Local tax expert reveals what to expect from 2018 tax reform
It appears the Feds have settled on a final tax bill. At least for this year. All 479 pages worth. And, while nothing is chiseled in stone, the Chamber likes to stay ahead of the game, whenever possible. What better way to come up to speed on what is, likely, the most significant change to the nation’s tax laws in more than 30 years than with a highly informative session with a tax expert?
Let’s get started.
Meet Marc Goodman, tax partner with EY. With more than 19 years of experience working with public and private companies in various industries and a primary emphasis in the energy sector, Goodman is an expert on taxes that impact businesses. Small businesses, big businesses, start-up businesses. And, at a recent Chamber Forum, he shed some light on what to expect from the new tax code.
“This is something that my colleagues and I have kind of lived for the last 18 months or so, as President Trump was elected and it looked like we would likely have some sort of significant tax legislation,” Goodman said. “Tax policy is not just economic policy and it's not just political, it's kind of a combination of the two. So, it often helps to kind of think about the economic and political landscape that we're in before you kind of dig into the details of tax reform or tax policy.”
Goodman said that the national economy, while generally considered to be healthy, may start to see inflation creep up over the next couple of years. There are also projections that interest rates, having been at historically low levels the last few years, will also creep up. What do these things have to do with the tax code?
Revenues and expenditures. Oh yeah, and politics.
“Most of the areas with significant spending are the areas that are really hard to change without significant political implication,” he added. “Things like Social Security, Medicare, Defense. Non-defense discretionary spending accounts for only about 6 percent of the federal budget. So, when Congress is trying to balance the budget, they’ve got some really hard choices to make. And, in fiscal ‘17, as we all know, the federal government ran a pretty significant deficit of just around $700 billion.”
And, it didn’t stop there. The bipartisan Budget Act of 2018 about increased defense spending and then also non-discretionary, non-defense discretionary spending and the net result was a $320 billion dollar increase to the federal deficit over the ten-year budget horizon.
How will we ever pay for that? You guessed it – taxes. But the “good” news for business – if any news about taxes can be considered “good” – is that there is a real push to fundamentally reform our taxation of companies that have international operations.
“As soon as the President Trump was elected and we started hearing that tax reform was intended to be a tax simplification to make it simpler for people to file their taxes,” said Goodman. “I can tell you, having spent the last several months reading what we ended up with, by and large that was not accomplished. There are some really complicated aspects of the tax reform legislation, but there are some pockets of simplification, especially for low- and middle- income folks, there will be some simplified aspects, but for more sophisticated tax payers, higher income taxpayers and businesses, there's some real complexity to what was just passed.”
One of the areas that saw simplification for corporations, according to Goodman, is the elimination of the alternative minimum tax. “This is one area of corporate tax simplification that was a significant burden for taxpayers to keep track of. Essentially, it was a two-tax system and so for that to go away for corporations is a simplification.”
And, what about an example of the complexities? How about net operating losses.
“Historically, companies that generated tax losses can carry those losses back for two years and generate and get refunds of the tax dollars paid in those years,” Goodman explained. “Then, they could carry forward that loss for 20 years. The new rules will no longer allow carry backs to recover those tax payments in the previous two years, but it will allow an unlimited carry forward period. However, when it's being carried forward, it will no longer be allowed to offset 100 percent of taxable income. It'll only be able to offset eighty percent, so it creates kind of a minimum tax concept.”
Wait, it gets even more complex.
The pass-through deduction corporate rate was reduced significantly, down to 21 percent, which generally impacts larger businesses more than small and mid-sized businesses. That didn’t go unnoticed by your friendly lawmakers.
“The legislators got together and said ‘we can't have all of this tax reform only benefiting the biggest companies, we really need something for companies that are smaller and midsize that tend to be operated as flow-through businesses,” said Goodman.
By the way, a “flow-through business” is a business where the income flows through to owners and taxed at individual rates.
“This will end up being one of the more complex areas of the entire tax reform,” he added.
Okay, but what about individual income taxes? Aren’t we supposed to be getting a simpler, easier-to-file tax code?
Remember that revenue/expenditure thing? Turns out, 83 percent of federal tax revenue comes from the individual tax payer. Among other things, that means that small changes in the individual rates can have drastic impacts on the federal budget.
“I think that's probably why we didn't see as drastic a tax cut as we did on the corporate side,” Goodman said. “Another big one is the state and local tax deduction. Individuals will no longer be able to deduct an unlimited amount of their state and local income and property taxes.”
Okay, okay, we get it. With the new tax law, some things became more simple. Others, well, not so much. But what does it mean, Mark?
“I think in the short run the tax cuts will be beneficial to the economy. I think most of the economists agree on that. What I worry a little bit about is, I think, longer term, making sure that we stay in balance from a federal government standpoint. That that federal debt as a percentage of our GDP doesn't start to increase too much over time, which really comes down to whether the economy grows or not. By and large, I think it's going to be beneficial.”
And that, really, is what the bottom line is all about.