A survey by the National Association for the Self-Employed showed that 83 percent of small business owners don’t fully understand the new tax law, and 90 percent of owners feel that the government didn’t adequately prepare these businesses for the proposed changes.
The Tax Cuts and Jobs Acts is the name of the new tax bill that has gone into effect this year. This republican tax bill claims to adjust tax structures in favor of small businesses and big businesses alike.
This tax bill was passed in December 2017 and went into effect in January. And in just a few months, this tax bill has definitely made its presence known and felt.
Originally, the National Federation of Independent Businesses (NFIB) stood against the bill, claiming it would be detrimental to small business owners. But they have since changed their stance, saying that this bill would have a positive impact on the economy. This federation represents about 300,000 small businesses in America, so their opinion matters. And it’s important to understand their stance and why it has changed.
As a business — whether you’re a new business on the scene or a seasoned veteran — you need to understand tax laws in the county in which you operate. Tax laws vary greatly country to country, so if you’re a business that has grown accustomed to the laws of the past, or you’re used to tax laws in other countries, it’s important you take some time to understand how these changes can affect you.
Growth and success are intricately linked with tax laws. You have to have a deep understanding of how much money you will owe depending on the size and scope of your business.
In general, this tax plan was created to help businesses by offering the tax breaks that give them more breathing room when it comes to what they pay and the profits they can collect. As a whole, the Republican tax plan will cut income tax rates for individuals and businesses, and double the standard deduction rates. This is good news for businesses, but it’s still important to understand the ins and outs of this bill. Because it goes far deeper than what’s on the surface, and you need to know how your business can both benefit and lose out. Depending on the size of your business and what industry you’re in, these numbers might differ.
If you’re a business looking to learn how to navigate the waters in 2018 as the new tax rates set in, you have to dig a little deeper into this legislation. Luckily, we’ve got the inside scoop you’re looking for.
What’s The New Tax Plan?
The new tax plan has gone into effect, becoming law in January 2018, but businesses and individuals alike may just now start feeling the effects of the new tax brackets and cuts.
The final tax plan was created with businesses in mind, and while there are many different facets to it, we've included some of the most glaring and impactful changes for you to consider. The first change is that this bill cuts the corporate tax rate tremendously — from 35 percent to 21 percent. Overall, tax rates seem to be cut.
Personal income tax rates remained the same or went down in general, giving individuals and families some leeway when it comes to the taxes they pay and the state of their income and financial situation. But there are very few other benefits for individuals in this tax plan.
The numbers are worth noting for individuals, but more specifically, there are allowances, cuts, and incentives for businesses that can give business owners a more comprehensive knowledge and understanding of where their business stands financially in 2018.
Businesses and corporations can deduct a lot more than they used to. They can deduct state and local taxes now. But big corporations also get additional help. This bill doubles estate tax exemptions, giving the richest of the rich companies some help.
There are also some incentives that this new bill puts in place. Small businesses are encouraged to invest by being allowed to deduct the cost of appreciable assets.
This bill also encourages businesses to bring their profit from overseas back to the United States by forgoing a foreign profit tax.
These are just a few of the perks this bill offers businesses. It's a rather general overview, but it should give you an idea of what the focus of this tax bill is and who it aims to benefit.
This tax bill was created with businesses and corporation in mind -- though many argue that it was actually created for Fortune 500 companies. But regardless of what you've heard, breaking down the tax plan by the numbers is the only real way to understand how it will affect you.
The goal is that these businesses will reinvest in American industries and an American workforce. There are very obvious incentives and cuts geared towards businesses in the hopes that they will reinvest in our markets here.
There is also the hope that these cuts will give our economy a boost, kicking it into high gear and putting the United States back on top in terms of economics, GDP and strength.
So what’s the timeline for these cuts and when will businesses begin to feel it?
The Tax Plan Timeline
Trump’s tax bill went into effect in January, but just because it’s live doesn’t mean businesses will suddenly see their systems overturned.
It will likely take a few months for businesses to feel the full effect. This is due to a lot of things — business operation, budgets and other factors that will make the entire process seem a little bit slow to start.
Businesses can expect to see and feel changes in the coming months, as tax cuts take effect and businesses begin taking advantage of the incentives and deductions provided to them. It may also take time for some businesses to readjust their budgets to accommodate the new structure as well.
