How Trump’s Tax Plan May Impact Your Small Business

A Q&A With SCORE’S Business Tax Experts

On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act into law. Since then, there has been a lot of back and forth about what the actual effects of the new law might be, particularly among small business owners who have been waiting for a significant tax break.

Lendio’s friends at SCORE have been busy helping small business owners around the country navigate the new tax code. SCORE is a nonprofit association dedicated to helping small businesses get off the ground, find ways grow, and achieve their goals through education and mentorship. Here’s what SCORE tax experts have to say about the new rules for small business owners:

Q: Do small businesses stand to benefit significantly from the new tax law?

A: Most small businesses are the home-based businesses in your neighborhood. They are the businesses that are in small shopping centers or office buildings downtown. They make money, but not large incomes. Most small businesses have just a few employees. The U.S. Census Bureau of Statistics roughly shows that there are a little over 27 million businesses in the U.S. running, but only 655,587 of them employ 20 or more employees. This means 21 million of those businesses do not have employees at all. These are self-employed Americans who pay taxes, but are not included on the monthly job reports. These businesses will not benefit from the new tax law because the new laws are pointed at corporations. Corporations get a 1 percent higher cut and are not subject to income ceilings.

Q: Will the additional 20 percent deduction for companies filing as pass-through entities be a significant tax benefit for small businesses?

A: Pass-through entities, which are businesses the IRS does not consider a separate person like a corporation (sole proprietorship, partnership, LLC or S-corporation), can now deduct 20 percent of their Qualified Business Income. This is the income after qualified business expenses. Pass-through entities, which are the majority of businesses in America, will be restricted from income growth, while corporations will not. Some businesses can make up to $35 million and still be considered small. However if your business makes at or under the income level $315,000 and your spouse make $60,000, there is no more 20 percent deduction.

Q: What aspects of the tax law will not be advantageous to small businesses?

A: Not being able to properly understand the tax laws could be a blow to many small business owners, as most small business owners try to deal with their taxes on their own. Organizations like SCORE are important because they help business owners understand the tax implications associated with running their businesses. For most business owners, tax law is just not their line of expertise.

Q: Will the positive impact be more of a long-term or a short-term benefit?

A: The positive impact will be short-term for small businesses unless breaks are leveled. Also, unless small business owners can become financially educated like corporations, that could be another unfair advantage for corporations.

For more on how the Tax Cuts and Jobs Act will affect your bottom line, check out Take It Or Leave It: How The New Tax Plan Impacts Small Businesses by Lendio CEO Brock Blake.