The beginning of the year marks the start of many new things: a new year, new business goals and new federal tax reform. What do the changes in tax law mean for California companies – especially in Silicon Valley?

In The Daily Journal, Carl Guardino (CEO of the Silicon Valley Leadership Group) likened the latest tax reform to the 1960s western, “The Good, the Bad and the Ugly” – and for good reason. While there are some changes that will benefit corporations, others will likely make it difficult for businesses in the area.

Are these changes considered ‘good, bad and ugly’ throughout the entire state, all the way down to Southern California? Keep reading to find out how this year’s federal tax reform will affect corporations in Silicon Valley as well as Southern California.

‘The Good’ of Federal Tax Reform

One big change to the latest tax reform is corporations seeing tax rates slashed; instead of paying 35 percent, they’ll only need to pay 21 percent. Also, companies making profits overseas will only be subject to taxes based on where the sales are made, eliminating an additional tax they’ve been paying in years prior. As you can imagine, these changes will make a big difference for many companies in the area. It also makes U.S. businesses more competitive with the global innovation economy, an important field for many Silicon Valley enterprises.

‘The Bad & The Ugly’ of Federal Tax Reform

What makes the tax reform such a burden for businesses? As Guardino explained, “They decided to lump in individual tax reform as well. Across many of our companies is a deep concern of how this negatively impacts their employees and families, especially those employees who live in high-cost states like California.” The innovative industries located in Silicon Valley rely on talent in the area; therefore burdensome individual taxes that affect employees will also affect businesses that employ them.

One notable change that will affect employees in the region is the cap on deductions such as interest paid on mortgage debt. Because they’ll only be able to deduct debt up to $750,000, middle-class residents with houses that cost millions of dollars are going to put many families into financial crises.

An additional tax reform cap that will affect California residents is one on how much individuals can deduct in state and local taxes on their federal returns. The Daily Journal explains, “In high-tax states like California, that $10,000 cap that also includes property taxes could put the squeeze on middle-income families.”

It comes down to this: if employees can’t afford to stay in the area, the talent local businesses rely on may need to leave.

How Does This Tax Reform Affect Southern California?

While Southern California corporations will benefit from this tax reform the same ways Silicon Valley enterprises will, the region has its own set of challenges that will affect employees. The OC Register notes several trends the southern part of the state is facing:

• A strong job market, which means employers need to compete for workers by increasing benefits and salaries.
• Rising interest rates on loans, which could be costly for both corporate and individual investments.
• The challenge of maintaining the population of residents. The OC Register recommends, “Political and business leaders should figure out how to create more ‘value’ for the existing citizenry with support for smart and fair future development plans…[and figure] out how to recruit more folks to move here!”
• A lack of breakthrough for the economic landscape. What new innovation can Southern California be known for?

As you can see, the new federal tax reform does include positive changes for corporations, however it’s important to remember that what affects the individual will affect the business. Of course, while we can anticipate benefits and challenges to any new tax reform, there are still always positive or negative results from a chance like this that may not be anticipated. It will be interesting to see how this new law affects enterprises over the coming year; of course, we’re always hoping for the best!

Have a question? Contact Monika Miles. Your comments are always welcome!