GOP Tax Proposal Could Affect Tech Jobs

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How will the GOP tax proposal affect jobs in tech?

Congressional Republicans’ much-publicized tax overhaul could prove disruptive for those in the tech industry.

Critics of the GOP plan insist that it will line the pockets of already-wealthy corporations at the expense of pretty much everyone else. Proponents call it a once-in-a-generation opportunity to tear down tax rules that contribute to bloated government. Whichever side of that fence you fall on, there are glaring signs that the proposed tax bill will cause many in tech to re-examine their futures.

First, this tax plan allows for greater deductions for manufacturing and infrastructure investments. Instead of a 50 percent write-off, companies can now deduct 100 percent of investments.

‘Investments’ is a nondescript term that nonetheless includes automation, a big focus of many tech companies at the moment. Speaking to the Huffington Post, corporate tax attorney Robert Kovacev said the provision would “accelerate spending, basically, on robots that could displace workers.” This provision expires in 2023, which means companies will move swiftly to automate (meanwhile, a ‘robot tax‘ potentially looms).

Corporate research and development (R&D) may also be in trouble. On the chopping block is a tax break that allowed companies to recoup engineering costs related to R&D. The Joint Committee on taxation says companies will file for $10.3 billion in research credits next year.

Artificial Intelligence assistants are actually pretty dumb

Small Tech Business

The second big hit affects those companies with pass-through income, which the Brookings Institute estimates is about 95 percent of domestic businesses. In a nutshell, income is considered ‘pass-through’ when it flows from a business directly into the pockets of those running it. LLCs, S-Corporations and other sole proprietorships are considered pass-through entities.

Pass-through income determines personal tax liability as well as Social Security and Medicare taxation. Personal tax liability has a limit of 39.6 percent (or as little as ten percent, depending on which bracket you fall into), which isn’t new. Social Security and Medicare taxes can hit 15.3 percent; The Tax Foundation says most pass-through businesses are taxed at the maximum rate of 46.2 percent.

An addendum to the bill would allow those small companies to qualify for a 25 percent tax bracket so long as they jump through a few hoops. Most notably, LLCs must file as an S-Corp; unlike an LLC, an S-Corp cannot have non-U.S. citizens or residents as owners, and have restrictions on being or owning subsidiaries (you can’t have an LLC that owns an S-Corp, for instance).

The new S-Corp tax rate allows a business to report 70 percent of its earnings as pass-through, and retain 30 percent as business income. The pass-through personal income is taxed at the traditional rates, while the 30 percent business income is taxed at the new 25 percent rate. Depending on how your income shakes out, this could prove beneficial if it slots you into a lower personal tax bracket.

S-Corps must have bylaws, issue transferable stock, hold director and investor meetings with minutes and corporate records, assign or elect directors and officers, and exist with an eye toward the long-term. If you just want to make some endless-scrolling games for Android, the S-Corp stretch may not be worth the risk. While an LLC can exist as a subsidiary, an S-Corp can be wholly assumed via stock purchases.

Moreover, professional services are excluded from the 70/30 tax break. Shoot-‘em-up app developers can likely get crafty with taxes, but individual consultants may not have the same opportunity.

But who’s really affected? According to the Small Business Administration (SBA), just about everyone. It says small businesses make up 99.9 percent of U.S. employer firms. Furthermore, 80 percent are non-employer (businesses without employees, or single-person entities), and 86.4 percent are sole proprietorships (typically, but not always, LLCs) while 4.7 percent are S-Corps. Around 60 percent of firms without paid employees are home-based.

As the SBA goes on to note, 98.5 percent of tech is small employer firms; 46 percent of those companies offer “computer system design and related services,” while 36 percent provide “architectural, engineering and related services.” The remaining 18 percent fall into the ‘other’ category. The number of “software publishers” grew ten percent between 2012 and 2014.

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Re-Evaluate What You’re Doing

If you’re involved in manufacturing, this might be a good time to consider a career shift. Even if you’re not directly pulling orders or driving a forklift, the tax incentives may encourage large and small companies to pull the trigger on upgrading to an automated platform, which may have a ripple effect on jobs elsewhere in the company. Happily, most indicators suggest automation will have no negative effect on the number of jobs available to people, just the kind of work we will do.

