Today the “Big 6” released their Unified Tax Reform plan. There were no surprises, and not much detail; however, we do have an idea where things are heading. If President Trump can pull this off as proposed, you will have wanted to be prepared for 2018. Here are some tips based on the assumption that we get reform in 2018 along the lines of the Unified plan, assuming prospective treatment only and no good transition rules (I know – big assumptions). More Thursday at our webinar: https://attendee.gotowebinar.com/register/136193592447687937
- Accelerate deductions into 2017. Top corporate and business rates are proposed to drop to 20% and 25% respectively. They are at 35% and 39.6% currently. Thus, a deduction today could be worth 15% more than a deduction next year.
- Delay purchases of equipment. The Plan anticipates full expensing. While it is not likely that we will have both lower rates and full expensing, we will likely see some form of extra write offs for investment in equipment, making a purchase next year more tax advantageous than a purchase now.
- Think hard about taking on debt. The Plan would disallow net interest deductions in a C corporation, placing debt on par with equity for tax purposes. All other things (e.g. tax) being equal, equity is better than debt – it need not be repaid, does not carry interest, and does not fight for priority with trade debt, like commercial lines.
- Make an S election. If you are currently zeroing out C corporation income with rents and compensation. you will find that to be an expensive strategy in a world where comp is taxed at 35% and passthrough income at 25%. Of course, we expect anti abuse rules and plenty of arguments with the IRS over how much (or how little, rather) comp is reasonable, but the basic strategy of converting high taxed compensation to low taxed business income is sound.
- Get a “loan out” corporation. A “loan out” is a corporation that employs a service provider and contracts with the service recipient, thus running the income through a corporation. We use them all the time for artists, actors and athletes (or at least we used to). Early indications are that the low passthough rate (25%) will not apply to services income, but the low C corporation rate (20%) might. Of course we have personal service corporation taxes and other gauntlets to clear, but the basic idea may be useful.
- Don’t die. Not yet anyway, at least not until the estate tax is killed. It is not at all clear that this will benefit decedents, however, because the estate tax could very well be replaced by a deemed sale of assets of the decedent, which will work out to be a tax increase. Here is why – the estate tax is the most voluntary tax we have. We can with careful planning avoid it. As an example, America’s most famous billionaires are also the most ardent proponents of the estate tax, probably because they will never pay it. Instead, they will leave their estates to tax exempt family foundations. They would not have that loophole under the Trump version of estate tax repeal and replace.
- Move to a red state, such as South Dakota or Nevada or any state that has low state taxes, because that deduction is on the chopping block. Those of us in states like California or New York will tell you that it is a big number.
You can read more about tax planning in 2017 at our blog: http://rroyselaw.com/tax-law/article/the-big-six-washington-lawmakers-release-their-unified-tax-plan/
Tomorrow I will post about which industries win and which lose under this plan. Stay tuned.