Tax Reforms is one of the key matters President Trump’s administrationis expected to tackle. Now that he has the office and Republicans have the tyranny of numbers in both chambers of Congress,we’re sure to see major tax reforms. According to Steven Mnuchin, Trump’s endorsed candidate for Secretary of Treasury Department, wide-rangingtax reforms is at the top of Trump’s list. And that he intends to stimulate economic growth and create more job opportunities through tax reforms.
But how will the reforms affect SMBs and their owners?
A look into the two major reform plans
Currently, there are two primaryall-inclusive reform plans on the spotlight; House Ways and Means (famous as the “Blueprint”) and President Trump’s Taxplan. And while the above plans look alike in many aspects, there are discrepancies in certain vital provisions.
A major component of President Trump’s plan is to cut down corporate tax rates to 15% from the present 35%. Sounds good given that the U.S. is among the countries with high corporate rates and this move could help American merchants compete more favorably in the global market. Mnuchin announced thatreducing corporate taxes will promote massive economic growth and increase personal income.
On the other hand, these lower rates will only be good news to corporations yetmost SMBs are run as limited liability companies, pass-through entities or partnerships(all usually taxed as partnerships or S corporations). Accordingly, it should be remembered that the Obama Administration failed to make tax reforms for the same reason. Republicans refused to accept lower corporate tax ratesuntil the topic of pass-through entities is addressed.
Both plans aim to address the corporate tax issue in two main ways. To begin with, the two proposals are suggesting three tax brackets …12 %, 25% and 33%, even though they hold opposing views on when every bracket should apply. At present, the max rate on a citizen (on taxable salary over $250,000) is 39.6% and 43.4% forcitizens subject to Net Investment Income Tax (NIIT). Both Trumps plan and the Blueprint want the NIIT eliminated to save small merchants up to 10.4% in their max tax rate. And as a result, save them money for other uses.
What’s in it forSMBs?
Small business owners may eventually enjoy greater savings. The Tax Policy Center has pointed out that Trump’s plan will enable pass-through entitieschoose a max rate for “business income” of 15%. This applies to the business income from pass-through entities, not including distributions those from “larger” entities which are to be taxed as dividends.
The Blueprint has the same idea, only it aims to increase the max rate to 25%. Therefore, if any of these plans are implemented, small business owners could save up to 28.4% on K-1 income from theirbusinesses.
Lastly,both plans look to completelycancelthe Alternative Minimum Tax which largely affects SMB owners. Trump’s plan proposes thatthe estate tax be revised, while the Blueprint wants it totally repealed. Either provision could help merchants who rely on merchant loans for startups pass on their companies to the next administration without the tax burdens they suffer today.