I’m A Small Business Owner – Did This Law Help Or Hurt Me?

Although the new tax law makes a number of changes that affect businesses organized as pass-through entities, the typical small business should not expect to see significant new tax savings. The law’s small business provisions are structured in a complicated way, so business owners should be prepared to incur significant expenses to navigate the law’s numerous changes. Additionally, small businesses may see heightened competition from larger competitors who are better able to adjust their business to the new changes.

How does the 20 percent deduction for pass-through income work?

The tax law includes a provision that will allow eligible owners of S-corporations to take a 20 percent deduction on their income. In other words, if you are eligible, you can reduce your taxable business income by 20 percent. However, there are complicated eligibility requirements for individuals to use that deduction – the biggest is that their income must generally fall into a “qualified” category. This category, in turn, is defined as any income that is not 1) wage income, or 2) profits from any business listed in the law as a “specified service trade or business.” The list of service trade or businesses – whose profits are not eligible for this deduction – includes the fields of health, law, and athletics. Eligibility also depends on the taxpayer’s taxable income: If a taxpayer’s taxable income is below a certain threshold, then they may still be able to claim the deduction even if they are in one of the industries excluded from the benefit, depending on what types of other income they receive. Given the complicated restrictions for eligibility for this deduction, many small business owners will have to invest a considerable amount of time and money into figuring out whether or not they are eligible for the deduction.

Other parts of the tax law could inhibit small businesses’ competitiveness

The law includes the enactment of a “territorial” corporate tax system, which gives foreign corporate earnings preferential treatment over domestic corporate earnings and creates incentives to off-shore business operations and income. This provision will allow large, multinational corporations to funnel their profits to tax shelters and other low-tax foreign jurisdictions – something that most small businesses are unable to do. As a result, taxpayers with international operations will have access to new loopholes, providing them with a significant tax advantage over domestic corporations and small businesses – and creating an even more unequal playing field for true small businesses.

The tax law also creates uncertainty for small businesses looking ahead. Although the tax law makes its deep corporate rate cuts permanent, almost all of the changes to the individual code, including those affecting pass-through entities and small businesses, expire after 2025. The law is also poised to add at least $1.5 trillion to budget deficits, which could increase the risks that policymakers will cut investments in areas important to small businesses, like infrastructure and education, to make up the difference.

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