When President Donald Trump unveiled the broad framework for his proposed changes to the federal tax code, it raised more questions than it answered.
Of course, it was simply the first step in what could be a lengthy congressional debate about the tax code. And Trump’s nine-page proposal — including the cover page — left most of the detail work up to Congress.
That includes potential changes for business tax deductions.
“Until there’s more concrete information, it is just speculation,” said Tad Goodenbour, CPA and partner at BKD LLP in Colorado Springs. “There are only a few deductions they’re looking at eliminating. They left the door open so there is still a lot to be seen. It’ll probably be 8,000 pages when it’s done, with those nine pages of framework. Every lobbyist will have their hand in it.”
Sage Eastman, principal for Mehlman Castagnetti, the government affairs consulting firm that lobbies in Washington, D.C., for the Colorado Springs Chamber & EDC, said he will closely monitor Congress’ progress.
“I think they’re headed in the right direction with lower rates and a simpler process,” Eastman said.
Trump has proposed a new tax bracket of 25 percent for pass-through businesses, as opposed to paying a higher rate on the business owner’s individual taxes. But will those potential added earnings be offset by the elimination of helpful deductions?
“The big standard deduction will be more beneficial than a ton of deductions,” Eastman said. “It’s better to just simplify than have a lot of deductions.”
Eastman said business owners should be “intrigued” by the potential changes to the tax code.
“It’s a positive if you can simplify and get a lower rate,” he said, “because a lot of business owners won’t be spending too much time on their taxes instead of focusing on their core business.”
DEVIL IN THE DETAILS
Trump’s framework specifically mentioned eliminating the Section 199 deduction, a tax write-off that aids manufacturers. Because of the proposed lower tax rate, Trump asserts that this deduction won’t be needed any longer. The framework states, “Domestic manufacturers will see the lowest marginal rates in almost 80 years.”
Eastman is in agreement.
“What we’ve done for 30 years is try to allow credits and deductions to get businesses into the 20-something percent tax bracket,” Eastman said. “If the tax rate drops to 25 percent, businesses won’t need those deductions maybe.”
Goodenbour has a different take on Section 199, noting that it doesn’t just affect large publicly traded companies, known as C-corps, but all types of business entities.
“Elimination of this deduction would have a wide-reaching effect as the eligibility for and use of the deduction extends from the smallest manufacturer to the large public companies,” Goodenbour said in an email.
Goodenbour said if the Section 199 deduction is eliminated, “… one could argue that the incentive to manufacture and produce goods in the U.S. is eliminated. That is specifically rationalized in the framework document by saying the 199 incentive is no longer needed due to the ‘lowest marginal rates in years.’”
Still, Goodenbour said if the 25 percent tax rate for pass-through businesses is instituted, it would be a difference- maker for small businesses.
“No question this will, in [the] majority of cases, be a significant tax savings to owners of profitable pass-throughs,” he said. “The potential loss of the 199 deduction would have a minimal tax increase to the owners.”
Eastman said he wonders which businesses will qualify for the 25 percent bracket.
“That’s the big question,” Eastman said. “Will it include services — like lawyers and accountants — or will they stay at the higher individual rate? The threshold question is who will qualify? Will it be the standard definition of a small business or will a dollar threshold be put on it to constrain the lower rate?”
Goodenbour said an inordinate amount of attention is being given to Trump’s nine-page framework, noting that the current tax code sitting on his desk is 4,132 pages of fine print rules that do not include eight volumes of regulations, each over an inch thick.
“While it has a number of beneficial concepts, there is little else but a conceptual framework,” Goodenbour said. “In tax law, [the] devil (and opportunity) lies in details. The details are why it will be so difficult for true reform. Too many oxen are out there that could be gored.”
NAHB WEIGHS IN
Many lobbyists will attempt to have a say in what tax changes occur. The National Association of Home Builders Chairman Granger McDonald announced Tuesday that the NAHB will try to ensure its industry’s priorities are addressed. The email said the current discussion of the tax code presents “an important opportunity for NAHB to explore additional policy options to support our industry and homeownership.”
The email continued: “To strengthen our position at the negotiating table, NAHB’s Executive Board today voted to revise our tax policy to provide more flexibility as we work with Congress on updating the tax code. NAHB supports a tax system that is simple and fair, and that promotes greater housing opportunity for Americans across the economic spectrum.”
The tax policies that NAHB supports include:
• A homeownership tax incentive;
• The low-income housing tax credit, along with additional resources to meet the affordability crisis;
• Tax incentives for remodeling, including energy efficiency tax credits;
• The exclusion of capital gains on the sale of a principal residence; and
• Business interest deductions for small businesses.
“The elimination of one deduction, say, on the construction industry, may have large repercussions,” said Trinity Bradley-Anderson, managing partner at accounting firm Stockman Kast Ryan + Co. “It could have a ripple effect on the whole economy.”
The Trump framework also states: “In addition, numerous other special inclusions and deductions will be repealed or restricted.”
That leaves the door wide open, Goodenbour said.
Trump’s framework specifically preserved business credits in two areas where tax incentives have proven to be effective for the economy: research and development and construction of low-income housing.
“This [framework] should be good for business owners,” Eastman said. “There’s the potential of a lower tax rate but business owners don’t exactly know what they’ll have to give up to get it. There’s economic benefit to the overall plan — there should be more foot traffic in your store because the business and individual tax cuts should stimulate economic activity.
“Businesses should get a lower rate and it’s easier to file. That’s good for your business.” n CSBJ
Editor’s note: This is the final story in a three-part series on the U.S. Administration’s proposed tax plan.