How Trump's Proposed Tax Code and Tariffs Could Shift Your Salon's Business Strategy

Major tax reform looms on the horizon, bringing changes that could dramatically impact your salon's profitability and operations. From tax-free tips potentially adding thousands to your stylists' take-home pay to new tariffs that could increase your equipment costs by up to 60%, these proposals represent the most significant tax overhaul the beauty industry has seen in years. Salon owners must understand and prepare for these changes regardless of political stance, as the effects will affect every aspect of business operations—from daily transactions to long-term growth strategies.

The proposed permanence of the Tax Cuts and Jobs Act of 2017 (TCJA), combined with new reforms, signals a pivotal moment for salon financial planning. At stake are critical aspects of your business: the tax treatment of tips, which could reshape staff compensation; equipment depreciation rules, which could alter your investment strategy; and import considerations, which could significantly impact your supply costs. Each of these changes carries the potential to either strengthen or challenge your salon's financial position.

For salon owners who plan ahead, these shifts present strategic opportunities to optimize their tax planning, reimagine compensation models, and refine investment approaches. The decisions you make in response to these changes could influence your salon's profitability for years to come. Understanding these proposals now—and their practical implications for your business—is essential for maintaining a competitive advantage in an evolving industry landscape.

For updates on these developments, keep an eye on SALON TODAY as Azarvand Tax Law continues publishing analysis. Remember that any major tax reform requires passage through both chambers of Congress and the President's signature. While these proposed changes could significantly impact salon businesses, the final legislation may differ from current proposals. We strongly recommend staying informed and planning ahead while awaiting final legislation before making major business decisions. Being proactive and prepared is key to navigating these potential changes.

Key Proposed Changes Affecting Salons

Tax-Free Tips: Perhaps the most significant proposed change for salon workers is the proposed exemption of tips from income taxes. A stylist earning a base pay plus tips could take home thousands more in pay each year. This change could revolutionize how salons approach compensation and pricing structures. Service providers might be more inclined to work in commission-based roles, knowing their tips would be entirely tax-free. In addition, salons may have fewer recordkeeping and reporting responsibilities regarding tips.

Proposed Overtime Pay Exemption: The potential exemption of overtime pay from income taxes could make overtime shifts more attractive to workers. For example, a stylist earning $25 per hour would see significantly more take-home pay from overtime hours, potentially making Saturday evening or holiday shifts more attractive. This flexibility could allow salons to extend their operating hours or accept more bookings during peak times without facing staffing challenges. It's important to be aware of these potential changes and their impact on your salon's operations.

Import Tariffs and Equipment Costs: The proposed tariff increases present significant challenges for salon operations. The plan includes raising Section 301 tariffs on Chinese imports to 60 percent and implementing a universal 20 percent tariff on all U.S. imports. For salon owners, these tariffs likely increase costs across all imported equipment and supplies, including styling equipment and chairs, professional hair care products, tools and supplies, and salon furniture and fixtures. Being aware of these potential changes and taking proactive measures, such as researching and sourcing U.S. based products before the tariffs take effect, can help you prepare for the future.

Proposed Extension of the Tax Cuts and Jobs Act (TCJA) and How It Affects Salons

The TCJA introduced several tax breaks and incentives that benefited businesses of all sizes, including salon owners. Making the TCJA business provisions permanent would restore 100 percent bonus depreciation and maintain R&D expensing. However, several of these provisions are set to "sunset" on December 31, 2025, meaning they will expire unless renewed or made permanent. The following are the key TCJA provisions likely to be renewed that could impact salon businesses:

Section 179 Expensing: Section 179 expensing provisions allow salon owners to deduct the total purchase price of qualifying equipment and improvements immediately. The $1 million annual limit means most salon purchases easily fall within the threshold. This provision is set to continue beyond 2025 unless Congress lets it expire. 

