The Impact of recent tax law changes on small businesses
Small businesses comprise major economic units in most economies across the globe. For instance, they contribute to the total workforce and in the economic development in the United States of America. Consequently, the fluctuations of tax legislation provide a powerful effect to these businesses, not only affecting basic financial parameters, including cash flow, profitability, and growth projections but also strategic planning and control.
Over the last few years, the tax laws of the country have changed a great deal, and small business organizations have not been able to cope with the changes in laws and policies as well as the emergence of new laws and policies. This blog will consider some of the most recent changes in the tax laws and how it affect small businesses and importantly, what business owners should do in order to apprentice these changes.
New Changes in Tax Legislation
Currently, significant changes in tax laws regarding small businesses were observed in December 2017 with The Tax Cuts and Jobs Act that were then followed by more changes in 2020 and 2021 to respond to the consequences of the COVID-19 pandemic. These changes have reshaped the taxation landscape in several key ways:
- Corporate Tax Rate Reduction: A key part of the Changes to corporate taxation under the Tax Cuts and Job Act was a cut in the official Corporation Tax Rate from 35% to 21%. This tax reduction directly affects corporations, but solopreneurs owning their C-corps will benefit from lowered tax rates.
- Pass-Through Business Deductions: Businesses that use pass-through taxation systems like sole traders, partnership, LLPs, S companies and many others have been subjected to income tax in their individual capacity depending on the business owner. Regarding these companies, TCJA brought into force a 20-percent deduction on qualified business income, which intended to bring down the disclosed tax rate for owners.
- Section 179 Expensing and Bonus Depreciation: The TCJA also enhanced Section 179 rules by permitting small businesses to claim a deduction for the cost of new and used business property in the tax year the property was placed in service up to $1,000,000. It also raised the bonus depreciation from 50 percent to 100 percent, which means businesses gave the cost of qualified property an accelerated five-year depreciation instead of the standard time frame.
- New Limits on Deductions for Business Interest: While there were many positive provisions for small businesses the TCJA also instituted new limitations on business interest expenses. Now, taxpayers with average annual gross receipts of more than $25 million are limited in the amount of interest they may deduct – which may affect enterprises with significant debt.
- Revised Net Operating Loss (NOL) Rules: With regards to some NOL provisions, the TCJA effected changes as to how businesses could utilize it. In the new system, the NOLs could not be carried back to earlier years and used against the taxes paid in those years, it could, however, be carried forward without any limit and used against taxable income in later years. The CARES Act enacted in 2020 also permitted businesses to carry NOLs back for five years in the period of the operation of the law.
- Paid Sick Leave and Family Leave Tax Credits: Due to COVID-19, the Families First Coronavirus Response Act (FFCRA) offered refundable tax credits for small business employers with less than 500 employees to be used for paid sick leave and family leave. The CARES Act of 2020 enshrined such credits and the American Rescue Plan Act (ARPA) of 2021 further prolonged these to help struggling small businesses.
- Employee Retention Tax Credit (ERTC): During the COVID-19 outbreak to support employees and assist struggling businesses, the Employee Retention Tax Credit was established. The credit afforded businesses with a refundable tax credit that was equal to the certain amount of wages paid on the eligible employees. This provision has been changed and Has been renewed several times helping the small businesses continue to receive assistance.
Effectiveness of the Changes in the Latest Tax Laws on the Small Business Companies
The tax law changes as observed above have had some benefits as well as the following detriments to small businesses. Most companies have been able to apply the new incentives while others are now facing new problems arising from the complexity and uncertainty of the new regulations. In this section, we are going to reflect on the main consequences of the aforementioned changes.
- Lowered tax rates for small business entities
The nontrivial change for commercial structures and one of the most significant for C-corporation companies is a decrease in the corporate tax rate to 21%. For that small business that employ C-corps, the upper rate has greatly lessened their taxes, freeing up cash flow for reinvestment or for owners. This has in turn enabled many small businesses to enhance cash flow and profitability and therefore get the necessary cash to expand or improve on existing operations.
Similarly, with regard to pass-through businesses, the 20-percent deduction on qualified business income has led to the same experience. Although the full deduction is limited as a function of gross income, modified adjusted gross income, and the type of business of the owner or higher-tier recipient for the tax year, it offers a substantial benchmark for reducing the small business owner’s taxable income. This has especially proven helpful to sole traders, partners and S-corporations since it lessens the applicable tax rate to the specific level hence stimulating additional capital investments.
- Capital intensity: There should be more investment in business properties.
Section 179 expensing and bonus depreciation are some of the extensively affected areas by the current changes on the side of small businesses most especially the capital-bound ones. The instant write-off of qualifying business property up to max $1 million has meant that important investments in machinery and equipment as well as technology enhancement have been made by small businesses without a view of having to wait for many years to enjoy the depreciation allowances on those investments.
The provision of 100% bonus depreciation has also has enabled business entity claim a larger deduction in the year they acquire eligible property and also improve cash flow and incentives for growth and expansion. This has been advantageous mainly for all the segments such as manufacturing, construction, and transportation that have to incur huge costs in their machinery requirements.
- Covid-19 Economic Stimulus for the People
The outbreak of COVID-19 presented small businesses with several considerations that were unknown before, but the federal government put several important measures to aid the business. The ERTC has been one of the valuable sponsors – financial support was delivered to businesses at a time when they still had employees on their payroll but wouldn’t otherwise be financially capable of keeping them.
