Are Tax Cuts Coming for the Small Business Owner?

While physician practices have many specialized health care compliance issues, most are, in essence, small businesses that face the same challenges as any small business. Taxes and regulations are among those challenges affecting all small businesses. And many owners are now eagerly awaiting alleviation of those challenges.

According to the National Federation of Independent Business, small business optimism is at its highest rate since 2004. Small business owners are hopeful that President Trump’s promises of regulatory reform and lower taxes will become a reality, and small businesses will reap the rewards. With Republicans controlling both Houses, that hope appears to be well-founded.

President Trump and the Republican Congress have promised that a repeal of the Affordable Care Act will lower insurance requirements for small businesses, that the deconstruction of the banking regulations of the Dodd-Frank Act will give small businesses more access to credit, and that tax reform will provide small businesses with tax savings. Let’s take a look at some of the specific tax plans President Trump has proposed that have small business owners excited.

Small business owners are hopeful that President Trump’s promises or regulatory reform and lower taxes will become a reality and small businesses will reap the rewards. Small business owners should rightly expect to see tax cuts in the near future.

The new administration has proposed cutting the highest corporate tax rate from 35 percent to 15 percent. S corporations and other pass-through entities may also see a reduced tax rate, as President Trump has proposed a maximum rate of 15 percent on business income that is reinvested into the company. This proposal provides some relief to the business owner on his “phantom income” tax bill. Comparatively, the House GOP tax plan reduces the corporate rate to 20 percent and the pass-through rate to 25 percent.

Of course, small business owners are also individual taxpayers, and President Trump’s tax plan contains several facets to benefit the individual taxpayer. President Trump’s proposal is to reduce the number of personal income tax brackets from seven to three. For joint filers, the proposed marginal rates on taxable income are 12 percent for up to $75,000, 25 percent for $75,000 to $225,000, and 33 percent for more than $225,000. (Dollar amounts for single filers are half of these amounts.) Here, the House GOP tax plan aligns with President Trump’s proposal, save a slight variation in the dollar amounts.

Of particular interest to many high-income earners is the Net Investment Income Tax (“NIIT”). The NIIT was enacted within the Affordable Care Act (“ACA”) and imposes a tax of 3.8 percent on investment income, such as interest, dividends, short-term and long-term capital gains, rental income, royalty income, and passive activity income. It applies only to investment income that exceeds a threshold of $200,000 of adjusted gross income for single filers and $250,000 of adjusted gross income for joint filers. President Trump, however, has proposed to repeal that tax. And because the NIIT is part of the ACA, which is first and foremost on the Republican Congress’s list of laws to repeal, this 3.8 percent tax may be the first tax to go.

President Trump’s tax plan also includes more than doubling the standard deduction, eliminating the estate tax, and providing revised childcare deductions and rebates. Additionally, he has proposed providing for the establishment of Dependent Care Savings Accounts with a government matching program.

It is worth noting, though, that President Trump has a stated goal of tax simplification. To that end, he has proposed to eliminate the reduced capital gains tax rate for carried interest, eliminate personal exemptions, eliminate the head-of-household status, and impose a cap on itemized deductions. As such, not all of President Trump’s proposed tax plan will provide a benefit to the taxpayer’s bottom line.

Even so, small business owners should be energized by the lower rates and simplification. A reduction of tax compliance expenditures could be significant for the small business. Piggyback that on the expected repeal of the Affordable Care Act, and small business owners can anticipate spending less time and effort on the compliance side and more on the business side.

Although portions of the House Republicans’ tax plan are not as aggressive as President Trump’s, the plans set forth similar reductions to the individual and business tax rates. Consequently, small business owners should rightly expect to see tax cuts in the near future.

Article contributed by Leslie H. Pitman, an attorney at Gilpin Givhan. Gilpin Givan is a Bronze Partner with the Medical Association.