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As Donald Trump prepares to return to the White House, his administration’s tax policy direction is a topic of keen interest for business owners. With the Senate under Republican control and the House’s leadership still uncertain, Trump’s victory signals a potential re-embrace of the tax policies introduced under the 2017 Tax Cuts and Jobs Act (TCJA), which aimed to boost both corporate and individual economic growth. However, some key provisions are set to expire soon, and business owners must prepare for potential impacts, both favorable and challenging.
Extending the Tax Cuts and Jobs Act Provisions
One of Trump’s significant tax objectives is to extend the TCJA provisions, many of which were scheduled to sunset in 2025. Extending these provisions, which include lower tax rates for both corporations and individuals, could prevent substantial tax hikes for individuals and keep business taxes at competitive levels. For business owners, maintaining the TCJA provisions means continued access to deductions and credits that have provided relief over the past few years, including the 20% Qualified Business Income (QBI) deduction for pass-through entities. However, the total cost of extending the TCJA provisions could reach $4.6 trillion, meaning the administration may face pressure to either adjust some provisions or find new revenue sources.
Lowering the Corporate Tax Rate
Trump has shown interest in reducing the corporate tax rate further from its current 21% — even a modest decrease could incentivize businesses to reinvest profits in expansion or hiring. For many small and mid-sized businesses structured as corporations, a lower tax rate would directly increase after-tax profits, providing more flexibility for growth strategies. However, owners should stay alert to potential trade-offs in other tax benefits as part of any corporate rate reduction compromise.
Revisiting the SALT Deduction Cap
The $10,000 cap on state and local tax (SALT) deductions introduced by the TCJA is another area Trump is looking to revisit. This cap has disproportionately affected business owners in high-tax states like California and New York. By lifting or modifying the SALT deduction limit, Trump could ease tax burdens for these business owners, potentially improving their cash flow and expanding their investment capabilities. Nonetheless, any changes here could impact the federal revenue balance, likely necessitating cuts in other areas or finding new sources of funding.
Restoring the R&D Expense Deduction
Another focus for Trump is to restore full expensing for research and development (R&D) costs under Section 174. This change would allow businesses, particularly in sectors like technology and manufacturing, to deduct R&D costs upfront rather than amortizing them over five years. Immediate deductions reduce taxable income sooner, aiding cash flow and encouraging investment in innovation. For business owners in fields where R&D is a core component, this provision can be especially beneficial, as it incentivizes continuous improvement and market competitiveness.
Special Tax Provisions Targeting Specific Professions and Situations
Trump’s campaign proposals included several unique tax breaks aimed at specific groups, which could create targeted benefits for qualifying business owners and their employees. Key proposals include:
- Exempting Overtime and Tips from Taxation: Eliminating taxes on overtime pay and tips for hospitality and service workers could potentially enhance workforce morale and retention in these sectors. For business owners, particularly in industries reliant on tipped employees, this change may make their businesses more appealing workplaces, aiding recruitment and reducing turnover costs.
- Eliminating Taxes on Social Security Benefits: Retired business owners drawing Social Security benefits may find relief here, particularly if they continue to run or advise businesses part-time. This proposal may enable seniors to retain more of their income, indirectly benefiting family-owned businesses.
- Tax Credit for Family Caregivers: Business owners supporting elderly parents or loved ones could see a financial break with the introduction of a caregiver tax credit. This change could alleviate the financial strain on small business owners, allowing them to allocate resources more efficiently to both family and business needs.
Tariffs and Trade Policy: Potential Funding for Tax Cuts
To offset the cost of these proposed cuts and credits, Trump has suggested implementing high tariffs on imported goods. For many business owners, particularly those relying on foreign suppliers, higher tariffs could increase production costs, affecting overall profitability. It is essential for business owners to prepare for possible increases in the cost of imported goods and consider sourcing alternatives or negotiating new contracts to mitigate tariff-related expenses.
What Business Owners Should Do Now
- Stay Updated on Legislative Changes: While these policies have been proposed, they require congressional support to become law. Business owners should stay informed about tax developments in Congress as the political landscape unfolds.
- Evaluate Potential Impacts: Identify which proposed policies could directly affect your tax liability or operations. If your business relies heavily on imported goods, begin strategizing ways to handle potential tariff increases.
- Engage in Year-End Tax Planning: Given the possibility of significant tax changes, work with a tax advisor to evaluate strategies for maximizing current deductions and credits before any new legislation takes effect. Business owners might consider accelerating income or deferring expenses, depending on the specific proposals that gain traction.
- Prepare for Potential SALT Changes: For those in high-tax states, anticipate possible adjustments to your SALT deductions and discuss the implications with your tax advisor. If limits on SALT deductions are removed or adjusted, your tax strategy could shift significantly.
Conclusion
Trump’s return to office suggests a renewed focus on tax cuts and policy changes that could impact a broad spectrum of businesses. By staying informed and actively planning, business owners can position themselves to benefit from favorable changes while minimizing potential challenges associated with tariffs or shifting deduction caps. Preparing now can help ensure a smoother adaptation to the upcoming changes in tax law, allowing business owners to focus on growth and profitability in an evolving economic landscape.
