How Upcoming Tax Legislation Could Impact Small Businesses

As the federal government and state legislatures prepare to implement new tax laws in the coming years, small business owners must be proactive in understanding how these changes could affect their operations, cash flow, and overall financial health. Here are several ways upcoming tax legislation could impact small businesses and steps you can take to prepare.

1. Potential Expiration of Tax Cuts and Jobs Act (TCJA) Provisions

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced several provisions that benefited small businesses, including the 20% Qualified Business Income (QBI) deduction for pass-through entities. However, many of these provisions are set to expire at the end of 2025 unless Congress acts to extend them. The expiration could result in:

• Higher Tax Rates: Small businesses operating as sole proprietorships, partnerships, or S corporations could face higher tax liabilities.
• Reduced Deductions: The loss of the QBI deduction could significantly increase taxable income for many small businesses.

To prepare, business owners should work with tax professionals to explore strategies like accelerating income or deferring expenses into years where the current provisions are still in effect.

2. Changes to Corporate Tax Rates

Proposals to adjust corporate tax rates could impact small businesses structured as C corporations. While some legislation may aim to increase the corporate tax rate, others might introduce targeted tax breaks or credits for specific industries, such as renewable energy or manufacturing.

• Impact on Profit Margins: A higher corporate tax rate could reduce net profits, making it essential for businesses to reassess their pricing strategies and operational efficiencies.
• Opportunities for Tax Credits: Staying informed about new tax credits can help offset potential increases in liabilities.

3. Increased Payroll Tax Obligations

Legislation aimed at addressing Social Security and Medicare funding shortfalls may result in increased payroll taxes for employers. This could disproportionately affect small businesses with limited cash reserves.

• Higher Employer Contributions: Businesses may need to pay higher rates for Social Security, Medicare, or unemployment insurance taxes.
• Impact on Hiring: Increased payroll taxes could make it more challenging to hire new employees or offer raises to current staff.

Consider conducting a payroll audit to understand how potential increases could affect your labor costs and identify areas for efficiency improvements.

4. New Tax Incentives for Green Initiatives

As governments push for environmental sustainability, small businesses could see tax incentives for adopting eco-friendly practices. For example:

• Energy Efficiency Credits: Tax breaks for upgrading to energy-efficient equipment or retrofitting buildings.
• Electric Vehicle (EV) Incentives: Credits for purchasing EVs or installing charging stations at business locations.

Take advantage of these incentives by exploring how green initiatives align with your business goals and evaluating their long-term cost benefits.

5. State-Level Tax Changes

In addition to federal tax laws, many states are enacting tax changes that could affect small businesses. These might include:

• Digital Sales Taxes: Expanded taxes on online sales, which could impact e-commerce businesses.
• Minimum Wage Adjustments: States with higher minimum wages may require businesses to account for increased payroll tax obligations.

Staying informed about both federal and state tax developments will be critical for compliance and planning.

6. Steps to Take Now

Given the uncertainty around upcoming tax legislation, small business owners can take the following steps to mitigate risks:

1. Engage a Tax Professional: Work with a CPA or tax advisor who specializes in small business taxation to stay ahead of changes and identify opportunities.
2. Review Your Business Structure: Evaluate whether your current structure (e.g., sole proprietorship, LLC, S corporation, or C corporation) is the most tax-efficient under potential new laws.
3. Optimize Cash Flow: Build a cash reserve to manage potential increases in tax liabilities.
4. Invest in Technology: Use accounting software to model different tax scenarios and ensure accurate reporting.

Conclusion

Upcoming tax legislation presents both challenges and opportunities for small businesses. By staying informed, seeking professional advice, and planning proactively, small business owners can minimize potential negative impacts while positioning their businesses for growth. Now is the time to assess your financial strategies and ensure you’re prepared for whatever changes may come.