Any new administration in Washington brings the possibility, indeed the likelihood, of tax law changes. The election of Donald Trump as the 45th President of the United States is no exception. In his campaign, the President highlighted several goals for tax reform that included reducing the official corporate tax rate to 15-percent from its present 35-percent.
President Trump also plans to “Repeal and Replace Obamacare.” That’s right, as long-promised, The Affordable Care Act would be repealed and, with it, the 3.8-percent tax on investment income. Also, the alternative minimum tax (AMT), levied on both individuals and businesses would be repealed.
And, it is not just President Trump who would like to see the Affordable Care Act (Obamacare) repealed, tax rates reduced and the rules eased, Congress may succeed with their own proposals.
President Trump promised to work with Congress to introduce broader legislative measures, included the following:
Middle Class Tax Relief And Simplification Act: An economic plan designed to grow the economy four-percent per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief, and lifting the restrictions on American energy. The largest tax reductions would be for the middle class. A middle-class family with two children would get a 35-percent tax cut under the proposal. The current number of brackets would be reduced from seven to three, and tax forms would be greatly simplified. The business tax rate would be lowered from 35- to 15-percent, and the trillions of dollars of American corporate money overseas could be brought back at a 10-percent rate.
End The Offshoring Act: Would establish tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free.
American Energy & Infrastructure Act: This proposal would leverage public-private partnerships, and private investments using tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.
To date, none have been acted on.PERSONAL BUSINESS
Of interest to the owners of many small snow and ice management businesses – and their heirs – the estate tax would be repealed if the President’s proposals become a reality. 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. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives would be disallowed.
CORPORATE TAX RATE REDUCTION
Both President Trump and House Republicans would like to see the corporate tax rate cut from its current top rate of 35-percent (the highest worldwide) to 15-percent and 20-percent, respectively. The Trump plan “would be a bold step that leapfrogs the United States all the way to having one of the lowest rates in the developed world,” according to the campaign’s Web site.
The plan from House Republicans, on the other hand, is more moderate. The House GOP plan also includes “base broadeners” to counter the revenue lost from the rate drop. Trump’s plan doesn’t have those. As a result, under Trump’s proposal, the corporate income tax raises less revenue than the House GOP’s plan.
With congressional concerns about deficit projections from the Trump proposals, these proposed rates may have to come up somewhat. Congress may also be concerned about extending the corporate tax rate to other business income due in part to the deficit.
The President has proposed that some sort of tax, like the tax on corporate dividends, would be applied to distributions of business income from these other entities. The Trump campaign has stated it hopes to include provisions to prevent the conversion of ordinary income into business income, although there are no details at this point.
President Trump specifically proposed a reduction in the top corporate tax rate while extending the same 15-percent top rate to the income of pass-through entities and sole proprietorships. The current top corporate tax rate is 35-percent, and the current top rate on business income from pass-through entities and sole proprietorships is the top ordinary, personal income tax rate of 39.6-percent.
Most incorporated businesses, so-called “C” corps, 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 LLCs, partnerships and S corps, don’t pay taxes at the entity level since their profits are passed to the owners and taxed at the individual income tax rate.
That’s long been a stumbling block for would-be tax reformers. There’s general agreement that the marginal tax rate on C corps is too high, but if that’s cut, pass-throughs wouldn’t get a reduction and may even face a tax increase. Some proposals consider cutting the ordinary income tax rate but experts say that could be expensive.
One alternative is to give pass-throughs a reduced rate compared to wage income, which has been proposed by Trump (a 15-percent rate cap) and the House GOP (a 25-percent rate cap). Both plans have a top ordinary rate of 33-percent, according to published reports.
However, creating a special rate for pass-throughs can encourage gaming, according to the Tax Foundation, the Washington-based think tank, because business owners would have an incentive to recategorize their wage income as business income. The President’s campaign materials seemed to include rules that would prevent pass-through owners from converting their compensation income taxed at higher rates into profits taxed at the proposed 15-percent rate.
The most likely scenario appears to tax pass-through entities at 15-percent but tax them again on distributions. Good news for snow businesses that retain a substantial share of their income. It would also increase the tax differential between corporate and pass-through investment
CORPORATE TAX EXPENDITURES ELIMINATED
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. That’s right, in order to pay for lower business tax rates, President Trump proposes to eliminate certain unspecified “corporate tax expenditures.” He has, as mentioned, indicated the research and development credit would be spared.
Congressional Republicans have run into trouble with lobbyists whenever they get too specific about what tax breaks they would eliminate in return for lower corporate rates. This will be a hurdle.
Of interest to many small businesses, Trump has proposed a doubling of the Code Section 179 small business expensing election from $500,000 to $1 million. That would mean purchases of up to $1 million for new equipment and other business property could be written-off as an “expense” in the first year. Presumably, the ceiling for all capital expenditures after which the first-year expensing is lowered, dollar-for-dollar would also be raised.
PAYING FOR THE CUTS
Tax cuts, real or proposed, must be paid for in some way. Some estimates put the proposal’s 10-year deficit increase at $9 trillion. There is some sleight-of-hand to ignore at least part of the problem, but it'll show up quickly.
The economy will have to grow faster than it has to solve the problem. If not, tax rates could creep higher after the initial cuts. That has happened in the past. It might be avoided with significant spending cuts, but that approach has also proven elusive in the past.
In the long run, the overall tax bills of most taxpayers – including snow businesses – are almost sure to be lower – but deductions for individuals are almost certain to be reduced. There could be cutbacks in certain tax credits and other 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 our lawmakers.Mark E. Battersby is a financial writer and frequent Snow Magazine contributor.