Corporate Tax Reform
In the new tax reform bill, the framework proposes a 20 percent corporate tax rate, down from 35 percent, as well as a top rate of 25 percent for pass-through income. This change, if passed would particularly benefit small business owners and sole proprietorships, but provisions may be put in place to prevent certain service providers or wealthy business owners from converting compensation income to profits that would be taxed at a lower rate.
One proposed change that makes a lot of sense for business owners is elimination of the estate tax. For anyone who has an estate valued at more than $5.49 million (as of 2017) and wants to leave an inheritance to anyone beyond their spouse, that money is taxed at a fairly steep maximum federal rate of 40%. Fortunately for Texans, there isn’t an additional state inheritance tax, since that tax was eliminated in 2015. Because taxpayers have already paid tax on income gained over their lives, opponents consider the federal estate tax to be double taxation.
Some of the business owners particularly affected by the estate tax are ranchers and farmers, whose assets are not liquid but tied to the value of their land. It is not difficult to go beyond $5 million in estate value for several thousand acres of land. Families have been forced to sell their land to pay the tax.
There is some mention of the estate tax being replaced by a carryover basis rule as well as elimination of the generation-skipping transfer tax. This is one change that may have bipartisan support.
Many changes to business incentives are proposed in the tax framework, from elimination of the Domestic Production Activities Deduction (DPAD) to modernizing industry-specific tax breaks to reflect economic reality. If a maximum 20% corporate tax rate is attained, it may make sense to eliminate DPAD and any special incentives that allow only certain businesses to reduce their tax impact even further.
There will be considerable planning opportunities for changes to bonus depreciation or first-year expensing. A proposed 100 percent bonus depreciation for five years starting in 2017 may accelerate investments in property or equipment, but such investments should still make logical sense for the business. In addition, if a business elects to deduct or expense investments rather than capitalize and depreciate, this will result in reduced deductions and higher taxable income in future years. On the face, it seems like an easy analysis, but each business situation will be different.
Repatriation of Profits
Within the tax framework, businesses would be encouraged to bring profits back from foreign subsidiaries and reinvest them in U.S. assets as well as reshoring their headquarters. A one-time 10 percent tax on non-repatriated money has also been proposed. Currently, unless they are structured properly, companies with business outside the U.S. are taxed at the normal corporate tax rate. The new framework offers a reduced tax rate for U.S.-based businesses, likely intended to increase U.S. competitiveness with other countries.
Corporate Tax Planning Prediction
For companies, it is too early to tell if a change in business structure is a good move for tax purposes. We recommend that clients sit tight with their current business structure until we have more clarity on how different business structures will be taxed.
Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.
As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!
Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.