New tax plan could dramatically affect Iowa businesses

Laura Wasson, Iowa Taxation Law, Dickinson Law Firm, Des Moines Iowa

Posted on 04/27/2017 at 07:14 AM by Laura Wasson

The Trump Administration unveiled its tax plan on Wednesday, April 26th. In a move consistent with the Administration’s goal to stimulate the economy, the tax plan includes a provision slashing the business tax rate to 15%. Here’s what Iowa business should know:

How much of a reduction could business owners realize? It depends on how your business is structured. For corporate owners, you could see your federal tax rate drop 20%. For pass-through entities – like S corporations, limited liability companies and partnerships – your business could see a 24.6% decrease in your federal tax rate.

Does the size of my business matter? No – though the Administration’s proposed tax plan is vague and meant to be construed as a set of “principles” rather than codified law, the initial plan does not distinguish between “mom and pop shops” and corporate giants.

Does such a dramatic decrease come with any unintended consequences? Yes – for example, one potential consequence of lowering the tax rate for pass-through corporations is that it incentivizes business owners to change the way they report income. Currently, the top tax rate for an individual receiving income from a pass-through entity is 39.6%. By creating such a discrepancy between the top individual tax rate and the business tax rate, the tax plan encourages individuals to categorize less of their business earnings as salary and more as LLC earnings. For a high earning individual, such a re-classification could cut their income tax in half. This may also motivate individuals considering business ownership to gravitate toward pass-through models instead of incorporating.

For more information on the effects federal tax reform could have on Iowa businesses, contact Laura Wasson

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Laura Wasson

Categories: Laura Wasson, Taxation Law

 

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