There has been a lot of talk in the media about the benefits and drawbacks of the new tax plan, which passed on December 20th of last year. We know all too well that small businesses are often the first to experience consequences from changes to national tax policy. The good news about this plan is that most critics, regardless of their politics, agree on this: the new tax plan will be financially beneficial for small businesses. Always, however, consult your tax advising service for details on how this affects you and your business.
The “Pass-Through Tax Rate”
There are two main ways small businesses will benefit from the tax plan. The first has to do with changes to something called the “pass-through tax rate.” About 90% of small businesses qualify for the pass-through rate, which means your business income is taxed one time through the individual owner, rather than through a corporate tax structure. About 40 million Americans claimed this type of income on their tax return in 2014, and it applies to architects, engineers, , and you, the small business.
Prior to the new plan, pass-through income earners were paying up to 39% in taxes, or the top individual income tax rate. Now, you can get a 20% deduction on income earned through your pass-through, with a cap of $415,000 for couples and $207,500 for individuals. A deduction of this size helps businesses at all different income levels up. Even more good news is that you’ll still be able to take advantage of deductions for capital expenditures, tax credits for hiring new employees, and conducting research and development.
With the money earned from this potential tax reduction, you may have an opportunity to invest in new expansions for your business, offer raises to deserving employees, or update worn-out equipment. Or maybe you prefer to save it for a rainy day. No matter your decision, these tax benefits will empower you to control and develop your business more effectively.
Small Businesses Benefitting through Corporate Gains
Small businesses are not the only ones seeing green with this new plan. Corporations will receive tax rate decreases from 35% down to 21%, and companies maintaining funds overseas will have a chance to bring their money back to the US for only a 12% rate. When corporate tax rates go down, big companies have more freedom in their spending, which enables them to invest and expand. Even if they choose to save the increased income, that capital will be held with financial institutions which will then be able to finance more loans and services for individuals and small businesses.
Small businesses always need big businesses. Big companies stabilize markets, create jobs, and demand services and products that you, the small businesses, can provide. As time passes, you may see more opportunities to take on corporate clients and more economic stability in your region overall.
At NiteHawk, we are always looking for new ways to support our clients. If you have any questions about the information in this article, or if you would like to discuss other aspects of your business, please give us a call!
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Marks, Gene. 21 Nov 2017. Two big reasons the House’s tax reform bill benefits small businesses. The Washington Post. Available at https://www.washingtonpost.com/news/on-small-business/wp/2017/11/21/two-big-reasons-the-houses-tax-reform-bill-benefits-small-businesses/?utm_term=.6a9e1e784010.
Parlapiano, Alicia. 20 Dec 2017. How the ‘small-business tax cut’ would also be a tax cut for the wealthy. The New York Times. Available at https://www.nytimes.com/interactive/2017/12/20/us/politics/small-business-tax-cut-pass-throughs.html.
PBS News Hour. 30 Nov 2017. Under this proposed tax cut, big small businesses benefit most. PBS.org. Available at https://www.pbs.org/newshour/show/under-this-proposed-tax-cut-big-small-businesses-benefit-most.