Businesses have wrapped up their tax season already, but come next year, they could be paying completely different rates than they did in 2017. Congress has pursued tax reform since the Republicans gained the majority. The president campaigned aggressively on the issue.
Needless to say, it’s a time of uncertainty for individuals and corporations. Radical tax reform became next to impossible with the failure to repeal the Affordable Care Act.
The House of Representatives and the president each had a plan for tax reform before that blow to their combined legislative agendas; American taxpayers are unsure at this point what tax plan, exactly, their government will try to implement.
Whatever incarnation it passes in, if it passes at all, would drastically alter the business tax structure. Here’s how it could affect your business.
Both the House and the president want massive business tax cuts
The president’s plan is the most radical. It would cut the top corporate tax rate from 35 percent to 15 percent. Non-corporate businesses — sole proprietors, partnerships and the like — could also pay that rate.
Congress, on the other hand, wants to cut the corporate tax rate to 20 percent. It would also institute what’s called the border adjustment tax, or BAT, which is convoluted and controversial.
Border adjustment tax
House Speaker Paul Ryan, R-Wis., is proposing a flat 20 percent tax on all goods and services imported into the United States. U.S. exports wouldn’t be taxed at all. The current U.S. corporate tax rate of 35 percent is one of the highest in the world, incentivizing multi-national corporations to report profits — and pay taxes — in countries with lower corporate tax rates.
As the University of California professor Alan Auerbach told NPR:
“Where does a company like Apple earn the money that it makes on an iPhone? Does it earn it in Silicon Valley? Does it earn it in China? Does it earn it in Ireland, where it has some of its intellectual property? It’s really hard to know.”
Ireland is a prime example. Amazon, Apple, eBay, Facebook, Google, IBM, PayPal, Twitter and many other companies have headquarters on the island, enabling them to pay its low 12.5 percent corporate tax rate.
Ryan intends for the BAT to close that loophole. Experts and members of the business community are divided over it — will it encourage companies to keep jobs and operations in the United States, or will the soaring costs of imported goods be passed on to consumers?
Probably both. Companies such as Boeing, GE and Pfizer rely heavily on exports and could benefit enormously because they’d be exempt from taxes on any goods they sent out.
Any of the thousands of American retailers that sell imported goods, however, would have to pay that 20 percent BAT to bring them in, a cost that consumers surely would incur, too. Needless to say, companies from AutoZone to Wal-Mart to Best Buy are opposed to the BAT.
Significantly, according to numerous reports, the BAT is also deeply unpopular in the White House.
How does Trump’s proposal differ from the House’s?
The president’s plan has a similar stated end as the Congressional one — boosting domestic industry and manufacturing — with different means. Besides cutting the corporate tax rate from 35 percent to 15 percent, U.S. manufacturers would have the ability to completely expense new investments in plants and equipment.
The president’s plan would also eliminate the alternative minimum tax and most tax credits besides the research credit. U.S. taxpayers with foreign subsidiaries would have to pay a one-time, 10 percent repatriation tax on foreign earnings from them.
How likely is tax reform to pass?
That’s the multi-trillion-dollar question. Republican hopes of earth-shaking reform likely died with their health-care bill. The Democrats have refused to consider changes to the tax code, so any alterations the Republicans want to make have to be by simple majority vote.
But to change the tax code by simple majority, any changes must be “revenue neutral” — they can’t add to the deficit, and any lost revenue must be offset by spending cuts. That’s tricky, because the Ryan tax plan would lose $240 billion a year in tax revenue as it stands.
And it would lose that $240 billion annually even with the added revenue from the BAT. Remove it, and the plan becomes more of a nonstarter. That’s a problem, because it’s as unpopular with parts of Congress as it is in the White House; Sen. Lindsey Graham, R-S.C., said that the BAT wouldn’t get 10 votes in the Senate.
In order to pass their tax reform, Congress and the White House must resolve not only these policy differences, but the personal rivalries and palace intrigue that have dominated behind-the-scenes reports of the nascent administration.
Any resolution likely will not come soon. The last massive overhaul of American tax code, the Tax Reform Act of 1986, took years to write and 10 months to debate after its introduction to Congress.
So if you want concrete answers as to how and when your business’s taxes will change, your guess is as good as ours, and the rest of the experts out there — who knows?