Every human being will agree that two of our most precious resources are time and money. This is doubly true for business owners, who are constantly time-starved and needing to keep an eye on cash to make sure they can operate another day.
With this in mind, taxes can be one of a business owner’s biggest fears, costing a business thousands of dollars owed to the IRS and an average of 22 hours spent filing taxes each year (compared to 13 hours for the average American, according to the IRS).
It’s no surprise, then, that small business owners listed taxes as their number one concern on a recent survey of more than 2,000 business owners. One quarter of small business owners said that taxes are the most critical issue facing their business, ahead of regulations, customer demand and employee healthcare.
“The more business owners spend on taxes, the less they’re going to have to spend on growing their actual business,” says Levi King, serial business owner and co-founder of Nav. Happily, business owners are optimistic about what lies ahead for the tax code in the coming year. The survey found that 42% believe that upcoming changes to the tax policy will have a positive effect on their business, while just 24% think it will have a negative effect.
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Trump’s Tax Plan: The Nitty-Gritty
The tax reform laid out in statements by the Trump administration focuses on simplifying the tax code and reducing tax rates, including cutting the number of tax brackets from seven (ranging from 10%-39.6%) to three (10%, 25% and 35%) and simplifying the individual tax code. The Alternative Minimum Tax (AMT), which requires millions of taxpayers to twice calculate their liability and pay the higher amount, would be eliminated, along with the marriage penalty. The standard deduction would double.
The Trump administration proposes reducing the corporate tax rate to 15%, and implementing that same 15% tax rate option for freelancers, sole proprietors and pass-through entities. Owners of pass-through entities (sole proprietorships, partnerships, LLCs and S corporations) would have the option to be taxed the flat 15% on their income rather than be taxed at their individual income tax rate. Currently, pass-through entities are taxed at their personal tax rate, and corporate tax rates range from 15-35% depending on taxable income, while unincorporated businesses and the self-employed are taxed at their personal tax rate.
Many new business owners struggle to understand what their tax burden will be and how to actually account for a more complex income stream than when they were a W-2 employee. It can cause a headache come tax time, even resulting in a tax lien on their business if they don’t pay the bill to Uncle Sam. A business tax lien can have a significant negative impact on their business credit scores as well, forcing them to delay plans to expand and hurting their chances of getting a loan for years. (You can check your business credit profile to see if you have negative items haunting your credit for free on Nav.)
How It Might Impact You
Two of the main goals of the corporate tax plan are to encourage U.S. job creation and drive economic growth. Surprisingly, only 27% of small business owners expect to add full-time staff in the coming year, a number that raises some concerns regarding the growth of the job market, considering small businesses account for 64% of net new private sector jobs, according to 2012 Census data.
The Trump administration plans to prioritize reducing taxes over a loss of revenue. A report from the Tax Policy Center notes that under the 2016 “Five-Part Tax Plan,” which is similar to the one-pager released by the Trump administration in late April, the federal debt would rise by $7.2 trillion over the first decade, including interest costs. This would raise the debt-to-GDP ratio, which already stands over 100%, increasing the risk of long-term reductions in economic growth.