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The Federal Tax Bills: How Will They Impact Your Business?

Wednesday, December 13, 2017   (0 Comments)
Posted by: Gregg Robertson
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WASHINGTON, D.C. – Both the House and Senate have passed versions of tax bills that could affect your business. The bills are now in a conference committee where the differences between the bills will be hammered out. Then the final bill will need to be approved by both houses and signed by the president. The goal of the Republican leadership is that this all will be done before the Christmas recess.

There are two ways that this legislation will affect your business when it passes. The first is at a macroeconomic level as it affects the entire economy and the second is how the detailed provisions will affect the tax liabilities of your business. Please realize that some of the details may change as the House and Senate conference committee wrangles over final bill language.

Macroeconomic Impact

The Congressional Joint Committee on Taxation (JCT), a bipartisan committee of both House and Senate members, is charged with scoring the impact of all tax bills that are produced by Congress.

The JCT report on the Senate tax bill released on November 30 calculated that the tax cuts in the bill would raise the gross national product by a modest 0.8% over ten years, an annual boost to GDP of less than 0.1%. At the same time, the bill, if enacted, would increase the federal debt by a net $1 trillion.

Impact on Housing Markets

Some of the provisions in the bill to eliminate certain tax deductions from personal income taxes will have a depressing impact on the housing market, especially in states with high home values and high state and local income taxes. The tax bills in both the House and Senate would eliminate or cap deductions for mortgage interest and property taxes.

Both the National Association of Home Builders and the National Association of Realtors are opposing the tax bills. The Realtors estimate that the overall value of homes will fall from 5% to 21%, depending upon the state in which the home is located, if the plan is enacted.

Impact on Demand for Landscape Projects

The drop-in housing prices will have a downstream impact on the market for landscape projects. In most markets, housing prices have finally recovered from the crash in 2008. Families will be less likely to borrow on their home’s equity to finance landscape projects if their recently won equity begins to erode again.

Impact on Small Businesses

There are many provisions in the tax bills that affect small businesses. Each business owner will have to look at their unique circumstances and consult with a tax advisor to judge what the tax bills will mean to them.

Below are some of the major provisions that affect small businesses:

Pass-Through Income – Most small businesses are not organized as corporations but as sole proprietorships, partnerships, LLCs and S corporations, and income to the owner is “passed through” and taxed as ordinary personal income. The House version calls for pass-through income to be taxed at a maximum marginal rate of 25% rather than the maximum personal marginal rate of 39.6%. The Senate version exempts 23% of that income from income taxes.

Estate Tax – The House bill doubles the current $5.49 million single/$10.98 million couple exemption from the estate tax and repeals it completely by 2025. The Senate bill also doubles the estate tax exemption, but does not repeal it.

Expensing -  Both bills allow immediate 100% expensing of purchases which under current law would require depreciating over time.

Section 179 Expensing – The House bill is more generous than the Senate bill, with the House raising the limit that can be immediately expensed from the current $500,000 to $5 million and increasing the phase-out amount to $20 million. The Senate version raises the limit to $1 million and increases the phase out to $2.5 million. Both versions are indexed for inflation.

Business Interest – Currently, business interest is fully deductible with no limitations. Both bills limit the deducibility of interest to 30% of adjusted taxable income for businesses with gross receipts greater that $25 million in the House version and $15 million in the Senate version.

Cash Method of Accounting – Both bills increase the threshold for allowing cash accounting for corporations and partnerships with a corporate partner from $5 million currently to $25 million in the House bill and $15 million in the Senate bill.

These two bills are being hammered into one bill by the House and Senate as at this writing. Watch this space for updates.

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