Last week, President Obama released his 2017 Federal budget proposals. The Treasury Department released its “Greenbook” in conjunction with the proposed budget. The Greenbook provides a summary of the current tax provisions and proposed changes under the budget. It should be noted that many of the proposals included in the 2017 Proposed Budget have been proposed in the past and it is uncertain which proposals could become law. However, the budget set forth the policy agenda for the administration. Included was an outline of potential tax reforms and other changes that will have a significant impact on existing tax incentives, simplify existing programs, eliminate others and create new taxes on certain foreign economic activities. The budget includes numerous changes, of which a few of the significant items have been summarized below.
Proposed Income Tax Changes
- Restore the Estate, Gift, and GST Tax Parameters in Effect in 2009 – The proposal would increase the current estate, GST, and gift tax rate from 40% to 45% and would reduce the lifetime exclusion from $5 million (indexed to inflation) to $3.5 million (not indexed to inflation).
- Extend Employment Tax Credits – One of the proposed changes seeks to permanently extend the Work Opportunity Tax Credit. This would impact qualified individuals that started work after December 31, 2019. There is also discussion about doing the same for the Indian Employment Credit which would impact qualified individuals starting work after December 31, 2016.
- Community College Tax Credit – Included in the proposal is the addition of new and enhanced education related tax credits. Businesses could receive a tax credit for hiring graduates from community and technical colleges as a way to encourage employer engagement. The program would allow $500M in tax credit authority for a period of five years starting in 2017 and ending in 2021. Credits will be allocated by state and will be available to qualifying employers.
- Enhance Renewable Energy Credits – The budget seeks to make the renewable electricity production credit permanent and refundable. It would also allow individuals to claim the credit for energy produced in connection with a residence. What makes this unique is that individual taxpayers could claim the credit whether or not they consumed the additional energy or sent it back to the grid for distribution and use by others. Finally, it would permanently extend the renewable energy investment tax credit for companies providing a 30% investment tax credit for solar, fuel cell and wind property and 10% for geothermal sources.
- Simplify Small Business Accounting –To make it easier for small businesses to comply with regulations, the proposal seeks to simplify small business accounting. Starting in 2017, companies with less than $25M in annual revenue would be exempt from certain accounting reporting requirements. This would allow them to elect the cash method of accounting, non-application of uniform capitalization (UNICAP) and other requirements. The income threshold would be indexed for inflation for taxable years starting after December 31, 2017.
- 14% Tax on Untaxed Foreign Income – The proposal creates a one-time tax of 14% on previously untaxed foreign earnings that U.S. companies have accumulated overseas. A credit would be allowed for the amount of foreign taxes associated with such earnings multiplied by the ratio of the one-time tax rate to the maximum U.S. corporate tax rate for 2016. The accumulated income subject to the one-time tax could then be repatriated without any further U.S. tax. The proposal provides that the tax would be payable ratably over five years.
- 19% on Foreign Income – To reduce the tax incentives for companies to locate production overseas, the proposal creates a 19% minimum tax on current foreign income. Under existing regulations, foreign earnings of U.S. owned foreign subsidiaries are generally taxed when the earnings are repatriated in the form of a dividend or under the subpart F regime. The proposal would subject foreign earning to current U.S. federal income tax at a rate not below 19%, less 8% of the per-country foreign effective tax rate. For example, if the CFC earnings were taxed at an ETR of 15% the U.S. parent company would be subject to current U.S. tax at 6.25% on those earnings (19% less 85% of 15% = 6.25%)
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