President Donald Trump’s tax plan proposes changes that may provide tax-cuts for small businesses based on how those businesses are organized. Under the proposed tax plan, certain “pass-through” entities may receive a major tax advantage with a tax-cut to 15%. This incentivizes small business owners to structure their business structure as a partnership, s-corporation or limited liability company. Those types of businesses currently “pass-through” to their owners a proportional share of taxable income (along with losses and other tax items) with a maximum tax rate of 39.6%.
Under the current law, there are a few tax-reasons to evaluate “pass-through” business structure. For example, some S-corporation business owners can save on Medicare and Social Security taxes when compared to other pass-through entities. If Trump’s tax plan is implemented, there will be an incentive or business owners to distinguish between compensation income and business income by using an optimal business structure to take advantage of the potential 15% tax-cut.
There are considerations other than tax planning that are important to evaluate when finding the perfect business structure. Small business owners should consult with an experienced attorney to determine if there are benefits to using a holding company or other combined business structure to meet all of their needs.
THE PROPOSED TRUMP TAX PLAN HIGHLIGHTS
Pass-Through Tax Bracket (Business Income)
It is unclear whether pass-through business income would be subject to a bracket, but we do know that the proposed maximum rate would be 15%. Business owners structured as partnerships, limited liability companies, or s-corporations may be able to take advantage of this tax cut.
Personal Income Tax Bracket (Compensation Income)
Trumps tax plan proposes climbing personal income brackets at rates of 10%, 25% and 35%. This is a drop from the current number of personal income brackets from seven to three.
Personal Standard Deduction
The current proposed tax plan calls for doubling the personal standard deduction. This equates to $6,300 standard deduction for single individuals and $12,600 for married couples filing jointly. It will be important to see if there are significant changes to the personal exemption, currently it is $4,050, but it is unclear if this will be adjusted to account for the proposed change in the standard deduction.
Itemized Deductions
IT appears that mortgage interest and charitable contribution deductions will be preserved. However, many itemized deductions may no longer be available. It will be important to see if the proposed increase in the Standard Deduction (mentioned above) will eliminate most taxpayer’s need to itemize deductions.