, the framework would partially limit interest expense deductions for C corporations. But it would still allow companies to claim research and development and low-income housing credits.
Another key element of the GOP framework is repatriating trillions of dollars that are currently kept offshore. To achieve this objective, there would be no federal income tax on future foreign profits that are repatriated to the United States, and dividends paid by foreign subsidiaries to U.S. parents that own at least a 10% stake would be tax-free.
To transition to the new system, companies would be charged a one-time tax at a fixed rate on accumulated earnings. Payment of this tax liability would be spread over several years. The framework also would eliminate the incentive for corporations to move jobs and capital overseas by taxing foreign profits of U.S. multinational corporations at a reduced rate.
It’s important to remember that this framework is proposed — any tax reform legislation that’s eventually passed by Congress will be the result of extensive negotiations and may wind up looking markedly different. The House Ways and Means Committee plans to turn the framework into legislation before year end.
On October 26 the House passed a budget resolution that the Senate had passed earlier in the month, which authorizes the Senate to pass a tax reform bill increasing the budget deficit by up to $1.5 trillion over 10 years. Normally, 60 votes would be required to defeat a Democratic filibuster, but in this case the Senate can do so with a simple majority, whereas at least 51% of members vote yes.
Contact us for assistance with your year-end tax planning as the details of congressional tax reform efforts continue to unfold.