It is important to stress that the bill has not yet passed and could likely either change or not pass at all. That said, however, reports seem to indicate that passage is likely and most of the provisions seem to have been worked out. With year end coming, we thought it might be helpful for purposes of planning to review a few of the most significant elements of the bill:
- Does This Bill Really Simplify Taxes – It sure doesn’t appear that it will. To be sure, there are elements of the bill that would make taxes more simple. The bill has provisions that would eliminate the corporate alternative income tax. This is important, because the alternative tax system is complex and frequently the source of many errors. However, the alternative minimum tax for individuals would still remain. Additionally, the bill in its current form, would eliminate the health care mandate, which can also be extremely complex. However, there are several new provisions being added (see item 3 below), which would likely add complexity. We will have to wait for the final version of the bill to pass judgement on whether the provision will increase or decrease tax regulation, but the version being floated currently doesn’t seem to eliminate much.
- When Would the Tax Bill Take Effect – Almost all of the provisions of the tax bill would take effect on January 1, 2018. That would mean that the the first tax return you would file that would implement the new changes would be the 2018 tax returns filed on or before April 15, 2019. There would be very few changes for the current year (2017).
- Are There Changes to Pass-through Income – One of the most significant changes the bill currently contains is to reduce taxes on pass-through entities. Most business owners currently utilize a pass-through form of business (i.e. S Corporation, Partnership, LLC or Sole Proprietorship). Currently the conference bill gives pass-through business owners a deduction (17.5%, 20% and 25% have been discussed) for pass-through income. There were previous discussions on possibly limiting that deduction over certain income thresholds and not allowing service businesses to use the deduction, but it is yet unclear if either of those provisions were kept. If the provision, or something like it holds, this would be the most significant development for business owners in a long time!
- Are There Changes to Corporate Tax Rates – Another significant provision of the bill would be to reduce corporate tax rates (currently taxed at 34%). The new rate discussed has ranged from 20% to 21%. Supporters of this provision believe that setting a rate for the multi-national corporations that is more competitive with European and Asian countries would bring more jobs and more economic activity to our shores.
- What About the Estate Tax – The estate tax would remain but the estate tax credit would be doubled. That would mean that all estates below 10 million (20 million if you have planned properly) would not experience estate tax.
- Are My Taxes Going to Go Down – Especially here in New Mexico, it is probably pretty likely that individual taxes are going to go down. Unfortunately, the higher the income, the less likely you are to see much of a difference. The highest individual rate currently is 39.6%. The highest bracket under the new law will be 37%. There will also be an increase to standard deductions, but decreases to some itemized deductions. In addition, the child tax credit was increased.
While the specifics of this bill may change before passing, it is clear that there won’t be much simplification. It is indeed good news that taxes in total will be declining. However, there was also an element of this plan that was very troubling. It would appear that this legislation will add even more to the ever growing federal debt. One has to wonder when Washington will become committed to addressing the most pressing and troubling development of the last decade, the exploding federal debt. Hopefully they will gain courage before it is too late!
As soon as the final legislation becomes available, we will be reviewing the specifics of the bill and helping our clients understand what will change in the coming year.
If you have any questions on how this legislation might impact you or just business questions in general, we are always happy to assist you. Our initial consultations to new businesses are free.
Happy Holidays, Larry Filener