Money Matters

Why Many Small Businesses Fear the Passage of the Senate Tax Bill Into Law

(Source: www.inc.com)

Lucas Czarnecki, 23, runs a small design firm in Charlottesville, Virginia. Under the recently passed GOP tax bill, he says he is “petrified” for the future of the company, called If It Has Words. 

“I could go out of business by 2025, as the disparity mounts year after year,” Czarnecki says.

In particular, he’s referring to the discrepancy between what large corporations would pay in taxes–once a permanent, 15 percent cut goes into effect–compared with the minor income deduction that some pass-through firms might claim. Meanwhile, under the current proposal, so-called “professional services”– including the kind of outsourced design work he offers–would not qualify for the deduction to begin with. (See p.29 of the Senate bill, 22-A.) “I will be left behind as everyone else moves forward,” Czarnekci says.

If It Has Words is among the millions of U.S. small businesses that stand to be hurt by the latest version of the Tax Cuts and Jobs Act, which the Senate passed in a 51-49 vote on Saturday morning. Although an eleventh-hour addition–aimed at appeasing swing vote senators Ron Johnson (R.-Wisc.,) and Steve Daines (R.-Mont.,)–would allow a majority of small businesses to claim a 23 percent deduction on a portion of income, that provision could nevertheless be phased out by 2025, and tens of thousands of architecture firms, law firms and “professional services” would not even qualify for the deduction to begin with. (See p.38, 1-h.) That’s in addition to the individual tax credits that would dissipate for middle-income earners after the seven years is up.

Meanwhile, it’s the larger businesses that seem to win out, critics say. The provision that reduces the maximum corporate tax rate from 35 percent to 20 percent doesn’t apply to pass-through entities, or the vast majority of U.S. small businesses. Pass-throughs are businesses for which profits are taxed according to the owner’s personal rate, including LLCs, sole proprietorships and partnerships. The proposal would put these firms at a competitive disadvantage compared with larger businesses, although the income deduction was meant to address this concern.

Anupam Satyasheel, a former financial analyst with Barclays PLC who in 2012 set up his own consultancy, Occam’s Advisory, anticipates that businesses making anything less than $2 million in annual sales, with profits of less than $100,000, are out of luck. “Fundamentally, this whole tax bill is skewed towards ‘small businesses’ that make a lot of money,” he says, noting that many of his clients would be put at a competitive disadvantage, should the bill be signed to law. “I don’t call it a tax cut. It’s a re-codification that helps the one percent.”

Barnet Sherman, founder of the Tenbar Group.

CREDIT: Courtesy Barnet Sherman

The bill also introduces major changes to the tax structure at the state and local levels, which could have ripple effects that seriously hurt companies in varied sectors. “Some of the implications of the bill haven’t been thought out,” suggests Barnet Sherman, a public finance expert and founder of the Tenbar Group, a Boston-based consultancy focusing on the municipal bond market. In particular, the GOP has proposed eliminating state and local tax (SALT) deductions. The loss of these would likely put pressure on states and municipalities to reduce their taxes, in order to offset the increases in federal taxes that most constituents would be forced to pay. (This would become doubly expensive for states and municipalities if the bill is reconciled with a House proposal, forbidding not-for-profits from borrowing from the municipal bond markets on a tax-exempt basis.)

These added costs don’t just go away; they would surely be passed on to local firms, Sherman says. For instance, freight carriers or other shipping and transportation services would see steeper fees on things such as tolls, last-mile delivery and docking. “There will be a negative supply chain affect on local businesses,” Sherman says, adding that the education sector could be similarly affected. As a recent Salon analysis estimates, offsetting federal taxes could impact as much as $125 million in school funding. Therefore, public schools might be forced to limit their spending on, say, pencil, paper and textbook suppliers.

To be sure, the Senate bill does introduce new benefits for small businesses beyond the income deduction. For example, it would allow companies to write off equipment that they purchase immediately over the next five years, and retain a portion of that write-off over time. Thor Eakes, who runs an accounting firm in La Jolla, California, sees these types of provisions in no uncertain terms: “Taxes rates are coming down [and] it is even easier to write-off your equipment purchases than before,” he says. “I am not sure I can find a reason for small businesses to fear the new tax act.”

It also remains to be seen what a final version of the bill would look like. Republicans in the House and Senate must reconcile the many differences between the proposals, as the conference committee meets this week. (You can peruse the 440-page House version of the bill here, and the 479-page Senate version here.) Together, they aim to get a final version of the bill to President Trump’s desk before Christmas. The uncertainty makes it especially difficult to forecast how any business–particularly the pass-through entities in question–might fare in 2018 and beyond.

Still, others warn that any version of what has been made available of the Tax Cuts and Jobs Act has the potential to seriously hurt the majority of Americans, entrepreneurs included. The Tenbar Group’s Sherman takes aim, in particular, at the last minute scribbles added to the margins of the bill, as senators rushed to appease Republican holdouts on Friday evening.

So much for regular order! Oh yeah sure, we’ll have plenty of time to read the final GOP tax bill – if you can make out the scribbled handwriting snuck into this massive, unsearchable PDF. #GOPTaxScam pic.twitter.com/a64mNovvHQ

-; Senator Bob Menendez (@SenatorMenendez) December 1, 2017

“If I were a teacher, and a student handed me a final term paper with hand-written notes in the margins, I would fail them,” Serman adds. With the passage of the tax bill, he suggests, “they [Republicans] are not just failing a class–they’re failing a nation.”

More Info: www.inc.com

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