tax reform - where do you stand? (Page 2)

Wait......9% on beer and wine?  I may want to revisit the 35% bracket.

The food you grow?  
The food you purchase and prepare for a meal?
The food you purchase already prepared for a meal?  

I've not weighed in until now.  

IMO, a truly FLAT tax or a combination of truly FLAT taxes is the way to go.  It can be done for rather modest amounts compared to the fictitious rates we have today.  

Flat income tax, maybe 5% regardless of income type (personal AND business).

Flat consumption tax, maybe 5%, regardless of what you purchase (again, personal and business).  

As soon as there is one "exemption" or "threshold" the camel's nose is under the tent and we will return to where we are today as various interest groups lobby to be "in" rather than "out."  

As for mortgage interest, property taxes, charitable contributions, 401K & HSA's, are any of you old enough to remember when personal interest was an itemized deduction?  The wailing of how eliminating this deduction would destroy the economy because people wouldn't carry debt without the tax incentive?  Yup...didn't quite happen that way...

How did I miss this thread.   

my opinion:

- less tax brackets -  Personally I'm a fan of just one tax bracket so any decrease is a step in the right direction.  
- doubled standard deduction - translates to more money in taxpayer pockets so that's good. 
- more child care tax deductions - I hate all the deductions in general, but why not.  Tax deductions for all...  
- repeal AMT - yes, kind of a dumb rule anyway
- repeal estate tax - yes
- repeal Obamacare tax - no, ACA is the law and as crappy as it is you have to keep the tax in place until you replace the law. 
- 15% business rate - Yes, should be 0%, but 15% would be a huge improvement and send our economy into a huge growth period.
- overseas tax holiday to get that money back in the USA - yes

Agree, plus it gives individuals control of their tax structure.

On the AMT, it's basically an entire second tax law just for rich(er) people who are not crafty enough to dodge it.  And since it was never indexed to inflation, the threshold for "rich" encompasses more of the middle class every year.  Dumb law, poorly written, jettison it.

One thing I learned long ago is that there's the tax laws as they're presented to the masses and then there's the reality of what it actually is.  We often hear about the argument of "the top rate used to be 90%" (or whatever it was) so the rich need to pay more.  However, back in that day there were so many loopholes in the system that nobody paid anywhere near that rate and the effective tax rate was probably much lower than it is today.  

Some people have very low taxes and some have very high taxes and it's all about how their income stream comes in.  I own a business that's an S-Corp which means all bottom line profits flow through as personal income to me and my family.  I get absolutely rocked on taxes because I don't get to take advantage of most of the deductions that get phased out based on income.
Then you take somebody like Warren Buffet who makes a gazillion dollars a year and his effective tax rate is pretty much 15% because all of his earnings are on capital gains of stock he owns.
So you have a progressive tax structure in place, but it selectively hits people based on different sources of income.

The whole thing is so jacked up. 

Well, you should get some advantage by paying yourself a small "income" and taking the rest as a distribution, which is helpful in an S-Corp.  Unless they've been cracking down on that - I've been out of the running my own business phase for a few years now.

Medical and other deductions are def better as a C-Corp, though.

Pretty much the only loophole I can take advantage of is exactly what you're mentioning.  I pay myself a modest CEO salary which is full W-2 income and taxed with social security.  I then distribute the rest of my earnings out of profit which is regular income and not subject to social security.  So basically for the difference between the social security max and my paycheck I get a tax break of around 15% (both company and employee sides put together).  It nets a difference of maybe $7k bottom line on the year, which I'll certainly take but the majority of my income comes through distributions which are still taxed at full rates with most deductions phased out due to my income.
Another thing that's annoying is that "my income" is the total of my personal income "W-2" and the total net profit of the business.  However, I only take out approximately 25% of my net profit as personal earnings.  So I still have to pay personal taxes on all my corporate income which I don't even get to use personally.  It's obviously intended to capture corporate tax as well as personal income tax, but it's higher than what a C-Corp tax rate would be.  It's also lower than the total tax rate than being double taxed if I were to become a C-Corp and pay myself from it. 
Either way, I'm really looking forward to the drop in business income tax because it will free up a ton of cash at our customers.  If it drops to 15%, it may even make it worthwhile to convert to a C-Corp because the majority of our earnings stay in the company and are re-invested.

The pendulum can swing the other way for an S-Corp also.  Since your business taxes pass through to your personal ones, if you run the business at a loss for a year (for example, taking a loan so you can expand more), that makes your income artificially low that year.  Which makes it a good time to do all your normally tax-heavy stuff - such as a Roth IRA conversion, things like that.

You probably know all this already, just throwing it out there.  I'm not a tax attorney or offering any legal advice here

The loan stuff seems like it helps, but doesn't that much.  I took out a loan last year to do some expanding and the only thing I get to deduct is the interest.  So I made a hefty profit and paid the loan down, but none of that profit was deductible because it all went towards premium and little interest.

