Rep. Nunes Business Tax Reform Bill Introduced

January 20, 2016

pic-taxes-fileOn Jan. 13, Rep. Devin Nunes (R-Calif.), an eleven-year veteran of the House Ways and Means Committee, introduced the American Business Competitiveness Act (H.R. 4377), a plan he crafted to reform the way the federal government taxes business income. It basically enacts a cash-flow tax for businesses, which he hopes will lead to increased productivity, more jobs, higher incomes, and improved opportunities for people across the income spectrum.

Highlights of the plan include:

  • Cutting the corporate income tax to 25 percent;
  • Limiting the top tax rate on non-corporate business income to 25 percent;
  • Allowing businesses to deduct investment costs when they occur (full expensing);
  • Eliminating most business tax credits and many deductions;
  • Moving to a territorial tax system like most developed nations;
  • No longer letting nonfinancial businesses deduct interest costs but no longer taxing them on interest receipts;
  • Applying the same tax-rate limitation to individuals’ interest income as now applies to their capital gains and dividend income; and
  • Eliminating the individual and corporate alternative minimum taxes (AMTs).

More specifically, the plan would let businesses claim the full costs of equipment, structures, intellectual property, inventories, and land in the same year they purchase the assets, with immediate deduction of the entire outlay, creating a “cash flow” tax that fully accounts for all the costs of business investment. For example, while current law most commonly requires businesses to write off the cost of an equipment purchase over five or seven years, the Nunes plan would permit the business to recognize the whole cost on its tax return when it incurs the cost. Unused deductions could be carried back up to five years or carried forward with interest. According to Rep. Nunes, in addition to more accurately measuring business expenses and net income, expensing is much simpler in terms of recordkeeping and computations than the stretched-out write-offs of depreciation, amortization, and capitalization.

Rep. Nunes would cut the federal corporate tax rate, which applies to C corporations, to 25 percent. With state taxes, the rate would fall from 39.1 percent to about 29 percent. In addition, the plan would limit to 25 percent the top federal income tax rate on “pass-through” businesses, such as sole proprietorships, partnerships, S corporations, and LLCs.

The Nunes plan would not let nonfinancial businesses deduct interest payments, but would not tax them on interest receipts. It would generally not allow individuals to deduct interest payments, except that home mortgage interest would remain deductible, and it would apply the same tax-rate limitation to individuals’ interest income as to dividends (top rate of 20 percent).

The plan has a number of transition rules designed to protect taxpayers during the changeover. For instance, taxpayers could continue to claim write-offs for old assets that had not yet been fully depreciated under old law. The plan also contains one transition provision included for revenue reasons: a 5 percent “toll charge” on unrepatriated foreign earnings. Although that would be an unexpected tax hit, the rate is low enough that most U.S. companies with foreign operations, according to Rep. Nunes, accept it with little protest in exchange for territorial taxation.

H.R. 4377 will now get vetted by the Ways and Means Committee over the next year, and Rep. Nunes is hopeful the panel will hold hearings on his measure. Committee Chairman Kevin Brady (R-Texas) has said he wants to push an international tax reform measure through the committee in 2016, as Republicans leadership works to try to build momentum for a more comprehensive revamp as soon as 2017.

NSBA applauds Rep. Nunes’ efforts on tax reform, and continues to call for a broad overhaul of the tax system by dramatically broadening the base—cutting the breaks that litter the tax code—and lowering rates. NSBA believes it is imperative that the U.S. moves toward a simpler, fairer tax system that does not attempt to only tweak one piece of the puzzle, such as corporate-only tax reform, but is comprehensive.

For more information, please see the following links: Bill Text, Basics of the ABC Act, Pamphlet, Two-Pager, Section-by-Section, and Tax Table.