By BECKY GILLETTE
One explanation given for the surge in the stock market since the presidential election is confidence that lowering of corporate tax rates would help boost the bottom line of businesses in the country. But tax reform is moving slower than was originally anticipated, said Horne LLP Tax Partner John Scott. The failure to pass a repeal-and-replace for the Affordable Care Act resulted in less funding for tax cuts, but Scott said it appears that Congress may be working on a possible deal on health care right now.
“Depending on how that turns out, it will set the parameters for the magnitude of any sort of a deal on taxes,” Scott said. “In fact, it might be that taxes and infrastructure get rolled into one package to solicit Democratic votes. So, when will all of this happen? The target keeps slipping later and later into 2017, or even into 2018. But, the Republicans need to show they can deliver on their promises before the mid-term elections in fall 2018, and some sort of tax reform/tax cut package will emerge.”
Scott said in all likelihood, the legislation will entail a corporate tax rate cut from a top rate of 35 percent to somewhere between 25-28 percent, a provision to tax business income earned through flow through entities at no more than that same maximum rate, and a reduction of the top individual rate from 39.6 percent to around 33 percent.
“Finding the ability to pay for this will be the biggest challenge, and getting something that will be acceptable to both the House and the Senate will take the most time of this entire process,” Scott said. “Business people should continue to monitor these events closely. Depending upon the timing and effective date of any tax cut legislation, strategies such as accelerating deductions and/or deferring income will be even more important than usual because they will generate a permanent tax savings.”
Tax planning is always made more difficult when there are numerous tax law changes being proposed and considered, said John Fletcher, a partner in the Jones Walker LLP Tax & Estates Practice Group who practices from the Jackson office.
“During 2017, there are many changes being considered, and many of those have been presented only in general and not specific terms, which also makes the planning process more difficult,” Fletcher said. “The proposed reductions in corporate tax rates have motivated many businesses to consider ways to accelerate expenses and deductions to tax periods ending before any adopted rate changes become effective, and to also consider options for deferring the receipt of taxable income until after any rate reductions are made effective. It is still possible that any corporate rate reductions that are enacted during 2017 will be made effective for all or part of the 2017 tax year, so it is important that businesses consider that possibility in their current tax planning.”
At the same time that businesses are anticipating tax cuts, there are also proposed elimination of some programs that have benefitted businesses such as economic development efforts by the Delta Regional Authority and the Essential Air Service subsidies for airlines that serve small airports in rural areas. Fletcher said there is always the possibility that when tax cuts are enacted, there will be corresponding reductions in various government programs, some of which may be beneficial to the same businesses that benefit from the tax cuts.
“If the objective of the tax cuts is to stimulate business growth and increased employment, then the proponents of the tax cuts must certainly take into account the possible effect on such programs,” Fletcher said. “In considering new tax policy, one of the primary objectives should be to reduce the overall complexity of the tax system and the cost of compliance. Many businesses have been forced to add tax compliance staff and to implement policies and procedures that may hinder their ability to operate efficiently and profitably. By eliminating some of the complexity and compliance issues, businesses would be able to operate more profitably and to compete more effectively in the global market, thereby generating additional tax revenues, which could offset some of the tax revenues lost through tax cuts.”
Fletcher said the biggest tax planning mistake that many businesses make is failing to consider tax consequences early enough in the business planning process. Often times, important managerial and operating decisions are made prior to considering the tax consequences of such decisions, and the tax issues are only addressed after the fact.
“At that point in the process, it may be too late to take advantage of opportunities to minimize or eliminate tax liability, or to achieve the maximum tax benefits that would have been available had proper planning been done earlier,” Fletcher said.