IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

Roger RoyseRoyse Law Firm, PC

Silicon Valley, San Francisco, Los Angeles, Silicon Beach

rroyse@rroyselaw.comwww.rogerroyse.comwww.rroyselaw.comSkype: roger.royseTwitter @rroyse00

Current Tax Reform Proposals

• Last comprehensive tax reform was in 1986• Tax reform is now seen as essential and the current tax system

is described by many as not being fit for its purpose• Prior to recently, the common themes included:

– Broadening the tax base– Reducing the headline rates of tax– Simplification

• Overview:– Chairman Camp’s 2014 discussion draft– Senator Hatch’s 2014 report on tax reform – Corporate integration– House Tax Reform Task Force (Ryan Plan)– The Trump Plan

Overview

• Most comprehensive attempt at tax reform to date– Discussion draft released in February 2014 – Almost 1,000 pages long (not including analysis from the

Joint Committee of Taxation)– Proposed a complete overhaul of the US tax system

• Business tax rate brought down to 25% but individual tax rate only lowered to 35%

• Draft was revenue neutral however it shifted $580 billion of the tax burden from individuals to businesses

• Chairman Camp’s proposal expired with the 113th

Congress

Chairman Camp’s Reform Proposal

Individual Taxation

• Three rates of tax for individuals:

– 10% tax on income up to $36,900 ($73,800 for married couples filing jointly)

– 25% tax on income between $36,901 ($73,801) and $400,000 ($450,000)

– 35% tax on income in excess of $400,000 ($450,000)

• Eliminates the personal exemption but increases the standard deduction to $11,000 ($22,000)

• Eliminate deductions such as state and local taxes, real estate taxes, medical expenses, and tax preparation fees

Chairman Camp’s Reform Proposal

Business Taxation

• Headline rate of tax decreased to 25% but there is an overall increase to the tax burden for businesses of $580 billion

• Depreciation and amortization periods extended

• Industry specific deductions such as the Section 199 manufacturing deduction would be eliminated, however the R&D tax credit would be made permanent

• Repeal of favorable treatment for small business stock under Sections 1045 and 1202

• Quarterly excise tax on banks of 0.035% of assets in excess of $500 billion

• S Corporation income would be taxable as self-employment income

• Most carried interest would be taxable as ordinary income

Chairman Camp’s Reform Proposal

• In late 2014, the Senate Finance Committee Republican Staff (headed by Senator Hatch) released a 300 page report titled “Comprehensive Tax Reform for 2015 and Beyond”

• The report does not put forward specific proposals but rather seeks to highlight the issues policymakers will need to confront in order to reform the tax code

• Senator Hatch states that tax reform should abide by seven key principles:1. Economic growth2. Fairness3. Simplicity4. Permanence5. Competitiveness6. Promoting savings and investment7. Revenue neutrality

Senator Hatch’s Report on Tax Reform

• Proposal was sidelined after the 2016 elections

• Lower rates and/or consumption taxes

• Simplification of deductions

• Repeal or reform of big individual tax expenditures

• Lower rate for business that approximates top rate for individuals

• Corporate integration

• Integrating tax treatment of pass through entities

• Territorial system

Senator Hatch’s Report on Tax Reform

• One level of tax on corporate earnings

• Dividends paid deduction

• Withholding tax

• Similar to Interest

• Treaty obligations

• Incidence of the Tax

• Impact on Tax-Exempted Organizations

Corporate Integration

• House Ways and Means Committee Member Nunesdrafted the American Business Competitiveness Act (still in discussion draft form)

• Only reforms business income tax

• Tax rate would be reduced to 25% over ten years

• Full and immediate deduction for all expenditure including capital assets such as real property

• Eliminates the deduction for interest expense

Congressman Nunes’ Proposal

• Economic Growth and Family Fairness Tax Reform Plan– Proposal put forward by Senators Rubio and Lee– Lowers individual tax rates to 15% for the first $75,000 ($150,000 married)

and 35% above that– Reduces elements of double taxation by eliminating taxation of dividends,

capital gains on sale of stock, and estate taxes– Reduces business income tax to 25%– Allows immediate expensing of investments

• Progressive Consumption Tax Act introduced by Senator Cardin– Proposes a broad consumption tax of 10%– Income tax exemptions increased to $50,000 ($100,000 married) to

maintain progressivity– Top marginal tax rate would be 28%– Retains deductions for charitable contributions, state and local taxes, and

mortgage interest

• Patent Box– Senator Schumer has expressed support for a U.S. patent box system which

would tax income derived from U.S. intellectual property at lower rates

Other Proposals

• The budget proposal for the 2016 fiscal year contains a mixture of old and new proposals

• Business taxation– Previous proposal to reduce business tax rate to 28% has been

eliminated– Imposes a bank tax of 0.07% of liabilities for banks with assets

of over $50 billion– S Corporation income would be taxable as self-employment

income– Eliminates oil, gas, and coal provisions– Repeals LIFO– Expands Section 179 to allow expensing of up to $1 million– Makes the R&D tax credit permanent– Retains incentives for renewable energy– Taxes carried interest as ordinary income

