by Michael J. Devereux II, CPA, CMP, partner
With Donald Trump winning the White House and Republicans maintaining majorities in both the US House of Representatives and US Senate, the prospect for tax reform and forthcoming business-friendly Department of the Treasury regulations is significant. While both parties agree on the need for tax reform, their visions for our future tax code are significantly different. The Republicans’ sweep in November 2016 creates a unique environment that has enhanced the likelihood of major changes to come. Likewise, a Trump administration is poised to roll back numerous Treasury regulations promulgated by President Obama to create a more business-friendly environment to allow US manufacturers to compete on the world stage.
Much has changed since the last time the United States had a major overhaul of the tax code. When Ronald Reagan signed the Tax Reform Act of 1986 on Oct. 22, 1986, the world economy and US manufacturing were entirely different. Going into 2017, tax provisions in three competing plans will vie for a spot in a potential tax reform bill.
President-elect Trump’s tax plan
In the last months of Donald Trump’s campaign, he modified his tax plan to align his proposed tax rates/brackets to that of the US House of Representatives’ plan, condensing the seven existing tax brackets to three, with tax rates ranging from 12 percent to 33 percent.
Trump’s plan will retain the existing capital gains rate, capped at 20 percent, while repealing the 3.8 percent Obamacare tax on investment and passive income. He proposed repealing the individual Alternative Minimum Tax (AMT), too.
For C Corporations, Trump’s tax plan lowers the top business tax rate from 35 percent to 15 percent and eliminates the corporate AMT. In addition, he proposes a one-time repatriation of corporate profits held offshore at a rate of 10 percent. Most credits and incentives would be eliminated, except for the Research & Development (R&D) tax credit, a provision of the code that most plastics processors use to reduce their overall federal and state tax liabilities.
Under Trump’s tax plan, US plastics processors would be allowed to elect to expense capital expenditures for equipment and machinery.
US House of Representatives: the Blueprint
Throughout 2016, the US House of Representatives released six different plans to tackle various issues within our country, including poverty, national security, the economy, the Constitution, health care and tax reform. The Tax Reform “Blueprint,” as it’s identified in the document released by Speaker Paul Ryan’s office, aims at simplifying the code, while increasing jobs and fueling growth. Here is a look at select provisions of the House Republicans tax plans that will affect plastics processors and their ownership groups:
The Blueprint flattens and reduces the individual income tax brackets, condensing seven tax brackets to three. It proposes a maximum tax rate of 25 percent on small business income from sole proprietorships or pass-through entities (S Corporations, Partnerships and LLCs). The Blueprint repeals the individual AMT. Families and individuals would be able to deduct 50 percent of their net capital gains, dividends and interest income, leading to basic rates of 6 percent, 12.5 percent and 16.5 percent.
Under this new approach for taxing small businesses, sole proprietorships and pass-through businesses will pay or be treated as having paid reasonable compensation to their owner-operators. Such compensation will be deductible by the business and will be subject to tax at the graduated rates for families and individuals. The compensation that is taxed at the lowest individual tax bracket rate of 12 percent effectively will further reduce the total income tax burden on these small businesses and pass-through entities.
Moreover, the Blueprint lowers the corporate tax rate to a flat rate of 20 percent and repeals the corporate AMT. In addition, the Blueprint allows for the full and immediate expensing of the cost of investments, including tangible property (such as equipment and buildings) and intangible assets (such as intellectual property).
The Blueprint allows corporations to deduct interest expense against interest income, with no current deduction for net interest expense. Excess interest expense would be carried forward indefinitely and allowed against interest income in future tax years. The House Ways and Means Committee would develop special rules for financial services companies, such as banks, insurance companies and leasing companies.
Finally, the plan allows net operating losses to be carried forward indefinitely, allows taxpayers to continue to use the last-in-first-out (LIFO) method of accounting and keeps the R&D tax credit.
Senate Finance Committee: Corporate integration
The US Senate has taken a completely different approach to tax reform. The Senate Finance Committee (SFC) believes the first step to tax reform is to level the playing field between C Corporations and pass-through entities (S Corporations, Partnerships and LLCs). In doing so, the SFC proposes the following:
- allow C Corporations to deduct dividends paid;
- impose withholding (35 percent) on dividends and interest; and
- eliminate the preferential dividend rate.
The SFC believes that by enacting these provisions, more companies will be organized as C Corporations, thus allowing Congress to enact tax reform for business and individuals as separate endeavors.
In addition to tax implications of the election, numerous Treasury regulations that affect plastics processors and their ownership groups have been issued in recent years. Some that have and could have a significant impact on the plastics industry include the tangible property regulations, research expenditure regulations, research credit regulations, domestic production activities deduction regulations, corporate inversions and limitations on discounts when transferring ownership to future generations. We expect the new administration to take a fresh look at these regulations and assess how they impact jobs and growth for our economy.
While many believe the election results did not purport to provide a mandate to Congress and the future administration, one thing is for sure – changes are coming. Hopefully, these changes will help plastics processors as they compete in the world market.
Michael J. Devereux II, CPA, CMP, is a partner and director of Manufacturing, Distribution & Plastics Industry Services for Mueller Prost. Devereux’s primary focus is on tax incentives for the manufacturing sector. He serves on MAPP’s Board of Directors and has been a MAPP sponsor since 2006. Mueller Prost’s Tax Incentives Group is nationally recognized and has assisted numerous companies in the plastics industry capture these benefits. For more information, email [email protected] or call 314.862.2070.