Trump Tax Reforms a Positive for American Small Business Owners
Recent news headlines have all been focused on Trump’s proposed tax reforms – like many of Trump’s policies, these reforms aren’t without controversy. And while much of the focus is on reductions in personal income tax and capital gains, small businesses also play a role in the reform.
If you’re a small business owner, you’re probably wondering how these reforms will impact your ability to operate and grow your enterprise. This article will overview Trump’s tax reforms in relation to small business owners – you’ll be surprised at how many advantages you’ll reap if this bill passes.
Small Business Tax Rate
Surprisingly, the United States has one of the highest corporate tax rates in the world – 39.1 percent. While our nation has always had a reputation for having lower income taxes than our European counterparts, this isn’t true when it comes to business. Previous governments have taken the stance that America’s economy is so strong that it shouldn’t take a low tax rate to encourage business development in the area.
The same goes for the small business tax rate – depending on how your business is structured, you might end up paying up to 39.6 percent tax on your business revenue. This is the top federal marginal income tax rate; a rate that many small business owners pay on their income. Trump’s tax reforms have decided to lower the top marginal small business tax rate to 25 percent.
Avoiding Abuse of New Tax Rate
So, you might have a few questions about how Trump’s team has proposed avoiding abuse of this new small business tax rate system. Why wouldn’t everyone channel their income through a small business and pay 25 percent on their income instead of 39.6 percent? This is a good question.
The answer lies in the terms of the new small business tax rate. The reforms propose that you are only able to run 30 percent of your business’s income through this new tax rate – 70 percent would still be taxed at the existing rate. This allows the federal government to avoid wide-scale abuse of the system, while still providing a solid tax cut for small business owners in desperate need of additional revenue.
Trump’s tax reforms don’t just focus on an overall reduction in the small business tax rate, they’ve also included several other tax deductions. These deductions seem primarily aimed at helping small business owners invest in their businesses. We will explore some of the primary deduction proposals below.
Capital Investment Write-Off
Business owners will now be able to immediately write off any capital investments they make in their businesses. This will provide many business owners with the means to improve aspects of their operations they may not have previously been able to afford. For example, a freight company would be able to write-off investing in new fleet straight away. If you own a small business that requires expensive machinery, computers, or equipment, this write off will be one of the primary advantages of the reforms.
Full Interest Expensing
This is another one of the primary benefits that small business owners will receive if the Trump tax reforms are to pass. This deduction will allow you to make a full deduction of any loan interest you pay within your business. This greatly reduces the cost of financing aspects of your company or investing in additional resources. Small business loans will be substantially more affordable.
If you have wanted to borrow money to make improvements or additions to your business, this tax deduction would greatly improve your ability to do so. In addition, it appears that there is no ceiling on how much interest you can write-off, making this a potentially huge benefit for a business of any size.
In terms of business, the tax reforms would also have some positive wider implications for the economy and local businesses. As corporate tax rates and small business tax rates are reduced, there is a higher chance that businesses will look to move into the United States from abroad. In addition, the economy may not lose as many jobs to globalization as it has done over the past two decades.
This business-friendly attitude has a net positive effect on the economy. Increased investment and economic activity will help small business owners increase their revenue streams and aim for growth. Even if your business doesn’t directly benefit from the tax reforms, you’ll might find that positive market forces will help spur consumer engagement.
While politicians debate over the reforms in the coming days, small business owners should remain vigilant to see if the bill passes. If the reforms do pass, business owners will benefit immensely. There is no doubt that the tax cuts and deductions within the reforms provide a substantial financial benefit to small business owners in the United States.
The additional deductions mentioned in this article also display how the reforms have targeted business investment and growth. While many critics will say that the reductions in tax rates will lead to capital hoarding, Trump’s interest and investment deductions prioritize re-investment in small business. This incentivizing will likely result in businesses expanding their operations and becoming more competitive.
Only time will tell if these tax reforms have a positive impact on the United States economy. The primary goal is to solidify America’s position as the world’s economic powerhouse, and reduce the chance that businesses outsource jobs overseas.
Recent market trends have suggested the tax reforms will do wonders for the economy. The stock market has soared to all-time highs since Trump has been elected, and a lot of this is thought to be because of anticipation regarding these tax reforms. Thousands of jobs have also been recreated – a sign that the economy might finally be fully recovering.
Keep yourself updated on the tax reform developments over the coming weeks. The results of this tax reform effort will determine how much you will be able to invest in yourself and your business over the coming years.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.