What one taxpayer calls a “loophole” is often another one’s lunch. The setting of policy for the purposes of funding government spending, improving enforcement while again cutting IRS’s budget, achieving “fairness” and “simplicity” can be just as subjective. These phrases well describe the congressional debate leading up to what may prove to be a comprehensive, and potentially epic effort in 2017.
Among the ideas contained in the Republican plan for 2017 tax reform is disallowance of the business interest deduction. This is just one aspect of many (such as eliminating net operating loss carrybacks, capping their annual use at 90% of the current tax liability and eliminating the domestic production activity expense deduction) tied together to pay for:
- a projected 20% flat corporate tax rate;
- repeal of the corporate AMT;
- adjustment of individual rate brackets to 12%, 25% and 33%;
- bifurcating partnership flow through income into business income to be taxed at 25% (or individual rate if lower) and non-business taxed at individual rates;
- an almost complete repeal of Subpart F resulting in a territorial regime, providing a 100% exemption for foreign sourced income;
- individual cap gains, dividends and interest income to receive a 50% exclusion;
- repeal the estate tax (again); and
- corporate income tax to become “border adjustable” with income earned from export sales becoming tax exempt, and imports still subject to tax.
- Applied to intangibles, the assumption is that payment for an inbound license of patented technology sitused in a foreign country would not be a US deductible expense, and the royalty costs would be added to the corporation’s taxable income.
A different world for US tax and cross border planning.
At times it seems incomprehensible to expect a polarized Congress and polarizing presidential candidates to pass one party’s entire reform package without a veto, or for that matter, anything material. Nevertheless these subjective and elusive purposes appear to be shared across the aisle, and although unpleasant for some, might well be achieved by the proposal. If not, such ideas in tax history often linger in the background, waiting for their moment, only later to be repealed.
As one or more of these taxing ideas will affect business strategy, it is important to at least be conversant with the ideas, but realistic in how we anticipate they might be realized. Planning should be business first, even though there can be meaningful tax leverage.
Regardless of who wins the 2016 presidential and congressional elections, there will be business, tax and strategy. Let’s watch, stay flexible, and of course, develop strategy.
Should you have any questions regarding tax planning, please contact Gary M. Harden.
Disclaimer: The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.