By Jennifer Kobylarz, CPA, MST – Tax Services, Rosenfield & Co, PLLC
On Wednesday, September 27th, the Republican Party announced their Tax Reform Framework, outlining tax cuts for both individuals and businesses. Largely, the Framework conforms to the goals President Trump outlined in April. The largest difference being the proposed corporate tax rate; President Trump wants a 15% corporate tax rate while the Republican Framework calls for a 20% corporate tax rate.
The Republican Framework only provides the party’s target goals and not the required legislative language needed for it to be brought to the House. The Congressional Tax Writing Committees will be working to get the new laws drafted so that they can be passed by the Republican Party’s desired enactment date of December 31, 2017.
Highlights of Proposed Changes to Individual Taxation:
- A reduction from seven tax brackets to only three: 12%, 25%, and 35%. The Framework does allow for a fourth bracket to be added for high income individuals, but does not specify the income levels to be applied at each bracket level.
- The repeal of the Alternative Minimum Tax, Estate Tax, and the Generation Skipping Transfer Tax.
- Passthrough business income would be taxed at a maximum rate of 25%; however, the final legislation will include rules to ensure high income taxpayers cannot use this to avoid the 35% tax bracket.
- Increasing the standard deduction, currently set at $6,350 for single filers and $12,700 for married couples filing jointly, to $12,000 and $24,000, respectively.
- The Framework would eliminate many of the itemized deductions currently allowed, most notably the deduction for state and local taxes, but would preserve the deductions for mortgage interest and charitable contributions.
Highlights of Proposed Changes to Business Taxation:
- Adopting a territorial based taxation system, ending the current world-wide income based tax approach.
- Allowing for a one-time tax on accumulated offshore earnings. There one tax rate for cash and cash equivalents and a lower rate for other assets. The tax rates were not specified.
- Interest deductions would be limited.
- Allows for the tax-writing committee to eliminate deductions at their discretion but urges the committee to retain the research and low-income housing tax credits.
- Allows for 100% expensing of the cost of depreciable assets, excluding buildings, for a period of at least 5 years.
It is unclear at this time how the proposed Framework would affect LIFO; however, it is possible that LIFO repeal may become a discussion point in order to make up for the lost revenue under these tax cuts.
We will be watching the development of the Republican Framework as it works its way through Congress and work with you on maintaining appropriate tax planning strategies as we move through the end of the year.