With Donald Trump having aligned his tax plans with those of Congressional Republicans over the course of the campaign, his election puts the GOP in a position to enact significant changes in the nation’s tax system.
“There’s no more reason for any delay for any type of tax reform,” explained Tony Nitti, a CPA, tax educator and partner at Top 50 Firm Withum. “You’ve got a Republican in the White House, control of the House and Senate, and a tax wonk as Speaker of the House in Paul Ryan. Their plans are fairly aligned between Trump and things that Ryan has proposed in the past, so there’s really no reason not to have significant change in the tax law – if that’s what they want to happen.”
Noting that this is the first time either party has controlled the White House and both houses of Congress in a decade, Marc Gerson, chair of the Tax Department at law firm Miller & Chevalier and a former majority tax counsel for the Ways and Means Committee of the House and Representatives, said, “We saw Trump over the course of his campaign move his tax agenda close to House Republican Tax Reform Task Force blueprint, and so there’s a lot of agreement on parameters for comprehensive tax reform package. It now becomes a base document on what will be considered in in next Congress.”
ON THE AGENDA
Likely at the top of the wish list of tax changes will be:
- Lowering the corporate tax rate to 15 percent;
- Lowering individual income tax rates and reducing the number of brackets to three (at 12 percent, 25 percent and 33 percent);
- Capping the capital gains rate at 20 percent;
- Eliminating the estate tax; and,
- Eliminating the taxes associated with the Affordable Care Act as part of its general repeal.
“When you talk about a corporate rate going from 35 percent to 15 percent, and then potential S corp and partnership flow-through income going from 39.6 percent to 15 percent, and the estate tax disappearing – these are huge changes,” Nitti explained.
“I don’t anticipate [Trump will] move solely on the corporate side, although they may argue over what the right maximum rate number is,” said Bill Smith, managing director of the National Tax Office of Top 10 Firm CBIZ MHM. “The Republicans and Democrats have both said we need to lower the corporate tax rate. Initially he came out with the 15 percent business tax rate, and there are still a couple of proposals in the House that have a 25 percent business tax rate. But he backed off that and changed up his individual tax rates to 12 percent, 25 percent and 33 percent … so those are the main parts of his program.”
Assuming the business rate changes, the form a business takes may be worth a second look, according to Howard Wagner, managing director of National Tax Service at Top 10 Firm Crowe Horwath: “People might want to reconsider if a S corp is right for them. With Trump’s proposal of tax rates being lowered to 15 percent, people may find that a C Corp [classification] is better for them.”
For the rate changes and several of the other proposals, it should be relatively easy for the president-elect and the Congressional Republicans to reach agreement, but there are a couple of areas where they are less well-aligned.
“It’s the estate tax and the international tax where there are some differences,” Nitti said. “Trump says he would tax appreciation inherent in assets when you die – he would not allow for the tax-free step-up in basis, so, say if your estate is valued in excess of $10 million, then you will pay tax on that appreciation not upon death, but when your heirs eventually sell those assets, and most Republicans don’t agree with that.”
And in terms of international taxes, Trump has favored a “worldwide” tax system, where income earned by overseas affiliates is taxed immediately at the U.S. minimum tax rate. “Paul Ryan and the other Republicans typically prefer the exact opposite of that -- a territorial system, where they say, ‘Hey, if a foreign affiliate earns in a foreign jurisdiction, let the foreign jurisdiction tax it, and we’re never going to tax it, even when it gets repatriated here,” Nitti explained.
Passing any agreed-upon changes will be procedurally easy: “There’s no reason Trump has to do the legwork on the tax stuff,” Nitti pointed out. “He can let Paul Ryan write it up and present it, the House and Senate push it through – maybe the Dems filibuster, maybe they don’t – but we could see this happen and happen quick. There’s just nothing to prevent it. We haven’t been able to say that for a long time.”
“The only bargaining chip that Democrats have now is the cloture rule in the Senate, that you need 60 votes to block a filibuster -- but the Republicans don’t have 60 votes,” noted CBIZ MHM’s Smith. “But it’s a little hard for me to believe that you can filibuster on tax legislation for four years just because you don’t have 60 votes.”
That means there’s a significant possibility of rate changes next year, and Crowe Horwath’s Wagner warned that that will require some thinking: “People considering transactions or considering what to do by the end of the year need to consider a transaction this year versus next year, when the rates will be lower.”
EFFECT ON TAX & ACCOUNTING COMMUNITY
Needless to say, tax professionals and accountants will bear much the burden of compliance with any new tax rules – as well as the unintended consequences.
Fred Slater, a CPA and owner of MS 1040 LLC, and a past chair of the Relations with the IRS Committee of the New York State Society of CPAs, warned accountants and tax pros that the promise of tax cuts by politicians can sometimes cause problems for tax preparers. “I would expect what I call tax reduction illusions,’” he said. “It will be similar to the Reagan cuts, where he cut the brackets and more importantly more severely cut the allowable deductions. The result was a tax season where I spent a lot of time trying to explain that ‘lower taxes’ on a much higher taxable income results in higher taxes for the middle class of New York.”
More broadly, the possibility of major change to the tax systems always presents a challenge.
“The biggest thing is how much our industry will change, because we just spent years learning the Net Investment Income Tax, for example, and years learning the repair regulations – Trump is talking about 100 percent expensing, so the repair regs go out the window, and Obamacare’s going to be repealed, so the Net Investment Income Tax goes out the window,” Nitti said. “We have spent so much time and effort learning this stuff, and it’s just not going to be applicable if these things really get pushed through.”
“We’re going to have to learn a whole potentially new tax system,” he continued. “Some of it’s going to add simplicity, and some of it’s going to add complexity, but either way, we need to know it and we need to get our arms around it quickly.”
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