Simple Gets Complicated

Facts About the New 2018 Tax Law

As millions of Americans put the finishing touches on their 2017 taxes, excitement is building for a brighter future in 2018. After all, the vast majority of them can look forward to substantial savings thanks to the sizable cuts made with our new tax code, right?

Unfortunately, the truth is “not so fast” and/or “probably not.” In either case for the time being, it’s probably a good idea to set that boat catalog back on the coffee table.

Even though many American business owners believe the new tax code has been vastly simplified and that their effective tax rates have been slashed—corporations to 21 percent and pass-throughs to 20 percent—for most small businesses, neither of those is going to wind up being true; especially in the near term. In fact, thanks to the ins and outs of section 199A of the law, about 95 percent of job-creating small businesses are carved out of the tax-savings benefits and can expect to probably pay about the same rates they have been.

The Fortunate Few

Let’s start with some good news. If you’re in a “Qualified Business” and not a “Specified Service Trade or Business” (more on that shortly), but you’re still single earning less than $157K, or a couple making less than $315K, you get everything! Your rates are low and your tax code is relatively simple. The unfortunate fact, however, is there are precious few people to whom this benefit will apply.

Most businesses, particularly those that are doing well, are likely to pull in far more than $157K in taxable income. And for those businesses, as their tax attorney or CPA will glumly relay, the tax rate is likely to remain up where it has historically been—as high as 39 percent. Navigating the new code is every bit, if not more, byzantine than before requiring a quagmire of complex calculations and considerations to determine areas of income, what are and aren’t deductions, and a host of other factors to be evaluated.

Now, a word on those ‘Specified Service Businesses or Trades’. In addition to their calculations becoming vastly more complex, another reason CPAs will be glum in reporting the tax code’s lack of tangible benefits is  whole lines of business—including accounting, law, healthcare, consulting, financial services and many others—are specifically excluded from the benefits of the new tax cuts.

Stay the Course

But, while most of us won’t be free of tax headaches for the foreseeable future, there is at least a chance that this too shall pass. By necessity, as outgrowths of the law continue to materialize, the new tax code will have to be tweaked and honed. Moving forward, there is reason to hope the Ways and Means Committee’s Tax Writing Group will come up with something to help. That wait continues.

Our best advice for now, is don’t get out over your skis thinking a windfall is headed your way. In all likelihood it isn’t. Keep paying your same estimated taxes as last year and to invest in your infrastructure and your employees. Those pie-in-the-sky growth dreams that sprung from last year’s hyperbolic tax talk, may have to wait until the law is fixed. Until then, touch base with your advisors, and keep doing what you’ve been doing.