The House Ways and Means Tax Policy Subcommittee held a hearing Wednesday on how the new tax law is affecting small businesses, hearing testimony from a CPA firm owner and others.
Larry Gray, owner of Alfermann Gray Co, CPAs LLC, a tax prep firm in Rolla, Missouri, testified about the new 20 percent pass-through deduction. “My small business clients, after explaining to them how the new law may impact them, were excited to know they were only going to pay on possibly 80 percent of their business income,” he said. “Also, they found they would be in a lower tax bracket, resulting generally in them wanting to know how to grow their business. Several were willing to set up planning sessions throughout the year. This year, small business owners are taking a much more proactive approach in tax planning for their businesses.”
He noted that his firm is getting more clients who want their financials done during the year. “Generally, they are asking for money to start a business, expand a business or bring in partners, like a family member,” said Gray. “We are seeing an increase in existing and new small business clients making the decision to outsource much, or all, of their accounting and payroll work. Accounting and compliance is the last thing they want to do. And now, finally they can afford us.”
Mike Baach, president and CEO of Philpott Solutions Group in Brunswick, Ohio, also testified in favor of the new tax law. “Tax reform has already made significant contributions to Philpott and our employees,” he said. “First, each employee received a $1,500 bonus in their last pay in December 2017, which our board awarded as a direct result of tax reform. This amount was in addition to the performance-based cash bonuses that are normally paid by March 15 of the year following our fiscal year ending December 31. In early 2018, our employees noticed and expressed their appreciation for the increase in their take home pay that tax reform created. Combined with their ownership in Philpott, keeping more of their salary and cash bonuses has provided added motivation to better serve our customers, thus helping our business grow.”
John Horne, owner of Anna Maria Oyster Bar in Bradenton, Florida, talked about how he had been giving out bonuses to employees in anticipation of the 20 percent pass-through deduction. “So what do I do with the 20 percent reduction that the new Tax Cuts and Jobs Act will provide? There are so many options, one I’ve already taken,” he said. “Back in April after I met with my accountant, I bonused $60,000 to some of my staff. I purchased two new two-sided LED signs at $20,000 each for two of my locations to attract new customers. I think I heard my accountant say we’d probably realize $100,000 in savings/benefits from new plan. Sometimes I hear what I want to hear, not what they’re saying. I may have to defer to my wife on my hearing!”
Philip Homan, president and CEO of Loram Maintenance of Way Inc. in Hamel, Minnesota, discussed how the new tax law would help his railroad maintenance business. “The 15-point reduction in our effective tax rate, the ability to repatriate foreign retained earnings at a lower tax rate and the ability to immediately expense capital builds has allowed Loram to make significant investments in our people, our equipment and technology and improve our competitiveness on the global stage,” he said. “It will also encourage increased capital investment in U.S. assets and infrastructure.”
However, John Arensmeyer, CEO of the advocacy group Small Business Majority, disputed the positive impact of the new tax law. “We believe the law will hurt small businesses and the economy because (1) it will increase the deficit by $1.5 trillion without giving most small business owners a significant tax break, (2) it adds more complexity and confusion, and (3) fails to address corporate tax loopholes that give large businesses an unfair advantage,” he said. “The new law’s tax breaks are skewed towards large corporations and a handful of wealthy pass-through entities, not Main Street small businesses. The real winners of the new tax law are large corporations and wealthy individuals, not Main Street small businesses.”
House Ways and Means Tax Subcommittee Chairman Vern Buchanan, R-Fla., pointed to some of the positive effects of the new tax law already being seen. “Recent data on small businesses is encouraging,” he said during his opening statement. “The National Federation for Independent Business reported small business profit growth at a 45-year record high. The percentage of small businesses that are expanding their employment is at its highest level since 1999, and the percentage of small businesses reporting plans for expansion, increased hiring and higher wages, is at or near record highs.”
Rep. Lloyd Doggett, D-Texas, the ranking Democrat on the subcommittee, disagreed with those positive indicators, noting that the panel didn’t have the opportunity to hear from small businesses while the tax law was being rushed through Congress last year by Republicans. He characterized the hearing as a “public relations exercise to try to put the best face on legislation that was designed to provide a windfall for Wall Street banks and for multinationals for whom small businesses were basically an afterthought.” He characterized the pass-through deduction as a “tax bait and switch” and argued that instead of helping mom and pop small businesses, almost half the overall benefits from the provision go to taxpayers who make more than $1 million per year. “Within a few years, two-thirds of the pass-through small businesses will be left with a mere 4 percent of the benefits while more than half of it will be going to those making at least $1 million each year,” he added.
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