It’s easier for big companies like Walmart and Home Depot to award employees bonuses and raises now that there’s a new tax law because they already know their top tax rate is dropping to 21% from 35% under the old law. But millions of small business owners are far less certain about whether they’ll be able to reward their employees.
The law provides 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% 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. As a result, giving bonuses or raises in response to a potential tax cut could leave smaller companies vulnerable to a cash flow crisis.
