How Will Trump Tax Policy Affect Businesses?

This is the second in a series of blog posts about the potential implications of President Trump’s tax policy. The first post focused on the impact for high-net-worth individuals.

Businesses are likely to benefit from proposed tax changes under the new Trump administration, which favors reduced rates and reduced regulation intended to guide U.S. companies toward growth and prosperity.

Early indicators showed the U.S. economy’s optimism as the S&P 500 and the Dow rallied right after the election. However, the stock market has since reflected the uncertainty that abounds as business owners, analysts, and government officials alike struggle to gain their bearings in this new political era.

Let’s take a closer look at the proposed tax policies that could have the greatest impact on businesses over the next four years and beyond.

1. Lower tax rates for businesses

The Trump plan would indicate that a significantly lower 15% tax rate would be available to businesses of all sizes that want to retain profits within the business as well as owners of pass-through entities, such as LLCs, partnerships and S-corps. Even sole proprietorships may attempt to elect to be taxed at 15% on their pass-through income rather than at individual tax rates.

2. Elimination of deductions and credits – except R&D

As businesses large and small consider how lower tax rates could benefit their business, they should also take note of a potential trade-off: President Trump’s tax plan would eliminate many current deductions and credits. This includes the popular domestic production activities deduction and carried interest deduction (discussed in our previous post). Even the work opportunity tax credit, which provides a credit to employers hiring from targeted groups such as qualified veterans, could be going away.

The one credit not at risk? The now permanent research and development tax credit (aka R&D tax credit), which can provide significant state and federal tax savings to companies across myriad industries who are working to improve or develop a product, formula, patent, process, or technique. Many companies may not even realize their potential for savings under this lucrative credit, which became even more attractive with some important changes in 2016.

3. Changes for manufacturers

For manufacturing companies that previously capitalized and depreciated equipment and infrastructure spending, there is now proposed legislation that could allow these entities to fully expense purchases in the initial year of acquisition. The trade-off? An end to their ability to deduct interest expenses. Given a nation where private manufacturing businesses account for more than 11% of GDP, a change of this magnitude could have significant impact on the U.S. economy.

4. Repatriation tax for offshore profits

While businesses operating in the U.S. could receive incentives in the form of lower tax rates, those with an overseas presence could face a one-time 10% tax designed to repatriate offshore profits and ultimately encourage U.S. companies to bring their foreign assets and production back to the United States. This change would have the biggest impact on companies with expansive global operations, such as Apple and Citigroup.

As always, we’ll continue to monitor these changes as they come to fruition.  Please contact your Kaufman Rossin tax professional to discuss how these potential changes could impact your business and what steps you can take to prepare.