15% tax rate for businesses

[Drsan1]

Hello, all! I wanted to get people's input or thoughts about the possibility of a 15% tax rate for businesses.

First do people think this will really happen?

Second will this change how anybody does anything, for example would anyone consider becoming an independent contractor/locums doc bacause of this. 15% sounds a lot better than 33% as an employed physician.

Third how do people feel that are already independent contractors about this, and how will it effect you. Will this be like a significant pay raise?

[Zaphod]

This is basically the same thing as has been proposed since the campaign. Dont worry about anything until something passes the senate, its unlikely to make it past house at this level. There is just a lot of posturing right now as trump wants to say something was accomplished in the first 100 days.

[ENT Doc]

First, understand that this is a corporate tax rate reduction, right?  This has no effect on pass-through entities other than the effect of any reduction in marginal tax rates otherwise proposed.  The market has built in some of this (Trump bump) as expectation but not all of it.  Market valuations won't look so silly if this passes.  Price adjusts before earnings.  When earnings pick up in the quarters to follow because of the additional cash flow to shareholders (RE or Div) the P/E will look more reasonable.  As for what to do about being an IC or whatever, I don't think this will have any sig effect.

[StarTrekDoc]

This will help dividends.

Looking to see if personal income brackets will be revised.

[Drsan1]

Will this effect people that have an LLC (for their locums business)? I guess that's what I was thinking, that it would effect sole proprietors also.

[pulmdoc]

Trump wants the 15% rate to apply to pass through entities as well, which obviously would affect many physicians. Kansas should be a major warning about what will happen; they eliminated state income tax for pass throughs, which led everybody and his dog to reorganize as a passthrough, and state revenue crashed. There was "growth" in the creation of LLC's but not actual tangible growth to offset the loss of revenue.

There are good reasons to redo the corporate tax code to lower the corporate tax rate in exchange for cutting exemptions, but growth is not one of them.

[TheGipper]

Who knows what will eventually pass but it sounds like Trump does want it to apply to pass-through entities. And sounds like he will be skimping on lowering the top individual rate. In my mind these two rates should both be lowered to the SAME percentage to prevent avoidance schemes and out of simple fairness, but that's not gonna happen.

Let's say you are in a private practice partnership that pays you by pass-through income via W2. You will be paying very close attention to the details here. If for some reason pass-throughs are excluded, should we be looking to become C corps?

[Craigy]

I doubt it will be 15% but I do believe a lower rate will eventually be passed.  The opening salvo is going to be an aggressive position, and from there Trump's team will negotiate.

[StarTrekDoc]

W-2 won't be affected as that is taxed at the personal income tax. So if you generate a W-2 from Corp or LLC the tax in that W-2 won't be affected. It would be interesting if the k1 pass through earnings is taxed at 15% too. That would be a boon doggle for businesses all over the place. And kill a lot of revenue...So don't know how they are going to get that through reconciliation as no Democrat is going to vote for that.

Too much corporate benefit. Not enough Walmart customer (middle America) to get their votes.. and Trump voters too.

[jfoxcpacfp]

TheGipper wrote:

Let’s say you are in a private practice partnership that pays you by pass-through income via W2. You will be paying very close attention to the details here. If for some reason pass-throughs are excluded, should we be looking to become C corps?

Click to expand...

That is a possibility. Currently, PSCs for medical practices empty out profits to owners via W2 to avoid taxation at a higher rate. The higher rate for professional corp's may remain in place, but the top rate may be lowered. As others have said, no use speculating until we know more.

(Clarification, partnerships do not pay the partners via W2, but pass through the income via guaranteed payments and distributions. My answer is still the same.)

[hightower]

Forgive my ignorance, but I am not familiar with the concept of "pass through entities."  Can someone explain what this means and how it applies to physicians?  Could physicians actually end up getting paid more if major tax cuts are applied to pass through entities as well?  If so, would this only apply to docs that work in a private partnership kind of setting or would it also apply to docs employed by hospitals/healthcare companies?

[TheGipper]

In way over my head here, but it is my understanding that many physician groups, including I think my own, are still structured as a professional corporations, defaulting to a C corp but having the option of electing to be an S corp.

In this process we distribute all salaries and extra distributions/bonuses to the physicians, as W2 ordinary income, making sure to zero all profits by the end of the year to avoid paying any 35% corporate tax.

If the corporate and pass-through rate is actually lowered to 15%, what would be the easiest/best way for PCs to capture the savings?