Independent developers or those running small businesses should examine their tax liability, and consult with an accountant. The S-Corp exemptions look great at first blush, but a closer examination shows it may have a sizable impact in the long term.

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18 Responses to “GOP Tax Proposal Could Affect Tech Jobs”

  1. This bill targets high tax rate states like NY, CA who gets high deductions and obviously this will create a level plain field for all states. Your article on small businesses getting affected with tax increase is not true.

    • Did you read the bill, or are you just recycling someone else’s statement? I have been looking for a long time for this bill to read it in it’s entirety. NY and California pay more taxes to the federal government than other states. So it was a leveled playing field when the states who contributed more to the federal budget, got some reprieve. Also as I reread the article, the author writes that unless you make the switch to a S-corp, pass through entities will not see any benefit from this bill; and deductions that were offered before won’t be available to some. What does that mean Mr. Joseph, when one is making the same income as last year, but they have a decrease in deductions? that means their taxable liability increases i.e. increase in their taxes. So your statement is wrong. Please don’t use words like obviously, when nothing is obvious at all. Also, if there is no need for a product/service, all the tax breaks in the world will not increase employees. I’m not going to hire anyone, if the demand is less than the supply.

      • Bill is so Good! its a huge break for small business… “NY and California pay more taxes to the federal government than other states”. NO they pay same tax rate like other states, it is not a level play if they get more deductions. If all states pay 20% fed tax, they should get same deductions. No matter how much you make and produce. If NY, CA feels burdens they should reduce their state taxes and other silly NY taxes. When comes to Income tax If I make 1 Million I pay more tax , and anyone with 100K pay less tax? It doesn’t sound right, when you talking about corporates taxes getting a pass in NY, CA, NJ.

  2. RE: “…an S-Corp cannot have non-U.S. citizens or residents as owners, and have restrictions on being or owning subsidiaries (you can’t have an LLC that owns an S-Corp, for instance).”

    Good! I am so tired of hearing about a business being “multi-national”. If you aren’t a U.S. Citizen, then you have no reason to owning anything in the U.S., in particularly any form of business.

    Having previously a sole-proprietorship, and looking into whether it could or should be converted to either an LLC or an S-corp, I have been dumbfounded over the definition and rules that govern an S-corp varies from state-to-state. The same can also be said for an LLC. An S-corp was designed specifically so that sole-proprietorships could be converted to some kind of corporation, still be owned by 1 person (who happens to be the only stockholder), and taxes are at the personal residential tax rates of the owner, so the S-corp does not file a corporate income tax return.

  3. Many large companies have already indicated that will use their tax break to automate or give back to shareholders not to increase jobs yet Congress persists in moving forward with this bad tax bill. Automation is coming, with or without, this tax bill so people better get ready. And, with Congress gunning for Social Security and Medicare, I don’t see a Minimum Guaranteed Income for people who have been displaced by automation and cannot be retrained to take on new work. The bottom line is that this tax bill is nothing but a reverse robin hood scheme to steal from the middle class and give to the rich.

  4. Small business stocks are at record high. The ETF IWM, that tracks Russell 2000(small business) shot up when the prospect of tax reform passing went up. I am confused by this article and what I see in wall street!!!

  5. Christine Lee

    Stick to technology and not your anti-trump rhetoric.

    Most IT people are not in the non-taxable income bracket. In fact, with an average salary of 50 to 70k, we’ll all get a tax break. Those of us who earn more might not get a tax break, but you won’t pay more.

    With a lower capital gains tax will directly benefit your business.

    Don’t pretend you care about the deficit, you didn’t when Obama was in Office.

    And, the deficit will close as we expand our trade gap and get our government to stop spending.