I do agree the pendulum can swing, but it's a balance.  Obviously it's not a good long term strategy to run a company at a loss, but i do try to deduct as much as I can legally do. 

I just feel that a more fair system is something that's more equitable to all versus charging higher percentages to small business owners who earn regular income versus those who own large businesses and only get dividends.  Just come up with a tax in the middle somewhere that makes sense for everyone.  It's so stinking complicated. 

As a side note, I don't really think a true flat tax will ever pass (too many special interests).  But if it did, one thing I worry about is the loss of those kinds of deductions.  What I mean is that expanding a business is a big risk.  Anytime you run at a loss, it is something you don't want to do for the long haul, as you mentioned.

Some deductions or deferrals soften that blow and allow business owners to take on a little bit more risk.  I think this helps entrepreneurship and I wouldn't want that to go away.

A little off topic, sorry - just my $.02

Not off topic.  

I agree, too many special interests will oppose losing their status.  

I'm curious about your statement "expanding a business is a big risk."  Why do you say that?  

Is it risky to build slowly, using cash flow to expand?  

Is it risky to not expand?  

There are more risks to borrowing money to expand, but then...do we want a tax code that rewards extra risk (which is what we have today)?  

It's a balance.  You want to have some level of risk taking, venture capital, etc - otherwise heavily entrenched older businesses will almost always dominate new startups.

I was in the "build slowly" camp with my business.  I have worked for other startups that were operating at a loss for several years before getting on the path to profitability.  There are pros and cons to each.

agree that it's a balance.  The risk for me is primarily hiring new employees or investing in marketing.  If I hire a $100k a year engineer I have to ensure I have enough work for them.  If I wait until I grow enough and then cash flow the engineer I have to decide how long to cashflow them.  I used 3 months as a general rule, but it was still very risky because the sales often didn't materialize and I'd end up losing money for several months before I started making it again.  It's easy to say build up 3 years of reserves or something like that, but it's very difficult to get to that point without investing in new employees which is counter to improving the bottom line in the short term.
I've been in business for 8 and a half years and every time I get a few hundred thousand in the bank I hire more people and rinse and repeat.  We grow a good 20%-30% most years, but I keep investing more and more in the business as we grow.  Obviously at some point down the road I can either sell or take the foot off the gas and reap the rewards, but in the mean time I feel at risk with every new hire I make. 

I always feel the track record is almost impossible to know because there's so many moving parts.  You can have a cut over here, but 800 other things happening over there such as a mortgage crisis or whatever that hides the benefits.

I also agree that the scoring is complete garbage.  Remember, the ACA scored revenue neutral. 
I pretty much ignore the scoring of all bills because it's so far off historically it's not even funny.  

My very simplistic view on things regarding the corporate tax cuts is how businesses react to them.  If all my customers receive an additional 15% to their bottom line as an example they have 15% they could potentially spend on new employees, new infrastructure, etc.  That money now goes from them to me (hopefully).  I then in turn send that money to either new employees or my vendors, etc.  Our tax system taxes money every time it changes hands, so if that 15% that was originally going to the government goes through me and another company and another, etc. the overall tax to the government goes up.

One thing we can all probably agree on is a hatred of lobbyists.  lol
It seems like the very big businesses (billion $ companies) rarely have a tax bill today because there are so many ways they can carry stuff over and capture losses.  I guess what I'm saying is I don't think any changes move the needle much on the billion dollar companies.  As for the individual billionaires they pay very little taxes already because their only tax is the cap gains tax of 20% (highest tax bracket).  I don't believe Cap Gains is even mentioned in this proposal so it wouldn't change the Billionaires much at all. 

Here's the framework released by the Trump Administration:

Key Provisions in the Framework

Corporate Taxes

• Corporate Rate: 20%
  • Eliminates the corporate AMT
  • Immediate, full expensing for new investments (besides structures) for five years
  • Deduction for net interest expense incurred by C corporations partially limited
  • Notes that numerous special exclusions and deductions will be repealed or restricted; however, it explicitly preserves business for research and development (R&D) and low-income housing
  • “Pass-through” rate for sole proprietorships, partnerships and S corporations: 25%

Individual Taxes

• Consolidates the current seven tax brackets into three brackets: 12%, 25% and 35%
  • repeals the estate tax and the generation-skipping transfer tax
  • doubles the standard deduction and repeals the personal exemption for dependents while increasing the Child Tax Credit
  • repeals the individual AMT
  • eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions
  • retains tax benefits that encourage work, higher education and retirement security

The part I love the most for me personally is:

• “Pass-through” rate for sole proprietorships, partnerships and S corporations: 25%

This would give me a substantial tax savings on the majority of my income which is currently taxed at my personal income bracket.