U.S. TAX: WHERE WE HAVE BEEN, WHERE WE ARE AND WHERE WE ARE GOING MAYBE. Keith Foster Director Dallas June 13, 2017

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2 U.S. TAX: WHERE WE HAVE BEEN, WHERE WE ARE AND WHERE WE ARE GOING MAYBE Keith Foster Director Dallas June 13, 2017

3 Agenda History of U.S. tax Current U.S. tax system Key aspects of tax proposals Process for passing tax legislation Planning considerations & takeaways

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5 History of Income Tax 1700s - British taxation of the colonists (sugar and stamps) Civil War and 1890s specific taxes for brief periods th Amendment The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration income tax laws are codified as the Internal Revenue Code (IRC) 1954 recodification of IRC 1986 IRC renamed Internal Revenue Code of 1986

6 Current Tax System: Types of Taxpayers C corporations Individuals Estates & Trusts

7 Current Tax System: U.S. Corporate Rate vs World

8 Current Tax System: U.S. Corporate Rate vs World

9 Current Tax System: System or Systems? Regular tax Capital gains tax Alternative minimum tax Net investment income tax

10 Current Tax System: Highest Individual Rate Source: Tax Foundation, "U.S. Federal Individual Income Tax Rates History, ", 17 October 2013

11 Current Tax System: Highest Capital Gains Rate Source: Tax Foundation, "US Capital Gains Taxes History Chart", 17 February 2017

12 Current Tax System: Preferred Capital Gain Rate

13 Our Tax System Is Not That Convoluted, Right? Source: A Better Way, Our Vision for a Confident America, 24 June 2016

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15 Tax Outlook Is Uncertain Impossible to predict possibility of tax reform in 2017 Many legislative priorities in addition to tax reform Unclear if any tax legislation would be retroactive to January 1, 2017 Substance of any tax reform remains uncertain Details of current proposals need to be more fully developed Could require bipartisan support

16 Election Results Republican Donald J. Trump elected to serve as 45 th President of the United States Republican majority in House of Representatives 241 Republican 194 Democrat Republican majority in Senate 52 Republican 46 Democrat 2 Independent

17 The Republican Tax Proposals House Republican proposal: A Better Way: Our Vision for a Confident America (House Blueprint) President Trump: Campaign tax proposals (Campaign) Guidelines announced April 26: 2017 Tax Reform for Economic Growth and American Jobs (Guidelines)

18 Comparison of Highlights from Tax Proposals Business Proposal Current tax law President Trump House Blueprint Corporate tax rate Top rate of 35% Top rate of 15% Top rate of 20% Alternative minimum tax 20% Repealed Repealed Pass-through tax rate Individual rate on ordinary income 15% on profits retained within business* *Provided during campaign but not specifically addressed in President Trump s guidelines 25%

19 Comparison of Highlights from Tax Proposals Business Proposal Current tax law President Trump House Blueprint Cost recovery Interest expense Tax breaks for special interests Over useful life of asset Deduction allowed for interest expense Various Manufacturers may elect immediate deduction* Electing manufacturers lose interest deduction* Eliminate all (except R&D credit per campaign proposal) 100% deduction for tangible & intangible assets Eliminate deduction for net interest expense Eliminate all except R&D credit & LIFO *Provided during campaign but not specifically addressed in President Trump s guidelines

20 Comparison of Highlights from Tax Proposals Business Proposal Current tax law President Trump House Blueprint Untaxed accumulated foreign earnings Future foreign earnings Not addressed 10% payable over 10 years with future profits taxed as earned* Worldwide income tax based on residence & source Territorial system 8.75% for cash/cash equivalents, 3.5% otherwise, payable over eight years Border adjusted destination-based cash-flow tax *Provided during campaign but not specifically addressed in President Trump s guidelines

21 House Blueprint Proposes Border Adjusted Destination-Based Cash-Flow Tax Destination-based Tax imposed based on place of consumption Cash-flow Immediate expensing for tangible & intangible assets Deduction for net interest expense eliminated Border adjusted Gross receipts from export sales exempt Tax on imports

