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How will the new tax bill affect small businesses?

For the first time since the presidency of Ronald Reagan, the United States tax system is undergoing a massive overhaul. Spearheaded by Congressional Republicans and signed into law by President Trump, the overhaul will herald significant changes for millions of Americans. The new law will take effect on Jan. 1, 2018.

As a business owner, you have probably been wondering how the new tax law will affect your company. If you have been worrying that the changes will negatively impact business, have no fear: The new tax law is written to benefit large and small businesses alike. Read on for the major ways that the overhaul will affect your company.

The corporate tax rate will drop

The new law will significantly lower the corporate tax rate-- that is, the percentage of taxes that businesses are required to pay. Currently, the corporate tax rate is 35 percent. Under the new law, this rate will drop to a mere 21 percent. This action will mainly benefit large corporations. By slashing the corporate tax rate, the bill’s authors hope to create incentives for corporations to move to the United States, generating economic growth.

Pass-through businesses have a new deduction

Currently, 95 percent of businesses in the United States are pass-through businesses, or businesses that do not pay corporate income tax. These businesses may not be directly affected by the reduced corporate tax rate, but the tax law grants them a different benefit. As of next year, pass-through businesses will have a 20 percent tax deduction, meaning that a company’s taxable income will decrease by 20 percent. This is great news for business owners, who will be able to pocket or reinvest the cash that would have gone to the IRS.

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