Bonus Depreciation: The potential reinstatement of 100% bonus depreciation could provide significant tax advantages for salon owners looking to invest in their businesses. This would allow immediate write-offs for qualifying purchases rather than depreciation over several years if enacted. For example, investing $50,000 in new salon chairs, equipment, or renovations could reduce your taxable income by the full amount in the same year rather than spreading it across multiple tax years under current rules. For salon owners considering major upgrades or expansions, the timing of these investments could become strategically important depending on when and if these changes are implemented. 

Qualified Business Income (QBI) Deduction: The QBI deduction remains one of the most advantageous tax benefits available to salon owners, offering up to a 20% deduction on QBI. 

The Qualified Business Income (QBI) deduction allows salon owners to reduce their tax burden by up to 20% of their business income. For example, if your salon generates $150,000 in qualified business income, you could potentially deduct $30,000, significantly lowering your taxable income. Business owners must be aware of annual income thresholds that affect this deduction. The IRS sets these thresholds annually for both single and joint filers. Above these thresholds, the deduction begins to phase out. Strategic planning can help maximize your benefits - for instance, if you're near the threshold, purchasing new salon equipment or making retirement contributions before year-end could help reduce your taxable income to qualify for the full deduction.

State and Local Tax (SALT) Deduction: The State and Local Tax (SALT) deduction cap of $10,000 continues to impact salon owners, particularly in high-tax states, by limiting the state and local taxes they can deduct on federal returns. However, operating as an S-Corporation may offer a strategic advantage since business-level SALT payments generally aren't subject to this cap. For example, if your salon pays $15,000 in state and local taxes, operating as an S-Corporation could allow the business to deduct the full amount. At the same time, individual owners would be limited to $10,000 under other business structures.

Keep in mind that S-Corporation ownership requires careful compliance with IRS guidelines, particularly regarding owner compensation. Salon owners must receive "reasonable compensation," meaning the employee-owner’s salary should align with industry standards for the role and responsibilities. For instance, if typical salon manager salaries in your area range from $55,000 to $75,000, your compensation should generally fall within this range based on your specific duties and salon performance.

Year-End Tax Planning Checklist and Looking Forward

Before year-end, salon owners should:

1. Review current performance and project next year's income, considering new tax treatments or business structures. 
2. Assess equipment needs and create a purchasing strategy that balances current tax benefits with anticipated tariff cost increases.
3. Prepare to update compensation agreements and tip policies to reflect the proposed changes while ensuring compliance with current regulations.
4. Document current supply costs and identify alternative sourcing options before anticipated tariff increases occur.
5. Schedule a year-end risk and opportunity assessment with a tax professional to evaluate exposure areas and potential tax savings under proposed changes and current laws.

Given the scope of proposed changes, year-end planning in 2024 takes on additional importance. While maintaining flexibility until legislation is finalized, salon owners should use this period to position their businesses advantageously. This means implementing traditional year-end tax strategies and considering structural changes that could significantly impact business operations and tax strategies. 

Year-end planning extends beyond December. Actions taken in the final months of the tax year can set the foundation for success under new tax rules. The tax-free treatment of tips and overtime pay could create significant advantages for your workforce, while equipment cost increases from tariffs will require careful management. Working with tax professionals who understand salon operations and the proposed changes can help ensure your year-end strategy aligns with immediate tax savings and long-term business goals. With the right strategies, these proposed changes could lead to a brighter future for your salon.   

The complexity of these proposed changes highlights the importance of working with tax professionals who understand tax strategy and the unique aspects of salon operations. While tax preparation is essential, proactive tax planning with a tax attorney who can translate these proposed changes into practical business strategies is crucial. Regardless of the size of your salon, strategic planning could significantly impact your salon's long-term success. Go online to set up a free 30-minute consultation at AzarvandTaxLaw.com or send us an email at Info@AzarvandTaxLaw.com.

Note: This article provides general information based on current proposals and economic analysis. Final legislation may differ significantly.