It's no secret that the Tax Cuts and Jobs Act (TCJA) was designed to primarily benefit big businesses. But in order to make those tax cuts more palatable to the rest of the U.S. taxpaying universe, Congress added what it promised were benefits for Main Street mom-and-pop operations, too.
What's that saying about best laid plans?
Four months into the new tax law and it looks like small businesses have a couple of issues with the TCJA.
First, an analysis by the Joint Committee of Taxation found that the key tax break for smaller operations, the Section 199A pass-through deduction, actually helps bigger businesses more. Much, much more.
Second, most small businesses owners don't understand the provisions that apply to them.
Wealthy business owners' big benefits: Under the TCJA, businesses that pass through company profits to the individual owner's personal tax return (hence the pass-through name) can claim a tax deduction equal to 20 percent of the income earned by the business.
Sounds good, right? But the pass-through deduction has been problematic from the get-go.
The Senate's version of quasi-tax reform differed from the House's bill. Finally, the two chambers compromised in mid-December 2017 on the 20 percent business break.
On paper, that looked like the way to go. But in reality, things don't appear that positive for smaller companies.
A Joint Committee on Taxation (JCT) analysis of the TCJA released in advance of an April 24 Senate Finance Committee hearing on, official title, "Early Impressions of the New Tax Law," doesn't have good news for small businesses.
The nonpartisan Congressional committee that runs the numbers for all tax related Capitol Hill measures found that the pass-through deduction would heavily benefit the wealthiest Americans.
How heavily? Americans who make more than $1 million a year comprise just 0.3 percent of all tax filers. This fractional group, however, will receive 44.3 percent of the total benefit from the pass-through deduction, according to the JCT report.
By 2024, the pass-through deduction will save affected millionaire filers more than $30 billion.
To get those numbers a bit closer to amounts more recognizable for most of us, the JCT report means that more than three-quarter of the pass-through benefits would go to those making more than $200,000 annually.
Confusing, too: Adding insult to the disproportionate tax break injury, the TCJA requires businesses jump through a lot of tax hoops to claim the pass-through deduction.
That could be why a recent National Association for the Self-Employed (NASE) poll found that many small business owners don't understand new tax law.
The survey of 389 nationwide NASE members, conducted online in the month leading-up to this April's tax-filing deadline, found that 83 percent don't fully understand the impact that TCJA will have on their businesses.
In addition, more than 90 percent thin that the federal government didn't adequately prepare small businesses for the new tax system.
Other NASE survey results that the GOP sponsors of the tax bill aren't going to like include:
- Survey takers were split on if they expected to pay more (48 percent) or less (52 percent) in overall taxes in 2018.
- Of those expecting to pay less, most say the savings will be $1,000 or less.
- Almost 60 percent of those who took the survey said they felt their taxes would be more difficult to complete in 2018 because of the new tax law.
- Over 90 percent indicated the government can still take additional measures to ease the tax burden.
"It is crystal clear from our survey that an overwhelming number of small business owners and self-employed Americans still don't understand how to make this new tax law work for them," said Keith Hall, NASE president and CEO, in announcing the survey results.
"The tax reform package signed into law last year is based on Americans reinvesting savings back into their business operations and helping to spur overall economic growth. Small business owners must first have a full understanding of how this new tax law will impact their bottom line," Hall said.
Are you a pass-through business owner? Do you have an idea of how the 20 percent deduction and other TCJA provisions will affect your personal and business taxes?
If you don't already work with a paid tax professional, are you considering hiring one this year to help you make sure you make the most of the new business and personal tax laws?
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