In the same way, the paid sick leave and family leave tax credits really helped businesses maintain paid leave changes without straining their pockets. These credits helped make certain that small business could carry on their operations without the disadvantage of being unable to pay employees who are affected by illness or family disasters.
The second element of the governmental stimulus is the Paycheck Protection Program (PPP) which offered small businesses loans that could be forgiven if the company needed financial help. Despite not being related to the tax laws, PPP loans and forgiveness have become a vital source of relief for most small companies.
- New Compliance and Administrative Issues
Nevertheless, the tax law changes have also had new administrative issues for the SMES as discussed below. Even given the simplification of several provisions, such as the new 20% pass-through deduction and changes to net operating loss (NOL) carrybacks and carry forwards, several new rules exist that must be managed by business owners and their accountants with care. The Treasury has held that many small business owners, who lack tax departments that can help decipher the code, have found the code more and more complicated to understand.
Furthermore, some small businesses have been sometime facing compliance challenges on the new restrictions of interest expense deduction. Impact on Interest Expense: These changes for businesses with big amounts of interest would cut on the amount of tax they could otherwise have scored by offsetting all the interest they have to pay, making more complex their tax issue.
- The Need for Professional and Highly Qualified Tax Consulting Help
As seen with the newer tax laws it has become imperative that small business owners consult professional tax consultants. To help organizations understand and access these new provisions and to avoid pitfalls with tax incentive schemes; this remains a critical area to focus on. While small businesses will be affected in one way or another by these changes, those who hire professional help for tax planning and strategy will be better prepared to take advantage of the opportunities while avoiding the pitfalls.
Conclusion
The recent tax law changes that have occurred have greatly affected small business entities in a positive and a negative way. Although there are new tax laws the reduction in the tax rates, expanded deductions and the pandemic relief measures have been a big boost to many businesses, following the new laws, there are new problems of compliance and administration.
Small businesses need to be aware of such changes and consult the relevant professionals in regards to changes in the taxation systems. The companies can maximize all the potential, minimize their taxes and have the best chance of getting through the long term. Because tax laws are in a constant state of flux, being knowledgeable and proactive will prove to be invaluable when trying to establish a small business within an ever-complicated taxation system.
Frequently Asked Questions (FAQ)
The TCJA was signed into law in December of 2017 and includes some of the most prominent changes in the taxation of corporations, the lowering of the corporate tax rate from 35% to 21% for example, the new 20% deduction on qualified business income received from pass-through businesses, and improvements made related to depreciation. All of these have contributed to making taxes more friendly to small businesses having been reduced and more deductions made available.
C-corporation: Small-scale businesses get ways of improving corporate tax, from 35% down to 21%. This reduction raises cash flows, and enhances the flow of resources into working capital, which in turn brings improvements and expansion of operations and profitability.
The TCJA established a brand new 20% deduction to reflect on qualified business income for pass-throughs comprising of individual proprietorships, partnerships, as well as S corporations. It is useful in lowering the amount of payable taxes to the state in the following ways.
Section 179 permits a business to deduct up to $1,000,000 for new and used property used for business during the year the property was placed into service. Bonus depreciation was raised to 100% which enables businesses to take a higher deduction in the year the assisted property is placed in service as a means of enhancing cash flow and stimulating the acquisition of new capital assets such as machinery and equipment, technology etc.
The TCJA also included provisions on utilization of losses whereby it limited the carryback of NOLs whereby businesses can no longer carry forward losses to reduce tax paid for prior years. Still, businesses can use NOLs in an unlimited way to scale down their future taxable income. The additional Coronavirus Aid, Relief, and Economic Security Act of 2020 provided for five years of carryback on NOLs.
It is an instrument that allows workers to take time off from work to attend to personal business such as; getting themselves or relatives treated for illness. It is very important for the small and expanding business because it gives workers the opportunity to take time off work The FFCRA allowed refundable tax credits for the paid days off in small firms of 500 or less employees during the coronavirus pandemic. These credits eased the financial pressure felt by these businesses when an employee is is on sick leave.
The ERTC was created to encourage employers to keep their workers through the coronavirus crisis. It is a credit against payroll taxes paid by companies compliant with specific requirements which include providing compensation or stipends to their employees during periods of economic turbulence, it is a refundable tax credit based on wages paid to qualified employees.
Tax reform has also imposed limitations as to the amount of interest that small businesses can deduct depending on their annual gross receipts exceeding 25 million dollars. This change may impact corporations that has a huge amount of debt, as it decreases the amount of interest expense that may be utilized when calculating taxable income.
Small business owners may find it difficult to understand the changes in the tax systems, and how to adjust to them, since it is a sensitive affair that may attract a lot of legal anticipation. It is an area of confusion for many organizations, including problems like changes in interest expense deductibility; NOL provisions; and eligibility for any deduction or credit.
Because of the numerous changes to the tax laws, small business owners should seek professional help from a tax practitioner if they are to take advantage of the benefits allowed as well as to avoid legal pitfalls. Accountants and other tax advisors may be useful to the business because they avail themselves in helping the business deal with this dynamic taxation regime, offering advice on different ways of reducing tax.
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