James ORilley of Doeren Mayhew
By James O’Rilley, CPA, MST Shareholder, Doeren Mayhew

Tax reform, one of President Trump’s key legislative agenda items, is moving closer to fruition – but how close is still the question. Last week the Trump administration and congressional Republican leaders released a vague framework to help Congress develop legislation to carry out reform goals. Citing dramatic tax cuts and code simplification, the much-awaited “Big Six” tax framework leaves many lingering questions about who will be the clear winners and how will the changes be sustainable.

What We Do Know

With a big task ahead for the House Ways and Means Committee and the Senate Finance Committee, any tax reform legislation changes likely won’t be ready to slide into effect in the 2018 tax year. However, it’s still technically possible to pass a bill by the end of the year, so planning ahead for the proposed changes we do know about is always a smart approach.

Doeren Mayhew has outlined below the major proposed tax changes that may impact individuals and businesses, and should be considered in year-end tax planning.

Businesses

  • Corporations would be taxed at a below-average 20 percent rate and no longer need to pay alternative minimum tax (AMT). The possibility of also reducing double-taxation of corporate earnings is mentioned.
  • Bonus depreciation of 100 percent would be available for investments for a five-year period, basically creating incentive to accelerate already planned purchases to tax years it is available. This could provide significant benefits to capital-intensive businesses.
  • Partial limitation of corporate net interest expense deductions may prove problematic for highly leveraged businesses.
  • The elimination of all business and tax credits, with the exception of the research and development credit and low-income housing credit, may prevent businesses from gaining an effective rate much lower than 15 percent.
  • Pass-through entities, like many small businesses, would be taxed at a no-higher-than 25 percent rate, a nearly 15 percent decrease from current legislation. Although, this may not apply to particular service providers in an attempt to prevent pass-through owners from converting compensation income into pass-through income.
  • An unspecified one-time tax on repatriated profits from foreign earnings of U.S. companies being accumulated overseas would alleviate impact for reshoring U.S. dollars. Although the goal is to reinvest and create new job growth domestically, studies have shown that past repatriated earnings typically go to buy back outstanding stock.
  • The move to a territorial tax regime instead of a worldwide tax regime would allow U.S. parent corporations to exclude 100 percent of dividends received from 10 percent-owned foreign subsidiaries. Foreign profits of U.S. multinational corporations would also be at a reduced rate. This shift in taxation of foreign profits will create blurred lines on legitimacy of foreign earnings exempt from U.S. tax.

Individuals

  • A reduction to a three, maybe four, bracket structure would lower current individual tax rates to either 12 percent, 25 percent or 35 percent. However, unknown proposed income thresholds provide uncertainty if individual taxpayers will see an increase or a decrease in tax rates.
  • Standard deductions would nearly double to $24,000 for married filing jointly taxpayers and $12,000 for single taxpayers.
  • Personal exemption for taxpayers, spouses and dependents will be eliminated, as the higher standard deduction is meant to offset this loss.
  • The elimination of most itemized deductions, with the exception of mortgage interest and charitable contributions, could prove difficult for some taxpayers and have a broader impact on charitable organization.
  • Repeal of individual AMT would likely provide beneficial for taxpayers in high-tax jurisdictions, assuming state and local tax deductions survive reform.
  • An undisclosed “significant” increase in the child tax credit, with the first $1,000 refundable, will likely benefit middle-income families as increases are proposed to the phase-out thresholds.
  • A $500 credit for the care of non-child dependents would be available for taxpayers.
  • Repeal of the 40-percent federal estate tax and also generation-skipping transfer tax would allow beneficiaries to see tax breaks. Although, gift tax is not discussed and likely will remain in place as is.

Preparing in Uncertainty

The framework covers many tax issues, but unfortunately paints reform with a broad brush – leaving many unanswered questions. With the details still to be hashed out, along with budgetary and political hurdles to overcome, its likely many provisions won’t go into effect until 2018 or later. That doesn’t mean there wouldn’t be a potential impact on your 2017 tax planning. You may find proposed changes provide you with incentives to defer income to 2018 and accelerate deduction in 2017. Doeren Mayhew’s tax advisors can be a key resource to help you navigate the uncertainty. Contact them today.

Author: James O’Rilley, CPA, MST is a Shareholder in Doeren Mayhew’s tax group and can be reached at orilley@doeren.com.