Exactly How The New Tax Plan Will Influence Your Business
The new tax bill has been described as, “the most sweeping overhauls of the U.S. tax system in more than 20 years.”
Trump’s tax bill isn’t the biggest tax restructuring in decades, and it certainly doesn’t offer the biggest cuts for individuals and businesses the country has seen, but the changes are great enough that they will seriously impact business operations and processes going forward.
But to fully understand how the tax bill will affect you and your business, it's important to first understand something about your business itself. How is it structured?
Are you a big business or small business? Are you a corporation? What's the size and scope of your business? To understand more thoroughly how you and your business will be affected, let's break down the types of businesses that will feel an impact. Becuase not all business entities are the same, and depending on the category you fall into, you will face different opportunities.
C-corporations, or C-corps, are corporations that, as a whole, exist separately from their owners on a legal scale. These C-corps stand alone and essentially make money on their own. This also means that they can be taxed separately from their owners. This means that they are taxed twice -- once at the corporate level, and once at the personal level depending on the profits taken by shareholders.
S-corporations of S-corps are essentially the opposite of C-corporations, though they are legal entities. They are exempt from being taxed twice. and benefit from something called pass-through taxation. This means that taxes are passed through from the business to the owner. Owners claim their profits and losses on a personal level and only get taxed on an individual level.
Sole proprietorships are not legally separate from their owners. Much like you'd expect, profits and losses get taxed on the individual, personal level by the owners.
Limited Liability Company
Limited liability companies or LLCs are smaller businesses that are owned by multiple individuals. Taxes are also passed-through for these businesses, and each owner isn't personally responsible for debt incurred.
Once you've decided where exactly your business falls, you can better understand how the benefits, cuts, and deductions will hit you -- if they will affect you at all.
The biggest and most talked about the change in the new tax bill is the corporate tax cut which we've already discussed. Prior to its implementation, C-corps were taxed at a specific rate range -- from 15 percent to 35 percent. But now, they're taxed at a flat rate of 21 percent. This gives major corporations a noticeable cut in the taxes that they pay.
But this tax cut only really affects the big, Fortune 500 companies like most other companies and small businesses are pass-through organizations. But just because this is the most talked about difference doesn't mean it's the only one to note.
These other businesses will benefit from the updated pass-through deductions included in the new tax laws. These benefits don't affect C-corps as they are taxed separately from their owners.
Businesses that claim they are pass-through businesses will get a 20 percent income deduction according to Trump's new tax plan. There are still some qualifications for this one. Your business must make less than $157,500 to qualify. And if these earnings only come from one individual -- like a doctor or lawyer -- you can't qualify.
But that's still a major plus for businesses who may now be able to take 20 percent off their gross earnings before taxation. And it gives many small businesses some breathing room when it comes time for taxes.
Bonus depreciation is another shining star in the new tax plan, allowing more businesses to write off bigger items more frequently -- thing mechanical or industrial purchases that are needed for businesses like pizza ovens or lawn mowers. Businesses can deduct up to $1 million in equipment purchases.
Previously, businesses were only able to deduct 50 percent of their purchases each year, now they can deduct 100 percent. This will help many small businesses out there who are just getting started and trying to find their footing by giving them a break.
Trump's plan also abolished the corporate alternative minimum tax which limited deductions corporations could claim. This helps big corporations by allowing them to claim more and pay fewer taxes.
There's also an additional credit added to encourage more businesses to pay for leave, giving them 12.5 to 25 percent of a tax credit if they offer paid leave to their employees.
As you can see, this tax plan offers businesses a lot of advantages and benefits that previous bills lacked. It may not be the most revolutionary tax bill, but it sure does give business a boost.
But just because it has its benefits, doesn't mean it isn't without fault.
The Nex Tax Plan's Cons
While the new tax bill offers a lot of helpful deductions and benefits, it also takes a lot of deductions away that previously helped small businesses and their owners.
The business interest deduction was cut to 30 percent in the new bills, which greatly impacts small business owners who took out small loans to help create and operate their organization. Before, owners were able to deduct these expenses as if they were any other business expense, but not the percentage has been decreased greatly, making the deduction seem not even worth it.
Entertainment expenses were also affected by the new bill.
