Earlier this year, with then-President-elect Trump optimistic about the tax changes, we expected to now have more details on his tax reform plan. After all, tax reform was high on his legislative agenda. What we have obtained in recent weeks could be described as a starting point for negotiations. It is fair to mention that changes of this magnitude will not be made overnight, the last Ronald Reagan tax reform in 1986 took more than two years.
What we know so far is that on individual taxes, he still asks for three tax rates of 10%, 25% and 35%. And although this is an adjustment from his previous plan of 12%, 25% and 33%, the simplification of the tax brackets is still in effect. On the corporate side, you still want a 15% rate for regular corporations and transfers like LLC and Scorps. A Senate bill for S-corporations is already in the works. An interesting aspect of this bill is the loosening of the rules for former C-Corps with retained earnings that elect S-Corps status. From now on, if more than 25% of the gross income is liabilities, the company is sanctioned with a 35% tax on the excess, it could also lose its S-Corp status if this occurs during a period of 3 years. This new bill will increase this threshold to 60%. The proposed bill will also allow IRAs to become S-Corp shareholders and will streamline the S election process. If this is met, we may not need to file Form 2553 again.
All of these tax cuts are sure to add to the already immense federal debt, the question remains how Trump will pay for all the proposed tax cuts. One of the supposed ways to balance the budget could come with reducing the tax benefits for retirement savings. If they stopped contributions from IRAs and instead forced the taxpayer’s deposit into a Roth IRA, it would end deductions for IRA contributions and increase income that could cover some of the these tax cuts. Another possible way could be to freeze current contribution limits for retirement plans by not keeping up with inflation adjustments.
Although White House officials have assured the public that retirement savings will remain intact, many in the industry think otherwise. Without a border adjustment tax and without other revenue being generated, it is difficult to see how Trump’s proposed tax cuts could be carried out. Unless they plan to cut tax incentives for retirement plans like we mentioned earlier. What could eventually end up happening is a temporary tax cut for businesses and individuals, which might be a solution for the time being, but it won’t sit well with business owners looking for a more permanent solution.
As we are today, the possibility of a major tax reform seems distant, especially since Congress doesn’t seem to find a way to find sources of revenue to offset the proposed tax cuts. Business owners and investors will likely have to wait until next year to see a major tax reform.