When clients ask if the Tax Cuts and Jobs Act (TCJA) means tax simplification, I remind them of the three fundamental paradigms of taxation: only two things are certain in life – death and taxes; the correct answer to every tax question is “it depends”; and there is no such thing as tax simplification. This holds true in the new tax landscape, the tax reform will not result in simplification of tax law. The new law has brought meaningful changes to the tax code, but with that comes the following added complexities.
New York State’s decoupling from certain aspects of the TCJA increased uncertainty and confusion surrounding the tax reform. Taxpayers need to learn the new federal rules, and also figure out how each state, including New York, has responded to each change. For example, many individual taxpayers will likely miss the New York itemized deduction since it is no longer simply based on federal amounts. While New York is pretty quick to react to federal changes, many other states are a lot slower and have not issued comprehensive responses to the tax reform.
The TCJA includes tax rules for global low-taxed intangible income (GILTI) and a base erosion and anti-abuse tax (BEAT). For taxpayers who report U.S. taxes on international operations, this means a lot more complexity and compliance costs as well as higher tax bills. These provisions were designed with the U.S. multinationals like Apple and Google in mind, but have roped in many unsuspecting individuals – only without some of the significant tax advantages available for C-corporations. Many individuals will be caught off guard by the additional compliance burdens and tax bills, meaning that proper and proactive planning is more crucial than ever.
On the topic of C-corporations, the new tax landscape dictates that the corporate tax rate is now 21%. When it comes to the corporate tax rate changes, business owners are faced with the decision to convert to a C-corporation. When making this decision, it’s important to remember that there is no “one size fits all” answer and there are multiple variables to account for, including the conversion (is it possible to structure it as a tax-free transaction?), operations (projected tax liability as a flow-through vs. as a C-corporation), expansion (new capital infusions), and eventual exit (sale to a buyer or passing down the business to the next generation). We have generally found that clients prefer to stay as a flow-through entity due to the eventual double taxation of C-corporations, the new 20% deduction for flow-through business income, and the political uncertainty about the longevity of the tax reform. Certainly, we have not seen the stampede to convert to C-corporations that some commentators have predicted.
Please see the full article here as seen in Crain’s 2019 Tax Guide, January 28, 2019 issue.