U.S. Tax Reform Proposal Highlights Potential Sweeping Changes

The Situation : The Trump Administration, in collaboration with the House and Senate, has introduced a Framework for tax reform legislation that could bring sweeping changes to U.S. tax laws.

The Provisions: The reforms include a reduction in corporate tax rates, immediate expensing (versus depreciation over time) of certain business assets, a shift to a territorial system of international taxation, and rules to "level the playing field" on foreign-based multinationals.

Looking Ahead: Tax-writing committees in the House and Senate will prepare draft legislation. It remains to be seen if the reforms will be included as part of the budget reconciliation process or addressed in separate legislation. On September 27, 2017, the Trump Administration, in collaboration with the House and Senate, issued a unified framework for tax reform ("Framework"). The Framework proposes sweeping changes that incorporate several previous proposals while providing the White House and Congress with breathing room to negotiate among their numerous constituencies.

Tax Reform Framework Summary

Corporate tax rate reduction from 35 percent to 20 percent Creates a new 25 percent rate for pass-through "business" income Full expensing of new investments in certain assets made after September 27, 2017 Shift to a territorial system of international taxation with 100 percent exemption of (presumably active) business income earned by at least 10 percent-owned foreign subsidiaries One-time deemed repatriation tax on U.S.-based multinationals' foreign earnings Current tax on certain (presumably passive) foreign income earned by U.S.-based multinationals Adoption of rules to "level the playing field" on foreign-based multinationals Business Tax Reform Under the Framework, business tax rates would be lowered across the board. Entities taxed as corporations for U.S. federal income tax purposes would see their income tax rate lowered from 35 percent to 20 percent, and the alternative minimum tax would be eliminated for such entities. "Small and family-owned businesses" held through sole proprietorships, partnerships, and S corporations would be taxed at a rate of 25 percent on their business income, but rules would be adopted to prevent the recharacterization of personal income into business income. As these entities are already taxed on a flow-through basis, the rate decrease would lower the single level of tax paid by such entities' owners from the new proposed top individual...