On November 8th, 2016, Donald Trump was elected the United States' 45th president. Although nothing is definitive at this time, President-elect Trump focused on tax reform as a large piece of the economic component of his campaign and has previously indicated that he plans to make changes to several key areas of US tax law. Therefore, it is critical for dealers to acknowledge these implications and begin considering how such changes might impact them and their dealership(s) once Trump officially takes office. The areas of potential change that are most likely to impact dealers and their businesses include:
- Lowering income tax rates
- Repealing the Affordable Care Act (ACA), thereby eliminating the net investment income (NII) tax
- Repealing/significantly reducing federal estate and gift taxes
Income Tax Considerations
From an individual standpoint, Trump's tax plan as communicated during his campaign entailed compressing the current seven tax brackets into three as well as removing the individual AMT. If put into place, this plan would reduce rates on ordinary income to 12, 25 and 33%, respectively.
From a corporate standpoint, Trump proposed lowering the business income tax rate from 35% to 15%, while also removing the corporate AMT. Trump has indicated that pass-through entity types whose owners wish to retain the profits within the business may be taxed at this flat 15% tax rate as well. However, the full impact of making such an election under the Trump plan is not defined, therefore it is possible that the tax rate would potentially be applied prior to any distributions with a second level of tax on subsequent distributions. It is worth noting that the Blueprint being developed by House Ways and Means Committee retains single level taxation and would place a 25% rate cap on business taxable income with a reasonable compensation deduction required in calculating business taxable income.
Pending the verification of this proposed plan, dealers might want to consider accelerating deductions this year and deferring income to next year.
Capital Gains Considerations
Trump's plan did not seem to entail changing the current tax rate for capital gains. However, his proposal does entail repealing the NII tax in relation to passive income, including capital gains. As such, it may be likely that Trump modifies the capital gains tax rate structure to align with his proposed three-pronged tax brackets. Under the Blueprint, rates on capital gains would be reduced via a deduction equal to 50% of net investment income, which would include not only capital gains and dividends, but also any interest income. In essence, taxpayers in the highest bracket (33%) would pay 16.5% on capital gains.
Potential ACA Repeal
Trump has included in his posted 100 day plan that he plans to eliminate Obamacare and repeal the ACA in its entirety; although, he did indicate that some provisions of the ACA may be carried over into a new plan. While repealing the ACA has many implications, the one most pertinent to taxation of dealers is removing the 3.8% NII tax, imposed by IRC Section 1411, as mentioned above.
Estate and Gift Tax Matters
While he proposed to repeal federal estate and gift taxes, Trump stipulated that his plan would not provide a "step-up" in basis for appreciated assets held at death with gains exceeding $10 million. Consequently, only a small business owner's holdings would be fully exempt from taxation. Otherwise, income tax would be due on gains over $10 million upon the eventual sale of a decedent's businesses. In making this calculation of appreciated assets, contributions to a private charity established by the decedent or decedent's relatives will be disallowed.
This proposed area of Trump's tax plan is, at a minimum, worth addressing in tandem with the recently proposed Treasury regulations surrounding the potential reduction of valuation discounts on interest transfers for family-owned businesses (which largely impacts dealers). This language has caused dealers to act quickly and make tax-advantageous gifts under current law; however, dealers might now consider stepping back and thinking through what these changes might mean for estate and gift taxes before making any finalizations.
With President-elect Trump's oncoming occupancy of the White House, there is likely much taxation change to ensue should the plans proposed in his campaign or the ones already underway in the House Ways and Means Committee's Blueprint be employed. While we cover some of the more prudent areas in relation to dealership impact, we recommend dealers and individuals begin familiarizing themselves with some of the more detailed nuances of these potential changes to better grasp how they might affect your business and personal tax posture.
For questions or to learn more, please contact your trusted tax advisor, or:
Jorg Kaltwasser at email@example.com or 901.684.5642, or
Adam Neporadny at firstname.lastname@example.org or 205.212.5317