Our Road Map to Understanding the Pending Tax Reform
Taxation in the USA is a delicate balance of social policy, fantasy economics, revenue raising, and a solid dose of political hope that it lasts long enough to get an incumbent re-elected without Accountability. Now we’re on our way to understanding the Pending Tax Reform.
Congress has just passed and has sent to the President a sweeping change in tax rules and regulations. There is a serious burden shift between corporate taxation and individual taxation. While ultimately only “people pay taxes” I have been on the record of being against this current legislation as it is incomplete and lacks a cohesive bi-partisan perspective that I believe is important.
Tax reform is “Very” ugly. It is so unattractive that it is often talked about and rarely implemented. Mostly because we are so strapped to our historic and traditional methods rather than approaching tax reform like a startup and begin with an optimistic clean slate. Or, Modify the existing (traditional) Business Model associated with the enterprise that it serves (see Start-Ups: The Start-Up is an Attitude, Not an Age)
While the Dust Settles: I do offer some initial observations and suggestions:
• Business Auto: Need a new Business-Car?
Defer to 2018 as proposed legislation dramatically increases the allowable annual deductions to reflect reality. Auto dealers will not like this. On the other hand, if you are not buying your car for business, you might want to consider buying it this year if you pay a sales tax as it could be deductible and beneficial. It is never easy and there are more ways to solve a challenge that fits your Business-Style.
• Real Estate: Buying Rental Real Estate?
Close escrow in 2018 as depreciation is favorable beginning in 2018. Less so for residential properties, but dramatically better for commercial properties.
• Entertainment Expense: Are you a cash-basis business with entertainment expenses (e.g. season tickets) then consider paying for them in 2017. Under the new legislation, entertainment will no longer be deductible.
• Equipment: Need new business equipment?
If you haven’t utilized your 2017 expensing election (up to $500,000 on qualifying purchases with limits, of course; there are certain levels of equipment you may expense this year rather than “depreciate” over several years). With 2017 tax rates scheduled to be higher than in 2018, it is prudent to buy now and expense it than it is to wait. On the other hand, if you have utilized all of your Section 179 allowances or are otherwise disallowed, consider waiting until 2018 when limits are raised and benefits are better.
Some Final Thoughts: This version of the tax reform bill “Lacks Process”
• Be Cautious; I think it is unstable. Solid legislation survives a few years before tweaks occur. This legislation has tweaks built into it. Add that to the process of reform (like health care during the President Obama’s tenure) minority parties aren’t always in the minority.
Forcing a bad meal down your opponents throat ultimately leads to a future bad meal in return; yours. The “Process” is more important than outcome when it comes to tough legislation. A lesson that never seems to be learned. Why does the U.S. Congress repeat Failure so often? Maybe we have a short-term attitude; we use 10 revenue forecasts as it relates to deficits, but we aren’t building for a new generation, the next generation. (Does this make sense?)
• In My Opinion, This is “Payroll-Tax” Legislation. A lot of discussion about pass-through businesses (partnerships, LLCs taxed like partnerships, and S-Corporation, etc.) increases the rules and regulations regarding owner compensation before residual income is passed through to its owners. Payroll taxes only travel one way…upward. And increasing payroll taxes through forced wage base increases is a hidden additional tax.
– “Leverage” (fancy word for debt) will become an Achilles heel for many new businesses as limitations of interest are implemented. If deductible interest is limited to 30% of income before the interest deduction, this will force people to use more equity (permanent cash invested) rather than borrowing money to operate their company
• Finally, what the federal government reduces and limits it is likely that the states and local communities will have to pick up and make up the difference to fill the pot fully. Accordingly, a federal reduction may well be a state and local tax increase.
Accordingly, fasten your seatbelts, as this is an E-Ticket ride. (Remembering back-in-the-day before there was a single entry price for all rides at Disneyland. If we remember, the E-Ticket represented the Matterhorn and other thrill rides at Disneyland. So, “fasten your seatbelts” is another way of saying a thrilling ride may be ahead of you.
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