On April 26, 2017, the Trump administration released its proposal for tax reform. The proposal addressed many broad tax changes, but left most of the details open. The following are some of the major proposed changes that impact businesses and their owners.
- Repeal of Alternative Minimum Tax (“AMT”) – originally created to ensure that corporations and individuals with substantial income do not avoid tax liabilities. This tax impacts an increasing number of taxpayers and creates need to recalculate tax under a separate set of rules. The current proposal calls for abolishment of AMT.
- This may reduce tax liability for individuals and businesses.
- It will eliminate need for separate computations, including depreciation schedules.
- Does not disclose how the government will offset this lost tax revenue.
- Reduction of Corporate Tax Rates – C-corporations are currently taxed at a maximum rate of 35%. The proposal calls for a reduction in the top rate to 15%.
- This is a significant reduction to the rate; however, the proposal also calls for elimination of many tax breaks which makes it likely that most profitable corporations would be subject to the maximum 15% rate.
- Specific tax breaks were not identified in the proposal, leaving taxpayers to wonder whether current benefits such as Research & Development tax credit, reduced built-in-gains period, energy incentives and other tax breaks will continue.
- Reduction to Top Rates for Partnerships and S-Corporations – the income from pass-through entities is reported on the partners or shareholders individual tax returns. Individuals have a top tax rate of 39.6%. The proposal calls for the 15% corporate tax rate to also apply to partnership and S-corporation pass-through income.
- This is a significant reduction from the current top rate for these owners; however, original campaign materials indicated that distributions from these entities would be subject to tax as dividends. Essentially, these entities would be taxed similarly to C-corporations.
- If this is established, administration needs to address whether future distributions related to previously taxed income should be exempt from the second layer of tax, as this income may have already been taxed at the highest individual rate.
- Leaves taxpayers unsure of the best entity structure and whether they should make distributions out of current equity to avoid a future dividend tax rate.
Overall, the limited information provided by these tax reform proposals makes tax planning very difficult at this time for both taxpayers and their advisors. We will continue to monitor the situation and will report on future developments.
This post is an excerpt from the Dopkins Risk Advisory Services newsletter. To read the complete publication, please click here.
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Dopkins Tax Advisory Group
Our tax professionals include specialists who are proactive, strategic thinkers who work to maximize your cash flow. In addition to cash flow considerations, we also believe that tax planning is most effective when it is integrated with, and fully supports, your business plan and personal goals. Our approach to tax planning will help you better understand the tax implications of any proposed course of action, and together we can make the right decisions for your business. For more information, contact Gregory Urban, CPA, CVA at firstname.lastname@example.org.