President Trump announced the broad outlines of what he is calling “the biggest tax cut” in U.S. history on Wednesday. While the plan is short on specific details, it provides a clear indication that upcoming tax reform negotiations are going to center on simplifying the tax code and reducing business tax burdens.
Key points include:
- Reducing the tax rate to 15% for corporations, S corporations, small businesses, and partnerships of all sizes (almost a 60% reduction for regular corporations and up to a 65% reduction for S corporations, small businesses, and partnerships).
- Imposing a one-time repatriation tax that would permit U.S. companies to bring back money from overseas at presumably a lower rate.
- Exempting from U.S. taxation income earned by corporations outside the United States.
- Excluding the border-adjustment tax, proposed by Paul Ryan, that would have the effect of imposing a 20% tariff on imported goods.
- Reducing the number of individual tax rates from seven to three: 10%, 25%, and 35% (which is a slight reduction from existing rates).
- Doubling the standard individual tax deduction to $12,700 for single filers and $25,400 for joint filers.
- Eliminating individual tax deductions other than for charity and home mortgage interest.
- Repealing the 3.8% Obamacare tax on net investment income that was levied on individuals with incomes generally above $200,000.
- Repealing the alternative minimum tax, which has the impact of increasing the tax burden of most individual taxpayers in states that impose high income taxes.
- Eliminating the estate tax.
In addition to facing political opposition from Democrats, the plan appears to violate the so-called “Byrd Rule,” which requires 60 Senate votes to enact a tax cut that increases the deficit outside a 10-year window. As a result, bipartisan support would be needed to enact the plan.
We are at the very beginning of a long and complicated “dance” that will probably consume the rest of 2017. Where we finally end up is open to speculation and debate. However, it is reasonable to conclude that business tax cuts are coming and that those cuts will not be limited to regular corporations. As a result, no one should be thinking about relinquishing their Subchapter S elections or converting their partnerships or limited liability companies to regular corporations.
Although Bill Clinton’s 1993 tax increases were enacted retroactive to the beginning of the year, we expect any tax cuts resulting from Trump’s plan to be prospective. So careful tax planning is needed for the balance of 2017 to ensure that you and your business reap the maximum benefits of any new legislation.
If you have questions, please contact your Wipfli relationship executive.