RIAs support Trump tax cuts for businesses

April 27, 2017 1:14 PM

President Trump's proposed major tax cuts for business owners earned praise from advisers, though some expressed concerned about potential impacts on their clients.

At the heart of a sweeping plan is a slashing of corporate income tax rates from a maximum 35% to 15%. That would benefit major corporations and small business owners such as RIAs with their own practices.

There are benefits for wealthy Americans as well, including a proposal to compact income tax rates and cut the individual top rate to 35%, end a 3.8% net investment income tax for those earning over $200,000 and elimination of the estate tax.

However, another proposal to repeal state income tax deductions would carry serious implications for HNW clients residing in states with high tax rates such as New York, New Jersey or Connecticut.

Click through to read advisers' reactions to the proposed tax plan.

Steven Mnuchin, U.S. Treasury secretary, right, and Gary Cohn, director of the U.S. National Economic Council, arrive to the White House press briefing in Washington, D.C., U.S., on Wednesday, April 26, 2017. President Donald Trump's call to slash the corporate tax rate to 15 percent, a number that many economists say would boost the deficit so much that the cut would be short-lived, may be less about policy and more about deal-making. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

President Trump's proposed major tax cuts for business owners earned praise from advisers, though some expressed concerned about potential impacts on their clients.

At the heart of a sweeping plan is a slashing of corporate income tax rates from a maximum 35% to 15%. That would benefit major corporations and small business owners such as RIAs with their own practices.

There are benefits for wealthy Americans as well, including a proposal to compact income tax rates and cut the individual top rate to 35%, end a 3.8% net investment income tax for those earning over $200,000 and elimination of the estate tax.

However, another proposal to repeal state income tax deductions would carry serious implications for HNW clients residing in states with high tax rates such as New York, New Jersey or Connecticut.

Click through to read advisers' reactions to the proposed tax plan.

"A major benefit for small business owners"

The huge proposed cut in the corporate tax rate —including a 15% cap on earnings of pass-through entities — would be a major benefit for small business owners, many of whom are the core client base of investment advisory firms and RIAs.

Reducing the taxation of retained earnings could present enormous planning opportunities. However, follow-through is a concern. If there is a delay in the delivery to achieve substantive policy goals, it could shake the confidence of the business community and even the broader markets.

Kimberly Foss, president and founder of Empyrion Wealth Management in Roseville, California

"I think it will all be positive"

I think it will all be positive. I am shareholder in an S corporation and it would be a lower tax rate, which would allow us to make more investments in human capital and technology to increase our capacity.

One of the reasons why it’s really beneficial, and a lot do not realize this —not just in this industry — but when someone’s a shareholder in an S corporation or and LLC, the owners of pass-through businesses are taxed on income whether they take it as distributions or not. If you have a lower tax rate, that would allow for more of the cash flow to go towards investing back into the business.

We’re seeing very good growth throughout the industry and it allows us to ramp up our capacity.

There are changes all the time in operational efficiencies driven by technology, and that costs money. This would make us more likely to expand those investments in technology. And you have to make investments in technology. You can’t stay put.

Michael Joyce, president at JoycePayne Partners in Richmond, Virginia

"It would certainly benefit me"

What [person or] business owner doesn't want a tax cut? It would certainly benefit me since I'm an LLC and mine are pass-through earnings. Of course, the argument is why should the owner receive the lower tax rate while their staff — if they earned a similar amount — would be taxed at a higher rate? Even so, it would free up some money to think about investing back into the business, perhaps with more equipment or staff.

How does the plan impact lower earners? I work with the middle to upper-middle class, those who still have to work for a living. So sure, they'll like the higher tax bracket ending at 35%. But for my clients it's often not just the impact on them but also on their grown kids. If tax rates at the bottom compress, some of those lower earners will be hurt. And that means my clients may have to help out kids for longer while those kids are trying to pay down student loans or save to buy a home.

Delia Fernandez, founder, Fernandez Financial Advisory, Los Alamitos, California

"I support tax reform that greatly simplifies the tax code"

I support tax reform that greatly simplifies the tax code and makes it easier for Americans to file their returns, while reducing rates and creating policies that stimulate the economy by encouraging business growth and job creation. It's my hope that the president and Congress enact legislation that accomplishes this.

Ric Edelman, founder and executive chairman, Edelman Financial Services

"To lose the state and property tax deductions will make my clients in California cry"

I am sure there will be more individuals changing their business tax status to a pass through partnership, S or C corporation. CPAs will be busy trying to clarify why clients owe so much more tax because most investors are not really aware of how the tax rates and deductions really work.

The biggest reaction I had was the loss of the state tax deduction and how much that will hurt residents of certain states, like California. To only deduct mortgage and charitable deductions will certainly hurt my clients. Real estate property taxes and state taxes are very high in some states, such as NY and California and this will certainly cause disruption.

To lose the state and property tax deductions will make my clients in California cry. Much of what we do in helping clients in deciding to buy a property, have a mortgage or pay it off, include an analysis of the tax breaks that property would give the investor. This will really change things. I am happy the 3.8% surcharge would be eliminated but the clients will still have a much higher tax bill to pay.

Sandra Field, founder, Asset Planning, Cypress, California

"I'm all for lower taxes, like everyone, but you have to do it right"

The issue is that, yes, the rates are going to go down, but is it going to benefit people? When you figure out your effective rate as a total, you may end up paying more. If they lower rates and take away some of the benefits, I'm not sure that's going to work out well.
I'm not sold that it's going to be this wonderful thing. Don't get me wrong, everyone wants to see lower taxes. In southern states with higher sales taxes, you end up paying more when everything is said and done. I'm all for lower taxes, like everyone, but you have to do it right.

Jeff Rattiner, president of JR Financial Group in Scottsdale, Arizona

"Clients lower their chances of being disappointed if they expect this to take a long time and get pretty ugly."

We are telling clients that they lower their chances of being disappointed if they expect this to take a long time and get pretty ugly.
Most of them expect that their personal income taxes are going to be lower in '18 than in '17. And they're anxious to see how much they save.
We're trying to manage their expectations because it may not be as dramatic as what the President campaigned on.

Dan Moisand, principal at Moisand Fitzgerald Tamayo in Melbourne, Florida