The tax law passed by Congress and signed by President Trump as 2017 drew to a close is already being claimed as the still-young administration’s most significant legislative accomplishment. The one-time slashing of the corporate tax rate from 35 percent to 21 percent seems to underscore the strengthening economic recovery at the same time it opens previously unthought-of opportunities for US-based business.
No less a figure than Dennis Muilenburg, the CEO of Boeing, appeared with Trump personally to praise the president’s “leadership on tax reform and creating jobs.” Alongside some congressional Republicans, Trump himself is already pushing for a “Phase 2” of tax reform, which “will help, in addition to the middle class, will help companies,” according to Trump, who also said it would be “very special.”
But not so fast. Because the legislative process in this case was so tightly compressed by the government, a host of problems are already cropping up in the writing, interpretation and execution of a law that is just barely three months old. This post is to highlight, for the benefit of entity professionals, some of the more glaring glitches, ambiguities and potential problems down the road for the new tax regime in the world’s largest economy.
1) Individual and small business tax cuts will expire
Congress passed the tax law along party lines, without Democratic support. In order to do this, the Republican leadership had to use a budget reconciliation process that limited some of the cuts targeted at individuals, and especially small business tax cuts, to 10 years or less, following Congressional rules against prolonging deficit-increasing measures past a decade (much like what happened to a similar law signed by President George W. Bush back in 2003). The fight over defining the scope of the cuts, therefore, threatens to do to the Republicans what they did to a Democratic government with the Affordable Care Act — create a legislative quagmire for the ruling party that the opposition has every intention of keeping them stuck in.
2) The restaurant renovation and grain glitches
The GOP also made some dumb drafting errors in the course of rushing the law through Congress and to President Trump’s desk. A major mistake that recently came to light involves the renovation of restaurants and retailers. While the law’s drafters wanted to allow enterprises to deduct renovation expenses over 15 years, the version that was passed specifies 39 years, negating the practical benefit. Similarly, the agrarian lobby is in an uproar about a late change to the language of the tax law allowing farmers to deduct 20 percent of their total sales to cooperatives — in a way that independent farmers are concerned will make it impossible for them to compete with large corporate farms.
3) The deduction on pass-through entities
Pass-through entities include sole proprietorships, S-corporations and LLCs where the profit “passes through” their owners and is taxed at the individual rate rather than at the corporate tax rate. The new law includes a 20 percent deduction on pass-through taxes, but many questions have been raised as to which businesses this applies to, and the types of income that may be deducted. These and other provisions where the language is ambiguous will probably soon become the subjects of a three-cornered fight between Congress, the IRS and the Treasury Department over the proper interpretation.
4) The new alternative minimum tax on overseas profits
We’ve written before about how a central provision of the tax bill attempted to realize then-candidate Trump’s rhetoric on the campaign trail in 2016 by encouraging US-based companies to repatriate their overseas investments by offering a one-off fee at 15.5 percent for liquid assets and 8 percent for illiquid assets. This was the carrot — but the legislation also included a stick in the form of an alternative minimum tax. Companies as diverse as Eli Lilly and Chevron have expressed anxiety that the Treasury or IRS will interpret these provisions as covering activities they do not believe fall under profit-shifting at the same time Republican lawmakers such as Utah Sen. Orrin Hatch are insisting on a strict interpretation.
5) Capital gains tax in asset swaps
The previous tax code allowed enterprises to swap certain assets tax-free provided the new assets were roughly equivalent in value to the old ones. By the addition of a single word to the language — which now reads “real assets” — only real estate swaps now qualify for tax-free status. Essentially, Congress wants to capture more revenue from manufacturers and other enterprises that trade assets for better-valued ones. This could affect a number of organizations that did not expect it. Baseball and basketball teams, for instance, may now have to pay taxes on roster trades with other teams. Again, the language is far from clear, and it’s not like there’s an established practice to measure the monetary worth of individual physical talents against each other. The tax status of asset swaps in the non-sports world are every bit as up in the air.
The changes in the US tax code — only the third such major overhaul in the past century — took only two months to pass, but the struggle to eliminate unintentional mistakes in its language, precisely define its interpretation and so on may take years. In many respects, the battle for a tax code that can further promote growth only began when President Trump signed the new law.
Most large organizations are already figuring out how they can take advantage of the windfall, but everyone needs to be thinking about warding off the new law’s potential dangers as well. Technological innovation based on sound and accurate data, combined with sophisticated methods to present information, can make a crucial difference as your leadership re-evaluates its structure to take advantage of these new opportunities and to avoid the potential pitfalls. This is precisely what is offered by Blueprint OneWorld’s entity management platform. Please email or call us today to discuss our solutions.