22 Comparison of Highlights from Tax Proposals Individual Proposal Current tax law President Trump House Blueprint Individual rates on ordinary income Seven brackets with top rate of 39.6%* Three brackets of 10%, 25% & 35% with repeal of NIIT Three brackets of 12%, 25% & 33% Capital gains rate Interest income Top rate of 20%* Seven brackets with top rate of 39.6%* *Plus 3.8% net investment income tax (NIIT) Current structure with repeal of NIIT Three brackets of 10%, 25% & 35% with repeal of NIIT 50% deduction with basic rates of 6%, 12.5% & 16.5% 50% deduction with basic rates of 6%, 12.5% & 16.5%

23 Comparison of Highlights from Tax Proposals Individual Proposal Current tax law President Trump House Blueprint Carried Interest Capital gains rate Ordinary income rate* Not addressed Alternative minimum tax Net investment income tax 28% maximum rate, exemption of $53,900 for single filers ($83,800 MFJ) Repealed 3.8% Eliminated by efforts to repeal/replace the ACA Repealed Eliminated by efforts to repeal/replace the ACA *Provided during campaign but not specifically addressed in President Trump s guidelines

24 Comparison of Highlights from Tax Proposals Individual Proposal Current tax law President Trump House Blueprint Itemized deductions Phased-out based on adjusted gross income Eliminate all but mortgage interest & charitable contribution Eliminate all but mortgage interest & charitable contribution Standard Deduction* $6,300 for single filers ($12,600 MFJ) Double current: $12,600 for single filers ($25,200 MFJ) $12,000 for single filers ($24,000 MFJ) Personal Exemption* $4,050 Eliminated** Eliminated *Subject to phaseout based on adjusted gross income **Provided during campaign but not specifically addressed in President Trump s guidelines

25 Postcard Tax Filing Under the House Blueprint Source: A Better Way, Our Vision for a Confident America, 24 June 2016

26 Comparison of Highlights from Tax Proposals Transfer Tax Proposal Current tax law President Trump House Blueprint Estate tax 40% tax rate with $5,450,000 basic exclusion amount Repealed but capital gains held until death subject to tax with exclusion on first $10 million* Repealed Gift tax 40% tax rate with $5,450,000 basic exclusion amount Not specifically addressed Not specifically addressed Generationskipping transfer (GST) tax 40% tax rate with $5,450,000 basic exclusion amount Not specifically addressed Repealed *Presumed $5 million per individual ($10 million per married couple). Tax on capital gains provided during campaign but not specifically addressed in President Trump s guidelines

27 Federal Budget Process Congressional Budget & Impoundment Control Act of 1974 Framework for congressional budget process Starts with President s budget request Congressional budget resolution Authorization & appropriation

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30 Federal Budget Process for Tax Legislation House Ways and Means Committee; House of Representatives Senate Finance Committee; Senate; Filibuster Joint Conference Committee House/Senate Compromise Bill To the President for Signature or Veto

31 Filibuster Sidebar Senate rules permit senators to speak on any topic for as long as they wish unless three-fifths bring the debate to a close under Senate Rule XXII This rule could be changed by a simple majority vote, but the rule change itself can be filibustered Any senator may nullify a Senate rule by making a point of order that the rule should not be followed In 2013, Harry Reid (D) made a point that rule XXII for cloture should be by majority vote for all nominations other than for Supreme Court In 2017, Mitch McConnell (R) made a point to include Supreme Court nominations The 60 vote rule applies outside of nominations or special situations

32 Federal Budget Process for Tax Legislation House Ways and Means Committee; House of Representatives Senate Finance Committee; Senate; Filibuster Joint Conference Committee House/Senate Compromise Bill To the President for Signature or Veto

33 Other Tax Reform Considerations Efforts to repeal/replace the Affordable Care Act American Health Care Act introduced March 6 House vote on AHCA cancelled March 24 Approved with amendments in the House on May 4 Impact on state & local tax Fate of recent IRS guidance

34 Tax Planning Considerations Taxpayers that expect tax reform & tax rates to decline should consider tax planning strategies to accelerate deductions & defer income. Maintaining flexibility will be key in implementing a strategy for possible tax reform as more details are revealed. The potential tax benefit of any planning strategy implemented should not overshadow the business & economic impact.

35 Items to Watch for in Tax Reform Planning Timing & effective date of any legislation Choice of entity considerations Compensation to owners Capital improvement planning Distribution of earnings from business International impact such as trade agreements

36 QUESTIONS?

37 THANK YOU! FOR MORE INFORMATION Keith Foster