Trump’s Tax Plan Six Months Later: What it Means for Your Small BusinessOlivia Katulka
We are now six months into President Donald Trump’s Tax Cut and Jobs Act and news stations are flooded with opposing viewpoints regarding its effect on the U.S. economy.
Knowing that the Republicans and Democrats will spin the story to meet their party’s standards, it can be difficult to wrap your head around what this tax bill really entails. For business owners, this tax reform can be mind-numbing considering the number of changes associated with it. Does it help small businesses or large corporations? What can you write-off and more importantly – will it put more money into your business bank accounts? It is certainly a lot to swallow, but it is crucial to understand where your business falls regarding these new regulations so that you can act accordingly.
According to The Star Tribune, 39% of business owners were still uncertain how the new law would affect their companies, a third stated they have already experienced its benefits and 27% didn’t expect to see a change. The input regarding its repercussions is all over the board and there is a simple reason for that – each business is going to be affected differently. Let’s dive into what this tax bill is really all about and find out where your business fits into its strategy.
Your Small Business Entity – Make Your Choice
It will be easier to comprehend the Tax Cut and Jobs Act’s financial details once you understand the basics first. It is your choice as the business owner to decide what form of business entity you want to establish when starting your business. Here are a handful of examples:
C-Corporation S-Corporation Self-Proprietorship LLC
Each category is held to different tax responsibilities and standards so it is important for you to discover which entity suits your business structure best.
The Tax Cut and Jobs Act provided C-Corporations with a significant tax cut taking it from 35% and dropping it to 21%. C-Corporation companies are known for being larger corporations known nation, if not, worldwide such as FedEx, General Electric, and McDonald’s. This recent tax bill significantly cuts their taxes, allowing them to reinvest the capital to spark improvement.
Since the tax reform, businesses like Comcast and AT&T were able to provide major bonuses for a large group along with other major C-Corporation entities. For example, Comcast provided $1,000 bonuses to 100,000 of their employees and AT&T did the same for 200,000 workers.
So what about the small businesses that make up 99.7% of employer firms in this country? Considering C-Corporations get double taxed at the end of the day, small businesses typically file under one of the other available options.
Fortunately, S-Corporations also received new tax regulations. A Pass-Through Tax Deduction was set in place for S-Corp businesses that allow them to only pay taxes on 80% of their business income. The purpose of this deduction is to provide the necessary working capital that small business owners need to invest in expanding operations, hiring skillful employees, and purchasing new equipment. This all may sound like great news, but there are financial limitations.
The Pass-Through Tax Deduction is available to S-Corporations that bring in less than $157,500, individually, and $315,000 if filed jointly. Once a business exceeds this amount, the deduction begins to phase out.
There are also industry limitations to this deduction, as well, but that’s where it starts to get really confusing. The best way to find out if your S-Corporation is eligible for the Pass-Through Tax Deduction is to seek professional guidance to find out if your business is correlated with these restrictions.
One more thing – it expires in 2025, so it only has an 8-year lifespan.
Tax Cut and Jobs Acts: Who is the Winner?
The ongoing concern regarding the tax bill is if it benefits the larger corporations or small businesses. As I mentioned before, the reviews of the tax reform are all over the board. Some say that the C-Corp tax cut will trickle-down to benefit small businesses while others believe larger small businesses will be the only ones reaping the benefits.
It’s time to break this down.
When you start a business you can choose what business entity you want to establish – C-Corp, S-Corp, LLC. Although we associate C-Corporations with large businesses like UPS, according to The Brookings Institution, 95% of C-Corporations were actually small businesses. This is why the wealthier small businesses cash in with this tax bill. Although they are taxed twice, their taxes were cut by 14%.
If you’re a small business owner with substantial income, it may be necessary to consider if a C-Corporation is right for you and your business. Your income will make you ineligible for any tax deductions within the Pass-Through program, so a C-Corporation 21% tax rate may suit your business financials more than you initially thought.
Doug Kauffman, a Certified Public Accountant for Kauffman CPA Company in Lancaster, PA states, “C-Corporations are traditionally, administratively, and legally more burdensome to own and operate than a pass-through entity, however, there may be circumstances that arise where it now makes sense for a business to go that route.”
Small businesses who have smaller earnings will find themselves wanting the Pass-Through 20% deduction. Even though the money you save is not close to what the C-Corp companies are experiencing, that capital can make a significant impact on your small business.
If you made $1,000,000 a year, $1,000 wouldn’t seem like much. However, if you made $50,000, the same amount of money now holds much more value. This is the concept you have to apply to the different tax structures.
Kauffman also shares that “the 20% deduction will help a business even if they only made $1,000 in profit this year.”
What Can Your Business Write Off?
Now let’s talk small business write-offs. Businesses across the country take advantage of write-offs to sway customers into buying their service or product. For instance, my mom went to a sold out Adele concert last year thanks to one of my aunt’s colleagues.
I was super jealous.
Whether it be a golf outing or a sporting event, businesses utilize opportunities such as these to please customers or reward employees because they are able to write it off come tax season. However, that is not the case anymore.
Entertainment expenses were generally 50% deductible – in some cases 100% deductible – prior to the Tax Cut and Jobs Act that was initiated in December of 2017. Now that the tax reform is set in place, entertainment expenses are no longer deductible – at all.
On top of that, food deductions have some restrictions as well. Meals for meetings and convenience for your employees took a dip from 100% to 50% deductible. Many business owners, including my employer, Fast Capital 360, provide food for their employees to maintain morale and satisfaction. With the decline in deductibility – how many businesses will still find it worth it?
This tax reform has put everyone through the ringer, including CPAs. Kauffman even shares that there is much about the new tax law that is still unclear. Although the tax bill has been passed into law, the IRS still needs to issue Treasury Regulations to provide additional details on the practical application in some areas.
These new regulations need some getting used to, especially since this is the first major tax reform since 1986 – over 31 years ago. Each business will be a case by case analysis and it is important to work through these new taxations with a CPA.
Prepare Your Small Business for Next Year’s Tax Season
Every business will respond to this tax bill differently. Some changes may be great, while others may seem irrational. Small business owners need to buckle down and really evaluate their business to decide what the best plan of attack is for next year’s tax season.
Don’t feel inferior if you are having a hard time understanding these new tax regulations. Honestly, did you really understand them prior to the reform? Even the most intelligent people who have graced this planet have a hard time wrapping their head around the taxation process.
As Albert Einstein said:
“The hardest thing in the world to understand is the income tax.”
Thanks, Al. You couldn’t have told me this six years ago when I owed the IRS $700?