Adapting to Tax Reforms: Essential Tips for Entrepreneurs

A Guide for Small Business Owners to Adapt to Corporate Tax Changes Under the New Administration

Nov 07, 2024

Understanding the intricacies of tax laws isn't just for accountants—it's essential for entrepreneurs aiming to maximize profits and stay compliant. With potential tax reforms on the horizon, being proactive can save your business thousands of dollars. Let's dive into the upcoming changes and how you can adapt.

Upcoming Tax Policy Shifts Affecting Small Businesses

Expiration of Key Provisions in the Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant benefits for small businesses. However, many of these provisions are set to expire after December 31, 2025.

Qualified Business Income (QBI) Deduction: This allows eligible pass-through businesses to deduct up to 20% of their qualified business income. For example, if your business earns $200,000 in qualified income, you could deduct $40,000, reducing your taxable income to $160,000. Without legislative action, this deduction will disappear, potentially increasing your tax bill by thousands.

Potential Increase in Corporate Tax Rates

Discussions are underway to adjust corporate tax rates, which could have significant implications.

Corporate Tax Rate Hike: The current corporate tax rate is 21%, reduced from 35% by the TCJA. Proposals suggest increasing it to 28%. For a small corporation with a taxable income of $500,000, this change would increase your tax liability from $105,000 to $140,000—an additional $35,000 in taxes.

Modifications to Depreciation and Expensing Rules

Investing in your business infrastructure is crucial, but upcoming changes might affect how you can deduct these expenses.

Bonus Depreciation Phase-Out: The option to immediately deduct 100% of qualified property is scheduled to decrease to 80% in 2023, 60% in 2024, and so on until it phases out completely.
Example: If you purchase equipment worth $100,000 in 2023, you can deduct $80,000 immediately. In 2024, that immediate deduction drops to $60,000.
Section 179 Expensing Limits: The maximum deduction is $1.16 million for 2023, with a phase-out threshold of $2.89 million. These amounts are subject to change, which could limit your ability to deduct large purchases.

Repeal of Green Energy Tax Credits

Investments in renewable energy currently offer lucrative tax credits, but these may be at risk.

Elimination of Credits: The Investment Tax Credit (ITC) provides up to 26% credit for solar energy systems. On a $50,000 investment, that's a $13,000 credit. Repeal of this credit means losing substantial tax savings.

Strategic Actions for Small Business Owners

Reevaluate and Optimize Your Tax Strategy

Action Step: Schedule a meeting with your tax advisor to assess how these changes affect you.

Maximize Current Deductions: If you're eligible for the QBI deduction, ensure you're taking full advantage of it while it lasts.
Timing of Income and Expenses: Consider accelerating income or deferring expenses to capitalize on the current lower tax rates.
Example: If you expect higher taxes next year, invoicing clients before year-end could save you money.

Prepare for Potential Cost Increases

Tariffs and trade policies can directly impact your bottom line.

Build Cash Reserves: Increasing tariffs could raise the cost of imported goods by 10-25%. Having extra cash on hand can help you manage these spikes.
Diversify Supply Chains: Relying on a single supplier, especially overseas, is risky. Identify alternative suppliers domestically or in countries not subject to tariffs.
Example: If your primary supplier in China faces a 25% tariff, sourcing from Vietnam or Mexico might reduce costs.

Invest in Renewable Energy Now

Take advantage of existing credits before they potentially disappear.

Act Quickly: Install energy-efficient systems or equipment now to lock in current tax benefits.
Example: Upgrading to energy-efficient HVAC systems can qualify for deductions under Section 179D, saving you up to $1.80 per square foot of your facility.

Adapt Your Hiring Practices

Labor policies may tighten, affecting your workforce.

Develop Local Talent: Partner with local schools or training programs to create a talent pipeline.
Example: Offering internships or apprenticeships can help you train and retain skilled workers.
Leverage Technology: Automate repetitive tasks to reduce dependency on manual labor.
Example: Implementing accounting software can save time and reduce errors, allowing your staff to focus on growth-oriented activities.

Conclusion

Navigating tax changes can be daunting, but with proactive planning, you can turn challenges into opportunities. By staying informed, adapting your strategies, and taking timely action, you're positioning your business for continued success, regardless of the shifting tax landscape.