By Fred Sroka, Dean of the GGU School of Accounting & Bruce F. Braden School of Taxation
On November 16, the House of Representatives and Senate Finance Committee passed different versions of the Tax Cuts and Jobs Act. The proposals are sweeping in scope. Sadly, we won’t know which proposals (if any) become law until very late this year, or even early 2018. We have provided summary slides and videos to help tax professionals advise clients in this uncertain time. Our experts have tried to keep things short, high level, and focused on reasonable actions you might consider before December 31, 2017.
INDIVIDUAL TAX PLANNING
Individual taxpayers may benefit from the proposed reduced tax on flow-through business income. Small businesses may want to defer income and accelerate deductions in anticipation of potential 25% tax rates on 2018 business income. The Bills also encourage purchases of business property through expanded write-offs. Small businesses may choose to defer any major purchases that would be capitalized under current rules, in hopes of getting an immediate write-off in 2018.
The tax benefits of home ownership may be reduced dramatically. Homeowners may want to prepay property taxes, and perhaps prepay the January mortgage installment to assure deduction of the interest expense. Proposed limitations on property taxes and mortgage interest may adversely impact residential prices, particularly in high real estate markets such as Northern California.
Individual taxpayers may also want to prepay itemized deductions that will be repealed under the Bills. State income tax and many other itemized deductions are scheduled for limitation or repeal. Curiously, the proposed elimination of the alternative minimum tax might encourage taxpayers to defer charitable giving, in hopes to getting a higher 2018 tax benefit.
BUSINESS TAX PLANNING
The House Bill drops 2018 corporate tax rates from 35% to 20%. The Senate delays this reduction to 2019. Dramatic changes are also proposed to encourage investment in depreciable property, to discourage excessive debt, and to eliminate a variety of deductions, fringe benefits, and credits. Businesses should consider deferring income, accelerating deductions, and deferring purchases of depreciable property if current rules would require capitalization.
Domestic flow-through businesses (partnerships, LLCs, and S corporations) may want to consider converting to C corporation status to take advantage of the dramatic reduction in tax rates. These entities will have until March 15, 2018 to make a retroactive “check the box” election or revocation of an S election.
For financial accounting, ASC 740 requires the tax provision to reflect all changes in laws enacted by December 31. The potential impact on deferred tax assets and liabilities (and in particular on international operations) may have a dramatic impact on 2017 financials.
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FLOW-THROUGH TAX PLANNING
Partnerships and S corporations must address the potential 25% tax rate on business income. This may impact compensation structures and future activities of owner-employees. S corporations need to consider a number of other special rules at year end, and partnerships should address the impending change to IRS audits under the Bipartisan Budget Act. Starting with 2018 tax returns, IRS can audit a partnership much like a corporation, and can simply collect any deficiency from the partnership itself unless substantial planning is undertaken.
The tax proposals will have their greatest impact on international tax. The reduction of U.S. corporate rates to 20% will be accompanied by a territorial tax system, under which the earnings of foreign subsidiaries can be distributed to the U.S. parent without any incremental U.S. tax. Other provisions seek to punish offshore income and encourage the repatriation of intellectual property.
Multinationals may decide to convert foreign branches into subsidiaries. If this election is made by March 15, 2018, it can be retroactive to January 1. Foreign subsidiaries may wish to engage in substantive tax planning to defer net income. U.S. parents may need to report the dramatic impact of the changes in the tax provision of their 2017 financial statements. Ultimately, the proposed changes may cause a profound change in how multinational corporations are structured, financed and operated.