Tax Cuts a Boon for TC Businesses
Sweeping federal legislation that provides lucrative tax cuts to businesses also is helping to fatten the wallets of Traverse City State Bank’s employees.
The bank announced in February that it was giving each of its 90 employees a one-time $750 bonus because of the federal tax overhaul that President Donald Trump signed in December and the bank’s strong performance last year.
“The tax reform has aided us in returning more funds to our staff in their paychecks and in turn, these bonuses will provide an additional boost to our local economy,” said bank CEO Connie Deneweth.
Those bonuses are an early tangible impact of a complex law that many small businesses are still digesting. It’s the biggest tax law rewrite since 1986. But most businesses will likely benefit from the steep rate cuts and other provisions of the law.
“One broad conclusion about the law is the overall reduction in rates,” said James Taylor, a partner in the certified public accounting firm Dennis, Gartland & Niergarth in Traverse City. “That’s going to help out a lot of taxpayers.”
Businesses will benefit not only from a cut in the corporate tax rate from 35 to 21 percent, but also from a 20 percent deduction on pass-through income for businesses organized as S corporations, limited liability corporations, partnerships, and sole proprietors.
In a pass-through business, profits are passed to the owners of the business, who report the income on their individual returns and pay tax on it. Individual tax rates also were trimmed in the new tax law.
“The biggest item in the bill for small businesses is the 20 percent pass-through deduction,” Taylor said. “That will impact a lot of people, but they must do some planning because of various limitations.”
For example, personal service firms will see their deductions limited unless owners’ annual taxable income is less than $315,000 for married couples or $157,000 for singles, according to a summary of the law provided by Taylor’s firm.
Businesses in the Traverse City area’s growing wine, craft beer and distilled spirits industries will get a boost from a steep cut in alcohol excise taxes designed to benefit small producers.
For wineries, a new tax credit on the first 30,000 gallons produced drops the effective excise tax rate from $1.07 a gallon to seven cents a gallon, according to Wine America, a trade group. The tax credit is gradually reduced at larger production volumes. And the law increases the allowable alcohol level for table wine from 14 to 16 percent.
“The wine business is pretty expensive to be in. We constantly have to plant new vineyards, buy new tractors and mechanize operations,” said Eddie O’Keefe, president of Chateau Grand Traverse. “I don’t think anybody in business is going to say getting a tax break is a bad thing.”
O’Keefe said the excise tax break and the pass-through income deduction will likely allow him to invest more money in his business and possibly hire several new employees — if he can find them in a tight labor market. The winery employs about 38 full-time equivalent workers.
“Anything we’ve ever gotten, we’ve invested back into the business in additional labor, equipment and wages,” he said.
“Under the old rules we were able to deduct 50 percent of the cost of new equipment with the remainder deducted over five years,” said Tonya Wildfong, communications director at Elmer’s. “The new law allows us to deduct 100 percent of both new and used equipment until it starts phasing out in 2023.”
Including the purchase of used equipment in the tax break might help construction companies upgrade their fleets, particularly if a strong economy leads to a shortage of new trucks and other equipment, she said.
“The result may be a quick stimulus for our heavy construction industry, if workload and equipment needs increase and new manufacturing cannot keep up with demand,” Wildfong said.
But Elmer’s and other firms are using caution not to be caught with too much equipment and not enough work, as many companies were during the Great Recession, she said. Elmer’s employed 467 across its operations in northern Michigan at the peak of last year’s construction season.
Not every business expects to see a direct benefit from the new tax law.
After an initial consultation with tax advisers, Beth Holmes-Bozung, a founder and principal of Safety Net Inc., said her company is unlikely to profit from the tax law.
Safety Net, an information technology firm headquartered in Traverse City and with an office in Farmington Hills, is organized as a pass-through S corporation. But Holmes-Bozung said her company won’t be able to take advantage of tax breaks for pass-though businesses because of various limitations in the law.
“There are some fairly complicated calculations involved with a lot of exceptions,” she said.
Holmes-Bozung is banking on stronger economic growth as a result of the new tax law to boost demand for Safety Net’s services.
“We certainly don’t expect the law to be a windfall, but it could be if it results in economic growth,” she said. “We don’t make plans around tax law. We make plans around our business prospects.”
If there’s any business that likes major tax law changes, it’s an accounting firm. Taylor said his firm is scrambling to prepare client returns for the 2017 tax year while advising them on the multitude of changes for 2018.
“Our clients are looking for additional tax planning services,” Taylor said. “It’s kind of fun, too, to be able to apply the new law and help people.”