What the Proposed National Tax Changes Might Mean for New Jersey
by Dr. Sean Stein Smith, CPA CFE, CGMA, CMA, Lehman College –
October 3, 2017
There has been a lot of analysis and discussion around the release of President Trump’s tax reform plan on September 27 and the looming tax reform debate. The effect that these changes could have on small businesses and entrepreneurs is particularly important since these businesses form the backbone and dynamic engine of the U.S. economy, and many of these companies become clients of CPA firms across the country.
Drilling down into some of the core components of Trump’s proposed tax reform, there are several areas that would impact New Jerseyans, small business owners in the state, and the CPAs who consult with these businesses. While there will undoubtedly be debate, compromise and further developments as these proposed changes go through Congress, there are a few areas that are worth analyzing. Examining these tax changes through the lens of small business ownership will definitely have an impact on the New Jersey business environment moving forward. These include:
Corporate Tax Rate Reduction
The proposed corporate tax rate will be 20 percent, which is significantly lower than the current statutory rate of 35 percent. That said, in order to make the proposed 20-percent rate financially viable, there will have to be eliminations of credits and deductions. Reducing the headline rate from 35 percent to 20 percent sounds good, but these tax credits must be paid for, and it is important to recognize that many corporations are already paying less than the statutory rate anyway. Cutting the statutory corporate rate might benefit businesses in New Jersey, but in order to make them viable, current deductions and credits might very well have to be eliminated.
Reduction of Pass-Through Rates
Drilling in specifically to the proposed changes of how businesses are taxed, the proposed changes to how businesses owned by individuals will be taxed is possibly the most important. While there will be restrictions as to what will be classified as business income, the implications are clear for small business owners: Reducing the pass-through rate to 25 percent may have a dramatic impact on individuals who operate their own business — instead of paying taxes at their individual rate, taxes will be paid at this flat rate. While a lower rate on pass-through income would lower the tax burden on small business, there will undoubtedly be changes to what can be classified as business income, so stay tuned.
Doubling of the Standard Deduction
To help offset the elimination of some deductions, the proposed tax changes include an almost doubling of the standard deduction. Individuals will be eligible for a $12,000 deduction, and married couples will be eligible for $24,000 in standard deductions. This may seem like a technicality, but it will have a large impact on both individuals and CPAs living in New Jersey. The doubling of the standard deduction will, in and of itself, help reduce the amount of taxes paid by the owners of small businesses, but, linking back to point number 2, entrepreneurs will have to be aware of which income streams will be classified as individual or business income.
Elimination of the State and Local Deduction
This is, potentially, a major issue for taxpayers in New Jersey, New York and Pennsylvania, as many individuals live and work across state lines. Many taxpayers in New Jersey, either as employees for organizations or as entrepreneurs running their own business, benefit from being able to itemize state taxes paid in their state of employment against New Jersey state taxes. The loss of this deduction could, potentially, wreak havoc on the returns on many taxpayers. This might represent the single largest potential negative change to tax code for New Jersey residents, and it should certainly be something business owners and individuals should keep an eye on.
Elimination of the Estate Tax
The elimination of the estate tax is something that would certainly be a welcome relief for small business owners operating in New Jersey. Eliminating this tax completely, reducing the specific tax rate or raising the threshold that would trigger the tax will certainly be part of the coming tax debate in Congress. Getting rid of the estate tax, on its surface, would be a welcome relief for entrepreneurs that have operated and built their businesses here in the Garden State. That said, and like many of these proposed changes, the details as to how these changes will be paid for is where the attention should be focused.
Tax reform is an arduous process that can make it difficult to achieve meaningful, long-term changes to the U.S. tax code. Lobbyists, vested interests and specific groups who benefit from some of the complexity currently embedded within the code also contribute to the difficulty of achieving comprehensive tax reform. That said, some of the potential changes to the tax code might have significant financial ramifications for entrepreneurs and small business owners operating in New Jersey. Keeping an eye on these changes is a good use of time, and could make a large difference for you, your clients, and your business moving forward.
Sean D. Stein Smith
Dr. Sean Stein Smith, CPA, DBA, M.S., M.B.A., CMA, CGMA, is an assistant professor at Lehman College. He is a member of the NJCPA Content Advisory Board, Student Programs & Scholarship Committee, Emerging Leaders Council, Nonprofit Interest Group and Accounting & Auditing Standards Interest Group.
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