Is your business ready for another round of tax reform? As November elections approach, Republicans in Congress and the Trump administration are discussing additional tax cuts. The two-page framework for “Tax Reform 2.0” and comments from the administration are light on details, but let’s take a look at some of the changes being talked about that would impact businesses.
Make existing tax cuts permanent
Several provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) will expire in 2025. One of those will impact pass-through businesses, which make up over 90 percent of businesses in the U.S., according to the Tax Foundation. The qualified business income deduction currently allows certain pass-through businesses to deduct up to 20 percent of their income.
Following criticism that last year’s tax reform benefitted corporations more than pass-through entities, lawmakers added the pass-through deduction. Designed to appease owners and shareholders of sole proprietorships, partnerships, LLCs and S Corporations, it still falls short. The large corporate tax rate cut was a permanent change, while this expires in 2025 with individual tax cuts.
The first bill of Tax Reform 2.0 would make the pass-through deduction permanent.
Incentives to start and grow businesses
Another part of Tax Reform 2.0 is aimed at “growing brand-new entrepreneurs,” benefitting business owners. The framework doesn’t provide much detail on what exactly the legislation will entail. However, it does state it “will help brand-new businesses wrote off more of their initial start-up costs and remove barriers to growth.”
More corporate tax cuts
The TCJA already cut the corporate tax rate from 35 percent to 21 percent. In an interview with Fox Business host Maria Bartiromo, President Trump mentioned reducing the corporate tax rate further, to 20 percent.
The Washington Post estimates that decreasing the corporate tax rate by an additional 1 percent would result in an additional $100 billion in tax cuts over the next decade.
Tax cuts as an annual event
Tax Reform 2.0 will provide “a new commitment to improve the tax code each and every year for American families and local businesses,” says another framework. Republican lawmakers suggest they plan to examine and modify the tax code every year. The tax code is only currently examined every few decades.
But do these measures have a chance of passing? That is uncertain.
Most analysts view these proposals as political tools rather than a legitimate effort to change tax law. The Congressional Budget Office projected the federal budget deficit will exceed $1 trillion annual beginning in 2020, largely in part to the TCJA and the subsequent spending bill. House Tax Committee Chairman Kevin Brady doesn’t expect Tax Reform 2.0 to be “revenue neutral,” meaning the deficit will grow.
Democrats opposed last year’s tax cuts, charging that it largely benefitted wealthy Americans and corporations. As such, they are unlikely to give the legislation the support it would need to pass in the Senate. The November midterm elections will determine whether we’ll either see a flurry of tax bills, or see any further tax reform come to a standstill until after the 2020 election.
Check out our latest white paper on Tax Reform.