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How Will Proposed Tax Reform Measures Affect Businesses and International Commerce? (Part two of a two-part commentary series)

By Andy Hoffman, CFP®
April 4, 2017

Commerce Trust Company Financial Planning Analyst Andy Hoffman, CFP, continues his series on tax reform with a focus today on how President Trump's proposal could affect businesses and international commerce. The provisions spelled out here may help you sort through the possibilities.

How Will Proposed Tax Reform Measures Affect Businesses
As mentioned in the first part of our two-part series, attempting to usher in the greatest change to the tax code since the 1980s is going to be politically messy. But chances are legislation will emerge by year's end, and taking a practical look now at how the tax code might evolve will help you review your own financial planning.

Today, we look at the proposals affecting businesses and international commerce. These provisions will play a prominent role in the upcoming negotiations between the White House and Congress. As there is no timetable for the final details of President Trump's plan, we can only speculate how it will compare with the plans laid out by House Republicans. Here is a look at the potential changes from the Trump Plan and the House Republican Plan:
  • Business Taxes and Border Adjustments
    • The House Republican Plan proposes to lower the corporate tax rate from 35% to 20%. In order to offset these cuts, the plan also incorporates "Border Adjustments," which are indirect taxes levied on imported goods. This proposal has been highly controversial and will surely be a topic of discussion moving forward. Depending on the nature of the business, this tax could have a positive or negative impact.
      • For companies who rely heavily on imports, energy and retail, they would see a rise in their operating costs due to the proposed border adjustment tax. Conversely, the manufacturers who do not rely heavily on imported goods view this as an advantage because their exports would no longer be taxed, making their goods less expensive around the world.
      • The other factor to consider would be the unintended consequence of trade repercussions from our trading partners.
    • The Trump Plan would lower the corporate tax rate to 15%, but does not include a border adjustment. However, recent reports have shown Trump may be warming to the concept of a tax which incentivizes export activity.
    • The Trump Plan also gives another option to owners of pass-through entities (sole proprietorships, LLCs, partnerships, and S corporations). The proposal would allow the owners to elect to be taxed at a flat rate of 15% instead of their regular individual income tax rates.
      • Distributions from "large" pass-through entities received by owners who elected the flat 15% rate would be taxed as dividends. As of right now, the meaning of a "large" pass-through entity is yet to be defined.
  • Impact on the Economy
    • The general idea behind both plans is to encourage business investment, which in turn could raise labor productivity and wages. It remains to be seen if this increase would be enough to offset the projected loss of revenue. Over the next 10 years the federal debt is forecasted to increase by at least $7 trillion under the Trump Plan and $3 trillion under the Republican Plan.
As the crescendo builds toward this potential legislation, you may find it advantageous to discuss potential outcomes with your financial planner. If you would like to discuss your financial planning options with a Commerce Trust analyst, email Andy Hoffman directly at andy.hoffman@commercebank.com, or call this toll-free number, 800-892-7100, ext 1-7329.


Disclosures:

http://www.taxpolicycenter.org/publications/analysis-donald-trumps-revised-tax-plan

http://www.taxpolicycenter.org/publications/analysis-house-gop-tax-plan/full

Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of April 4, 2017. This summary is intended to provide general information only and reflects the opinions of Commerce Trust Company's Financial Advisory Services Group.

This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.

The information in this commentary should not be construed as an individualized recommendation of any kind. Strategies discussed here in a general manner may not be appropriate for everyone.

Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product or specific financial situation.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. All expressions of opinion are subject to change without notice depending upon worldwide market, economic or political conditions.

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ABOUT THE AUTHOR

Andy Hoffman
Andy Hoffman, CFP® Vice President, Private Client Advisor Commerce Trust Company
Andy is a private client advisor for Commerce Trust Company. He serves as a consultant and relationship manager providing clients with personalized objective advice and oversight across all of our services, including trust administration, financial advisory services, private banking, and investment management. Andy facilitates all aspects of relationship management for the client team, including administering complex trusts, maintaining client communication, and coordinating with internal and external partners to deliver a superior client experience. He joined Commerce in 2016 with ten years of industry experience. Andy received his bachelor of science degrees in finance/economics and MBA with a concentration in finance from Rockhurst University. He has achieved the designation of Certified Financial Planner. Andy is a member of St. Ambrose Catholic Church and the Crusaders Club at St. Ambrose.
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