Personal incomes taxes are due this week, but it’s not to soon to start planning for the next tax year. Taxes can be incredibly complicated to understand. When the new tax bill was rolled out by Congress in December 2017, many business owners started to panic because there were so many unknowns, but now that the dust has settled, there’s good news. The new tax law is one that business owners should be excited about, and and I’m going to explain why. But first, let’s lay some groundwork.
The Tax Cuts and Jobs Act was created with the goal of causing economic growth across the United States by adjusting tax structures for small businesses and corporations.
Businesses can expect the following changes this year:
- There’s a 20 percent deduction for all pass-through businesses.
- Married individuals who own service-based businesses like law and accounting firms can only receive the 20 percent deduction if they make under $315,000 per year ($157,500 if single).
- The corporate tax rate will drop from 35 to 21 percent.
- The alternative minimum corporate tax rate will be eliminated.
The overall hope is that an improved corporate tax rate could make the United States a tax haven for corporations, and the 20 percent deduction for pass-through businesses may help economic growth throughout the nation.
Now let’s break it down even further.
Over 95% of businesses in America are pass-through businesses. Pass-through businesses are businesses like sole proprietors, S-corporations, or even partnerships. These particular styles of businesses do not pay corporate taxes, due to their size and structure. Any profit from the business is passed through as income to owner on their personal income taxes. This means, in effect, that 95% of businesses will see a 14% reduction in their net income taxes! This is a huge win for small business owners.
A 21% tax rate can mean hundreds or even thousands of dollars for these businesses, and maybe even much more. For small business owners, this will allow them the opportunity to be able to raise their salary, reduce debt and invest more in their businesses. A recent survey conducted by Insureon of 2,700 small businesses found that the majority are planning to use their tax savings to invest into their companies. This investment is expected to spur job creation and growth for these small businesses. The most important thing is that this growth will often travel down the line as the business decides to expand the showroom floor, which in turn provides work for builders, which in turn provides work for vendors who supply that labor or sell the inventory necessary, and so on.
Growing the business might also mean growing insurance responsibilities as well. Business insurance that worked great for your start-up business may be inadequate for your growing business. It is important to make sure your business insurance is keep up-to-date as you add new employees, equipment, or office space you need to make sure everything is covered.
Insureon President Jeff Somers said to look at your insurance as your business grows. “As businesses change, their insurance needs often evolve as well. To ensure they’re prepared to take advantage of tax savings to grow their business, small business owners may need to adjust their insurance coverage. While almost all small businesses can benefit from a general liability policy, they may need to add professional liability or commercial auto insurance policies or increase coverage limits depending on what changes they anticipate making to their business,” said Somers.
There are many important savings to be had for small businesses from the new tax bill, but it’s best to consult your accountant early so that they can help you with any tax planning measures so that you can maximize any tax benefits that put more money in your pocket and help grow your business. Utilizing savings wherever they can be found is not only a shrewd business practice but can also help you secure your financial future.
Do you have any idea how you will invest the money you’ll save from the new tax bill?
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