Tax Reform Starts to Take Shape

Written by The HORNE Public & Middle Market Team | September 29, 2017

After fits and starts over the last nine months, a broad tax reform plan is now beginning to emerge between Congress and the White House.

On Wednesday, an agreed upon framework was unveiled. While this is a mere starting point, some of the major guideposts are now known. The next step will be committee work and hearings before the House Ways and Means panel commencing in October.

From a political perspective, tax reform becomes more imperative for Republicans after the continuing failures to repeal and replace the Affordable Care Act along with a lack of other notable accomplishments despite holding the White House and both branches of Congress.

Timing is also going to be critical. If a bill were finalized and signed into law this year, it could be made retroactive to January 1, 2017. However, if the process is delayed into February or March of 2018, then the current tax provisions will remain law for 2017.

Among the most important headlines referenced today are the following:

For businesses, the top corporate tax rate would be 20% versus the current 35%.
For individuals, there would be three or four tax brackets of 12%, 25%, and 35% plus potentially one higher bracket. No income levels for the various brackets were specified.
Pass through income from partnerships, LLCs, and S corporations would be taxed at a maximum rate of 25% but with anti-avoidance rules to prevent high-income taxpayers from avoiding the higher brackets. This provision was left intentionally vague for now.
The individual and corporate alternative minimum tax (AMT) would be repealed.
The estate tax (but not gift tax) would be repealed.
Individual itemized deductions for charitable contributions and mortgage interest would be maintained, but the deduction for state and local taxes and most other deductions would be eliminated.
The individual standard deduction would double, but personal exemptions would be eliminated.
The child tax credit would increase, and incentives for retirement savings, higher education, and employment are to be broadly maintained with no details provided.
Bonus depreciation of 100% would be allowed for five years on the cost of depreciable assets, except for buildings.
Limits would be imposed on net interest expense of C corporations but again with no further details provided. The effect on non-corporate taxpayers was left to committee work.
The domestic production activities deduction (DPAD) would be eliminated.
The R&D and low-income housing credits would be maintained, but other business tax credits would be repealed.
Significant modifications would also be made to the taxation of foreign earnings.

So, what does this all mean right now?

First, the tough work is just beginning. Many provisions that may be eliminated or scaled back have strong support and powerful lobbies. Substantial changes to this framework are to be expected. Also, the fall legislative calendar is already very full so timing is hard to predict.

Committee work will commence in several weeks, but the writing of the actual draft legislative language, hearings, and final passage in both houses of Congress could easily slip into early 2018.

Hopefully, by late October or early November, we should have a much better feel for the actual direction of many of these items. Many may be either phased-in or phased-out over several years.

But, the absolute biggest takeaway is that tax reform in some shape is almost a certainty to happen. Staying abreast of this legislation and timely year-end tax planning will be essential.

We will keep you updated as further details emerge.

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