With the U.S. Tax Cuts and Jobs Act moving through the House of Representatives last month and now before the Senate for deliberation, business owners are turning to tax advisers for guidance. They want to know how to plan for possible changes to the tax laws next year and how to make the best of 2017 while they still can.
If something similar to the current proposals is signed into law, lowering the corporate tax rate from its current 15-35 percent range to a maximum of 20 percent could have the largest effect on the business landscape, according to tax professionals who spoke with Springfield Business Journal.
“There are a lot of proposals within that tax bill that are very, very business friendly – especially large-business friendly,” said Edward House of Bohl, House & Samek CPAs, noting that lowering the maximum tax rate most affects the businesses with the highest profits. “What you end up with is a very top-heavy tax bill.”
House is watching the changes as a certified public accountant and a co-owner of 9 Eagle Stop gas stations and convenience stores throughout Missouri.
But the ramifications could make waves throughout the business spectrum, said Damien Martin, national tax assistant director at BKD LLP.
Although the larger, often publicly traded businesses are organized as C corporations, which pay corporate taxes, most local small businesses are structured as “pass-through” entities, such as limited liability corporations, partnerships or S corps. Pass-through companies do not pay corporate taxes, but pass the tax burden to the owners, who pay at each one’s individual income level.
Currently, there are advantages for most businesses to be pass-through organizations, but Martin said that might change.
“There is an inherent double taxation in the corporate arena,” he said. “The corporation itself pays tax on its taxable income. But when they make distributions to their shareholders, that is considered to be a dividend which is also subject to tax – although at a lower rate, generally, at the individual level.
“But if the top corporate rate were to drop 15 percent, that would essentially eliminate that additional layer of tax.”
The U.S. House bill would lower the personal income rates from the current 10-39.6 percent range to a maximum 25 percent on business income. It also would restructure the tax brackets, as well as decrease the seven brackets to four.
Since the corporate and pass-through tax rates could become more similar under the proposed tax bill, Martin said it might cause some business owners to consider switching to a C corp model. But there are also reasons outside of taxes to be a pass-through business, he noted, such as various ownership levels allowed in partnerships.
“An S corporation is a corporation that made an election to pass the income through to their owners to be taxed. You can revoke that election,” Martin said. “An S corporation is a little easier to switch back to a [C] corporation to be taxed at the corporate level, because they are a corporation already. If you are a partnership, you would actually need to be incorporated, so there would be some legal hoops to jump through to do that.”
From House’s business owner perspective, he said his gas station and c-store LLC likely would not change its structure should the 500-page Tax Cuts and Jobs Act become law. He is CFO of Gier Oil Co., a C corporation which owns the Eagle Stop brand and an undisclosed portion of the total 50 stations. House owns nine of the remaining stores, through several LLCs.
“There are a lot of nontax reasons why we are structured the way that we are,” said House, also Gier Oil’s chief financial officer. “The proposals in the current tax reform bill would actually just increase the tax advantages that we currently hold.”
The tax law changes might have a clearer effect on House’s other business venture, as co-owner of the Big Whiskey’s franchise in the Kansas City area. A lower tax bill for individuals would create additional disposable income.
Dave Myers, a partner at The Whitlock Co., expects the possible tax savings to be highly individualized.
“It’ll take some strategy to see how to take advantage of it,” he said. “The individual changes are a little more interesting, because everybody files a 1040.”
If personal taxes are reduced next year, some action might be warranted this year, Myers said.
“If you have the opportunity to take additional deductions this year, that’s a really good strategy,” he said. “Because, for most people, the rates will go down some, so you’d rather have the deductions against the higher rates that are in effect this year.”
Business owners also will have spending decisions to make in the future, House said, due to the current political climate that seems to swing hard one way for a period of time and then the other way for a period of time. The concern, he said, is that in four or eight years, power will shift from the Republicans to the Democrats, and the tax rates could rise again – especially if the current proposals significantly raise the national debt.
“Then, when it swings hard the other way, it will swing harder than ever,” he said, “and tax rates are likely to be much higher than they are today.”
Business owners must decide, House said, if they want to make tax-deductible investments in their companies under a less-favorable, lower tax rate or hold out until tax rates jump back up and see better returns on those investments.
“If there are things that we can delay that we are pretty confident will have deductibility in the future – that don’t provide immediate returns – it makes sense to delay them,” he said.
Of course, it’s still unclear what provisions will pass, if any, so advisers will continue to watch the developments closely.
“There’s a lot of assumptions being made, and that’s what every business owner and CPA is going to have to do – make some assumptions,” he said. “The guiding rules are going to be ‘What are the tax rules today?’ But we still have to take into account what we think is going to happen in the future.”
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