Barton James, senior vice president of government relations for the Air Conditioning Contractors of America (ACCA), today issued an email letter to members to report ACCA is pleased with the tax plan put forth by President Trump and congressional republicans.
The tax reform proposal, "includes numerous elements ACCA has been lobbying for and which will positively impact your bottom line. This proposal serves the purpose of kicking-off the push for tax reform. The hope is that this will unite Republicans in the effort to get a bill across the finish line," wrote James. He wrote that the final proposal should be completed by the end of October.
"The timing of next steps aligns perfectly with ACCA's latest push on Capitol Hill," he wrote. "ACCA’s board of directors will be hosting a Capitol Hill briefing and calling on their members of Congress on October 12th to reinforce our priorities on what must be included in Tax Reform."
The following are James's explanations of the plan's key provisions and what they would mean to ACCA members. Contractors with questions or comments may contact him at [email protected]
Pass through entities, such as S-crops, LLCs, and sole proprietorships will get a tax rate of 25%. The framework goes on to state that “the committees will adopt measures to prevent the characterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
This is a very complex issue. The simple way to think about it at this point is that the likely outcome will be that professional services will not be able to be structured in a way that allows them to avoid paying taxes at this individual tax rate and just get the lower pass through rate of 25%. The details here will be very important.
Business Tax Rate
The framework reduced the corporate tax rate to 20% and “aims” to eliminate the corporate Alternative Minimum Tax (AMT). Using the word “aims” here suggests that this could be jettisoned as the tax bill moves through legislative process. It also states “The committees also may consider methods to reduce the double taxation of corporate earnings.”
This is from Sen. Hatch (R-UT) who is pushing a corporate integration idea, which would give corporations a dividend paid deduction. This needs to be taken seriously as it comes from the Chairman of the Senate Finance Committee. However, we believe it could be a back-up plan if Congress is unable to drop the corporate tax rate all the way to 20%.
Not only does it eliminate the AMT it also eliminates the Estate Tax (a top ACCA Priority).
Expensing and Interest
As we shared in in our recent Government Relations report, we expected the Republicans to back off the “blueprint” proposal from last year that called for permanent full expensing (allowing businesses to immediately write off the cost of new investment in depreciable assets) and the elimination of the ability to deduct interest expense.
The framework allows five years of full expensing (starting today) and that the deduction for net interest expense will be partially limited. Allows for expensing of capital investments for at least five years.
This section is where we are working to have the HEAT Act folded in.
While the framework says the aim is to create three tax brackets, it may actually produce five. Besides the 12%, 25% and 35% designations, with the doubled standard deduction, there will be a large number of Americans that are in the “zero bracket” as the framework mentions. An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.
Republicans are keeping their options open as they may need more revenue to make this bill come to fruition and they are sensitive to the charge that this bill will only benefit “the rich.”
The elimination of the AMT, estate tax, and generation-skipping tax are in line with what we have been hearing. We did notice that there was no mention of the gift tax and believe this is a warning that the gift tax will not be eliminated. We’ll keep an eye on this issue as we move forward.
Also, the framework continues the mantra that the mortgage interest deduction and deduction for charitable deductions will be retained. This may not be enough for realtors, home builders and charities. With a doubling of the standard deduction, very few people will itemize and actually utilize these two deductions.
Also, we would note that the word “retained” is used, not “maintained.” This actually leaves open the possibility that these two deductions stay in place, but changes could be made.
In that vein of “retain,” the framework retains tax benefits that encourage work, higher education, and retirement security. Think about 529s and retirement accounts here. There is a conversation behind the scenes to change many of these vehicles towards post-tax events (like Roth accounts) versus pre-tax like traditional 401(k)s. Changes here would be controversial, but these changes could garner hundreds of billions in revenue to offset rate reductions.
While there remains a lot of unanswered questions about this package, and a lot for ACCA to keep an eye to make sure they don’t lost in negotiations, we are pleased with this first proposal and the impact it would have on ACCA members.