The House bill would dramatically reform the taxation of businesses.
Last week we put out key provisions from the proposed House Tax Plan that will impact individual tax payers. In addition, here are the note-worthy components impacting business and business owners.
Corporations (regular C-Corp) would pay tax at a flat 20% rate, down from 35% now. This lower rate would be permanent and would begin in 2018 with no phase-in. Note, that currently the first $50,000 of income in a Corp is currently taxed at 15% – so for those that use payroll, rent, etc. to owners to reduce taxable income to this level will see a tax increase to their Corp.
Personal services corporations (owned by professionals who provide personal services for the corporation in the fields of accounting, architecture, actuarial science, consulting, engineering, health, law, or the performing arts) would be subject to a flat 25% corporate rate.
The corporate alternative minimum tax would be scrapped, too.
Pass-Through Entities – The tax rate that individual owners of pass-throughs would pay is complex. That’s because the proposed 25% top rate is subject to lots of special rules to help prevent gaming of the tax system, since it’s lower than the top individual rate.
The rules cover sole proprietors and owners of S corporations, partnerships and LLCs.
Income from passive business activities would qualify for the 25% rate in full. The convoluted material participation rules for passive activities under current tax law would apply in figuring whether a person is active or passive with regard to an activity. Active business owners would use a default 70-30 wages-to-profits ratio that would tax 70% of income at individual rates and 30% at the 25% pass-through rate. Or they could elect a specified formula. The election would be binding for five years.
Capital gains and dividends that pass through would retain their character.
Folks in personal service businesses generally can’t use the 25% rate.
This includes lawyers, accountants, consultants, engineers, doctors and more.
Enhanced write-offs for business asset purchases are included in the bill:
100% bonus depreciation for many assets put into use during the year. But there’s a catch. This business tax break is temporary, lasting for only five years.
A higher cap on expensing business assets. It would skyrocket to $5 million.
Many key breaks would be eliminated or pared back:
- Business entertainment – golf outings & fishing charters are gone! The House bill would deny all deductions for entertainment, amusement, or recreation activities.
- The 9% domestic production deduction – this is huge for our construction based economy.
- The rehab and work opportunity tax credits.
- Net operating losses could offset only 90% of taxable income, and NOL carrybacks would be prohibited.
- Tax-deferred like-kind swaps would be limited to real property.
- The deduction that firms claim for interest paid on debt would be limited. Their net interest write-offs would be capped at 30% of income before taking NOLs, interest, depreciation and amortization. That’s right folks… EBITDA will now factor into tax calculations! Disallowed interest could be carried forward for five years. Businesses with $25 million or less of average gross receipts, real estate companies and certain regulated public utilities would be exempt.
There are no changes to the credits for R&D or low-income housing.
Nor is there a provision for hedge fund managers to report gains as ordinary income.
Which part of this is simple?