Last week the President released his proposals for the government’s 2017 fiscal year. The budget includes new spending as well as new revenue ideas. It would raise $2.8 trillion in revenue over the next 10 years. While these are only proposals, and the Republican-controlled Congress is unlikely to adopt most of the proposals, some may become law (17 proposals from the FY 2016 budget) and it is helpful to understand which ones would affect small businesses. Some of the proposals appear to be helpful to small businesses, while many others are not. You judge for yourself.
Multi-employer qualified retirement plans
Small employers that do not have retirement plans would be able to join a multi-employer plan in order to offer a 401(k) to their staff. This would save on administrative costs and hassles. More details about this and other proposals related to retirement plans are in a White House Fact Sheet.
Net investment income taxes
Did you ever notice that the net investment income (NII) tax of 3.8%, which applies for high-income taxpayers with investment income, equals the Medicare tax on self-employed individuals (2.9%) and the tax on earned income for high-income taxpayers (0.9%)? I don’t think this is a coincidence. The government wants to be sure it’s collecting this rate of tax on high-income taxpayers.
Currently, investment income for the NII tax includes income from businesses in which taxpayers do not materially participate (i.e., they’re merely investors). However, there are some gaps that allow some of these business owners to escape the NII tax on their passive investments even though it is not subject to self-employment tax. The proposal would make sure that a taxpayer with income from a trade or business would pay the NII tax unless such income is subject to self-employment tax. In other words, the way in which a business entity is structured would not lead to different tax treatment for purposes of a 3.8% tax collection.
The PATH Act, which became law on December 18, 2015, delayed for two years the so-called Cadillac tax (an excise tax) on high-dollar health care plans. Instead of starting in 2018, it won’t take effect until 2020. Nonetheless, it is still scheduled to begin at that time. Now the President is proposing that the tax should apply only to the very, very expensive health care plans, defined as the “gold plan average premium.”
Who would be impacted? While unions benefit from the change because they offer their members great health coverage, some small employers may also benefit from the change. The NFIB said that small employers are more likely to be impacted by the Cadillac tax than large companies from a cost and compliance perspective.
Community College Partnership Tax Credit
There is a proposal to give employers who hire, on a full-time basis, graduates from community colleges and technical schools a tax credit of $5,000. However, it is not clear whether small businesses would be able to enjoy this tax benefit, even if they did such hiring. It appears that the credit is for only for companies that partner with community colleges to offer internship programs and more.
The budget contains a slew of measures that would greatly increase taxes for many business owners, including:
- Raising the top capital gains rate to 24.2% (from the current 20%). When added to the 3.8% NII tax, high-income taxpayers would pay 28% on long-term capital gains and dividends.
- Cutting the estate tax exemption from the current $5.45 million in 2016 to $3.5 million. The proposal would also increase the rate to 45% (up from the current 40%). This would adversely impact small business owners by exposing their business interests to estate tax; in some cases it would force liquidations to pay the taxes due.
- Impose the so-called “Buffet Rule” so that high-income taxpayers with large deductions would pay at least 30% (presumably increasing the current top alternative minimum tax rate of 28%).
- Restricting tax-free like-kind exchanges to $1 million per taxpayer per year.
Republicans have already called the budget proposals a “non-starter.” Eventually, Congress will enact a budget for FY 2017. How many of the President’s proposals will make it in remains to be seen. Most important, how will small business owners fare under a final budget?