Small businesses are feeling very optimistic these days, with a record number believing it’s the perfect time to expand. The positive outlook has reportedly been fueled by the changes instituted by the Trump administration’s tax-reform package.
Survey Says It’s a Good Time for Small Businesses
According to a survey released by the CNBC and Survey Monkey, the Small Business Confidence Index for Q1 saw numbers rise from 57 to 62. The five-point increase is the largest move per quarter that the index has seen since the two companies started measuring in 2017.
The CNBC/SurveyMonkey Survey also highlighted several key takeaways. For instance, 47 percent of small businesses stated that on the whole, business conditions are good. Only 44 percent believed that last quarter. The survey also revealed that 32 percent of small business owners are planning to add more full-time workers in 2018.
How the New Tax Law Affects Small Businesses
It should be pointed out that the Q1 survey is the first done since President Donald Trump enacted the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. The rise in optimism and confidence is quite the surprise, considering that in the Q4 2017 survey, small-business owners were split in the middle regarding the effect the tax law would have on their business. Now it seems that 46 percent of those surveyed believe Trump’s tax policy will have a positive impact; an impressive jump from the 38 percent of last quarter.
What kind of impact will the new tax law have on SMBs? The final iteration of the bill allow pass-throughs of as much as 20 percent of the income. However, these deductions depend on the type of business.
In personal service businesses, like lawyers, architects, and brokers, the 20 percent deduction is only permitted for married partners that filed joint incomes of as much as $315,000. Meanwhile, the deduction is allowed for single taxpayers with incomes of up to $157,000.
For businesses that are employee intensive, like manufacturers and restaurants, the deductions depend on the payroll. The 20 percent deduction is actually confined to 50 percent of the payroll. So companies with a lot of workers get a big break. The new tax law basically gives these businesses a good reason to expand and hire new people.
Last December, Adam Looney of the Tax Policy Center was interviewed on PBS’s News Hour where he explained how the ‘pass-throughs’ would work for small business.
Benefits of Tax Cuts to Small and Medium Sized Businesses
The TCJA appears to have a trickle-down effect on consumers and small businesses. The higher take-home pay and bonuses resulting from the new tax law have given consumers more spending confidence. This was clearly seen during last year’s holiday season.
This consumer confidence is a good sign for small and medium-sized business. With increased spending, these companies can generate more revenue that they can use to either improve the business or pay off creditors. For instance, savvy business owners can take steps to improve their credit rating, like paying their bills immediately.
Companies with improved credit ratings have access to more capital. This can be beneficial to owners thinking of expanding operations, improving an office, buying new equipment, or refinancing a debt.
More importantly, a positive credit score makes it possible for entrepreneurs to apply for small business funding with banks. These traditional lenders typically look more closely at credit scores. They can also offer small businesses better terms and rates. For example, instead of paying 20 percent interest on a credit card, a businessman can get capital at 8 percent interest which can be used to pay off debt and place the company in a healthier space, finance wise.
Small businesses certainly have a lot to look forward to now that the TCJA is in effect. However, the changes introduced in this new law can be challenging to navigate. Some of the new rules are just so complicated that tax experts might have trouble processing them. So it’s a good idea for small businesses to invest in reliable tax advisers this year.