We certainly could use it. According to the IRS, Americans spend a total of 6.6 billion hours a year filling out tax forms.2
While simplifying taxes is a good thing, the new legislation may have oversold that concept. That’s because a lot of time and money usually is spent on figuring out ways to take advantage of new tax laws, and this situation likely will be no different. Analysts expect many individuals and businesses to restructure their income streams to create more tax shelter opportunities.3
It’s important to follow the letter of the law when it comes to tax filing. We recommend you work with an experienced tax advisor to ensure you comply with the new law and benefit from any changes. If you could use a referral, please give us a call; we may be able to recommend tax professionals from our network. The new tax legislation lowered the maximum corporate tax rate to 21 percent from the current 35 percent. It’s interesting to note that the majority of American businesses won’t be able to take advantage of that lower rate. That’s because most are already set up as pass-through entities (such as sole proprietorships, partnerships and S-corporations), which means the owner’s income is taxed at his or her ordinary income tax rate. But these business owners may deduct up to 20 percent of income, with limits. However, this deduction expires after 2025.4
Unfortunately, there likely will be some negatives that accompany reduced corporate taxes, such as lower tax revenues at the state level, which could mean budget cuts. Another concern is that Congress will cut federal programs next, which states currently depend on for about a third of their revenues. If federal agencies are forced to reduce headcount, for example, Maryland could be especially hard hit since so many federal employees live and work there.5
As a result, officials in some states are urging their legislatures to raise the state corporate tax rate to help offset expected federal spending cuts. In Florida, one official has proposed a rate increase and suggests the extra funds be allocated to raise teachers’ salaries, fund early childhood education programs and invest in vocational training.6
In California, two lawmakers are recommending a 10 percent surcharge on companies with net earnings of more than $1 million.7
Interestingly, because state utilities are regulated by the government, windfalls resulting from lower taxes may be required to be passed on to consumers — good news for utility customers.8
1Barnini Chakraborty. Fox News. Dec. 18, 2017. “GOP tax bill: Can you really file your taxes on a postcard?” Feb. 7, 2018. 2The Tax Foundation. “Business Tax Compliance and Complexity.” Accessed Jan. 23, 2018. 3Adam Looney. Brookings. Dec. 14, 2017. “How the new tax bill encourages tax avoidance.” Accessed Jan. 23, 2018. 4Zoë Henry. Inc. Dec. 20, 2017. “The Tax Bill Is Final. Here’s What U.S. Businesses Need to Know.” Accessed Feb. 7, 2018. 5Lydia DePillis. CNN Money. Jan. 8, 2018. “How the federal tax overhaul could reshape state budgets.” Accessed Feb. 23, 2018. 6WUSF News. Jan. 22, 2018. “Gillum Proposes Corporate Tax Increase." Accessed Feb. 7, 2018. 7Edmund DeMarche. Fox News. Jan. 21, 2018. “California Democrats want some businesses to fork over half tax-cut savings to state.” Accessed Feb.7, 2018. 8Tracy Samilton. Michigan Radio. Jan. 23, 2018. “Residential utility bills could go down 3% thanks to corporate tax cut.” Accessed Jan. 23, 2018.
The tax overhaul legislation that was passed in December has been billed as a means to streamline tax filings at both the individual and corporate level.