The Tax Cuts and Jobs Act: Implications for Small Businesses
Businesses for Responsible Tax Reform
First published May 2018
The Tax Cuts and Jobs Act includes two key changes that will affect small businesses: (1) the introduction of the 20 percent deduction on qualified business income and (2) the move toward a territorial system of taxation through the global intangible low-taxed income (GILTI), in which the profits of a foreign subsidiary of a U.S. company that meets certain conditions will not be subject to U.S. taxes. The international taxation of business income under the new tax law will likely push businesses to save money by moving offshore.
The majority of small businesses are pass-through entities, meaning business income generated is passed through to the owner(s)/shareholder(s) and taxed at the personal level. The GILTI provision is structured in favor of C corporations and puts small businesses at a competitive disadvantage. The new tax law introduces a number of changes and repeals to business deductions and credits, such as the 20 percent deduction on qualified business income (QBI). However, for many small businesses, the expense of navigating through the new tax code via the expertise of tax professionals is going to be burdensome and costly.