Late last month, the Treasury Department released a document called “The President’s Framework for Business Tax Reform.” The relevance of this document is not that we think that it will become law, but that it lays out the basis of our tax discussions later this year.
The framework provides a rough blueprint for the President’s plan to cut corporate tax rates, simplify corporate tax rules, and reform the international tax rules. It also carries some proposals for simplifying and reducing the tax burden for small businesses.
The major provisions of the proposal are:
- Reduce the top corporate tax rate from 35% to 28%.
- Cut the top corporate tax rate on manufacturing income to 25% and to an even lower rate for income from advanced manufacturing activities. This would be accomplished by reforming the Code Sec. 199 domestic production activities deduction.
- Eliminate tax breaks for specific industries “with the few exceptions that are critical to broader growth or fairness.” Tax breaks that would be targeted would include the following: last-in, first out (LIFO) accounting; tax breaks for the oil and gas industry; interest deductions allocable to life insurance policies (would be disallowed unless the contract is on an officer, director, or employee who is at least a 20% owner of the business); current rules allowing “carried interest” to be taxed at preferential capital gains rates (would be taxed as ordinary income); and special depreciation rules that allow owners of non-commercial planes to depreciate them more quickly (over five years) than commercial aircraft (over seven years).
- Revise current depreciation schedules that generally overstate the true economic depreciation of assets.
- Reduce the deductibility of interest by corporations.
- Establish greater parity between large corporations and large noncorporate counterparts.
- Require greater disclosure of annual corporate income tax payments, to improve transparency and reduce accounting gimmicks.
- Overhaul the current research tax credit, which makes businesses choose between using a complex formula to calculated their R&E credit at a 20% rate, and a much simpler approach that provides a 14% credit. The rate of the simpler credit would be increased to 17% and the credit would be made permanent to increase certainty and effectiveness.
- Extend, consolidate, and enhance key tax incentives to encourage investment in clean energy. The tax credit for production of renewable electricity would be made permanent and would be refundable.
- Subject income earned by subsidiaries of U.S. corporations operating abroad to an unspecified minimum rate of tax. This would stop the tax system from rewarding companies that move profits offshore. Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to an unspecified minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country.
- Create a 20% income tax credit for the expenses of moving business operations back to the U.S., and disallow deductions for moving business operations abroad.
- Taxing currently the excess profits associated with shifting intangibles to low-tax jurisdictions.
In an effort to show the tax problems of small businesses haven’t been overlooked, the President’s proposal calls for simplifying the tax rules that apply to them and adding incentives to help build “innovation and entrepreneurship.” Specifics include: allowing small businesses to expense up to $1 million under Code Sec. 179; allowing cash method accounting for businesses with up to $10 million in gross receipts (up from current law’s $5 million); doubling the amount of currently deductible start-up costs from $5,000 to $10,000; and expanding the health insurance credit for small businesses.
We will keep you posted as we progress towards our year end tax discussions. If you have any questions, please do not hesitate to contact us.