President Donald Trump has proposed sweeping changes in taxes for both businesses and individuals. Here is what we know about his proposals for American businesses. Keep, in mind however, that these are only proposals and it is unlikely they will be fully adopted by Congress, which has its own proposed tax plans.
For updated information on the tax changes enacted by the Tax Cuts and Jobs Act, see How the Tax Cuts and Jobs Act Affects Businesses.
Regular C corporations are separate taxpaying entities that file their own taxes and have their own tax rates. For many years, the top corporate tax rate has been 35%, which is higher than in most countries. Trump wants to reduce the top corporate tax rate to 15%. However, corporate dividends will still be taxable income for a corporations’ shareholders. Thus, corporate income distributed to shareholders as dividends will remain subject to double-taxation—taxes on this income must be paid by both the corporation and shareholders. Many experts believe the proposed 15% rate is too low and that a reduction of corporate rates to 25% is more likely to be adopted by Congress.
Most smaller businesses (and many larger ones) are not organized as C corporations. Instead, they are pass-through entities—sole proprietorships, limited liability companies, partnerships, or S corporations. Profits earned (or losses incurred) by these entities are passed-through the business to the owner’s individual tax returns, and they pay income tax on the profits at their individual rates. Trump wants to allow owners of these entities to elect to have their pass-through income taxed at a single 15% rate—a substantial reduction from what most pay now.
Trump proposes a top 33% income tax rate for individual taxpayers, including employees. Thus, an employee who earned $125,000 would pay a 33% top income tax, while the owner of a pass-through entity would pay only 15% on all of his or her business income. This could lead many employees to seek to form a pass-through entity to provide their services to their employer, instead of being paid employee wages. The Trump plan does not explain how this problem would be dealt with. Presumably, there would have to be some enforcement mechanism to prevent employees from gaming the rules.
Businesses engaged in manufacturing in the United States would be allowed to deduct 100% of the cost of equipment and machinery in a single year, instead of depreciating the cost a little at a time over several years. Businesses who choose this option, however, will not be allowed to deduct the interest on money they borrow to purchase equipment and machinery.
Trump’s plan eliminates most special tax credits for businesses except the research and development credit. There are dozens of such credits--for example, credits for businesses that develop alcohol based fuels, hire disabled workers, or invest in alternate energy property.
Businesses that provide on-site childcare for their employees are entitled to a tax credit equal to 25% of their expenses, subject to a $150,000 annual cap. Trump’s plan would retain this credit and increase the cap to $500,000. Additionally, businesses that pay a portion of an employee’s childcare expenses can exclude those contributions from income.
Large U.S. businesses hold nearly $2.5 trillion in foreign profits in their foreign subsidiaries. They have kept this money abroad to avoid having to pay U.S. income tax on it. Trump’s plan would encourage these businesses to bring this money back to the U.S. by taxing it at a single 10% rate (assets other than cash would be taxed at a 4% rate). This one-time tax would be payable over 10 years. Trump’s plan would thereafter tax earnings of U.S. firms held overseas even if they are not repatriated to the U.S.
So is the Trump tax plan good or bad? It depends on your time frame. In the short run, the plan would likely have a positive impact because it will reduce the cost of capital (by reducing tax incentives for borrowing), and lower the tax rate on labor. This should lower unemployment and boost wages. A study by the Tax Policy Center found that the plan would grow the economy by an additional 1.1% in 2018. However, the plan would also increase the federal deficit by $2.6 trillion to $3.9 trillion over the next decade, which will reduce economic growth in the long run. The Tax Policy Center says that by 2024 the positive effects of the plan will be erased and by 2027 it could lower GDP by 0.78%.