Throughout his campaign, and then once he was in office, President Donald Trump extolled his vision for a vastly simplified tax code that would lower rates for everyone and help make America more attractive to businesses of all sizes. The tax code is one area that could certainly benefit from some reform and simplification, but as with any major changes to a system like this, it’s hard to forecast how individual groups may be impacted.
A Broad Outline
Although the general direction President Trump is likely to move in his tax reform efforts was always clear, there were few specific details available concerning how he would accomplish his goals. His administration finally released an outline of his tax plan at the end of April.
The basic structure of the Trump Administration’s plan involves reducing the number of individual income tax brackets to three from the current seven. The rates associated with these would be 10%, 20%, and 25%, and no one making less than $25,000 individually or less than $50,000 as a married couple filing jointly would pay any federal income tax at all.
Corporate Taxes and Business Structures
Another main feature of the Trump Administration tax plan would be to lower the corporate tax rate from 35% to 15%. While President Trump’s plan does stipulate that no business of any size or structure would pay more than 15%, it has not yet specified how the business vs. personal tax brackets will apply to small businesses that pass through income and report it on personal returns.
Implications for Entrepreneurs
Overall, the main takeaway from the outline that the Trump Administration has released is that pass-through entities will ultimately benefit from the reduced tax rates the same as corporations, but that the mechanisms by which these changes will be implemented remain unclear. Additionally, while the base tax rate may be lower, the elimination of many itemized deductions could result in similar sized tax bills in many cases.
Of course, with a simpler outline to follow, it would be easier to anticipate the final bill, and that could be an advantage. Individual circumstances will dictate whether the larger standard deduction available under the Trump plan, which replaces the ability to itemize most deductions, will actually result in a larger or smaller final tax bill for any given person or small business.
A small change can be a huge benefit to small businesses, however, and even a modest reduction in the overall tax liability could create significant room to grow. Some other details, including the repeal of the Alternative Minimum Tax, would benefit many entrepreneurs, and the raising of the threshold for the Estate Tax to $10 million from the current $1 million would make it easier for small businesses to be passed on to the next generation.
There are a few groups that would benefit clearly and significantly from the Trump plan as it stands right now. They include hedge funds, doctors, lawyers, and real estate developers. Some manufacturing companies would also stand to gain by taking advantage of the option of full expensing of a purchase in exchange for the ability to deduct net interest payments over time.
Anticipating the Final Bill
Another thing to keep in mind when you’re trying to determine how the Trump Administration’s tax plan may impact your business is that what’s been released so far is only the Administration’s vision for revising the tax code. The final bill may look very different after moving through both houses of Congress, and any changes made during that process could have a significant impact on how the plan will ultimately affect you.
Even if the Administration does get most of its priorities included in the final tax reform bill, many specific details will still need to be ironed out. Part of the reason tax reform is such a contentious issue is that each individual provision may benefit one group while creating more negative circumstances for another, and these will need to be offset to put together a plan that satisfies all interested parties. With that in mind, it’s easy to see how the end result of the tax reform process may look very different from the outline that’s been presented so far.