Pass Through Deduction Will Benefit Many Owners
In addition to the federal corporate tax rate change, tax reform legislation includes a 20% exclusion from taxable income for non-compensation income paid to owners of qualifying pass through entities including Sub S corporations and limited liability companies. This means that owners of certain pass through companies, there may be a significant decrease in their personal federal tax due. The impacts of this portion of tax reform is still murky as tax accountants and attorneys sort out the best method to assure legal favorable treatment, but certainly there will be some movement in terms of the propensity of a growth company to expand level of employment, invest in capital equipment and make tuck-in acquisitions since less cash will be utilized to make cash distributions to owners related to their pass through personal income tax obligations.
Macroeconomic Volatility Due to Higher Federal Deficits
Federal budget deficits will inevitably be higher due to lower revenue from corporate taxes and without significant adjustment in other tax rates to compensate. In fact, the U.S. Treasury Department reported earlier this month that the federal deficit increased 17% to $779 billion in the fiscal year ended September 30, 2018. The unprecedented decision by our federal government to increase the already stunningly high federal budget deficit level during a period of economic expansion puts our economy into uncharted territory. With deficit spending this high late in the economic cycle, there will be less room for future moves to counter-balance macroeconomic downturns with fiscal policy, making our next down cycle potentially more painful than otherwise would have been the case.