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Sunday, 05 November 2017 19:59

Federal tax reform creates winners and losers

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The reform proposal rolled out by Republicans in Congress to rewrite the U.S. tax code creates the proverbial winners and losers, sources say.

Corporations could benefit from a proposed lower flat tax rate and a one-time ability to repatriate cash back into the U.S. from foreign earnings. Many small businesses could benefit as well, although one trade association in Washington, D.C. offered early opposition to the proposal because it “leaves too many small businesses behind.”

“We believe that tax reform should provide substantial relief to all small businesses, so they can reinvest their money, grow, and create jobs,” National Federation of Independent Business President and CEO Juanita Duggan said in a statement Thursday after the tax reform proposal was released.

The proposal includes a new 25-percent tax rate for small business owners, sole proprietors and partnerships — or so-called “pass-through entities” — who report their business income on their personal tax returns.

The proposal could reduce the federal tax burden for small business organized as S-corps, sole proprietorships or partnerships, depending on their income level, said Phil Mitchell, president of accounting firm Kroon & Mitchell Certified Public Accountants LLC in Grand Rapids. However, the proposal has a provision that would exclude professional service providers with higher incomes — doctors, lawyers, financial professionals — which drew the objections of the NFIB.

That opposition illustrates the difficulty in rewriting a complex U.S. tax code that offers a vast array of deductions, and “everyone has their own vested interests” that will oppose its elimination, Mitchell said.

“There’s going to be winners and losers of who’s negatively impacted and who’s positively impacted,” Mitchell said. “Everyone’s got their own little horse in the race. That’s the challenge.”

Under the proposal, the corporate tax rate in the U.S. would drop from 35 percent to a flat rate of 20 percent, and businesses would get the ability to immediately write-off investments in new equipment.

Advocates of the lower corporate tax rate say it’s needed to make the U.S. more competitive globally with other countries and halt the movement of American companies overseas, such as when Perrigo Co. in Allegan re-domiciled to Ireland three years ago after an acquisition.

Business Leaders for Michigan, a coalition of corporate CEOs and university presidents in the state, applauded the proposal.

“While we still need to review the details of the bill, this is an important step and we look forward to working with members of Congress and the Administration to enact meaningful tax reform this year,” said Doug DeVos, president of Ada-based Amway Corp. and chairman of Business Leaders for Michigan’s federal issues committee.

Backers of corporate tax reform also say it will boost the U.S. economy by spurring higher investments by corporations with lower tax burdens.

During an interview last week in Grand Rapids, the chief executive of the Cincinnati, Ohio-based Fifth Third Bancorp, the market leader in West Michigan, called business and personal tax reform “very positive from a growth perspective” for the U.S. economy.

“If they can get tax reform done, that’s a positive for growth next year,” Fifth Third President and CEO Greg Carmichael said in an interview with MiBiz the day before House GOP leaders released their tax proposal. “A tax cut on the corporate side and a tax cut for the middle class will be welcomed and create additional economic growth because you’re going to see increases in spending. You’re going to see corporations be in a better position to return their cost of capital.”

One of the “biggest” aspects of the proposal that Mitchell cites comes in the form of what Congress should not do: Make any changes 401(k) retirement plans.

“That impacts a lot of small business owners because they use that as a tool to defer or lower or manage their taxable income. So that was pretty significant,” he said.

For individuals, the tax proposal reduces from seven to four the number of tax brackets, with a low of 12 percent and high of 39.6 percent, raises standard deductions and child tax credits, caps write-offs for property taxes at $10,000, and maintains mortgage deductions for only existing mortgages and new mortgages of less than $500,000.

The proposed changes in the mortgage deduction and property tax write-off led to the National Association of Realtors to oppose the reform proposal as “a tax increase on middle-class homeowners.”

Meanwhile, National Association of Manufacturers President and CEO Jay Timmons called the overall proposal a “grand slam for hardworking manufacturers and the U.S. economy.”

“The proposal is a guaranteed path to surge investment, jobs and economic growth that will lead to better lives for every American,” Timmons said in a statement. “This plan is the real and meaningful reform that they are looking for, and the change they voted for almost one year ago.”

 

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Mark Sanchez

Senior Writer

msanchez@mibiz.com

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