If taxes were a sport, discussing President Trump’s proposed tax plan would be akin to ESPN analysts hashing out potential trade deals in the off-season and discussing the potential outcomes of each speculative scenario without certainty. It is too soon to make large tax decisions about Trump’s announcement, but we can theorize on how the potential tax cuts and new tax brackets might affect our Las Vegas community. Trump’s plan is not even close to being a bill, and though his advisors promise to get the tax reform “done this year,” we might be filing our 2017 taxes with no changes.
National Economic Director Gary Cohn and Treasury Secretary Steven Mnuchin revealed core principles of the president’s tax reform plan. Items that stood out for businesses included cutting the corporate tax rate to 15 percent and reducing some components of the top tax rate for pass-through businesses and individuals from the previous rates of 39.6 percent to rates starting at 10 percent.
The reduction in corporate income tax is insignificant for the majority of U.S. taxpayers, since most do not operate in the C-Corporation tax arena but are pass-through entities, by choice. Most C-Corps are either publicly traded or set up many years ago, with advisors who cannot easily change their structure. Most new businesses choose a different entity structure because C-Corps still have a built-in double tax when dissolved and are always dealing with year-end compensation to zero out taxable income.
The larger portion of taxpayers will be affected by tax changes for pass-through entities, like LLCs or S-Corps, since all of their taxes are paid on the individual tax returns. The proposed plan doesn’t spell out how the new reduced tax rates will coordinate with those self-employment taxes and individual tax rates. This change will be very difficult to implement due to the sheer volume of taxpayers affected.
In the proposed plan, the current seven individual income tax rates will be reduced to three: 10 percent, 25 percent and 35 percent. Removing the 15 percent bracket is an unusual move, but it is consistent with the comments during the Trump campaign related to almost doubling the standard deductions for those who don’t itemize. This might remove some itemizers and the tax options for certain deductions (which were not explained in the plan announcement). This new, larger standard deduction would primarily affect low-income returns for taxpayers who typically don’t own homes and have no mortgage interest, or individuals residing in high state tax locations where they never itemized in the past.
In addition, the possible repeal of the alternative minimum tax is a big deal since it has been discussed for years as unnecessarily affecting many taxpayers. The announced tax plan’s reduction in individual tax rates and increased standard deductions will affect large numbers of taxpayers, primarily low income tax payers.
The proposed removal of estate taxes affects only a limited number of estates. Due to careful tax planning, only a small number of estates actually pay tax. The increase of estate exemptions and the possible repeal has been discussed for years; this current plan is just a follow-through of previous attempts. Most professionals believe it will not happen without a major change in congressional committees. Remember, a presidential announcement is much different than committee discussions in Congress and are certainly even more removed from becoming a tax bill.
Lower taxes for local businesses would be a welcome change, as rising health care costs, a potential increase in the minimum wage and inflation weigh heavily on business owners as they try to make a profit and maintain a workforce.
Much like the first discussions about bringing a professional sports team to Las Vegas, it might be years before the proposed tax cuts presented by President Trump come to fruition. Stay tuned for more information as this chapter of tax reform unfolds in our country. This will take time, but I am hopeful that we will see some pro-business changes with a simplified tax structure that will benefit Southern Nevada. After all, Las Vegas now has two professional sports teams coming to town, so small discussions can sometimes lead to big outcomes.
Scott Taylor, CPA is a shareholder with Piercy Bowler Taylor &Kern, the largest locally owned accounting firm in Las Vegas with offices in Reno and Salt Lake City. Contact Scott at staylor@pbtk.com with any questions about tax planning or preparation strategies.