Ever since the new tax law otherwise known as the Tax Cuts and Jobs Law was assented to law back in December 2017, there has been a lot of buzz generated, particularly from large companies. The likes of Apple celebrated the move by announcing that it will bring back a majority of the cash to the US, which is estimated to be around in the region of $252 billion https://www.nytimes.com/2018/01/17/technology/apple-tax-bill-repatriate-cash.html . The thrill around the new tax law has certainly centered on benefits of the new law to bigger businesses in the economy but how does this law affect small and medium businesses?
Will small businesses benefit from the new tax law?
Now, those who support this bill believe that it will set the ball rolling as far as economic growth is concerned. But democrats have had their fair share of criticism of the law with the opinion that it only favors corporations and wealthy individuals over small businesses and people in the lower end of the food chain. Politics aside, what do the experts have to say about the effects of this new law on smaller businesses?
According to G.B.Bajaj, the founder of Life on Thrive-a company that specializes in offering business and tax services to small and medium business https://lifeonthrive.com/newsletter.php, SMBs are also bound to benefit from the new tax law. Of particular interest to SMBs are three changes made in this law: A cut on individual tax rates, an additional 20 percent deduction for companies filing as pass-through entities coupled by an extension of Section 179 filing, which permits for expensing of business-related equipment.
Bajaj says that most businesses owners file as pass through entities which means that any slash in individual tax rates tends to benefit smaller businesses. In fact, 95% of businesses in the U.S entail pass through entities https://www.brookings.edu/research/9-facts-about-pass-through-businesses/ like sole proprietorships, partnerships and S corporations which will benefit directly from the 20 percent tax deduction.
Not every small enterprise will benefit from this deduction though. According to Bajaj, service based businesses like law firms, doctors, and tax companies are exempted from this blanket relief and they can only claim a deduction if their annual income is $315,000-for married couples ($157,500 for single).
Moreover, the new law has doubled the limit in the realm of expensing business-related equipment. Previously, business could expense equipment up to $500,000 but the limit has been stretched to $1 million deduction per tax year. This won’t make a huge difference to businesses purchasing small equipment like computers, but it will certainly make a difference to those businesses that buy bigger equipment like trucks.
In a nutshell, small businesses are poised to reap a lot from the tax law, but of course, not all aspects are great for SMBs. Bajaj believes that the cut in deductions like travel costs and membership dues for professional organizations may drive employees to larger businesses who have the ability to absorb such costs. Then there is also a question of what is a “small business” keeping in mind that in instances, large companies can be classified as small business. http://smallbusiness.chron.com/determines-small-business-vs-large-business-20302.html
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