A “C” corporation, one that files and pays its own tax, has a maximum tax rate today of 34 percent. That makes it profitable to move jobs and investments to other countries that have lower tax rates. The proposal the House of Representatives recently sent to the Senate proposes a new flat rate for “C” corporations of 20 percent.
Also with the individual tax rate changes, individuals will be taxed at half of the regular tax rates for both dividends received from “C” corporations and capital gains on sale of corporation shares.
The current law provides for depreciation expense computations. The proposal would provide businesses with the benefit of fully and immediately writing off (expensing) the cost of investments in tangible property (equipment, buildings, etc.) and intangible assets (intellectual property). There would be no deduction for purchases of land. That would be a simplification that could give real growth in the number of jobs and the national economic activity.
Interest expense would be allowed as a deduction only to the extent of interest income. If the net result is more interest expense than interest income, it can be “carried forward” and deducted in the next year to the extent of net interest income. That seems harsh, but with the immediate deductions for business equipment, etc. it might result in more decisions for business reasons instead of decisions that are driven by tax deductions and tax benefits.
Net operating losses (NOLs) would be allowed to be carried forward indefinitely and also would be increased by an interest factor. The goal is to have the same purchasing power in future years and to compensate for inflation. No carrybacks of NOLs would be allowed and the deduction for a NOL in future years would be limited to 90 percent of that year’s net taxable income before the NOL deduction.
The many special interest deductions and tax credits would generally be eliminated. Section 199 Domestic Activity Production Deduction is complex and frustrating. By reducing the “C” corporation tax rate to 20 percent and expensing equipment etc. in year of purchase, maybe only the Research and Development tax credit would be continued.
Changes would include only taxing sales to U.S. customers with sales to foreign customers being exempt from U.S. income tax. With a switch to a “territorial” tax system, the goal is to reduce the inversions that encourage our companies to move to foreign countries just to pay less tax.
If the tax code was changed as generally proposed, the IRS would be changed also, hopefully with much better computers and communications.
Did you hear? “Don’t dwell on what went wrong. Instead, focus on what to do next. Spend your energies on moving forward toward finding the answer,” by Denis Waitley.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.