Trump vs. Harris: How Their Tax Proposals Could Affect Small Businesses

With the upcoming election, tax policies are a hot topic of discussion, especially for small business owners who are keen to understand how potential changes could impact their finances. Both Vice President Kamala Harris and former president Donald Trump have put forward tax proposals that present distinct paths for the country’s economic future. While Trump's plan builds on the tax cuts implemented during his previous administration, Harris's approach aims to increase taxes on higher earners and introduce new credits. Here’s a breakdown of how each proposal could affect small businesses and what you need to know.

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The Trump Tax Proposal: Expanding Cuts and Simplifying Taxes

Donald Trump’s tax proposal is centered around extending and expanding the Tax Cuts and Jobs Act from 2017. According to the Tax Foundation, Trump plans to continue reducing tax rates for individuals and businesses while advocating for simplified tax brackets. One of the key features of his plan is to make the current temporary tax cuts permanent, which could potentially benefit small business owners by maintaining lower tax rates on pass-through income and allowing for more straightforward tax planning.

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Impact on Small Businesses

• Continuation of Lower Tax Rates: Small businesses structured as pass-through entities, such as S-corporations and LLCs, stand to benefit from Trump's proposal to make these lower rates permanent. This means businesses can keep more of their profits, providing additional capital for reinvestment, growth, or hiring.
• Section 199A Deduction: The plan also includes maintaining the 20% deduction for qualified business income, a popular feature of the TCJA. As Tony Nitti, a tax partner at RubinBrown LLP, mentioned in Newsweek, “Maintaining this deduction would continue to offer substantial savings for eligible small business owners,” especially those operating in service industries.
• Potential Simplification of Tax Filing: Trump’s proposal to simplify the tax code could reduce the administrative burden on small businesses, saving them time and money when preparing their tax returns.

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However, critics argue that Trump’s approach might contribute to increased national debt, which could eventually lead to inflation or other economic challenges, indirectly affecting small businesses in the long run. As Reuters noted, some experts worry about the sustainability of maintaining such tax cuts without offsetting revenue sources, which could impact funding for public services that indirectly support the small business ecosystem.

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The Harris Tax Proposal: Targeting Wealthy Earners and Offering Credits

Kamala Harris’s tax proposal takes a different approach, aiming to raise taxes on the wealthy while providing more support to working families. According to the BBC, her plan seeks to increase the corporate tax rate from 21% to 28% and add a surtax on individuals earning over $400,000 per year. Additionally, Harris plans to introduce tax credits for low- and middle-income households.

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Impact on Small Businesses

• Increased Corporate Tax Rates: If Harris's proposal is implemented, small businesses that have opted to structure themselves as corporations could see an increase in their tax liabilities. As stated by the Tax Foundation, this change could lead to reduced net profits for some businesses, making it more challenging to reinvest in growth or expansion.
• Enhanced Tax Credits: On a positive note, Harris’s plan includes tax credits that could benefit small businesses, especially those with lower-income employees. This includes a refundable tax credit that could help small business owners reduce their overall tax burden, making it easier to invest in employee benefits or training programs.
• Focus on Green Energy Initiatives: Harris's plan aims to introduce incentives for businesses that invest in renewable energy and environmentally friendly practices. This could present an opportunity for small businesses looking to modernize their operations while benefiting from tax credits, ultimately reducing their overall tax liability.

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Rebecca Saldanha, a policy analyst at the Tax Policy Center, emphasized in Forbes that “while the increased rates may be seen as a disadvantage for some small business owners, the targeted credits and deductions could provide much-needed support for companies looking to make socially responsible investments.”

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How These Proposals Might Affect Small Business Owners

As a small business owner, it’s essential to stay informed about how these potential tax changes could affect your bottom line. Here’s a breakdown of what to keep in mind:

1. Assess Your Business Structure: The impact of both proposals largely depends on how your business is structured. If you operate as a pass-through entity, Trump's plan might be more favorable. If you’re a corporation, be prepared for possible increased tax rates under Harris's plan.
2. Consider Investment Opportunities: Trump's tax proposal may allow for more cash flow, which could be ideal for reinvesting in your business. On the other hand, Harris’s credits for green initiatives could offer incentives if you're looking to make your business more sustainable.
3. Evaluate Employee Benefits: Harris’s plan may offer small business owners opportunities to take advantage of tax credits related to employee wages and benefits. Now could be a good time to consider how to support your workforce while potentially reducing your tax burden.

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Conclusion

Both the Trump and Harris tax proposals offer distinct advantages and challenges for small businesses. Trump's approach emphasizes maintaining lower taxes and simplifying the process, potentially giving small businesses more financial flexibility. In contrast, Harris's plan aims to support working families and encourage investments in sustainable practices but may result in higher taxes for some businesses.

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Understanding the nuances of each proposal is crucial for making informed financial decisions as the election draws closer. Small business owners should work with a trusted financial advisor or accountant to assess how these potential changes could impact their operations, allowing them to adapt and thrive regardless of the outcome.

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Sources

Tax Foundation

Newsweek

Reuters

BBC News

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