The Trump administration’s long-awaited tax reform legislation, the Tax Cuts and Jobs Act (TCJA), was passed by Congress and signed into law on December 22, 2017. Much has been written about the impact these reforms will have on corporate tax rates and middle-income workers, but small business owners want to know: how will Trump’s tax cuts affect them?
BidNet took a hard look at what reform will actually mean for small businesses. Here’s what we found.
Large Corporations Will Benefit More Than Small Businesses
According to an op-ed analysis of the legislation written by small business advocate Jim Blasingame, under the reform, large American corporations will receive a 40 percent reduction in their tax bill in the form of a permanent tax cut. The tax cut for small businesses, however, is around 9 percent and expires in 2025.
Also, proponents of the TCJA state that small businesses, including sole proprietorships, partnerships and Limited Liability Corporations (LLCs) will benefit from an additional 20 percent tax cut on qualified income. But language in the legislation suggests that many of these businesses - including those run by lawyers, accountants and business consultants - will not qualify for this additional tax cut.
Many Low and Middle-Income Earners Get a Tax Cut for Eight Years
Single people and married couples with household incomes of between $9,526 and $38,700 will see their tax rate cut from 15 to 12 percent. The next tax bracket, for those making $38,701 to $93,700, has now had the upper cap adjusted downward to $82,500 and these earners will enjoy a 3 percent tax cut, lowering their tax rate to 22 percent.
Income caps for higher income brackets have also been adjusted downward, while the minimum qualifying income for the second-highest tax bracket (35 percent) for single individuals has been chopped in half from more than $400,000 to $200,000. This means that single people making between $200,000 and $500,000 annually will now be taxed at the rate that was once reserved for people whose income fell in a narrow range of about $424,000 to $426,000.
Wall Street Loves the TCJA, but America’s Town and Cities May Not
Bank of America Merrill Lynch recently predicted that S&P 500 corporations can expect to enjoy a 10.5 percent increase in earnings per share in 2018, thanks to the TCJA.
This is good news for the largest corporations in America, but the tax cuts will also lead to a massive drop in tax revenue for the federal government. In addition, critics point out that the TCJA could increase income inequality, create incentives for companies to keep their profits overseas, and discourage local and state governments from investing in infrastructure.
A close analysis of the TCJA reveals that there may be some surprises for small business owners at tax time depending on whether their business qualifies for a lower tax rate or not. Couple this uncertainty with the potential for less community investment and increased income inequality and the picture is far more complex than it will be for larger corporations – especially after 2025, when the tax cut for lower income earners expires.
Nathan Munn | BidNet.com