Historic Tax Reform Passes on Capitol Hill
IFA continues to monitor developments with the fast-moving issue and seeks to ensure that franchise small businesses in the “professional services” category are considered pass-through businesses.
By Michael Layman
For the first time since 1986 when President Ronald Reagan, U.S. House Speaker Tip O’Neill (D-Mass.) and a host of then-congressional tax writers negotiated and enacted major amendments to the nation’s tax code, Congress has passed sweeping tax reform. This year’s legislation has major implications for franchises.
At the time of this article’s writing, both the U.S. House and Senate had approved tax bills and voted during the week of Dec. 4, 2017 to go to conference to make decisions on final legislation that must be approved by each chamber. The conference comes on the heels of the Senate passing its tax reform measure by a vote of 51-49 on Dec. 2, and the House approving its bill by a 227-205 margin on Nov. 16.
The two bills had several differences, including the contrasting provisions changing the individual, corporate and pass through business rates. Currently, there are seven brackets in today’s individual tax code: 10 percent, 15 percent, 25, 28, 33, 35, and 39.6 percent. The Senate bill also calls for seven brackets, but changes the rates to 10, 12, 22, 24, 32, 35 and 38.5 percent. This highest rate would apply to individuals earning more than $500,000 or couples earning over $1 million. By contrast, the House bill establishes four brackets: 12 percent, 25 percent, 35 percent and 39.6 percent. The House and Senate bills both double the standard deduction from $6,350 to $12,000 for individuals and for married couples filing jointly from $12,700 to $24,000.
The corporate rate (also known as the C-corp rate) is reduced from 35 to 20 percent in both bills, but the cuts become effective on Jan. 1, 2018 in the House bill and on Jan. 1, 2019 in the Senate bill.
Perhaps most important to franchises is the differences in the bills’ treatment of pass-through businesses, also referred to as pass-through entities. What are pass through businesses? Effectively, they are all the businesses that are not corporations or C-corps; these include the vast majority of all American businesses and franchises. Pass throughs include sole proprietorships (where one person owns the business), partnerships (where two or more people own the business), limited liability companies and S-corporations.
The House and Senate bills each set a new pass-through business rate, respectively at 25 percent and 20 percent. But “professional services” firms appear to be carved out from the lower rate in both bills, as an attempt by Congress to withhold the tax reduction from many entities to whom Republican tax writers are not sympathetic, such as law firms, hedge funds, and lobbyists.
IFA has been concerned that this professional services exemption from the pass-through rate may catch some franchise businesses, who consequently may not be allowed to access the new pass-through benefits of tax reform. IFA worked closely with Sen. Steve Daines (R-Mont.) on a Senate amendment that would ensure franchise small businesses are not excluded from the professional service exemption on tax relief.
An estimated 252 brands representing 126,515 franchise businesses are impacted by this professional services exemption, and thus we are urging the House and Senate conferees to ensure all franchise businesses are covered under the new pass through rate.
IFA has been strongly supportive of the goals of tax reform to grow the domestic economy, but we have fought aggressively with champions like Sen. Daines and Sen. Ron Johnson (R-Wis.) to ensure that franchise businesses have enhanced ability to grow and invest in new locations and create new jobs.
Again, this article is being written before the complete tax reform story concluded on Capitol Hill. The worst-case outlook for tax reform legislation is that, because tax reform is being considered under congressional budget reconciliation rules, Congress has until Sept. 30, 2018 to pass a tax bill into law. IFA will continue advocating on behalf of your businesses to ensure franchises can take full advantage of the new tax provisions… through 2018, if need be!
Michael Layman is Vice President of Federal Government Relations for the International Franchise Association and Executive Director of the Coalition to Save Local Businesses.