15 Oct Trump Tax Proposal
One of the biggest platforms that President Trump ran on leading up to his election was tax reform and, more specifically, the promise to cut taxes. As such, many people have been waiting for his Administration’s tax reform proposal to roll out, and it finally did. The Trump Administration, along with Congressional Republican leaders, recently released their tax reform proposal, entitled, “Unified Framework for Fixing Our Broken Tax Code.”
The proposal is a nine-page document designed to serve as the basis for developing tax reform legislation, which means that it does not contain any legislative text in itself. There aren’t a lot of details or guidance specifically regarding debt, funds, private equity funds, hedge funds or any other alternative asset management funds. The proposal does, however, go over what to include and what not to include once tax form legislation is developed and passed.
The Trump Administration’s Tax Reform Proposal
The following are some of the tax reform focus areas that could affect participants in the asset management industry in regards to their operations and their investments.
- Carried Interest – The proposal doesn’t specifically mention how carried interest will be treated, nor does it mention recent reports that carried interest will not be focused on as part of the initial tax reform. However, the White House Chief Economic Advisor and the White House Legislative Director have both stated that the President remained committed to ending carried interest.
- Taxation of Pass-Through Entities – The proposal would set a tax rate cap of 25 percent on income of small businesses that are operating as pass-through entities. The proposal also emphasizes the need to ensure that a wealthy person’s wages or personal income are not re-classified as flow-through business profits. However, experts are predicting that alternative funds may not be eligible for the 25 percent rate cap.
- Corporate Tax Rate Reduction – The proposal suggests a 20 percent cap on corporate taxes and the elimination of corporate AMT (Alternative Minimum Tax). There’s also mention of the possibility of business deductions and credits being eliminated.
- Capital Expensing – The proposal would immediately allow the expensing of new investments in depreciable assets for a minimum of five years. Similar relief would be provided to smaller companies, although no guidance on thresholds is provided.
- Interest Deductibility – Corporate deductions for net interest expenses would be limited under the new proposal. However, no details are provided on the limitation’s extent and there’s no mention of any grandfathering rules in regards to existing debt obligations or carve-outs for smaller companies.
- Territorial System – The proposal suggests moving from a worldwide system to a territorial system. This would make dividends to an American corporation from a ten percent (or greater) owned subsidiary exempt from tax, and as a result would force multinational groups to change how they think about cash repatriation, intercompany transactions and model financing arrangements.
- Taxes on Un-Repatriated Earnings – The proposal suggests that all accumulated foreign profits and earnings be taxed just one time and that this one-time tax be phased in over several years. No specific tax rate or phase-in period are mentioned; however, earnings held in assets that are cash or equivalent to cash would be taxed higher than illiquid assets.
- Anti-Base Erosion – The need for anti-base erosion measures are mentioned in the proposal, but no details are provided.
- Individual Income Tax Rates – The proposal includes the expansion of the zero-tax bracket, which would be achieved by doubling the standard deduction for individuals and married couples. Currently, there are seven income tax brackets. These would be consolidated into three brackets – the 12 percent, 25 percent and 35 percent brackets. The individual AMT would also be fully repealed.
- Deductions – The proposal recommends the elimination of almost all itemized deductions, including both state and local tax deductions. This could have a big impact on professionals based in areas such as New York City and California, where state and local income taxes are high. The reasoning is that it would encourage committees to retain tax incentives for retirement, work, and higher education.
- Estate Tax – The estate tax, also known as the “death tax,” is something President Trump has called on for repeal throughout his campaign. The proposal calls for its repeal as well as for the repeal of the generation-skipping transfer tax. However, there are no details within the plan on how or when the estate tax would be repealed.
There are a number of issues that the tax reform proposal does not address. The proposal does not mention the taxation of derivatives or financial products, nor does it mention any possible lower tax rates on investment income. Additionally, no permanent tax changes are addressed and there is no planned timeline in regards to the enactment of the tax reform plan or any effective dates regarding issues brought up within the proposal.