Is the Republican Tax Proposal Good For Small Business?

tax proposalMembers of Congress unveiled the Republican tax proposal last week dubbed “Tax Cuts and Jobs Act”. The finger pointing has already begun on whether this is good for the average American. In addition, special interest groups are chiming in to protect their deductions.

But is the Republican tax proposal good for small business?

Let’s take a look at what it proposes:

  1. Slash corporate taxes. The bill wants to cut corporate taxes from 35% to 20%. Republicans say that this would deliver $1 trillion in tax relief over 10 years and would spark economic growth plus encourage businesses to create more jobs. Most small businesses would not be able to take advantage of this tax reduction since they are not traditional “C” corporations because of the double taxation involved in that kind of structure. It seems that there is a change for “S” and “LLC” corporate structures (which most small businesses are) that would allow 30% of the the full time owner’s income to be taxed at 25% and the rest at regular income tax brackets. The crazy part of the proposed Republican tax proposal according to The Washington Post is that “if instead you’re considered a “passive” owner… then you inexplicably qualify for the special pass-through rate on 100 percent of your earnings.”  This is not a real tax cut for small business since most of their personal income is now taxed at 25% of less. In fact, according to the New York Times, “most pass-throughs are small sole proprietorships currently paying less than a 25 percent marginal rate. But a few are quite large — 1.7 percent of pass-through businesses generate more than 40 percent of all pass-through income and are taxed at the top 39.6 percent rate.”
  2. Limit on personal tax deductions. This part of the Republican tax proposal will have a big impact on small businesses. By far, the greatest part of a typical business owner’s wealth is in their home. Limiting the deductibility of mortgage interest (to $500,000) and property taxes (to $10,000) will devalue real estate in the more expensive parts of the country. This will reduce the equity in small business owners home and limit their ability to borrow growth capital from banks.
  3. Limits on state and local tax deductions. The Republican tax proposal will eliminate the ability for small business owners to deduct these taxes on their federal returns. Entrepreneurs that live in more highly taxed states may see local customers flee their state and reduce their company’s revenue.
  4. Eliminate the estate tax. The reality is that the current estate tax today affects just 0.2% of all estates, which have greater than $5.5 million in assets (or $11 million if there is a spouse behind). This affects so few small businesses, it will not create any more wealth except for the richest Americans.

If you are running a large corporation or one of the few that have an LLC or S corporation that generates millions of income, this Republican tax proposal is for your company. We do not know if this retained wealth by corporations will really result in economic growth for small business that are subcontractors and vendors.  For a small business, there is not much that will help immediately and this proposal may even hurt owners in the long run making their largest part of their wealth, their home, worth less.

How will this affect your small business?

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