How the Trump Tax Changes Will Affect Your Exit and Your Business

Early November 2016 saw the end of one of the most contentious political presidential elections in quite some time. Each candidate had distinctly different plans for the direction they wanted to take this country.

From a taxation perspective, Clinton’s platform called for increased taxes for higher income individuals, including income taxes, capital gains taxes, and estate taxes. Trump took a completely opposite approach by promoting a reduction of certain taxes and even the elimination of certain taxes. Having studied the provisions of Mr. Trump’s policy, it’s clear that this administration is looking for high volume of activity to generate the necessary revenue to accomplish his tax policy goals.

A recent study by the Urban-Brooking Tax Policy Center states that Mr. Trump’s tax policies will create a $7 trillion deficit in 10 years and a $22 trillion-dollar deficit by 2036. To debunk those forecasts, this administration is looking to fund the government by exceeding GDP estimates while incentivizing investment in labor, structures, machinery, and equipment.

So how will these tax revisions affect your business and exit? The following are some provisions that have been discussed under the Trump Tax Plan and what they mean to your exit from your business:

Some key points to the Trump Tax Plan include the following:

  • Reduction of business income tax from 35% to 15%. This rate is intended to include C-corporations as well as pass through entities such as sole proprietorship, partnerships, and S-corporations;
  • Elimination of the Alternative Minimum Tax;
  • Reducing income tax brackets from 7 to 3 with the highest bracket now at 33% vs. the current to tax rate of 39.6%;
  • Repeal of the estate, gift, and generation skipping transfer taxes; however, they would be replaced with capital gains tax on appreciated assets at the date of death;
  • Repeal of the 3.8% Net Investment Income Tax that was introduced by the Affordable Care Act (ACA);
  • Immediate expensing of investments made in your business; and
  • Elimination of investment interest expense deduction, if expensing election is made.

PERSPECTIVE ON THE PROPOSALS

Clearly, the greatest benefit comes from the reduced individual and corporate income tax rates. Since almost all business acquisitions are executed with after tax dollars (ESOP being the exception), it will become less costly to generate net proceeds to acquire corporate assets or stock. The great news is this will be particularly beneficial to closely held businesses that are transferring internally to family and managers – the most common contractor exit.

In addition, the plan calls for an election to expense all investments in equipment, structures, and inventory, rather than depreciating them. The trade-off is that investment interest expense would not be an allowable deduction.

There is clearly an opening for abuse here where more employees may be categorized as “independent contractors,” thereby getting the benefit of the 15% tax rate versus the higher individual tax rate on wages. This is a concern, but one that has yet to be addressed from an enforcement perspective.

More good news for your exit is the capital gains tax will also see a reduction. The proposed plan calls for continued beneficial tax treatment by allowing taxation at the preferred rates. The plan further calls for the elimination of the Net Investment Income Tax that was created by the ACA and added an additional 3.8% tax on capital transactions based on your income level.

Two other taxes that are subject to repeal are the Alternative Minimum Tax (AMT) and the Estate, Gift, and Generation Skipping Tax. One of the benefits of the elimination of the AMT is that C-corporations that were established years ago may now get better tax benefits from utilizing the section 1202 gain exclusion. If certain C-c