Effects of New Tax Laws on SMBs

On Dec. 22, 2017, President Trump signed a $1.5 trillion rewrite of the tax code into law—the most sweeping tax overhaul in more than 30 years. Now, the real fun begins. What exactly does this mean for small-and medium-sized businesses (SMBs) going forward?

In this blog, we identify a few of the most relevant and promising benefits and opportunities that will most likely impact SMBs, starting in the calendar year 2018 through 2025.

SMBs are optimistic about business growth in 2018 and beyond—and with good reason.

Thanks to the new tax code, there is a potential for SMBs to take home more in profit—some reports say that one-third of what you used to pay in taxes is now profit.

So, what could this mean? Well, it likely means more spending and more cash flow. Let’s look at how SMBs may want to spend their “newly found” money.

Your Company Entity Makes a Difference

First, you should review and understand your structure, because businesses tax laws are complex and taxed in different ways.

Corporations and their investors are subject to two layers of taxation. First, a corporate rate of profits is paid directly by the company. For the fiscal year ending in 2017 and before, the top rate is 38.9 percent, which is the highest corporate tax rate among major economies, when combined with average state and local taxes. Then, when the business pays returns to its investors, they pay tax on the money they’ve earned when they file in April 15. That income — dividends and capital gains — is taxed at a top rate of 23.8 percent.

Starting in the fiscal year 2018, businesses incorporated as C-corporations get taxed on their profits — reduced from a high of 38.9 percent to 21 percent.

By contrast, pass-through businesses pay tax just once. These are small and large partnerships, proprietorships and companies with fewer than 100 shareholders known as S corporations and Limited Liability Corporations (LLCs), and they include the freelancers and small merchants, but also the National Football League and Fiat-Chrysler. They aren’t subjected to any separate business tax but pay on their individual income tax when the money dispersed by the business is passed through to its owners or shareholders. The individual income tax rate depends on what bracket someone is in, but the highest is 39.6 percent. While pass-through income will continue to be taxed at ordinary income tax rates, many small business owners will be eligible to deduct 20% of their “qualified business income” (QBI) non-investment income starting in 2018.   In other words, some pass-through entities will only be taxed on 80% of their pass-through income.

It’s clearly important to carefully choose your company structure; so make sure you do your homework and adopt the one that makes the most sense for your business.

Now, let’s assume you are a business owner incorporated under one of these structures. How would you spend your increase in profits?

In a recent Wall Street Journal/Vistage survey, nearly 40 percent of CEOs and owners of SMBs said they would use it to increase investment. Here’s how others plan to use their tax savings:

• 24 percent said they would take more profits
• 14 percent said they would expand into new areas
• 8 percent said they would boost wages
• 15 percent described various other preferred activities

Where would SMBs spend their money? 

Let’s assume you agree with the nearly 40 percent of CEOs and business owners who plan to invest. How would spend your money?

Thrive Analytics, a digital marketing research and customer engagement strategy consulting firm, released its latest Local Pulse Report™, which reveals insights into SMBs trends. It recommends that the vast majority of owners should invest in their business, expand it, and grow it for the future. According to the Local Pulse Report, SMB will invest more in software/technology services, which includes the following:

• 21 percent — customer relationship management tools
• 20 percent — lead generations services
• 17 percent — reputation monitoring tools
• 17 percent — online scheduling tools

A high-performance network is critical to good application performance, and Cisco can help ensure your employees, partners, and customers have the best experience.

What about you? What are you planning to focus on in 2018? Let us know.

With a select portfolio for SMBs, Cisco is uniquely positioned to provide businesses with high-performance solutions that don’t break the bank. To learn more, click here.