In 2016, the staffing industry in the United States reported 150 billion dollars in revenue. Eighty-five percent of this revenue was generated in the temporary and contract employment sector which continues to grow as employment dynamics continue to change.
Staffing firms that deal primarily with temporary and contract job positions are gaining momentum in all employment sectors and levels. This is due to the shifting dynamics of both employers’ and employees’ needs.
What’s in the 2018 Tax Bill?
On December 22, 2017 a tax reform bill was signed into law. The bill, which goes into effect this year and has no end date, though some of its changes do, contains a number of provisions that affect small to medium-sized businesses.
These changes include:
- Permanent reduction in the corporate tax rate from 35% to 21%.
- Pass-through businesses may deduct 20% of their income tax free. Note: Complex rules and limitations apply to this deduction.
- Effective in 2019, the reduction to $0 penalty of the individual mandate of the Affordable Care Act.
- Immediate and full expensing write off of the cost of new buildings and equipment. Note: This provision will begin to phase out in 2023.
- Federal deduction of up to $10,000 on combined state and local property taxes, sales, or income taxes.
- Deduction of mortgage interest reduced from $1 million to $750,000.00
Winners in the 2018 Tax Bill Revisions
Many small to mid-size staffing firms are partnerships, limited liability corporations (LLCs) or S Corps rather than large corporations. Most of the 20,000 or so staffing firms in the United States are organized as pass-through entities. As such, most of them will now have the ability to deduct 20% of their income tax free.
However, many small to mid-size businesses quickly realized that their accountants are the big winners in this arena. The promise of, and wide promotion of, a simplified tax code did not come to fruition. Attempts to condense the current tax brackets from seven to four and to cut many deductions, for example, were unrealized.
What did happen is the generation of a new set of complex rules and limitations that apply to the 20% income free tax deduction on pass-through income, and a five year limit on the provision offering immediate tax benefits on capital investments.
How to Proceed
Meet with your accountants to understand how best to maximize advantages offered by the tax reform bill and minimize the losses. Some positive changes in accounting methods will benefit many small and medium businesses; in particular, greater access to the cash method of accounting by increasing the threshold of using cash accounting from $5 million to $25 million using a three-year average annual gross receipts test.
Make it a priority to meet with your accountants to review not only the new accounting rules and how they might provide tax savings, but also whether or not major capital investment is strategically beneficial for your company over the next five years.
Bottom line – there are some benefits to small and medium-sized businesses in the reformed tax bill but it will take planning and strategizing to make the most of them.
