Editor’s note: The following is based on proposals made during the election campaign. Actual policies enacted may differ from those proposed.
Last month, we discussed tax planning for the balance of 2016 and steps to reduce taxes in 2017 and beyond. Well, we can now add some thoughts into the mix based on the election results. Here are three things to consider:
- Trump plans to cut taxes for both corporations and individuals.
- Trump will make international companies holding offshore profits at bay an offer they cannot refuse — bring it back at 10%!
- There is discussion about using the repatriation tax money to fund infrastructure spending.
- So far, nothing bad here for contractors, equipment manufacturers or rental companies.
In terms of tax rates, the big deal is the proposed 15% flat tax on corporations. C-Corps will start to look better going forward even though there is still unfavorable tax treatment when you sell C-corp assets. It is no secret the U.S. has the highest corporate tax rate among developed nations. We are also the only industrialized nation that taxes companies no matter where the income is earned. Even with that being the case, we allow the tax on non-U.S. profits to be deferred until they are brought into the country.
I believe that the spread between the cost of manufacturing offshore vs. being produced in the U.S. has diminished to the point where manufacturing can be shifted back here. Extremely low energy costs together with current productivity levels compare very favorably against lower foreign wages, much higher energy costs and the cost of shipping goods back to the U.S.
If those funds are brought back to the U.S., I have to believe some of it will be invested to restore manufacturing in this country. Still nothing bad here for the construction industry. We could see a lot of new work updating industrial centers throughout the U.S. or building new modern facilities.
Individual and Corporate Tax Benefits
Proposed individual rates are to be reduced from seven rates to three, with the highest rate set at 33%. This represents a 17% reduction off of the current highest rate (39.6%).
Proposed Trump Tax Rates
Ordinary Income Capital Gains Single Filers Joint Filers
12% 0% $0-$37,500 $0-$75,000
25% 15% $37,500-$112,500 $75,000-$225,000
33% 25% $112,500+ $225,000+
(Source: The Bauman Letter, November 16, 2016, SovereignSociety.com)
However, those of you with flow-through tax entities — such as sole proprietorships, LLCs, S-Corps and partnerships — could now find yourself taxed at rates higher than the corporate rate of 15%. For example, if you find yourself in the 25% personal bracket, that is 66% higher than the 15% rate. Now you know why C-corps may have a comeback as the preferred form of tax entity.
To equalize this difference between the 15% flat tax and your personal rates when there is flow-through income to consider, what I’m hearing is that taxpayers will have the option of using the corporate rate if they so desire. If it sounds too easy, it isn’t. We can all recognize that flow-through company owners could “stuff” the 15% income as opposed to the personal rates, so there will be some restrictions on how you can use the option of the 15% rate. I could see a formula being developed that you will have to use to keep your average salary and bonuses in the personal rate column and the balance to the 15% rate if you so choose.
Both President-elect Trump and the House want to eliminate the estate tax, which is 40% for estates larger than $5.45 million. I assume most readers are not worried about estate taxes yet, but would love to have a $5.45 million estate to leave to their families when the time comes.
Another great proposal for the middle class is the increase of the standard deduction to $30,000 for joint filers and $15,000 for singles. Itemized deductions would be capped at $200,000 for married filers and $100,000 for singles. The House plan for itemized deductions is to eliminate them all except for those related to mortgage interest and charitable contributions.
None of these new tax provisions have been finalized and when they are we will give you all the gory details.
Infrastructure Spending Boost
Also of interest to the construction industry is Trump’s proposal that the $1 trillion in infrastructure investment consist of public/private funding. To stimulate such a plan, Trump is proposing $137 billion in tax credits in exchange for private investments in highways, bridges, seaports and airports. So far, still nothing bad for the construction industry.
The two big take aways here are: (1) lower income tax rates and (2) more construction work. The one fly in the ointment is the timing of these events. We know what happened to the “shovel-ready” projects we heard about a few years back. We are still waiting for them to hatch. I would not expect to see the final tax changes until August 2017, and if history provides any guide, some of the changes will be carried back to start January 1, 2017, while others may take effect when they pass Congress.
The infrastructure work probably falls into the same time frame, but there have to be some projects ready to go as we speak. Hopefully there are and they will be able to start in early 2017.
Add A Dose of Reality
Okay, let’s return to reality and not get too excited about these changes until they become law. When they do, you can do whatever planning is necessary to take advantage of what they have to offer in terms of tax savings.
But let us keep in mind that these changes may also eliminate bonus depreciation, LKE transactions, MACRS depreciation and other special credits and deductions currently available to contractors. Eliminating these current incentives to buy equipment is probably unlikely, but you never know when they get into negotiating the tax changes. This is all the more reason to take what you can in 2016, and carry back and carry over what you can to 2017.
I’m happy to report some positive news for the industry starting in 2017. But let’s stay focused until we know we have them in hand. Continue to run your business in a prudent, profitable fashion and hope to pay less taxes on your 2017 profits.
Garry Bartecki is the managing member of GB Financial Services LLP and a consultant to the Associated Equipment Distributors. He can be reached at (708) 347-9109 or [email protected]
