With campaign season in full swing, contractors would be wise to pay attention to an oft-debated issue: corporate tax reform. Contractors and other businesses should be prepared for changes to the tax code and determine what impact the changes will have based on their business’s tax structure. Depending on what changes are actually made, the previous benefits of operating as a pass-through entity (LLC’s, partnerships, S-Corps) may be mitigated.
Although tax reform has been debated before, many believe there is additional motivation to reform the tax code due to the Nation’s growing deficit as well as the anticipated expiration of the 2001 and 2003 tax cuts (Bush tax cuts). In short, the expiration of the Bush tax cuts will raise the top individual tax bracket from 35% to 39.6% (to match the 2000 tax brackets).
In addition, corporate tax (C-Corporation) reform made a big push forward with “The President’s Framework for Business Tax Reform” (the Framework), a February 2012 report by The White House and the Department of Treasury.
Although short on specific language, the proposal calls for the reduction in C-Corp tax rates from 35% to 28%. To make up for the drop in rates, the Framework seeks to eliminate certain deductions and credits currently available to businesses. These deductions and credits enable businesses to reduce their effective tax rates.
Because the C-Corp rate is now lower than the highest individual rate, it may be more advantageous for businesses to be organized as corporations (and pay corporate taxes) than operate as pass-through entities, where individual owners could be taxed as high as 39.6% on corporate earnings. Moreover, the Framework’s main theme of leveling the playing field for C-Corps and pass-through entities suggests future regulations or limitations for businesses that seek pass-through structures.
In conclusion, contractors and business owners should identify what advantages their businesses’ tax structure currently provides and determine whether or not those advantages will still be around depending on who will be living in the White House in 2013.
For more information on our real estate and construction accounting firm, contact John DiGeronimo, CPA by leaving a message below or by calling 440-449-6800.