Trump vs. Harris: How their Tax Plans May Affect Contractors

Curious how Trump and Harris’s tax plans could impact your construction business? We break down the key proposals and what they mean for contractors. Learn how to prepare your finances for potential changes. Watch now to stay ahead of the game! 

Topics we cover on this week’s episode:

• 03:23 – Corporate Tax Rates
• 06:42 – Individual Tax Proposals
• 10:46 – Unrealized Capital Gains Tax
• 14:34 – Business Deductions
• 18:28 – Tariffs Discussion

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

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TRANSCRIPT

[00:00:00] Wade Carpenter: How will the upcoming election change your taxes? What should you be doing right now to prepare your construction business? In today’s episode, we’ll break down the candidate’s key tax proposals and give you our take on what each plan could mean for contractors.

Welcome to the Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs, joined by Stephen Brown from McDaniel Whitley Bonding and Insurance. Stephen, I’d love to get your take on what you think each candidate’s plan could mean for contractors today. 

[00:00:25] Stephen Brown: Wade, first of all, we’re not a political podcast, but taxes are important to our listeners. We’re just simply going to compare what the candidates’ proposed tax plans are coming up. And I think it’s also equally as important as we go over the plans and changes for us to discuss exactly how this might affect a contractor in their normal course of business.

[00:00:48] Wade Carpenter: I think that’s exactly the idea, and I agree that nobody’s trying to be political here. When I was doing research for the episode, I was looking into, you gotta really watch the political spin that’s out there on the tax plans and, the grain of salt, for who’s writing it. But there are some things out there and there’s some definite differences between the two, as well as the Tax Cuts and Jobs Act of 2017 that are scheduled to expire in 24, so contractors need to know about that.

Just thought we’d kick some of that around.

[00:01:17] Stephen Brown: All right. Let’s talk about that. And I also, wanted to observe too, Wade, that you’ve gone through a number of presidential elections and different tax changes over the years and seen how that’s affected your construction clients. I think as our expert, I don’t think we could have better.

Let’s just start off with that first topic you mentioned.

[00:01:38] Wade Carpenter: Okay let’s break that down, if we can. On the individual side, let’s talk about the business owners. Construction business owners. Trump’s plan is to extend the Tax Cuts and Jobs Act, which there’s a lot of things that that did. And we probably need to go into key provisions of that.

One of the things that he has said on this, that on the individual side, was one of the big pushbacks from that was a lot of the SALT deduction, which is the state and local taxes, and was capped at 10, 000.

What he’s proposing in this one is, keeping the Tax Cuts and Jobs Act, but making that part unlimited again. There’s also a lot of other things. The biggest one I think that would hit contractors and business owners of all type is the qualified business income deduction, which is that 20 percent off the top. I’d love your feedback on this, but for eight years, businesses of all types, contractors are probably used to getting that haircut on how much they’re paying taxes on. That’s going to go through the roof. There’s going to be a huge hit. 

It’s set to expire after the 24 year. So the taxes you’re doing in ’25 for ’24, are not affected. But the following year they are affected. Short answer is that the Harris plan wants to do away with all those. Let’s stick with that part. What’s your thoughts on that? There’s several other key provisions here, but what’s your thoughts?

[00:03:06] Stephen Brown: It’s just a simple question. You mentioned the haircut that contractors are used to taking from the tax implications of that. And one candidate wants to extend it and one does not want to extend that. Maybe you could elaborate a little more on that.

[00:03:23] Wade Carpenter: Okay. So the Tax Cuts and Jobs Act did several things. It also brought in, okay. You make 100, 000 and the 20 percent off the top. So you’re only paying taxes on 80 percent of your business income. That’s the qualified business income deduction. There’s several other things like the bonus depreciation thing that was put in that act as well, that is scheduled to be taken out and is not supported by the Harris plan. And Trump, I believe, wants to make it permanent, as I understand. 

Again there’s blurred lines between what hits the business side and the personal side. One of the other things on the individual side that Trump is trying to do is eliminate taxes on Social Security benefits. I have not heard anything from the Harris plan about that. They’ve got some different things, but it’s both candidates who come out and said, let’s not do tax on tips. There’s also another provision in the Trump’s plan that there’s not going to be taxes on overtime as well as tips. So–

[00:04:27] Stephen Brown: I want to start having McDaniel Whitley pay me in tips. I’ve decided.

[00:04:30] Wade Carpenter: That sounds like a good plan. Any thoughts on that versus, I think we need to give equal time to what Harris is talking about doing, but.

[00:04:39] Stephen Brown: I think we should too. And I get it. Both candidates have something that is resonating with the voters that they’re willing to push. And it’s, again, it’s all about the voters and the perception of how their candidate’s tax plan is going to help them or hurt them, and the base of voters they’re appealing to.

