Tax Reform Proposal & What It Means for Small Business

In order to ensure small business success in America, President Barack Obama has recently proposed new tax reform aimed at boosting the small business bottom line. However this new tax reform proposal may not be a “better bargain” for small businesses for several reasons:

• The rate reduction benefits large corporations. The biggest failure of the proposal is that while it includes a fairly significant reduction in tax rate, it only applies to corporate entities. Since most small businesses are set up as individual or pass-thru entities, the rate reductions will not be of benefit. According to Molly Brogan,communications director at National Small Business Association, as many as 83% of small businesses are operating as pass-through entities and will therefore not receive the rate reduction.
• Closing loopholes may cause more harm than good. As part of this tax proposal, many tax loopholes would be closed which ultimately may harm small businesses.  By removing some of these incentives, it could further disadvantage American companies from competing abroad, affecting both small business and large corporations alike.
• The reform is too limiting. Some of the thresholds set in the reform proposal may be too limiting. For example, the reform aims to reduce compliance burdens on companies with $10 million or less in annual revenue by letting them use the simpler cash method of accounting. This would allow some small businesses to record revenue when they receive payments, improving cash flow by not having to pay taxes until payment is received. Right now, most small businesses are supposed to book revenue when it’s earned (the accrual method), for tax purposes at least. Many are contending that the $10 million threshold should be higher to expand the definition of small business and allow more businesses to benefit.

Whether these proposed changes will eliminate  or reduce the tax burden on small businesses remains to be seen. However, given that pass-through entities make the majority of the business income in the United States, there’s no question that the right type of tax reform would be beneficial.  What do you think about these proposed tax reforms? Will they help your small business?

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