Taxcut premium and business 2017
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Their income is categorized as “carried interest,” and taxed at the capital gains rate, producing a lower effective rate than other businesses. Hedge funds – the guardians of finance capitalism – saw no changes with the new tax law. As I warned, when politicians put “small business” and “wealthy individual” in a two-sentence paragraph, gird your loins and prepare for the worst. Consequently, small businesses have just been handed a tax-compliance nightmare as the IRS interprets who qualifies. Remember the 20% deduction for “qualified” pass-through businesses? In my Oct 1 column, I warned about this language in the proposed tax bill: “The committees will prevent the recharacterization of personal income into business income by wealthy individuals to avoid the top personal tax rate.” Here’s what I warned about: inexplicably, millions of small business owners, like attorneys, accountants, and consultants – won’t qualify for the 20% deduction. Can you say, stepchild? But it gets worse.Ģ. And yet, corporate America got a 40% effective rate reduction in the form of a permanent tax cut, while “qualified” small businesses got about a 9% effective rate reduction – and even those crumbs expire after 2025. Remember what small businesses do with tax cuts, and that they create half of the economy and jobs? If Congress wanted to make sure tax cuts would drive the economy and grow jobs, they would at least treat small businesses the same as big ones. You don’t get points for giving someone something you know they can’t use.ġ.
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This change is like graciously offering to share your ice cream with someone you know is lactose intolerant. Even though Section 179 direct expensing was doubled (see The Good, 8), most small businesses don’t put hundreds of thousands into capital acquisitions in a year. The original purpose for this tax scourge has been gone for at least 30 years.
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Unlike corporations, the alternative minimum tax for individuals was not repealed. economy? Since those firms are doing 60% of their business outside the U.S., won’t the cuts also encourage more overseas investment? These cuts should have come with re-investment strings! We’ll know how this turns out in about a year.ģ. What makes us think American multi-nationals will invest tax cuts on repatriated foreign profits in the U.S. This bill creates as many, if not more, complications than it remedies (see The Ugly, 2, below), and as we now know, it’s only permanent for some.Ģ. The definition of reform is to “make changes in order to improve.” Implicit in that definition is that changes are permanent. At least they were honest enough to not use that word in the title. The Obamacare individual mandate is abolished – forever. So the effective tax rate for individuals will go down, even if changes in other deductions impact taxable income. Individuals still have seven tax brackets in the new law, but each one is lower than before. Section 179 direct expensing of capital assets for small businesses rises from $500,000 to $1million. The deduction will be applied before the income lands on the owner’s individual return and taxed at the individual rate. Small businesses (the pass-throughs), like Sub S Corps, LLCs, sole proprietors, and partnerships – millions of small firms – will get a 20% deduction on “qualified” business income. And while most aren’t small like you think of a small business, they’re very important.ħ. The corporate tax cuts will accrue to thousands of small businesses formed as C Corps. The alternative minimum tax for corporations is repealed – permanently. There are several $trillion of off-shore earnings (this is different $trillions than mentioned earlier) that can be repatriated at huge tax discounts. American multi-national corporations received more sugar in a permanent “territorial” tax rate reduction for profits made abroad. Santa replaced their top tax rate of 35%, with a permanent, flat rate of 21%, making our big firms more competitive globally. Corporate America – the C Corps – must’ve been very good in 2017.
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At the macro level – a rising tide floats all boats – the new tax law will be good for America.ģ. The Congressional GOP finally got out of its own way and accomplished something.Ģ. Now for the TCJA analysis, which I’ve segmented into the ever-handy, “Good, Bad and Ugly” approach.ġ.