With Donald Trump poised to become president on January 20, and the Republicans controlling Congress, tax reform may be an early and potentially achievable priority. Small business owners will surely be watching for such reform closely. In fact, they ranked tax reform as one of their three top issues in the just-concluded presidential election, and taxes ranked second among year-end priorities for small companies in a November 2016 Paychex survey of 444 owners/partners of firms with one to 500 employees.
The new approach could blend the measures Trump outlined during his campaign with existing GOP reform proposals championed by House Speaker Paul Ryan, including:
- Cuts to business and individual tax rates;
- A cap on the capital gains rate at 20 percent;
- Elimination of the estate tax; and
- The permanent ability to write off capital expenses immediately, instead of depreciating them over time.
It’s speculated that many of the changes lawmakers could consider would fuel the creation or expansion of small businesses. However, to fund these tax decreases, some current popular tax breaks and deductions may be eliminated or scaled back.
Candidate Trump’s Declarations
When running for president, Trump vowed to cut the corporate tax rate from 35 percent to 15 percent, and eliminate the tax deferral on overseas profits. He proposed setting rates on long-term capital gains and dividends at 0 percent, 15 percent, and 20 percent, and apply a 15 percent rate to business income from sole proprietorships and income passed through to individuals from S Corps, LLCs, and partnerships.
As a candidate, Trump advocated for allowing manufacturing businesses to immediately write off the costs of their investments. He also supported a one-time tax rate of 10 percent on the repatriation of corporate profits held offshore.
In addition, Trump announced his intention to cap or eliminate many business interest deductions to help pay for the reduced rates and his intent to repeal the Affordable Care Act (commonly referred to as Obamacare) and its tax increases.
What Businesses Might Expect
Once Trump takes office, how many of these campaign promises might become reality? And what effect would they have on U.S. businesses? New survey data from Paychex ranks tax reform third among the priorities they wanted the Trump administration to address upon taking office, after the Affordable Care Act and immigration reform.
Experts speculate about the new administration’s possible actions:
Cuts to business and individual tax rates
This move would shake up the tax options for C corporations and some S corporations. C corp status would appeal to small firms if it no longer required two levels of taxation on the same income—once when revenue is earned, and again when the business makes shareholder distributions. C corp status could become very attractive when a business is in the startup phase if the corporate tax rate drops to 15 percent.
The tax code overhaul penned by Republicans earlier in 2016, similar to Trump’s ideas while campaigning, is more likely to pass with him in the White House. The GOP’s plan would bring the top corporate tax rate down to 20 percent, and to 33 percent for individuals. Small companies set up as pass-through entities—sole proprietorships, partnerships, limited liability companies, and S corporations—would see their tax rate drop to 25 percent.
Capping the capital gains rate at 20 percent
Capital gains—defined as profits from the sale of assets such as stock shares, a business, land, or artwork—are usually regarded as taxable income. Since 1954, the capital gains tax rate has fluctuated from a low of 15 percent to a peak of almost 40 percent in the mid-1970s. Currently the rate is 15 percent for most wage earners (those in the 15-35 percent tax brackets). Those in the highest tax bracket of 39.6 percent are taxed at 20 percent for capital gains.
Trump’s tax plan would retain the existing capital gains rate structure with a maximum rate of 20 percent, using his new individual tax brackets. The House GOP plan calls for a reduction in capital gains taxes.
However, according to the Tax Policy Center, the tax rate on capital gains “does not appear to be significant” in driving economic growth, and therefore is unlikely to stimulate the U.S. economy.
Eliminating the estate tax
The federal estate tax of 40 percent affects those who leave their heirs property (cash, real estate, stock, or other assets) that exceeds $5.45 million per person. Only the richest 0.2 percent of Americans—two out of every 1,000 estates—must pay this tax.
Instead of the estate tax, candidate Trump proposed taxing estate beneficiaries on capital gains held until death and valued at over $10 million.
Immediate capital expenses write-off
Current tax laws don’t allow businesses to deduct the full amount of their capital expenditures in the year they occur. Companies must depreciate the cost of major purchases such as facilities, technology, or machinery over a period of three, five, or 10 or more years, depending on the type of asset.
Trump’s plan allows U.S.-based manufacturers to elect full expensing of plant and equipment, an invitation for investment. If manufacturers elect this approach, they give up the ability to deduct interest expense. The House Republican plan calls for immediate expensing of capital investments for all businesses.
Paychex will continue to monitor tax reform developments under the Trump administration.