A New Presidential Administration Will Soon Be Upon Us. What Tax Changes Can We Expect???

    Effects on Businesses

    What do the election results mean to your business? Your taxes? There’s no one answer to that. As far as the effect on your business, with small exceptions, it should be positive. Most experts believe they’ll be a move away from regulations that have negatively impacted many businesses. But the actual impact will vary widely. The plumber working on his own faces regulation on the local, county, and town level. Federal rules probably have little, if any, effect. Some health care businesses will do much better, as evidenced by the surge in prices for drug companies. Some will do worse as many hospitals believe the demise of Obamacare will hurt their business.

    Donald J. Trump
    Donald J. Trump

    It can get far more complicated. Will home prices rise? It depends. If immigration (legal and illegal) is severely restricted, new home prices will rise because smaller contractors often use immigrant labor. Higher interest rates, which some professionals predict, would also have an effect on home prices. On the other hand, reduced regulation of banks could ease lending rules which could offset higher interest rates. And a lower tax rate would increase available income.

    From a business standpoint, the best advice is to analyze the situation, listen to any trade organizations, and don’t overreact in either direction. While it seems fairly certain Obamacare will be attacked rather quickly, many other changes could take much more time.

    Effect on Taxes

    What will happen to taxes? Some changes are fairly predictable, some aren’t. Here’s my brief rundown of the most predictable ones. These are based on President-Elect Trump’s proposals.

    Individual Tax Rates: They’re heading lower, at least the top rates. The proposed rates are 12 percent, 25% and 33%. The lowest rate would apply to the first $75,300 for those married folks filing jointly ($37,650 for single); 25% on taxable income up to $231,450 ($190,150 single). Everything above those levels would be taxed at 33%. The 3.8% tax on net investment income would be eliminated. The head-of-household filing status would be eliminated.

    NoteThe income breakpoints indicated are based on a House of Representatives proposal.

    Capital Gains: The capital gain rates might be unchanged, with the exception of eliminating the 3.8% tax on investment income. The same rates would apply to qualified dividends.

    Deductions: The standard deduction would increase to $30,000 for married filing jointly ($15,000 for single). There would be a $200,000/$100,000 cap on itemized deductions. No personal exemptions.

    Childcare: An above the line deduction for child and elder care expenses limited by a taxpayer’s income.

    Alternative Minimum Tax: Trump’s proposal would be to eliminate the tax.

    Corporate Tax Rates: The corporate rate would drop to 15% under Trump’s proposal. That may be unrealistically low. Passthrough entities would be taxed at 15%, but taxed again on distributions. Good news for businesses that retain a substantial share of their income.

    Section 179 Expensing: The limitation would increase from $500,000 to $1 million per year.

    Estate Taxes: The estate tax would be eliminated. But so could the stepped up basis on assets at death, at least on assets above the current estate tax threshold.

    Those are the highlights, the ones that affect the most taxpayers, and the ones that have the best prospect of passing.

    But the devil is in the details. Here are some points to consider.

    Congress: The Republicans do have a majority in both houses, but the Senate for one, is thin and not all members vote the party line. That means some compromise might be necessary. In addition, the Trump plan isn’t the only one. The House has its own plan. And many individual members have their own thoughts.

    Paying for the Cuts: The cuts have to be paid for in some way. Some estimates put the 10-year deficit increase at $9 trillion. There is some sleight-of-hand that can be used to ignore at least part of the problem currently, but it’ll show up quickly. That’s happened in the past. The economy will have to grow faster than it has in some time to solve the problem. If not, tax rates could creep higher after the initial cuts. That’s happened in the past. It might be avoided with significant spending cuts, but that approach has proved elusive in the past. And at some point spending cuts will be felt at the voting booth.

    Fewer People will Itemize: That’s definitely true. And for a number of taxpayers, taxes will be simpler. But having three tax rates rather than seven won’t help much. Most tax returns are prepared by professionals on computer. Few people actually use the tax tables to compute their tax liability. And for many taxpayers, itemizing isn’t the problem. It’s dealing with capital gains, education expenses, rental properties, a sole proprietorship, etc. and that will continue to cause headaches.

    State Taxes: Most states use federal taxable income as a starting basis for their tax. Many states use the same itemized deductions, some with modifications. Unless they change their approach, you still could be itemizing.

    Retirement Plans: Look for additional benefits for contributions to retirement plans.

