Tax reform likely in 2017

The Specialty Tools and Fasteners Distributors Association (STAFDA) shares tax reform predictions from the Small Business Legislative Council.

The Small Business Legislative Council (SBLC) held a December 20 webinar on what the future of tax reform looks like under the Trump Administration. Here is a summary of what they shared with listeners.

The stage for tax reform is set with both houses of Congress and the President under Republican control; Speaker of the House, Paul Ryan (R-WI), a policy expert well-versed in tax code; along with Representative Kevin Brady (R-TX), Chairman of the House Ways and Means Committee, and Senator Orrin Hatch (R-UT), Chair of the Senate Finance Committee, both committed to comprehensive tax reform.

There was much talk on Capitol Hill last year of the House Republican's tax reform "Blueprint." Currently it's being put into a legislative format from its 35-page policy paper, but the Blueprint's goal is to dramatically simplify the tax code, reduce tax rates by broadening the tax base (i.e. eliminate or limit tax deductions and credits), and promote growth.

In 2016, Trump's plan differed in some aspects to the Blueprint, but as the November election drew closer, he adjusted his plan to become more in line with what Republicans propose. Whether the Blueprint or Trump's plan, figures below in red represent the proposed changes.

One of the Blueprint's top priorities is to lower personal tax rates at three tax levels: 12% for married couples filing jointly with taxable income below $75,000; 25% for married couples filing jointly with taxable income between $75-$225,000; and 33% for married couples filing jointly with taxable income above $225,000. Taxable income thresholds are half of the above limits for single taxpayers: Head of household rates would be eliminated.

The standard deduction would rise under both the Blueprint and Trump's plan: increase to $24k for a joint filer; $18k for a single tax payer with a child; and $12k for a single filer. Personal exemptions would be eliminated. Trump's plan caps itemized deductions at $200k for joint filers and $100k for single filers.

What about capital gains, dividends, and interest income? The Blueprint would allow taxpayers to deduct 50% of net cap gains, dividends, and interest income (subject to a tax rate of 6%, 12.5% or 16.5% depending on their tax bracket). Trump's plan does not change the cap gains tax rate (maximum rate stays at 20%).

For business taxes, the House Blueprint calls for active business income from pass-through entities and sole proprietors to be capped at 25%, but income which is "reasonable compensation for services" would be taxed as regular personal income up to the 33% personal tax rates. C corps would be taxed at 20%.

Trump wants to drop the business tax rate from 35% to 15%. He does not appear to have a separate tax on active business income for pass-through entities and sole proprietors.

When it comes to businesses expensing investments, under the House Blueprint, businesses would be permitted to expense investments on all property except land. This would eliminate the deduction for interest expense associated with debt incurred to finance such an investment. Under Trump's plan, manufacturers would be allowed to expense capital investments, but would lose deductibility of corporate interest expense. There would also be "border adjustments" made. U.S. exports would be exempt from corporate income tax but imports would be taxed. The goal is to foster manufacturing jobs for blue-collar Americans.

Would any taxes be eliminated? Yes! The following taxes would be eliminated: Alternative Minimum Tax (AMT); 3.8% investment income tax; medical device tax (House Blueprint only), Cadillac tax; estate, generation-skipping transfer, and possibly gift tax. However, for the estate, generation-skipping transfer and potential gift tax, under the House Blueprint, it's not clear whether the step-up in basis is retained, but under the Trump plan, it looks like the intent is to maintain at least a $10M step-up, but the language is not well defined.

The Blueprint and Trump's plan continue to be hashed out behind closed doors, but the cost of the Blueprint is estimated at $2.5-$3.5 trillion versus Trump's plan, $5-$7 trillion. However, Washington insiders feel tax reform will most likely follow the Blueprint.