The much anticipated White House tax plan and reform package was just released, and there has already been a lot of coverage on what exactly this plan will mean. If you run your own business, for example, there are certainly some reasons why you might love the tax cuts you have been hearing about.
Conversely if you like to itemize your tax return, the fact that almost all of the itemized deductions are being eliminated might result in a higher tax bill for you. Specifically, the proposed elimination of the deduction for local and state taxes could result in you paying a significantly higher amount than you are used to, but on the other hand the proposed elimination of the alternative minimum tax (AMT) might help offset this increased tax burden. Confused yet?
Last, but not least, the proposed realignment of both the business and individual tax brackets are adding to the uncertainty and debate surrounding this freshly released taxed plan.
If you run your own business, however, there are three aspects of this hot-off-the-presses tax plan you need to know about. Let's take a look and see what these proposed changes can mean for your business. Like most changes there is the good, the bad, and the ugly, but all are important for entrepreneurs to understand.
1. The Good: Lower Rates
The proposed cutting of tax rates for both corporations and individuals, has spurred endless discussion and debate on both sides of the political spectrum. If you own a business and are currently in the 35 percent corporate tax bracket you are paying income taxes, on every $100,000 of that income, or $35,000 at the corporate level. Under the proposed tax changes, you would be able to apply the lower income tax rate -- 15 percent as of this first draft -- to your business income even if your personal income tax rate remained in one of the high proposed tax brackets. The tax savings would only be magnified the more profitable your business became.
2. The Bad: It Might Not Matter
Not every entrepreneur will benefit from the reduction of corporate tax rates. For example, if your business is organized as a partnership or other type of pass-through entity, all of that business income is already passed through to you as an individual. In that case, depending on which of the income brackets that you are eventually assigned to, you might end up paying pretty much what you are paying now. Most painful of all, is if you lose access to itemized deductions such as those for local and state taxes, you might actually end up paying more
3. The Ugly: Just Getting Started
Despite what already feels like months of debate over these specific issues, the tax policies unveiled are just the preliminary beginning of a comprehensive tax plan. It will take months of negotiation between the White House and Congress to arrive at a final tax plan, so all of this might very well change before any of it becomes law.
The Trump administration has just rolled out what it is calling the largest and most dramatic tax cut in U.S. history, and is causing a tremendous amount of debate in the process. As currently proposed, the changes to the tax code will have an effect on both individuals and business, but small business owners may be the ones feeling the queasiest as these changes are discussed. As you work with your tax advisor to think about these possible changes, however, remember that we are just getting started and have a long road ahead until these changes are finalized.