Out with the Old, In with the New, What Does it Mean for Small Business

In D.C. It's Out with the Old and In with the New: What it Means for Small Business

Out with the Old, In with the New, What Does it Mean for Small Business

What a new administration means for small business

This year’s election results mean changes…a new administration and a new Congress. What affect this will have on small businesses is too early to predict, but it’s inevitable that there will be changes. Here are some possible changes to anticipate:

Tax increases

While the new administration promised to raise taxes only on high earners ($400,000 or more), it could severely impact small business owners who pay taxes on business earnings on their personal returns. For example, in a one-member limited liability company, the net profits are reported on the owner’s Schedule C of Form 1040 or 1040-SR; such profits are not diminished by distributions taken by the owner (who, as a self-employed individual, does not receive a tax-deductible salary). While most small business owners don’t fall within the “high earners” category, there are still a significant number who do.

For C corporations, the current 21% tax rate could rise substantially as announced in campaign promises. Most small businesses are sole proprietorships or pass-throughs (S corporations, partnerships, and limited liability companies), so any corporate rate hike would not directly impact small businesses. But if C corporations must pay more in taxes, it could produce an adverse financial result felt through the economy.

There may be other tax-related changes to come that could be burdensome to small businesses. These may involve mandatory retirement savings with additional government incentives, more employer-required assistance in childcare, changes in health care, and other measures.

Note: Whether there will be any significant tax changes depends on the outcome of the Georgia senatorial elections, which will determine control of the Senate. A divided Congress (a Democratic-controlled House and a Republican-controlled Senate) likely will stymie enactment of dramatic tax changes, though some changes will come.

Federal spending

Much of what will happen depends on the pandemic and its impact on the economy. That will likely drive more federal spending going forward, such as additional support for certain industries hard hit by closures. Small businesses are in many of these industries—entertainment, restaurants, travel—so additional federal spending here could be beneficial.

The new administration has promised to focus on infrastructure and there may be bi-partisan support for this. Because the construction industry has many small businesses, this could be favorable too.

Labor

Prior to the pandemic, one of the biggest issues for small businesses was finding and retaining qualified workers. A new administration that likely will relax immigration restraints could produce a larger pool of available workers going forward.

But this benefit could be countered by the challenge to pay employees more, given promises to raise the federal minimum wage to $15 per hour (or higher). While many states have their own (higher) rates, the federal rate is used in a number of states. A hike in the minimum wage rate has a trickle up effect, requiring small businesses to boost pay for non-minimum wage workers and creating a strain on profitability.

Regulations

One of the biggest costs to small businesses is regulatory compliance. The Obama-era regulations that were rolled back could return, plus new ones. This is especially so as a result of the new administration’s focus on climate change.

Final thought

If history is any teacher, anticipated changes won’t be as bad…or as good…as expected. Whatever they are, small businesses will adapt; they always have.
As John F. Kennedy said: “Change is the law of life, and those who look only to the past and present are certain to miss the future.”

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