Small Business Taxes & ManagementTM--Copyright 2016, A/N Group, Inc.
Effects on Businesses
What do the election results mean to your business? Your taxes? There's no one answer to that. As far as the effect on your business, with small exceptions, it should be positive. Most experts believe they'll be a move away from regulations that have negatively impacted many businesses. But the actual impact will vary widely. The plumber working on his own faces regulation on the local--county and town--level. Federal rules probably have little, if any, effect. Some health care businesses will do much better--as evidenced by the surge in prices for drug companies. Some worse--many hospitals believe the demise of Obamacare will hurt their business.
It can get far more complicated. Will home prices rise? Depends. If immigration (legal and illegal) is severely restricted, new home prices will rise because smaller contractors often use immigrant labor. Higher interest rates, which some professionals predict, would also have an effect on home prices. On the other hand, reduced regulation of banks could ease lending rules which could offset higher interest rates. And a lower tax rate would increase available income.
From a business standpoint, the best advice is to analyze the situation, listen to any trade organizations, and don't overreact--in either direction. While it seems fairly certain Obamacare will be attacked rather quickly, many other changes could take much more time.
Effect on Taxes
What will happen to taxes? Some changes are fairly predictable, some aren't. Here's a brief rundown of the most predictable ones. These are based on President-Elect Trump's proposals.
Individual Tax Rates They're heading lower, at least the top rates. The proposed rates are 12 percent, 25% and 33%. The lowest rate would apply to the first $75,300 for married, joint ($37,650 for single); 25% on taxable income up to $231,450 ($190,150 single). Everything above those levels would be taxed at 33%. The 3.8% tax on net investment income would be eliminated. The head-of-household filing status would be eliminated.
Note. The income breakpoints indicated are based on a House proposal.
Capital Gains The capital gain rates might be unchanged, with the exception of eliminating the 3.8% tax on investment income. The same rates would apply to qualified dividends.
Deductions The standard deduction would increase to $30,000 for married, joint ($15,000 for single). There would be a $200,000/$100,000 cap on itemized deductions. No personal exemptions.
Childcare An above the line deduction for child and elder care expenses limited by a taxpayer's income.
Alternative Minimum Tax Trump's proposal would be to eliminate the tax.
Corporate Tax Rates The corporate rate would drop to 15% under Trump's proposal. That may be unrealistically low. Passthrough entities would be taxed at 15%, but taxed again on distributions. Good news for businesses that retain a substantial share of their income.
Section 179 Expensing The limitation would increase from $500,000 to $1 million per year.
Estate Taxes The estate tax would be eliminated. But so could the stepped up basis on assets at death, at least on assets above the current estate tax threshold threshold.
Those are the highlights, the ones that affect the most taxpayers, and the ones that have the best prospect of passing.
But the devil is in the details. Here are some points to consider.
Congress The Republicans do have a majority in both houses, but the Senate one is thin and not all members vote the party line. That means some compromise might be necessary. In addition, the Trump plan isn't the only one. The House has it's own plan. And many individual members have their own thoughts.
Paying for the Cuts The cuts have to be paid for in some way. Some estimates put the 10-year deficit increase at $9 trillion. There is some sleight-of-hand that can be used to ignore at least part of the problem currently, but it'll show up quickly. That's happened in the past. The economy will have to grow faster than it has in some time to solve the problem. If not, tax rates could creep higher after the initial cuts. That's happened in the past. It might be avoided with significant spending cuts, but that approach has proved elusive in the past. And at some point spending cuts will be felt at the voting booth.
Less People will Itemize That's definitely true. And for a number of taxpayers, taxes will be simpler. But having three tax rates rather than seven won't help much. Most returns are prepared on computer, either by professionals or at home. Few people actually use the tables to compute their tax liability. And for many taxpayers, itemizing isn't that complicated. It's dealing with capital gains, education expenses, rental properties, a sole proprietorship, etc. and that will continue to cause headaches.
State Taxes Most states use federal taxable income as a starting basis for their tax. Many states use the same itemized deductions, some with modifications. Unless they change their approach, you still could be itemizing.
Retirement Plans Look for additional benefits for contributions to retirement plans.
Other Changes It's more than likely that Trump's proposals will be incorporated into a host of other changes. Where this will end up is hard to predict. Overall tax liabilities are almost sure to be lower, but deductions for individuals reduced. There could be cutbacks in certain credits and other deductions for particular industries or taxpayer benefits. Thus, some taxpayers may benefit less than others. Once more information is available, you should discuss your situation with your tax advisor.
Timing of Changes Clearly nothing will happen in 2016 to affect 2016 returns. Any changes will be in 2017 and between the actual timing is difficult to predict. At this point many experts predict early attention to taxes, but it may be far enough along in the year that some of the changes will not be retroactive to the beginning of 2017.
Tax Planning The safe bet now is to defer income into 2017 and take deductions this year. For a more detailed discussion of tax planning, see our upcoming articles.
Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 11/14/16