Since its conception, the sweeping tax law passed last week has been hurdling through Congress at a brisk pace. With numerous areas being reformed, keeping abreast of all the changes has been difficult as both the House and Senate were forced to give and take. Now that the finalized bill is signed into law, the changes will begin taking effect on January 1, 2018.
Big changes for small business
Pass through businesses are likely to be enthusiastic about the new 20 percent tax deduction. The deduction is meant to give small businesses some financial breathing room. Supporters of the reform hope the money saved in deductions will be invested back into business, thereby stimulating the economy. The tax deduction lowers a business owner’s taxable income, so if an owner earns $200,000, only $160,000 will be taxable.
There are caveats. The deduction cannot exceed 50 percent of your share of the W-2 wages paid by the business. Service type businesses are not eligible for the discount unless their taxable income is less than $157,500 if single, or $315,000 if married. The exclusion is meant to prevent professional one man firms from getting a tax rate that is less than a marginal income tax rate.
Overall, the deductions are meant to correspond to the corporate tax rate change and prevent disadvantages to small business.
New corporate tax rate
The new law lowers the corporate tax rate from 35 percent down to 21 percent. The lower taxes are meant to encourage larger corporations to move their base to the U.S. to stimulate economic growth. While large overseas corporations may not set up shop right away, it does make the U.S. more competitive globally. The lower rate is also a deterrent for American companies considering moving their operations overseas.
The tax benefits to businesses will not be immediately visible. Most businesses already had their first quarter budget in place and will not make changes until the New Year is underway. As with past tax reforms, hidden consequences will be revealed over time, leading law makers to make tweaks. Is your business ready for the changes?