Small business taxation continues to be an area of tax reform that evolves as both President Trump and the GOP attempt to provide tax incentives to allow small business to compete with larger corporations.
President Trump’s plan would reduce the tax rate on income from pass-throughs to 15%, as opposed to the maximum individual tax rate of 33%. However, if those profits are withdrawn from the pass-through entity another layer of tax would be imposed on the withdrawn funds, similar to the taxation of dividends from a corporation. More details are needed to properly plan for this new set of taxation rules. President Trump indicated during his campaign that rules would be put in place to prevent manipulation of profits to be taxed at this lower rate, rather than the ordinary wage rates for owners if they were to lower their compensation. There are also questions regarding carried interest taxation at a preferential rate. We would expect much more regulation and guidance regarding this area of taxation prior to any action towards enactment.
The GOP plan would also reduce the maximum tax rate on income from pass-throughs. The plan calls for a maximum limit of 25%
Particularly for small businesses, President Trump’s plan calls for an increase in the deduction for expensing capital expenditures under Internal Revenue Code Section 179 to $1.0 million. The GOP plan allows the cost of capital investment to be fully and immediately deductible. However, the GOP plan does not allow the deductibility of interest expense on future loans, eliminating the benefit that would be received to continue to finance a deduction for capital expenditures.