The Trump administration is pondering yet another new tax cut. Will it happen? If it does, then it could be a very, very good thing for small businesses around the country.
The tax reduction is aimed at capital gains. Right now if you’ve got an asset – like stock or equipment – and you sell it, you’re likely subject to a 20% tax because it’s considered a capital gain. The Trump administration is proposing change to that rate by taking into consideration the impact of inflation on this gain and allow investors to exclude it.
So for example if today you sell an asset that you purchased 20 years ago for $10,000 and your cost was $7,000, you would have a $3,000 gain. If the administration’s proposal goes through then you would be allowed to exclude the inflationary effects of that gain over the past two decades, which means your gain would be lower and you would pay lower taxes.
This is far from a done deal. If the administration cannot persuade Congress to legislate their proposal then the Treasury department – which oversees the Internal Revenue Service – may go forward with it anyway, taking the position that it’s just a rule change that doesn’t require legislation. Putting aside the continuing (and terrifying) effects that lower tax rates will have on future deficits, challengers are calling the idea just another tax gift to the rich and opposition is fierce. Regardless of whether it’s a rule change or actual legislation, it’s sure to face a vigorous test in the courts.
I understand these concerns. But, regardless, I like the idea. Mainly because any reduction in the capital gains rate would benefit small business owners like myself. Here are five reasons why.
Cashing in savings, and putting it to use
Since recovering from the Great Recession of 2009, many of my clients have slowly been generating – and hoarding – their cash. A few have used their profits to purchase equipment or property. But most have stuck their money into mutual funds and other stock-backed investments. A lowered capital gains tax would encourage some of them to cash in a portion of those savings and put it towards more productive use like hiring people or making other, more operational business investments.
Customers have more spending power
Second, my customers would be more flush. Even with the economy doing as well as it is, I still encounter plenty of resistance from prospective companies when it comes to them investing in the software and technology services my company sells. Sure, it may be that I’m a lousy salesman. But part of their reason is that they still have rather strong memories of the last big downturn and are reluctant to part with their money. An added tax incentive like this will certainly generate more activity in the markets and just as certainly push stock values higher. This will make my customers (and prospective customers) feel wealthier. It would also be the tipping point for some them to cash in some of their stocks and buy my products – which I know will help them grow in the long term.
More businesses put on sale
Third, more business owners will sell their businesses. According to business-broker site BizBuySell, last quarter was yet another record one for business sale transactions. It’s easy to see why. With the economy as strong as it is, the aging boomer-population are selling their businesses to an eager and growing millennial generation while interest rates and inflation are still relatively low. With a reduced capital gains tax rate, I would expect a number of these boomers who have owned their companies for decades and have been looking for the right opportunity to exit and play a few more rounds of golf to take the leap. That not only means a nice extra payout for them, but more opportunities for entrepreneurial buyers.
More investment
Next, there would be more investments in small businesses. Today, there’s a relatively little known tax rule called “1202” (which references a section in the IRS code) that allows investors to exclude as much as 50% of their gains on the sale of the stock of a “qualified” small businesses even up to the point of paying no taxes if a stock is held for more than five years. Although the qualification is pretty large (small businesses can have assets up to $50m) there are other requirements – such as filing status and number of shareholders – that have precluded many of my clients from taking advantage of this rule. A reduction in the capital gains rate may encourage those who don’t want to take advantage of the 1202 rule to invest more in small businesses, knowing that they can still benefit from a tax break if and when they eventually sell.
Trickle down
Finally, there’s trickle down. Go ahead, argue with me on this. You wouldn’t be alone. But to me, there’s no question that more money in the pockets of business owners, entrepreneurs and other so-called “wealthy” gets spent on things like clothes, restaurants, landscaping, plumbing, new construction, vacations, tutors, charities, furniture, electronics, pizza shops and all sorts of other things that make life in the Western world in 2018 so great. Who receives this cash? Walmart, Microsoft, Amazon and tens of thousands of small businesses who are merchants, contractors, restauranteurs, retailers and service providers. When the rich get richer, everyone who services them also benefit.
So yes, the Trump administration’s proposed “Tax Cut 2.0” would benefit the wealthy. It will face harsh opposition. It will increase the deficit. But let’s admit that it will also potentially put more money in the hands of small business owners too.
Gene Marks is a columnist, author and small business owner. His company, the Marks Group PC, provides technology and financial management services to SMBs in the US and abroad.