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Proposed Tax Changes Could Affect Some Small Business Owners

Possible Tax Changes for Small Businesses
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated May 24, 2023
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A White House proposal that called for corporate tax changes that would provide relief for some small businesses (while hiking taxes on many larger-sized businesses) mostly failed to pass in 2022. However, some tax provisions favored by House Democrats did gain Congressional approval. Here’s a look at what passed, how these provisions affect small businesses, and what’s included in the Biden Administration’s newest tax proposals.

Corporate Tax Changes

The U.S. corporate tax rate currently stands at 21%, but House Democrats unveiled a plan in 2021 that would lower the rate to 18% on corporations with taxable income up to $400,000, while preserving the 21% corporate tax rate on corporations with incomes between $400,000 and $5 million. They also proposed to increase the corporate tax rate on corporations with incomes greater than $5 million to 26.5%.Here’s what happened: Most of the Biden Administration’s proposals to significantly change the tax code failed to get Congressional approval in 2022. However, some notable tax provisions were included in the Inflation Reduction Act that gained Congressional approval in August 2022, as well as in the SECURE 2.0 Act, signed into law in December 2022. Here’s a look at two provisions that may have an impact on small business owners.

Expanded IRS Enforcement

The Inflation Reduction Act immediately provided an additional $80 billion in funding to the Internal Revenue Service (IRS) over the next ten years. This is meant to allow the IRS to boost tax collections by pursuing more audits and other tax enforcement measures. The increase in funding, and large number of newly hired IRS agents, could potentially lead to more small business tax audits. This is all the more reason to stay organized and honest. Good tax and accounting software and assistance from an experienced accountant can help ensure your business remains tax-compliant. Recommended: 5 Small Business Tax Tips for Business Owners

15% Corporate Minimum Tax

While businesses earning less than $400,000 won’t get a tax break, the Inflation Reduction Act includes a provision to ensure that corporations earning more than $1 billion in profits (as listed in the company’s financial statements) pay a minimum of 15%. While current law requires these firms to pay a 21% corporate tax rate, many corporations pay less or no federal tax. The minimum corporate tax rate went into effect January 1, 2023. Recommended: 19 Small Business Tax Deductions to Know

Automatic Enrollment in Retirement Plans

The SECURE 2.0 Act primarily addressed retirement issues but one of the rules it includes could impact your business down the road. The Act makes automatic enrollment mandatory for most 401(k) plans starting in 2025. The mandated automatic enrollment is required for: 
  • 401(k) plans established after December 29, 2022
  • Businesses in existence for at least three years 
  • Businesses having more than 10 employees
There are still a number of questions surrounding this new mandate and further guidance on how automatic enrollment will work is likely coming from the IRS.Recommended: Do Businesses Get Tax Refunds?

2024 Proposed Tax Changes

The Biden administration released its 2024 budget proposal in March 2023, and many of the proposed changes to the tax code could impact small businesses. For one, the new budget reintroduces a small business surtax on businesses earning over $400,000. This was proposed in 2021 but was ultimately removed from the Inflation Reduction Act passed in 2022. The newly proposed version would expand the tax increase rate further from 3.8% to 5%.In addition, the plan would raise the corporate tax rate to 28%, up from the current rate of 21%. This is still well below the 35 percent rate that was in place before the 2017 tax law. If this were to go into effect, it could impact small businesses, depending on how they are structured.The White House budget also increases the top individual rate from 37% to 39.6% and the threshold to $400,000 single ($450,000 joint), which could potentially impact some businesses that operate as pass-throughs. A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.The White House’s plan could potentially change the calculus on what legal structure you should consider when starting a small business. However, don’t expect any major changes to the tax code to happen soon. With Republicans in control of the House (by a narrow margin) and Democrats controlling the Senate (by a narrow margin), any major changes to tax legislation are unlikely to get passed in both houses for the next two years.Recommended: Is Business Loan Income Tax Deductible?

The Takeaway

The prior — and new — tax proposals issued by the White House largely reflect the campaign promises President Joe Biden made when running for office. Biden, a Democrat, promised that he would “require corporations and the wealthiest Americans to finally pay their fair share” and that he would cut and not raise federal taxes on individuals making less than $400,000 per year.Getting changes to the tax code passed will be an uphill climb in the current political climate. However, small businesses may be affected by recent changes in IRS funding and new rules regarding enrollment in retirement plans.If you’re looking to grow your business by getting a small business loan this year, keep in mind that the interest you pay is typically a tax-deductible business expense. Curious about what type of financing you might qualify for? Lantern by SoFi can help. Use our fast online search tool to get a personalized small business loan option in minutes.Let Lantern help you find the right financing solution for your small business.
Photo credit: iStock/PeopleImages

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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