In late April, President Donald Trump unveiled his tax plan, touting it as, “the biggest individual and business tax cut in American history.” So, what exactly is his plan and how would it affect small business? Industry officials have been taking apart the plan for days, analyzing it from every possible angle. Although the long-term implications of the plan are up for debate, short-term impacts are obvious.
What is Trump’s tax plan?
Although the tax plan has implications for both individuals and businesses, this article will focus only on the business side of the issue. Proposed changes to the business tax code include:
- Reducing the corporate tax rate to 15%
- Limiting the top individual income tax rate on pass-through businesses such as partnerships to no more than 15%
- Repealing the corporate alternative minimum tax
- Imposing up to a 10% deemed repatriation tax on the accumulated profits of foreign subsidiaries of US companies on the effective date of the proposal, payable over ten years
- Taxing future profits of foreign subsidiaries of US companies each year as the profits are earned
For small businesses, the most significant parts of the plan are the first two items, particularly lowering the corporate tax rates to 15% from the current 35%.
What is a pass-through business?
Many small businesses formed as partnerships and limited liability companies are considered “pass-through” businesses because their incomes are “passed through” to owners. These owners then pay taxes on that income at rates that generally range from 15% to 35%. Trump’s plan proposed to limit that individual income rate to no more than 15%.
According to the USA Today, establishing businesses as pass-throughs has become increasingly popular since it allows entrepreneurs to pay lower tax rates than they would under corporate guidelines.
What are the implications of Trump's plan?
For small business owners, hearing about a reduction in corporate tax rates to 15% sounds great, and in the short-term it appears it will be. According to Gary Cohn, director of the National Economic Council, “the stimulative effects of the tax cuts will spur economic growth and help make up for much of the anticipated increase in the deficit.” Trump’s officials have said the goal of his tax plan is to generate a 3% or higher growth that is sustainable.
Other financial experts are not quite as confident in Trump’s plan, believing that the cuts could enlarge the deficit by hundreds of billions of dollars. According to the Tax Foundation, lower rate for business owners would likely boost annual U.S. GDP growth by 0.13 percentage points (going up to 2.03% from 1.9%) over the next decade. Unfortunately, it would also increase the deficit by $1.3 trillion, even after factoring in higher tax receipts because of the extra growth.
In other words, short-term gain for individuals would likely lead to long-term issues for the nation’s financial health. As a results, experts predict that the plan will likely be negotiated at a higher rate.
Other opponents of the tax plan fear that the real benefits would go to taxpayers who are already wealthy. A recent report from the Center on Budget and Policy Priorities noted that last year, “roughly half of all income from these so-called ‘pass-through’ businesses targeted by the Trump plan went to the top 1% of earners, those making $693,500 or more. Meanwhile, only about 27% went to households in the bottom 90% of households.”
What does it all mean?
Ultimately, Trump’s tax plan is nothing more than just that – a plan. Whether the plan will see fruition is yet to be seen. If it is implemented, small businesses will enjoy a significant tax break. And let’s be honest, extra money in one’s wallet is never a bad thing. Exactly what impact that will have on the country’s financial health, however, is up for debate.