A new report from Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, discusses how small businesses will face more uncertainty and complexity from the Republican tax law and will ultimately need help from their accountants to figure out the pass-through deduction.
The report, “Tax Code and Small Business: Even More Bizarre and More Unfair than Before,” predicts small business owners will be spending more money on tax professionals than on growing their operations. The pass-through provisions of the bill provide a 20 percent deduction to businesses, but only up to a certain income level for certain types of professional service providers, such as accountants, lawyers and doctors. The deduction starts to phase out when the net income of one of the owners reaches $157,500, or $315,000 for joint filers, and it ends entirely once income reaches $207,500, or $415,000 for joint filers.
“Republicans claim to want less government intervention, but with their new tax law they picked winners and losers—architects are in, accountants are out; engineers made the cut, doctors did not—leaving business owners wondering whether or not they were blacklisted,” said Wyden. “What good is a deduction if money spent in annual fees to your accountant far exceed the tax break? Main Street job creators will be lucky if they figure out how to calculate their deduction any time soon.”
The report notes that the text of the pass-through deduction spans nine pages, cross-references more than 20 other sections of the tax code, and directs the Treasury Department to issue volumes of new regulations. It also cites a recent letter from the AICPA asking for more guidance about the provision: “And if there is any question whether the new law and regulations will add additional burden to small business owners, just look to the 19-page letter sent by the American Institute of Certified Public Accountants highlighting issues that require ‘immediate guidance’ for taxpayers to be able to simply ‘comply with their 2018 tax obligations."
Wyden’s report quoted the founder of an IT consulting business in Washington D.C., who has been telling his colleagues and friends in the small business community to “speak to their accountants because there is no way to make any sense of how the law will impact folks.”
Wyden pointed to a separate recent report from Businesses for Responsible Tax Reform that found a majority of small business owners don’t believe the tax law will help grow their business. When asked if they would hire a new employee as a result of the new tax law, 69 percent of the business owners polled said they would not, while only 25 percent said they would. When asked if they would be giving their employees raises due to the new tax law, 59 percent said no, while 31 percent responded that they would. The poll found that 54 percent of small business owners said the tax law favors large corporations over small businesses (40 percent disagree), and 50 percent believe the wealthy and corporations will benefit most from the tax law, while only 20 percent believe the middle class and small businesses will benefit. In addition, 55 percent of respondents don’t believe the tax law puts small businesses on a level playing field with big businesses, with only 31 percent believing it does.
The poll surveyed 385 small business owners in the election battleground states of Arizona, Tennessee, Maine and Nevada, and skewed more Republican than Democratic, with 41 percent of respondents identifying as Republican, 31 percent as Democrat and 28 percent as independent or other.
The majority of respondents opposed the fact that the corporate tax cuts were made permanent while cuts for pass-through businesses were on temporary, with 58 percent saying they oppose eventually ending tax cuts for pass-throughs like S-corps, LLCs and proprietorships in 2025 while making corporate tax cuts permanent, while only 34 percent saying they support it. That response was understandable, as 86 percent of the respondents identified as being pass-through businesses such as S corporation, LLCs, sole proprietorships or partnership, while only 5 percent of the respondents said their business was organized as a C corporation.
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