How Trump’s Tax Policies Will Affect Subchapter S Corporations

Many wealthy clients, especially owners of closely-held firms, have interests in subchapter-S corporations. The tax policies proposed by the Trump administration will have a significant impact on them, according to Toni Nitti.

Nitti is a tax partner with the Aspen, CO-based accounting firm, WitmumSmithBrown, PC. He spoke on June 13 at the AICPA ENGAGE 2017 conference, held in Las Vegas.

“Tax policy is going to be at the forefront of pub consciousness over the next few months,” Nitti said.

Nitti went through Trump’s agenda and the changes it would have for those with significant S-corporation earnings. He also reviewed some recent legal cases and their implications for S-corporation owners and shareholders.

Tax reform and its impact on subchapter-S corporations

Nitti reviewed the key elements of Trump’s proposed tax reform:

  • The tax rate would decrease from 35% to 15% for C corporations;
  • For pass-through entities (partnerships, LLCs and sole proprietorships), tax rates go from 43.4% to 15%;
  • It would repeal the 3.8% net-income investment tax (NII), which would reduce the tax on S-corporation income and on S-corporation capital gains if a company is sold;
  • There would be a one-time “repatriation” tax of 10% on off-shore earnings; and
  • The worldwide taxation system would change so that U.S. taxpayers would pay taxes in the country where income is earned instead of in the U.S.

A key element, Nitti said, is that there would be a 15% unified business tax rate, which would apply to S-corporation income and to partnerships, LLCs and sole proprietorships.

“But,” he warned, “there is no proposed legislation and no detail.”

Nitti said that one could sell an S corporation to escape the 3.8% NIII tax in 2018, based on the Obamacare repeal act which would take effect January 1, 2018.

The unified business rate is the most controversial aspect of Trump’s proposal, he said. The idea is that it is a middle-class tax break, but many in that demographic are already paying a rate of around 15%, according to Nitti. “The windfall will be to the wealthy,” he said, who pay at rates in excess of 40%.

He said the other big controversy is that many employees of S-corporations could leave and set up a S-corporation for themselves, lowering their tax rate to 15%. They would also save on self-employment tax. This is an abuse that could give rise to one of the “greatest tax shelters of the modern era,” Nitti said.

Toni Nitti