Tax Reform and its Impact on the Small Business Environment

By at 20 April, 2018, 8:30 am

by Raymond J. Keating-

Small business confidence remains high, and pro-growth policy changes on the tax and regulatory fronts have a lot to do with that optimism.

Consider, for example, the Vistage CEO Confidence Index (Q1 2018) from small and mid-size CEOs. The Index finds confidence remains very high, although it slipped a bit at the end of the first quarter.  According to the survey results: “SMB CEOs are optimistic about the growth prospects of their own businesses. The majority of CEOs (79%) expect their company’s revenues will grow in the next 12 months. This is close to the record peak (83%) recorded last quarter. Two-thirds of CEOs (66%) also anticipate increased profits, which is nearly equal to last quarter’s peak record of 67%.”

The most recent NFIB Index also shows continued strong optimism. According to the report: “The 104.7 March reading, down from 107.6 in February, remains among the highest in survey history and for the first time since 1982, taxes received the fewest number of votes as the number one problem. Taxes as the number one problem has declined since November 2017, the month before the tax bill passed, from 22 percent to 13 percent in March.”

Given the ongoing debate over the tax law, it pays to provide a quick reminder of key reforms positively impacting small businesses and, therefore, the economy.

For example, the corporate income tax rate was cut from 35 percent to 21 percent. This lower corporate tax rate is a direct benefit for the small businesses, since most C-Corps are small firms, with 86 percent of C-Corp employer firms having less than 20 employees; 96.7 percent less than 100 workers; and 99.1 percent fewer than 500 workers.

Also, pass-through enterprises – S-Corps, LLCs, partnership and sole proprietorships – experienced a cut in the top personal income tax rate from 39.6 percent to 29.6 percent, thanks to a 20-percent deduction. While there are some limitations on this (such as phasing out at higher incomes for certain services, and there are measures to distinguish between individual wage income and business income), it was a clear plus for small businesses.

In addition, expensing of certain investments, such as machinery and equipment, is allowed for five years for all businesses, and then phased down over the following five years. Meanwhile, small business Section 179 expensing was expanded, increasing the cap from $500,000 to $1 million and the phase-out level from $2 million to $2.5 million.

For good measure, the corporate alternative minimum tax was eliminated; the use of cash accounting was expanded; the ObamaCare individual mandate is repealed in 2019; and the exemption level of $5.6 million was doubled.

All of these rank as positives for small businesses, increasing resources and incentives for business investment and growth.

Act II on Tax Reform and Relief

Looking ahead, of course, there is more that needs to be done on the tax reform front, such as improving and making the lower rates for pass-through businesses permanent, moving the top individual rate to a much lower one, and expanding expensing to all businesses and making it permanent.  The capital gains tax either needs to be eliminated or cut from 23.8 percent to, at most, 15 percent (where it was from 2003 to 2012); and the death tax needs to be terminated. Indeed, it’s important that the Trump administration and Congress stay focused on continuing tax and regulatory relief efforts.

SBE Council’s agenda for tax reform and modernization includes a host of ideas, which also highlights an important bipartisan bill – the Small Business Tax Simplification Act (H.R. 3717) that makes common sense changes and long overdue tweaks to improve the tax system for entrepreneurs, startups and small businesses.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.


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