Planning anything can be tough when you don’t know what the landscape is going to look like moving forward.
As the 2022 midterm elections neared – with its possible impact on everything from the economy to corporate tax rates – planning for business leaders got even a little more dicey.
With that as a backdrop, according to Lauren Debay, business planning has already been underway, although with a keener eye toward possibilities depending on which political party was in power when all the votes were counted.
With the outcome still in doubt at press time, Debay, a certified public accountant and a partner at Ann Arbor-based CPA firm Schlaupitz Madhavan, said there would still be confusion until the political landscape is settled.
(At press time, Republicans were one seat away from the majority in the House, and Democrats had hung onto control of the Senate.)
“There usually is some change in power during midterms … If the Dems gain more control, which I realize is not what most people think is going to happen, there’s a potential for increased corporate income tax rates and increased individual taxes, as well,” said Debay. “Everyone says they’re going to close loopholes, but new ones pop up, so I don’t know how realistic that is.”
Debay, who holds a bachelor’s degree in general management from Oakland University and a master’s degree in accounting from Walsh College and has been a practicing CPA since 2008, offered her views on a variety of issues surrounding what businesses need to know headed toward the end of the year.
The 2017 tax cuts
The Tax Cuts and Jobs Act, passed in December 2017 and colloquially refer to as the Trump tax cuts, made what Debay called a “big, sweeping change, the biggest change we’ve had in tax law in decades.”
The act established a 21-percent flat tax rate on corporations and established the qualified business income deduction, according to Debay.
“The TCJA made some very broad, sweeping changes,” she said. “There were some very big changes in that tax package.”
Debay is also encouraging businesses to start planning for something that’s still more than three years away: The ending of the lifetime exemption for estate taxes established in the TCJA.
The act increased the exemption significantly, raising business’s ability to shield up to $24.1 million from estate taxes. However, that exemption, Debay said, is set to expire Dec. 31, 2025.
Estate tax planning
“That’s a huge change, so we’ve been doing a fair amount of planning relative to that change specifically because it’s set to drop to about $6 million,” Debay said. “It’s going to come down significantly if nothing is done to extend it … some speculation has been that they’re going to reduce it early and get rid of this because it’s our wealthiest people being protected by that.
“That’s where you get into the push-pull of politics, so that’s what we’ve been doing a lot of planning around,” she added.
The planning, Debay said, revolved around setting in place a “gifting” strategy that allows business owners to distribute some of the corporate wealth among younger generations or friends or family.
Some clients, she said, are planning to give part of the business to children or grandchildren, or putting it into some sort of trust. That has led to her firm doing more estate tax filings than usual.
“Our very wealthy clients … are intending at some point to try to leave gifts to members of their family or other people,” Debay said. “We start making those gifts now. Just like anything else in the tax roll, you don’t want to make an unwise decision based solely on a tax factor.
“But we do have some people who’ve accumulated enough wealth that they can start giving it away now and it won’t impact their lifestyle.”
Kicking the can
Debay acknowledging that shield company assets from the estate tax simply “kicks the can down the road,” but notes that’s the “name of the tax game.”
She likens it to the 1031 exchange in real estate, which allows delaying the gain from the sale of one property by attaching it to the next property.
“It’s the same thing … you just keep pushing that gain out,” she said. “That is part of tax strategy. ‘I don’t want to pay it today.’”
The Inflation Reduction Act, Debay said, “did change things for the largest corporations (making over $1 billion in profit) establishing an added minimum tax that’s going to be imposed on them.
“Most corporations fall below that, so they’re still getting this 21% tax rate,” she noted.
Debay felt like the former 28-percent tax rate was already “a pretty fair tax” but knows critics say a lower rate is necessary to give the U.S. an “edge in the worldwide economy.”
“The idea is it would be less attractive to have a corporation in the U.S. (with the higher rate), companies would have less money to invest in R&D or other things,” Debay said. “I think that argument is a little thin, but that’s the criticism. For years we’ve been a competitor in the world economy with much higher rates than 28%, so for me the argument doesn’t hold a lot of water.”
Not much change
Regardless of how the midterms played out, Debay said she wouldn’t expect much change in things for middle-income earners.
“Our biggest impact is always through small-business owners, and often they … wouldn’t be affected. I don’t expect large impacts,” Debay said. “The Inflation Reduction Act actually gave some benefits to individuals — more tax credits that were extended or increased, the extension of the Affordable Care Act, etc. That’s more your Middle America ‘normal’ person.
“That was favorable for those people,” she added. “That was bipartisan, so potentially there could be more of those kinds of things that could be agreed upon.”