2018 brought about big financial changes with the passing of the Trump Administration’s Tax Cuts and Jobs Act (TCJA) that directly affects small businesses and large corporations nationwide. While tax law is complicated and should always be discussed with a tax lawyer, accountant or certified financial advisor, understanding the basics of how it will personally affect your business is imperative in determining your company’s current and future courses of action.
What Was the Purpose of the Bill?
This bill was passed in an effort to strengthen the United States economy by promoting the growth and expansion of businesses through the reduction of taxation. According to the U.S. Small Business Administration Office of Advocacy, as of 2017 there are 29.6 million small businesses running in the United States. Those businesses employ over 57.9 million employees and make up a majority of U.S. exports―the year 2014 saw $1.4 trillion in small business exports alone. With small businesses making up a vast majority of the United States economy, it would make sense that their growth would help to shave off the crippling debt faced by the U.S. today.
How Does the Bill Benefit Your Small Business?
The bill has many benefits for the U.S. small business holder, although there are some limitations and exceptions depending upon several factors. Each benefit is directly intended to reduce the tax liability of each company so they may gain more financial freedom and boost their profits with their expanded budgets. Here are a few of the benefits you may experience:
- The New Tax Rate―The largest benefit, to date, for small businesses is the new pass-through business tax rate of 21%. Pass-through small businesses are any registered Sole Proprietorship, LLC, S-corp or Partnership that is owned by 1 or more individuals.
- Higher Income Deduction―This tax rate runs in tandem with the second highest benefit, which is the 20% deduction of qualified pass-through business income. With this element in the mix, businesses may find themselves paying a lower tax rate than they have in previous years, as such a significant deduction can put them into a lower tax bracket than years prior.
- Overseas Profit Tax Breaks―In previous years, U.S. companies making a profit overseas were hit with several different taxes when they declared foreign incomes. However, under the new tax law, these deductions can be severely reduced, making it more affordable for companies conducting business internationally.
- New Equipment Write-Off―For companies who are reliant upon extensive machinery and property to produce, there will now be an increase in deductions from $510,000 to $1 million for qualifying property placed into service during the 2018 business year.
What Are the Negative Impacts for My Small Business?
While there are many benefits arising from the passing of this bill, as with any legislative act, it won’t be smooth sailing for all involved. There are some negative impacts that this bill may impose upon small businesses, including:
- Complicated Tax Preparation―While the bill has certainly made headway in making sure there are ample tax incentives for the small business owner, it has not made much headway in the means of simplifying the tax laws so that small business owners can understand them. This means that the majority of small business’s owners are forced to employ tax attorneys and CPAs to manage their business taxes and finances.
- The Federal Debt Continues to Rise―Even though the tax law is still in its infancy, there is growing concern around how the national debt will handle all of the tax cuts given to businesses and corporations. If the debt continues to increase, inflation, costs of production, import fees, etc. may all be potential negative factors to the newfound financial freedom of the tax cuts.
- Some Businesses May Experience Fewer Benefits Than Others―Depending upon several factors, some small businesses may experience less benefits than others. Factors that can contribute to a business’s qualifying status are: industry, number of employees, tax bracket, production value and company classification.
So, What’s My Best Course of Action?
The best course of action for you to take right now is to get with a licensed CPA and a tax lawyer who can explain exactly where you stand with the new 2018 TCJA. In this way, you will know exactly what to expect, what benefits you can have and where you might have some impacts that affect your finances. This will also help you to determine if you should look into changing your business platform (e.g. incorporate, start a business, hire more employees, etc.).
Ready to talk about how the 2018 tax bill affects YOU? Call us at Beaton Accounting today to schedule a meeting! 631-921-6894
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