I wrote this on November 8 on the first draft of the conclusion of my five-part series on the Republican Party's tax reform plan:
Do I think that a tax bill of this magnitude will be passed in two months? Not a chance. There may be certain provisions that get passed, but as for the entire bill, no way. The Tax Cuts and Jobs Act is almost too ambitious to be passed before year end. However, I would like to discuss some provisions of the bill.
When you are wrong, you are wrong. The bill has passed the House and is up for a vote in the Senate. The Senate’s version will probably pass after the Thanksgiving break. The bill will go back to the House, this deal will be made, and that deal will be made, and BAM, we have a bill that goes to the president to sign — all of which will probably happen before the end of the year. After the Republicans' crushing defeat of healthcare, they need something.
So, without this interruption, back to what I wrote.
Corporate Tax Reform
I think this is the most interesting part of tax reform. If C-Corporations are taxed at a flat 20 percent and S-Corporations at a flat 25 percent, then it would appear that the C-Corporation would become the business of choice.
With S-Corporations, you lose some things like fringe benefits, plus you have to pay reasonable compensation and deal with the other restrictions of the S-Corporation. With a C-Corporation, you can write off things like a medical reimbursement plan, educational expenses that do not exceed $5,150, have a company car, and other fringe benefits that would preclude you from taking a dividend and paying double taxation. It’s a win-win, even for a professional service corporation (PSC) that is taxed at a flat 25 percent. Not to mention that in a C-Corporation, you can have different classes of stock.
The immediate expensing of capital assets is appealing because, unlike 50 percent bonus depreciation, the use of the equipment doesn’t have to commence with the taxpayer. Furthermore, this would provide a true tax planning opportunity for someone that actually needs equipment.
The simplification of the method of accounting is nice as well. Having the option open of using the cash method of accounting for companies that make less than $25 million and have inventory is a solid option to have.
However, things that don’t make sense are the repeal of certain popular tax credits. For instance, those businesses that retrofit their establishments to be handicapped friendly lose the tax credit associated with that. Secondly, gone is the work-opportunity tax credit, which is a popular incentive for a business to hire someone on disability or welfare.
There are some good things here, so don’t get me wrong. The educational credits have been simplified. Section 529 Plans can now be used to pay for private elementary, middle and high school, in addition to post-secondary education. The increased standard deduction is another upside, and some other things, but there is a lot not to like here.
For example, the elimination of certain itemized deductions, like employee business expenses, casualty and theft losses, tax prep fees, and a reduction in the mortgage interest to name just a few.
In the End...
All of this was what I wrote on November 8. Today, I believe that the House and Senate bills will be reconciled. I have surgery on December 11 and will probably take six weeks to recover, during which I will have plenty of time to surmise a better opinion of the bill finalized into law.
I don’t know if you are anything like me, but when a tax law like this is passed, I look for the loopholes in the plan. I’ve mentioned a few of them now, and hopefully they will stick.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...