Since the U.S. Senate passed its version of the tax overhaul bill, much has been made about what the legislation will mean for large corporations, families and individuals. But what should small businesses in Arizona be aware of as President Trump looks to have the bill finalized and signed by Christmas?
The GOP Tax Plan: An Overview for Small Business
First thing, anyone evaluating how they will be impacted by the GOP tax plan should keep in mind that is has not been finalized yet. While the House and Senate have each passed a version, there remain differences between the two bills that need to be rectified before we know exactly what will be contained in the legislation. Republicans from each chamber are meeting this week to negotiate and find a compromise on some elements. In the meantime, here are elements of the tax-overhaul bill that small businesses should keep in mind.
Reduction in corporate tax rate
Both versions of the tax bill, the House’s and the Senate’s, include a reduction in the top corporate tax rate from 35 percent to 20 percent. However, amidst concerns about how all of the decreased revenues to the government a la tax cuts in the plan would impact the national debt, some are anticipating a final version in which the top corporate tax rate is ultimately cut to 22 percent — something that the Trump Administration has signaled it may be open to.
You may be asking yourself, why should a small business be concerned with the tax rate for top-earning companies? Well, you can look at it a couple of ways. If you are a small business with large, corporate competitors, you may find that more money in their pockets means stiffer competition for you on a variety of fronts, including talent acquisition.
On the other hand, if you are an Arizona small business that provides your service to large companies, you may see a benefit via increased spending capacity for your B2B clients. Whether you are a glass-half-full or glass-half-empty person on the question of top corporate tax rates, it is something you should be aware of as the government looks to finalize the GOP tax plan. Analysts are expecting any corporate tax cut to be permanent.
What about small businesses?
Most small businesses are considered pass-through entities (partnerships, limited liability companies and sole proprietorships). In these types of organizations, business profits “pass through” to the business owners where it is then taxed at an individual rate — sometimes as high as 39.6 percent.
The House’s version of the tax reform bill would implement a new income tax rate of 25 percent for these types of businesses. Under the Senate’s version of the GOP tax plan, pass-through business owners could deduct as much as 23 percent of their income, which could mean significant tax savings for many entrepreneurs.
However, under both versions of the tax plan, professionals like lawyers and accountants — “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” — is ineligible for these benefits, except for individuals making less than $250,000 or married professionals making less than $500,000 under the Senate’s bill.
What small businesses in Arizona need to know
Some businesses, usually those that have been or are intended to be passed down from generation to generation, are established as trusts. For example, many small manufacturing companies and grocery stores fall into this category. The Senate’s version of the tax bill excludes trusts from tax savings, something that could have ramifications for them as they face competitions from organizations that are otherwise structured.Under the Senate’s plan, small business trusts would see all of the income taxed as ordinary — even if the revenue is saved to reinvest into the business. The trusts would not be eligible for the 23 percent deduction in taxable income as pass-throughs are under the latest plan. While some GOP politicians have voiced a desire to rewrite this portion of the bill to allow trusts to be treated more like pass-through businesses, especially because the amount it would cost to extend this benefit is unclear.
Regardless of which type of small business you own, the truth is, absolutely nothing is final yet. Hopefully you have a better understanding of the current status of the GOP tax plan. In the coming weeks, be sure to check out our monthly newsletters for small businesses and keep an eye on this blog for updates to how tax reform will shake out. And if you have any questions about how or if a particular provision of the tax plan would impact your business, reach out. We are following closely and one of our tax professionals would be eager to speak with you.