Taxes are a big deal, especially for small-business owners, many of whom are S-corporations. While the House of Representatives’ proposed Tax Cuts and Jobs Act includes both cuts and tax increases to pay for those cuts, the Senate will most likely make changes of its own. What it will ultimately look like is anybody’s guess.
Plante Moran (Chicago), a consulting/business advisory CPA firm, released its “quick take” on the current proposal and what it might mean.
Under the individual tax, one change that will benefit many small, family-owned businesses such as moldmakers and molders, is the reduction of the maximum gift tax rate to 35% with a $10 million exclusion. Also, repeal of the Alternative Minimum Tax (AMT), which was implemented in 1969 after it was discovered that 21 millionaires did not pay any U.S. income tax as a result of various deductions, is in this bill—something that has long been debated. “Many taxpayers won’t be sad to see it go," said Plante Moran, "but repealing it would reduce U.S. Treasury revenue by over $400 billion, according to one estimate.”
The proposed bill would “generally maintain current retirement savings plans, including 401(k) plans,” said Plante Moran.
For business entities, the proposed plan would “create a flat corporate tax rate of 20%,” a decrease from the “current graduated rate structure that tops out at 35%,” said Plante Moran. It would also create a “25% rate on business income from a pass-through entity,” excluding professional services. The plan includes “provisions to determine the portion of pass-through income that qualifies for the lower rate versus income that is more appropriately characterized as compensation, subject to the individual rates.”
The AMT would be repealed for businesses, as well.
The proposed bill would “eliminate net operating loss carry backs and modify the application of carry forwards,” according to Plante Moran, and it would “enable businesses to immediately write off the full cost of new equipment through 2022.”
It would “reduce the deductability of business interest by limiting net interest deductions to 30% of adjusted taxable income. However, this limitation would not apply to businesses with less than $25 million in gross receipts, public utilities, and real property trades or businesses.”
Since many plastics processing and moldmaking business have less than $25 million in gross receipts, this limitation would not apply.
The proposed bill would keep the R&D tax credit; however, “most other tax credits would be eliminated such as the new market tax credit and the work opportunity tax credit.”
More importantly for many small, family-owned businesses, the estate tax would be eliminated entirely by 2024, but the beneficiary’s stepped-up tax basis in estate property would still be maintained.
This is a big one for many in the plastics industry. A number of years ago I wrote an article about two brothers who owned a plastics processing company. They each had several grown children who were also involved in business operations. The brothers died suddenly—I can’t recall exactly how it happened—and left the family with no succession or estate plan for the company. The IRS stepped in and calculated the estate taxes at some astronomical figure that forced the heirs to sell the company just to pay the taxes.
Keep an eye on what is happening in Washington, D.C., as it is critical to your business and your family, if yours is a family-owned business. PlasticsToday will try to keep you updated through our resources as the proposal moves through the Senate.