IBAW January 2018 Magazine

7 Plusses for Small Business in the “Tax Cuts and Jobs Act” Ray Keating, SBE Council, Washington D.C. Congress is poised to finally vote on major tax relief. While no major piece of legislation is ever perfect, the “Tax Cuts and Jobs Act” conference report ranks as a solid bill that will help the economy and be a clear net positive for small businesses.

Consider seven clear plusses for small businesses and the economy in this major piece of legislation.

First, the corporate income tax rate will be slashed from 35 percent to 21 percent. Such a dramatic reduction in the marginal tax rate would enhance incentives for corporations to invest and expand. It also would make the U.S. a far more friendly place to do business considering that the current combined federal and average state corporate tax rate ranks second highest on the planet, as noted in an SBE Council report. Finally, it must be noted that a dramatically lower corporate income tax rate is an obvious positive for the small businesses, in particular, given that most C-Corps are small firms, with 86 percent of C-Corp employer firms having less than 20 employees; 96.7 percent less than 100 workers; and 99.1 percent fewer than 500 workers.

Second, for non-C-Corps, a 20-percent deduction is adopted on pass-through income, bringing the effective top federal income tax rate on such pass-throughs (that is, S-Corps, LLCs, partnership and sole proprietorships) down from 39.6 percent to 29.6 percent.

For certain service businesses, this deduction is phased out if their business income exceeds $315,000 for married joint filers and $157,500 for individual filers, with the phase-out occurring over a range of $50,000 for individual filers and $100,000 for joint filers. (As noted in the conference report, these service businesses are defined as: “any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.”)

Also, there is a capital and/or a wage test to broaden the scope of businesses eligible for pass-through deduction, and there are measures to distinguish between individual wage income and business income. Unfortunately, this measure (along with reductions in individual tax rates) is temporary, expiring after 2025.

While in effect, this will be a major plus for small businesses – incentivizing entrepreneurship, investment and expansion – especially given that most small businesses are non-C-Corps. Making this permanent is vital going forward.

Third, expensing of capital investment is expanded. For all businesses, expensing of certain investments, such as machinery and equipment, is allowed for five years and then phased down over the following five years. In addition, small business Section 179 expensing is expanded, raising the cap from $500,000 to $1 million, and increasing the level where this is phased out from $2 million to $2.5 million. Expensing serves as a significant incentive for capital investment, with such investment proving beneficial in terms of enhancing efficiency, innovation, productivity, profitability and worker compensation.

Fourth, the corporate alternative minimum tax is eliminated, while the exemption level for the individual AMT is increased. The AMT serves to increase tax complexity and costs, while limiting the effectiveness of various tax deductions and credits that can have beneficial effects for individuals, businesses and the economy. (See a recent SBE Council analysis on the ills of the AMT.) Eliminating the corporate AMT makes sense.

Fifth, the ability to use cash accounting is expanded. Currently, cash accounting is an option only for businesses with less than $5 million in income. Under this legislation, that would be expanded to $25 million. Many small business owners prefer cash accounting due to it being easier and simpler. (See this piece on cash vs. accrual accounting.)

Sixth, the exemption on the death tax is increased. Currently, the exemption level for the death tax is $5.6 million. That would be doubled under this legislation. While eliminating the death tax would be the ideal, increasing the exemption level so fewer individuals, investors and family businesses are subject to this unfair tax on total assets is a major step forward.

Seventh, the ObamaCare individual mandate penalty, or tax, is repealed in 2019. The mandate that individual either purchase health insurance or pay a penalty was a punitive tax. This is a good start in getting serious about repealing and replacing ObamaCare.

These measures, along with others in the “Tax Cuts and Jobs Act,” aid small businesses and the economy by reducing the overall tax burden, and by boosting incentives for entrepreneurship and investment.