Small Business Tips
Trump Tax Reform & Small Business: What You Need To Know
People have been talking about it for years, but it always seemed an impossible dream – just out of reach. Now it looks that it may actually happen. No, we're not talking about the new Star Trek television series. We're talking about tax reform. Here's how small business owners can prepare for tax reform.
What To Expect From Tax Reform
The forces in Washington, D.C. are aligned to enact fundamental changes to the United States tax code. Because Republicans are in the majority, the tax "reform" will likely be favorable to business. Right now, that could include businesses of all sizes. The Trump Administration released a brief outline of what it wants tax reform to contain. To put it mildly, it gives businesses a "yuge" break. Here's what President Trump has proposed for business tax reform:
Reduction of Corporate Tax Rates
Regular C corporations are separate taxpaying entities that file their own taxes and have their own tax rates. For many years, the top corporate tax rate has been 35 percent. This is higher than in most countries, yet, few corporations pay this much because they take advantage of many corporate tax breaks.
15 Percent Tax Rate for Pass-Through Entities
Most smaller businesses are not organized as C corporations. Instead, they are pass-through entities. This includes sole proprietorships, limited liability companies, partnerships or S corporations. Profits earned (or losses incurred) by these entities are passed-through the business to the owner's individual tax returns, and they pay income tax on the profits at their individual rates. Profits earned or losses incurred by these entities are passed-through the business to the owner's individual tax returns. They pay income tax on the profits at their individual rates. Trump wants to allow owners of these entities to have their pass-through income taxed at a single 15 percent rate. This is a substantial reduction from what most pay now. Trump proposes a top 35 percent income tax rate for individual taxpayers, including employees. An employee who earns a high amount would pay a 35 percent income tax rate. If that employee was the owner of a pass-through entity, they would pay only 15 percent for the same amount. This could lead many employees to seek to form a pass-through entity to provide their services to their employer. The Trump plan does not explain how this problem would be dealt with. Presumably, there would have to be some enforcement mechanism to prevent employees from gaming the rules.
