by Jean Miller | Accounting News, News, Newsletter, Small Business
As the United States prepares for a second Trump presidency, small business owners are paying close attention to the policies that could shape their future. Trump’s economic priorities, including tax reform and deregulation, will echo those from his first term. Here’s an analysis of how Trump’s proposed policies could impact small businesses.
The Tax Cuts and Jobs Act: A Retrospective
One of Trump’s most influential achievements during his first term was the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. The law lowered the corporate tax rate from 35% to 21%, benefiting small businesses organized as C-corporations. Additionally, it introduced the Qualified Business Income (QBI) deduction, allowing certain pass-through entities—like sole proprietorships, S-corporations, and partnerships—to deduct up to 20% of their qualified income.
This meant lower overall tax liabilities for small businesses, leaving more funds for reinvestment, hiring, and growth. However, critics argue that larger businesses reaped the benefits disproportionately while small businesses felt minimal relief.
Key Focus Areas Under a Second Trump Administration
Several proposed policies stand out for their potential to reshape the small business landscape during Trump’s second administration.
Lower Corporate Taxes
Trump has suggested reducing the corporate tax rate further to 15%. For small businesses structured as corporations, this could mean even more tax savings, allowing for more funds to invest in technology, marketing, hiring, and training. Additionally, Trump has floated the idea of eliminating taxes on employee tips for hospitality and service workers.
Pros:
- Increased cash flow for reinvestment.
- Greater incentives to expand operations or hire employees.
Cons:
- Critics worry about the impact on the national deficit.
- Sole proprietors and other non-corporate structures may not see proportional benefits.
Deregulation
Deregulation was a hallmark of Trump’s initial term. In an effort to spur economic growth and encourage investment, his administration rolled back over 1,500 rules across industries. One of the most notable was the energy sector, where deregulation allowed oil and gas exploration to increase domestic energy production and reduce dependence on foreign oil. The result was cheaper gas prices, which directly benefited small businesses in delivery and transportation industries. If Trump continues to minimize compliance burdens, small businesses in sectors like energy, agriculture, and manufacturing will again benefit.
Pros:
- Lower compliance costs, especially for startups.
- Simplified operations in heavily regulated industries.
Cons:
- Some regulations, particularly those related to labor and environmental protections, are considered necessary for long-term sustainability and public welfare.
Tariffs and Trade Policy
Trump’s trade policies in his first term, including tariffs on goods from China and other countries, had a mixed effect on small businesses. The goal of imposing tariffs is to protect domestic manufacturers, but many small businesses that rely on imported materials faced higher costs. Biden kept Trump’s tariffs on Chinese imports, and if Trump continues them into his second term, there could be a continuation of supply chain challenges and increased prices for certain goods.
Pros:
- American manufacturers may gain a competitive edge.
- Encourages investment in American supply chains.
Cons:
- Higher costs for imported materials could squeeze profit margins for U.S. manufacturers.
- Potential retaliatory tariffs by other countries could limit export opportunities for small businesses.
Access to Capital
Lending through the Small Business Administration (SBA) saw a notable increase during Trump’s first two years in office. By streamlining loan processes and promoting programs like the 7(a) Loan Program, his administration helped many small businesses secure funding. Looking forward, Trump could push for expanded SBA lending programs, which would make it easier for entrepreneurs to access the capital needed to grow.
Pros:
- Easier access to financing for new and existing businesses.
- Potential for strong economic growth at the community level.
Cons:
- Over-reliance on debt financing could lead to financial vulnerability during periods of economic uncertainty.
by Stephen Reed | Accounting News, Audit and Accounting, IRS, News, Newsletter, Small Business
The Internal Revenue Service (IRS) has recently announced a significant increase in the number of audits it plans to conduct in the coming years. This development is part of a broader initiative aimed at improving tax compliance and closing the tax gap, which is the difference between taxes owed and taxes paid on time. As a taxpayer, understanding who the IRS plans to target with these audits is important. Here’s what you need to know.
The Inflation Reduction Act
The Inflation Reduction Act (IRA), which was signed into law in 2022 by President Biden, granted the IRS $80 billion in new funding. The goal of the funding is to bolster an agency known for lengthy processing delays, a drop-off in audit rates, and major customer service shortcomings.
Over the next three tax years, the IRS plans a sharp increase in audits, but the agency insists these audits won’t affect taxpayers who earn less than $400,000 annually.
Focus on High-Income Earners
The IRS plans to focus on individuals earning $400,000 or more annually. This demographic has historically been associated with more complex tax returns, which can include multiple income streams, investments, and deductions. The IRS’s goal in focusing on high-income earners is to ensure that these taxpayers are accurately reporting their income and paying the correct amount of taxes.
