Impact of the 2016 elections

Deloitte Development LLC

Business Taxes  
In August of this year, when he delivered his first economic address as the GOP presidential nominee, Trump told the Detroit Economic Club that the current US tax laws “punish companies for making products in America” and promised that his administration would promote tax policies—centered on lower rates and simplification—that he characterized as “geared towards keeping jobs and wealth inside the United States.”

Overview of Trump’s tax plan: Business Provisions
The following table highlights the business provisions in Donald Trump’s tax plan (which was originally unveiled in 2015 and updated several times this year) and shows how they stack up against current law and the proposals in the House Republican tax reform blueprint released on June 24, 2016.

Proposals marked with an asterisk (*) were included in the House GOP’s health care reform blueprint released on June 22, 2016.
Highlighted (green) material indicates discrete proposals from Senate Finance Committee leaders Orrin Hatch, R-Utah, and Ron Wyden, D-Ore., that also could influence the tax policy debate next year.
Selected Business Provisions
Provision Current law Trump House GOP blueprint
Domestic Provisions
Top corporate rate 35% 15% 20%
Pending Hatch proposal: Reduce effective corporate rate through a corporate integration plan that combines a dividends-paid deduction and a withholding tax on dividend and interest payments
Top passthrough rate 39.6% >15% rate on passthrough business income “available to all businesses, both small and large, that want to retain the profits within the business”
 >Trump campaign has explained that:
Passthrough businesses may elect to be taxed at the 15% corporate rate or under the individual side of the code
>Large passthroughs electing the 15% rate would be subject to second-level tax on distributions to owners, but small ones would not (no details on threshold for determining when or how second-level tax would apply)
>Anti-abuse provisions to prevent taxpayers from misclassifying wage income as business passthrough income to take advantage of 15% rate would be negotiated with Congress
>Top rate of 25% will apply to active business income of sole proprietorships and passthrough entities (partnerships, LLCs, and S corps)
>Passthrough entities will pay or be treated as having paid reasonable compensation to their owner-operators, which will be deductible by the business and will be subject to tax at the graduated rates for families and individuals
Carried
interest income
Taxed as long-term capital gain Tax as ordinary income (see overview of individual provisions for details on proposed rates) No changes to the tax treatment of carried interest are specified, though the top effective rate on long-term capital gain income would be reduced to 16.5% from 23.8% (see overview of individual provisions below for more detail)
AMT Imposed on a corporation to the extent its tentative minimum tax exceeds its regular tax Repeal; treatment of accumulated AMT credits not specified Repeal; treatment of accumulated AMT credits not specified
Derivatives Taxation of derivatives may vary depending upon the tax treatment of the underlying investment, the type of contract and its holding period, the source country of the transaction, and the characteristics of the taxpayer No changes specified No changes specified
Wyden draft proposal: Require mark-to-market tax treatment for many derivative contracts not entered into to hedge business risks
Research credit Generally allows either a 20% credit for qualifying research expenses in excess of a base amount, or a 14% alternative simplified credit Retain research credit, but repeal most other business tax expenditures Retain credit; Ways and Means Committee will “evaluate options” to make it “more effective and efficient”
Domestic production activities deduction (section 199) Up to 9% deduction under section 199 for certain income attributable to domestic production activities Repeal most business tax expenditures except for the research credit Repeal
Depreciation Taxpayers generally recover costs under the Modified Accelerated Cost Recovery System (MACRS) or, at their election, under the straight-line Alternative Depreciation System (ADS) Firms engaged in US manufacturing may elect to deduct the full cost of their capital investments in year one; option is revocable within first 36 months Full expensing in year one of all assets, tangible and intangible, other than land
Wyden draft proposal: Replace current tax depreciation rules with a “pooling” system for most tangible personal property
Domestic Provisions
Interest expense Generally deductible Businesses that elect full expensing in year one (see Depreciation, above) will lose their ability to deduct net interest expense >Interest expense deductible against interest income, but no current deduction for net interest expense; net interest expense may be carried forward indefinitely and deducted against net interest income in future years
>Ways and Means Committee will develop “special rules” with respect to interest expense of financial services companies to “take into account the role of interest income and interest expense in their business models.”
Amortization of intangibles 15-year amortization of acquired intangible assets No changes specified Full expensing in year one
NOLs Generally may be carried back two years and carried forward 20 years to offset taxable income in such years; different carryback periods apply with respect to NOLs arising in different circumstances No changes specified >Eliminate NOL carryback
>Permit indefinite carryforward increased by “an interest factor that compensates for inflation and a real return on capital to maintain the value of amounts that are carried forward”
>Deduction capped at 90% of taxable income for the year without regard to the NOL
Accounting methods >Last-in, first-out (LIFO) and lower of cost or market (LCM) included among permissible inventory accounting methods
>Cash method of accounting permissible for certain non-C corp and other entities, subject to an average annual gross receipt limit of $5 million (gross receipt limit does not apply to personal service corporations)
No changes specified >Retain LIFO; Committee will continue to evaluate ways to make inventory accounting more efficient

