Tax reform was a critical part of the legislative platform in 2016. However, lawmakers have failed to pass any major tax law changes yet this year. House Speaker Paul Ryan hopes to unveil a draft proposal in September and pass a bill by year end.

Lower Corporate Taxes

While its trading partners have lowered corporate tax rates, rates in the United States are among the highest in the world. The top federal tax rate for businesses is currently 35%, compared to an average of 22.5% for businesses in the industrialized world. Ryan has said that a 20% corporate tax rate is “very realistic.” The plan would also speed up deductions for capital expenditures by allowing full expensing in the year assets are placed in service.

In turn, businesses could use the savings from permanent tax reforms to pursue growth opportunities and create jobs. The Tax Foundation estimates that the tax blueprint published by Congressional Republicans in 2016 would generate 1.7 million new jobs.

A More Level Playing Field

Comparatively high tax rates have caused many companies to move facilities and jobs offshore. Lawmakers hope that lower tax rates will entice companies to reshore their operations and curb corporate inversions. They also want to allow U.S. companies that earn money and pay taxes overseas to bring cash back to the United States without being taxed — or to at least be taxed at reduced rates.

Preservation of Valued Deductions

On the individual tax front, some lawmakers want to lower tax rates, including taxes on income that flows through to small business owners’ individual tax return. In addition, they’ve promised to preserve deductions for home mortgage interest, retirement savings and charitable giving for individuals. Other items, such as like-kind exchanges and state income tax deductions, are rumored to be on the chopping block.

Simplification

Our tax code is roughly 70,000 pages long. Speaker Ryan has announced plans to simplify the tax code by eliminating the estate tax and alternative minimum tax (AMT). Congress also plans to close special interest exceptions and other loopholes, along with consolidating the number of tax brackets for individuals.

Border Adjustment Taxes

What about the border adjustment tax (BAT)? That proposal would basically tax imports while exempting exports. Originally, the BAT was expected to generate significant tax revenue — and allow Congress to make budget-neutral tax cuts. But, for now, negative feedback from retailers, oil refiners and others appears to have shifted tax reform discussions away from the BAT.

Next Steps

When Congress finally unveils a more detailed tax reform draft, some legislators may support its basic underlying principles, even if they disagree about the best way to achieve these ideals. So, it may be helpful to keep the basics in mind when tax planning for the short term. Contact us for assistance with business and personal tax planning. We’re monitoring this project, and we’ll keep you informed as more details unfold.