With every new President comes the potential for change, especially when it is about our country’s economics. But will the current President’s proposed economic shake-up in tax reform deal a win for the small managed service providers? Much of the evidence we see now points to Yes.
Small businesses come in all shapes and sizes
Before we get too involved with how the tax reform can “fix” small businesses, let’s first focus on why we need it.
By standard definition, small businesses are generally those with 500 or fewer employees producing less than $7 million in annual revenue. However, some exceptions would lump businesses with up to 1,500 employees and $35.5 million in annual revenue in the same SMB category! That’s like saying a multi-million dollar corporation and your local furniture artisan have enough in common to be considered the same in the tax world.
However, the majority of small businesses (especially managed service providers) come nowhere near these figures. A 10-person MSP has radically different revenue production abilities than a 300-person manufacturing company, not to mention unique economic perspectives and contributions. Tossing your downtown hardware store into the same data and statistics as a 500-person operation can grossly skew any perceptions and insights from that data when it comes to making better economic decisions for our country, especially when trying to favor SMBs.
Generally, most small businesses keep fewer than 20 employees on staff, which means small business owners and their team are wearing many hats to keep their business alive. Their sale rep may also handle marketing, while the front counter person may be in charge of bookkeeping. Studies show that around 4.9% of a small business’s time is spent on administrative tasks alone.
It’s not lack of work that’s preventing new jobs from opening up. Essentially, small business owners may not be able to afford spreading out duties if they want to keep costs low enough to remain profitable. Otherwise, there may not be any sales to make or books to keep, and the unemployment line would be several folks longer.
But, since not all small businesses are technically small, they pay the same as their looming competitors that fall just under requirements to achieve the same benefits. They’re also forced to pour additional hours into complying with government regulations that, while necessary for small businesses of 500+ employees, may not be entirely necessary for a family-owned soda shop.
Will the recent tax reform proposals have SMBs cheering or jeering?
While the reorganization of how SMBs are classified, both in size and in revenue, isn’t currently up for congressional debate, tax reform as a whole may provide a palatable solution regardless of size.
In an unveiling in September, the President planted the seeds for tax reform expectations. If those seeds flourish, this will be the first major rewrite of our nation’s tax code in more than three decades.
During his speech, the President revealed a 25% maximum tax rate for SMBs classified as sole proprietors or partnerships, which account for roughly 95% of all SMBs. For comparisons, small business owners currently pay a maximum of nearly 40%.
If these promises of tax reforms become reality, their positive impacts on small business owners will be felt throughout our country’s economics. As National Federation of Independent Business President and CEO Juanita Duggan stated in a press release, “Small businesses need meaningful reform that lowers their tax bill, allows them to invest in their business, create jobs, and grow the economy.”
Lower taxes may be able to deliver all of the above.
Not only do small businesses comprise almost all of the business market, they also employ more than half of the country’s private sector workforce. That means more than half of all payroll tax and income tax is derived straight from these companies. If small businesses are able to reduce their tax liability, they could potentially more than make up the deficit by creating jobs that will generate additional payroll tax and income tax, not to mention the revenue fueled by people who now have money to spend, thanks to their newly created jobs.
Also, if the aforementioned 4.9% of time spent on admin tasks was returned to the business in the form of a new position, small businesses could boost the GDP by an estimated $335.3 billion.
Economic decisions like these tend to have chain reactions, where no action goes unaffected by the previous one. It’s just a matter of firing the right shot to set the chain in motion with a strong possibility that its effects will be welcomed.
