6 Things Partners Need To Know About The Tax Cuts And Jobs Act

Digging Into The New Legislation

Tax reform legislation was officially passed by the House of Representatives in a 224-201 vote on Wednesday after being approved by the Senate in the early hours of Wednesday morning. The Tax Cuts and Jobs Act will be the largest one-time tax reduction in U.S. history, cutting an estimated $1.46 trillion in overall tax collections by the government. Perhaps most noteworthy for small businesses and corporations is that the Republican bill will cut corporate tax from 35 percent to 21 percent.

CRN sat down with Alan Weinberger, a lawyer, and chairman and CEO of The ASCII Group, an organization that provides business-building tools to 1,500 VAR and MSP partners throughout North America, to learn about what the latest legislation will mean for the channel.

Here are five details that solution providers need to know about the freshly-passed Tax Cuts and Jobs Act.

A Tax Cut For Solution Providers

The GOP tax bill will create a 20 percent business income tax reduction for smaller "pass-through" companies that run as partnerships, LLCs and S-corporations until 2025. These designations apply to a majority of solution provider and MSP organizations. The provisions allow these businesses, which could be taxed at individual rates as high as 39.6 percent, to also immediately write off new equipment costs and eliminate the corporate alternative minimum tax.

On its face, the Act will immediately help most channel partners, Weinberger said. Because the legislation is new, however, it will take time for tax court rulings to break down the nuances of the Tax Cuts and Jobs Act, and partners may need to consult tax lawyers or accountants.

Solution Providers Plan Hiring Spree

Many solution provider executives tell CRN that dramatic tax reduction is a game-changer that will allow them to direct savings toward staff expansion, growth initiatives and technology development.

A CRN poll found that 53 percent of solution providers expect to add head count thanks to the Tax Cuts and Jobs Act.

Frank Vitagliano, CEO of Houston-based Computex Technology Solutions, No. 121 on the 2017 CRN Solution Provider 500, plans to use the tax savings to increase his company's headcount by about 20 percent next year, with a focus on hard-to-find security talent, managed services sales reps and solution architects focused on security and data center.

"This is a tremendous opportunity for the channel," said Vitagliano. "We can't wait to take advantage of it. We are in growth mode and moving quickly to add people in anticipation of this. This bill is going to have a very positive effect on companies like us that are in growth mode. We are very excited about it."

Digital Transformation Acceleration

The Tax Cuts and Jobs Act is expected to accelerate digital transformation at companies looking to use the tax savings to build technology solutions that give them a competitive advantage.

The legislation allows business to immediately write off new equipment costs and eliminate the corporate alternative minimum tax. This applies to large corporations, solution providers, and also end customers, who may be more apt to upgrade their IT infrastructure or even invest in emerging technologies, such as cloud solutions, with lower taxes in place.

"Customers are spending more on IT because people are feeling more comfortable, and that will continue into 2018," Weinberger said.

Sole Proprietors Become Subchapter S, LLCs

With sole proprietors being taxed at the higher marginal rate of 37 percent compared to the 20 percent tax reduction for pass through companies, many sole proprietors are likely to move to become chapter S AKA. S-corporations,or LLCs. Both S-corporation and LLCs are both known as "pass-through" tax entities, S-corporations file a business tax return and LLCs only file business tax returns if the company has more than one owner. The Tax Cuts and Jobs Act could encourage more solution providers to become S-corporations or LLCs.

"The [Act] could help partners corporatize their businesses if they are sole proprietors, so I think more channel partners will be bumped up into S-corporations or LLCs," he said.

Potential Benefit Increases For Employees

Employees of smaller companies may gain some "trickle-down" enhancements to their benefits. Smaller companies with more money from the tax break may improve on soft benefits for their employees, like improved healthcare premiums, Weinberger said.

"The [tax reform] will give the biggest help to corporations and S-corporations," he said. "But, the [act] could help small companies put more money towards other benefits for their employees -- channel [organizations] are more like families and are more likely to share the wealth."

Major Technology Vendors May Not Use Tax Cut To Create Jobs

While the tax cut is expected to drive signficant job creation for many solution provider organizations, major technology vendors may not follow suit, according to Weinberger.

In a Yale CEO Summit survey conducted last week, just 14 percent of CEOs said their companies plan to make large capital investments in the United States if the tax bill were to pass. Channel partner organizations, Weinberger said, are more likely to use the extra money for business investments. As such, the tax break will most likely benefit the employees of smaller companies as opposed to corporate employees.

"Corporations will most likely look at this windfall to buy back stock or make capital improvements, but not necessarily build employment," he said.