The Impact of Tax Reform on Small Businesses

What is the importance of tax reform?

Tax reform ensures that the rate of tax evasion and avoidance gets lowered. It ensures that the tax structure gets fully organized. It simplifies tax laws and encourages compliance. It widens the tax base and reduces per capita tax by dividing the tax burden by bringing more and more taxpayers under the umbrella.

The Impact of Tax Reform on Small Businesses

Small businesses across the nation have had to worry about changes to the tax code for the past several years, as President Trump and Congress worked to pass a comprehensive tax reform package. Now that the Tax Cuts and Jobs Act has been passed and is in effect, it’s important to understand what the changes mean for your small business.

The new tax law is likely to have a positive impact on small businesses. Many small businesses that file their taxes as “pass-through” entities (sole proprietorships, partnerships and S corporations) will now be able to deduct up to 20 percent of their qualified business income. This means their taxable income will be reduced, allowing them to keep more of their profits. Corporations, including C-corporations, will benefit from an overall reduction in the corporate tax rate from 35 percent to 21 percent, helping them to keep more of their profits.

The new tax law also provides for several other benefits for small businesses, including a new deduction for qualified domestic businesses with gross receipts of less than $25 million each year, and an increase in the Section 179 deduction, which allows businesses to deduct certain capital purchases in the same year. Additionally, the law provides incentives for businesses to invest in new equipment and machinery, as well as research and development.

While the new tax law has generally been viewed as a win for small businesses, there are several potential drawbacks. The elimination of personal exemptions will increase the tax burden for some small business owners, and the new pass-through deduction may be subject to income limits or other restrictions. The corporate tax rate reduction may also be offset by the new limitation on deducting business interest expenses, which could make it more difficult for businesses to secure financing. Further, the law includes a provision that could limit the ability of business owners to deduct certain losses on their personal returns.

Ultimately, the impact of the Tax Cuts and Jobs Act on small businesses will depend on the individual situation of each business. Business owners should consult with a qualified tax advisor to determine the best way to take advantage of the available tax benefits and to minimize their tax liability.