Tax Reform and Deregulation Are Boosting Small-Business Optimism

The tone and the policies coming out of Washington are different, says McMahon
May 23, 2018 Updated: May 23, 2018

WASHINGTON—Optimism within the nation’s small-business world has soared to the highest levels this year as a result of President Donald Trump’s leadership, said Small Business Administration (SBA) head Linda McMahon at a National Press Club luncheon on May 17.

Small businesses are already benefiting from recent tax cuts by expanding their businesses, investing in new equipment, and creating new jobs, according to McMahon.

The tax reform bill signed into law last year offers a deduction of 20 percent of income for pass-through entities such as S corporations and LLCs. Under the old tax code, pass-throughs were taxed at 39.6 percent. In addition, businesses can immediately deduct the full cost of their investments in new equipment under the new tax code.

Recent surveys have shown that small businesses are hiring and investing as a result of the windfall they get from tax reform.

According to a nationwide survey conducted by Bank of America, 71 percent of entrepreneurs expect the tax cuts to save them money. The survey also found that 37 percent of small businesses are planning to invest in their businesses, 21 percent plan to increase wages and benefits, and 14 percent expect to hire new workers in 2018 as a result of the tax cuts.

Another survey by the National Federation of Independent Business (NFIB) shows that three-fourths of small-business owners believe the tax cuts will have a positive effect on their businesses.

In recent months, NFIB’s small business optimism index reached one of its highest levels in 45 years. The index sustained record-high levels in April, driven by reports of improved profits, the highest in the NFIB survey’s 45-year history. In addition, the number of small businesses reporting weak sales dropped to a near record low.

According to McMahon, the surge in small-business optimism didn’t happen by accident.

“It’s not the result of some cyclical realignment. It’s not happening because of public policy decisions that were made years ago,” she said. “It is happening, I believe, as a direct result of this president’s leadership. Both the tone and the policies coming out of Washington are different.”

Besides tax cuts, another factor driving small-business optimism is regulatory relief. Committed to cutting red tape, the Trump administration eliminated 22 old regulations for every new regulation introduced last year. The administration continues to roll back regulations to reduce time consumption and compliance costs for businesses.

The average cost for small businesses to comply with federal regulations is $11,700 per year per employee, compared to $9,000 for large firms.

“That’s a lot of money to take out of the bottom line of a small business,” McMahon said.

Despite rising optimism, small businesses complain about increasing healthcare costs. The Trump administration is trying to address the problem by “looking at changes that could make health care more affordable and more accessible for small businesses,” she said.

McMahon also touched upon the challenge of finding skilled workers, which is an ongoing problem for small businesses.

“It is not just skilled workers that they need, but … workers who basically have a work ethic,” she added.

During her meetings with entrepreneurs throughout the country, McMahon was surprised to learn the impact the opioid crisis has had on small businesses.

“I really was surprised at the opioid issue and how prevalent it is in preventing many small businesses from having the workforce they need,” she explained.

McMahon advised small businesses to focus on unique and personalized services against online competition.

“That personalized service makes so much difference, and you can’t do it online,” she said.

McMahon, who is co-founder and former CEO of World Wrestling Entertainment, also talked about ups and downs of running a business. She said going through bankruptcy early in her career was a tough experience.

“Our house was auctioned off, my car was repossessed in the driveway. I was pregnant with our second child,” she explained.

She and her husband, Vince, came out of bankruptcy and turned their small business into a global company with a market valuation of nearly $4 billion.

“If you want to start a business, you may not succeed, [but] give it a shot, take a risk. Don’t be afraid to fail,” she said.

According to McMahon, one of the reasons entrepreneurs often fail is because they are not well capitalized and they don’t know how to manage cash flow. She advised business owners to protect the downside and learn how to effectively manage cash flow.

Small businesses are the backbone of the economy, creating nearly two out of every three new private-sector jobs each year. According to SBA, more than half of Americans own or work for a small business.

SBA guarantees loans for entrepreneurs, mitigating a lender’s risk. In addition, the agency provides counseling, training, and mentorship programs to small-business owners.

SBA loan programs provided more than $30 billion to small businesses nationwide last year.

Nearly 85 percent of SBA-backed loans are under lending program 7(a), which covers a wide variety of small-business needs, including working capital, machinery and equipment financing, and export support.

Follow Emel on Twitter: @mlakan