So I get all that, Wade. Not dealing with taxes all the time, like you do, there’s just certain things that are frustrating. There’s certain things that contractors just don’t get. One thing we’ve always talked about before is contractors going broke trying to get out of paying taxes. The more complicated it is, the more I’m going to learn how to dig in and not pay taxes.

Nobody wants to pay taxes that you don’t owe, but you’ve got to be prepared. It’s a reality of living in America is that you will be paying taxes. It’s a reality of living anywhere. You will be paying taxes. Death and taxes are certainties. So from a contractor’s perspective, what do you see their biggest frustrations with either plan when it comes to taxes?

I can’t imagine being their accountant and tax consultant that there are not certain situations that cause a huge problem to a contractor’s cash and cashflow from tax purposes that they may or may not have been prepared for. 

[00:06:03] Wade Carpenter: I know we’ve got an episode actually coming up that deals with paying yourself as well as some of these issues, and I absolutely agree, I don’t want to steal too much thunder from that talk, but– 

[00:06:15] Stephen Brown: It’s not specifically the topic of today’s podcast. I get that. But I guess from my perspective, you’re talking to a non tax expert, that’s all. And from my perspective, I’m thinking of everything from if certain candidates win or lose and these plans take effect when will they take effect, and what do I need to do as a contractor to minimize the impact of that?

[00:06:42] Wade Carpenter: Okay so there’s a lot to unpack there too, but as far as like the Tax Cuts and Jobs Act, they are scheduled to expire.

Any changes to the plan, any tax plan normally has to be voted on by Congress and signed by the president, whoever that might be. The one thing about these cuts are that they just expire and there’s no extending them without Congress, approving a change. That’s one of the things that we need to know here. 

Just pivoting to the Harris plan, she wants to raise taxes on higher earners. And the top tax rates that were down to 28%, she wants to bump it back up to that top rate at 39. 6 percent on people making over 400, 000. And we can come back to that. There’s the whole story about I think it’s called barstool economics, and we’ll talk about that in a little bit, I think. 

There’s some other things that she had proposed, like the earned income credit which expanding that to 5, 000 per child. Trump actually proposed that as well, the 5, 000. Harris was wanting to go to 6, 000 per child in the year that a new child is born, so an extra 1, 000.

There was also an increase to the Medicare tax to 5 percent on high earners. And I’d have to look up what she was talking about, probably that 400, 000, I don’t know what that was. A lot of these are designed to raise revenue, and that sometimes comes at the expense of hurting the small business owner. Let me take a breath and let you share any thoughts on that. 

[00:08:21] Stephen Brown: I guess there’s no getting around what the tax proposals have to say for the future. What I would ask you, Wade, is historically, over your years as an accountant, what things do you normally see that candidates do and don’t do that have the biggest effect on a contractor’s ability to make money?

[00:08:42] Wade Carpenter: We could go back to some of the things that were done in the last administration that, again, I don’t want to get too political here, but, in a stroke of a pen, the Keystone Pipeline was cut out. It did supposedly take construction in a different direction with the Infrastructure Act.

Unfortunately, from what I read recently, a lot of that money has still not been spent. Just a tiny fraction of that money has been spent.

[00:09:09] Stephen Brown: That means a lot to our federal contractors doing federal work and implementing this project labor agreement for non union contractors adds cost to the overall project, and then the ability to get the project started and completed. It’s a whole other area of trying to understand how that’s going to be done.

But, as a general rule, you would say that when any candidate is pumping federal money into construction, and interest rates are high, and owners privately are not going to finance their construction projects with rates that high. They can’t, the numbers don’t work. So where’s that contractor going to find business?

Doing service work for existing companies, manufacturers? Being their go to customer to developers that have certain funds? And a lot of those are tied to incentives from the municipality to where they work. You just have to be creative. Sure. From a tax standpoint, you have to say, how does that affect the economy? How does that affect interest rates historically?

[00:10:13] Wade Carpenter: And again, there’s blurred lines between what’s the individual and I think we need to speak about the corporate side, but I will come back to the discussion about the tax on unrealized capital gains. I think we need to spend some time talking about that part of it.

But let’s just talk in general about the corporate side. I know I’ve already mentioned a couple of things that really hit the, the qualified business income and the bonus depreciation, but one of the things the 2017 Act did was lower the corporate tax rate to 21%. A lot of people say okay, that killed tax revenue.

But if you look at what it actually did, it stimulated the economy, number one, so tax revenues actually went up. But the bigger part of that was the fact that the what they call repatriation of, income. So if you got a U. S. company and they’re, penalized for having, income in the U. S. and they could move it to another country that is paying less tax, then, it makes sense to do it. 

