Tax Reform: Super Boost For Small Business
Tax Reform: Super Boost For Small Business
Finally, after months of speculation and guess-work, now we know. The “Framework” for tax reform has officially been released and there is something in it for everyone. This effort at tax reform will have significant implications for small businesses, specifically with unlimited equipment expensing and lower small business tax rates. The following is a broad overview of the proposed changes that has been officially published by the tax writing arm of Congress.
Corporations
Corporate Tax Rates: Much has been made of the high corporate tax rates compared to foreign corporations. To level the playing field for American corporations, the framework reduces the corporate tax rate to 20% – below the 22.5% average of the industrialized world.
Also, it allows corporations to re-patriate foreign profits by imposing a one-time, low tax rate on wealth that has already accumulated overseas.
Small Business Relief
Lower Tax Rates for Small Businesses: Currently, income from small businesses who operate as flow-through partnerships, small S corporations, and sole proprietors is taxed at the higher individual tax rates.
The framework proposes limiting the maximum tax rate for small and family-owned businesses to 25%. For many, this is significantly lower than the top individual rates that these businesses pay today.
Unlimited Equipment Expensing: The framework calls for businesses to be able to immediately write off (fully deduct) the entire cost of new business investment purchased over the next five years, without limitation.
Currently, the maximum “expensing” allowance is $500,000 on new and used equipment with an additional 50% bonus depreciation allowance on brand new business equipment.
Estate Tax and AMT
Repeals the Estate and Alternative Minimum Tax: The framework does away with both the estate tax and the punitive and dreaded individual alternative minimum tax (AMT). The Internal Revenue Service was prominent in its recommendation that the AMT be repealed.
Individuals
Lowers Rates for Individuals and Families: The framework shrinks the current seven tax brackets into three – 12%, 25% and 35%. It has the potential for an additional top rate for the highest-income taxpayers, to ensure that the wealthy do not contribute a lower share of taxes paid than they do today.
Doubles the Standard Deduction and Enhances the Child Tax Credit: The framework roughly doubles the standard deduction so that, coupled with the change in tax brackets, typical middle-class families will keep more of their paycheck. It also significantly increases the Child Tax Credit.
Eliminates Loopholes for the Wealthy and Protects Bed rock Provisions for Middle Class: To provide simplicity and fairness, the framework eliminates many itemized deductions that are primarily used by the higher-bracket filers. It does, however, retain tax incentives for home mortgage interest and charitable contributions, as well as, increased incentives for work, higher education, and retirement set asides.
