Nothing good is what the 2018 tax changes mean for small business owners in the US. President Trump strongly disagrees with that, calling the tax reform “an economic miracle” (The Guardian). In a way, that’s definitely true as big corporations are sure to benefit greatly from the drop in tax rate from 35% to 21%. However, small businesses are not eligible for this huge cut. So for them, the taxation is only to become more convoluted.
Tax Reform of 2018 and Small Business: The Truth
The tax reform is happening, that’s been decided and signed now. Big businesses and C corporations rejoice as they get a flat tax cut, which means more money coming to their owners. The money that can be reinvested back into the already big companies to make them grow further.
Yet, there’s a not-so-small matter of the small businesses, which accounts for over 90% of all businesses in America according to US Small Business Administration. These companies don’t get to benefit from the corporate income tax cut unless they are a registered C corporations. And the majority of small businesses aren’t.
Therefore, the small businesses of today merely do not get their income tax reduced. There’s a chance for them to get a tax cut under the new law, but the process of claiming that is extremely complex and convoluted. One also needs to note that this small benefit has an expiration date, which is the year 2025.
That doesn’t seem too bad, right? At least, the new law isn’t actively harmful.
It really isn’t harmful to the small business directly. However, indirectly, the blow is significant.
What Should a Small Business Do to Strive Under the Tax Reform?
As usual, small business owners should do everything within their power to keep their products and services competitive. One of the methods is to cut their taxes in different ways, like:
- Hiring a PEO (professional employer organization).
Using the services of a PEO will allow a small business to hire more and/or higher-qualified professionals without a big rise in taxes. PEO Spectrum however cautions that with over 700 PEOs in the US one should choose very carefully. It’ll be best to get an unbiased third-party comparison of the services so the business owner can choose the one that will offer most tax benefits in the long run. - Contributing to a retirement plan.
If one has a retirement plan that qualifies for tax deductions, income from the business can be ‘sheltered’ there. This can also be used to entice employees as such a plan will provide them with a chance to have a retirement savings account. - Adding benefits instead of raising salaries.
One can avoid added taxes by increasing contributions to employee benefits, like health insurance, instead of raising the salary by the same amount. The employees win as they won’t have to pay income tax from the raise but will get a better benefit.
Small business owners should discuss tax-saving opportunities with their trusted tax experts to use any loophole available. This struggle is becoming crucial as due to the new tax reform big businesses will be easily getting bigger.
For small companies this means a higher level of competition, and many might not be able to survive under the pressure. That’s the real danger of the new tax reform for small businesses, and it’s so subtle that many have yet to realize how it’s going to affect them long-term. Yet, if a small company wants to keep existing and prospering in the future, its owner should be thinking of ways to make their services/products more competitive now. Without the resources of big corporations, this will be a huge challenge that will require creativity. The sooner small businesses start changing to adapt to the new taxing situation, the higher is their chance of actually existing five years from now.