by Michael J. Devereux II, CPA, CMP, partner, Mueller Prost

With Donald Trump winning the White House and Republicans maintaining majorities in both the US House of Representatives and US Senate, the prospect for tax reform and forthcoming changes to Treasury Regulations is significant. While both parties agree on the need for tax reform, their visions for the future tax code are significantly different. The Republicans’ sweep in November 2016 creates a unique environment that has enhanced the likelihood of major changes to come.

Going into 2017, tax provisions in three competing plans will vie for a spot in a potential tax reform bill.

President-elect Trump’s tax plan

Donald Trump modified his tax plan to align his proposed tax rates/brackets to that of the US House of Representatives’ plan, condensing the seven existing tax brackets to three, with tax rates ranging from 12 percent to 33 percent.

Trump’s plan will retain the existing capital gains rate, capped at 20 percent, while repealing the 3.8 percent Obamacare tax on investment and passive income. He proposed repealing the individual Alternative Minimum Tax (AMT), too.

For C Corporations, Trump’s tax plan lowers the top business tax rate from 35 percent to 15 percent and eliminates the corporate AMT. Most credits and incentives would be eliminated.

US House of Representatives: the Blueprint

Throughout 2016, the US House of Representatives released six plans to tackle various issues within our country, including poverty, national security, the economy, the Constitution, healthcare and tax reform. The Tax Reform “Blueprint,” as it’s identified in the document released by Speaker Paul Ryan’s office, aims at simplifying the code, while increasing jobs and fueling growth.

The Blueprint flattens and reduces the individual income tax brackets, condensing seven tax brackets to three. It proposes a maximum tax rate of 25 percent on small business income from sole proprietorships or pass-through entities (S Corporations, Partnerships and LLCs). The Blueprint repeals the individual AMT. Families and individuals would be able to deduct 50 percent of their net capital gains, dividends and interest income, leading to basic rates of 6 percent, 12.5 percent and 16.5 percent.

Under this new approach for taxing small businesses, sole proprietorships and pass-through businesses will pay or be treated as having paid reasonable compensation to their owner-operators. Such compensation will be deductible by the business and will be subject to tax at the graduated rates for families and individuals. The compensation that is taxed at the lowest individual tax bracket rate of 12 percent effectively will further reduce the total income tax burden on these small businesses and pass-through entities.

Moreover, the Blueprint lowers the corporate tax rate to a flat rate of 20 percent and repeals the corporate AMT. In addition, the Blueprint allows for the full and immediate expensing of the cost of investments, including tangible property (such as equipment and buildings) and intangible assets (such as intellectual property).

Senate Finance Committee: Corporate integration

The US Senate has taken a completely different approach to tax reform. The Senate Finance Committee (SFC) believes the first step to tax reform is to level the playing field between C Corporations and pass-through entities (S Corporations, Partnerships and LLCs). In doing so, the SFC proposes the following:

• Allow C Corporations to deduct dividends paid;
• Impose withholding (35 percent) on dividends and interest; and
• Eliminate the preferential dividend rate.

The SFC believes that by enacting these provisions, more companies will be organized as C Corporations, thus allowing Congress to enact tax reform for business and individuals as separate endeavors.

While many believe the election results did not purport to provide a mandate to Congress and the future administration, one thing is for sure – changes are coming. Hopefully, these changes will help businesses as they compete in the US market and across the world.

Michael J. Devereux II, CPA, CMP, is a partner and director of Manufacturing, Distribution & Plastics Industry Services for Mueller Prost. Devereux’s primary focus is on tax incentives for the manufacturing sector. For more information, email [email protected] or call 314.862.2070.