A Tax News article by Deloitte comments on the tax reform blueprint released by House Republicans on June 24 that calls for reducing tax rates for corporations, passthrough businesses and most individuals. The article summarizes the blueprint as follows,

The blueprint calls for reducing the top statutory corporate income tax rate from 35 percent to a flat rate of 20 percent.

Passthrough business income (e.g., business income earned through sole proprietorships, partnerships, limited liability companies, subchapter S corporations, etc.) would face a maximum rate of 25 percent – greater than the proposed top rate for corporations, but less than the proposed 33 percent top income tax rate for individuals. (See discussion of the proposed new personal income tax brackets below.)

The blueprint notes that reasonable compensation paid to employee-owners of passthrough entities would remain deductible to the business and would be taxed to the employee-owner at his or her marginal rate.

Other notable proposals in the blueprint would:

  • Move toward a cash-flow business tax model by allowing 100 percent first-year expensing of investments in tangible personal property, real property other than land, and intangible property.
  • Disallow deductions for net business interest expense (i.e., interest expense would be deductible only to the extent of interest income), with an indefinite carryforward period for disallowed net interest expense deductions. The blueprint notes that the Ways and Means Committee intends to develop special rules for industries such as banking, insurance, and leasing, for which interest expense is integral to their business model.
  • Repeal carrybacks of net operating losses (NOLs), but allow NOLs to be carried forward indefinitely with a dollar adjustment designed to compensate for inflation. The blueprint proposes to limit NOL deductions in any one year to 90 percent of taxable income (similar to the current-law NOL limit under the alternative minimum tax).
  • Repeal the corporate AMT.
  • Repeal most business tax preferences, which according to the blueprint would reduce complexity, encourage economic growth through a more efficient allocation of capital, and raise revenue to help finance lower business tax rates. The blueprint is generally vague on details in this regard, but specifically mentions the section 199 deduction for domestic production activities income as a business tax preference that should be repealed.
  • Retain the research and experimentation tax credit and the last-in-first-out (LIFO) method of inventory accounting. The blueprint notes that these two preferences could undergo changes upon further evaluation by the Ways and Means Committee.

Find the full commentary here: Tax News & Views

Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal