It’s been over three decades since Congress passed Ronald Reagan’s Tax Reform Act of 1986 – the last major overhaul of the U.S. tax code. However, this could change soon. In late April, the Trump administration proposed a broad outline of his tax reform plan, which Treasury Secretary Steven Mnuchin proclaims will be “the biggest tax cut and the largest tax reform in the history of our country.”
Until Trump’s proposal is enacted via the arduous legislative process we all learned from Schoolhouse Rock!, these changes remain tentative. But, here’s what could possibly happen to you and your small business if his plan becomes law:
Lower Corporate Rate
Corporate tax rates would drop from the current 35% to a staggering 15%. To put things in perspective, the United States possesses the third highest corporate tax rate among 188 countries in the world. This cutback would position the U.S. well below the worldwide average of 25%.
The good news is this 15% rate would not only apply to large corporations but small to medium-sized businesses as well.
The idea behind this strategy is to encourage you to invest back in your business. With more capital in your hands, you’ll be able to hire more employees and disperse your current duties onto others. Additionally, this reduced corporate rate could help keep your business operations on American soil as opposed to outsourcing jobs overseas.
Three Tax Brackets
Currently in the U.S., there are seven brackets — based on annual income and filing status — taxed at rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Under Trump’s tax reform, you would only see three tiers – 10%, 25%, 35%.
Since specific details about the income ranges for the new tax brackets have not been released, it’s difficult to predict who will or will not benefit from this revision.
This is worth noting because if your small business is structured through a sole proprietorship, partnership, LLC or S corporation, then your company is considered a pass-through entity. This means you’re only taxed at the individual level, not the corporate level.
Standard Deduction is Doubled
When preparing your taxes, you’re given the option to lower your overall tax bill by adding up your deductible expenses or taking the standard deduction. This is a flat amount you may subtract from your income — no strings attached.
As of now, the standard deduction is $6,350 for single filers and $12,700 for joint filers. This means single filers could take $12,700 off their adjusted gross income, while couples can subtract $25,400.
Goodbye, Tax Deductions …
To implement the doubled standard deduction, there must be some trade-offs. Most tax deductions – except for home ownership, charitable donations, and retirement savings – will be eliminated.
This change is meant to simplify our country’s complex tax-filing process. Plus, the removal of tax breaks would allow you to focus more on the growth of your business and liberate you from tedious obligations – e.g. tracking miles for the vehicle deduction.
And the Alternative Minimum Tax
The Alternative Minimum Tax, or AMT, functions as a parallel tax system alongside the regular tax system to ensure higher income individuals do not take advantage of loopholes or overuse tax breaks.
Ever since its inception in 1969, AMT had been met with lukewarm reception because critics claim it targets the upper-middle class, not the extremely wealthy.
Trump’s financial advisor Gary Cohn stated: “The AMT creates significant complications and burdens which require taxpayers to do their taxes twice to see which is higher. That makes no sense, and we should have one tax code.”
To ensure your business taxes are on the right track, consider working with 1-800Accountant. We provide accountants, certified public accountants and enrolled agents who are available to assist with any of your tax and accounting needs — and we’re available any time you need us, not just during tax season. For information, visit www.1800accountant.com or give us a call at 1-800-222-6868.