On April 26, President Trump’s White House loosely outlined his plan to overhaul and simplify the U.S. tax code by reforming both individual and business taxes. The undetailed proposal has four goals:
- Expand the economy and create millions of jobs.
- Simplify the tax code.
- Provide tax relief for American families, especially the middle class.
- Adjust the business tax rate from one of the highest in the world to one of the lowest.
- Lower the corporate tax rate from 35 percent to 15 percent. This would include most small businesses and “pass-through” structures, such as S-corps.
- Cut the top personal income tax rate from 39.6 percent to 35 percent.
- Reduce the number of personal income tax brackets from seven to three: 10 percent, 25 percent, and 35 percent.
- Double the standard deduction for taxpayers to $24,000.
- Eliminate all personal tax deductions, except the mortgage interest deduction and the charitable tax deduction. This would affect many parties, including small businesses. Residents of states with high income taxes would feel the loss of deductions for state and local taxes.
- Repeal the estate tax.
- Repeal the 3.8 percent Obamacare tax on small businesses and investment income.
- Repeal the alternative minimum tax for individuals.
- Move to a “territorial” tax system, which excludes from taxation most income that businesses earn overseas. A one-time tax — rate not yet determined — to prompt companies to return cash held overseas.
Impact on Businesses
Companies of all sizes come out winners, as the proposed tax plan would lower the corporate tax rate by 20 percent. Firms paying taxes through the personal income tax code will see hugely reduced tax bills. As USA Today noted, “Since the last major tax reform in 1986, establishing businesses as pass-throughs has become increasingly popular for entrepreneurs since it typically gives them lower tax rates than paying the corporate rate.”
The proposed tax plan:
- Includes no specifics as yet, but represents the Trump administration’s “core principles” and reflects the president’s campaign pledges.
- Would allow “pass-through” business entities to qualify for the same 15 percent rate.
- May reduce national revenues by $4-$6 trillion over the next decade, but offsets would bring in only about $2.5 trillion.
- Does not include the border adjustment tax, which House Republicans wanted. The tax would have given preferential treatment to American exporting companies over companies mainly importing goods.
- Assumes that the tax cuts will generate enough economic growth to offset the deficit in tax revenue.
Paychex will continue to monitor tax reform developments and provide pertinent updates.