First of all, kudos to Wisconsin Senator Ron Johnson and the other Senators working behind the scenes to help protect small business owner’s interests in this critically important tax bill.
The truth of it is, the House bill does very little for small business owners, as I will set forth in detail below. The Senate bill however has a glimmer of hope for us, and hopefully Senator Johnson’s objections and concerns will be heard.
Over the past three weeks, I have been extremely vocal about my personal concerns regarding the House Bill and what should change in the legislation before it becomes law. In fact, I will go as far to say that the House version hurts small business, let alone helps the average small business owner.
In fact, I was shocked to see Treasury Secretary Mnuchin’s comments that this legislation “substantially helps small business owners”. Either his definition of ‘small business’ is far from that of mine, yours and the Small Business Administration (SBA), or he can’t do math. Since he is the Treasury Secretary, I’m going to assume we have a definition problem.
But enough rhetoric, lets break it down and I’ll give you the pros and cons of both the House and Senate Bills in a simple, easy to understand format (as much as humanly possible with over 750 pages of combined legislation material to pour through and decipher).
Moreover, at the end of this article I’m going to give you the method and resources to contact your elected representative, and preferably your Senator, to express your concerns and plead for some relief for the small business owner as ‘reconciliation’ between the two bills takes place over the next few weeks.
Now, as we dive into ‘the numbers’, it is important to put this Bill in perspective regarding the ‘definitions’ and ‘facts’ being thrown around. It may be interesting for you to note that the IRS and SBA have an extremely broad definition of ‘small business’. Believe it or not, under both of these institutions, a small business could be anywhere from 2 employees to 500 employees, or sales from 7Million to 35Million.
However, according to the U.S. Census Bureau in 2015 there are two critical facts you and I need to recognize:
- According to the definition of ‘small business’ by the SBA and IRS stated above, in 2015 over 97.9 percent of these small businesses had less than 20 employees or no employees at all, AND…
- Among employer C Corporations in 2014, 85.0 percent had fewer than 20 employees, and 99.0 percent had less than 500 workers.
The point being is that when the GOP leadership stands up in front of the microphone or camera and says that this legislation is going to substantially help small business aka. “Main Street”, don’t be fooled by the smoke screen. There is a very slim cross section of small business owners this legislation will ‘substantially’ benefit, and its primarily ‘Big Business’, not the firms with less than 20 employees.
Moreover, in fact this legislation from both the House and Senate delivers a whopping 15% permanent and across the board tax cut to large corporations, NOT the 97.9 percent of small business owners or 99 percent of C-Corporations that have no ‘global impact’ and need for a tax cut to be competitive.
The benefits to ‘pass through businesses’ that the GOP leadership loves to boast about, is so convoluted, complex, and watered down, it’s truly a joke. In fact, if I was IRS Commissioner John Koskinen, I would be thrilled to get this legislation on my desk. The IRS has been trying to find any method to further regulate pass-thru compensation for year!!
This legislation will give the IRS carte blanche latitude to now further scrutinize officer/owner compensation. It will in fact have a negative impact on pass-thru tax planning and potentially even a chilling effect on the whole concept and benefit of a pass-thru company. It’s actually frightening the negative impact this legislation could have on millions of S-Corporation owners.
Here is what the small business ‘pass through business owner’ really gets in the terms of tax savings:
So rather than just complain and not give any constructive recommendations, here are my 10 ‘Amendments’ I would propose to the House and Senate as you go through ‘reconciliation’:
- Change the Senate version of the flow-thru business deduction of 17.4% to 12.4% and allow all trade or businesses to use it, including personal service firms, with no phase out limitations.
- Don’t use ANY provisions of the House Bill in regards to flow-thru entities.
- Do not eliminate the Entertainment deduction for business owners (part of the House bill). Audits and Tax court guidance have prevented its abuse for years and will continue to do so.
- Keep the current provision of selling your personal residence with the 2 out of 5 year rule.
- Keep the Coverdell IRA (the 529 is a Wall Street strategy and we should encourage saving for education, not discourage it)
- Continue to allow for Roth IRA re-characterizations (It’s not being abused, the IRS just hates it and Social Security is tenuous at best- We need Roths!!)
- Multiple Business Tax Credits are gutted with the House Bill. Leave these alone. They may sense for business and encourage wise business expenditures and investments.
- Go ahead and double the standard deduction and ‘simplify’ tax returns for millions of Americans that own modest homes, rent and have a W-2 – Great…BUT DO NOT touch the itemized deductions. Leave them alone for those that want to AND can use them. Don’t touch the State and Local Income Tax (SALT) deduction, mortgage interest, charitable and medical itemized deductions.
- Oh, yes… I KNOW that these 10 recommendations will cost (at least the 8 above). So what you do is only reduce the Corporate tax rate to 25% or 27.5% in order to pay for the cuts above. Big corporations don’t need all the breaks in this Bill.
- Moreover, to help pay for the above cuts for ‘main street’ and small business owners, no one in the top 2% of income in the U.S. need any sort of tax break. Gut those provisions out of the legislation, period.
In summary, I cannot emphasize enough how important this is for you, the small business owner, to take seriously and contact your elected official. Share you concerns. Demand more. The two Senators from your state are probably the best method to hopefully finding some resolution. This is primarily because the Senate has a much slimmer margin for victory and have to carve out a Bill during the reconciliation that will pass the Senate. At this point anything will pass the House as you can see from my analysis above.
Go to https://www.usa.gov/elected-officials to find the phone number and email to your Senator and send a message immediately. This is your government. Demand more for ‘Main Street’. For regular tax tips, deadlines, videos and resources, sign up for my free weekly e-newsletter at www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.