Will the New Tax Law Boost Small Businesses?

By Gannon, Joyce | Pittsburgh Post-Gazette (Pittsburgh, PA), February 4, 2018 | Go to article overview

Will the New Tax Law Boost Small Businesses?


Gannon, Joyce, Pittsburgh Post-Gazette (Pittsburgh, PA)


For the past decade, Sewickley Spa's 13 employees didn't receive annual raises.

With economic pressures forcing cuts at the business since the Great Recession of 2007-09, owner Dorothy Andreas said she couldn't afford pay hikes - though she still managed to provide a bonus every Christmas.

But on Dec. 20 - the day Congress gave final approval to the Tax Cuts and Jobs Act - Ms. Andreas decided to "pull the trigger" on raises of 2 percent to 5 percent and bonuses that averaged 2.5 percent.

"My staff needed a morale booster," said Ms. Andreas. She welcomes the federal tax changes because she expects them to translate to savings she can pump back into spending for new equipment and at least two more employees.

In recent years, her luxury spa - which offers massages, facials, and other salon treatments for men and women - has delayed investments in things like updated computer systems and pedicure chairs.

"I just want to put it all back into my company," she said. "It feels like the government wants to see small business succeed and it's like a breath of fresh air into a very stale climate."

While the tax bill - the most sweeping federal tax change in three decades - provides large corporations a dramatic cut in their tax rate from 35 percent to 21 percent, the impact on smaller companies is tougher to gauge.

There are about 28 million small businesses in the U.S., ranging from one-person enterprises to firms that employ as many as 1,500 and generate as much as $40 million in sales, according to the federal Small Business Administration.

The majority, like Sewickley Spa, are classified as "pass-through" businesses, which means they don't file a separate business tax return. Their business income "passes through" to the owners' personal tax returns.

Under the new law, 20 percent of that "pass-through" income can be deducted. The rest is taxed at regular individual rates that have been lowered to a maximum 37 percent.

"So small pass-throughs typically would benefit, some perhaps more than others, because individual rates in general are coming down," said Dan Phillips, tax shareholder at Downtown accounting firm Schneider Downs.

'Deluged with questions'

But because of the bill's complexities and a number of exceptions it contains, Mr. Phillips and other accountants are scrambling to help clients determine how the law will affect their bottom lines.

For one thing, the 20 percent deduction for pass-through income is set to expire in 2025.

Other exceptions: small business owners who earn more than $157,000 or married couples whose earnings top $315,000 have a limit on how much they can deduct; and the 20 percent deduction is phased out for professional service businesses like law and consulting, said Mr. Phillips.

"We're being deluged with questions," said Judith Herron, a certified public accountant with Markovitz Dugan & Associates in Banksville.

"The problem with this law is that it's so complex that it's difficult to generalize" for small businesses which include S-corporations, sole proprietorships, partnerships and limited liability companies, she said.

"For big corporations, the tax rate is just being lowered so it's much more straightforward."

Most of Ms. Herron's clients are small and privately held, but some have asked whether they should shift their tax classification to C-corporation to get the permanent rate reduction, she said.

At Herbein & Co., another Downtown accounting firm, staff members began blogging about the proposed bill in November to give clients a jumpstart on tax planning.

By the end of December, they had compiled a summary of the bill's highlights that clients could download, including the firm's recommendations on how to tackle specific tax changes.

The top question they're fielding from small, pass-through businesses is whether they should reorganize as C-corporations to get the flat 21 percent rate, said Beth Bershok, the firm's regional marketing director. …

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