[Editor’s Note: This post is current as of December 12, 2017. Subsequent changes to the bill may render some of this information outdated.]
The tax bill currently pending in Congress could spell major tax cuts for businesses, but it’s not quite that simple. From profitable corporations to struggling startups, every business wants to know how their finances will be affected, and there’s not always an easy answer. In this article, we break down how the bill as it currently stands could affect your business.
Rewards for Large, Profitable Businesses
Large corporations stand to gain quite a bit from the latest version of the bill, which slashes the corporate tax rate from 35% to 20%. This is good news for big businesses, and it could be good news for you, too. For entrepreneurs seeking to sell to a larger entity, a lower tax rate could mean more money floating around for mergers and acquisitions. There have been relatively few high-profile startup purchases this year, due at least in part to uncertainty about tax reform. If those issues are resolved and the tax cut takes effect, it’s reasonable to assume we’ll see plenty more acquisitions in 2018.
Pass-Throughs Get Left Behind
If your business is organized as a sole proprietorship, an LLC, or a partnership, you’re not alone. These types of entities make up the majority of US businesses. However, it’s not great news as far as the tax bill is concerned. The 15% tax cut that large corporations would enjoy doesn’t apply to pass-through entities, which puts small businesses at a disadvantage compared to large corporations. A last-minute addition to the bill allows for many small business owners to claim a 23% deduction on some of their income, but this provision only lasts for seven years and many “professional services” businesses (such as lawyers, etc.) wouldn’t even qualify in the first place.
There are other aspects of the bill that at first glance don’t appear to have much of an impact on business owners but could have long-terms consequences. In particular, the bill would get rid of many deductions for state and local taxes, forcing states and municipalities to consider lowering their own taxes to ease the burden on citizens. Sounds great, right? Wrong. The costs these taxes defrayed don’t go away, they’re just passed on to local businesses. This would make it costlier to do business and perhaps encourage businesses to close up shop or move to a different area. On the flip side, if states and municipalities don’t decrease their taxes to keep pace with the loss of the federal deduction, businesses could see issues with their hiring pool. To avoid paying more in tax each year, employees may consider moving to a different state or town. This is particularly relevant for the tech community as many startup workers often accept a lower paycheck to be part of an exciting young company’s journey. With many startups headquartered in highly-taxed areas like Silicon Valley and New York City, it’s entirely possible that employees just couldn’t afford to live there anymore.
It’s Not All Bad!
There are certainly some benefits to the new bill that are meant to help small businesses thrive. In addition to the (temporary) 23% deduction, businesses would be able to write off any equipment they purchase immediately over the course of the next five years and even keep some of that over time. Depending on your industry, that could be a very big deal.
Finally, the bill is by no means final as the Senate and House must now work to hammer out the differences between their two proposals. With a combined 919 pages, this is no easy task – compromise is a given. If you’re upset by what you’ve read, we encourage you to contact your senators and representatives and let them know how you feel. There’s still time to be heard.
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