Large Corporations
The IRS plans to triple the audit rates on large corporations with assets totaling more than $250 million. By tax year 2026, audit rates for these companies will rise to 22.6%, up from 8.8% in 2019. Additionally, large partnerships with assets totaling more than $10 million will be subject to significant audit rate increases, rising to 1% in tax year 2026 from 0.1% in 2019.
Small Businesses Potentially Under the Microscope
Despite initially assuring small business owners that the increase in audits won’t affect small businesses, some evidence is signifying otherwise. The Government Accountability Office, a nonpartisan agency, reported that more than 90% of audits are on families and small businesses below the $400,000 income threshold. In March, when Treasury Secretary Janet Yellen was asked by the House Ways and Means Committee about the number of new audits funded by the Inflation Reduction Act, she confirmed that the proportion of new audits targeting those families and small businesses would remain at the historical level of 90%.
Cryptocurrency Transactions
With the rise of digital currencies, the IRS is increasing its efforts to audit taxpayers involved in cryptocurrency transactions. This includes gains from the sale of cryptocurrencies, mining activities, and even receiving cryptocurrencies as payment for goods or services. If investors do not comply with reporting requirements, the IRS could impose accuracy penalties. Therefore, investors should maintain detailed records of all cryptocurrency transactions.
Offshore Accounts
Taxpayers with offshore accounts and foreign assets are also on the IRS’s radar. The Agency has long focused on foreign income and assets due to the potential for significant tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers with foreign financial assets exceeding certain thresholds to report these assets to the IRS. Failure to comply with these reporting requirements can result in substantial penalties. The boost in funding will allow the IRS to continue an aggressive pursuit of individuals and businesses attempting to hide income and assets overseas.
Preparing for a Possible Audit
Given the IRS’s focus on these areas, taxpayers need to ensure their tax returns are accurate and comply with all applicable laws. Keeping thorough records and documentation can help in the event of an audit. Consulting with qualified tax professionals can also provide guidance and help mitigate the risk of errors on your tax return.
by Jean Miller | Accounting News, Business Growth, News, Newsletter, Small Business
The Small Business Administration (SBA) is set to introduce a new working capital pilot program that promises to provide a significant boost to small businesses. This initiative, which is expected to roll out in the coming months, will offer government-backed credit lines of up to $5 million, making it a valuable resource for small business owners looking to manage their cash flow and invest in growth opportunities. Here’s everything you need to know about this upcoming program.
A Game-Changer for Small Businesses
The SBA’s new working capital lines are designed to be more attractive to both lenders and borrowers compared to the agency’s existing products. This program aims to address common challenges that small businesses face when trying to secure financing, such as high interest rates and stringent lending criteria. By offering more favorable terms, the SBA hopes to increase accessibility to much-needed funds.
Improved Access to Capital
One of the most significant benefits of the SBA’s new program is improved access to capital. Small businesses often struggle to secure financing due to strict lending criteria and high costs associated with traditional loans. The SBA’s backing reduces the risk for lenders, which can lead to more approvals and better terms for borrowers.
Generous Credit Limits
One of the standout features of the SBA’s working capital pilot program is the high credit limit. Small businesses will be able to access credit lines of up to $5 million. This substantial amount can help businesses cover operational expenses, invest in new equipment, expand their operations, or navigate through periods of reduced revenue.
Competitive Interest Rates
The interest rates for these working capital lines will be based on the prime rate plus an additional 3% to 6.5%. Given the current prime rate, this translates to an approximate range of 12% to 15% today. While this may seem high, it is important to note that these rates are relatively competitive compared to many alternative lending options available to small businesses, especially those that might not qualify for traditional bank loans.
Annual Fee Structure
In addition to the interest rates, the new working capital lines will come with an annual fee. This fee structure is designed to make the program sustainable while ensuring that it remains attractive to lenders and borrowers alike. The exact fee amount has not yet been disclosed, but it will be structured to support the needs of small businesses without being prohibitively expensive.
Stay Informed
As the SBA prepares to launch this pilot program, small business owners should stay informed about the latest developments. It’s a good idea to subscribe to SBA newsletters and follow updates on their website. Additionally, the SBA’s Export Finance Managers are expected to provide counseling to lenders interested in participating so they have the knowledge and resources to guide and support small businesses effectively.
by Jean Miller | Accounting News, Business Growth, News, Uncategorized
Securing the right funding for your small business is crucial for growth and stability. Asset-based lending is one option for financing for businesses that have strong assets and need access to working capital. But is asset-based lending the right choice for your small business? Below we go over the pros and cons of this approach to help you make an informed decision.
