Matter & Substance
  February 10, 2014

Corporate Tax Rate Reduction?

There seems to be quite a bit of momentum behind the reduction in corporate tax rates. This is one thing both the White House and Congress seem to agree on. This may happen in 2014 even though big changes in the tax law do not always occur in an election year.

The consensus is that a reduction in corporate tax rates from 35% to 26% will make the U.S. more competitive in the world market. It also may give multi-national companies holding funds off shore an incentive to bring the funds back to the U.S. where they will be subject to tax.

The question is what will be offset because the White House and Congress want to make the change "revenue neutral." It appears the offsets may be an elimination of certain benefits such as the expanded Section 179 deduction (was $500,000 in 2013 and is $25,000 in 2014 already), bonus depreciation (was 50% in 2013 and zero in 2014), deductions related to domestic production activities and the credit for increasing research activities. All of these tax benefits could be eliminated as part of the negotiations.

One item of uncertainty is the effect on flow-through entities. Many companies are organized as LLCs or S Corporations as there has not been a significant difference between corporate and individual tax rates and there are significant benefits to being a flow-through entity when the business is sold. If corporate tax rates are reduced, one has to give consideration to being taxed as a C Corporation as the annual costs will be less and the business may not be sold for many years. This decision will require analysis on a case-by-case basis. The whole problem could be solved if the proposed law change provided for a maximum tax rate of 26% on income from a trade or business which is reported on an individual's tax return.

We will be watching these developments very closely.