Tax Law Could Get Complicated for Businesses

BY STEVE DINNEN

If there is an upside to the massive 2017 tax bill, it lies in the fact that its full impact doesn’t take hold until Dec. 31. So we still have some time to figure it out, which is not a joke because some questions, especially with businesses, remain.

Take compensation, for instance. “This promises to be an area of contention and uncertainty,” said Joe Kristan, a partner in CPA and business advisory firm Eide Bailly.

With an S corporation, Kristan has been telling audiences in Des Moines that defining reasonable compensation has been the subject of IRA audit attention, as taxpayers are inclined to minimize W-2 income to trim their payroll taxes. This raises the possibility of an unwanted exam.

With partnerships, reasonable compensation through guaranteed payments—often found with medical practices—there is, Kristan said, “almost no precedent or guidance.” And will the IRS attempt to impose reasonable compensation on Schedule C (sole proprietorship) and Schedule F (farm owner) filers?

Speaking of S corps, Kristan wondered whether business owners might want to consider the C corp. It has generally been thought that for smaller firms an S corp works well because the income flows through to the owner’s personal tax return and the rate he or she qualifies for. C corps, on the other hand, pay taxes on their profits, and then any profits that flow through to owners are taxed at dividend rates.

The top tax rate for an individual is now 37 percent (adjusted gross income of more than $600,000). That’s a slight decline from the past. A C corp’s rate has been permanently slashed from 35 percent to 21 percent, giving a considerable boost to such entities’ profit picture.

Before you get all excited about a C corp, bear in mind that they now face a 20 percent levy on “excess accumulated taxable income.” That and other perambulations of the new tax code may mean they’re not a slam dunk. And once an S corp or C corp is formed it can be very tough to switch just to grab perceived tax advantages.

Now, how about some personal tax changes:

  • Kiddie Tax simplified. This applies to unearned income on children up to age 24. “Kiddies” are taxed at single taxpayer rates, but unearned income is taxed using the estate and trust rate tax, without a single standard deduction. This means a bigger exemption for earned income, but potentially higher taxes on other income
  • For 2017, the alternative minimum tax is almost unavoidable for adjusted gross incomes from about $275,000 through $525,000. 

Starting in 2018, the higher phase-out levels will make AMT unlikely for Iowa taxpayers without significant capital gains, tax credits or some relatively unusual items.

This stuff is complicated. Don’t wait until year-end to start talking with your tax adviser.

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