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What a Trump Administration Has in Store for Small Business Taxes
The ballots have been cast, the votes counted, and we now know who will be our next president: Donald Trump. While talk of actual policy wasn’t always the emphasis of this tiresome election cycle, we’re now getting a clearer picture of his plans: a traditionally conservative proposal of tax cuts to spur economic growth.
Of course, we still need to wait and see what makes its way through Congress. Even with a decidedly Republican House and Senate, there are no guarantees. But as it stands, a few of the changes you can expect to see include simplified tax rates, increases in standard deductions, and limits in tax expenditures.
Many of these proposed tax changes, if passed, will affect the economy greatly overall, and that includes small business owners. Here are some changes a Trump presidency could bring to a small business’s tax protocol:
1. Cutting Corporate Tax to 15 Percent
After a company takes care of its expenses such as paying its staff, any remaining profits are currently taxed up to 35 percent. Trump wants to cut this rate down to 15 percent. But many startups are pre-revenue and won’t be able to take advantage of this change. For any company that’s profitable, 20 percent is a substantial cut.
2. Taxing “Pass-Through” Income at 15 Percent
Many startups are C corps, while the rest are what’s known as pass-through entities, which includes S corps, partnerships, and LLCs. In fact, pass-through entities account for 95 percent of all businesses in the United States and more than 60 percent of all business income.
For pass-through entities, all income-tax liability passes through the company and rests on the shoulders of its owners. So right now, the company income would be taxed at your personal income-tax rate, which is usually more than 15 percent. The proposed change will tax the pass-through income at that same 15 percent corporate rate, down from 35 percent. For profitable pass-through entities, that’s a huge reduction in tax.
3. Eliminating the Carried-Interest Loophole
The carried-interest loophole doesn’t directly affect startups and small businesses as most don’t carry interest from a private investment fund. Fund managers will feel it, however, which could then trickle down to some VC funds in the startup space. Again, this one is a question mark until the provision is changed.
4. Removing Corporate Tax Expenditures
Trump wants to eliminate corporate tax expenditures and loopholes, particularly those that cater to special interests. However, in news that benefits the startup space, he won’t be touching the R&D credit.
But reducing what you can deduct will definitely affect general small business but not startups that aren’t profitable. Remember, most are pre-revenue and won’t be affected by the change mentioned earlier.
5. Enacting a “Tax Holiday”
For companies that set up foreign corporations to conduct business overseas and bypass a 35 percent corporate tax rate, Trump wants to bring that money back to the U.S. But in an effort to drive domestic investment, it’ll be taxed at only 10 percent. It’s called a “tax holiday” and was last enacted by George W. Bush in the early 2000s.
This could be good news for startups. Theoretically, some of this money may be put back into the startup ecosystem — think investments in incubators, internal projects, mergers and acquisitions, etc. But these proceeds have typically been used to pay out dividends or for stock buybacks. Time will tell whether this has any real effect on small business.
6. Instituting Childcare Tax Credit
Another potential win for businesses is the proposal to increase the tax credit for companies with on-site childcare. Currently, the tax credit is set at $150,000, but Trump wants it to increase to $500,000. For any company that provides this benefit to employees, this will be something to keep an eye on.
As with any tax proposal, talk to your tax accountant before the changes become law. Find out whether you can or should be doing any restructuring to benefit from these changes, and monitor what happens for you and your business once these changes take place.