Previous Administration

• Individual taxation– Increases capital gains tax to 28% and eliminates

step up in basis on death

– Introduces a “Fair Share Tax” (a.k.a. Buffet Rule) to ensure a 30% minimum tax on high earners

– Increases estate tax rate to 45% and reduces the exemption to $3.5 million

– Increases and expands Child Tax Credit (CTC) and American Opportunity Tax Credit

– Expands Earned Income Tax Credit (EITC)

Previous Administration

• Working Families Tax Relief Act– Would make the EITC and CTC permanent, expand EITC

for workers without children, and index CTC to inflation

• Early Refund Tax Credit– Proposal to make up to $500 of the EITC payable in

advance of tax return filing

– Workers would enroll through their employer half-way through the year to request early payment

• American Opportunity Tax Credit – Proposal to make the AOTC permanent and expand the

maximum credit to $3,000 up from $2,500

Tax Credit Proposals

• Although many plans do not have the following elements, commonalities among the plans include:– Ending capitalization in favor of instant expensing

– Ending the estate tax

– Ending the AMT

– Ending the marriage penalty

– Reducing taxation on investment income

– Reducing tax rates and number of brackets

– Increasing exemptions and credits, or even giving prepayments, to lower earners

– Eliminating state-and-local tax deductions

Republican Candidate Tax Plans

• Whether and to what extent to keep the home mortgage interest deduction; Huckabee and Bush want to eliminate or limit

• Whether to move from a worldwide international tax regime to a territorial regime, and how to handle the deemed repatriation

• To what extent the IRS ought to be reduced or eliminated• Whether to have a “business tax” instead of a corporate tax,

thereby eliminating the distortion in favor of pass-throughs• Whether to have a flat tax or just reduce the number of

brackets• It is not clear what many think of the R&E credit; some

certainly want to expand or keep it

Republican Tax Areas of Disagreement

• Rand Paul wishes to end corporate tax in favor of a VAT. He also wants to end payroll taxes, excise taxes, and most tariffs

• Jeb Bush would end bias favoring debt over equity, by generally making interest non-deductible and taxed at dividend rates. – Rubio wishes to end this bias too

• Trump would keep a worldwide regime and end deferral; his very low business tax rates plus the foreign tax credit would minimize this change’s impact

• Santorum’s old tax plan included 0% tax rate for U.S. manufacturers• Rubio’s system integrates the corporate tax with the individual income tax

via an international dividend exemption system• Huckabee would end the income tax in favor of a large national federal

retail sales tax (the “Fair Tax”)• Carson would base his still-vague tax system around tithing

Republican Tax: Most Unique Features

• The Democrats have not issued comprehensive tax reform plans

• Hillary Clinton’s ideas include:– New tax credits and expenditures (to encourage training new

workers, expanding into underserved communities, etc.)– New 6 year holding period for capital gains, beginning at

39.6% tax and steadily dropping each year until 20% tax at year 6

– Making permanent the 0% rate on 5 year old qualified small business stock

• Bernie Sanders’s ideas include expanding the estate tax, and taxing investment income of top 2% of earners at ordinary rates

Democratic Candidate Tax Proposals

“A Better Way,” Blueprint released June 24, 2016:

• Lower ordinary rates and reduce brackets (12% / 25% / 33%)• Eliminate all itemized deductions

– Except charity and mortgage interest

• Enhance child and dependent care tax credits• Consolidate personal exemption and standard deduction into a

larger standard deduction (single $12k, married $24k)• 50% deduction of net capital gains, dividends, and interest• Repeal taxes enacted under the ACA, including 3.8% NIIT• Repeal individual AMT and corporate AMT• Repeal estate tax and generation-skipping transfer tax• Move towards consumption-based tax system

Ryan Plan

• Pass through and individual business income taxed at a maximum rate of 25%– Reasonable comp taxed at individual rates– C corporations taxed at maximum rate of 20%

• Eliminate “special interest deductions and credits”– Except R&D and LIFO

• Full, immediate write-off of business investments

• No net interest deduction, but indefinite carryforward

• No carrybacks for NOLs, but indefinite carryforward

Ryan Plan – Business provisions

• Destination-based, territorial, tax system

• Border adjustable and similar to a VAT

• Imports subject to U.S. tax, exports exempt

• Repatriation tax of 8.75% on cash and 3.5% on other property, payable over 8 years

• 100% exemption for dividends from foreign subsidiaries

• Will eliminate the bulk of subpart F

Ryan Plan – International provisions

• Restructure IRS into 3 divisions– Families and individuals;– Businesses; and– Small claims court

• Goal to transform the IRS into an agency focused on customer service

• IRS Administrator—New presidential appointment to manage the agency and administer the new tax code for a term of three years; eligible for a single reappointment

Ryan Plan – Administrative provisions

• Lower rates/reduce number of brackets

• Cap itemized deductions at $100k/$200k married

• Simplify standard deduction and personal exemption

• Replace child and dependent tax credit with spending rebate for child care expenses

