If Your Business Has a Pass Through Structure, New Tax Proposals May Grant Significant Savings

President Donald Trump’s first 100 days have been yielding news on just about every conceivable front, and so it can be easy to miss details even when they directly affect you. On Tuesday, Trump was reported as proposing a 15% tax rate on what are known as pass through businesses.

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15% Corporate Taxes

This came after news on Monday that corporate tax rates would be proposed at a maximum of 15%, however it is the pass through business proposal that is the most interesting. This is because it is already estimated that two thirds of corporations don’t currently pay any federal tax, and effectively already sit at or below 15%. Most corporations will not really see a lot of difference should this be implemented, so the announcement was regarded as fairly underwhelming until it was followed up with the details of through business tax cuts. This is all that will actually have an impact on the economy, as it will affect a large number of entrepreneurs and self employed workers.

Pass Through Business Structures

There are lots of forms of enterprises that are classed as pass through businesses. A pass through business is any in which taxes are paid as personal income, rather than where owners are taxed as a corporation first, and then on capital gains or the salary they pay themselves. There are many reasons people use pass through approaches, for instance taking money from their business as dividends in order to be subject to lower capital gains rates, or simply to avoid the paperwork and extra taxes conventional C-corporations are subject to. LLCs, sole proprietorships, S-corporations and partnerships all come under the umbrella term of pass through businesses, and this includes most self employed people. As entrepreneurship has grown in the US, for a number of reasons, not least the advancements in online technology, pass through business income has grown, from 20.7% in 1980 to 54.2% in 2011 – the most recent data published on the matter.

Good News for Businesses?

While Trump campaigned with a very pro-business stance, it will be interesting to see how his moves to benefit US companies and entrepreneurs actually pan out over the course of his presidency. Many self employed people do stand to benefit from this proposal if it makes it through Congress, though there is, of course, the nagging worry about the economic impact of cutting tax for such a large group of people on the nation’s budget. Certainly, if it is implemented it will be welcomed on an individual level, however it would remain to be seen what the knock on effect of the budgetary implications would be – will the taxes simply be recovered somewhere else, or will the budget take a hit? Those interested in foreign currency exchange rates may also be interested on whether these tax cuts coming into play will have an impact on the dollar. There is more information on the performance of the US dollar and other macroeconomic information at forex.com.

We will have to wait and see whether the pass through business 15% tax rate proposal is passed by Congress in order to find out the answers to any of these questions.