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Archive for the ‘tax reform’ Category

If you tuned in to the President’s State of the Union address last week, you surely noticed that the recently enacted Tax Cuts and Jobs Act has been earmarked as the elixir for all that ails America. Soon enough, assembly line workers and supermarket cashiers will be lighting cigars with $100 bills — all because $1.5 trillion in corporate and individual tax cuts have been placed on the ol’ national credit card.

And while that may come to pass, it is important to remember that in any tax bill, while the good news gets the headlines, there is always more to the story.

For example: there are over $4 trillion in tax cuts contained within the Act. But remember: because Republicans chose to use the streamlined budget reconciliation process to pass the bill without a single vote from a Democrat, their hands were tied from a fiscal perspective: the net tax cuts could not exceed $1.5 trillion over the next ten years.

So how did Republicans get $4 trillion in tax cuts to fit within a $1.5 trillion-sized box? By offsetting some of the cuts with tax increases.

Think about the business side of the Act: The corporate rate was reduced from 35% to 21%, a move that ALONE would amount to a $1.3 trillion tax cut over the next decade. That’s right: the tax break resulting from the corporate rate reduction, in isolation, nearly matched the total cuts permitted by the budget reconciliation process.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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Two short weeks ago, we dissected perhaps the most widely-anticipated but least-understood aspect of the Tax Cuts and Jobs Act: the new deduction available to business owners. As a reminder, under the new law, after January 1, 2018, the owner of a:

  • sole proprietorship reported directly on Schedule C
  • rental activity reported directly on Schedule E
  • S corporation, or
  • partnership…

…is entitled to take a deduction equal to 20% of the “qualified business income” earned from the business.

Qualified business income is best thought of as the ordinary, non-investment income of the business. Stated in another way, this is the revenue the business was designed to generate, less the applicable expenses. So we ignore things like interest or dividend income or capital gains from the sale of property.

The deduction, however, is limited to the LESSER OF:

  • 20% of qualified business income, or
  • 50% of the total W-2 wages paid by the business.

There is also an alternative limitation based on the owner’s allocable share of 2.5% of the unadjusted basis of certain business assets, but let’s cast that aside for today.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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When you arose from your Titos-induced slumber on the morning of January 1st, it was more than just your pants and dignity that had gone missing. While you were ringing in the New Year, the Internal Revenue Code you’d come to know and love had disappeared, replaced by the Tax Cuts and Jobs Act, the most comprehensive overhaul of the tax law in 31 years.

Fortunately for you, with enough money, both trousers and self-respect are easily recouped. An understanding of the tax law, however? That can’t be bought. As a result, you’ve got to start over, diving into the wholesale changes that took effect on New Year’s Day in hopes of regaining the same level of comfort you enjoyed with the previous version. And that’s not going to be a quick process, because as we’re quickly learning, for every straightforward tweak to the law– the doubling of the standard deduction, the elimination of personal exemptions — there is a corresponding influx of complexity that requires you to pop on the ol’ thinking cap.

In last week’s Tax Geek Tuesday, we took on perhaps the most intimidating and impactful provision of the new law: the “20% of qualified business income” deduction available to sole proprietors and owners of pass-through entities. It was a productive endeavor, but our work is far from over.

Today, we’ll move on to the next big challenge posed by the new law: understanding the changes that have been made to the way we depreciate assets purchased for use in a business.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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On December 22nd, President Trump signed into law the Tax Cuts and Jobs Act, finalizing a once-in-a-generation overhaul of the existing Code and leaving the once-burdensome tax law so simple, we’ll all be preparing our returns on postcards come the spring of 2019.

Simple. That’s rich. I’ll make a deal with you: how about we spend some time diving into just one aspect of the bill — the new deduction bestowed upon owners of sole proprietorships, S corporations, and partnerships — and then you decide for yourself just how simple this all will be?

For those of you who are familiar with the format of a “Tax Geek Tuesday,” you know what to expect. For those of you who are new to this space, what we do here is beat the heck out of a narrow area of the tax law. In great, painstaking, long-form level of detail. The hope, of course, is that we can accomplish what Congress can’t: making the law more manageable for those who need to apply it. Let’s get to it.

