Our initial analysis of the proposed corporate tax plan on international business and S-Corporations shows a mixed bag of moving pieces. Generally speaking, the plan calls for a corporate tax cut from the present rate of 35% to 20%. One interesting component is the replacement on the tax of worldwide profits to a territorial taxation methodology. This is obviously intended to encourage US multinational businesses who have stockpiled cash offshore to repatriate these earnings and invest them here in the United States. The US Congress Joint Committee on Taxation recently estimated US corporations are holding $2.6 billion in untaxed profits offshore.
The plan stated it this way: “To prevent companies from shifting profits to tax havens, the framework includes rules to protect the US tax base by taxing at a reduced rate and on a global basis the foreign profits of US multinational corporations. The committees will incorporate rules to level the playing field between US-headquartered parent companies and foreign-headquartered parent companies.” While the details are hammered out in committees over the next several weeks or months, international businesses here in San Diego must consider not only the structure of their multinational entities but their methodology for structuring transactions and realizing gain.
Another key area of focus in the taxation of income from pass-through corporate entities. Our initial analysis of the proposed corporate tax plan noted the proposal is hyping the new “pass-through tax rate” of 25 percent for pass through entities such as S-corporations and partnerships. Pass-through entities represent the vast majority of American businesses. The problem is this: the majority of pass through entities don’t pay taxes presently. The income is “passed through” to the individual shareholders or members and taxed at the individual rate which is most often much lower. The primary benefit would apply to high income individuals whose present tax bracket is above 25%. For example, the highest marginal individual tax bracket is presently 39.6% and those who are taxed at this rate would see a drop to the pass through rate of 25%. This is positive news for taxpayers with taxable income of $418,400 and higher for single filers and $470,700 and higher for married couples filing jointly. It will not change the tax picture for the majority of US pass-through business owners.
Allen Barron offers integrated tax, legal, business advisory and accounting services to business owners and individuals. If you have offshore financial accounts or international investments, are concerned about IRS FBAR compliance or are searching for ways to reduce the impact of taxation while improving profitability we invite you to contact us for a free consultation at 866-631-3470.
Our initial analysis of the proposed corporate tax plan on international business and S-corporations will continue in the weeks and months to follow. We invite you to follow us on Twitter, Facebook or Linkedin as we provide high level insight across a broad spectrum of professional disciplines to evaluate the actual impact upon you and your business.