~~There is a lot of chatter in Washington DC about tax reform for next year and how this will affect the corporate tax rate. Currently, the top tax rate for C corporations is 35% and this kicks it at very low amounts of taxable income. Most of the other developed countries in the world have a much lower corporate tax rate. For example, most European countries have a top corporate tax rate less than 25% and in many cases, it is closer to 15%.
These differences in tax rates have led to the numerous corporate inversions that have taken place in the last few years. By doing an inversion, a corporation is able to reduce their tax rate from the US rate (35%) to the new country rate (perhaps 15%). The IRS has put out new Regulations to help slow these conversions; however, with President-Elect Trump and a Republican controlled House and Senate, it is likely these Regulations will be changed or eliminated.
The current discussions on the top corporate tax rate is at the 15% level. The House Republicans had proposed a 20% rate, but President-elect Trump had pushed for 15%. It now appears that both are on board at the 15% rate. The biggest issue is whether pass-through income from partnerships or S corporations will be taxed at this lower 15% rate or whether it will be subject to the maximum 33% rate (if that is the new maximum rate). We have the current case of Kansas passing new tax laws a few years back that created a zero tax rate on all business income. What essentially happened in many cases is that "employees" created their own business and now paid no income tax to Kansas. This will be the primary issue with capping the tax rate on flow-through income at 15%.
Now reducing the top corporate rate to 15% may not be as large a deduction as you may think. Certain other provisions may increase the amount of income subject to tax for farmers such as not allowing business interest to be deducted. However, as an offset, you may be allowed to deduct 100% of all farm asset purchases in the year of purchase (other than land).
As you can see, this whole issue is in an extreme amount of flux. It will change many times over the next few months, but we can almost guarantee that there will be some type of tax-law changes next year and we will keep you posted.