Here’s How the Tax Reform Could Affect Your Business

On December 22nd of 2017, President Trump signed the Tax Cuts and Jobs Act into law after winning approval from the Senate. The tax reform has since received mixed reviews: while the White House forecasts that its tax cuts for corporations will increase the average household income and grow the economy, many disagree with this premise. Regardless of who’s right, though, the tax reform is sure to have a big effect on businesses. Here’s a quick overview of how it will most likely affect merchants, and specifically, for whom the changes will be most advantageous.

How the Tax Reform Affects Businesses

The tax reform is expected to be quite beneficial for businesses overall. The corporate tax rate will be lowered from 35 to 21 percent, which is the lowest it’s ever been since 1939. And significantly, the standard deduction for pass-through businesses will be raised to 20 percent. Pass-through businesses make up around 95 percent of all U.S. businesses, and they are businesses in which the owner doesn’t take income through a direct salary, but instead through distribution of the total profit. These business types can now deduct the first 20% of their income, free of taxes. While there will be limitations with this deduction for service-based businesses such as law firms or accountants, overall this change will probably be very helpful for many businesses.

How the Tax Reform Affects the Retail Industry

  • The National Retail Federation called the tax reform “a major victory for retailers.”

They pointed out that currently, retailers tend to pay more in taxes than businesses in other industries, since there are less relevant tax credit opportunities. With the new tax cuts, though, the NRF (and many others in the retail industry) feel confident that retailers will profit.

  • Retailers Can Hire More

Because the business tax cuts will boost profit, many feel that businesses will be inclined to hire more, since deductions for pass-through, employee-based businesses are dependent upon payroll. However, others- including the CEO of Starbucks- are skeptical of these claims, especially when it comes to large corporations. This is because a lot of corporations have already admitted that they will use the new profits to buy business shares or to pay off shareholders, rather than to increase employee pay or hire more. However, other corporations have stated that they will hire more or invest in their company with the extra funds, and many smaller businesses will likely do the same.

  • Good News for the Liquor Industry

The reform cuts taxes on alcohol and for businesses in the industry, such as breweries.

  • Wealthy Consumers will Buy More

While the tax bracket for the lowest income earners will remain the same, it will drop for those in the highest income bracket. This means that wealthier people will probably have more disposable income, which could boost retail sales. This will especially affect luxury companies, whose clientele is wealthier to begin with.

 

Keep in mind that since the tax law was just signed into effect, much is left to be seen. So, we encourage business owners to do their own research and speak with experts in order to have the most comprehensive understanding. Best of luck!