How the Proposed Tax Plan Affects Businesses
As we head into December, Congress and President Trump continue to hash out the details of a comprehensive tax reform bill. While we certainly can’t promise that every proposition contained in that bill will become law, we can review some of the highlights and discuss how they might affect us all. In particular, businesses stand to gain the most from potential sweeping cuts.
Possibly the most meaningful proposal contained within the bill is a lowered tax rate that would affect the majority of American businesses. The so-called “pass-through” entities (e.g., partnerships, LLCs and S-Corporations) account more than 60 percent of the net business income in America. These businesses are taxed at the individual rates of their owners, but could be set at as low as 15 percent if the bill passes. For the vast majority of these smaller business owners, that would amount to a significant tax cut.
As for the non-pass-through corporate tax rate (e.g., C-Corporations), which generally affects large and publically traded businesses, the bill could lower their tax rate from the current 35 percent to a much more modest 20 percent. For reference, the average corporate tax rate in the industrialized world is 22.5 percent.
Dramatically, the Senate’s tax bill (as it is currently written) includes a territorial tax system. Large multi-national corporations currently keep foreign profits overseas, to avoid the high taxes triggered by repatriating the money. Under the new law, these corporations would be able to bring that money back to the United States, without the burden of any additional taxes.
Theoretically (although not supported historically), these changes would spur both small business owners and large corporations to re-invest in their companies, via infrastructure, improved technology, new hires, and so on.
We will continue to update our clients on any changes that might affect you. In the meantime, remember to call our business planning attorneys if you have any questions.