Tax Reform: Impact to the Business Owner
Weyrich, Cronin & Sorra
Dec 01, 2017
Congress has released their proposals on tax reform, an area of the law that was last revised in 1986. This article will focus on key sections of the current proposal that could impact your business.
Deduction/Special Rate for Business Income
Under both bills, some owners of pass-through entities would receive a preferential tax treatment on a portion of their business income, either in the form of a deduction or a special tax rate. The bills distinguish between income an entrepreneur earns as compensation and income generated by the business. Income generated by the business would receive the preferential treatment, with compensation income taxed in the same manner as is under current law. Not every business will qualify for this preferential treatment.
Individual and Corporate Rates
Generally, for businesses taxed as a C-corporation, both the Senate and House propose a flat tax rate of 20%, with the date of implementation varying. The Senate and House bills both differ in the number of brackets and top rate for individuals with the top rate ranging between 38.5% and 39.6%.
Repeal of Alternative Minimum Tax/Other Deductions Curtailed
The proposal eliminates the alternative minimum tax but removes or reduces deductions most business owners claim. Proposals include: removing the state and local income/sales tax deduction, lowering the mortgage interest deduction, reducing or removing the property tax deduction, and limiting the utilization of net operating losses.
Disallowance of Business Interest
Business interest would be limited to 30% of a business’s adjusted taxable income. Both proposals carve out small business and limited industry exemptions.
Small Business Reporting Eased
Both proposals ease tax reporting burdens on small businesses. This includes expanding the ability for small businesses, including those owning inventory, to utilize the cash basis method of accounting. In addition, the bill increases the threshold before businesses must capitalize certain costs associated with inventory or are required to utilize the percentage of completion method for long term contracts.
Both proposals increase the exclusion amount to $10 million before an individual is subject to the estate tax. The House proposal calls for the elimination of the estate tax after 2024 and retains the ability for most inheritors of a decedent’s property to use the date of death fair market value as the inheritors new cost basis.
Impact on your business
As of the date this article was written both bills were under debate. Before any bill is signed into law, amendments and reconciliations of both bills will occur. The full contents of the proposed bills are beyond the scope of this article. If you would like to discuss the impact and opportunities of tax reform on your business, please contact our tax and consulting team. I95 Content Marketing
Weyrich, Cronin & Sorra