Tax reform is now official, although the path to its passage was certainly divisive. While the political rifts are still evident, some supporters of the tax bill believe that it will lead to a small business boom.
Why The Tax Bill Could Be Good For Small Businesses
As The Hill reports, President Trump’s advisor, Kellyanne Conway, thinks that individuals will be attracted to the looser business regulations and decide to start that small business they may have dreamed of. Small businesses are subject to a simpler tax code; due to the pass-through nature of many companies, small business owners get to keep more of their earnings.
The New Tax Rules For Small Businesses
Tax reform eliminated the corporate Alternative Minimum Tax (AMT) and reduced the business tax rate from 35 percent to 21 percent, which means that all businesses will see a reduction on their tax rate.
Pass-through businesses receive a 20 percent deduction on their taxes when the owner’s annual income falls below $157,500 for single tax filers or $315,000 for married filers. Effectively, business owners will be able to shelter 20 percent of their earnings, then pay the lower tax rate on the other 80 percent.
Pass-through businesses stand in contrast to large companies that are taxed at the corporate level. Since 95 percent of businesses in the U.S. are pass-through businesses, where profits pass through to the owners of the business who are then taxed on profits, this has the potential to put more money in the hands of business owners, small and large.
While tax is an important factor in the success of any business, there are many other factors that set the stage for a small business’s success. For instance, location of the business can be key to its success due to the cost of starting a business, access to business resources, and overall business environment. With its abundance of all of these variables, Texas is a choice location for new small businesses. Yet in the end, no matter what the tax code says or where you decide to open your business, careful planning is crucial to success.