Changing plans: Tax law makes small businesses rethink ideas

Small business owners have already figured out they stand to gain from some of its changes

As Congress debated a new tax law at the end of last year, Jerell and Elissa Klaver began revising their company’s plans for 2018.

The Klavers crunched the numbers, estimating how a lower tax rate and bigger deductions on equipment purchases could help increase their sales of bath soaps and other personal care products. They’ve already hired an engineer to create new manufacturing machinery for their company, Fort Collins, Colorado-based SALUS. “For our business, pennies add up. If I can save a penny, it gets big really fast,” Jerell Klaver says.

Although there are still many unknowns about the tax law that took effect January 1, some small business owners have already figured out that they stand to gain from some of its changes and are changing their plans to maximise their benefits. Some believe they’ll get a break on income taxes for sole proprietorships, partners and what are called S corporations. Those who buy new computers, vehicles or other equipment can take a bigger deduction.

Klaver estimates SALUS will save $500,000 (Dh1.84 million) to $1 million in taxes in one year, partly from the breaks on equipment purchases. The law nearly doubles to $1 million the amount small companies can deduct upfront on equipment. It also allows companies of all sizes to fully deduct larger equipment and property purchases during each of the next five years rather than depreciate them over years, the requirement under the previous law.

New equipment

New manufacturing equipment will help SALUS meet increasing demand for its products. Klaver also expects to save enough money to add to the staff of 60.

Many owners and their tax advisers, though, are still unsure of the law’s impact. The wording of the law is complex, containing many limitations on a number of breaks for individuals and businesses, and the IRS has only recently begun writing the thousands of pages of regulations that will detail the requirements. It will take months for all of that to be written, and some may be proposed or temporary, says Manuel Pravia, a certified public accountant with MBAF in Miami. And, as was the case following a tax overhaul enacted in 1986, Congress may need to make some revisions, he says.

Tax professionals advise owners not to rush into decisions based on what they believe they know about the law.

“There’s confusion out there and confusion is never good for those kinds of decisions,” says Michael D’Addio, an attorney at the accounting firm Marcum in New Haven, Connecticut. His firm has been doing tentative projections for clients about their taxes, but even the pros don’t have answers. “Hopefully the IRS will provide some guidance,” D’Addio says.

One still-mysterious part of the law that’s critical for many owners involves “qualified business income.” The law provides for a deduction of 20 per cent of the qualified business income of many sole proprietors, partners and S corporation owners who make up the vast majority of small business owners. But the regulations will need to spell out what qualified business income is under the law, and in turn, who’s likely to benefit from the deduction, Pravia says.