May 1, 2017

Key takeaways of Trump’s tax plan for business owners

On April 26, President Donald Trump delivered the long-awaited tax reform plan he spent most of his campaign discussing.

True to his word, it called for significant changes to the tax code, though there are still some open questions about how, when and if the plan will be implemented.

Several hours after he publicly released his plan, I was invited on Nightly Business Report to offer my analysis of and reaction to the outlined changes. During my discussion with hosts Tyler Mathisen and Sue Herrera, I explained some of the nuances of the president’s plan and how individuals will be affected. You can check out my appearance here.

Because the plan was so wide-sweeping, we wanted to publish a post highlighting some key provisions that will specifically impact business owners if the plan comes to fruition. Right now, the President and Congress are hoping to pass some version of tax reform by the end of the year, though it remains to be seen if they will be able to stick to that timeline.

1. Massive tax cut for pass-through entity and C corporation owners

Trump’s plan proposed a massive tax cut for business owners, recommending that their tax rate be capped at 15 percent.

The highest individual tax rate is currently 39.6 percent, but if you add in the net investment income tax (NIIT), the real maximum rate is 43.4 percent. That means pass-through entity business owners would see a 28.4 percent tax cut. C corps would receive a 20 percent tax cut, and owners would benefit from another 3.8 percent cut on dividends received as Trump is proposing eliminating the NIIT.

Of course, this begs the question of whether this could realistically happen. We think there’s a possibility something remotely looking like this could happen, as the House of Representatives’ blueprint called for C corps to be taxed at 20 percent and the rate for pass-throughs to be capped at 25 percent.

2. Repeal of the estate tax

Trump’s plan calls for the complete elimination of the estate tax, which Secretary Steven Mnuchin referred to as the death tax. This is particularly important to business owners because it allows them to pass on their business to their family or heirs after their death tax free.

3. Elimination of state and local tax deduction

While the first two points would likely be seen as a win by most business owners, certain aspects of Trump’s plan actually might cause wealthy individuals to pay more in taxes.

Individuals will no longer be entitled to deduct state and local taxes under Trump’s plan. These deductions cause many taxpayers to be subject to the alternative minimum tax (AMT), which means the marginal rate on that income is being taxed at 28 percent. By taking away the state and local income and property tax deductions, the Trump plan could effectively increase the marginal rate paid by those taxpayers from 28 percent to 35 percent.

It’s important to note that while we will be keeping a close eye on those and the other elements of the Trump tax plan, nothing is set in stone and the plan can and likely will evolve over time, especially given Congressional input.

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