Pit & Quarry, November 2017

The IRS can and will challenge salary amounts they deem to be unreasonable The Trump proposed tax reform would Reduce regular C corporation tax rates to 15 percent Eliminate the net investment income tax which is an additional 38 percent tax on high income shareholders pay on distributions Further complicating matters the tax rate on income passed through from S corporations and other entities would be lowered but only if the earnings are retained in the business Earnings distributed to shareholders would potentially be taxed at a higher rate If these or other tax rate reduction proposals become a reality it could mean significantly lower taxes on regular corporations and their shareholders with many businesses seriously thinking about changing the type of entity they do business as The pros and cons to think about Changing from a pass through entity or a regular corporation is usually not complicated An LLC or another entity taxed as a partnership files Form 8832 Entity Classification Election In most cases the transformation is tax free The downside of converting to a regular corporation is primarily the double tax that will ultimately be paid on the liquidation of the corporation or the sale of its assets followed by a distribution of the sale proceeds to the owner The tax rules allow a partial exclusion of gain from the sale of some small business stock The relief of liabilities upon conversion may exceed the owners adjusted tax basis in the entity Fortunately the taxfree transition door swings just one way so owners and producers should analyze both the potential benefit and pitfalls of changing the form of entity because conversion back to a pass through could carry a significant tax cost Further costs could include self employment tax on partners and accelerated phaseouts from the increase in the owners adjusted gross income MAKING PLANS TO PLAN While good tax planning is commonly based on current versus future tax rates the significance of looming tax reform cant be ignored In fact the potential of tax reform next year makes tax deferral even more valuable especially for really profitable aggregate businesses or those subject to the highest marginal tax rate In addition to deferring income until next year when tax rates may be lower the possibility of tax reform would also make it more valuable to accelerate deductions into the current year After all if next years tax rates will be lower than this years rates then tax deductions will be less valuable next year than this year There are a number of decisions to make Will profits be greater next year Will tax rates finally come down Will deductions be limited Making these decisions and more as well as planning to reap tax savings year after year requires professional assistance now not just as tax returns are being prepared P Q Mark E Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years pitandquarry com November 2017 PIT QUARRY 65