    Other Changes: It’s more than likely that Trump’s proposals will be incorporated into a host of other changes. Where this will end up is hard to predict. Overall tax liabilities are almost sure to be lower, but deductions for individuals reduced. There could be cutbacks in certain credits and other deductions for particular industries or taxpayer benefits. Thus, some taxpayers may benefit less than others. Once more information is available, you should discuss your situation with your tax advisor.

    Timing of Changes: Clearly nothing will happen in 2016 to affect 2016 returns. Any changes will be in 2017 although the actual timing is difficult to predict. At this point many experts predict early attention to taxes, but it may be far enough along in the year that some of the changes will not be retroactive to the beginning of 2017.

    Tax Planning: The safe bet now is to defer income into 2017 and take deductions this year. For a more detailed discussion of tax planning and to see how any upcoming tax changes will affect you, contact Solid Tax Solutions (SolidTaxSolutions.com). We can be reached, all year-long, at (845) 344-1040.

    ___________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

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    You and Your Spouse Own a Business Together. What are the Tax Issues?

    Ahhhhh……….The Husband and Wife owned business.

    Love, love, love……….

    A man and a women holding hands.

    No one knows for sure how many businesses in the U.S. are co-owned by spouses.

    A professor from Oklahoma State University estimated in 2000 that there were 3 million such businesses, so the number today likely is much higher.

    Some giant corporations — Fiji Water, Forever 21, Panda Express, and Houzz — were founded by husband-wife teams.

    There are many personal issues that couples face when co-owning a business.

    Here are some of the tax issues that spouses co-owning a business should think about.

    Tax Filing for Spousalpreneurs

    A couple who co-owns and operates a business that is unincorporated and shares in the profits and losses are in a partnership, whether or not they have a formal partnership agreement. Usually they must file a partnership tax return, Form 1065, as well as report the income, losses, etc. on their personal return. However, they can elect to file Schedule Cs along with their Form 1040 instead of Form 1065, saving them from the complexities of the partnership return. To make this election:

    • Both spouses must materially participate in the business, which essentially means working on a day-to-day basis. (Material participation tests can be found at the IRS.) Neither spouse can be merely an investor.
    • Each spouse must file a Schedule C to report his or her share of income, gain, loss, deduction, and credit attributive to the respective interests in the business. If they split things equally, then both Schedule Cs will look the same.
    • Each spouse must file a Schedule SE to pay self-employment tax on his/her share of the net income from the business. This is the same action that would occur if the couple had filed a partnership return.

    Divorce

    It’s not uncommon for spouses who co-own a business to get divorced. What happens in the property settlement? Some spouses continue to co-own the business after divorce. Others may transfer interests to the other so that only one spouse owns and runs the business after the couple splits up.  How the business interests are addressed all depends on the couples involved.

    From a tax perspective, the transfer of property incident to divorce is tax free. This means the transferring spouse does not recognize any gain or loss on the transfer to the other spouse. The spouse who now owns the business steps into the shoes of the other spouse when it comes to tax basis, so that if the business is later sold, the recipient-spouse recognizes the gain on any appreciation the transferor-spouse had but did not recognize at the time of the property settlement.

    If spouses try to co-own and run a business after the divorce but it doesn’t work out, they can still part ways tax free. That’s what happened recently to one couple who had co-owned three dance-related businesses. After 17 months following the divorce, one party bought out the other for $1.6 million, and the Tax Court said this wasn’t a sale but rather part of the property settlement.

    Innocent Spouse Relief

    Spouses who co-own businesses typically file joint tax returns. These tax returns include the couple’s business income. By filing jointly, each spouse is jointly and severally liable for the tax due on the return, plus any interest and penalties. Can an owner obtain innocent spouse relief for the actions of the other spouse? Seems so.

    In another recent case, one spouse was the sole owner of the business; the other handled the books and all other back-office operations. This spouse routinely had the tax return prepared and, after obtaining the other’s signature, filed it. The problem: She didn’t file it one year and he was assessed interest and penalties (she had died by this time). While he owed the tax, the Tax Court gave him innocent spouse relief for the interest and penalties.

    Bottom Line

    Spouses who co-own businesses should have very good lawyers and tax professionals so that each spouse’s interests are protected.

    Solid Tax Solutions (SolidTaxSolutions.com) is skilled in such matters and can be reached year-round at: (845) 344-1040.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).