With the surprising election of Donald Trump, and Republicans in control of both the House and Senate, the prospects for a major U.S. tax overhaul took a giant step forward recently.  Or did they?

An interesting procedural anomaly may slow the pace of the aggressive strategy endorsed by the new President.  Tax legislation starts in Congress, not with the President (who certainly has influence).  The House Republicans have had a tax plan on the shelf waiting for just this moment.  It provides tax simplification, lower individual and corporate tax rates, and a full repeal of estate taxes.  But when the plan hits the Senate, the Republicans do not control enough of the chamber to pass the package without Democratic support.  And Democratic support will be tough to find without changes that the House Republicans won’t accept.

There is one procedural tactic that allows highly partisan measures to pass.   The Congress can pass an identical bill in both the Senate and the House under a provision called “budget reconciliation.”  The Affordable Care Act (“Obamacare”) passed under this very provision, exclusively by Democrats.  One major restriction on budget reconciliation is that it may be used only once each fiscal year.

Republicans are planning to use budget reconciliation as the vehicle to pass reforms to repeal and replace Obamacare early in 2017.  This means that virtually the entire Republican body needs to agree on the reforms necessary, and it can pass without any Democratic support.  Even this near-universal Republican goal breaks down at the detail level, because any large legislative undertakings will leave problems and uncertainty for many citizens.

Since the Obamacare legislation is going to be using the budget reconciliation bill this year, major tax reform is unlikely to be introduced early in 2017.  If budget reconciliation is the vehicle of choice for tax reform (to avoid compromise with Democrats), the earliest such a bill would be voted on would be after September 30, 2017.  As such, it’s likely not going to be effective for 2017, but more likely for 2018.

Tax reform provisions that are contemplated under the tax plans would likely include these provisions:

Item Current House Republicans President Trump
Ordinary tax rates 10-39.6% 0-$75,000 = 12%

$75,000-$225,000 = 25%

$225,000 and above=33%

0-25%
Capital gains 0-20% 50% excluded 0-20%
Alternative Minimum Tax 26-28% Repealed Repealed
Net investment income tax 3.8% Repealed Repealed
Standard deduction $6,300/$12,600
S        MFJ
$12,000/$24,000
S        MFJ
$15,000/$30,000
S        MFJ
Personal Exemptions $4,000 Eliminated
Itemized deductions •      Medical

•      Taxes

•      Charitable

•      Mortgage Interest

•      Investment fees

•      Gambling (limited)

•      Employee Business

•      Mortgage Interest

•      Charitable Contributions

Cap at $100,000/$200,000

S           MFJ

Estate Tax 40% Repealed Repealed
Step up in basis on death Permitted Unknown Taxed over $10m
(exemption for small businesses and family farms)
Business Income (flow through) Ordinary Rates 25% 15%
Corporate Income Tax 35% 20% 15%

 

From an international perspective, the provisions that will most affect global trade include the proposal to permit immediate expensing of capital investments.  In addition, the plan adopts a “territorial” approach for foreign business income to make the United States a more attractive place to headquarter multinational corporations.  When combined with the lower corporate tax rate, the proposal would likely generate a large inflow of real investment, rather than repelling it as our current system does.

Your Bowman team is eager to assist with inquiries concerning U.S. taxes.  You can contact us at dpetrick@cpabowman.com for further advice on tax planning and strategy.

 

San Joaquin County’s largest locally-owned accounting firm, Bowman & Company, LLP is proud to announce that Ryan M. Dingler has been admitted as a partner of the firm, effective January 1, 2017. Dingler is a 2004 graduate of UC Santa Barbara and has been licensed as a CPA since 2009. Ryan specializes in taxation and accounting of real estate and construction, agricultural interests, family-owned businesses, and high net worth individuals. He, his wife Lindsay, and children Alexandra and Trent reside in the Lodi wine country.

Bowman & Company is listed among the largest 300 accounting firms in the United States, and has been named among the 50 “Best of the Best” firms nationally in both 2015 and 2016 by an industry trade publication. The firm’s 50 team members serve the tax and accounting needs of many of the area’s most notable businesses and families. The firm was founded in 1949 by one of the pillars of the Stockton business community, Herbert H. Bowman. Dingler becomes the 23rd partner in the 67-year history of the firm.

 

In an effort to assist individual taxpayers in getting timely information to help them prepare their tax returns, Congress has enactdreamstime_xs_29543309ed legislation which accelerates the due dates of certain tax forms.  Starting this year, businesses which file Form 1099-MISC to report nonemployee compensation will need to send those 1099s to both the recipients AND the IRS by January 31, 2017.  Late filers could face penalties ranging from $50 to $530 per 1099.

In another significant change, partnerships which formerly were required to file tax returns by April 15 have had their filing due date moved up to March 15.  The change is intended to allow partners a full month to have their K-1s to file their individual tax returns by April 15.

Bowman is prepared to help our business clients meet these accelerated due dates!  Our client service teams are working hard to ensure that all of our clients meet their obligations without filing extensions except when absolutely necessary.   If you need help in meeting your filing obligations, please contact us for assistance.