Tax reform possibilities

Transcription

1 Tax reform possibilities NARUC Presentation March 2017

2 Tax reform possibilities Agenda Tax reform timeline Process and priorities: A look at Tax reform proposals Potential impacts to the Power & Utilities Sector 2

3 Legislative paths available for tax reform in 2017 Regular legislative process Benefits Limitations Legislation can be enacted permanently No artificial restrictions on which measures can be included 60 votes needed at every step in the Senate (i.e., to begin debate, vote on amendments, vote on passage, to conference, etc). Budget reconciliation process Benefits Key Limitations Requires only simple majority vote at every step in the Senate (no filibuster allowed) Expedited consideration (time limits for amendments and overall debate) Legislation has to sunset if it is projected to lose revenue beyond the budget window (typically 10 years) 60-vote Senate super-majority required to waive sunset rule Senate rules also require reconciliation to be used only to enact measures that have a fiscal effect on the federal budget 3

4 Prospects for tax reform in 2017 and beyond Comprehensive or incremental reform? Corporate Share of Business Income Comprehensive Business Corporate Largest Business Tax Expenditures International 4

5 Comparison of recent tax reform proposals Tax rate C corporations Rate Pass-through entities AMT Individual Rates Capital Gain Rates Carried Interest Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform blueprint 25% rate (phased in over 5 years) 20% rate 15% (As current law) Repeal corporate and individual AMT 25% maximum (combined entity and individual) Repeal corporate and individual AMT Three rate brackets (12%, 25%, 35%) Three rate brackets (12%, 25%, 33%) Tax as ordinary income with 40% exclusion Recharacterization needed for partnerships that are engaged in a trade or business of (1) raising or returning capital, (2) identifying, investing in, or disposing of other trades or businesses, and (3) developing such trades or businesses (doesn t apply to a partnership engaged in a real property trade or business) Tax as ordinary income with 50% exclusion; 50% exclusion also applies to interest Not stated Trump tax proposals 15% (within individual income tax regime); Distributions from large pass-throughs could potentially be subject to dividend tax Repeals corporate AMT Three rate brackets (12%, 25%, 33%) Maximum 28% rate Taxed at ordinary rates 5

6 Comparison of recent tax reform proposals Other business reforms Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform blueprint Trump tax proposals Cost recovery Repeal MACRS and implement ADS type system, with inflation adjustment Full expensing for investments, excluding land Businesses manufacturing in the US may elect full expensing for investments (revocable within the first 3 years) Domestic production Phase out and repeal Section 199 deduction Repeal Section 199 deduction Repeal Section 199 deduction Interest expense Limit for thin capitalization Deductible only against net interest income; Special rules TBD for financial services Businesses manufacturing in the US and electing full expensing for investments (see above) must forego interest expense deductions R&D Make alternative simplified credit permanent; Require 5-year amortization Business credit to encourage research and development Maintains R&D credit 6

7 Comparison of recent tax reform proposals International reforms Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform blueprint Trump tax proposals Repatriation toll tax International General income tax regime International Consumption tax regime International Anti-base erosion regime (subpart F) Previously untaxed foreign earnings: 8.75% tax on cash and cash-equivalents and 3.5% tax rate for non-cash assets paid over 8 years Territorial system, with 95% foreign dividend exemption (No provision) Subpart F generally maintained; New tax on intangible income: 15% for foreign market sales, 25% for US market sales Same Territorial system, with 100% dividend exemption system Destination-based cash-flow approach with border adjustments that exempt exports and tax imports Subpart F reduced to foreign personal holding company income provisions (see border adjusted tax above) All previously untaxed foreign earnings subject to US income tax at 10% rate (Not stated) (Not stated) (Not stated) 7

8 Comparison of recent tax reform proposals Individual reforms Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform blueprint Trump tax proposals Standard Deduction $22,000 joint returns / $11,000 other tax payers $18,000 for single filers with a child / $24,000 for joint returns / $12,000 for other tax payers $15,000 for single filers / $30,000 joint returns Itemized Deductions Itemized deductions would look similar to current law with exception of: - Taxes not incurred in trade or business - repealed - 2% floor on miscellaneous itemized deductions - repealed - 3% of AGI overall limitation on itemized deductions - repealed - Expenses relating to trade or business as an employee would be moved above the line All itemized deductions, with the exception of mortgage interest and charitable contributions deductions, will be eliminated Cap itemized deductions at $200,000 for married joint filers or $100,000 for single filers Estate Tax Two rate brackets (25% and 35%) Repeals estate tax Repeals estate tax 8

9 Possible impacts to power and utilities companies 100% expensing vs. 50% bonus depreciation Assume a company with a 35% tax rate and 50% bonus depreciation (Scenario 1) vs. a 20% tax rate with full expensing (Scenario 2) has the following facts (ignoring book depreciation and state tax impacts): Scenario 1 50% BD, 35% ADIT rate Scenario 2 100% exp, 20% ADIT rate Taxable Income ($) Rate Base ($) Taxable Income ($) Rate Base ($) Construct Asset - 1,000-1,000 Net Income 1,100-1,100-50% bonus depreciation 100% expensing on new asset Taxable Income/(Net Operating Loss) (500) ( 175) $ (1,000) (200) Ending Rate Base

10 Possible impacts to power and utilities companies 100% expensing 100% expensing creates additional tax deductions for regulated companies which increase the deferred tax liability offset to rate base. Assume a company with a 20% tax rate has the following facts (ignoring book depreciation and state tax impacts): Scenario 1 no NOL Scenario 2 with NOL Taxable Income ($) Rate Base ($) Taxable Income ($) Rate Base ($) Construct Asset for $1000-1,000-1,000 Net Income 1, % expensing on new asset (1,000) (200) (1,000) (200) Taxable Income/(Net Operating Loss) $100 (400) 80 Ending Rate Base

11 Possible impacts to power and utilities companies Excess Deferred Income Taxes (EDIT) Reduction of the tax rate from 35% to 20% Assume normalization of property related deferred income taxes refunded to customers (similar to 1986 Act) Assume a company has the following facts (ignoring the gross up) Totals Gross Plant temporary differences 5,000,000 Accumulated federal deferred income 35% 1,750,000 Accumulated federal deferred income 20% 1,000,000 Excess Deferred Income Taxes (to be refunded) 750,000 EDIT established in a regulatory liability and refunded to customers over the remaining book life of the assets Reduces future revenue collected from customers Treatment of nonproperty deferred taxes? 11

12 Possible impacts to power and utilities companies Other Deductibility of interest expense - Parent/unregulated debt - Regulated utility debt Business tax credits - R&D credit continues - Section 199 manufacturing deduction is no longer available - LIFO preserved (in the Blueprint) important for gas companies 12

13 Possible impacts to power and utilities companies Other Border adjustability - Impacts for significant importers or exporters International provisions - Mandatory repatriation for those US parented multinational companies Investors - Parity in dividend and capital gains rates 13

14 Thank you Contact me to discuss further: Janice Mays Washington National Tax Services Managing Director (202) Robin Miller US Power & Utilities Tax Leader Partner (312) mobile (312) office Michael (Casey) A. Herman US Power & Utilities Leader Partner (312) mobile (312) office 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. refers to the United States member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. United States helps organizations and individuals create the value they re looking for. We re a member of the network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at