Throughout his campaign, President-elect Donald Trump proposed significant reductions in corporate and individual tax rates. Trump has proposed reducing the current 35 percent corporate tax rate down to 15 percent.
The House Ways and Means Committee’s tax blueprint is similar in many regards to Trump’s campaign proposals. While there may be a great deal to overcome in order to see these proposals through to enactment, Trump’s election, combined with Republican control of the House and Senate, means that there is a strong prospect of reduced rates in 2017.
The obvious tax planning consideration is that corporate deductions claimed in 2016 will provide a 35 percent tax benefit while those claimed in 2017 and later years possibly could provide a benefit as low as 15 percent. Likewise, income taxed in 2016 will generate a tax liability at 35 percent, while income taxed in 2017 and later years could possibly be taxed at a rate as low as 15 percent. Tax planning strategies aimed at accelerating deductions into 2016 and deferring taxable income into later years should be considered in light of the prospect of a 2017 corporate tax rate reduction.
Several highly effective tax planning strategies are based on tax return elections or automatic accounting method changes that can be made all the way up until the timely filing date for the tax return, which can be as late as the 15th day of the ninth month after the close of the year if the tax return is properly extended. The extended time period for considering these strategies offers more time to determine the likelihood of tax reform legislation being passed.
Tax planning strategies that can be executed after year-end but before the tax return for that year is timely filed include:
- Claiming bonus depreciation and accelerated tax depreciation
- Performing a cost segregation analysis of current-year construction projects or those completed in recent years to currently or retroactively accelerate tax depreciation on those assets
- Adopting the repair or refresh safe harbor election for restaurants and certain retailers
- Adopting a favorable tax accounting method to currently deduct qualified short-term prepaid expenses if one is not already in place
- Adopting a method of accounting to defer qualifying advance payments for services
Trump also has proposed to reduce the top individual rate from 39.6 percent to 33 percent and to eliminate the 3.8 percent tax on net investment income. Because of the prospective rate reduction for individuals, the corporate tax planning strategies already noted also are viable for pass-through entities owned by individuals.