The Facts About the Tax Law & Your Small Business

The bill that Congress passed is historically unpopular—in no small part because it gives enormous tax cuts to giant corporations, while doing little for America’s small businesses and middle-class families. Small businesses have been at the center of the American economy for years, and have created nearly two-thirds of private-sector jobs since the Great Recession—but the new law doesn’t treat them like the job creators they are. It treats entrepreneurs like consumers. The fact that it heavily favors large and multinational corporations is an insult to the economic might of American small businesses.

Corporations benefit greatly from the tax bill

  • The law permanently lowers the corporate tax rate from 35% to 21%—a 40% rate cut

  • For small businesses, by comparison, the law creates a temporary 20% pass-through deduction, not rate cut. Deductions by their nature favor those higher up the income scale. A 20% deduction on $30,000 is much different than on $300,000.

  • The law creates a “tax holiday” for U.S. multi-national businesses that stored profits overseas to avoid paying taxes at home. Under the bill, overseas profits are deemed repatriated and subject to a one-time tax of up to 15.5%—a far lower tax rate than any small business can enjoy.

  • The law repeals the 20% corporate Alternative Minimum Tax, which had been a way to ensure that corporations could not deduct their way out of paying taxes.

  • The bill shifts the U.S. from a worldwide tax system, which requires American companies to pay Uncle Sam taxes on all their profits regardless of where the income is earned, to a territorial one, under which companies don't owe taxes to their own governments on income they make offshore.

    • Why is this detrimental to small businesses? The change to a territorial system incentivizes big businesses to push their profits offshore in search of even lower taxes—giving them a significant financial advantage over the neighborhood mom and pop shops that will stay onshore.

 

The benefits for small business are minor by comparison

  • 90% of small business owners pass-through their business income to their personal income tax returns. Therefore, changes to personal income tax have a significant impact on small business owners. 

  • In the law, the changes to personal income taxes are temporary, disappearing after 2025

  • Small business owners qualify for a temporary 20% deduction if their taxable income is less than $157,500 for individuals or $315,000 for joint filers. Any service small business owner who exceeds those income levels is subject to a lesser deduction.

  • The law increases the standard deduction, but eliminates personal exemptions, squeezing the middle class.

  • The law reduces the state and local tax deduction that can be claimed—setting a combined $10,000 limit for state and local tax income tax, property tax and sales tax.

  • The law reduces the mortgage debt limit for the mortgage interest deduction from $1 million to $750,000. It also eliminates the deductions on home equity loans. Existing mortgages are grandfathered in at the $1 million level.

  • The law doubles the exemption for those who pay the estate tax, so the estate tax applies only to those whose estates are worth more than $11 million for individuals and $22 million for married couples.

    • Only 80 small businesses and farms paid any estate tax in 2017 (when the exemption was half what the current law makes it). The Tax Policy Center estimated that small businesses paid $30 million in estate tax in 2017—fifteen hundredths of 1% of the total estate tax revenue.

  • When the law is fully phased in, it would raise taxes on more than half of all Americans—or 100 million families, according to the nonpartisan Tax Policy Center. Those 100 million families are small business customers. When their taxes go up, their discretionary income—what they use to shop at small businesses—goes down.

  • 83% of the benefits in the tax law accrue to the top 1% of earners.

  • The law repeals the Affordable Care Act mandate—taking effect in 2019. The Congressional Budget Office has estimated that this will lead to 13 million more uninsured people and a 10% increase in insurance premiums.

Let’s call this law what it is: an epic and irresponsible tax giveaway to the wealthiest people and richest companies in the country. The GOP made a $1.5 trillion gamble that these cuts—despite all the evidence to the contrary—will boost our already strong economy. But in doing so, they ignored American small business owners.