Tax Law Alert: “Big Six” Release Tax Reform Framework Supported by President Trump

After months of speculation a group of Republican leaders referred to as the “Big Six” (House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Committee Chairman Kevin Brady, Senate Finance Committee Chairman Orrin Hatch, Treasury Secretary Steve Mnuchin, and Director of the National Economic Council Gary Cohn) this week released a nine-page summary of tax reform objectives titled the “Unified Framework for Fixing Our Broken Tax Code.” The framework includes broad descriptions of objectives and does not contain detailed or specific proposals. Much of the work on the specifics of the reform effort is left to the House Committee on Ways and Means and the Senate Committee on Finance. The proposals set forth in the framework include:

Maximum 25% “business income” tax rate for small and family-owned businesses organized as partnerships, S corporations, or sole proprietorships:

• A special 25% maximum federal income tax rate would be imposed on the “business income” of “small and family-owned businesses” conducted through partnerships, S corporations, and sole proprietorships. Although not included in the framework, in earlier news reports Treasury Secretary Mnuchin indicated the Big Six do not intend for this special rate to apply to “services companies” such as accounting firms.

Changes specific to federal income tax on C corporations:

• The top federal income tax on C corporations would be reduced from 35% to 20%.
• The corporate alternative minimum tax would be eliminated.
• The net interest expense deduction would be “partially limited” for C corporations.
• In addition, the framework indicates that Congress will “consider methods to reduce the double taxation of corporate earnings.”

General changes to business income tax credits:

• All business tax credits except for the research and development tax credit and the low-income housing tax credit would be eliminated, unless Congressional committees “decide to retain some other business credits to the extent budgetary limitations allow.”

General changes to federal income tax deductions:

• A full deduction would be allowed for investments in depreciable assets other than “structures” in the year they are placed in service. This expensing would apply in lieu of depreciation deductions over a number of years, for a period of at least five years beginning on September 27, 2017.
• Congress will “consider the appropriate treatment of interest paid by non-corporate taxpayers.”
• The deduction for income attributable to U.S. domestic production activities under Section 199 of the Code would be eliminated.
• “Numerous other special exclusions and deductions” would be repealed or restricted.

U.S. worldwide taxation modified into territorial system of taxation:

• Previously accumulated foreign earnings would be treated as repatriated to the U.S. and thus would be subject to tax, payable over “several” years (no tax rate specified).
• Future foreign profits would be exempt from tax when they are repatriated to the U.S.
• To prevent companies from shifting profits to foreign tax havens, a tax on the foreign profits of U.S. multinational corporations would be imposed at a reduced rate and on a global basis.
• A 100% exemption would be allowed for dividends from any foreign subsidiary in which a U.S. parent holds at least a 10% ownership interest.

Repeal both the estate tax and generation-skipping transfer tax:

• The estate and generation-skipping transfer taxes would be eliminated.

Changes specific to individual income tax:

• The standard deduction would be increased from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married taxpayers filing jointly.
• The existing seven tax income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) would be reduced to three (12%, 25%, and 35%) or possibly four. No income thresholds for the brackets were proposed, and the summary indicates an additional top rate may apply to the highest-income taxpayers.
• “Most” itemized deductions (including the state and local tax deduction) would be eliminated, but the home mortgage interest deduction and the charitable contribution deduction would be retained.
• The personal exemptions for dependents would be eliminated.
• The child tax credit amount and the income levels at which the credit phases out would be increased.
• A $500 non-refundable income tax credit for a non-child dependent would be allowed.
• The individual alternative minimum tax would be eliminated.
• “Benefits that encourage work, higher education and retirement security” would be retained but simplified.

It remains to be seen which of these proposals will survive the legislative drafting and negotiation process. In addition, absent detailed proposals, it is difficult to assess how some of these proposed changes would be implemented.

We will keep a close eye on the proposals as they move forward. If you have questions about any of the proposals in the tax reform framework or any related issues, please contact one of the listed key contacts.