The Trump Tax Plan and What It May Mean to You

The President-elect made a few campaign promises to us regarding taxes.  And since the Republicans are controlling the House and the Senate, we are likely to see tax changes if his campaign plans and promises hold.  These may not go into effect until the 2018 tax year.  Since his campaign promises were without specificity, below is what we do know.

Business Taxes

Trump has promised to repeal the estate tax, reduce corporate taxes to a flat 15% and simplify individual taxes.  Trump has indicated he will first focus on changing business taxes before individual ones.

C-Corporations currently have a graduated tax rate to 35%, he is proposing that any business would be taxed at 15%.  However, we do not know what expenses would still be allowed, and there is talk that Trump maybe moving toward a gross receipts tax, where very few expenses can be deducted. This would be good for some industries and not for others.  It would discriminate against certain types of businesses – those that are very heavily expense-laden, like retail; they would pay more.

S-corporations and partnerships, which are pass-thru entities, presently are taxed on the individual level, but they would have the option to be taxed at the 15% corporate rate.

Personal Taxes

For individuals, Trump may take the top rate down by 6.6% to 33%, repealing the alternate minimum tax and reducing the number of tax brackets from seven today to three.  Those with taxable income between $0 and $37,500 ($0 to $75,000 for married filers) would be subject to a 12% tax rate, while those with taxable income between $37,500 to $112,500 ($75,000 to $225,000 for married filers) would be subject to a 25% rate.   And those with taxable income above $112,500 ($225,000+ for married filers) would be subject to a 33% federal tax rate.  This may sound beneficial to some people, but there might be some negative surprising results as to what some people’s tax liability might be.

Trump may change the standard deduction and it would more than double to $15,000 for single filers to $30,000 for married couples filing jointly while eliminating many itemized deductions and capping all deductions at $100,000 for single individuals and $200,000 for married couples.  This increase along with the lower tax brackets would see the federal tax liabilities go down for most Americans, and is in line with Trump’s goal to simply tax rules and present the rich from taking legally gray deductions.  Charities may suffer if there’s a cap because this would not incentivize charitable deductions.

Under the Trump tax plan a middle class tax payer would likely see modest tax savings while those in the highest income ranges would actually see the most in savings given the lowering of the highest marginal tax rate, increase in the standard deduction and repeal of the Alternative Minimum Tax.

For those of us with businesses it would behoove us to consult with an up-to-date accountant regarding year-end tax planning.

It’s Spring and Its Tax Time

 

adding machine

As small business owners we have to be mindful of the fact that we have to prepare our taxes on the business as well our personal filings. As budding entrepreneurs we may not realize that there is a fair chance that we could create tax headaches for ourselves.  Since we went into business we may have more forms to fill out that are growing more complex as time goes by because of new laws coming into play in the federal and state tax codes.  And it can become difficult to keep abreast of the changes that affect us.

Just think about it. If we have employees we have to consider the new withholding taxes and the sheer volume of work that is involved. And it is not just the work; employees will need explanations as to why their pay stub is different. The employer must file federal tax Forms 941, Employer’s Quarterly Federal Tax Return, and 940, Employer’s Federal Unemployment Tax Return (FUTA), which address reporting of withholding for social security, Medicare and unemployment, as well as for federal and state income taxes.  So it is difficult for the small business owner to keep up with all this information and the changes in the withholding tax laws and rates.

With regard to the business itself, Schedule C, Profit or Loss from Business (sole proprietorship), revealing the sales and expenses of the business, must be completed. Some issues may come up in preparing these; for example, any change in the value of inventories must be calculated and the treatment for the related profits and losses must be addressed. The treatment for such changes can be a tricky situation for the entrepreneur.

If you have an online business and sell to customers out of state, there is another issue which can become problematic. Some states which are short of cash may force companies to collect tax on sales made to their residents even when the company is based elsewhere.  Court challenges on this topic leave the requirement in doubt, but if the trend catches on companies would find it harder to comply with the various sets of rules and tax rates.

What is the entrepreneur to do? In the first place it is recommended that a payroll preparation company that serves small businesses be hired to prepare your payroll and file the required withholding taxes and quarterly reports for your business.They are not expensive and the time and energy they can save you makes this task worry-free.

Hiring a small business accountant who has experience in your type of business is also worthwhile. Make sure you interview them for their abilities and your needs. While the fees they charge are an important consideration, you may want to retain them instead of getting billed for every question you may have. An accounting firm should have a retainer, like $150 a month, to cover payroll, tax returns and other filings. In this way you will be able to develop a relationship with the accountant and someone you can lean on.  Nickel and dime billings for phone conversations would be nonexistent.

An experienced small business accountant who understands your business can help you grow your business.  If he is asking the right questions he would address your goals and where you want to be in the next couple of years. He can help you shape your life.