Will Small Businesses Sink or Swim in Result of New Tax Law?

Brittany Hynes – After President Trump’s signing of the American Tax Cuts and Jobs Act in December, sizable corporations have been recognized for increasing pay and providing employees with bonuses. Experts suggest that small businesses will gain substantial benefit from the new tax law, as well. However, the focus on small businesses has been limited while large corporations have appeared in numerous headlines.

Trump and fellow Republicans, proud of their largest legislative accomplishment thus far, have asserted that the law would spark economic gain. On the other hand, Democrats argue that it provides more benefit for the wealthy and large corporations than for smaller business and low-income individuals. So who guessed it correctly?

Well, Brad Close, the Senior Vice President for public policy at the National Federation of Independent Business (NFIB)—an association which supports small businesses—has offered his input. Close suggested that three central changes to the tax law are likely to benefit small businesses: (1) reduced individual tax rates, (2) an additional 20 percent deduction for businesses filing as pass-through entities, and (3) an extension of Section 179 filing, permitting the expensing of business-related material. It is Close’s belief that small businesses will experience “more savings and more money in their pockets.”

Nearly 80 percent of small business owners file as pass-through entities, which basically signifies that they pay business taxes as an individual. Thus, the cut down of individual rates allows small business owners to pay less. Additionally, many small companies that file as pass-through entities will be eligible for at least a little additional deduction. Such change will provide companies with survival through stagnant periods and financial crises.

Prior to the tax law’s enactment, companies could expense equipment up to $500,000 pursuant to Section 179 of the tax code. Now, the new tax law doubled the cap to $1 million deduction each tax year. For some businesses this will not make much of a difference, such as those seeking only to enhance computers. But equipment valuing around $500,000 is now entirely deductible. This provides some companies with more money, allowing them to expand by putting the money towards costs such as creating more jobs, purchasing more equipment, or conducting research.

Nonetheless, it is clear that not every element of the new law will be beneficial for small businesses. For instance, the removal of numerous deductions, such as certain business expenses like travel costs, could potentially encourage employees to work for bigger businesses that have the ability to absorb such costs. However, Close stated that the NFIB is closely monitoring this problem.

Another complication arises from the varying viewpoints on what establishes a “small” business. Such differing opinions impede attempts to decipher precisely how these businesses will be affected. The Small Business Administration officially classifies small businesses by industry, founded on size or income. So, the agency categorizes big companies in certain industries as small companies. Close clarified that nearly all small businesses are the “kind of mom and pop shops most consumers think of.” He included that the ordinary number of employees is approximately 5 to 10 for companies that are members of the NFIB.

Regardless of Republican’s vow to simplify it, the tax code remains intricate and many small company owners are still attempting to handle the changes. In result, such owners are obligated to await a meeting with their tax accountants to understand the new law’s effect. Overall, a considerable amount of small business owners seem to be positioned to benefit from the tax law. But it seems, at this point in time, that there is no way to tell for certain. So for now, it may be best for small company owners to remain tentatively optimistic until we get closer to the end of 2018.



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