President-elect Donald Trump has promised sweeping tax changes. The Republicans control Congress and also want to implement tax changes. Therefore, there is a high probability that we will see tax law changes in the next couple of years. Business owners have the choice of playing offense or defense given the Trump tax plan. This post will describe some tactics that can be used to play offense when it comes to tax planning. Before we get into the details, here is a little background on the Trump tax plan.
Trump’s tax plan
Mr. Trump has proposed making the business tax code more competitive. One of the biggest changes would include lowering the corporate tax rate from 35% to 15% and cap the rate at 15% for passthrough entities like LLCs. The plan would also eliminate the business AMT (Alternative Minimum Tax). In exchange for the lower rates, the Trump tax plan would eliminate most tax credits and deductions to simplify the process. This offers opportunities for tax planning.
A lot of talk in recent years has been about corporations stashing money overseas to avoid taxes. Several proposals have been discussed in recent years to allow corporations to repatriate foreign earnings. However, the Obama administration opposed such measures. Mr. Trump’s tax plan proposes a one-time 10% repatriation fee imposed on all overseas cash, whether corporations bring the money back to the U.S. or leave it overseas. In the future, foreign earnings will also be taxed, however, the foreign tax credits will remain available to avoid double taxation. For all the proposed changes, you can visit Mr. Trump’s site.
Tax planning for businesses
- Defer income – since it’s likely that rates will be lower in future years, it makes sense to recognize as little income as possible this year. To defer income, you could max out 401k plan contributions (up to $59,000 per person), consider a cash balance plan, max out HSA contributions, don’t sell investments, firms with cash basis accounting may consider invoicing clients in January (make sure you can do this from a cash flow perspective), etc.
- Increase deductions/expenses – office supplies, year-end bonuses, contribute to employee 401k plan accounts, pay off accounts payable, do a year-end marketing campaign, pre-pay general business expenses like property and casualty insurance, etc.
- Wait to purchase capital equipment – under Trump’s tax plan, you may be able to expense assets that are currently depreciated. This would have a larger, immediate impact in future years.
If your CPA or accountant hasn’t contacted you to discuss how proposed tax changes may impact you, and what tax planning you should do, then we invite you to schedule a free consultation to discuss if our proactive approach would benefit you.