On the campaign trail, Donald Trump promised to reduce the top corporate tax rate from 35 percent to 15 percent and make sweeping changes to the tax code.
President Trump also plans to end most business tax deductions and incent U.S. companies holding cash overseas to repatriate it at a lower rate.
As businesses are preparing 2016 tax returns and strategizing for the 2017 tax year, it’s worth closely watching how Trump’s planned changes play out in Congress. With attention to the process, business owners should be able to take advantage of the opportunities.
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“You never know what’s going to happen with Congress,” said Arthur Lee, owner and founder of Alliance Tax & Accounting Service LLC in Elm Grove.
Trump has proposed the 15 percent top tier tax rate for corporations, while the GOP plan in Congress has called for 20 percent. Trump also has suggested a simpler individual tax code, with just three income brackets.
“We know for a fact that (President) Trump wants to do some overall large scale tax law changes and he wants to do it quickly,” Lee said. “Unfortunately, history has shown that large tax reform doesn’t happen quickly. However, we also know that the (president) and the GOP majority in the House and Senate are pretty close in the things they’d like to see happen.”
It will take months to implement the kind of broad tax overhaul being proposed by the new administration, but if approved, it likely would be made retroactive to Jan. 1, 2017, said Rick Taylor, partner at Wipfli LLP in Wauwatosa.
“It’s really up in the air,” Taylor said. “We know taxes are going to go down; we don’t know how much.”
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Taylor said cutting the corporate rate to 15 percent seems unrealistic.
For one thing, about half of the corporations in the U.S. are S corporations, which are tax pass-through entities. For business owners, effective individual tax rates can be as high as 45 percent once the Obamacare tax is factored in and the benefits of deductions are phased out, so S corporation owners could be at a major disadvantage, Taylor said. And if individual tax rates were cut along with corporate rates, revenue would be an issue.
“Most of the jobs are created by pass- through entities, and so why should they pay more taxes than the big corporations?” he asked. “It’s going to be a rough 100 days as they work through this.”
The detailed GOP “Blueprint” tax plan proposed last year is more likely than Trump’s rhetoric to be what is included in the end bill, Taylor said. And the cost of reducing tax rates may be made up by having all income, including dividends and long-term capital gains, taxed as ordinary income.
Jim Locatelli, president of accounting firm Locatelli S.C. in Milwaukee, is less optimistic that there will be a rate change for businesses in 2017.
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“In terms of, ‘I expect the rates to drop from x to y,’ I’m not comfortable at all because I’m hoping that the rates drop, but the reality is we’re currently operating at a budget deficit,” Locatelli said.
“We reduce the tax rates to any significance, where is the offsetting revenue coming from?”
He is advising clients to do traditional year-end tax planning, which he says normally includes deferring revenue recognition and accelerating expenses on a cash basis.
Several area accountants agreed a proactive step business owners can take now, especially if they expect tax rates to be lower this year, is to defer income and accelerate deductions for the 2016 tax year using depreciation.
“In effect, you can say, ‘Look, rates are coming down, I’m going to take more depreciation expense when I file my 2016 tax return,’” said Eric Trost, principal-in-charge, tax services at SVA Certified Public Accountants in Brookfield.
Most equipment and new property, such as if a business purchased new computers, can be deducted at a 50 percent bonus on top of normal depreciation for the 2016 tax year, Taylor said.
Trost also advised business owners to look at their accounting method and determine whether they can use one that defers income.
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“If I’m on the accrual basis of accounting, I might want to look at changing to the cash basis of accounting,” he said.
And since most business deductions, with the exception of the research and development tax credit, would go away in 2017 under Trump’s plan, it’s probably a good idea to take advantage of some for the 2016 tax year.
“The research and development credit is more powerful now because for small businesses, it can be used against the alternative minimum tax,” Trost said. “That’s new for 2016. By being able to apply against alternative minimum tax, it reduces their current year tax obligation.”
Taylor agreed business owners should take advantage of the R&D credit.
“Most businesses that are doing any sort of new product development or are looking for ways to make their businesses more lean will qualify,” he said.
Other deductions to look out for are Section 179 expensing, through which corporations can get up to $5,000 for certain types of property, and de minimis expensing, through which basically every piece of tangible property purchased for less than $2,500 can be expensed, Taylor said.
“There’s lots of ways that people should just maximize those rules this year,” he said. “The problem is this stuff has gotten so complicated and so convoluted and there’s so many exceptions and things that the business owner really has to work with a CPA, work with a tax advisor.”