BY D. ADAM ANDERSONThis article originally appeared in the February 7, 2017 edition of the Business Tribune.
It is the rare New Year that fails to bring new laws affecting business owners. With the unexpected election of President Donald Trump, 2017 should see some of the most significant changes to business taxation in recent memory. Congressional republicans have long sought a simplification of the tax code, generally focused on the twin aims of lowering overall tax rates while broadening the tax base by cutting various tax credit programs and other tax expenditures. When campaigning, President Trump announced a tax plan distinct from that of the Republican Party platform; thus, what exactly Congress will be debating is as-yet unknown. Nevertheless, now that republicans control the White House and both houses of Congress for the first time since 2006, owners of Oregon-based businesses—large and small—can be relatively assured of notable changes as early as the 2017 tax year.
Trump’s campaign tax proposals include (1) reducing the top corporate income tax rate from 35 percent to 15 percent; (2) repealing the corporate alternative minimum tax; (3) eliminating most business- oriented tax expenditures, including the Section 199 deduction for domestic production activities; and (4) enacting a deemed repatriation of deferred foreign profits at a 10 percent tax rate. This is in addition to a variety of similar changes to the individual income tax, and a proposed repeal of the entire federal estate and gift tax system.
If enacted, these changes as a whole should generally reduce the “double-tax” hit to C corporation shareholders, currently the cumulative effect of up to a 35 percent tax on gross corporate profits and a 15 to 20 percent tax rate for an individual shareholder tax on “qualified dividends.” Further, it may incentivize C Corporations with foreign earnings held overseas through complicated tax avoidance strategies to go ahead and repatriate a significant amount of those corporate profits.
Large companies aside, one of the more interesting aspects of Trump’s plan is how it may address smaller businesses organized as “pass-through” entities that avoid entity-level taxation (e.g., S corporations, partnerships, and limited liability companies). Commentators have debated throughout the fall and winter with regard to whether Trump’s 15 percent corporate tax rate proposal is in fact an overall “business tax” rate, allowing pass-through entity profits to be taxed to owners at the 15 percent rate, rather than at an owner’s otherwise applicable marginal income tax rate (which, under the Trump plan could be as high as 35 percent reduced from the present top rate of 39.6 percent).
Despite the potential benefit to small business owners, there is criticism of this proposal based on the disproportionate advantage it would give to wealthier taxpayers. For instance, many hedge funds, private equity groups, and professional firms are organized as pass-throughs. Thus, high earners would stand to gain a major tax break on pass-through profits, as well as an incentive to recharacterize their wages as pass-through profits by creating entities that contract to provide services (rather than a traditional employer-employee wage arrangement). Trump’s campaign filings were reported to show that he himself is the owner of over 550 limited liability companies, leading to the Clinton campaign’s criticism of this proposal as the “Trump Loophole.”
Whether or not the 15 percent “business tax” will prove applicable to pass-through entities, at least some pass-through owners should see a reduction in tax on business profits due to the expected overall lower individual tax rates. In addition, for family-owned small businesses, the elimination of the estate tax could reduce taxation on overall family wealth, and could result in simplified business succession planning. Major changes are afoot. Let us at Jordan Ramis know how we can help you navigate them.