The tax reform proposals floated by the Trump administration and the Republican-led Congress would cut tax rates for individual taxpayers and simplify the tax code. But businesses aren’t being left out of the mix. Other reforms would be aimed at business entities of all shapes and sizes.
One radical reform for business taxes pitched by some Republican House leaders – a switch to a destination-based cash-flow tax – doesn’t appear likely to be approved, especially because President Trump is not in favor of it.
However, other proposals reflecting Trump’s campaign pledges and the House GOP tax reform blueprint issued last year stand a better chance of enactment. Trump renewed his calls for business tax reforms to spur growth in his speech before a joint session of Congress on Feb. 28.
Here are several proposed items that may be of particular interest to your business clients.
Corporate tax rates. Cutting corporate taxes is a high priority of the Trump administration. Currently, the top tax rate for corporations is 35 percent, kicking in at the $10 million mark. Trump has proposed an across-the-board rate reduction to 15 percent for businesses. In effect, this represents a tax cut of more than half for the corporate heavyweights.
Similarly, the House GOP plan would reduce the top tax rate to 20 percent.
Pass-through entities. Besides a corporate tax cut, Trump would allow owners of pass-through entities, like partnerships and S corporations, and sole proprietors to elect to have business income taxed at the 15 percent rate, instead of individually. Even if individual tax rates are reduced as Trump has proposed, a business owner could end up paying just 15 percent as opposed to 33 percent.
Section 179 deduction. Under current law, a business may elect to deduct the cost of property placed in service during the year, up to a maximum of $500,000 (indexed for inflation). This deduction, authorized by Section 179 of the tax code, is reduced for costs above an annual threshold of $2 million (indexed for inflation). Trump has proposed doubling the maximum Section 179 deduction to $1 million – an instant shot of tax adrenalin for some businesses.
Repatriation tax. Both Trump and members of Congress want to halt “tax inversions,” where corporations establish headquarters in foreign countries to avoid paying higher US corporate taxes. To help bring businesses back home, Trump has proposed a one-time repatriation tax of 10 percent on corporate earnings. Note that some multinational corporations located in foreign tax havens may still decide to stay put.
Manufacturing firms. In lieu of deducting interest expenses, Trump would allow manufacturing firms to deduct expenses without regard to the Section 179 threshold.
In addition, he would eliminate the Section 199 deduction, a special tax break that is generally available to manufacturing firms and certain others involved in domestic production. The president also wants to eliminate business tax credits other than the research credit. These changes would have to be coordinated with other tax law revisions.
Corporate alternative minimum tax. Just like individuals, corporations must contend with alternative minimum tax (AMT) calculations. Generally, a firm may be liable for the corporate AMT if its tentative tax calculation is higher than its regular income tax liability. In yet another move aimed at tax simplification, Trump would wipe out the corporate AMT.
Be aware that other tax-related provisions may come into play. For instance, if Trump makes good on his vow to “repeal and replace” the Affordable Care Act, the tax provisions in the massive healthcare law – including the 3.8 percent surtax on net investment income – would probably be eliminated.
Of course, there will be numerous twists and turns as any proposed legislation works its way through Congress. Expect the unexpected.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...