Tax Reform: What To Watch For

Tax Reform: What To Watch For

Perhaps we should call it “tax help” instead of tax reform, this is what every small businessperson is looking to Congress to provide in the coming months of 2017. Because different committees in Congress have worked on some variation of  tax reform, as far back as 2010, all sides appear to be better prepared to tackle the large-scale issues which come with tax reform.

After a grueling winter and spring, the fall session of Congress presents another huge chance on an issue that many can agree on, tax help. Let’s take an advanced look at several tax issues important to the small business person that will be addressed in the coming weeks.

Business Expensing

Already permanent at the $500,000 level, the committee that has been working on tax issues continues to assert that even higher business equipment write-offs will be targeted. Whether that means an increase in the annual amount, or full expensing for all investment remains to be seen, but it is clear that increasing the write-offs for investment in business equipment is on the table.

Will Pass-Through Business Income Get Lower Rates?

Many small business owners operate as a  partnership, LLCs, S corps and sole proprietors. The income from these business models “flow-through” to your personal return and are often taxed at higher individual rates.  

Gauging by the large volume of discussion on this issue, it’s clear that tax-writers are aiming to lower the top tax rate on small business pass-through income. This issue has been a major point of emphasis from the President as well as Speaker Ryan and his committee.  The rates on this type of income may also be the most difficult to predict as speculations are varied, however, a safe bet it these rates would be tiered with a maximum in the mid to upper twenties range.

Is there a current example of capping other types of income? Yes, the individual capital gains tax has a rate cap and is computed separately from other types of individual income.  

Individual Tax Rates

There is no doubt that tax writers are focused on both reducing the number of tax brackets and lowering the individual tax rates. As noted above, the interaction between individual rates and rates on pass-through small business income has been a major source of welcomed discussion for small business. It stands to be one of the most watched highlights of the tax reform movement.

What About My Mortgage Interest?

Some elements of tax reform may be difficult to predict, this is not one of them. The mortgage   deduction will stay as well as the state income tax deduction. There has been talk of a phase-out or indexing of these write-offs, but they are not going away.   

Permanent vs. Temporary

Any business person who has experienced the pain, over the last fifteen years, of tax planning for expiring tax provisions understands the significance of this question. Speaker Ryan has been adamant that the way to remove uncertainty in the business community is to make most changes permanent.

Is Tax Reform Possible?

Total overhaul? Will be difficult. Meaningful changes? Yes. Perhaps this is not quite as contentious as some of the other issues. There is a general consensus among both Democrats and Republicans that some level of tax reform is needed. Stay tuned.