Tax Reform Watch: General Timing & Small Businesses – February 17, 2017 by Tracy Monroe

We got a glimpse into the tax reform timetable yesterday at the president’s press conference, during which he said that they are “deep in the midst of negotiations” on a “very historic tax reform” plan. However, he noted that repealing and replacing the Affordable Care Act (ACA) needed to happen first, and they would likely be submitting an initial plan in March. Another indicator of the administration’s immediate focus on the ACA is the recent announcement where the IRS said it will not reject 2016 tax returns that fail to indicate the taxpayer’s healthcare status. Current law states that individuals are required to have health care or face a penalty, which is due with their tax return.
So, we can surmise that tax reform comes sometime after March, perhaps summer or fall depending on progress of the healthcare initiative.
We also got a glimpse in the last few days of issues being discussed surrounding tax reform and small businesses. On February 15, the House Small Business Committee held a hearing to examine the barriers existing within the current tax code for start-ups and small businesses. The discussion at this meeting centered on how to achieve a tax reform platform that is workable for the small business community.
AICPA Tax Executive Committee Chair Troy Lewis testified that lawmakers should consider policies to mitigate three primary barriers for small businesses within the tax code: “the limited deductibility of business net operating losses, the limited deductibility of capital losses and lengthy depreciation schedules.”
The overriding theme throughout tax reform discussions has been simplification. Mr. Lewis testified, “Let’s keep it simple — all of us would agree it (the tax code) is too complicated.” However, while there is almost universal agreement with this statement, the devil is clearly in the details and the specific items discussed may lead to more, rather than less, complexity.
There is a keen focus on reducing the corporate tax rate to help the U.S. be more competitive in a global economy. The House tax reform plan, “A Better Way,” recommends dropping the corporate income tax rate from a top rate of 35% to a flat 20% rate. Also included is a plan to reduce the top individual income tax rate from 39.6% to 33%. The problem is that many small businesses are organized as partnerships and S Corporations, with the income from their operations taxed to the individual owners. So the challenge is how to create parity in the system for small business owners who may pay tax at 33% when their corporate counterparts may only pay 20%. However, under current Internal Revenue Code rules, when considering a liquidation event, the small business owner would still pay a lower overall rate than its C Corporation counterpart because of the double tax C Corporations face.
There also have been discussions of creating a special tax rate for pass-through business income or a delay in the timing of when individuals would incur the top tax rate on their pass-through income. However, these carve outs add complexity, which deviates from the core goal of simplification. Each business at inception has the opportunity to choose how it will be organized and taxed and has the opportunity to change its status once established. But in the end it may not be practical to have rules to bring parity; it may be more important to know how tax reform would impact your specific situation.
There will continue to be a lot of interest and anticipation for tax reform. When the president merely hints at tax reform, even in the midst of other government turmoil, the stock market has responded positively. For now, small businesses, along with the rest of us, will continue keeping a close eye on any developments as they progress.
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