President Trump’s Tax Plan: What This Means for the Timeshare Industry
Some of the more substantive initiatives included in Mr. Trump’s tax plan which would be expected to affect timeshare industry businesses are described below.
Lower and Fewer Tax Rates on Individuals
Presently, the highest individual marginal tax rate is a whopping 39.6% which, when added to the 3.8% tax on net investment income enacted under the Obama administration, brings the real top rate to 43.4%.
Mr. Trump has proposed reducing the number of tax brackets from 7 to 3, with a top rate of 33% and eliminating the 3.8% net investment income tax. His proposal also includes a tax on capital gains ranging from 0% for those in the lowest tax bracket to a high of 20%.
Change to Treatment of “Flow-Through” Entities
Much of our nation’s business income earned by entrepreneurs is taxes at individual tax rates rather than corporate rates. United Statestax policy since 1986 has strongly incented business owners to structure their businesses as what is known as a “flow through entity”, such as an S-Corporation, partnership or LLC electing to be taxed as either and S -Corporation or a partnership. According to statistics published by the Internal Revenue Service, the share of business activity represented by flow-through entities has been rising since the passage of the Tax Reform Act of 1986. Excluding sole proprietorships, now more than 80% of businesses are organized as flow through entities – up from 49% in 1985.
The income or deductible loss of these types of entities is currently attributed proportionately to the owners, many of which are individuals, regardless of whether the owners received actual distributions of cash from the entities. Accordingly, assuming the business entity is profitable, this income currently adds to the individuals “normal” taxable income, thereby increasing his or her marginal tax rate.
Mr. Trump’s plan, however, would provide a unified business tax rate of 15%, meaning not only would regular “C” corporations pay tax at that rate, but all business income, even the income earned by an individual from a flow through entity or sole proprietorship and reported in an individual’s tax return, would be subject to the same 15% rate. This means that an entrepreneur earning business income would experience a drop in top tax rate from 43.4% to 15% under Mr. Trump’s plan. Interestingly, this would also mean that the difference in top tax rate between being paid as an employee and as an independent contractor would drop from 43.4% to 15%. This may present some significant interpretation and enforcement issues because of the incentive for individuals to move from employee status to independent contractor status, and likely will be the subject of many negotiations among lawmakers in the coming months.
This, of course, is extremely relevant to many timeshare business owners because with approximately 80% of them utilizing entities that result in individual tax consequences, this proposal would result in reducing the business related portion of their tax liability, allowing them to more fully capitalize their businesses with current earnings.
Business Tax Cuts and Change to Depreciation Structure
Under Mr. Trump’s plan, businesses would be permitted to immediately deduct the cost of asset acquisitions, which is a huge change from current law, under which businesses have to depreciate the cost of purchased assets over a number of years, greatly reducing the tax benefits as compared to the immediate deduction of the cost of capital assets as Mr. Trump suggests. The businesses that fully deduct asset costs will not be permitted to deduct interest expense on any borrowing under his plan.
Repeal the Corporate Alternative Minimum Tax
Under current law, corporations are taxed on the greater of their “regular” tax liability or their “alternative minimum” (“AMT”) tax liability. The AMT adds back into taxable income certain “preferences” including interest from private-activity municipal bonds, adjustments for certain accelerated depreciation, income from corporate owned life insurance and various other items. The resultant alternative minimum taxable income is then subjected to a minimum tax rate of 20%. Mr. Trump’s plan would completely eliminate the corporate AMT.
Repeal of Estate and Gift Taxes
Mr. Trump’s plan would repeal the federal estate tax and the federal gift tax. Obviously, this would reduce the vast amount of planning and posturing which is currently commonplace among closely held business owners who under current law are incented to limit the assets owned by them at their death so as to minimize the estate tax on business assets.
Taxation of Unrepatriated Foreign Income of U.S. Companies
Mr. Trump’s plan would impose a one-time transition tax of up to 10% on existing unrepatriated foreign income of U.S. companies, payable over 10 years. The future profits of foreign subsidiaries of U.S. companies would be taxed each year as the profits were earned, ending the current law’s deferral of tax on these profits until they are repatriated.
As noted by the analysis of Mr. Trump’s plan by the Brookings Institution, large reductions in the corporate rate and the repeal of deferral would reduce the incentive for firms to recharacterize their domestic income as foreign-source income to avoid U.S. tax. The lower corporate tax rate would also decrease the incentive for a U.S. corporation to move its tax residence overseas.
The Brookings Institution estimates that the plan will result in decreased federal tax receipt of $9.5 trillion over the 10 year period between 2016 and 2026 and another $15 trillion in the succeeding decade. Of the decrease, approximately 75% is attributable to the reduction in individual tax rates and the provision increasing the standard deduction, which may make those provisions a likely target for those who might criticize the plan. It is clear to even the most casual observer that the implementation of Mr. Trump’s plan will encounter significant resistance, not the least of which will be that Mr. Ryan and other legislative leaders have said publicly that they believe strongly that any tax legislation should be revenue neutral.
For the time being, our advice to our clients is to base their actions on current law and watch the next few months very closely. Any changes to the current tax law will take time, but we expect to see some changes implemented for the 2017 tax year (2018 filing season).
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
How Can We Help?
