The Final Act of the Tax Reform Play...Now What?
On December 19, 2017, the House and Senate approved final passage of the Tax Cuts and Jobs Act (H.R. 1). The law provides $5.5 trillion in tax cuts with $4 trillion in offsetting tax increases. This leaves a net $1.5 trillion of unfunded tax cuts. Republicans predict the tax cuts will propel the economy to a robust 2.9% annual growth rate, increasing wages and taxes to make up the deficit. Many economists and politicians are skeptical this will happen. The non-partisan Joint Committee on Taxation, the government economists, predicts the tax cuts will result in approximately $483 billion of economic growth (less than 1% on average over the next decade) offset by an increase of $55 billion in interest on the debt to finance the legislation’s addition to the deficit.
Over the years, I have observed estimates of growth, revenue, and costs related to numerous tax bills by politicians on both sides of the aisle and Congressional economists who advise Congress. The only certainty is that economic predictions by any of these groups will inevitably vary widely from predictions and estimates. Our economy is simply too big and complex and often impacted by world events to predict outcomes 10 years into the future with any reasonable level of accuracy.
Regardless of where you come out on the politics of tax reform, keep in mind the relative balance in power is likely to change in Congress over the next eight years when many of the individual tax cuts sunset for budget reconciliation reasons. What we can say for sure is that tax reform — and how to address the sunsetting provisions — will be a topic for political parties in every Congressional election through 2025. In addition, Ways and Means Chairman Brady is signaling the need for a massive technical corrections bill to fix drafting and other errors he anticipates will surface after passage. The passage of this bill will also trigger an avalanche of regulations to help taxpayers comply.
Many will criticize the bill as catering to special interests. In fact, a wide variety of industries received tax breaks including small craft brewers, mead producers (honey wine), film and TV producers, private aircraft maintenance, and lodging to name a few of the more interesting ones. When I hear this, I am reminded of the late United States Senator Russell B. Long who said “A [tax loophole is] something that benefits the other guy. If it benefits you, it is tax reform.”
For now, it is important to focus on what is in the final deal and how to maximize its benefits to your personal and business tax situations. The law includes many significant policy changes and myriad effective dates and sunsets, thus putting a premium on up-front planning. We highly recommend you seek expert advice before undertaking any action with respect to the tax changes in relation to your own tax situation. See the Individual and Business Tax Highlights diagram for details on the tax changes.
Tax Planning Considerations
- The tax rate of C corporations will be lower in most cases than the tax rate on pass-through entities like partnerships, S corporations and sole proprietorships for high-earning businesses. One of the chief sponsors of the pass-through tax rate proponents, Senator Ron Johnson (R-WI) included a provision in the law easing the way to change legal structure from an S Corporation to a C corporation to take advantage of lower tax rates. In addition, more capital-intensive pass-through businesses may be able to increase the deduction of pass-through income by calculating the value of capital assets and applying this to an alternative asset-based formula in the law.
- Consider deferring income into 2018 to reduce your tax bill.
- Review capital acquisitions to take advantage of increased expensing and depreciation provision in the new law and the limited time to acquire qualifying property.
- Review your long-range research and development investment program to account for new limits on amortization of research and experimental expenditures effective 2026.
- Review your corporate debt situation to ensure you meet the new limitations on net interest deduction to 30% of adjusted taxable income.
- Lower tax rates on wages may necessitate changes in your employees’ income tax withholding elections.
- Additional limits on deductibility of stock-based executive compensation may necessitate review of compensation of top executives.
- Review your investment portfolio considering the changes to the taxation of advance funding state and local bonds.
Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress in 2017. Doug is Director of Retirement Policy at the American Retirement Association and consults with businesses on Washington Strategies and Planning. In this role, Doug works with the ARA membership and other private companies to protect, advise and grow their businesses through ideation and advocacy in the benefits area. Before joining ARA, Doug led Fidelity's legislative policy and thought leadership development teams involving retirement, health and welfare benefit plans. Doug has advised many Fortune 1,000 companies on the impact of legislation and regulation on the design and delivery of benefits. Before joining Fidelity, Doug served as tax counsel to the U.S. Senate Finance Committee and was involved in writing the pension, health and insurance provisions of the Small Business Job Protection Act of 1996; the Balanced Budget Act of 1997, including the Roth IRA, Simple retirement plan, medical savings account (predecessor to the health savings account); and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
The opinions expressed and information contained in any article published in the Vault are given in good faith and considered reliable. However, such opinions and information are subject to change without notice and are provided only as of the date issued. Neither Boston Private nor its affiliates warrant the completeness or accuracy of such information. Any third-party opinion is solely the opinion of its author and does not necessarily reflect the opinion of Boston Private or its affiliates. The materials on this website are for informational purposes only and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.