Tax Reform – Compromise, Complexity, & Predictions

Although everyone would like to make the tax code easier, we just can’t seem to get it done.  In the spirit of trading political favors, also known as compromise, we always seem to end up making the tax code more complicated rather than less.  That being said, there are some significant changes that will soon change our world once they are enacted into law and we need to get our hands around them quickly.  Here are just a few predictions of what might result from the proposed changes:

  1. The Formation of More “C” Corporations for Business Ventures. Corporations taxed under sub-chapter C of the Internal Revenue Code have always been a tax trap for many small businesses and entrepreneurial ventures because of the “double-tax” that results from being taxed at both the corporate level, and then again on the dividends distributed to shareholders. Lowering the tax rate to a flat tax rate of 21% goes a long way to leveling the playing field when compared to other pass-through entities that result in just one level of tax.  Having one level of tax, however, always came with additional tax complexity for pass-through entities. The new deductions for pass-through entities will make it harder for owners to determine what structure is still better for tax purposes, and the answer will continue to be, it depends.
  2. Spending on Business Assets will Likely Go Up. The preservation and expansion of accelerated depreciation (the ability to depreciate up to 100% of the acquisition costs) for certain business assets and the increase of Section 179 expenses to $1,000,000 will encourage business owners to invest more heavily in business assets.  Some of these changes are temporary so businesses will likely invest in capital assets now as opposed to later.
  3. Luxury Homes Prices Will Fall. Eliminating all but $10,000 of property tax deductions from itemized deductions is a killer for luxury home owners who can pay as much as 2% of the value of their home in real estate taxes.  Losing that deduction will be painful.  To add insult to injury, mortgage interest deductions will be eliminated for home mortgages greater than $750,000.  Millennials don’t want these homes to begin with, and baby boomers are trying to get out of them.
  4. Political Chaos.  If you thought we had political chaos now, wait until next year. Republicans and Democrats will fight over whether or not this a victory for Republicans or a Christmas gift to Democrats.  Political uncertainty and chaos are a certainty.
  5. Tax Planning Will Rise.  Although the original goal was to simplify the code and reduce taxes, the proposed changes create additional complexity for individuals and business owners.  What was true yesterday is not true today, so rethinking and recalculating your total tax burden will be at the forefront of everyone’s minds for the next year.

 

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