Tax Reform

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

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.

Between now and April, I’ll use my blog to periodically answer client questions and spread awareness about some of the biggest tax issues that could affect your 2017 return. Let’s begin with a brief overview of three potential changes with large implications.

Health Care

The individual and employer health insurance mandates remain the law now that the Senate has rejected GOP proposals for a repeal of Obamacare. The Affordable Care Act remains in force unless and until changed by Congress. Uninsured individuals must pay a penalty tax if they don’t qualify for an exemption. Employers with 50 or more full-time employees but no affordable health plan owe a penalty tax if their employees opt to buy insurance on an exchange and qualify for the premium tax credit. Trump’s executive orders on Obamacare do not change the law, per the IRS. Don’t be surprised to see more exemptions to the individual mandate. There are several now.

Also, keep an eye out for a bipartisan plan with significant changes to Obamacare. A new proposal by the 30 plus members of the House’s Problem Solvers Caucus sets forth solutions intended to help stabilize the individual health insurance market. It includes two tax provisions: First, repeal of the 2.3% tax on medical device sales; second, an easing of the employer mandate so it would only apply to businesses with 500 or more employees, up significantly from the current 50-employee threshold. In addition, the 30 hour per week threshold to qualify as a full time employee would be hiked to 40 hours.

Identity Theft

The incidence of reported individual tax identity theft is on the decline, but an increase in business tax identity theft is causing concern. This occurs when fraudulent individuals file bogus corporate, payroll, or excise tax returns, Schedule K-1s, and others, using stolen tax ID numbers and claiming false tax refunds. The IRS has flagged 10,000 suspicious business tax returns filed thus far in 2017. To help alleviate the problem, the IRS is asking more from tax return preparers. Beginning next year, tax preparation software will be updated to require additional data, such as the name and Social Security number of the executive signing the return and the company’s payment and filing history. The IRS anticipates that these questions will help it identify suspicious returns. Be ready for this. This would become a requirement by way of an internal IRS administrative ruling.

Tax reform is a priority in Congress, and GOP tax writers and their staff are busy working on a proposal to overhaul the federal tax system, which they expect to release after the August recess. In the meantime, those in the know are making the following forecast.

Will the business tax rate be cut to 15%? No. Despite President Trump’s promise to slash the current 35% corporate rate to 15%, this won’t fly with moderate congressional Republicans. There just aren’t enough revenue raisers to offset such a low rate, they argue, especially now that the projected savings from the repeal of Obamacare is no longer in the mix. GOP lawmakers will aim for a 20 to 25% rate in their plan which will also apply to owners of pass-through businesses such as partnerships and S Corporations and self-employed business owners, such as those filing on Schedule C with their personal tax return.

If you have tax questions, I’d love to hear from you. Feel free to call me at (713) 785-8939 or email me at robert@robertstevensoncpa.com – I may even feature your question in a future blog post.

Until next time,
Robert Stevenson, CPA

Category: Tax Reform

Important Update on Corporate Tax Reform