President Trump and Congress passed a major overhaul to the tax code as a Christmas gift to businesses and taxpayers. While the changes are mostly good for businesses, it is clear that big business got the best gifts. The good news is that most tax payers will see some reductions, and this will likely put more money in the hands of consumers. So, don’t be surprised if pallet demand in 2018 is even better than 2017, which ended on an upward swing.
When it comes to tax reform, the first step is to talk with your tax policy consultant or accountant to determine exactly how the reforms will impact your business and its regular practices. On a very basic level, you will have to change the amount that you withhold from employees, and the Internal Revenue Service (IRS) recently announced new guidance on withholding policies. Check out the details at https://www.irs.gov/pub/irs-pdf/n1036.pdf.
The biggest change in the law is the adjustment to the corporate tax rates to make the United States more competitive compared to other major developed nations. The tax rate for C corporations has been reduced from a top rate of 35% to a flat rate of 21%. Unlike in the past, reforms will allow for cash-based accounting for companies that meet a $25 million gross receipts test. The deal is not quite as good for companies with pass-through income. The net income of pass-through entities, such as partnerships, S corporations, limited liability companies (LLCs) and sole proprietorships, is taxed at individual rates. Reforms create a 20% deduction on qualified business income with a few restrictions. Most notably the deduction can’t be claimed by taxpayers in service businesses (excluding architecture and engineering) for single filers with taxable income above $157,500 and $315,000 for joint filers. Unlike the new tax rates for C corporations, which are permanent, the pass-through deductions expire at the end of 2025.
Section 179 deductions used for qualified business property and equipment doubles the maximum allowance to $1 million. In addition, the reform has expanded the deduction to include “used” property and increases the bonus depreciation from 50% to 100% for five years and then gradually phases out the deduction over the next five years. These changes may spur business investment in the short-term. And if you are looking to upgrade that plant or buy a new machine, now is the time.
Not all the news was good news. Reforms repeal the Section 199 deduction for qualified domestic production activities, deductions for business-related entertainment expenses, deduction for transport fringe benefits. Business owners living in high-tax states (California, New York, New Jersey, etc.) that itemize deductions may benefit less due to the new caps on state and local taxes and mortgage interest. These new policies help people in low-tax states and hurt those in traditionally blue states.
And when it comes to health care, the law repeals the individual mandate. This move could drive up insurance costs for companies that offer coverage. It remains to be seen the full impact because the tax penalties had not really gone up to levels that would have pushed many young, healthy workers into buying coverage. Over the long run though, ending the individual mandate likely means this group will remain uncovered until they have a health event. And that is not the kind of new participant you want if you are hoping to keep costs down.
Due to a number of tax reforms that favor corporations, Mihir Desai, a professor of finance at Harvard Business School, recently predicted, “Many individuals will lower their tax burdens by setting themselves up as corporations.” Desai added, “The big three effects we are going to see is real businesses becoming partnerships; we’re going to see some individuals try to become corporations; and then finally, we’re going to see some individuals who used to be employees basically want to become contractors so that they can take advantage of the pass-through deductions.”
Every company is impacted differently by the reforms. You need to evaluate your position. The world’s largest pallet rental pool is getting a cut. CHEP recently reported that it will see noticeable savings over the next year in its U.S. tax bill. What will be the impact of the Trump tax cut on your business?