• Tax carried interest as ordinary income

• Repeal individual AMT

• Repeal ACA tax provisions, including NIIT

• Repeal the estate tax

Trump Plan - Individuals

• 15% rate on business income of pass-throughs and C corporations

• 18% differential between business and wage income

• Eliminate most deductions and credits, retain R&D credit• Repeal corporate AMT

• Full, immediate write-off of business investments• Interest expense not deductible if full expensing of capital

investment

• Business Tax Credit for on site day care

Trump Plan - Businesses

• Deemed repatriation of corporate profits held offshore at 10% rate

• Retribution tariff for companies that move jobs offshore

Trump Plan - International

• Ryan Plan would reduce federal revenue by $3.1 trillion in 10 years

• Trump Plan would reduce federal revenue by $6.2 trillion in 10 years

Revenue Neutrality?

• Ryan’s plan would charge U.S. companies’ domestic sales and imports at a new 20% rate; Exports exempt

• Supporters argue it will end advantage for foreign-made products

• Opponents say it will lead to higher prices for consumers

• The plan may conflict with WTO and GATT rules

• Trump has released conflicting statements, but generally approves of the policy rationale to “create a level playing field” for American companies and workers

Border Adjustment

• Under a territorial tax system, corporate profits earned from production abroad are not subject to U.S. tax

• Instead, tax is based on the location of consumption, i.e., where goods are sold or services are performed

• Shifting from a worldwide-based system to a territorial system will be disruptive and require many changes to the tax code

• Key territorial components of the GOP Blueprint:– Border adjustment– Exemption for dividends from foreign subsidiaries– Streamlining anti-deferral rules to apply to passive income only

Territoriality

• Generally, a 60-vote supermajority is needed to advance legislation in the Senate

• By contrast, budget reconciliation bills cannot be filibustered and require a simple 51-vote majority to pass– Republicans currently have a 52-seat majority in the Senate

• Republicans have indicated they are prepared to use the budget reconciliation process to repeal the ACA tax provisions and to pass comprehensive tax reform

• The Trump administration and congressional Republicans have made it their goal to pass tax reform by August 2017

Budget Reconciliation

• Tax reform legislation can apply to the existing tax year even though the year is nearly complete

• Too soon to tell what the effective dates will be

• The blueprint indicates that Ways and Means will craft clear rules to serve as an appropriate bridge from the current tax system to the new tax system, with particular attention given to comments received by stakeholders

• There will likely be grandfather provisions for debt and special carve-outs for financial institutions and insurance companies which may have a broad impact

Retroactivity

• Is Death a Taxable Event?

Trump Plan: “…capital gains held until death and valued over ten million dollars will be subject to tax to exempt small business and family farms.”

‒ In the absence of an estate tax, Trump would treat death as a recognition event and tax capital gains on death

‒ No indication that the $10 million exemption would apply only to businesses and farms

The House Plan: The blueprint does not yet mention eliminating the step-up in basis, nor suggest that a capital gains tax should apply at death in lieu of the estate tax

‒ This proposal will probably be fleshed out over time

Estate Tax

• Repeal: $500k limit on deduction of insurer’s comp; NIIT (3.8 and .9% Medicare tax); Higher floor for medical expense deductions (7.5% restored); Individual and employer mandate penalties; Cadillac tax on health plans; Limitation on FSA contributions; Medical device excise tax; Tanning tax; Over-the-counter exclusion from qualified medical expenses under FSAs/HSAs/MSAs; Annual fee imposed on branded prescription drugs sales

• Cost: of $600 billion over 10 years– NIIT repeal alone is a cost of $157 billion

• Economic substance rules not repealed (tax shelter legislation)

ACA Repeal

• Replace: New refundable advance tax credit for health insurance coverage

• Generally, for state-approved major medical health insurance and unsubsidized COBRA coverage

• Credit equals the annual sum of monthly credit amounts; or, if less, amount paid for “eligible health insurance”

-Min $2,000/year credit for each individual under 30

-Max $4,000/year for each individual age 60 and older

Excess credits can be rolled over into an HSA

• Income-based phase out

• Effective months beginning after Dec. 31, 2019

ACA Replacement

• Tax reform is a hot-topic item for 2017

• Most of the focus is on lowering rates and broadening the base

• Current proposals attempt to simplify the tax system and eliminate many existing deductions/credits

• Some key deductions look set to remain e.g., mortgage interest deduction

• Estate tax appears to be history

• New health care coverage credit

• Border adjustability is big unknown

Conclusion

Contact Us

SILICON VALLEY149 Commonwealth

Drive Suite 1001Menlo Park, CA 94025

LOS ANGELES445 S Figueroa Street

31th FloorLos Angeles, CA 90071

SAN FRANCISCO135 Main Street

12th FloorSan Francisco, CA 94105

Silicon Valley Office: 650-813-9700

CONTACT US

www.rroyselaw.com

@RoyseLaw

SILICON BEACH12121 Wilshire Blvd

Suite 600Los Angeles, CA 90025