As a follow on to the previous post, " Trump-o-nomics 101: Outlook on 2017 and 2018 Personal Taxes", we wanted to provide some guidance to business taxpayers trying to figure out what to do for tax planning for the rest of 2017, 2018, and beyond. Trump promised tax reform during his campaign, and Wall Street is still banking on it happening, albeit maybe not this year. Here is a list of the top five items affecting your Form 1120, 1120S, or 1065.
1) Tax rates. Current state: Federal corporate tax rates are 15%, 25%, 25%, 34%, and 35% (there are two mid-bracket bridging rates; 38% and 39%). The 35% tax bracket, the nominal rate most corporations are subject to, applies to unadjusted profits over $10 million. Outlook: Because of low foreign income repatriation, shell corporation income shifting in favorable foreign jurisdictions, and a number of domestic tax breaks, real corporate rates average 10%-15%. Some international conglomerates, like General Electric, pay nothing some years. However the best hope in reducing nominal corporate rates was in successful congressional acceptance of the proposed border adjustment tax. That proposal is dead. Corporate taxes represent fully 12% of total federal receipts--no trivial amount. We now assume that Trump will try to pass lower repatriation taxes to fund changes to the corporate tax brackets. As repatriation is discretionary, we hold out little hope for real corporate tax rate change. What this means for you: Plan on more of the same taxes, with a possible short-term window to repatriate foreign earnings at a favorable rate, assuming you have any such overseas cash. One possible congressional trade-off could be a lowering of nominal rates offset by a reduction in special tax deductions, such as for research and development. We think overall real tax rates will still not change.
2) Depreciation rates. Current state: Depreciation of capital investments are fully deductible over their service lives. Outlook: Democrats would love to eliminate deductability of capital depreciation for disfavored industries such as petroleum. This seems unlikely given the crushing effect such a move would have on machinery and tooling industries. Republicans may be willing to extend depreciation schedules outward in an effort to bring in near-term tax revenues to fund headline grabbing tax bracket rate reform. What this means for you: No changes.
3) Payroll taxes. Current state: Federal employer contributions to payroll taxes is set at 7.65%. The federal unemployment tax rate is 6% on the first $7K of wages. Outlook: Despite the desperate state of the Social Security Trust Fund, it is unlikely that conservatives will tolerate a rate increase. Liberals would not countenance a rate reduction. What this means for you: No changes.
4) State sales taxes and federal value added tax. Current state: Many states imposed a higher sales and use tax rates after the 2007 financial crisis, but with sunset provisions that are coming due over the next few years. Outlook: Sunset provisions may benefit those businesses engaged in commerce in affected states. A federal VAT is in favor with select conservatives as way of changing or eliminating the current income tax structure. However most of Congress has little appetite for championing what would be viewed as a massive tax hike by the public and an unwelcome administrative burden by businesses. What this means for you: Don't look for sales and use tax rate reductions over the next three years in states without sunset provisions. A federal VAT is dead on arrival.
5) Alternative fuel tax credits. Current state: Incentives continue for biofuel feedstock, energy research, electric vehicle development, alternative vehicle fuels, biomass research, ethanol production, and natural gas vehicle waivers. Outlook: Conservatives despise these incentives. Liberals and alternative fuel businesses want more. But tax reform and budget pressures will likely result in some incentive reduction. What this means for you: We advise that alternative fuels capital budgets be seriously reviewed and re-substantiated.
Still not sure what the new upcoming tax laws will mean for you? Give us a call at 301-841-0209, or email us at firstname.lastname@example.org. We can help!