What this did was actually brought a lot of that money back and as well as some investment back in the United States. And according to what I read, it brought in about 380 billion of tax revenue, I think over a 10 year period.

Even though everybody said, okay, you’re dropping the rate, then there were definitely international implications, as well as there was several stories of companies that said, okay, we’re not going to pay as much taxes. And I’m trying to remember who it was. It was one big case where they said, okay, let’s give it all to our employees. And they gave them a big bonus. I don’t know if you remember that. But it did have a lot of good impact on the economy. 

So Trump’s plan is to drop the corporate rate another 1 percent to 20 percent, as well as he wants to drop the tax on manufacturers to 15%. And we’ll talk about the tariffs and all that stuff in a little bit. 

But what he’s trying to do is bring jobs back to the United States. So that 15 percent for domestic manufacturers, if you’re manufacturing it in Mexico or China or wherever, that’s where he’s trying to bring the jobs back. The Harris plan intends to raise revenue by, her plan is she wants to raise corporate tax rates to 28 percent from the current 21%. Again, trying not to go too far one side or the other and put my opinion in. 

[00:12:46] Stephen Brown: Well, no, you, I mean, you certainly had, why would you want corporate taxes to go up if you could keep them down? I get that. If those corporate tax rates are raised, what’s everybody going to be doing to minimize showing any income in their corporation?

[00:13:03] Wade Carpenter: That’s going to, again, I think going to send corporations to send it back to overseas. It’s a disincentive to manufacture here. One of the things that I was going to talk about was the capital gains part. The proposed tax on unrealized capital gains that the Harris plan–

[00:13:21] Stephen Brown: How do you define an unrealized capital gain, Wade?

[00:13:24] Wade Carpenter: You’ve got stocks and bonds. So you held Coca Cola stock for 20 years. You may have spent a thousand dollars, maybe it’s worth 20, 000 now. You hadn’t cashed it out, but they would look at that 19, 000 gain over what it costs you, and you would be taxed on that, even though you don’t have the cash in your pocket.

They’re also talking about unrealized appreciation on real estate. To be fair, they are talking about people with, I believe over a hundred million in net worth or something like that. But that goes back to what I was talking about, that old story. You probably heard various versions of it. And you go on the internet and just, I think they call it barstool economics. 

But 10 friends go into a bar and they run up a bar tab of a hundred bucks. And I won’t go through all the iterations of it, but so they say, okay you’re my richest friend. You’re going to pay the biggest part. 

Our bar tab’s just gonna be split, and whoever makes the most is gonna pay the largest share. And again, there’s different iterations where the bar owner gives them a discount and then they start arguing over who gets the discount. 

[00:14:32] Stephen Brown: Who gets the most of the discount? Yeah.

[00:14:35] Wade Carpenter: Yeah. The most discount.

And in the story, they were like the bottom four people that were paying nothing, and they were upset because they weren’t getting part of that discount. And again, the whole story goes into okay, so the next day, only nine show up, and the richest friend doesn’t come back.

So now they got to split it over nine friends. The whole parable is about if you tax too many people, they’re going to leave the country. And I think that’s exactly what happens with this unrealized tax. There’s several things I think that’s going to do.

You can see people all over the internet or even on TV talking about, okay, I’m going to pull all my investments out of the country. I’m gonna go stick it either in some foreign land or whatever. You think about all the real estate that, you were talking about how old your house, but I’ve been in my house for 30 years. I got a lot of appreciation on my house. Not that I have a hundred million dollars, you know, what does that do? Are they gonna go ahead and leave the country? 

[00:15:31] Stephen Brown: Yeah, and you’re gonna have to take out a home equity loan to pay those taxes. You can’t move your house out of the country. 

[00:15:37] Wade Carpenter: There’s so many key pieces of this, but the way that was structured, on death normally you could pass your estate down, and that is another thing that the Tax Cuts and Jobs Act did was massively increase the estate tax. But under this unrealized capital gain proposal, you would immediately be taxed on death by how much your house had grown, how much your stocks had grown, what it was due, and there wouldn’t be no step up in basis. So that’s where a lot of people avoided a lot of these estate taxes because they didn’t have to worry about, all these they got to step up in basis.

Which means whoever inherited it, you bought this at 100 and it’s worth 1, 000. Whoever inherits it, their cost basis is at 1, 000, so when they go to sell it, if they sold it on day two for 1,020, they only have a 20 gain. Hope that makes sense.

[00:16:33] Stephen Brown: It does.

[00:16:34] Wade Carpenter: Again, there’s a lot to unpack here. We talked about the Child Tax Credit. The business deductions, we all talked about that SALT deduction, Trump wants to reinstate that unlimited SALT deduction, and that 20%.

