Political affiliations aside, it’s important that startups and small business owners take some time to understand the impact of a Trump tax plan on small businesses.  Focusing solely on the bottom line of small businesses, his tax plan is largely favorable.  However, it is important to note that none of what is currently on the table is guaranteed to be passed into law.  Regardless, lets examine the two biggest areas his proposed tax overhaul would impact– personal income rates and business income tax rates.

Impact on Personal Taxes

The first part of Trump’s proposed plan will overhaul the personal income tax brackets.  As it currently stands, there are 7 tax brackets, ranging from 10% to 39.6% at the highest income threshold.  Trump’s proposed plan shrinks the number of tax brackets from seven to three, with the lowest being 12%, the median at 25% and the highest capping itself at 33%.  In general, this will yield substantial tax savings for both the wealthy and the working middle class on their ordinary income (income from wages and interest).  Under the current tax law, this would favorably impact most small business owners and startups that are taxed as flow through entities (i.e. LLCs, S-Corps and Sole Proprietorships).  However, the big wrinkle in Trump’s proposal is the potential that business income from flow through entities that is currently taxed at the individual rates may now be taxed at preferential business rates.

Impact on Business Taxes

The second major component of Trump’s tax plan is that it will cut business tax rates from its highest rate (currently 35%) to a mere 15%.  Where this becomes of interest to small business owners is that his plan seemingly would tax business income from flow through entities under this new preferential rate.  As mentioned previously, income from LLCs, S-Corps and Sole Proprietorships that is currently taxed at personal tax rates could now qualify as business income taxed at the newly proposed 15% tax rate.  This could effectively reduce the tax rate on business income for highly successful small business owners from 39.6% (at the highest income threshold) to 15%, a net savings of 24.6%.

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Other Considerations Worth Noting

There are more components of his tax plan that will have a far reaching impact.  For example, his proposed tax plan would eliminate the alternative minimum tax, remove the depreciation deduction on capital expenditures (in favor of either expensing the entire investment or electing to deduct interest payments over time) and remove the estate tax, among others.

Conclusion

The impact of a Trump tax plan on small businesses should be, in general, highly conducive to entrepreneurship.  The ability to shift income from flow through entities to preferential business tax rates would create an unprecedented amount of new small businesses as America responds to this tax incentive.  Whether or not the proposal becomes part of our tax code in 2017 remains to be seen, but it is certainly something to follow over the coming months.  Often seen as the great equalizer, it may be time to finally take the leap and embark on the journey of entrepreneurship.

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