On February 22, the Treasury Department released “The President's Framework for Business Tax Reform.” The document outlines the Administration’s overall view of the tax system and its proposals for reform. The general view of the U.S. tax systems is that high corporate tax rate along with the existing corporate tax “loopholes” has made the system “uncompetitive relative to other countries, distorts business decision making, and slows economic growth.” The document also argues that the system is overly complex which has increased compliance costs along with increased enforcement costs for the IRS. The report also argues that choice of business entities, such as the ability of certain companies to elect pass-through treatment has led to distortions in the tax system. The report argues that “the ability of large pass-through entities to take advantage of preferential tax treatment has placed businesses organizing as C-corporations at a disadvantage. By allowing large pass-through entities preferential treatment, the tax code distorts choices of organizational form, which can lead to losses in economic efficiency; business managers should make choices about organizational form based on criteria other than tax treatment.”
Below, we have outlined some of the more important elements of the reform package included in the Treasury Department document:
- Reduction of the top corporate tax rate from 35% to 28% with a further reduction of the top corporate tax rate for manufacturing income to 25%.
- Revision of the depreciation schedules due to its overstatement of the true economic depreciation of assets.
- Elimination of many existing tax breaks including, last-in, first out (LIFO) inventory accounting; interest deductions related to life insurance policies; and changing taxation of “carried interest”.
- Significantly reduce the ability of corporation to deduct interest expense.
- Potentially taxing large pass-through entities as corporations.
- Increase disclosure rules in order to heighten transparency.
- Simplifying the research and development tax credit with a corresponding reduction in its benefits.
- Reforming the tax treatment of off-shore income earned by subsidiaries of U.S. corporations by instituting a minimum tax in the U.S.
- Creating incentives to move business operations back to the U.S., while creating penalties for companies moving operations overseas.