    • Christine,

      What good are tax breaks if your low skill, low education job has been taken by a robot, and you can’t get a job because no one needs widget makers any more, they need educated automation specialist. If you actually read the article, and were the analytical sort like the rest of IT-dom, you would have something to offer besides crying ‘fake news’. This tax plan is going to have positive and negative affects on everyone and everything not unlike the ACA (admittedly). You need to be open to the fact that you, or someone close to you, could be effected negatively by this tax plan, and that it deserves more analysis than it is being given.

  6. merle grall

    Automation is coming? Got news for you, it’s here, has been here and increasing since the 1800’s. Work going to machines is nothing new. A primary reason some jobs, particularly manufacturing, go offshore is for cheaper labor, cheaper even than a machine. Automation will still come to replace that cheaper worker, but then it will be in that foreign factory and not here. We need the automation here and a workforce that knows how to support it. The last thing we need here are more low and unskilled human laborers (stop immigration in all forms , especially ILLEGAL !). Time to put up the no vacancy sign and concentrate on educating the people here rather than allowing our overpopulation crisis to keep ballooning.

    • You are comparing apple to oranges, this discussion is on Tax reform and AI automation, nothing to do with your 1800’s analysis. The truth is companies will opt for cheap labor, that can do same repetitive jobs – it is the business practice. If they find cheap labor under water they will hire fishes and it foolishness to say corporate people hire unskilled worker. It nothing to do with skills, it all about rate for same tasks – don’t fall for your ego. Your statement – “concentrate on educating the people here ” , this segment is ridiculous, you have the highest spending per person in education, when comparing to the whole world education spending. Business has no boundaries or state lines, if you hold anything too hard you will lose it!

      • It’s not apples to oranges. He has a point about automation and disruption, which is valid, regardless of the industry we consider. Automation replaces some jobs, ie, roles, but others are created. And it is true that automated producers need skilled employees to run them. So the issue for anyone whose job could be replaced by automation, is to look for new opportunities and prepare for them.

  7. Everyone is an indiot

    Hey Christine,

    None of this is anti Trump rhetoric, but that’s the problem with you blind sheep. Discussing the reprecautions of GOP tax plan is a part of life (hence cause and effect). And thus isn’t talking about IT jobs; tech is deeper than that, nor bashing the president. Stick to your funny faces and pathetic Trump defenses. Hopefully one day you will wake up one the “right” side of the bed. Maybe after you realize you are just as negatively impacted by these politicians as everyone else.

  8. Ok folks let’s get real here. Little, if any, of the so-called “work” that our “representatives” do is to the benefit of the average work-a-day person or the ones smart enough to have their own business. They are ALL bought and paid for by Big Corp and Wall Street (Las Vegas East) moguls and their untold billions they donate to “campaign contributions”.

    In addition there are maybe a handful of our so-called “representatives” who are actually intelligent enough to even read a bill with this complexity, much less write one. I mean to you actually think ANY of them has read the bill and understand how it fits into the already tangled web of the current tax code? The tax code is beyond, beyond complexity. It is 73,000+ pages of indecipherable, undecipherable tangled web of legal-sleaze to any human being. In addition ALL these tax bills do not originate from the desk of our “representatives” who worked ponderously night after night writing the bill. No they originate in these massive New York and Washington think tanks and then are presented to our “representatives” who vote on it knowing very little(if anything) of all the nuances, loopholes, special provisions, special tax-breaks built into these bills.

    So all of us out here in the huddled masses, including those who think they know all the implications, get over it. These bills are not designed for you or me to understand. Almost without fail they are designed to line the pockets of Big Corp, Wall Street moguls and fill the off-shore accounts of our “representatives” hidden from public view.

    Have a nice Christmas. Oh sorry about that. (The Speech Gestapo will be after me) Happy “Holidays”

    And further I say naught.

  9. Kenneth A. Hill

    Everyone needs to calm down and quit trying to be on a side. I guess we need another 911 for you all to remember what it is to be one nation. As for government, none of us have had a horse in the race for a very long time. One thing is for sure, we have to quit looking at our neighbors and seeing the enemy! Liberalism never has worked and most of the republican party has abandoned true conservatism….and I don’t mean social conservatism. Please, let’s not even visit that.

