How Trump's New Tax Bill May Impact eCommerce

Feb 06, 2018

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As you’ve almost certainly heard by now, Congress recently passed its long-awaited - and long-debated - tax bill.

Officially known as the Tax Cuts and Jobs Act of 2017, the Republican-backed bill is poised to have a huge impact on both consumers and business entities throughout the United States. However, as the bill has been revised numerous times by both the House and the Senate leading up to its final version, speculation about what the finalized bill actually entails - and just how, exactly, it will affect the country.

Now that the dust has settled, and the details of the bill have become official, we can take a look at some of the major changes we, as ecommerce professionals, should expect to see in the years to come.

(Note: While the bill features a number of changes that will affect major corporations, we’re going to focus on the changes that will matter most to small business owners and their customers.)

Three Major Ways the New Tax Bill Will Impact eCommerce

If we’re looking at the big picture, the truth is that every aspect of the new tax bill will, in some way, affect your ecommerce business.

(Of course, writing this article from such a chaos theory-esque perspective would lead us down an endless rabbit hole of “What if?” scenarios that probably wouldn’t be all that helpful.)

So, instead of droning on ad nauseam about the seemingly infinite ways in which the new tax bill might affect your company, we decided to dig into the major changes brought about by the tax code that almost certainly will impact your business in the coming years.

Let’s dive in.

Pass-Through Business Income

As the owner of a small ecommerce business, it’s highly likely your company operates as a pass-through entity.

Essentially, this means that you claim the profits your company generates on your individual tax forms as part of your overall income.

Before the New Bill

Prior to the passage of the Tax Cuts and Jobs Act, pass-through business owners were required to lump their entire pass-through income into their individual income statement.

Fundamentally, this meant that any pass-through business owner who found themselves in the top tax bracket would face a 39.6% taxation on their combined income (regardless of whether it came from their business or from their day job).

After the New Bill

The nature of claiming pass-through income remains the same: profit earned via your ecommerce business will still be considered part of your individual income.

However, the new law allows pass-through business owners to deduct 20% of their business’ earnings before adding this amount to their individual tax return. For example, if your business brought in $100,000, you’d only need to claim $80,000 of it on your individual tax return (in addition to any other income you generated throughout the year, of course).

(Note: A threshold of $157,500 for single filers and $315,000 for married couples exists, at which point certain limitations on deductions apply.)

Of course, the example provided above is rather straightforward; things can get much more complicated depending on a variety of factors. Essentially, though, small business owners - whether sole proprietors or a collection of partners - will typically be able to claim this new deduction on their individual tax return for the coming year.

“This 20% income deduction provides an opportunity for small business owners to reinvest 20% of their profits tax-free. It would behoove small business owners to carefully manage their bottom line to take advantage of this tax benefit.
For example, contributing on the business level to a retirement vehicle could potentially reduce small business owners net income under the qualifying thresholds. This would create a win-win scenario whereby a small business owner would benefit from the 20% tax deduction and tax savings on the retirement contribution.”
- Jonathan Bander, CPA and Managing Partner at Rich & Bander, LLP

Implications

While this change in law won’t necessarily affect your ecommerce business directly, per se, it will certainly affect you as the owner of said business.

Needless to say, the ability to keep more of the money you’ve earned through your business is certainly a good thing.

But the implication for small business owners who are either just getting their company off the ground, or who are struggling to keep it afloat, is much greater. For these individuals, the prospect of receiving such a tax break could be the incentive they need to push forward rather than declare their venture a lost cause.

“In addition to the 20% deduction, new individual tax brackets have been established. Most taxpayers will find themselves in a reduced tax bracket. The deduction, combined with a reduced tax rate, could potentially allow for more profits to be reinvested. These breaks were intended to provide growth capital and stimulate the economy”
- Jonathan Bander, CPA and Managing Partner at Rich & Bander, LLP

On top of all this, the ecommerce industry has been continuing to grow as it is - even before the new tax bill came into play. Says House of Fluff’s ecommerce consultant Danielle Cafiero: “(We) can assume that the new cuts for businesses will only add more flame to the already hot ecommerce industry.

Full and Immediate Expensing

Expenses are a surety for business owners of any kind.

Typically, these expenses can be written off during tax time, allowing the company in question to recoup at least a percentage of the cost of doing business.

Before the New Bill

Previously, businesses were required to take depreciation into consideration when writing off certain assets as business expenses.

Under the old tax code, there was a special accelerated depreciation allowance called “bonus depreciation.” on qualifying assets. This allowed for 50% of the asset purchase to be taken in year one and the remaining balance to be amortized over the assets useful life.

After the New Bill

Under the new tax code, bonus depreciation has been increased to allow businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation will then be phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.

As it currently stands, companies can now write off 100% of the value of most equipment and assets purchased for business purposes.

Using the example from above, a company purchasing a $5,000 computer - no matter how long it plans on using it - will be able to write off the complete $5,000 price tag come tax season.

Implications

The immediate implications of this new law are obvious: Because companies will be able to recoup 100% of most of their expenses for the next five years, they will likely invest in technology and other assets that will help spur growth within their business.

As Victor Calanog and Barbara Byrne Denham of REIS explain:

 “E-commerce companies...that were contemplating the decision to build their own warehouse (or) distribution facilities may accelerate their plans (due to the new law).

While the immediate change certainly benefits small businesses at the present moment, time will tell where things will stand when the maximum deductible amount begins to taper off in five years.

Individual Deductions

As we said earlier, even the changes that don’t directly affect your ecommerce business will affect it in one way or another.

With that said, let’s take a look at how the new tax bill will affect the everyday American citizen.

Before the New Bill

There’s a good amount to look at here, so let’s run through it in list form.

Before the new bill was passed, the following applied to the individual taxpayer:

  • Standard deduction limit of $6,350 for single individuals, and $12,700 for married couples
  • Personal exemptions of $4,050 allowable
  • State and local taxes were deductible up to a certain limit for higher-income filers
  • Child tax credit of $1,000 allowable for couples earning up to $110,000

After the New Bill

Again, let’s take a look at the changes as a list:

  • Standard deduction limit raised to $12,000 for single individuals, and $24,000 for married couples
  • Personal exemptions are no longer allowed
  • State and local tax deductions are now capped at $10,000
  • Child tax credit amount increased to $2,000 for couples earning up to $400,000

Implications

For the most part, the average American citizen will likely receive more from their next tax refund than they had in recent years.

Additionally, the US Treasury estimates that 90% of people who receive a paycheck are likely to almost immediately see more take-home pay.

As the owner of an ecommerce business, you certainly stand to benefit from your customers having more money in their pocket, right?

As explained by spokeswoman Bethany Aronhalt of the National Retail Federation:

“All retailers, including traditional and online sellers, will be better off as both a lower corporate tax rate and higher consumer spending have a positive impact on their bottom line.”

Wrapping up

Assuming, of course, that you plan on taking full advantage of the newly-implemented expensing deduction, and that you plan on investing at least some of the money you saved through the pass-through law, the coming years will be prime time for your ecommerce business to take off.

Again, though, while all seems pretty well and good on paper, only time will tell how these new laws end up affecting ecommerce entrepreneurs in the years to come.

Topics: E-Commerce

Matt Duczeminski

Written by Matt Duczeminski

As one of our Content Superheroes here at Sales & Orders, Matt writes awesome pieces geared towards helping E-Commerce business owners get more out of their marketing.

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