On Thursday the House Republicans unveiled a 429 page tax proposal entitled, Tax Cuts and Jobs Act. The simplified tax reform will enable 9 out of 10 Americans to file on a form as simple as a postcard and intends to provide more jobs, fairer taxes, and bigger paychecks for the American people. The reform is by far the most malleable plan yet, benefiting business owners where it impacts them most -- taxes. Below are 3 ways the reform will impact you.
1. Create a New Tax for Businesses
If your business is set-up as a S-Corp or C-Corp your tax rate will be reduced from 35 percent to 20 percent. Non-corporations will benefit too. Previously sole proprietorships and partnerships carried-over its income and expenses onto the business owner's personal income tax return. The proposal calls for a 25 percent rate for pass-through businesses, rather than paying the individual tax rate which would exceed 40 percent at times. Instead small businesses will be taxed at no more than 25 percent, allowing small business owners to keep more of its money.
Personal filers benefit too and will pay either 12 percent, 25 percent, or 35 percent instead of falling into the previous seven tax brackets. The new plan would change so single filers earning between $45,001 to $200,000 (previously $37,951 and $91,900) will be in the 25 percent tax bracket. American workers earning between $91,901 and $200,000 would also be pushed into the 25 percent tax bracket, instead of the current 28 percent or 33 percent bracket.
While the plan intends to protect more of every paycheck and create more jobs with additional cash flow. The Economic Policy Institute, a nonprofit, nonpartisan think tank, reported in October 'there is little relationship between post-tax profit rates and business investment that boosts productivity, while productivity and wages have grown faster in periods of higher taxes.'
Either way, taxes will be reduced no matter how your business is set-up which is a win for every business owner.
2. Eliminate the State and Local Tax (SALT) Deduction
Business owners that historically have chose to itemize their deductions (state and local real estate, property sales, or income taxes) rather than claiming the standard deduction will no longer be able to deduct this expense. The current deduction primarily helps those in blue (Democratic) states where taxes are higher. The Times reports, eliminating SALT could increase federal revenue by $1.3 trillion over the next 10 years.
3. Preparing for Retirement
An earlier version of the plan proposed to lower the 401(k) cap from $18,500 to $2,400. The plan does not touch your retirement savings and will still provide tax relief to help more employees and businesses lower its taxable income by contributing to retirement plans.
The proposed plan is a win for business owners and at last may get bipartisan backing.