The Latest on Tax Reform – Part 2

The currently proposed tax reform bill, if enacted, would have a significant impact on business taxation. As noted in Part 1, don’t get too nervous, or excited just yet – there’s a long political journey ahead before it becomes law. But it does not appear evident that the train has departed the station and in the next 60 – 120 days we’re likely to have new tax law that impacts businesses.

The biggest change is likely to be the Corporate tax rate – a  flat 20%. That’s a huge decrease (and that’s HUGE) from the current 35% under present law. Personal Service corporations would see a 25% flat tax rate, which is also a change. So the fast thinkers are already noticing that the corporate rates are LOWER than the top individual rates which opens the door for some serious tax planning.

But from there it gets…well, it gets complicated. But we didn’t expect anything different. After all this is tax law, right?!

Income from passive business activities will qualify for the 25% rate but active business owners (meaning those who actively work in the business they also own) would allocate some income to personal wages (about 70%) and the remainder to the more favorable corporate rate. The current bill would allow for some deviation from this but expect strings – like the election would be binding for five years and could not be revoked.

As in the personal arena, the tax reductions come at a cost – namely the elimination of various tax breaks. The domestic production deduction, the rehab and work opportunity credits, and the options associated with net operating loss carrybacks are all likely victims. One area that could have wide ranging impact is the proposal to limit the deductibility of interest paid on debt.

And just like the provisions impacting the personal tax realm, there are likely to be some significant changes before the bill becomes law. But we think you can count on some form of this bill becoming law because the price of failure both for the President and the Republicans is just too high. The outcome may not be the best solution but it will be a change. Stay tuned as the various committees start the process of synchronizing the bill. And don’t forget the lobbyists who’ll dissent on every front to protect their sponsors.

The next 60-90 days are probably also going to provide some “better-than-reality-TV” action from our elected trope of Washington DC performers! Buckle up and stay tuned.