>No specific discussion of LCM or cash methods

Energy Provides a variety tax incentives benefitting the fossil fuels industry, alternative energy, and energy efficiency Repeal most business tax expenditures except for the research credit No specific proposal, although the blueprint suggests that most credits, deductions, and other preferences will be repealed
Treatment of employer-provided health care benefits Employer-provided health benefits excluded from income and payroll tax No changes specified Limit the exclusion for employer-provided health benefits; new refundable credit for individuals without workplace coverage*
Patient Protection and Affordable Care Act (PPACA) taxes >2.3% excise tax on covered medical devices (suspended for 2016-2017)
>“Cadillac” tax on high-cost health plans (delayed until 2020)
Repeal PPACA Repeal all PPACA tax increases*
Economic development and infrastructure incentives >Provisions such as the New Markets Tax Credit and the Work Opportunity Tax Credit are intended to encourage employers to hire workers in high-unemployment areas or from certain targeted groups
>Provisions such as tax-preferred Build America Bonds are intended to encourage infrastructure development
>Repeal most business tax expenditures except for the research credit

>Create “a deficit-neutral system” of unspecified infrastructure tax credits to promote private-sector infrastructure investments.

No changes specified
Domestic Provisions
Employer-provided child care incentives (section 45F) >Employers eligible for a tax credit of 25% of qualified expenses for providing on-site employee child care and 10% of qualified expenses for child care resource and referral services (maximum $150,000 per year)
>Portion of credits taken for the expenses of acquiring, constructing, rehabilitating, or expanding a qualified child care facility is subject to recapture if facility is closed within the first 10 years after being placed in service
General call to increase credit cap, shorten recapture period, and “devise ways for companies to pool resources in order to make the credit more attractive” No changes specified
International Provisions
Regime type Worldwide with deferral No changes currently specified (2015 plan called for retaining current-law worldwide regime and the foreign tax credit but repealing deferral) Territorial system with 100% participation exemption for foreign dividends
Wyden’s position: Although he has not introduced a specific proposal this year, Wyden historically has supported repealing deferral on active foreign-source income to help finance a reduction in the corporate rate
Repatriation Repatriated foreign-source income taxed at full corporate rate with allowance for foreign tax credits One-time deemed repatriation of accumulated deferred foreign income at flat 10% tax rate; no discussion of giving companies multiple years to pay One-time deemed repatriation with differential rates for cash (8.75%) and noncash assets (3.5%), payable over eight years at the taxpayer’s election
Prevention of base erosion Subpart F rules limit deferral for certain mobile and passive foreign income; US interest deductions for inbound firms may be limited by section 163(j) No changes specified Eliminate most subpart F rules; retain foreign personal holding company rules for passive income shifting
Border adjustability of tax base N/A N/A Destination-based cash flow tax based on jurisdiction of consumption and not production; thus imposed on value of imports but not on value of exports, similar in concept to “border adjust­ments” in other countries’ Value Added Taxes

© 2016 Deloitte Development LLC
Portions (pp 17-20) of the report “Tax Policy Decisions Ahead — Impact of the 2016 Electionsreprinted with permission.  Deloitte Development and its affiliated and related entities are not, by means of providing the Material contained herein, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. The Material is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business.

The Tax Policy Decisions Ahead — Impact of the 2016 Elections”, can be downloaded and viewed in its entirety by visiting www2.deloitte.com.