The corporate income tax rate for the U.S. is currently 38.9 percent, the third highest in the world, according to the Tax Foundation. In 2016, the total cost of tax compliance in the U.S. was $409 billion, reports the Tax Foundation. This translates to roughly 8.9 billion hours complying with the Internal Revenue Code tax filing requirements that year. Against this status quo, President Donald Trump and the House Republicans have each proposed their own tax reform proposals.
The "A Better Way" Proposal
On June 24, 2016, House Republicans published the policy paper, A Better Way. The proposal, in many ways, is similar to the President's proposal. However, some key differences exist. For example, it converts the corporate income tax to a "destination-based cash-flow tax," which would be assessed at 20 percent, down from 35 percent. Instead of being taxed on where organizations produce their goods, they'd be taxed on where they sell their goods. Additionally, the proposal would place a cap of 25 percent on pass-through income for entities not currently subject to corporate tax rates, such as sole proprietorships, LLCs, partnerships and S corporations.
The "Tax Reform That Will Make America Great Again" Proposal
On Sept. 14, 2016, during his campaign, President Trump published his proposal called, Tax Reform That Will Make America Great Again. It would reduce the corporate tax rate from 35 percent to 15 percent and place a cap of 15 percent on pass-through income. Additionally, organizations may choose between deducting net interest expenses or taking the full deduction of capital investments, such as machinery or inventory.
Finance leaders should pay careful attention to the above tax proposals and how they could impact their organizations. These new reforms, if implemented, will perhaps change compliance requirements from the status quo. Although a shift in compliance could occur, finance leaders will have to ride this wave out to determine if the shift decreases the compliance burden and cost once new legislation is fully effective.
To find out what other HR and tax compliance changes may be coming from the new administration, read Preparing for HR & Tax Compliance Changes: What may be coming from the new administration. Finance leaders will want to monitor these changes to see if they hold, as legislation and changes to legislation are moving rapidly.
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