Tax cut, bonuses for workers?
Many businesses not sure yet
NEW YORK — Small business owners may want to hand out bonuses and raises now that there’s a new tax law, but many don’t know if they’ll have any wealth to share.
“We didn’t base any raises or bonuses on the tax situation because, quite frankly, until it actually happens, no one’s sure what’s going to happen,” says Rod Hughes, a vice president at Kimball Hughes Public Relations in Blue Bell, Pennsylvania. The company gave its seven full-time employees year-end bonuses last month.
It’s easier for big companies like Walmart and Home Depot to award bonuses because they already know their top tax rate is dropping to 21 percent from 35 percent under the old law. Millions of small business owners have far less certainty.
The law provides for a break for the owners of sole proprietorships, partnerships and small businesses structured as what are called S corporations. But while they can deduct 20 percent of their business income, the size of the deduction declines when an individual owner’s taxable income reaches $157,500. And the IRS still needs to issue regulations on how these owners’ business income is calculated.
“The 20 percent deduction is extremely complex and it’s going to require a complete understanding of how the statute works,” says William Hornberger, an attorney with tax expertise at the firm Jackson Walker in Dallas.
Big companies also have an advantage because they have billions of dollars in cash reserves. Small and mid-size businesses often don’t have such cushions or access to big lines of credit that can help pay operating costs if revenue slows. Giving bonuses or raises in response to a potential tax cut could leave smaller companies vulnerable to a cash flow crisis.
Even when tax professionals have more clarity about the law, small and mid-sized companies are likely to hold off. Owners typically give raises at the end of the year or early in the new year, after they have assessed how employees and the company overall have performed. If owners have a sense of what their revenue and profits will be in the year ahead, that goes into the mix as well.
Mark Carpenter has consulted both of his accounting firms about the law, and gotten different opinions about its potential impact on his roofing company.
“We need to see how the rules change and if it allows us to raise wages,” says Carpenter, whose business, Columbia Roofing & Sheet Metal, is based in Tualatin, Oregon. He’s already given employees raises and bonuses based on the company’s performance, but needs to be careful with cash flow because the business is growing rapidly.
It’s not known exactly how many companies overall have awarded raises or bonuses based on the law. The most recent report on employee wages from payroll company ADP covers the fourth quarter of 2017 and doesn’t reflect the impact of the law. But the first-quarter report also may not reveal any trends because it won’t specify the factors that go into higher pay, spokeswoman Allyce Hackmann says.
Many business owners say they don’t base decisions, including raises and bonuses, primarily on how much money they might save on taxes. Small business advisers say they’ve been seeing their clients holding to that conservative approach since the law went on the books in December.