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Government Affairs: Will the federal tax bill help your business?

December 4, 2017 -  By

As I am writing this blog, the U.S. Senate is debating its version of a tax bill that could dramatically change the country, from the way that our businesses operate to how we make personal decisions about where to live.

When the Senate’s version of the tax bill passes it will go to a conference committee where the House and Senate versions will be combined into a final bill that will need to be approved by both houses. The Republican leadership’s goal is to complete this process before the Christmas recess.

There are two ways this legislation will affect your business when it passes. The first is at a macroeconomic level because it affects the entire economy. The second is how the detailed provisions will affect the tax liabilities of your business.

We’ll look at both levels of impact, but 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.

According to the JCT report on the Senate tax bill released on Nov. 30, the tax cuts in the bill would raise the gross national product (GDP) by a modest 0.8 percent over 10 years—an annual boost to GDP of less than 0.1 percent. At the same time, the bill, if enacted, would increase the federal debt by a net $1 trillion.

Effect on housing markets

Some provisions in the bill eliminate certain tax deductions from personal income taxes, which 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 said the overall value of homes will fall an estimated 5 percent to 21 percent, depending upon the state in which the home is located, if the plan is enacted.

Effect 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.

Effect on small businesses

There are many provisions in the tax bills that affect small businesses. Each business owner will have to look at his or her unique circumstances and consult with a tax adviser 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 percent rather than the maximum personal marginal rate of 39.6 percent. The Senate version exempts 23 percent 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 percent 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 percent 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.

It is likely that there will be many adjustments and changes to the bill that comes out of the House and Senate Conference Committee, so stay tuned!

Photo: Jeffrey via Foter.com / CC BY-NC-ND

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Gregg Robertson

About the Author:

Gregg Robertson, Landscape Management's government relations blogger, is a government relations consultant for the Pennsylvania Landscape & Nursery Association (PLNA) and president of Conewago Ventures. From 2002 until May 2013 he served as president of PLNA. Reach him at gregg.robertson@conewagoventures.com.

2 Comments on "Government Affairs: Will the federal tax bill help your business?"

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  1. Nicole C says:

    You are talking about changes that affect businesses that make millions of dollars. Is that who reads your articles? It would be nice to hear how this would affect smaller businesses whose income would be in the 200k and under. Are there changes to the deductions we can make for indirect things like phone, computer, software, home office, etc?

    • Gregg Robertson says:

      Nicole,

      Many of the changes I refered to do affect small companies. You are correct that the benefits to larger companies are greater. Much depends on how you are organized. Most landscape contractors, especially those of $200,000 revenues or less, are organized as pass-through companies. So whether the pass-through rate will benefit you depends upon your personal tax bracket. Small items like telephones and computers will be fully deductible in the current year they are purchased in both bills. The Section 179 exemptions should help with equipment purchases.

      You should consult your tax advisor for specifics on how the bills will affect you personally. And there is always the possibility that things will change in the final bill that comes out of the conference committee. Unfortunately, the smaller you are, the less likely the tax bill will help you.

      I have done the analysis for myself (I have an LLC) and in my personal situation, taking both business and personal tax liabilities into account, I will pay more income taxes under both the House and Senate bills, due mainly to the elimination of some of the personal exemptions.

      Sorry I can’t be of more specific help!

      Gregg

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