Early returns show C-corps and international companies most impacted by tax reform

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By Danielle Besser, public relations coordinator, Upstate SC Alliance

“Did we really get tax reform this time?” asked GreerWalker partner Barry Leasure as he opened a presentation to middle-market companies on Feb. 13.

“In parts, we did, if you’re a C corporation or if you’re working internationally. For other small or midsized businesses or flow-through entities, I’m not so sure it’s much of a difference.”

The event was the first in a Middle Market Outreach series hosted by the Upstate SC Alliance to connect companies with information, support, and resources for key business growth topics.

 

Origins of the Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act, the first federal tax code overhaul since 1986, is intended to make the United States a more competitive business environment. According to the Organization for Economic Co-operation and Development (OECD), the U.S. had the highest combined federal and local tax rate among developed nations.

“That was a problem of our competitiveness as a nation,” Leasure said. Previously, the U.S. tax rate was 39 percent. France was second-highest at 34 percent; the average excluding the U.S. was 25 percent; and Ireland offers the lowest with 12.5 percent.

 

International provisions

Encouraging repatriation of funds was another driver, with the goal of encouraging U.S. economic growth from 2 percent to 3 percent.

“Before, if you were a U.S. company, any money you made all around the world, you were taxed on. You got a credit for anything you paid over there — since all the other nations had a lower tax rate, what the companies would do was set up an entity headquartered in those other nations, and all of their profits and the money would stay there,” he explained.

The shift to a hybrid territorial tax system is one of the most important reform components for businesses.

“Now, if you’re a U.S. company over in Ireland, and you pay the tax in Ireland, you don’t have to pay it in the U.S., and you can bring income back to the U.S. as well for free,” he said. Past earnings that were subject to taxation can now be brought back subject to a one-time 15.5 percent rate.

 

C-corp versus S-corp

For larger C-corp companies, the tax benefits are more apparent, with a 14 percent reduction in the maximum tax rate, Leasure said. They also maintain state income tax deductions.

For those filing with S-corp status, where business income flows through to individual owners, the water is a little murkier. More often, smaller companies fall into this category.

The previous Domestic Production Activities Deduction was eliminated, which was a benefit to companies in the manufacturing and construction sectors.

However, pass-through business income is allowed a 20 percent deduction of “qualified business income” for those who earn $315,000 or less. For those who earn more than 315,000, a business must meet a W-2 threshold to get the deduction — and even then, some service entities would not be eligible.

“This is where it gets a little complicated, and we’re going to have to get some clarity on that,” Leasure added.

 

Business benefits

Under the new regulations, 100 percent of purchases of qualified machinery, equipment, and fixtures made between Sept. 27, 2017, and Jan. 1, 2023, can be written off. This can be a boon to companies looking to upgrade fleets or transition to new technologies, though it does not apply to real estate transactions.

The threshold for taxpayers using the cash method has increased from $10 million to $25 million, another change that’s good for small to midsize companies.

 

Additional considerations

Companies may also notice that some familiar deduction opportunities have been eliminated. Take the deduction for entertainment, amusement, or recreation – which previously was a 50 percent deduction – or the deduction for meals provided for the employer’s convenience.

Another change has greater impact on densely populated metropolitan areas: Employer-covered parking or transit expenses will now be reported as a taxable fringe benefit on an employee’s individual filing. Previously, these expenses were a write-off for employers and were not taxable for employees.

 

Where do federal and state tax rates intersect?

Following the federal discussion, Nexsen Pruet member Rick Reames — who previously served as director of the S.C. Department of Revenue — offered insights about how the federal reform will impact state filings.

The goal of reform, he said, is to broaden tax bases while lowering tax rates — which, for South Carolina, could mean $250 million more state revenue collected from more payers.

Exact impacts remain to be seen, as the General Assembly has not yet acted to conform the state’s tax code to the federal.

“Accountants generally want to see it earlier in the year every year, because they are looking for what they are doing,” Reames said.

“This year, we have not had conformity yet, and the big issue is: What does South Carolina conform to? Does it pass conformity as it has in the past, and have a broader tax base, with the same rates — which means $250 million more goes into the state coffers, or does it give some rate relief? Does it tie to all the federal provisions or to some of them?”

 

Interested in learning more about the Middle Market Outreach series? Sign up for updates here.

What: What Does Tax Reform Mean for Your Business? (presented by GreerWalker, Nexsen Pruet, and Upstate SC Alliance)

Where: Upstate SC Alliance, 124 Verdae Blvd., Fifth Floor Conference Room

Feature Presentation: Barry Leasure and Rick Reames

Who Was There: Upstate SC Alliance investors and middle-market companies

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