Business tax changes under Trump tax plan

Business tax changes under Trump tax plan

A MAJOR thrust of the Trump Tax Plan is to bring back jobs to America. Large multi-nationals left and set up operations in foreign countries to avoid our corporate tax rates – the highest in the developed world. We need tax incentives to get them back.

Corporate Tax Rates:

Trump wants to cut corporate income tax rates by more than half from the current top rate of 35% to 15%. This rate is available to all businesses, big and small, that want to retain the profits within the business.

Business Deductions:

The Tax Code would be simplified by eliminating most business deductions and allowing up-front deductions instead of complicated depreciation over many years as discussed below.

Cost Recovery for Property Investments

Trump has proposed that manufacturing companies could immediately deduct all new investments in the business. This means full expensing of capital investment. This annual Section 179 expensing cap would increase from $500,000 to $1 million.

Corporate Alternative Minimum Tax (AMT):

Trump also proposed to eliminate corporate AMT. This is a burdensome parallel tax that should have been repealed by past presidents. Now is the time to terminate this dreaded tax.

Small Businesses (LLCs, S Corporations, and Sole Proprietorships):

These entities would pay the same 15% rate as corporations. Taxpayers currently taxed at 39% (or even 43%) on flow-through business income could see their tax rate slashed to 15%. This presents  planning opportunity for a wage earner who is paying high income taxes to form an entity and conduct business as an independent contractor. If you pay 39% now, wouldn’t you also form a corporation to pay a low 15% rate? Caution: Watch out for aggressive IRS audits on companies who convert W-2 employees to 1099 independent contractors.

By the way, pass-through entities are businesses that pay their taxes through the individual income tax code. Under current law, such businesses distribute all of their earnings to their owners every year effectively taxing such earnings to the owners immediately – at higher ordinary individual income tax rates.

Traditional C Corporations:

In contrast, traditional C corporations can retain earnings without distributing them immediately to shareholders. This allows shareholders to defer, but not permanently avoid, personal income tax liability. A substantial drawback to C corporations, though, is that they have to pay two layers of tax: an entity level tax on retained profits, and personal income taxes for the shareholders who receive the profits when they are disbursed.

Repatriation of Overseas Profit

Trump’s proposals would permit a one-time repatriation of corporate profit held offshore at low tax rates. Repatriation rate would be 10% for cash and 4% for earnings not represented by cash. He would allow these companies to pay untaxed deferred foreign income to shareholders as dividends at a lower tax rate. These incentives will probably cause companies to repatriate money held overseas. If that doesn’t work, the low corporate rate of 15% should get them back.

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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California. 

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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies.  He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at vicsy@live.com.

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