1). Have the PC elect S corp (rather than C corp) and pass through earnings? Would also potentially save on corporate FICA. (transition could be messy with some 35% double tax on accounts receivable, any any other assets locked up in the Corp. Also possible complications with cash balance, PSP, and MERP set-up)

2) Switch to PLLC. Just as strong liability protections as PC. ?require re-filing with state, ?not allowed in all states for docs, ?could delay billing for months during changeover.

3) Other?

[hightower]

Yeah, I'm thoroughly confused by all this. I just want to know if Im going to be paying more in taxes. I receive all of my income through W2's. And we still dont know what income levels will apply to each new bracket. I cant imagine that someone making ~250-320k per year would get the 25% tax bracket.

I saw an article tonight that said they predict that the top 1% of earners would see a 14% reduction in taxes whereas all else would see <2%. Seems about right coming from Trump. Sad thing is that his "little guy" supporters (who are getting the short end of the stick) will probably think a 2% reduction is good and ignore the fact that the wealthy are getting the biggest break at their expense.

And if they get rid of retirement account reductions would that mean we all stop contributing to 401ks and put everything in taxable accounts and roths only?

[ENT Doc]

hightower wrote:

Yeah, I’m thoroughly confused by all this. I just want to know if Im going to be paying more in taxes. I receive all of my income through W2’s. And we still dont know what income levels will apply to each new bracket. I cant imagine that someone making ~250-320k per year would get the 25% tax bracket.

I saw an article tonight that said they predict that the top 1% of earners would see a 14% reduction in taxes whereas all else would see <2%. Seems about right coming from Trump. Sad thing is that his "little guy" supporters (who are getting the short end of the stick) will probably think a 2% reduction is good and ignore the fact that the wealthy are getting the biggest break at their expense.

And if they get rid of retirement account reductions would that mean we all stop contributing to 401ks and put everything in taxable accounts and roths only?

Click to expand...

So a few points.  There are corporate structures and pass-through entities.  The corporate tax structure involves paying tax once at the corporate level (corporate tax rate, typically 35%, which combined with state is the worst in the OECD) and another time at the individual level as a shareholder when dividends are distributed (0-20% rate, depending on tax bracket).  This is what is referred to as "double taxation".  Corporations can defer payments to their shareholders in the form of retained earnings while pass-through entities can't.  Pass-through entities (think sole proprietorship, LLC, S corp, etc.) pay one tax at the individual tax bracket level and must pass through all profits and losses that year.  The ideal structure for your business will depend on the corporate and individual tax rates and the benefits of being a C-corp (access to public capital, legal protections, etc).  The math favors the pass-through, which means there must be additional benefits to being a c-corp.  The tax rate commonly discussed is the corporate tax rate.  It is the worst in the world and we also are the only country to my knowledge that still taxes on the worldwide level (35% applied regardless of where you earn it, with foreign tax credits applied).  Everyone else has some type of territorial system where corporations only are taxed on the territorial tax rate and the rest not taxed or at a reduced rate.  We are the worst on both fronts - the rates and the worldwide system.  So it is no wonder that so many firms have retained earnings "trapped" in overseas subsidiaries so as to avoid the worldwide tax on repatriation, or wait until a tax holiday to bring the money back.

The second point is that the rich pay a disproportionate share of tax revenue - over 50% at the top 1% level.  Many of the "little guys" don't pay squat.  Over 40% of working Americans pay nothing in personal income tax but certainly use our resources.  So pretty much by definition the people who gain the most from a tax cut are the rich.  But that doesn't mean the less well-off don't benefit.  God forbid we should give money back to people who literally work 4 months of the year for the federal government (unwillingly).  The fact that so many people pay nothing in personal income tax and yet utilize our resources just the same should really be the focus of any notions of "fairness".

[TheGipper]

Well said ENT doc.

If I hear one more analysis that this is a tax cut for the wealthy, I think I'll vomit. Any tax cut will by definition help the ones that are actually paying the taxes, and the top 10% of earners pay almost all the taxes (notice I didn't say the wealthy because we tax productive income and hard work, not wealth or consumption). Almost half of Americans pay NO income tax, and Trump raising the standard deduction will have the effect of making this worse.

Taking away almost all the deductions will hit the average doc hard who likely has high state/local taxes and property tax deductions, well over the new standard deduction. I wouldnt be surprised if the net result is $20,000+ more in tax liability for me in 2017 unless our group can reincorporate to capture the business tax rates.