If that’s not extended, the itemized deduction and all that stuff and the deductions all revert back to where they were.

And there was a huge impact to the middle class by doing that because they substantially raised what the standard deduction was. It actually made taxes a lot simpler for people like me to do it. 

The one thing that I did mention, Harris was talking about raising the deduction for somebody starting a business. And I don’t know if you dug into that part, but I’m all for doing anything to help a business owner get started. What it is actually is there is a cap on how much you can deduct in the first year of loss. So what she’s proposing doing is you can deduct up to 50, 000 of loss. Now, be fair, the current rules of like, if you got a 5, 000 cap on it, and you have a 50, 000 loss, you can carry that over and use it against income in future years.

So personally, I don’t think that’s going to do much to stimulate the economy. It sounds good on paper, but if people realize that’s, a lot of businesses are going to have a loss the first year. It’s not really helping somebody that, they’re, you typically don’t have that much income in the first few years anyway, sometimes.

So that was just my take on that

[00:18:10] Stephen Brown: Yeah, now that makes perfect sense, Wade. 

[00:18:12] Wade Carpenter: Let’s see, any other parts? We could talk about the tariffs. 

[00:18:16] Stephen Brown: Yeah how are these tariffs affecting the materials, the supplies that our listeners are depending on and how these tariffs affect the overall taxes of their company.

[00:18:28] Wade Carpenter: The idea and going back to what was done in the previous administration, everybody was really paranoid about what would happen if Trump started raising these tariffs on China. And his intention was to get the jobs in the manufacturing back here in the United States. And he did that and it actually did raise a lot of revenue. It probably did increase some of the costs for some people, but it, what it did was actually stimulate the economy, raise revenue for tax purposes. 

What his current plan is to impose a universal tariff on imports, like 60 percent specifically for Chinese imports. If you look at the trade deficit in this country we import way more than we export. And there is a huge imbalance there. And again, people could get in a bidding wars or whatever, but I think that these tariffs have been a positive thing. And personally don’t think it’s a problem. I’m calling some of these people out. I’m saying basically that, it should cost you more to import this. versus having it manufactured here in the United States. Harris, she has no plans to put any tariffs in place from what I’ve seen. No specific changes that I see that was put in there. 

[00:19:45] Stephen Brown: My thoughts on my understanding of tariffs and how they affect my clients and how that affect me and how they affect what I have to spend. To live here is confusing. I get it. We want to promote growth of jobs and manufacturing in the United States. I guess there’s some situations in tariffs where we’re never going to be as competitive as another market in a certain area.

I wish tariffs could be more equal in how they help our customers bid work profitably first and foremost, and how long does it take to get America back up and running again to where we can provide all the materials and supplies that we need manufactured right here in the United States.

That’s personally what I would love. I just don’t understand the. Practical applications of these tariffs. I know that during COVID, the ability to get items in from overseas almost stopped because of our ports and ability to move that product. It was terrifying to me how much we totally depend on other countries to live.

And, after World War II, you know, America was the breadbasket. When America was at its strongest, we were producing 98 percent of agricultural products, 98%. Now it’s 2%, is what I heard the other day. The–

[00:21:12] Wade Carpenter: That’s amazing,

[00:21:13] Stephen Brown: Yeah. Things change. Things change intrinsically, things change politically. And to be able to look at it and all we can do is look historically about how these decisions have affected the construction industry, and us personally.

I know how much more it’s costing everyone. Insurance is going up. I’m an insurance agent. That makes people crazy. It’s an intangible product that you have to do to be in a construction industry. I get that. But at the same time, all of us, including me, have to spend more money to live. Everything’s more expensive.

And these tax implications to me are scary. You could definitely be taxed out of business and you can definitely go out of business by not paying your taxes. Okay. I get both of those. But what can you do right now? And my point would be look at both plans, and compare them and see how that’s going to affect your taxes and see what’s important to you, and then vote accordingly.

[00:22:15] Wade Carpenter: Good point. I think we hit most everything. There was several things that I had done like looking at what would happen with the tax rates and jobs and that kind of stuff, but I think we probably hit the majority of it today. 

And again, this was not intended to be a political discussion. I want everybody to know what’s actually out there, what’s published that they said they’re going to do or their intentions are. And just, as always, I think that’s our mission is to educate contractors as best we can. So I hope everybody found this valuable. If you’ve got any thoughts or feedback on today’s discussion, we’re always happy to answer questions or hear your thoughts on topics you’d like us to cover, drop in the comments below. 

Wanted to thank you for listening. If you enjoyed the episode, please like share and subscribe and follow us every week as we post a new episode and we will look forward to seeing you on the next show.