The Election and Taxes: What Small Business Owners Need to Know
Dustin Terry
Wealth Advisor to Entreprenuers and Executives, Christian, Husband, Father, Bama Fan
·?????? Both former President Trump and Vice President Harris have outlined several tax policies
·?????? Impacts on small business owners and high-income-earners are many
·?????? Preparing for tomorrow is always important, but keeping tax changes in perspective is key
Election Day is right around the corner. With both parties’ conventions out of the way, all eyes are on the campaign trail. Amid the mudslinging, it’s important for voters to consider the actual issues, and for small business owners, assessing the tax policies of former President Trump and Vice President Harris is important.
We generally know where Trump stands on many issues, but it is still being realized what Harris would like to do with economic issues. Entrepreneurs and investors who follow tax matters closely know full well that the end of next year brings about the sunsetting of the 2017 Tax Cuts and Jobs Act (TCJA) - if Congress does nothing, then marginal tax rates will revert to higher levels and other key deductions will go away.
Zooming out, the economy is the front and center issue. It’s top on the list of voters’ concerns, with inflation being the primary catalyst. Both candidates will focus on combating high consumer prices, but it’s notable that the inflation rate has come down significantly in the last two years. Keep that in mind as we outline policies from the Republicans and Democrats. Furthermore, with a rising unemployment rate, proposals that would reduce incentives from the private sector could be particularly perilous right now.
Let’s dive into where the candidates stand on taxes. This piece is not an attempt to sway you one way or another, but to help us plan for potential outcomes in an unbiased way. We’ll end with a hone in on what small business owners and families should do today to prepare for an uncertain next four years.
Former President Trump
We will begin with the challenger, Donald Trump. The media’s focus of late has been the 45th president’s universal baseline tariff on all US imports which could result in higher goods prices paid by American consumers. Small business owners who source from overseas could encounter higher costs, but we saw that during Trump’s first term, other macro forces were at play that had impacts, too.
Perhaps more importantly for all income earners, Trump aims to make the individual and estate tax cuts of the TCJA permanent, which would be a significant financial boon for many households. At the same time, he has stated that he would like to drop the corporate tax rate from 21% to 20%, potentially replacing that tax cut with increased tariffs.[1]
Another idea Trump floated, which Harris recently got on board with, is to exempt tip income from tax liability – this wouldn’t affect the economy much but is rather a reach for votes in the swing state of Nevada. In another vote-grab attempt, Trump stated that he would like to exempt Social Security benefits from taxation, though that would seem to be unlikely to get through Congress given the state of the deficit and rising national debt. Finally, the Republican candidate has considered expanding the child tax credit to a universal $5,000.[2]
Vice President Harris
The new Democratic candidate for the White House looks to continue policies that she has helped push forward within the Biden administration. There are fresh proposals, though, and many of them are seen as more left-leaning. It was recently reported that Harris would like to increase the corporate tax rate from 21% to 28%.[3] That would be a significant increase for C-Corporations and medium-sized and larger enterprises. On the TCJA, there hasn’t been much detail on what parts she would like to extend or modify and which the vice president would be fine with letting expire at the end of next year.
Harris has come out in favor of more progressive capital gains taxation, even suggesting that unrealized gains could be taxed among holdings of the ultra-wealthy (above $100 million).[4] There are also reports that capital gains on income above $1 million per year could be taxed as regular income.[5] But let’s focus on what we actually know about her $5 trillion tax plan. The Democratic candidate has stated that there will be no tax hikes on individuals earning less than $400,000 per year.[6] A higher top marginal tax rate could potentially be enforced, increasing the current 39.6% rate to 44.6% when including Medicare surtaxes.[7] Another Harris proposal, if signed into law, would tax investment income as regular income for those making over $1 million.[8]
As you can see, there are already a myriad of potential financial planning impacts if this blueprint comes to pass. Another game-changer would be an alteration to the capital gains tax at death. Harris proposes eliminating the step-up in basis rule for inherited assets, potentially taxing them at the original owner’s passing (though, according to The New York Times, several exemptions would apply).[1] Bigger picture, questions remain about how she would address the expiring TCJA and whether tax hikes would fund her administration’s spending initiatives.
On that front, Harris made headlines ahead of the Democratic National Convention by suggesting that she would crack down on corporate price gouging, namely high prices at the grocery store. That was likely mere rhetoric and was met with intense backlash. It’s also unclear what would define price gouging and how she and the FTC would impose such measures. If there is a blue wave in November, then some of these leftfield policies should not be dismissed entirely. And she is serious about expanding the child tax credit to $6,000 for low- and middle-income families and restoring the pandemic-era $3,600 credit.
Another headline-maker was the Harris campaign’s goal to create three million new housing units in four years, offering tax breaks to homebuilders and a $25,000 first-time homebuyer credit.[2] Additionally, she may look to claw back deductions for depreciation and interest for certain rental construction investments.
Tax Policy Summary
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Your Money
There are many potential changes to the tax code that would impact the economy. We should remember that while the government plays a seemingly increased role in our everyday lives, it is free-market capitalism that drives the US forward. For most high-income earners, former President Trump’s initiatives would generally be more favorable. For low- and middle-income earners, especially those with growing families and who are looking to buy their first home, Vice President Harris’ policies might be more appealing.
No matter your political preferences, we should at least prepare for potentially higher tax rates on investment income. And depending on how control of Congress shakes out, there might be higher marginal tax rates. Doing small things like Roth conversions before 2026 and preparing for higher tax bills in the years ahead is prudent, but don’t make drastic changes. As we learn more, we can revisit where things stand, and craft tailored strategies to your situation.
It’s also an ideal time to review your estate plan. With potential shifts in estate tax laws, families with significant assets should revisit their plans to ensure they are optimized for both current and whatever future tax environments unfold. Gifting strategies, establishing trusts, and outlining to whom your assets would flow upon your passing is well worth the time and energy.
We will also know more about tax changes for small business owners in the coming months and which proposals actually get signed into law. That could have financial impacts on business structures (e.g., LLC, S-Corp, C-Corp) and succession plans for firm owners.
The Bottom Line
Will there be changes come January 2025? Yes. Will they be life or death? No. Despite the media turning crazy every four years, it’s rare to see major tax overhauls due to political outcomes. There are absolutely strategies we can craft and execute to optimize your financial plan based on the latest tax laws, but the best advice is to focus on your business and your family's finances. Together we can navigate whatever challenges come ahead as we always have.
[2] https://www.cnbc.com/2024/08/20/what-to-know-about-harris-affordable-housing-economic-proposals.html
[3] https://www.reuters.com/world/us/harris-calls-raising-us-corporate-tax-rate-28-percent-2024-08-19/