Donald Trump says he wants to lower your business taxes, but if you own a small business, is he likely to keep that promise?
Trump and the Republican leadership are expected to propose new tax plans soon, hoping to lower a bunch of taxes: corporate, personal, and capital gains taxes. Trump repeatedly pledged to lower the corporate tax rate from 35% to 15%, and small business owners are hopeful this means something for them. Beware: most tax plans discussed contain a minefield of bombshells for small businesses.
Here’s what a small business owner should look out for:
- Lowering tax rate on businesses. Sounds terrific, but look behind the curtain. Overwhelmingly, few small businesses pay the “corporate tax rate.” If your business is an “S” corporation, an LLC, a partnership, or a sole proprietorship, you instead pay on a “pass through” basis. Profits (or losses) are passed through your business to be taxed at your personal income tax rate. No gain for you here, while big corporations get a financial gift.
- Lowering tax rate on pass-through businesses. Okay, so Trump said let’s include pass-through businesses. Once again, this sounds great. But this would mostly benefit the wealthy, such as partners in large financial or law firms or ultra-rich land owners like Donald Trump. Most small businesses already enjoy this rate, as nearly 70% of all pass-through entities are taxed at 15% or less, and only 3% pay over 33%. A tax cut on pass-through entities would be massively expensive, and the tax revenue would have to be made up elsewhere (possibly by eliminating tax deductions you currently enjoy).
- Service company exemption. To overcome the above problem, Treasury Secretary Steven Mnuchin indicated service industry companies will not be entitled to the lower business tax rate. Small businesses are heavily in service industries, so they’d be excluded from this lower tax rate. How would technology, distribution, and other non-manufacturing companies be treated? Is creating a business with high-paid technologists less worthy of a tax break than one for a company that, let’s say, makes cardboard boxes with minimum wage jobs?
- Estate tax reduction/elimination. Proponents of this tax break claims it saves small businesses from the grip of the ‘death tax.’ Don’t be fooled. In 2017, the first $5,490,000 of your estate is exempted from ANY estate tax, meaning if your business is worth $5,500,000, your heirs would only pay estate tax on $10,000. Only 80 small businesses or farms will pay ANY estate tax in 2017, according to the Tax Policy Institute, representing a miniscule fifteen hundredths of 1 percent of total estate tax revenue. Who benefits from this tax break? It’s the one-tenth of one percenters who pay about 27% of the total. Those of us still living will pay more taxes to make up for this gift to the ultra-wealthy dead.
- Repatriating dollars. Trump wants to create a tax holiday to repatriate some of the trillions of dollars corporations hold in “overseas accounts,” hoping to get them to create more jobs. In 2004, George W. Bush lowered the tax rate to only 5.25% for repatriated dollars. What happened? Corporations used the more than $300 million that came back to the US to buy back shares and give dividends—NOT to create jobs. Three hundred companies were surveyed about what they’d do if Trump succeeds in getting them to bring offshore money back in 2017, and they said they’d pay down debt and do stock buybacks. Once again, it’s not going to lead to creating many jobs.
- Elimination of mortgage interest deduction. Where can we find the money to make up for all these tax cuts for big corporations and the rich? By eliminating major deductions. One that’s being considered is eliminating the mortgage interest deduction. This helps many middle class Americans buy a home. Without it, there’s likely to be fewer home owners, and middle class homeowners hire a lot of small business people—home improvement contractors, painters, carpenters, maintenance people such as landscapers, realtors. Less business for all of them.
So look carefully at any upcoming tax proposals, and go behind the headlines. They’re unlikely to help your small business, and very likely to give a financial boost to some of your biggest competitors.
Copyright, Rhonda Abrams, 2017
This article originally ran in USA Today on September 20, 2017