The Republican Tax Bill has passed, so if you’re a business owner you’re probably scrambling to figure out how it will affect your business. The Tax Cuts and Jobs Act aims to kick start economic growth across America by adjusting tax structures for small businesses and corporations. Now that the President has signed off on the bill, businesses can expect the following changes to kick in now that 2018 has begun.
- There’s a 20% deduction for all pass-through businesses.
- Married couples that own service-based businesses, like law and accounting firms can only receive the 20% deduction if they make less than $315,000 per year.
- The corporate tax rate will drop from 35% to 21%.
- The alternative minimum corporate tax rate will be eliminated.
The final bill’s overall benefits are a little simpler and more straight forward for all U.S. companies. The main arrangements that have made it through to the final bill are a reduced corporate tax rate and a sizeable deduction for all pass-through businesses.
Pass-Through Business Deduction
The fundamental aspect of the new bill deals with a change to the tax complex for what are known as pass-through businesses. Pass-through companies make up about 95% of American business; sole proprietorships, partnerships, and S corporations. The change will give a 20% tax deduction for all pass-through businesses, but it comes with a catch; married individuals who own a service-based company like a medical office or advertising agency can only collect the deduction if their annual income is below $157,500 (if single).
To put simply, lawmakers want to stop a one-man medical practice or agency from benefiting from a tax break that isn’t meant for their business. The tax deduction is meant to give a break on a part of a business’ cash flow that comes from capital income. Capital income stems from assets that accumulate value over time and should be given a tax break, according to the lawmakers, while labor income is cash generated from workers and should be left out.
By capping service-based businesses at $315,000 per couple, lawmakers are attempting to limit the possibility of certain business owners from benefitting from a lower taxable income.
Corporate Tax Rates
The tax plan’s main point is slashing the corporate tax rate. By lowering the rate from 35% to 21%, lawmakers are trying to make the United States the place for larger corporations to set up and create economic growth.
Lower taxes are appealing for companies because of profitability – corporations will move to whatever area provides the chance to profit the most. However, there are a lot of factors to consider before foreign companies move to the U.S. It’s not clear yet if new businesses will set up shop in America, but the new tax rate makes the United States more competitive in the global economy.
Broad Policy Impact
An important point to note is the impact these tax cuts will have on economic policies across America. Since 2008, the Federal Reserve Bank has kept interest rates low to encourage businesses to borrow money and boost economic growth. With reduced taxes, we could see the Federal Reserve Bank raise interest rates and try to offload assets that it has accumulated since the financial crisis.
These cuts are positive for business, but it’s important to keep in mind that these cuts will have a broad impact on the economy and future economic policy.
The bottom line is that Republicans believe slashing the corporate tax rate could make America a tax haven country for corporations, and the 20% deduction for pass-through businesses may help economic growth throughout the nation.
For more information on the new tax bill and how it can potentially affect your business, call us at (855) 851-8318 or visit our website http://bodineperry.com/