Congress’ recent tax reform bill, the Tax Cut and Jobs Act, aims to lower taxes on corporations and companies. The GOP believes that lower taxes will help American companies to be more competitive and, in turn, will generate more jobs and more dividends for shareholders. Not all economists are sold on this argument. They note that many corporations are already cash-rich, and there are no guarantees that lessening their tax burden will result in employment gains or more generous dividends for their shareholders.
Senate Republicans agree with their Congressional colleagues on corporate tax reform, but they have additional proposals. These have been reviewed by the nonpartisan Congressional Budget Office, which has reported that the Senate’s reform package will leave lower-income and middle-class families worse off, and that proposed health insurance changes will further burden America’s poorest families. The bill overall would add some $1.4 trillion to the deficit over the next decade. Here’s an overview of the how the currently proposed reforms might affect business owners and households.
- Big Business Scores Big
The top corporate tax rate would be cut from 35 percent to 20 percent (Senate version does not go into effect until 2019) – the largest one-time decrease in corporate taxes ever. Also, corporations would see additional tax breaks, including a lower rate of percent on money expatriated from low-tax countries, and a new system that, for the most part, would tax the profits created in the United States rather than worldwide income. The amended House version taxes cash repatriation at 14 percent and non-cash assets at 7 percent, while the Senate version taxes cash at 10 percent and non-cash assets at 5 percent.
- Some Joy for Small Businesses via “Pass-Through” Taxation Reform
More than 90 percent of small businesses are organized for tax purposes as “pass-through” companies – either sole proprietorships, partnerships or Limited Liability Corporations. This means that income is only taxed once. If the business receives income, the money boosts the owner’s coffers, and the owner makes the appropriate tax payments based on his/her individual tax rate. The new House proposals call for cutting the top pass-through rate from 39.6 percent to 25 percent, but excludes service companies like consultants and lawyers. It also proposes a complicated formula so that the lowered rate may apply to only about 30 percent of total income. Business owners who make $150,000 or less would be allowed to pay a reduced rate of 9 percent on the first $75,000 of their earnings. This tax break would be phased in – the lowest rate would not be available until 2022. The Senate takes a different approach to lowering business owner income by proposing allowing pass-through entity members to deduct up to 17.4 percent of their ordinary business income. It also denies this deduction to anyone in operating a service businesses with a taxable income of more than $500,000 or $250,000, married filing jointly versus single.
- Less Deductions for Most of Us
It may be great to have less tax brackets to consider, but along with this streamlining comes a big reduction in itemized deductions. What remains under the House version are deductions for charitable donations, property taxes (up to $10,000 per year), and mortgage interest deductions. The Senate version of the bill completely eliminates the SALT (State and Local Tax) deduction.
- The Wealth Passes On
Changes to estate taxation will help wealthy families keep more of their inheritances, until 2024 when estate taxation is eliminated entirely. Current estimates suggest that about half the benefits included in the reform proposals will accrue to the wealthiest top 2 percent. These individuals will no longer have to pay the alternative minimum tax (AMT), a measure first introduced in 1969 to inhibit tax-dodging strategies. The extremely wealthy segment of society will also be able to file charitable deductions to lower their tax bills.
What eventually becomes law remains up for debate. However, almost everyone can agree that the final passage of the Republican’s tax reform proposals faces a rough road ahead.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.