Entity Choice Under Current Law

If you want to operate a business, there are four main choices for doing so:

  1. C corporation
  2. Sole proprietorship
  3. S corporation partnership

Owners of a “C corporation” are subject to double taxation. When income is earned by the corporation, it is first taxed at the business level, at a top tax rate of 35% under current law. Then, when the corporation distributes the income to the shareholder, the shareholder pays tax on the dividend, at a top rate of 23.8%. Thus, from a federal tax perspective, owners of a C corporation pay a combined total rate on the income earned by the business of 50.47% (35% + (65% * 23.8%)).

Of course, you don’t have to operate as a C corporation. Instead, you can operate a business as a sole proprietorship. Or as an S corporation. Or as a partnership. And what do these three business types have in common? They all offer a single level of taxation: when income is earned at the business level, it is generally not taxed at that level; rather, the income of the business is ultimately taxed only once, at the individual level.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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Neither snow nor rain nor crippling deficits nor a monumental upset in Alabama stays these Republicans from the swift completion of passing a tax bill that few understand and even fewer seem to want.

That’s right; undeterred by nonpartisan proof from the Joint Committee of Taxation that the $1.5 trillion in proposed tax cuts will not “pay for themselves,” and unwilling to wait for Doug Jones, the new Democratic Senator from Alabama, to take his seat and possibly jeopardize their goals, the GOP continues its spirited yet shameful sprint towards the most comprehensive overhaul of the tax law in 31 years.

Let’s review: Last month, the House of Representatives went from proposing 479 pages of legislation in the form of HR 1 — the Tax Cuts and Jobs Act — to passing the bill in a mere two weeks. Not to be undone, the Senate managed to surpass the hilariously-harried pace set by its counterparts in the House, taking its version of HR 1 to a floor vote just days after the 429 pages of legislative text were made available.

The making of many things — from movies to marriages to mac and cheese — can be rushed without adverse consequences. Not so with the tax law. It’s very nature – a complex morass of provisions that interact with one another in nuanced and often unanticipated ways — requires a deliberate approach; something the Senate, in particular, refused to acknowledge. In fact, in such a hurry was the Senate to pass its bill that it asked its 100 members to vote on a piece of legislation that had been radically redesigned just hours earlier; quite famously, the “final” version of HR 1 was replete with margins full of hand-written text and multiple strikethroughs and redactions.

The results were predictably hilarious. While the bill passed by a 51-49 margin, as a result of the numerous 11th-hour negotiations, the Senate managed to make a $289 billion mistake in its drafting of the legislation; inadvertently killing off a tremendously popular incentive — the research and development credit — that it had intended to keep.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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After a dizzying few weeks, tax reform enters its final stages. At present, the House has passed its Republican-led bill, while the Senate has done the same with its GOP-led version of HR 1. Now, the two sides will come together, crafting a final piece of legislation that — once it passes the House and Senate a second time — will be signed into law by the President.

As the two chambers go to conference, you may be confused as to which bill to root for. After all, there are a lot of moving parts (many of which you can read about here). Ultimately, unless you have a rental empire, you probably won’t love either option in its entirety; instead, your allegiance will be determined at a more granular level. You’ll pick your preferences à la carte, taking item A from the House bill, item B from the Senate bill, and so on.

But one thing is clear: if you are a fan of education — whether its getting one or giving one — you will be praying for the House bill to die a quick, painful death, because the House’s version of HR 1 declares what can only be described as a war on education.

Let’s take a look at how the House appears to go out of its way to strip every imaginable tax break currently afforded to students and teachers, at every step in the educational life cycle.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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As late Friday night gave way to early Saturday morning, the Senate floor was home to quite the celebratory scene. They were all there: Mitch McConnell and Orin Hatch, Rand Paul and John McCain, Randolph and Mortimer Duke, an army of Republican leaders doling out congratulations faster than corporate lobbyists can line pockets, lauding the passing of a bill that paves the way for the largest tax cuts in 31 years.

But don’t let the smiles fool you…the GOP’s work is not done. You see, the Senate’s passage of HR 1 by a 51-49 margin last Friday did not mark the end of the process; rather, the Senate bill must now be merged together with a companion bill that was crafted by and passed in the House several weeks earlier. The two chambers will soon break bread and try to agree on a final bill, which can then be sent to the President, who will formally tweet it into law.

While the GOP’s vision of tax reform is largely uniform between the House and Senate bills, there are some significant differences that will need to be ironed out. Here are a just a few of the items that will have to be reconciled.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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