How Proposed Senate Tax Bill Could Affect Installing Security Contractors

Republican leaders are still trying to secure the votes they need to pass the tax overhaul, but here is a look at what is being considered.

If you watched the news this week there has been a lot of talk about the Senate version of the tax bill wedged in between the latest tweets, sex scandals and royal engagements. President Trump has challenged Congress to come up with a bill before the holiday recess and chances are good that they will come up with something.

On Tuesday, the Senate budget committee has approved the bill on a party line vote.

Most of the news coverage has been about the effects on individuals, and not much coverage has been devoted to the effects on small businesses. The only comments that I am seeing in consumer media are about how “corporations” will benefit.

First, let me point out that corporations don’t benefit or lose from tax laws.  Corporations are owned by shareholders and it is the shareholders who benefit or lose.  Most individuals are corporate shareholders, either through direct ownership of stock or mutual funds, or through participation in retirement or pension funds that hold stock.  When corporations benefit, we all benefit.

Key Items in the Senate Tax Bill

While the Senate bill preserves the estate tax, it lessens its effects on the owners of small businesses. Unlike the House GOP bill, Senate republicans have not proposed repealing the estate tax, but they are proposing to double the exemption levels — which are currently set at $5.49 million for individuals, and $10.98 million for married couples. While even at today’s levels, only 0.2% of all estates ever end up being subject to the estate tax, doubling the exemption limits may exempt substantially all small businesses.

Not planning on dying next year?  That’s fine, but remember that estate tax reductions are not popular and, if Congress swings back to Democratic control, this break may be the first on the chopping block.  Plan on staying alive, but protect your heirs, and your business, by forming a trust and transferring ownership while the floor is higher.

The Senate also proposes to cut the corporate rate (on C Corporations) … in a year: Like the House bill, the Senate bill would cut the top corporate tax rate to 20% from 35% today. But the 20% rate would not take effect until 2019 under the Senate proposal. The delay would reduce the cost of the measure in the first 10 years.

Senate Republicans want to make it possible for businesses to immediately and fully expense new equipment (Section 179 deduction), for at least five years, similar to a provision in the House bill.

Lower Taxes on Pass-Through Business Income

Subchapter S corporations, partnerships and most small LLCs are set up as pass-throughs. This means that their profits are passed through to the owners, shareholders and partners who pay tax on them on their personal returns under ordinary income tax rates. The House bill simply dropped the top income tax rate on pass-through income to 25% from 39.6%, while prohibiting anyone providing professional services (e.g., lawyers and accountants) from taking advantage of the lower pass-through rate. The Senate bill would let most pass-throughs deduct 17.4% of their income. The 17.4% deduction would be prohibited for anyone in a service business — except those with taxable incomes under $500,000 if married ($250,000 if single).

The Senate bill also has measures to prevent abuse of pass-through tax break. If the owner or partner in a pass-through also draws a salary from the business that money would be subject to ordinary income tax rates. This has been a hot enforcement topic for the Internal Revenue Service. Many small business owners take little or no salary and simply report all of the corporate income as pass through income on their personal tax returns. This has the effect of enabling them to avoid paying FICA and Medicare tax on their income.

To prevent owners from recharacterizing their wage income as business profits to get the benefit of the pass-through deduction, the Senate bill would automatically limit the deduction to half of the W-2 wages of the pass-through entity or its share to the individual taxpayer. The W-2 rule would not apply, however, if the filer’s taxable income is under $500,000 if married, $250,000 if single.

Note to security and integration business owners: This wouldn’t give you a green light to avoid taking a salary. You will still be required to take a “reasonable” salary. It just creates a break for sheltering excess profits.

Keep in mind that crafting this bill is a dynamic process. In the 24 hours between my fingers touching the keyboard to write this article and it being posted on, everything could change.

Stay tuned and stay hopeful.

Mitch Reitman,  a SSI Hall of Fame inductee, is the Managing Principal at Reitman Consulting Group.  He can be reached at (817) 698-9999.

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