By Mark Battersby, Contributing Editor
Any change in Washington brings the possibility, indeed the likelihood, of tax law changes and the election of Donald Trump as the 45th U.S. president is no exception.
In his campaign, the president-elect highlighted several goals of tax reform that included reducing the official corporate tax rate to 15% from the current 35%.
Of interest to the owners of many small convenience store businesses—and their heirs—the estate tax would be repealed if the president-elect’s proposals bear fruit. However, capital gains on property held until death and valued over $10 million would be subject to tax, with an exemption for small businesses and family farms.
COMPANIES, PARTNERS AND CORPORATIONS
Most incorporated businesses, so-called “C” corporations, are taxed twice—once at the entity level and again when shareholders pay taxes on dividends and capital gains. In other words, pass-through businesses such as limited-liability companies, partnerships and S corporations, don’t pay taxes at the entity level since their profits are passed to the owners and taxed at the individual income tax rate.
There’s a general agreement that the marginal tax rate on C corporations is too high, but if that’s cut, pass-throughs wouldn’t get a reduction and may even face a tax increase. One alternative would be to give pass-throughs a reduced rate compared to wage income, which has been proposed by Trump (a 15% rate cap) and the House GOP (a 25% rate cap). Both plans have a top ordinary rate of 33%, according to published reports.
The most likely scenario appears to tax pass-through entities at 15% but tax again on distributions. That’s good news for convenience store businesses that retain a substantial share of their income. It would also increase the tax differential between corporate investment and pass-through investment.
Most corporate tax expenditures, except for the research and development (R&D) tax credit, could be eliminated in exchange for a lower corporate tax rate. So, in order to pay for lower business tax rates, Trump proposes the elimination of certain unspecified “corporate tax expenditures.”
President-elect Trump has also proposed a doubling of the Code Section 179 small business first-year expensing election from $500,000 to $1 million. That would mean expenditures of up to $1 million for equipment and other business property could be written-off as an expense in the first year.
As the new Congress is seated, it’s more than likely the president-elect’s proposals will be incorporated into a host of other changes. Where this will end up is hard to predict since, already on the congressional drawing board are a number of tax proposals along with many tax bills that never made it out of committee. More likely, when Congress undertakes the 2018 budget this spring, it will consider these items:
• creating a new business rate for sole proprietorships or pass-through entities instead of taxing them at individual rates;
• reducing the corporate tax rate to 20%;
• providing for immediate expensing of the cost of business investments;
• allowing net operating losses (NOLs) to be carried forward indefinitely and increased by an interest factor, and eliminating NOL carrybacks;
• generally eliminating certain (but unspecified) special interest deductions and credits; and,
• moving “toward a consumption-based tax approach.”
In the long run, the overall tax bills for most U.S. taxpayers—including many owners/operators and convenience store businesses—are almost certain to be lowered, but deductions for individuals are very likely to be reduced resulting in higher tax bills. There could be cutbacks in certain tax credits and deductions for particular industries.
In other words, some taxpayers may benefit less than others, making it more important than ever to keep an eye on lawmakers.
To read the full report: http://csd2018.wpengine.com/wp-content/uploads/2017/01/Shuffling-the-deck.pdf