It’s now been about six months since President Trump signed into law the landmark Tax Cuts and Jobs Act (TCJA) of 2017. With one tax season having come and gone, business owners are beginning to understand some ways the new law is affecting their businesses. Here are three ways the TCJA may be having an impact on your business so far.
Businesses Are Passing Tax Cuts Along to Employees
Fueled primarily by federal tax cuts, more than 500 U.S. employers have announced pay raises, 401(k) increases, bonuses and other employee benefits for more than four million Americans. While the number of employees affected by these announcements accounts for only a little over three percent of the total workforce, it’s likely that other companies will follow suit in the coming year. Maybe yours will be one of them.
Salary and wage increases are a better indicator of corporate America’s long-term commitment to employees than are one-time awards, such as bonuses or benefits that can be modified or taken away. A Chick-fil-A store in Sacramento, California, recently said it would raise the pay of its workers from $12 to $13 per hour to $17 to $18 per hour, what it considers to be a living wage. A movement toward raising minimum wages appears to be catching fire generally across the U.S.
It should be noted that, with unemployment at historic lows, and with a government crackdown on both legal and illegal immigrants under way, companies are feeling the pressure to pay employees more in order to keep them in the fold. Prices of goods and services may rise as a result. Of course, higher paychecks may also mean more tax dollars coming into government coffers. What remains a question is whether the increased revenue will in any way offset the ballooning deficit spending the country currently experiences.
Immediate Expensing Creates Quicker Growth
In prior years, when deducting business expenses on federal tax forms, business were required to depreciate tangible assets over the life cycle of the assets. This could take many years. Tangle assets include items such as manufacturing equipment, business vehicles and computers.
The new tax law allows businesses to immediately expense depreciable tangible assets in the year in which they are purchased, a rule slated to last through 2022. After that, the old “original use” requirement comes back into play, which stipulates that only the first owner of a depreciable tangible asset may qualify to use immediate expensing.
The upshot of this rule is that more businesses are expected to spend more in the near term to upgrade and grow their businesses. This is especially true when you consider the huge corporate tax breaks included in the law, which should provide business owners with more capital to invest. So, for example, a roofing contractor might be more inclined to accelerate buying new trucks and better equipment, which might also enable them to expand their workforce. Of course, a manufacturer might decide that now is the time to purchase equipment that automates more processes, allowing them to eliminate jobs as well.
Employees Lost Some Tax Breaks
Most employees submit expense reports to their employer who cover those expenses. But depending on the nature of the work environment, some employers don’t reimburse all expenses. Under prior law, an individual taxpayer could deduct unreimbursed job expenses, including travel, transportation, meals, entertainment, gifts, and local lodging – as long as it was directly related to their work. Employees could also deduct expenses for an office they used for business purposes at home, even if they also had an office at their workplace.
The TCJA changed all that. Individual taxpayers who are employees may no longer deduct unreimbursed job expenses, including office space in their homes. So if your employees used to rely on these tax breaks to offset some of their tax owed, they no longer will be able to do so. This may become an issue for you should employees ask for more compensation.
If you’re still not sure about how the TCJA is affecting your business, you might consider consulting with an accountant. A knowledgeable accountant can walk you through the changes and help you make decisions that are best for your business.