What Is Asset-Based Lending?
Asset-based lending (ABL) is a type of business loan that is secured by using a company’s assets as collateral. These assets can include a variety of tangible and intangible items that have value, such as inventory, accounts receivable, equipment, or real estate.
Asset-based financing can be easier to qualify for compared to other small-business loan options. However, if the borrower defaults on the loan, the lender can seize and sell the assets to recover their money.
The Process of Asset-Based Lending
In order to better understand your business’s financial health, your lender will first evaluate your business’s financial information, including its assets, financial statements, and credit history. Next, based on a thorough asset evaluation, your lender will offer a loan amount. This amount is typically a percentage of the value of the collateral, known as the “advance rate”. Generally, liquid collateral such as certificates of deposit or securities are more valuable to a lender because they can be easily converted to cash if you default on your loan. Finally, your lender will also establish the terms of the loan, including the interest rate, repayment schedule, and any associated fees.
Pros and Cons of Asset-Based Lending
Pros
- Access to quick capital. A primary advantage of asset-based lending is that it’s typically a quicker process than traditional loan approval. If your business needs funds urgently, such as covering unexpected expenses, this can be a significant advantage.
- Flexible terms. Because the loan is secured by business assets, this type of lending could be a better fit for businesses that don’t meet the strict criteria of conventional loans. Asset-based lending offers more flexibility than traditional loans, which can be beneficial for businesses that have a shorter credit history or imperfect credit scores.
- Lower interest rates. Because the collateral you provide reduces the lender’s risk, you’ll typically receive lower interest rates on asset-based loans compared to unsecured business loan options.
- Flexible financing. Funds from asset-based loans aren’t typically restricted. They can be used for various purposes, such as financing growth initiatives, covering operational expenses, or managing cash flow gaps.
Cons
- Risk of losing assets. If your business fails to repay the loan, your lender can seize and sell your business assets to repay the debt. If the assets you used as collateral hold strategic importance for your business operations, losing them could have adverse effects on your business.
- A thorough and time-consuming process. A lender’s assessment of your assets can be time-consuming and may require professional appraisals, audits, and legal documentation. Furthermore, some of your business assets may not qualify for an asset-based loan. Lenders generally prefer tangible and sufficient assets, so items such as specialized goods, perishable inventory, and equipment with high depreciation rates typically aren’t accepted as collateral.
- Costs and fees. While asset-based lending often comes with lower interest rates than other financing options, it’s important to consider other associated costs. Lenders can charge origination fees, appraisal fees, and ongoing monitoring fees, all of which can impact the overall cost of the loan.
Asset-based lending can be an effective tool for small businesses seeking access to capital, but the decision to pursue this type of lending should be made after careful consideration of your business’s assets, financial needs, and risk tolerance.
by Stephen Reed | Accounting News, Business Growth, News
Whether anticipated or unexpected, small businesses in every industry face a lot of challenges. Both veteran and new businesses need to be prepared, flexible, and adaptable in order to succeed. Here are the most significant business challenges in 2023.
Economic Uncertainty
The economy has been wavering for some time now, and it appears that we’re on course for the same in 2023. This makes long-term planning a difficult task. When the economy is more balanced, business owners are equipped to make better investments and more informed decisions. However, with rising inflation, as we have now, small businesses face the possibility of stalled growth. It will be imperative for small businesses to budget costs and manage their operations efficiently.
Inflation and Rising Costs
Small businesses are not immune to the effects of inflation. Increasing costs of raw materials, shipping, and energy can all influence the profitability of a small business. Whereas larger companies might be able to pass these costs onto customers, small businesses typically don’t have the pricing power to do so. To attend to this challenge, small businesses may need to reduce costs through more efficient operations, renegotiating contracts with suppliers, or exploring new revenue streams.
Hiring and Retaining Labor
Most industries have experienced a labor shortage since the onset of the Covid-19 pandemic. The inability to find and retain qualified employees could impact the ability of small businesses to deliver goods and services or focus efforts on growth. Small business owners should think about offering more competitive wages and benefits, improving working conditions, and investing in automation to help reduce the work load of employees.
Competition
Competition isn’t a new challenge to small businesses, but the pandemic accelerated the shift toward e-commerce and digital channels. It’s now up to small businesses to find a way to stand out from the crowd in order to retain existing clients and attract new business. They might want to consider investing in digital marketing and advertising, improving their website and social media outreach, and offering products or services that set them apart from competitors.
Funding
Securing funding will be difficult this year as lending firms await to see what the economy does. On the positive side, this is an opportunity for small businesses to stand out among the competition. Business leaders will need to come up with creative pitches that prove the value their company offers.
