Hurry Up and Wait: Understanding Tax Reformby
From Congress to the White House, expectations for a comprehensive tax overhaul abound, and a path forward is being drawn. But much of the details remain to be seen – when the White House revealed its one-page tax reform framework, for example, questions of the fate of the border-adjustment tax were left unanswered.
What’s most important to keep in mind during this uncertain time is that the proposals on the table are likely a shell of what will end up on the president’s desk for signature. It’s critical to focus on what we know, rather than what may happen.
Assessing the Overhaul
According to BDO’s 2017 Tax Outlook Survey, published in March, 34 percent of tax executives highlighted planning for federal tax reform as a top concern. What’s clear based on the president’s reform framework is the goal to lower the business tax rate to 15 percent and shift the United States to a territorial tax system while encouraging repatriation for US-based multinationals. However, very few details were revealed with the initial announcement, leaving many key questions unanswered.
Overall, a simpler tax code would be beneficial for taxpayers and the economy in theory, but any proposal will have both winners and losers.
The lack of clarity on pass-through entities is a perfect example. In the current setting, take, for example, $100 of taxable income that is taxed at the taxpayer’s marginal rate (possibly as high as 40 percent). Once that $100 is distributed to the business, there’s no additional tax paid. On the corporate side, organizations pay a lower tax at the business level. Once it’s distributed, they pay tax again.
Now there is uncertainty around whether pass-throughs will be able to take advantage of the lower rate. It’s improbable that large multinational S corporations will only pay tax at 15 percent, but questions like these need to be addressed for companies to effectively assess how the president’s plan will impact their bottom line.
Tax Executives’ Take
Despite uncertainty, comprehensive reform seems more likely now than in any time in recent memory. In fact, tax executives unanimously agreed in BDO’s 2017 Tax Outlook Survey that tax reform is likely under President Trump. Bolstering these predictions, almost two-thirds (60 percent) noted reform is very likely.
While reform seems likely, tax executives are aware of the intricacies of the legislative process, and a majority (51 percent) think that reform will be stalled due to congressional gridlock.
Tax executives have reform wishes top of mind and many align with the GOP plan. At the top of their “reform wish list,” unsurprisingly, is the hope for a lower corporate tax. But execs don’t seem confident the president will achieve the goal of lowering the rate to 15 percent. During a March 28 webinar attended by more than 500 international tax professionals, 63 percent predicted the corporate rate will stay in the 20s, while 34 percent of respondents predicted it will fall somewhere between 20 and 24 percent. Just 6 percent predicted the tax rate will fall between 15 and 19 percent.
Filling out the rest of the wish list, 20 percent of tax executives are interested in tax incentives to repatriate foreign earnings, and 17 percent hope for the shift to a territorial tax system, also in line with the president’s plan. Following that, 12 percent of executives would like to see a simpler tax code, and 9 percent are interested in a lower tax burden on capital gains. Just 2 percent of tax executives have changes to the tax treatment of carried interest, one of both presidential candidates’ campaign promises, as a top priority.
Preparing for Uncertainty
Because of the lack of specificity in the president’s tax reform framework, there is significant uncertainty around where this will all end. At this point, it’s important to be aware of various potential outcomes and keep them in mind. What’s certain is that it’s premature to be taking specific planning steps in anticipation of change until more details come to light.
Though it may seem strange to put proactive planning on hold, knowledge will be your most valuable tool in the near term. Because policy objectives change every day in Washington, DC, be sure to stay on top of what’s being reported in the news, changes from congressional committees, and advice from your organization’s tax professionals to stay ahead.
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Matt Becker, CPA, leads BDO USA’s National Tax Office and is the managing partner for the Central Region. Paul Heiselmann is national managing partner in the Specialized Tax Services practice at BDO USA.