Author(s): Micah Frankel, John Tan
The landmark Tax Cuts and Jobs Act (TCJA), enacted by Congress and the president on December 22, 2017, makes the most sweeping changes to the tax law in the United States (U.S.) since 1986. Many changes to the business tax laws, under TCJA (2017), are applicable to all business entities ranging from C corporations (public or private), S corporations, partnerships, to sole proprietorships. To encourage capital investments, TCJA (2017) offers some new incentives such as the additional first year depreciation deduction of the Internal Revenue Code (IRC) section 168(k). It is important to research the tax behavior of private business owners, because in 2015 small and medium sized enterprises (SMEs) employed 47.5% of the private workforce in the U.S. Many SMEs report their business operating income from partnerships or S corporations or sole proprietorships under their individual income tax returns. According to the Data Book for 2018 published by the IRS (IRS, 2019a), income taxes accounted for 56.90%, employment taxes accounted for 32.70%, and corporation accounted for 7.60% of the total $3.5 trillion of federal taxes collected by the IRS in 2018. Unfortunately, there is a gap in the literature due to the lack of studies regarding the tax behavior of SMEs. Researchers face difficulties in researching the tax practices of SMEs due to the lack of publicly available tax data and information regarding SMEs. In contrast, financial data and tax data of public companies is readily available. As a result, prior literature contains numerous studies using the innovation-diffusion theory to explain the tax practices of public corporations. Using the innovation-diffusion theory, this paper investigates whether owners of SMEs aware of the changes in the tax law of TCJA (2017) that affects their tax liabilities. Assuming owners of SMEs would like to minimize the present value of their taxes, this paper investigates whether owners of SMEs will modify their business operating, investing, and financing activities in response to the changes in the tax law of TCJA (2017). Following prior studies such as Apostal and Pop (2019), this paper uses interviews to conduct a qualitative study. By analyzing the interview comments of 125 private business owners, results suggest that (1) knowledge about the new tax law has been diffused among the owners of the SMEs and (2) owners of SMEs adopted the new tax law by actively managing their obligations to pay tax under the TCJA (2017). This paper contributes to the literature by filling in the gaps in the research on the diffusion of tax knowledge and most importantly the tax behavior of SMEs in the U.S.