Published By Janet Gershen-Siegel at December 13th, 2017
As we sift through the news and the opinions about the proposed Trump tax plan, one question small business owners should be asking is: how does this affect my business? Will this plan raise or lower my small business taxes? Will you be one of the winners under the proposed Trump Tax plan?
Note: as of the original writing of this article, the president’s tax reform proposal had not yet been passed. It was also a rather large bill and it may be some time before all of the details come out, particularly as the House and Senate versions must reconcile.
Note: as of the updating of this article (July of 2019), the tax reform proposal had passed. Kind of.
Currently, sole proprietors, freelancers, unincorporated businesses, and pass-through businesses pay taxes at higher individual rates. The plan proposes to reduce their rate to 15%. The corporate tax rate would also go down to 15% under the president’s proposal.
This month (December of 2017), CNBC released the results of a survey they took regarding small business’s attitude toward the president’s tax proposals.
According to the survey, about one quarter of all participants said taxes were their biggest concern, with regulation coming in second. Customer demand and the costs surrounding employee health care were also cited.
Over 40% of all respondents said they felt the proposed tax plan would benefit them. However, another third said they felt it would have no effect on them.
Some respondents felt the current proposal would not be passed in its current form and, instead, would serve more like the opening salvo in negotiations. Given the climate in Washington, that seems a logical conclusion to draw.
Per Senators Bernie Sanders and Elizabeth Warren, in a November Boston Globe article, the plan would generally favor the larger banks, rich foreign investors, and multinational corporations. Small business owners were not necessarily in agreement with the Senators’ assessment.
The survey also took a measurement of confidence, and found it to be flattened. The survey’s Small Business Confidence Index stayed at 57. This was no change from the previous quarter. This figure means more small business owners are optimistic than those that are pessimistic about the future direction of their business. The figure strongly correlated to both support for President Trump and also beliefs in the passing of the president’s tax reform plan and beliefs that business tax levels would decrease in 2018.
But it pays to dig deeper into the numbers, as they show the same kind of gulf which a number of other types of opinion polls have been showing in the US for the past several years. The 33% of business owners believe that taxes will go down in 2018 also had a confidence level of 70, whereas the 31% expecting higher taxes had a confidence level of only 44.
For the 53% of respondents who support the president, their confidence index rose from 65 to 67. But for the respondents who disapprove of how the president is handling this, their confidence index dropped from 49 to 47 during the past quarter.
A good 55% of small business owners in the survey supported the passing of a tax bill. However, the number of employees in a small business directly correlated with belief that the bill would lower company taxes. Just over half of all owners of businesses with 50 or more employees felt their taxes would decrease under the plan. While only 30% of owners of small businesses with zero to four employees thought their taxes would decrease under the president’s proposed plan.
There was a less dramatic difference when looking at which small business owners felt they would be paying more in taxes. A third of owners of businesses with zero to four employees thought their taxes would go up under the plan, whereas only 22% of small business owners of companies with 50 or more employees felt the same.
Overall, without taking size into account, the numbers were close to evenly split. So this is between business owners believing their taxes would go up (31%), go down (33%), or stay about the same (33%).
If the tax plan passes, one of the bigger changes affects everyone – not just small business owners. The proposal to reduce the number of tax brackets from seven to four should benefit anyone preparing their own tax returns. Even for people and businesses which use outside services, a simpler tax code could mean, at the very least, a faster turnaround on getting tax returns out the door. This could be particularly beneficial for anyone paying taxes on a quarterly basis.
A year later, one main benefit for small business owners is the reduction of the maximum corporate tax rate from 35% to 21%.
For small business owners who are looking to sell – and, in particular, baby boomers looking to retire – the proposed reduction in capital gains taxes would mean that million-dollar businesses could be sold with losing a significantly smaller tax bite.
Before the proposed tax bill becomes law, just like with any other bill in Congress, there will undoubtedly be changes. Small business owners should – as should all citizens – take a look at the tax proposal overall. And don’t just consider a little piece of it. This is because the size and reach of the president’s plan means it will affect the entire country for years to come.
Since the original posting of this article, over a year and a half has gone by. And the biggest winners under the proposed Trump tax plan turn out to be the very rich. Does that shock you?
So – are you in the 1%?
So, who really are the winners under the proposed Trump tax plan?
So, what did happen after all? The Tax Cuts and Jobs Act, according to The Balance, eliminated personal exemptions. At the same time, it doubled the standard deduction. Hence that was potentially a benefit for people whose returns are relatively simple.
After all, if you did not itemize before, then you are not going to care. You are probably not going to miss many of those deductions now that they are out of the picture.
These changes will expire in 2026. Practically speaking, this means the deductions will go back to their old levels then.
Congratulations on getting a lower corporate tax rate. Now it’s down, from 35% to 21%. Unlike for personal, these cuts will be permanent ones. Of course, ‘permanent’ is a somewhat relative term. If the federal government needs money, they will get it, and some other bill would undo the cuts.
One issue with eliminating certain itemized deductions and raising the standard deduction is that these changes will ripple into other consumer behaviors. This includes buying homes, as the higher standard deduction means fewer people will take the mortgage interest deduction. Per the National Association of Home Builders and the National Association of Realtors, this may lower housing prices.
However, keep in mind that there is likely some form of a recession looming. If the housing market bubble bursts, then home prices are going to plummet, anyway.
Persons who pay alimony will lose their deduction, whereas those who receive it will retain theirs. One thing to understand is that the government sometimes attempts a form of social engineering with the tax code. As an example, offering a tax deduction for mortgage payments encourages both home ownership and timely payments.
Did the deduction for alimony payers start off as an attempt to reward people for taking care of their ex-spouses? Maybe. Certainly it would sweeten the pot for a conscientious person paying their responsible sums.
But did it encourage any deadbeats to come on over to the right side of the law and make payments?
Now, this one more or less is dependent upon who you talk to. With a (somewhat) simpler tax code, it should be easier to prepare taxes. Hence this plan could help consumers at least in that area.
But of course that also means that tax preparers may very well find themselves out of a job.
How has the tax plan affected you? The real winners under the proposed Trump tax plan just might surprise you.