The Fair Tax Act

taxes Mar 31, 2025

Admittedly, I don’t watch the news much… some days I’m even surprised by the weather. But the other night, I lay awake wondering… what happens if income tax goes away and everything moves to tariffs? Will businesses even need me and other bookkeepers anymore?

So after I spiraled for a bit, I turned on a sleep meditation podcast and decided I would tackle this in the morning.

Turns out, businesses will still need us bookkeepers and accountants. So let’s dive in to this two-parter, starting with the Fair Tax Act (we’ll get to tariffs on the next blog):

What the Fair Tax Act Means for Small Businesses (and Why Bookkeeping Still Matters)

There’s been a lot of buzz about the Fair Tax Act of 2025, which proposes eliminating income taxes, payroll taxes, and even the IRS—replacing them with a national sales tax instead. If passed, this would mean a huge shift in how businesses handle taxes and finances. But before you get too excited (or worried), let’s break it down:

What Is the Fair Tax Act?

The Fair Tax Act would replace federal income tax with a national sales tax on goods and services. That means:

✅ No more personal or business income taxes

✅ No more payroll taxes (goodbye, Social Security & Medicare deductions)

✅ No more IRS (yes, really! - the administration would fall on State Agencies, like sales tax does now)

✅ A single federal sales tax (estimated at 23-30%) that businesses collect and remit

If passed in 2025, this new system would go into effect on January 1, 2026.

What Would This Mean for Small Businesses?

At first glance, this might sound like a dream come true—no more dealing with income tax filings, quarterly estimates, or payroll tax headaches. But before you ditch your bookkeeping system, consider these key changes:

1. You’d Become a Tax Collector

Instead of worrying about income tax, your business would now be responsible for collecting and remitting the new federal sales tax on everything you sell. That’s a big shift—especially if your business doesn’t currently deal with sales tax.

Service-based businesses (like consultants, coaches, and accountants)—which often don’t have to collect sales tax today—would now need to. Just another reason to use a system like Xero with built-in sales tax.
E-commerce businesses would need to navigate federal sales tax alongside state sales tax, no matter the volume—whereas right now, you may be exempt from collecting sales tax in states where you don’t hit a volume or sales threshold.
Retailers and product-based businesses would likely need new systems to track and remit sales tax correctly.

2. Pricing and Customer Impact

Since all products and services would be taxed at a national rate (on top of any state sales tax), prices could rise for customers. This could lead to:

Potential lower sales volume if customers push back on higher prices
A competitive disadvantage for small businesses vs. large corporations that can absorb costs more easily
New cash flow challenges—since businesses would need to set aside tax money for remittance instead of using it for expenses (this is something we already help clients manage for state sales tax)

3. Say Goodbye to Deductions & Write-Offs

Right now, small businesses can deduct expenses (like marketing, home office costs, and vehicle use) to lower their taxable income. But if there’s no income tax, there are no deductions—meaning you can’t lower your tax burden by reinvesting in your business.

While businesses might save on tax prep costs, they’d need to rethink cash flow management and budgeting to make up for the loss of deductions.

4. Bookkeeping Isn’t Going Anywhere

Even if income tax disappears, bookkeeping will be more important than ever because:

✅ You’ll need to track and remit sales tax correctly to avoid penalties.

✅ Cash flow management will be critical to avoid accidentally spending sales tax funds.

✅ Budgeting and forecasting will change—without income tax deductions, you’ll need a solid plan for managing your finances.

5. When would this go into affect?

The Fair Tax Act of 2025 (H.R. 25) was introduced in the House of Representatives on January 3, 2025. As of now, the bill has been referred to the House Committee on Ways and Means and has not progressed further in the legislative process.

If enacted, the Act proposes that the national sales tax would take effect on January 1 of the year following its passage. So, if the bill passes in 2025, the new tax system would be implemented starting January 1, 2026.

What Should Small Businesses Do Now?

While it’s not guaranteed that the Fair Tax Act will pass, smart business owners should start preparing for potential changes. That means:

📌 Learning how sales tax compliance could affect your business

📌 Strengthening cash flow and budgeting systems

📌 Keeping clean, organized financial records to avoid compliance issues

📌 Working with a bookkeeper who understands these changes

Need Help Navigating the Changing Tax Landscape?

No matter what happens with tax laws, small business bookkeeping is here to stay—and getting ahead of these potential changes now can save you headaches later.

At Of Course Financial, we help small business owners stay on top of their finances, adapt to tax changes, and keep their books in order—so you can focus on growing your business.

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