What's an entertainment expense? it's those fancy dinners, client luncheons, shows and games that businesses treat their customers and clients to. Normally, businesses would be able to write these off as a business expense -- up to 50 percent. But in the new bill, these expenses can't be deducted at all.
Yes, the new tax bill completely eliminates these entertainment deductions. So if you're a business that relies on these client encounters, you're going to have to start being a little more frugal or be willing to pay these costs in full.
Another deduction eliminated is the employee meals deduction. Previously, businesses were able to deduct the cost of the meals employees ate on premises by 100 percent. Now, it is only 50 percent and soon it will be zero.
Since we're on a roll, another deduction abolished is the transportation deduction. If businesses paid for parking, transportations or monthly passes, they could deduct these purchases. Now, they can't.
These are just the big ones when it comes to the cons of the new tax bill. Of course, it could be argued that the additions outweigh the losses, but it all depends on the kind of business you run and the deductions that hit you the hardest.
But there are ways you can prepare for next year so your business doesn't feel sucker punched.
What Your Business Can Do To Prepare For The New Tax Plan
There are both positive and negatives to the new tax plan -- pros that make it beneficial for businesses of all sizes, and cons that seem to negatively impact smaller businesses. But wherever you stand, it's important that you at least have an understanding of where that place is. Are you a big business benefiting from the tax cuts or a smaller business that might be impacted by the deduction removals? Once you understand this, you're well on your way to successfully navigating the new tax plan and its consequences.
There are ways your business can prepare for the changes heading your way, here are just a few to get you started.
Understand Where Your Business Stands
First and foremost, your business needs to know its structure and makeup. Is it a C-corp, S-corp, LLC, sole proprietorship or small business? Understanding this is the first step to understanding how the tax plan will affect you.
This tax plan is broken down by business entity type. One type will be affected differently than others. There are some broad, general changes that will affect every business but to understand how this plan will affect you specifically, you need to know more specifically the kind of entity you are.
Consult Your Financial Experts
Most business owners aren't financing experts, that's why it's important to enlist the help of a professional to help you get your finances in order. Even if you do understand business finance, your businesses' financial needs might differ from what you'd think. And with these new changes, an expert is your best bet at making sure you get the most out of the new plan.
Businesses can deduct 20 percent of their earnings if they are a pass-through company. A financial expert can help clear these muddy and confusing waters for you. Financially, this tax plan has the potential to truly shake up your strategy, so it's imperative that you enlist the help of experts that can clear up any confusion.
Keep Your Business Based In The U.S.
Trump has consistently proclaimed that he'd bring jobs back to the United States, and this plan emphasizes this mission. Businesses are given tax breaks if they bring their labor and products back to America.
Many small businesses probably don't have to worry about this tip, but if you're a big business with foreign investments and foreign labor, bringing that labor back stateside could do you financial favors.
Invest In Your Workers
This is more of a general tip for business growth and success. Investing in your workers and your company has been seen to drive growth and innovation on a grander scale. If you invest in employees and make them feel like they are vital to the team, they will produce more effective content.
Innovation, dedication and work-ethic can improve by investing in your workers. If an employee feels like their work matters, if they feel like they matter, then they will do more to produce work that inspires and excels.
Investing in your own company should be your number one priority if you're looking to create a brand that lasts.
How The Tax Plan And Your Business Converge
The new Republican tax plan has already gone into effect and will continue being felt until its end in 2019. Overall, this bill claims to cut taxes and promote economic and business growth. It does so by offering incentives, deductions and allowances to businesses and corporations.
It can be argued that this bill helps big business more than small -- by slashing the corporate tax rate and allowing big corporations the ability to claim major deductions and pay fewer taxes, but there are some benefits for small business as well.
It does, however, eliminate a lot of the smaller deductions that businesses had grown accustomed to and which had helped them to flourish and grow.
Whether you're a large corporation or a small entity, however, it's hard to ignore the many benefits this tax plan offers you. It's just a matter of learning how to navigate the waters so that come tax season next year, you're better prepared to handle the changes.
This tax plan can impact your business in both positive and negative ways, but you'll never understand how it will affect you until you understand the bill itself. Hopefully now, however, you can take this information and plan your next year's business and financial strategy accordingly. Plus, if you'd like some additional help with your business finances, DesignRush has plenty of top outsourcing companies and agencies to help with taxes, business growth strategies and everything in between.
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