The Alaska Business Law Blog

The Trump Tax Cuts for the Small Business Operator

The Trump Tax Cuts, known as the TCJA (Tax Cuts & Jobs Act), is a smashing success among taxpayers anyway, including in a large way those who own and operate a small business.  The new law takes effect this calendar year.

All US Treasury tax bracket rates were reduced by the TCJA, especially the corporate tax rate.  This blog post looks at the newly minted tax deduction for operating a business, a huge 20% deduction for all net revenues with some limits.

The law is intended to finally give relief to the small business owners who have had an effective 40% tax rate for their own incomes for decades, given the 15.3% self-employment tax.  Billionaire investors often pay a 10% or less effective tax rate by comparison.

This new IRS deduction is targeted in a way to help the small business “tax donkeys”, but not to become just another huge tax cut for the wealthy in the highest tax brackets.  The wealthy already have their bonanza from the TCJA.

Almost all small business in Alaska operates under the several business structures that are eligible for TCJA tax relief, Sole Proprietor, Subchapter S Corporation, Partnerships, LLCs.  For those few companies that operate as a trust while selling services or products, not just investing, a change may be needed to take advantage of the TCJA new business deduction.

So, if by far most businesses are already eligible for the new deduction, there are certain limits.

1.  Labor intensive businesses may lose a part of the deduction if the deduction exceeds 50% of the gross payroll.  One can also instead meet a test combining payroll and capital expenditures.  In the case of a business with only one or two workers, this limitation may require owner managers to start taking more W-2 income rather than equity draws with quarterly tax filings.

2.  Investment earnings are not included in calculating the deduction.

3.  The deduction begins to fade away as income for the year increases, starting at $157,00 and expiring at $207,000.  So, not a billionaire’s delight then.  This reduction in the new Trump tax deduction begins near the income level where the FICA self-employment tax ends, $127,000.

4.  Many businesses, including athletes, entertainers, lawyers, physicians and banking/investment businesses, may be able to gain little effective benefit at all from the TCJA.   Darn!!!!

When a new tax regimen is first enacted, the intended benefits of the plan are touted widely.  Sometimes big benefits to the economy appear and sometimes that does not happen.

But what no one at all talks about at first anyway are the unintended consequences of tax law changes, bad ones that is, that everyone could be writing about the TCJA a few years from now.

One thing that will not go wrong though is the partial leveling of tax-rates between the employers in the real economy and the billionaire investors.  Real jobs are more important to an economy that paper profits are.

Stephen Merrill, Attorney
Anchorage Alaska

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Mr. Merrill does not do tax law or accounting work.  His business practice concentrates on going to court and how to avoid going to court in the first place.