Tax Cuts and Jobs Act - The Major Changes and How They Impact Businesses

It’s been almost 2 years since President Trump signed the Tax Cuts and Jobs Act. As you probably know, the Act decreased individual income tax rates, doubled the standard deduction, and eliminated most itemized deductions.

But the Act wasn’t just geared towards personal income taxes. Businesses benefited from the plan as well. Depending on the business classification, entities saw different tax benefits meant to increase profits and improve the American economy.

Did the Act live up to the hype? Or was it nothing more than a political talking point? This article highlights some of the major changes under the Act and how businesses were impacted.

Small businesses

Before we tackle corporate America, let’s start with main street.

Most small businesses in the U.S. are structured as pass-through entities: sole proprietorships, partnerships, limited liability companies, or s corporations.

While these pass-through entities are effectively taxed at individual rates, the Act offers a 20% standard deduction on qualified income for pass-through businesses. Furthermore, the Act also introduced immediate expensing under section 179. That means businesses can deduct the cost of depreciable assets in a single year instead of amortizing the assets over several years. While immediate expensing is available for large corporations as well, small business owners are likely the most appreciative of the change. Now they can write-off major business purchases right away, allowing them to purchase new equipment they otherwise wouldn’t be able to afford.

For the most part, small businesses seem happy with the Act’s changes. For example, since the National Federation of Independent Business began polling small business owners about the challenges they face, many owners placed taxes at the top. But when the tax cuts went into effect, the list changed, and labor took the lead.

Finally, unlike the new corporate tax rate, small business tax cuts are not permanent. Unless Congress extends it, the qualified business deduction expires in 2025. That means small business owners should take advantage of whatever tax benefits they can now, in case things revert.

Corporations

In 2018, the Act cut the corporate tax rate from 35% to 21% - the lowest corporate tax rate since 1939. The hope was that a lower rate would make America more competitive by incentivizing organizations to leave places with tax rates now higher than America’s. Hopefully it would also discourage businesses from seeking more favorable tax havens elsewhere.

Not surprisingly, after-tax corporate profits rose substantially. But it remained uncertain how companies would spend the extra cash. Walmart was one of the first companies that promised to increase salaries. Others like Apple, Best Buy, and Disney soon followed suit. But despite the moves by some major corporations, the Wall Street Journal reported that most companies were not increasing hiring or benefits. On average, wages saw only a marginal improvement and only 6% of companies polled said they had more hires.

Instead, corporations used the extra profits on capital expenditures. According to the Washington Post, spending on new equipment and factories by Standard & Poor’s 500 largest public companies jumped nearly 19% in the first three quarters of 2018. Research and development spending hit $175 billion, a 34% increase.

But the spending on research and new equipment also came with increased spending on stock buybacks. Many claimed the tax breaks primarily helped wealthy business owners who would buy back stock to inflate share prices and improve their compensation. Buybacks totaled $579  billion for the first three quarters of 2018.

The verdict is still out on the long-term economic impacts of the Act. But for now, both large and small businesses are looking to take advantage of increased profits before the laws change again.