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As the Trump administration prepares to take office, business owners should be prepared for potential shifts in tax policy, especially regarding provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire. Trump’s campaign promises suggest a strong interest in extending or making permanent some key tax breaks, while introducing new reforms aimed at reducing the tax burden on U.S.-based businesses and individuals. Here’s a breakdown of what these proposed changes could mean for business owners.
Corporate Tax Rate Reduction
Trump has proposed lowering the corporate tax rate further, potentially to 20% across the board, with a 15% rate for companies manufacturing within the United States. Reducing the rate could make U.S.-based manufacturing more appealing and alleviate some financial strain on corporations, particularly small and midsize businesses. However, business owners should remain cautious as tax law changes require Congressional approval, and this proposal may face political obstacles.
100% Bonus Depreciation
One of the notable provisions under the TCJA was 100% bonus depreciation, allowing businesses to deduct the full cost of eligible assets in the year they are placed in service. Currently, this bonus depreciation is set to phase down, dropping to 40% this year and decreasing further next year. Trump’s plan to reinstate 100% bonus depreciation would provide significant tax relief for companies investing in capital assets. Business owners considering major purchases might benefit by delaying these until next year if this policy is reinstated.
Elimination or Increase of the SALT Cap
The TCJA introduced a $10,000 cap on the state and local tax (SALT) deduction, which disproportionately impacted business owners and individuals in high-tax states. Trump has proposed eliminating or increasing this cap, which would allow more substantial tax deductions for those with high property and state income taxes. Business owners might want to strategize around property tax payments to optimize potential deductions, depending on whether and when any changes are implemented.
Research & Development (R&D) Expensing
Current tax law requires businesses to amortize R&D expenses over five years. Trump has expressed a desire to allow businesses to expense these costs immediately, which would benefit companies in industries like technology and pharmaceuticals. Making R&D costs fully deductible would reduce compliance costs and taxable income for companies engaged in significant research and innovation, ultimately increasing cash flow for these businesses.
Section 163 Interest Limitation Adjustments
The TCJA’s limitation on business interest expenses was initially calculated using EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). However, this shifted to an EBIT basis, excluding depreciation and amortization, which has increased the taxable income base and the tax burden for some businesses. Trump’s plan to revert to the EBITDA calculation would reduce the tax hit on interest for many businesses, especially those capital-intensive industries.
Stock Buyback Excise Tax
Under the Biden administration, there was a 1% excise tax on stock buybacks, with proposals to increase this rate to 4%. Trump has indicated his intent to eliminate this tax entirely, potentially making stock buybacks a more attractive option for corporations. While primarily relevant to large public companies, small business owners should keep an eye on the stock buyback environment, as it may impact broader market dynamics and investment returns.
Expanding the Qualified Business Income (QBI) Deduction
The TCJA introduced a 20% deduction on qualified business income for eligible pass-through entities, including S-corporations, partnerships, and sole proprietorships. Trump’s proposal to make this deduction permanent would offer ongoing relief to business owners. However, it’s important to note that certain service-based businesses, such as accounting firms, may still be excluded.
Doubling the Standard Deduction
A proposed doubling of the standard deduction could significantly reduce the number of taxpayers who itemize deductions. While this provides relief to many individual taxpayers, business owners who currently rely on itemized deductions might find less benefit, especially those in industries with large deductible expenses.
Additional Tax Benefits for Caregivers and U.S. Manufacturing
Trump’s tax proposals include a tax credit for family caregivers and a deduction for interest paid on U.S.-manufactured car loans. These incentives align with Trump’s agenda of supporting domestic industries and may offer financial relief to business owners involved in caregiving or manufacturing.
Potential State-Level Implications
While federal tax cuts may benefit business owners, they could create budget gaps for state governments. States might respond by “decoupling” from federal tax provisions, meaning that while federal taxes on certain income (such as overtime) may be reduced, state taxes on the same income might remain unchanged. Business owners should remain vigilant to see if their states introduce independent tax policies that counterbalance federal cuts.
Legislative Hurdles Ahead
While Trump’s proposed changes could benefit business owners significantly, it’s essential to recognize that tax legislation originates in Congress. The extent to which Trump’s policies are enacted depends on the level of support in the House and Senate, especially with Republicans potentially facing challenges in securing full control. Business owners should stay informed on legislative developments to adjust their tax planning strategies accordingly.
Next Steps for Business Owners
Business owners should work closely with their tax advisors to prepare for potential changes in 2024. Key strategies might include:
- Capital Expenditures: Consider deferring large capital purchases if 100% bonus depreciation is reinstated.
- Interest Expenses: Reassess financing strategies if the interest deduction rule shifts back to EBITDA.
- SALT Deduction Timing: Plan property tax payments based on changes to the SALT cap.
- R&D Planning: Track developments in R&D expensing policies to determine the optimal timing for claiming these expenses.
As tax policy evolves, strategic planning will be crucial for maximizing benefits and minimizing tax liabilities in a complex and shifting landscape.
