President Trump's long awaited tax reform plan was released on April 26, 2017. The plan, if enacted, would significantly affect federal tax burdens for businesses and individuals. The initial release did not contain in depth details.
Here are the highlights and some observations by the Quarles & Brady tax team:
The proposal will cut the corporate tax rate to 15 percent. That is down from the current 35 percent. All things being equal, the rate reduction will benefit retailers, securities firms, airlines, and the hospitality industry which have traditionally paid the highest effective rates.
The president's plan will also reduce business taxes for most pass through entities. Partners, shareholders of LLCs, and owners of sole proprietorships may be taxed at 15 percent. We caution, however, that much detail is needed to see how this new tax would work in practice. Of all the president's proposals, this 15 percent tax is the most likely to change in the legislative process.
Businesses would also be subject to a onetime tax on deemed repatriated earnings held overseas. The proposal did not identify what the rate would be. But the proposal would shift to a territorial system, no longer subjecting US corporations to tax for profits earned overseas.
To pay for the rate reductions, the President proposes to eliminate many business deductions. It is not clear what those deductions would be at this time. But administration officials have noted in past that it could include accelerate depreciation and interest expense.
The President's proposal would establish three tax brackets -- 10, 25, and 35 percent. It is not clear at this time what income ranges would encompass the brackets. The plan also would double the standard deduction for both single and married filers.
The proposal also calls for eliminating the 3.8 percent net investment income tax created to fund the Affordable Care Act. This would effectively lower the capital gains rates to 20 percent. And the President would repeal the alternative minimum tax.
To pay for the rate reductions, the president's plan would repeals all itemized deductions except for home mortgage interest and charitable contributions. Tax preferred retirement plans such as IRAs and 401ks would be retained.
Finally, the President's plan would repeal the estate tax.
We caution that this proposal, if it proceeds, will likely look much different after it goes through the legislative process. And there is a competing -- significantly different -- tax plan put forth by the Republican leadership in the House.