What Will Corporate Tax Reform Look Like? Here’s What Small Businesses Need to Know

Though the Trump administration gained office partly through promising huge tax breaks for the country’s largest corporations, these campaign promises don’t seem to be shaping up as law makers attempt to solidify the Republican-led tax reform bill.

Indeed, as Trump’s advisers and key lawmakers plan the bill behind closed doors, the 15% corporate tax rate that the President promised becomes less and less feasible.

In fact, the larger 20% corporate tax rate that Speaker Ryan set as a goal last summer also looks out of bounds. With the formal corporate tax rate as it is right now at 35%, lawmakers struggle to find ways for the reform to fund such drastic slashes to rates.

Raising Expected Corporate Tax Rates

While Fox Business reports that the corporate tax rate will only be slashed to 20-25%, a thorough economic analysis of the proposed bill suggests that the tax reform bill realistically can’t even reach this range.

Scott Greenberg of Tax Foundation has found that merely eliminating corporate loopholes and special preferences—as the bill proposes in order to fund the overall lowering of the corporate tax rates—would not produce the return needed to make a cut to 15%, 20%, or even 25% revenue neutral.

That is, any bill that proposes to slash corporate taxes to any of these rates while accounting for these cuts by only patching up corporate expenditures in the forms of loopholes and special preferences would ultimately cause the government to spend more than it takes in, making the proposed bill revenue negative.

Greenberg found that, with these current proposed means of balancing cuts that the bill offers, a minimum corporate tax rate of 28.5% would be the lowest rate feasible.

This rate—at almost double the 15% that Trump promised—obviously doesn’t fulfill what Republican legislators hoped for in their tax reform.

However, these same legislators are also experiencing a significant amount of political pressure to meet the fall deadline that they imposed on themselves to get this bill agreed upon and passed.

With little news from closed-off meetings beyond reports of disagreement about where to compensate for funds lost with a drastic tax cut for corporations, this deadline doesn’t seem to be hospitable for the possibility of reaching a rate below the 28.5% that Greenberg pinpointed.

In fact, as Bloomberg Politics reports, international tax lawyer and former member of the U.S. Treasury Department said that the rates cited by both Trump and Ryan are “almost certainly a pipe dream” and added that the legislators structuring the bill “don’t know how to pay for a cut of that magnitude.”

Rates Might Even Hurt Huge Corporations

The way in which they propose to pay for these cuts will not only fall short in breaking even for the funds, it would also likely end up being ineffectual or even counterproductive when it comes to corporations’ effective tax rates.

As a study has found, while the official corporate stands at 35% right now, the rate that Fortune 500 Companies pay is far lower at an average rate of 21.2% from 2008 to 2015. This lower effective rate flows from the very tax loopholes and special preferences that the bill plans to patch up in order to pay for the lower formal corporate tax rate.

Though ideologically this tax reform bill might be seem big business-minded, as it stands, this proposed corporate tax reform bill would, in practice, raise the amount of taxes that corporations pay.

With this bill, the tax rate of corporations would move to meet the formal one, which, as Greenberg found, could only be feasibly lowered to 28.5% while remaining revenue neutral.

What It Means for a Small Business

But what does this mean for small businesses across the country?

Those businesses that aren’t corporation-status might think that this big-business legislation won’t touch them.

Nonetheless, with this information regarding their tax reform strategy, those planning the bill behind the closed doors will have to come up with ways to restructure it.

Greenberg says there are a couple of ways of going about fixing the bill, and an onus falling on small, non-corporate businesses is an unfortunately distinct possibility.

In order to fund a tax rate lower than 28.5%, lawmakers might, among other options, look to eliminating tax break for not only those very corporations, but for small businesses as well.

This means that while small businesses’ giant competitors might not reap the astronomical benefits promised by Trump, they might be incurring more modest benefits at the expense of their smaller, more local competitors’ tax exemptions.

To prepare for this possibility, look into what decreased tax exemptions might mean for your small business, and keep those implications in mind while moving forward in your future budgeting.

The post What Will Corporate Tax Reform Look Like? Here’s What Small Businesses Need to Know appeared first on Fundera Ledger.

from Fundera Ledger https://www.fundera.com/blog/corporate-tax-reform