Will Small Business Owners See Relief in Tax Reform?March 8, 2017

By: Peter Pfister, CPA

While President Trump and Treasury Secretary Steven Mnuchin continue to push for sweeping tax reform, small business owners anxiously await the relief that could be on the way. Either Trump’s plan or the House Ways and Means Committee’s “Blueprint” would offer significant benefits to America’s 28 million small businesses.

Trump recently suggested that submitting his “very well finalized” tax plan is next on his agenda after repealing the Affordable Care Act. Mnuchin said the goal is to pass new tax legislation before the House and Senate August recesses, which begin July 29. In the meantime, here’s what we’ve gathered thus far:

Reducing Corporate Tax Rates
America’s corporate tax rate is one of the biggest challenges small business owners face. The U.S. corporate federal income tax of 35 percent is the highest in the world, and state and local taxes add an additional 4 percent for a total tax rate of 39 percent. Trump’s plan aims to slash the corporate tax rate to 15 percent, which Mnuchin says would create “huge economic growth” and “huge personal income.”

Three Tax Brackets
The corporate tax reduction, however, would not apply to pass-through entities, which are the most common types of entities for small businesses.

“The Trump plan and the Blueprint seek to address this issue in two key ways,” Bill Smith, Managing Director for the CBIZ MHM National Tax Office, writes for Entrepreneur. “First, both plans call for three tax brackets — 12, 25 and 33 percent — although they differ on when each bracket will apply. The current maximum tax rate on individuals is 39.6 percent on taxable income over $250,000, and 43.4 percent if the individual is subject to the Net Investment Income Tax (NIIT).”

No More Net Investment Income Tax
Smith adds that both plans seek to eliminate the NIIT, which could save business owners up to 10.4 percent in their maximum tax rate. Currently, the NIIT applies a 3.8 percent tax when and individual’s gross income exceeds $250k, on top of the 15 to 20 percent capital gains tax.

Business Income
Under Trump’s plan, pass-through entities would also reportedly be able to elect a maximum rate of 15 percent for “business income.”

“The Blueprint has a similar concept, but increases the maximum rate to 25 percent,” Smith writes. “If one of these plans makes it into an overall tax reform package, small business owners could realize a savings of up to 28.4 percent on their K-1 income from the companies they own.”

Business as Usual
The tax outlook for small business owners appears to be on the upswing with Trump in office. However, our best advice is to sit tight until legislation. It’s important to stay informed, but there are many moving parts involved, all of which are changing by the minute. The Curchin Group will continue to provide updates on tax reform, with more insightful advice to follow once new tax laws are passed. Need help? Check out our small business consulting.