What the Tax Reform Proposal Means for C-Stores

A new 25% maximum rate for small businesses operated as pass-through entities may be one welcome change.
November 03, 2017

WASHINGTON – Yesterday, the House Ways and Means Committee released their long awaited tax reform proposal. By now you’ve likely seen the overall highlights—the current 7 individual tax brackets condensed into 4, along with doubling of the standard deductions, the corporate tax rate dropped from 35% to 20% with a new small business tax rate for pass through entities capped at 25%. What’s it all mean for the convenience retail industry?

The short answer is, we’re still diving deep into the bill and running numbers but there are some things we know initially. On the surface, the new 25% maximum rate for small businesses operated as pass-through entities seems to be a welcome change, and it may be. Though, as is often the case, the devil may be in the details.  The legislation limits most active small businesses owners to being able to categorize 30% of the income from their businesses as business income subject to the 25% maximum and the remaining 70% would be treated as regular income subject to the individual’s appropriate tax bracket. There are some complicated formulas by which small business owners could categorize more than 30% of their income as business income.

Other parts of the bill include a mixed bag of results for our industry. Many businesses in our industry use last-in first-out (LIFO) accounting to help manage their cash flows. Under many previous tax reform proposals, LIFO has been a popular target for repeal—fortunately the current proposal preserves LIFO. Unfortunately, a tax credit popular in the industry, the Work Opportunity Tax Credit (WOTC) is repealed under this legislation. Generally, that credit is meant to bolster the hiring of at risk populations such as long term unemployed and veterans.

Some additional highlights are: the bill dramatically increases the maximum allowed amounts for Section 179 expensing. It immediately doubles the amounts subjected to the estate tax and completely repeals the estate tax after 5 years.

We’ll continue to analyze the bill and any changes that may be coming as the Ways and Means Committee is scheduled to mark-up the bill starting on Monday. At that time, it is subject to amendment and may be significantly altered before reaching the floor in subsequent weeks. On top of that, the Senate Finance Committee is expected to unveil their own proposal next week which may vary significantly from the proposal released by the House.

Stay tuned, this is just the opening of what will likely be a long drawn out process.