Tax reform has been at the center of attention in Washington since the 2016 presidential election. Last month, the White House unveiled a blueprint for what it calls the “biggest tax cut” in U.S. history.
The proposed reforms, while not finalized by any means, have direct implications for small business owners. Here’s what we know about the plan and what it could mean for business.
The Proposed Tax Plan
There’s a reason the White House touted its tax reform as “massive.” When you crunch all the numbers, it amounts to trillions of dollars in savings for businesses and individuals.
The primary goal of the new plan is to lower the corporate tax rate to 15% from 35%. The plan also creates a “repatriation holiday” to encourage corporations to bring back overseas money at a discounted tax rate. U.S. corporations have an estimated $2.6 trillion in profits stashed away overseas!
In addition to the above, the new measures promise to adopt a territorial tax system. This means most business profit earned overseas would not be subject to taxation by Uncle Sam. This is a big deal for businesses looking to expand into global markets.
Finally, the plan would lower individual income tax rates and streamline the current bracket system. Instead of seven tax rates, we’d go down to three. The new tax rates would be set at 10%, 25% and 35%.
Currently, Americans are taxed at the following rates: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
The new plan also calls for a tax break for child care costs and would eliminate most deductions.
What Tax Reform Means for Small Businesses
From a small business perspective, the proposed tax reforms have obvious benefits. The United States has one of the highest corporate tax rates in the world. A 20-point reduction for corporations could help companies stay competitive in a global market place. It may also encourage more self-employed Americans to incorporate. Entrepreneurship is driving the U.S. economy. Read the following article to find out how to scale up your business.
According to the Tax Policy Center, the proposed plan allows pass-through entities to choose a maximum rate for business income of 15%. Again, this could lead to potential savings for business owners.
That’s exactly what the White House is banking on. It’s also what Treasury Secretary Steven Mnuchin said when unveiling the new plan.
“By cutting corporate taxes, we’re going to create huge economic growth and we’ll have huge personal income,” he said.
Entrepreneur.com has also done a good job of explaining how the new tax plan would apply to Section 179 deductions.
Although the plan has a provision that would allow full expensing for capital investment, businesses would have to forgo deductions for net interest expenses.
“This would effectively provide for an unlimited Section 179 deduction with no phase-outs occurring at any level of investment,” says Bill Smith. “Currently, Section 179 allows for $500,000 of expensing, but the deductions start to disappear after $2 million of investments.”
Of course, plans don’t always work out as intended. The proposed plan has been criticized by economists, investors and politicians of all stripes. Although these debates are outside the sphere of small business owners themselves, there’s a consensus that some kind of tax reform is coming.
Maximizing Your Tax Deduction
It may be a while still before we know whether the new tax plan will actually make it through the Senate in its current form. For entrepreneurs and small business owners, it’s business as usual until we have new information.
The good news is there are plenty of ways business owners can minimize their taxes owing under the existing tax plan. Here’s a rundown of legitimate deductible business expenses courtesy of Entrepreneur.com:
- Auto expenses: mileage, parking fees and tolls for business use of your automobile are tax deductible.
- Equipment and furniture: Entrepreneurs and startups usually have big equipment and furniture expenses. Purchases made for business can be deducted from your taxes owing.
- Professional and legal expenses: Professional and legal expenses can also be deducted as business expenses. If these costs are associated with startup expenses, you may need to amortize the cost over a 60-month period.
- Startup and business expansion: Are you looking to take your business to the next level? Some expansion expenses are also tax deductible. If you’re interested in financing your growth and expansion, check out the following link.
- Advertising: Fees related to advertising also make for legitimate tax deductions.
- Home Office: If you’re starting your business from a home office, don’t forget to deduct it. If the room is used exclusively for business functions, it is certainly tax deductible.
- Telephone and internet: Any portion of your telephone and internet bills devoted to your business can also be deducted.
- Education and training: Looking to up-skill or re-skill in a business you’re already in? Continuing education is also tax deductible.
- Interest and loans: You can fully deduct interest on business loans.
Equipment Financing With Red Door Capital
All the talk of the Section 179 deduction is a reminder of the importance of purchasing new equipment. Not only do equipment purchases help you grow your business, they can also offer an immediate expense deduction during tax season.
Red Door Capital Group helps all types of businesses purchase and finance equipment. Examples of business equipment that we help finance include:
- Production line machinery and equipment
- Commercial vehicles
- Specialized technology
- Office furniture and equipment
- Lab equipment
To learn more about financing your equipment purchases, check out the following article: Equipment Financing: What are the Options?
Be sure to follow the Red Door Capital Blog for the latest tips and strategies for growing a more successful business. We can help you get the financing you need to streamline your business and reduce costs.
Sam Bourgi (April 26, 2017). “White House Announces “Biggest Tax Cut” in U.S. History.” Economic Calendar.
Alexia Fernandez Campbell and Dylan Scott (April 25, 2017). “Here’s what we know of Trump’s new tax plan.” Vox.
Karine Price Mueller (March 4, 2010). “15 Small-Business Tax Deductions.” Entrepreneur.com.
Jeanne Sahadi (April 26, 2017). “Trump calls for dramatic tax cuts for individuals and businesses.” CNN Money.
Bill Smith (February 9, 2017). “Will Trump’s Tax Plan Benefit Small Businesses?” Entrepreneur.com.