Lexington businesses digest tax reform effects 

By: Elly Cosgrove

Republican tax reform laws will not hurt local small business owners in the short run. Nonprofit organizations are not so sure.

That was the message at last week’s Lexington-Rockbridge Chamber of Commerce event featuring local accountant David Hawkins, who gave advice to the audience of more than 40 people.

His message: “Calm down. There’s time to plan,” Hawkins said. “We do have to pay attention to what the changes in the law are and how they fit to a particular circumstance.”

Many business owners and local nonprofits were concerned about how the new tax laws would affect their bottom line, said Chamber of Commerce Executive Director Tracy Lyons.

“People are trying to understand it,” Hawkins said“and how to apply it to their particular business circumstances.”

Sarah Dyer, owner of Urban Farm Girl in downtown Lexington, relies on a Richmond accountant to do her taxes.  “You know if you talk to me about milk paint or painting furniture or something I really know about I can tell you all about it,” she said. “When it comes to taxes, that’s one thing that I’m just a little lost as far as it goes.”

Tax laws are complicated because companies incorporate in a variety of ways, depending on ownership, type of business or other factors. For instance, “C corporations” are taxed separately from the owners.

Under the new tax laws, C corporations saw their tax rate decrease from 35 percent to 21 percent. “There’s $14 for every $100 that’s going to be available for things other than taxes like to give people raises or buy stuff or pay dividends to owners,” said Jack Bovay, an accounting professor at Washington and Lee University.

Most of Rockbridge County and Lexington’s smaller businesses are incorporated as “S corporations” reflecting closely-held ownership, such as a family business. Income is passed directly to shareholders, who are taxed.

S corporations, partnerships and limited liability corporations now pay taxes on 80 percent of their profits; before the law, they paid taxes on 100 percent.

Many of these local business owners perceive that C corporations are getting the bigger tax break, but that doesn’t reflect the double taxation on both the company and shareholders.

“A couple of folks who own very successful small business corporations that operate as S Corporations wanted to know does this law create an incentive to revoke that election and to be taxable as a C Corporation,” Hawkins said.

Hawkins advised most of his clients to keep their current structure because changes in the law relating to C corporations are designed to address the needs of very large corporations that have international operations.

Some attending the event expressed concerns about the tax law changes impact on nonprofit companies. One fear is how changes in individual tax laws will hurt charitable giving.

The reason is changes in itemizing deductions versus taking the standard deduction, and whether there will be “little or no tax benefit from their charitable giving,” Hawkins said.

The previous tax laws encouraged some people to itemize deductions, such as property taxes, charitable donations or mortgage interest payments. That reduced their taxable income.

The new law doubled the standard deduction, which appeals to some people who previously itemized.  “Some charities are concerned that the lack of the deduction might cause me to be less generous with the church or the YMCA,” said Bovay, the accounting professor.

Bovay said charities will not be able to gauge the impact for another year.