Okay, this could get interesting.
Trump's new plan proposes that the business tax rate is reduced to 15%. That is a huge change since currently corporate rates are as high as 35% and tax pass-through entities like S Corporations, LLC's or Partnerships tax rates can approach 40%.
Trump tax plan, as stated on his site:
The Trump Plan will lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business.
So what does that mean for all of the pass-through entities? If the proposal passes, this could be a tectonic shift in tax strategy.
Currently, pass-through entities do not pay their own tax. The income from the pass-through entity is passed-through to its owners. The owners then report the income or loss on their personal tax return and pay tax at income tax rates.
Assuming that an S Corporation will still need to comply with the REASONABLE COMPENSATION requirements, the effective tax rate could decrease significantly.
If we go through an example for a married couple filing jointly.
Assumptions:
S Corporation Wages -- $75,000
Business Income from S Corporation -- $75,000
2016 Current Tax -- $23,900
2017 Taxes under Trump Proposal* -- $16,650
Savings -- $6,350
That is a huge decrease in tax. But, don't spend it all just yet. They are already talking that the 15% business tax rate might be taking things a bit too far. Or, if the rate does stay at 15%, that it will only apply to C Corporations, since pass-through entities already avoid the double tax on dividends.
So, only time will tell. Stay tuned and we will keep you posted.
*Because of incomplete information provided by the Trump Tax Plan, certain assumptions were made. The tax was calculated as follows:
($75,000 - $30,000 standard deduction) @ 12% + $75,000 @ 15% = $16,650