The Impact of Federal Tax Reforms on Small Businesses

Tax reforms seem to come and go every few years, but the recent changes introduced by the Inflation Reduction Act of 2022 and the proposed Tax Relief for American Families and Workers Act of 2024 could have real staying power. As a small business owner trying to navigate the ever-changing tax environment, you may be wondering—how will these new reforms actually affect me?

While the objectives behind the reforms are complex, ranging from stimulating the economy to encouraging green investments, the bottom line is they aim to provide tax relief and incentives to small businesses like yours. But understanding the nuances of the new legislation is key to taking full advantage of the opportunities they introduce.

In this article, we’ll break down how adjustments to tax rates, deductions, credits and more could impact your tax planning, cash flow and long-term investments. We’ll also explore some sector-specific incentives and tips for leveraging the reforms to drive growth.

tax reform impact small business

How Tax Rate Changes Directly Impact Your Bottom Line

Let’s start with arguably the most basic but impactful change: adjustments to federal income tax rates. Even minor rate changes can significantly affect your net profits and thus what you owe Uncle Sam each year. For example, the Tax Relief for American Families and Workers Act of 2024 proposes modifications that could lower rates across the board for small businesses. Understanding the implications of an even 1% shift could inform everything from your forecasting to hiring budgets.

Similarly, the Inflation Reduction Act introduced some measures targeting sustainable businesses with credits and deductions. So while they may not alter your rates outright, building energy efficiency into your operations could indirectly reduce your effective tax rate.

Deductions and Credits Can Encourage Specific Investments

Beyond rate adjustments, some of the most powerful tools in the tax code are deductions and credits. By redefining what expenses qualify for deductions or expanding certain credits, reforms can incentivize investments in areas deemed beneficial for the economy.

For instance, enhanced R&D deductions (as suggested in the Tax Relief for American Families and Workers Act) would allow immediate full write-offs of research expenses, thus encouraging innovation-driven companies to double down on development. Similarly, credits for renewable energy installations (as seen in the Inflation Reduction Act) might motivate some small businesses to install solar panels or upgrade to more efficient HVAC systems.

The key to maximizing your savings is to identify deductions and credits relevant to your specific operations and growth plans. Each new tax reform creates an opportunity to review your priorities and determine the most profitable path forward.

Administrative Changes Attempt to Simplify Compliance

Though not as flashy or attention-grabbing as deductions and credits, administrative changes to filing and documentation requirements are equally important. Onerous record-keeping and form filing tends to sap small business owners’ time and resources.

In an effort to reduce this burden, many reforms aim to streamline compliance standards. This simplification can take many shapes, whether reducing the number of mandatory forms, increasing e-filing adoption through pre-population or even modifying deadlines. These small process improvements stack to save you time and stress, allowing you to focus more on customers and less on red tape.

Incentives May Encourage Investments in Specific Asset Classes

Thus far we’ve discussed mainly indirect incentives and savings, but certain tax reforms take a more direct approach. Reforms often include provisions specifically encouraging capital investments in physical assets like technology, equipment and facilities.

For example, the proposed Tax Relief for American Families and workers act could reset bonus depreciation back to 100% (rather than the 80% it had fallen to in 2023). This would businesses immediately deduct 100% of eligible asset costs rather than depreciating them over time, accelerating write-offs to match the pace of modern equipment turnover.

Through provisions like this, tax reforms can have a significant impact on your approach to asset investments and fixed asset planning. These cost savings then compound by improving ongoing cash flow as you upgrade facilities and tools sooner than would otherwise be feasible.

Sector-Specific Incentives Provide a Boost for Targeted Industries

Though broad tax reforms are wide-ranging, they tend to include certain sector-specific provisions as well. Legislators build in provisions aimed at not just general business growth but targeted economic priorities. The Inflation Reduction Act’s many green-energy incentives are the perfect example of this. From production credits for solar manufacturers to deductions for energy-efficient buildings, this recent tax reform included several targeted incentives.

In short, not all businesses are equally impacted by tax reforms. The Inflation Reduction Act may not have meant much for furniture manufacturers, but it was certainly a big deal for solar panel installers. Understanding existing and upcoming credits and exemptions for your niche allows you to ride potential waves within your industry.

Tax Planning Is Crucial to Capitalize on Opportunities

No matter how many changes our tax code may see, one thing remains certain: smart tax planning is essential for small businesses hoping to seize opportunities and savings. Proactive planning allows you to align operational decisions with strategic tax goals. Partnering with a specialty tax firm can prove invaluable for staying abreast of reforms and mapping out how to integrate savings into your growth plan.

Turn Change Into Opportunity

Though the uncertainty of tax reforms can feel unsettling for small business owners, perspective and planning help transform change into opportunity. Staying informed on legislative impacts allows you to maximize advantages relevant to your situation.

Rather than simply reacting to each policy shift, you have the opportunity lead the way by taking charge of your tax strategy and leveraging reforms for all they’re worth. Your future self will thank you when those opportunities compound into something far greater down the road.

Don't let the complexity of tax legislation hold your business back. Contact Engineered Tax Services today to discover how we can assist you in navigating current and future tax reforms, enabling you to turn change into opportunity and secure a more prosperous future for your business.

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