The new tax code has been on the minds of business owners and individuals alike over the last several months, ever since President Donald Trump announced the tax reform plan in 2017. Since then, it’s been a whirlwind of opinions, speculations and questions about what these changes would mean for American businesses.
In February, 51% of Americans approved of the tax law, up from 46% in January and 37% in December. But many still see wonder if it will really benefit the masses. Some businesses and advocacy groups are still not convinced that the reform is in their best interest, seeing the majority of tax savings directed toward the top 2.6% of eligible businesses.
No matter where you land on the political spectrum, here’s what you need to know about the tax plan and your business.
What is the new tax plan all about?
There are still plenty of questions around the tax reform passed in December. But businesses should note two of its main features: increased standard deductions and decreased corporate tax rates.
Currently, about 80% of businesses are classified as “pass-throughs” (that is, they claim income as individuals). Many of these companies will be able to reduce their taxable income by 20%. But these deductions are capped at $315,000 for service-based businesses to minimize the possibility of a loophole that could unfairly benefit one business over another. Businesses will also be able to deduct up to $1 million instead of just the old $500,000 deduction.
Decreased corporate tax rate
Despite growing support for the bill, it’s still not clear who it will affect the most. But large corporations are already seeing benefits. Billionaire investor Warren Buffet, who was previously opposed to cutting taxes, just saw a $29 billion increase in his company’s net worth, thanks to the tax reform. Since corporations will now be paying taxes at a 21% rate instead of 35%, they will be able to hold on to more of their profits, which increases the value for shareholders everywhere. In this light, Buffet is seeing it as a good change, even if he has voiced his reservations overall.
How will the tax plan affect small business owners?
The plan is still unfolding, and we’re waiting on additional details from the IRS on how businesses can determine their eligibility for certain tax breaks. These pending considerations include:
A business’ structure is a vital element to how small businesses will fare under the new tax reform bill. Whether your company is structured as a C-Corp, S-Corp, LLC or Sole Proprietorship will determine how the law affects you.
Small business definition
While many people wrongly assume that a set number of employees or earnings designates an entity as a “small business,” the Small Business Administration (SBA) has an industry-by-industry definition. So to many companies, it’s still not clear where they actually fall in the algorithm.
The National Federation of Independent Business (NFIB) said, “The historically high readings indicate that policy changes – lower taxes and fewer regulations – are transformative for small businesses.
But Michael Trabold, director of compliance risk for payroll and HR firm Paychex said, “There’s going to be a lot of really good stuff that comes out of the rule and some excellent opportunities from a tax perspective. But right now there’s still quite a bit of ambiguity. And until the rules come out from the IRS in detail, it’s going to be a little bit tough to determine exactly what path you should take.
Make the most of the tax reform for your business
Don’t throw caution to the wind
Nearly half of SMBs report that tax regulations are their biggest challenge. But despite the questions that remain about the reform, about 70% of SMBs feel good about the business year ahead. As you survey the landscape ahead, don’t throw caution to the wind. There’s still much unknown, so waiting for the plan to further unfold will be helpful.
Think, then act
Don’t change the way your company is structured just yet to cash in on what you think could be bigger tax savings. Many of the stipulations have a very clear definition of who may qualify, so it’s important to take a bigger-picture view and see how it all takes shape into 2019.
Enlist a tax expert who understands the financial landscape
The tax code has never been a simple matter. Although from appearances it seems we’re off to a strong start this year, it’s important to sit down with a tax expert to understand what impact the reform will have on your business.
Once you determine if business expansion is the right move, get in touch with one of our lending experts to see how we can help you secure the type of funding best suited for your business’ needs.