Thoughts for Businesses in Light of Potential Tax Reform
On Sept. 27, the Trump administration and Republican leaders in Congress released a long anticipated framework intended to guide legislative efforts on comprehensive tax reform.
November 14, 2017 at 10:30 AM
5 minute read
Richard A. Bruner Jr. and Carl T. Berry of Trenam Law.
On Sept. 27, the Trump administration and Republican leaders in Congress released a long anticipated framework intended to guide legislative efforts on comprehensive tax reform. The framework expresses the following general goals:
- Tax relief for middle class families;
- The simplicity of “postcard” tax filing for the vast majority of Americans;
- Tax relief for businesses, especially small businesses;
- Ending incentives to ship jobs, capital and tax revenues overseas; and,
- Broadening the tax base and closing special interest tax breaks and loopholes.
Unfortunately, the framework is a vague, high-level outline with few details on how these goals will be achieved, and it is up to Congress to turn the framework into legislation. While Congressional Republicans indicated they want to pass tax reform before year-end, the timing and extent to which these goals are achieved remains to be seen.
We view it as likely that tax reform will not be adopted until (and generally not be effective before) 2018. Additionally, anticipated Congressional battles over increased budget shortfalls that would be caused by tax reform introduce further uncertainty into this process. Nevertheless, businesses should be aware of the proposed changes and their potential impact.
Rate Reductions
Under the framework, the maximum tax rate for C corporations would drop from 35 percent to 20 percent, and the framework would eliminate the corporate alternative minimum tax. Further, methods to reduce the double taxation of corporate earnings are being considered, although no specifics were given. For small and family-owned businesses operating through pass-through entities, including S corporations and partnerships, the maximum tax rate would be reduced from 39.6 percent to 25 percent. The framework does not flush out what constitutes a “small business” or “business income” (providing fertile grounds for ravenous lobbying activity to shape these concepts), but anticipates any final legislation will include measures to prevent the recharacterization of personal income into business income to avoid higher individual rates.
In light of the proposed rate reductions, businesses may want to consider delaying the formation of new entities until the differences between C corporations, S corporations and partnerships are determined. Further, mergers and acquisitions (M&A), as well as dispositions of investments, may result in more favorable tax consequences for sellers if delayed, or an installment payment method is used. Redemptions of equity and purchases among owners of closely held businesses would be subject to similar considerations.
Expensing of Capital Investments
The framework contemplates allowing businesses to immediately expense the cost of new investments in depreciable assets other than structures made after Sept. 27, for at least the next five years (similar to previous rules in stimulus years). This is consistent with the framework's goal of promoting new investment in the United States, not giving tax breaks for prior capital investments. The expensing of capital investments could lead to an uptick in private M&A activity, particularly if this treatment is extended to goodwill and other intangible assets, which are currently expensed over a 15- year period.
Elimination of Deductions, Exclusions and Credits
To offset the decline in tax revenues, the framework provides that deductions of net interest expense incurred by C corporations will be limited, special exclusions and deductions would be repealed or restricted, except business credits for research and development and low-incoming housing, and current special tax regimes would be modernized.
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