  10. I am not concerned that “robots” are going to take my IT /Tech job that’s pretty silly.That is just a bunch of hogwash. If I was cutting sheet metal I might be worried. And having seen robot forklifts working alongside “manned” forklifts I don’t think forklift drivers have much to worry about either, worst case they will get tech training to fix their automated coworkers who can’t perform the same tasks as well outside of narrow parameters.

  11. Literally LMAO at Russian bots like Robert and Joseph (who even writes ‘Bill is so Good!’ if they speak English? lol).

    The Trump tax handout to the wealthy is awesome news for the rest of the world as the US weakens and cedes more influence to China by getting deeper and deeper into debt and cutting R&D spending on technology.

  12. I enjoy “rational”, “reasoned”, and civil discussions about public policy. Lately everything has to be colored by “Trump” or “not Trump” and it destroys the rationality that should be employed in discussions like this. Here’s the reality which nobody wants to realize:

    1) “This tax break is for the wealthy” I hate to inform the people who are spouting this argument that the wealthy PAY the most in taxes. The top 20% pay 84% of the total tax bill! And if you think that’s “wealthy” the top 20% starts at around $135k. So if there is a tax cut it will of course affect the top 20% disproportionally more than the bottom 80%. Heck, the bottom 20% don’t even pay any taxes but instead end up receiving money back after paying taxes.
    So unless a tax cut is excluding the top 20% entirely the “wealthy” will benefit most from any tax cut.

    2) “The tax cut doesn’t help out the middle class.” Who are the middle class? Would you consider a farmer who owns land and might be worth a million dollars or more on paper but barely eke out a living in a down year NOT part of the middle class? As I noted above the top 20% starts at income of $135,000 – is that considered to be “wealthy”? And what constitutes “poor”? The federal government considers the poverty level to be under $25k for a family of 4. Sooooooooo let’s say “poor” doubles that to $50k. The middle class then covers the income range of $50k to $135k. That roughly covers 2/5 of all taxpayers and they collectively pay roughly 20% of all taxes. In order for the middle class to obtain the majority effect of a tax cut in actual $ you’d probably have to increase taxes on the top 20% and eliminate taxes entirely for the middle class.

    3) “Big business is making out like a bandit”. There MAY be some legitimacy to this statement. Sure the tax rate is taking a big drop but what other aspects are changing? If a whole bunch of tax breaks which business currently uses are being dropped to make everything more simple then it’s possible that everything will be a wash. Tax policy shouldn’t be used for engineering policy anyway – it just distorts actions. Why do businesses consider relocation based upon how much they can squeeze out of local government entities? The decision should be based upon location to market, shipping costs, logistics, tax load, workforce availability, business costs, etc. I would be all for a federal law outlawing local governments making any money available to business entities for locating facilities. If business just had to pay a flat 20% of profits w/o any (or very few) tax credits and deductions then the reality might be that business will end up paying MORE in taxes in total dollars than now.

    4) “Government is inefficient with spending taxpayer dollars”. I don’t see how anyone could argue with this statement. Government suffers from what I call “screaming baby syndrome”. The loudest baby gets the attention. What this means is that lobbyists and activists raise a stink about some issue and if they generate enough noise something happens in government – usually a newly funded program. Once the program is in place it will usually just keep getting funding from year to year as there isn’t enough effort placed on having each program justify it’s existence. For all the $ that you received what have you accomplished????? It should be asked but isn’t. The federal budget process is to take last year’s budget, tweak it around the edges, add a few new programs and change it all by x%. No analysis of all the various programs. Soooo not a surprise that a lot of waste happens. Also there is a disincentive to NOT spend your budgeted $. If you don’t spend it you obviously don’t need as much so we’ll cut your budget next year. Sooooo you go out and spend the $ on materials and stuff you don’t need but MIGHT in future. Then you warehouse it at an additional cost until it’s outdated and it is “surplused” at pennies on the dollar. Government DOESN’T need all the tax revenue it receives and it needs to become more efficient.

    I could go on to write a book but will just leave it at this for now. I’ve vented enough for one blog (lolol).