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Trump’s Tax Proposals and Small Business

Phil Cohen

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President Donald Trump ran on a firebrand political agenda that promised to shakeup everything about U.S. politics as we know it—from immigration and defense to healthcare and the tax code. While the Trump administration has come up short in delivering on some of his promises (like reforming the Affordable Care Act and his controversial travel ban), he certainly has lived up to a number of his campaign pledges—including his reformed tax code. While the President is very outspoken about his beliefs and plans, many are still left wondering about Trump’s tax proposals and how they will effect small businesses nationwide.

Donald Trump ran as the pro-business candidate, and after months of rhetoric, the President has unveiled his official proposal for the new U.S. tax code. Trump’s tax plan is vastly different from that of his predecessor, and is sure to have big implications for your small business. Check out all of the need-to-know details of President Donald Trump’s tax proposals and small business implications below:

Trump’s Tax Proposals & Their Potential Effect On Small Businesses

In short, Donald Trump’s tax plan is to simplify, deregulate and lessen the taxation of America’s business and industrial sectors. His proposal, if enacted, would introduce seven key changes:

A Three Bracket Tax Systemcurrently, there are seven tax brackets for taxing income. But, the Trump administration has proposed a simpler, three bracket setup, at 10% (for the poor and the working class), 25% (for the middle class) and 35% (for the upper middle class and rich).

No More AMTotherwise called the alternative minimum tax, the AMT was a measure emplaced to prevent the super-rich from dodging their tax responsibilities. Trump has planned to do away with it, altogether.

Double DeductionTrump’s tax policy doubles the standard deductible from their taxable income. The logic behind this move is that the higher deductions will simplify tax returns and, hopefully, leave the average taxpayer with some more money in his/her wallet.

Killing the Death Taxthe “death tax,” or perhaps more judiciously known as the “inheritance tax,” was implemented in 2014 and taxes the estates that the deceased bequeath to their heirs. The Trump administration claims that it hurts America’s working class—the tax, after all, cuts down on the inheritance of even modest families, who could use every penny of their loved one’s assets. Critics of Trump, though, will likely jump on him for this proposal; suspicious of his character, they will wonder if this isn’t a law devoted to helping the national elites pass their money more efficiently from generation to generation.

Reducing the Capital Gains TaxTrump plans to cut the capital gains tax from 23.8% to an even 20%. This reform takes the capital gains tax back to its pre-ACA rate and is closely linked to his broader call to end Obamacare.

Keeping Deductions for Charity, Mortgages onlywhile wishing to eliminate all individual deductions except for those pertaining to mortgages and charity, many are worried that this will be a redundant confusion in the process considering he is already planning a double deduction system.

Slashing the Corporate Ratethe biggest winners in the Trump tax proposal would be business owners. The tycoon-turned-president wants to cut the corporate tax rate from 35% to a mere 15%. While such a reduction would greatly lessen the national tax revenues, the administration hopes that a liberal economy will spark investment and overall growth (which would compensate for the loss in tax revenue).

Employee Meals Deductionspreviously, under the former tax law, businesses were able to deduct 100% of the expenses incurred for providing meals to their employees. However, with the implementation of the Donald Trump tax plan, there has been a significant alteration to this deduction. As of now, if businesses choose to provide meals to their staff on business premises, only 50% of the expenses associated with those meals can be deducted. It’s also important to note that by the year 2025, this deduction for employee meals will no longer be allowed at all.

Transportation Expensescertain transportation expenses are no longer eligible for deduction. These expenses include the costs incurred by business owners for providing employee parking, public transportation passes, and reimbursing employees for their bike commuting expenses.

Entertainment Expensesmost entertainemtn expenses have been eliminated, with only a few exceptions. Under the new plan, businesses can no longer deduct expenses related to entertainment, such as tickets to sporting events or meals out with clients. However, there is still an opportunity to deduct the cost of food that is provided to clients at events. This implies that business owners will now have to pay taxes on previously deductible expenses like box seats and dinners with clients, unless they choose to remove such activities from their business plans completely.

 

Pass-Through Companies

Perhaps the most controversial of the White House’s tax proposal is the loose policy surrounding so-called pass-through entities. A pass-through entity is a company that pays its taxes through its owner’s income taxes, rather than being taxed directly—think of it almost as if the business owner becomes the company, in the eyes of the IRS. Donald Trump’s own company is set up this way, as are countless others nationwide.

Trump’s proposed cut of the corporate tax to a mere 15% encompasses these pass-through entities. So—as a small business (or a large business) owner, you could, in theory, change your corporate structure and register as a pass-through entity, reducing your personal income tax to the corporate level of 15%.

Implicitly, unless the verbiage of his proposal is tweaked, the Trump tax plan would offer all business owners a route to reduce their personal income tax to only 15%. The idea is highly controversial—many do not like the blurred distinction between corporation and person. Others are upset that the country’s wealthiest members will be able to walk away with a far larger payday thanks to a loophole in the legislation. For entrepreneurs and business owners, though, it would prove advantageous. Rather than paying taxes on personal income and corporate income, one would be taxed once—and at a much lower rate.

Section 199 Deduction

The Section 199 deduction, also known as the domestic production activities deduction, was a provision in the U.S. Tax code that allowed business owners to reduce their taxable income by 3% for income generated from qualified production activities. This deduction was created with the objective of incentivizing domestic manufacturing within the country.

However, the Section 199 deduction became a subject of criticism among various stakeholders, including critics of the former tax code. One of the main reasons for this criticism was the perception that some manufacturers were exploiting this deduction, taking advantage of the system rather than using it for its intended purpose.

As a result, the Section 199 deduction was eventually repealed. The repeal eliminated the ability of manufacturers to claim this specific benefit. The decision to repeal the deduction was made in order to address the concerns regarding its misuse and to bring about a more equitable and efficient tax system.

By repealing the Section 199 deduction, lawmakers aimed to ensure that tax benefits were being directed towards the desired outcome of boosting domestic manufacturing, rather than being used as loopholes to reduce tax liabilities without fulfilling the intended purpose of the deduction.

Invoice Factoring Solutions

As a small business owner, you do not need to find some obscure loophole in the tax code or have a phenomenally creative accountant in order to save tons of money. All you need is invoice factoring. Invoice factoring is a method of alternative finance for small businesses that is perfect for startups and small outfits that are looking towards expansion. Invoice factoring is a debt-free procedure and any business can qualify for it—regardless of credit. Give Factor Finders a call today and start saving your money. There is a lot of potential for change in the coming months, especially with the 2024 presidential election around the corner.

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Phil Cohen

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