As a result of Republicans winning the White House and retaining the House and Senate, the 2016 election created the most promising climate for major tax reductions in years.
Tax reform is a priority for both President Donald Trump and Congress. Therefore, it’s possible a tax code overhaul could be coming in the first 100 days of the administration. Whether this is accomplished through a bipartisan bill or the budget reconciliation process, the result is likely to be a mix of the tax plan Trump supported during his campaign and the House Republicans’ Tax Reform Blueprint.
Though there are some differences between the House Republicans’ plan and Trump’s plan, there are many similarities that indicate the direction comprehensive tax reform could take.
Tax comparison
Corporate income tax rate:
- Republican: Lower the corporate tax rate to 20 percent.
- Trump: Eliminate most deductions and credits except R&D. Manufacturers may expense capital investment but lose interest deduction (election revocable within three years, then permanent).
Pass-through business:
- Republicans: Lower the top rate on pass-through businesses to 25 percent.
- Trump: Originally said no business income taxed at a rate higher than 15 percent. Now, no proposed changes. Going forward, the 15 percent rate only applies to businesses that are taxed as corporations.
Capital expenses:
- Republicans: Move to full expensing of capital investment. Preserve the last-in, first-out method of accounting.
- Trump: Maintain maximum rate of 20 percent for highest bracket.
International income:
- Republicans: Shift to a territorial tax system. Enact a deemed repatriation of foreign income at a tax rate of 8.75 percent for cash and cash-equivalent profits and 3.5 percent on other profits. Make the federal income tax border-adjustable, exempting businesses from paying taxes on exports but denying them a deduction for cost of imported goods.
- Trump: A one-time deemed repatriation of corporate cash held overseas at 10 percent tax rate. End the deferral of taxes on corporate income earned abroad.
Replacing ObamaCare
Republicans in the House favored eliminating several business credits and deductions, including the domestic production activities deduction. House Republican plans also included eliminating the deductibility of net interest.
Trump has supported repealing the net investment income tax, as well as repealing and replacing the Affordable Care Act.
He also supported child care tax changes for both businesses and individuals. An incentive for businesses to create on-site child care would involve a $500,000 tax credit limited to a five-year recapture window. Direct employee subsidies for the child care would be taxed to the employee rather than the business, and the subsidies would not be eligible for tax credits. An above-the-line deduction for child care would be created for individuals, covering up to four children and capped at the state average for child care costs. The exclusion would be available to stay-at-home parents and grandparents. Spending rebates would be available through the earned income tax credit.
For health care, Trump supported creating dependent-care savings accounts. The DCSAs would be available for specific individuals, including unborn children. The total amount of contributions to DCSAs would be limited to $2,000 per year. Any leftover funds for children could be used for education expenses when the child turns 18. The government will provide a 50 percent match on parental contributions with a maximum match of $1,000 a year. •
David Bussius is a managing director at CBIZ Tofias. He can be reached at DBussius@cbiztofias.com.
