Trump Tax Plan Terrific Boost for California Small Businesses

The much anticipated Federal tax reform framework developed by the Trump Administration and Congressional leaders has been released this week, and it not only lives up to the President’s campaign promises to lower taxes, but will be particularly welcome relief for California’s small businesses.  An outline of the tax reform proposal appears below.

Small businesses in California create jobs at a faster rate than big businesses according to the nonpartisan Public Policy Institute of California.  Sole proprietorships make up 3.1 million of California’s 4 million business entities according the the state legislature, yet their job creating abilities have been hampered by both Obama-era policies that impose high marginal income tax rates of 39.6% and job killing regulations, and also state policies that keep raising taxes, set the highest marginal state tax rate at 13.3% and place further regulatory impediments to business growth.  The combined current Federal and state top marginal tax rate of 52.9% of income is simply killing off California’s potential for business expansion and better job growth among the state’s many small businesses.

But that is about to change with federal tax reform if the Trump plan can be embraced by members of California’s Congressional delegation and passed into law.  While the over-all Trump tax plan is geared to middle class tax relief and simplifying the enormous tax code, an important provision will give California’s many small businesses some needed breathing room.  Under the Trump plan, the top marginal tax rate for small family-owned businesses, sole proprietorships and so-called small business “S Corporations,” will be reduced and capped at 25%!  This tax reform will allow many of California’s small businesses immediate tax relief, helping profitability, and help businesses to plan and grow and create new jobs with the understanding that their firms won’t be pushed into a more expensive tax bracket for all the effort.  The result should be a greater participation in an improving economy by middle class business owners and more and better job opportunities across the state.

There are a lot of good ideas in the new Trump tax plan, but in my view among the provisions that are the best are those that help and offer hope for California’s small businesses, who are otherwise under siege in a state considered the “worst for business” by CEO magazine now ten years running.

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HIGHLIGHTS OF THE UNIFIED TAX REFORM FRAMEWORK

Lowers Rates for Individuals and Families

The framework shrinks the current seven tax brackets into three – 12%, 25% and 35% – with the potential for an additional top rate for the highest-income taxpayers to ensure that the wealthy do not contribute a lower share of taxes paid than they do today.

Doubles the Standard Deduction and Enhances the Child Tax Credit

The framework roughly doubles the standard deduction so that typical middle-class families will keep more of their paycheck. It also significantly increases the Child Tax Credit.

Eliminates Loopholes for the Wealthy, Protects Bedrock Provisions for Middle Class

To provide simplicity and fairness the framework eliminates many itemized deductions that are primarily used by the wealthy, but retains tax incentives for home mortgage interest and charitable contributions, as well as tax incentives for work, higher education, and retirement security.

Repeals the Death Tax and Alternative Minimum Tax (AMT)

The framework repeals the unfair Death Tax and substantially simplifies the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice.

Creates a New Lower Tax Rate and Structure for Small Businesses

The framework limits the maximum tax rate for small and family-owned businesses to 25% – significantly lower than the top rate that these businesses pay today.

To Create Jobs and Promote Competitiveness, Lowers the Corporate Tax Rate

So that America can compete on level playing field, the framework reduces the corporate tax rate to 20% – below the 22.5% average of the industrialized world.

To Boost the Economy, Allows “Expensing” of Capital Investments

The framework allows, for at least five years, businesses to immediately write off (or “expense”) the cost of new investments, giving a much-needed lift to the economy.

Moves to an American Model for Competitiveness

The framework ends the perverse incentive to offshore jobs and keep foreign profits overseas. It levels the playing field for American companies and workers.

Brings Profits Back Home

The framework brings home profits by imposing a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keeping the money offshore.