The impact of Trump’s 2017 tax reforms is already being reflected in several businesses’ effective tax rates. Last year, was the first full calendar year that US businesses operated under the new growth-centered tax laws which among other things saw the corporate tax rate cut to just 21 percent. Before this change, some businesses could pay as high as 39.6 percent in corporate tax, which had a negative impact on net income.
With the new changes, businesses can now use the extra savings on taxes to expand their operations or improve operating systems by acquiring new technologies. However, while the reduced tax rate could work wonders for large corporations, small businesses that make under $500,000 per year might not be able to enjoy much of this benefit.
And according to tax experts, the impact of Trump’s tax reforms do not stop at the corporate tax rate. They affect a variety of taxation items including personal taxes, which now present a more complex challenge to taxpayers that want to reduce their tax burden using traditional methods. According to a report compiled by Tax Defense Partners, the new tax bill affected several aspects of consumers spending as promised. For businesses capital expenditure increased sharply after the bill was enacted before normalizing shortly afterward.
And while there are some challenges that small businesses could also face, most of them will be delighted by what the new tax laws could mean to them in terms of tax deductions. The benefits that small businesses could take advantage of vary from write-offs to pass-through taxes.
After the new tax reforms came into effect towards the end of the year 2017, businesses now can enjoy increased write-offs on the purchase of new equipment, machinery, and automobiles. This benefit can be realized through accelerated depreciation, which allows businesses to deduct huge amounts of new equipment during the first years of use.
In addition, bonus deduction was also increased from 50 percent to 100 percent for all qualifying equipment acquired and used for service after Sept. 27, 2018, and before January 1, 2023, this report by Iowa State University Center for Agricultural Law and Taxation discusses the 100 percent bonus reduction in detail. Businesses can also enjoy bonus deductions for purchasing used assets.
Cash accounting requirements softened
Before the new reforms were introduced, there was already a process in the US Congress making changes to bring into force friendlier accounting requirements for small businesses.
In the past, any business with inventory was required to use the accrual basis method of reporting. However, that has now changed with this requirement set for businesses with annual sales of at least $25 million. This means that any business that reports annual sales lower than $25 million can use cash accounting to recognize sales and expenses.
One major problem of the accrual basis is that businesses recognize revenue before cash is received. This means that they are subject to taxation on income whose cash is yet to be received. Cash accounting ensures that small businesses pay taxes for income whose cash has been received.
The section 199A deduction (pass-through taxes)
This is one of the most effective benefits that small businesses will realize from the new tax reforms. With pass-through taxes, business taxes paid are passed through to owner’s tax returns. This effectively provides small businesses with up to 20 percent tax deduction from business income together with all business expenditure deductions as discussed in this comprehensive report by Tax Foundation.
The net effect is that small businesses will be able to generate more cash from their income through the savings on taxes obtained from pass-through taxes. They can then use this cash to expand operations or implement technological enhancements to cut more costs.
In summary, Trump’s Tax Deductions and Jobs Act of 2017 has stirred the market a bit following IRS report for last year. While some individual taxpayers might feel a little pressed after tax refunds were greatly affected, small business will be looking forward to what could be an interesting future ahead given the several benefits they could profit from in coming years.
(Featured image by DepositPhotos)
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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