A new tax plan recently passed through the House, and this week, everyone in Washington is talking about corporate tax reform. I parsed the legislation and have summarized some key points below. The implications for S and C Corporations are especially great.
Tax Reform – Don’t Get Excited Unless You’re a “C Corporation”
Unfortunately that’s true. It appears the only real winners are your regular corporations, or C corporations as they are called. Their rate reduction is expected to go from 35% down to 20%. Individual taxpayers may discover that they, depending on your circumstances, got very little from this version of tax reform. I’m not saying your tax liability won’t go down at all, I’m just saying that the House bill takes away too many deductions and the rates are not significantly different from the rates we now have. There are other changes that make the bill good such as repeal of the AMT, a significant increase in the unified credit (for estates and gifts), and the doubling of the standard deduction, but rate reduction is the true solution to creating jobs.
The House Bill and S Corporations – A Major Tax Increase and More Complication
The House Bill passed last week has a top rate of 25% for S Corporations and other pass-through businesses, but in many cases the real rate is significantly higher. S Corporation shareholders need to pay attention. If you are a professional service firm, the 25% rate doesn’t apply to professional service businesses. Specifically, the bill excludes businesses engaged in “the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, or investing, trading, or dealing in securities, partnership interests, or commodities.”
What this means is that the top tax rate prescribed in H.R. 1 is the new rate for personal service corporations. For active owners of non-professional services corporations, the bill imposes a separate limitation on the 25% pass-through rate. It would cap the owner’s profit eligible for the 25% rate at 30% of the sum of their wages and profits from the business. The remaining 70% would be subject to the higher personal rates. It gets even more complicated, because H.B. 1 makes S Corporation profits subject to the self-employed payroll tax and your state and local income, sales, and property taxes are not deductible.
Next week we will discuss Records Retention and how long you need to keep those old tax records. We will also review H.B. 1 changes to tax credits and other tax items related to paying for college.
Thanks for reading. Wishing you and your family a happy Thanksgiving.