Written by: Gene Snook, Osborne Rincon CPAs
In a White House Briefing on April 26, 2017, Secretary of the Treasury, Steve Mnuchin and Director of the National Economic Council, Gary Cohn, released Donald Trump’s proposed income tax reform – intended to provide significant changes to the current tax system. The proposals are merely a framework at this time, but provide us with enough information to speculate on potential opportunities that may be available to individual taxpayers and small businesses in our community.
First, Gary Cohn revealed that Trump’s plan would reduce the number of individual tax brackets from 7 to 3. Current individual income tax brackets of 10, 15, 25, 28, 33, 35 and 39.6%, would be reduced to 10,25, and 35% brackets. Middle class taxpayers would benefit substantially if the range of income that the 10% and 25% brackets in the new plan were to include income currently taxed in the 28 and 33 percent brackets. In addition, the proposal to eliminate the Alternative Minimum Tax would alleviate many middle class taxpayers from the burdens of a tax originally intended for the wealthiest taxpayers.
The current standard deductions would be doubled for each filing status and all itemized deductions would be eliminated, except for mortgage interest and charitable contributions. The doubling of the standard deduction would be beneficial for middle-class taxpayers who are not able to capitalize on the mortgage interest deduction; either because they rent, have low mortgage payments, or have no mortgage at all.
For small businesses, the proposed plan would reduce the current rate for C-Corporations from 35% to 15%. With dividends currently taxed at 15%, the rate of double taxation on C-Corporation earnings would be reduced from 55% to 30%. S-Corporations by contrast currently have their pass-through income subject to the maximum individual tax rate of 39.6%, so a 15% cap on pass-through income would create an unprecedented tax opportunity. Mandatory reasonable wage compensation to corporate officers presumably will be subject to proposed 10, 25 and 35% brackets.
While the proposed rollout is merely in its infancy stage, the proposed legislation offers significant opportunity for members of our community. For unincorporated businesses, now may be the time to consider changing to an S-Corporation; especially if the proposed legislation passes and is enacted retroactive to the beginning of the 2017 tax year.
Gene A. Snook, CPA, joined Osborne Rincon in August 2014. He has been in public accounting for over 14 years and has extensive experience in providing tax preparation and strategic tax planning services for many areas of industry. For more information, (760) 777-9805 or go to OsborneRincon.com.