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Massive new tax law a win for most businesses, but there are caveats, exceptions

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There are winners and there are losers.

Businesses are starting to figure that out after the sweeping tax overhaul legislation that was recently signed into law: some will be winners and some will be losers.

Proponents of the Tax Cuts and Jobs Act, which cuts $1.5 trillion over the next decade, say it will bring jobs and investment to the United States and boost economic growth. But many economists say the plan will add to the federal debt and likely reduce the size of the economy, as well as cause tax increases or spending cuts.

But most businesses are winners, particularly in the areas of C corporations, pass-throughs and businesses that invest in equipment.

“I think this is great for business because you’ve got a lowering of rates and you’ve got some ability to pay tax on less than 100 percent of your income,” said Andy Kahn, a shareholder at Concannon Miller & Co., in Hanover Township, Northampton County.

CORPORATE TAX CUT

The most significant change was the cut in the corporate tax from 35 percent to 21 percent.

“That’s huge. It will help businesses of any size that are taxed as a C corp be more competitive with the rest of the world,” said Robert Duquette, a Certified Public Accountant and professor of practice in the accounting department at Lehigh University.

The average corporate tax in the developed world is around 24 to 28 percent.

Although lower taxes are only one factor that help companies determine where to invest, Duquette cautioned that such a large tax reduction could create a competitive race among developed counties to see which can offer the lowest rates.

PASS-THROUGH RATE ALSO FALLS

Although not as high as C corporations’ reduction, pass-through businesses will get a 20 percent reduction in tax rates. Pass-throughs will not be taxed higher than 37 percent; the rate is lower if the owner is in a lower tax bracket.

Pass-throughs are so named because their income “passes through” to their owners to be taxed under the individual income tax. They include S corporations, partnerships and sole proprietorships and specific service-based businesses such as doctors, lawyers, accountants and financial consultants who own their businesses and deduct their income as personal income.

About 95 percent of businesses in the U.S., and that includes half the workforce, are pass-throughs, although they are not all small businesses.

“By giving them a 20 percent reduction, you reduced the effective rate to be no more than 29.6 percent,” Duquette said.

SOME NOT AS LUCKY

Duquette noted that small businesses, which already had a 10-point advantage over C corporations, lost ground because the C corp rate came down.

“So Congress didn’t help small business as much as they helped C corp owners,” he said.

Individuals with taxable income of $157,500 or less will get a 20 percent deduction from qualified business income. Married taxpayers who file jointly who have $315,000 in income or less will also get a 20 percent deduction.

“For businesses that are profitable, but not highly profitable, they will get that 20 percent deduction no matter what industry they are in,” Kahn said.

LIMITATIONS

For those in the personal services industry, such as doctors, lawyers, accountants and stockbrokers, once an individual’s income reaches $207,500 and $415,000 for married couples filing jointly, that 20 percent deduction phases out.

“If you are in any other business, you are now going to be subject to limitations based upon the amount of wages you pay and the amount of depreciable property you own,” Kahn said.

Pass-through businesses can choose to take the 20 percent deduction or take 50 percent of W2 wages or 25 percent of W2 wages plus 2.5 percent of depreciable property.

“That piece was put in for real estate businesses,” Kahn said. “There is a way for people who have significant assets they own to get a benefit, even if they don’t pay a lot of wages.”

“You may have people who are sole proprietors who are very profitable, as long as they are not in a personal service business, that currently pay themselves no wages because you can’t as a sole proprietor. There may be situations where a profitable businesses changes its entity structure to get this 25 percent business income deduction.”

SEEKING TO CREATE GROWTH

The new tax law will add $1.5 trillion to the national debt, which is projected to increase from $20 trillion to $30 trillion over the next 10 years.

Under the new tax law, the economy is predicted to grow 0.5 to 1 percent. The gross domestic product, which was predicted to grow 2 to 3 percent per year, is now predicted to increase 3 to 4 percent per year.

“The intent of the law is to create economic growth, and it appears the greatest beneficiary of the law is business,” Kahn said.

“I believe that on the individual [taxpayers’] side there are winner and losers, but I believe on the business side it appears, if not 100 percent winners, it’s fairly close. I haven’t run across a business that thinks it has been hurt by this new law.”

CONCERNS ABOUT INFLATION, DEFICIT

Duquette said the new tax law won’t create financial instability or hyperinflation, “but it’s going to aggravate it.”

The problem is the enormous federal deficit, he said.

“One has to hope that the accumulated wealth that is saved will find its way in capital investment that produces innovation and jobs and products that we can export to the rest of the world,” he said.

“We have no choice but to hope that supply side economics will work in a way it never has before,” Duquette said.

“I’m hopeful that tax reform does more than pay for itself because it’s one of the last measures our federal government has to try to avoid a national debt crisis at some point in the future.”

MORE WINNERS

Other winners from the new tax law include:

<Duquette said any business, large or small, that’s thinking of expanding by acquiring equipment, new or used, wins under the new law because it can immediately expense 100 percent of the cost of the purchases.

<Small businesses are given another advantage because they can expense up to $1 million in equipment purchases, double than the previous cap.

<Craft breweries, distilleries and winemakers will get reduced excise taxes and other reductions.

<Business that are innovating and experimenting through research and development get a 20 percent credit.

STANDING TO LOSE

Losers from the tax law include:

<Companies that have significant debt.

“Before, they could deduct their income expenses against profits. Now there will be a bit of ceiling,” Duquette said. “It applies to every business, not just C corps and pass-throughs. The one exception is a business will be exempt if it has average receipts of $25 million or less.

“A lot of pass-throughs are over $25 million, and they are going to have to be concerned about the loss of deducting their interest expense on their debt.”

<Manufacturers no longer get a 9 percent domestic manufacturing deduction.

<Multinational companies because of several base erosion provisions.

“The new law will give multinational companies incentive to keep their earnings here and to bring back their intangibles, such as intellectual property,” Duquette said. “Their advisers, accountants and lawyers and their whole financial teams are busy trying to figure out what their liability is. They have a couple of months to figure out this liability.”

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