Advisors, Small Business Owners Could See Windfall From Trump Tax Plan

For financial advisors and their clients who own small businesses, President Trump’s tax plan has one high point: It would slash the taxes on pass-through companies—LLCs and S corps—to 25 percent from the highest rate of 39.6 percent.

The lower rates could be a boon for many advisors and their clients who structure their businesses this way. Right now, pass-through companies, which account for 95 percent of U.S. businesses, are taxed at owners’ income tax rates, which can mean they pay higher taxes than even large corporations do at their top rate of 35 percent.

The pass-through company rate reduction in the Republican plan could save advisors and their small business clients substantially, says Bernard Kiely, a CPA and principal of Kiely Capital Management in Morristown, N.J.

“We risked everything to start our businesses, as so many small business owners do, and should not be taxed like employees or at a higher rate than corporations,” says Kiely.

But the nine-page outline introduced by President Trump on Wednesday is not without significant uncertainties, even for pass-through companies. The plan "contemplates" that lawmakers drafting the legislation "will adopt measures" to prevent wealthy people from taking advantage of that new, low pass-through rate by recategorizing personal income as business income. Advisors and their investors craving simplification worry this could add a new layer of complexity to the tax code.

A Boon To High Earners?

While advisors across the country think the Trump plan looks promising for high earners, that aspect also has as many unknowns as benefits. The plan sets out three tax brackets for individuals—12 percent, 25 percent and 35 percent, down from the existing seven rates, which top out at 39.6 percent. The White House’s May outline set the lowest rate at 10 percent, but that was scrapped as too costly.