Tax and Spending Bill, Small Businesses Less Optimistic, Klarna Goes Human

Hey everybody, it's Gene Marks, and welcome to this week's episode of the Paychex THRIVE Week in Review podcast. This is where we take a few items in the news that impacts your business and mine. We talk a little bit about that impact. So, let's get right to the news.

According to the Wall Street Journal this week, the GOP's “big, beautiful tax and spending bill” is now out and being debated, but there are a lot of hurdles right now. Republicans looking to muscle through tax cuts and spending reduction and President Trump’s sprawling “big, beautiful bill” got an instant reminder of how hard it will be, according to the Wall Street Journal.

Dozens of protesters, many in wheelchairs, crowded the hallways outside the House Energy and Commerce Committee to protest proposed cuts to the Medicaid program, just as the panel was gathering to advance its portion of the plan.

GOP spending hawks lobbied shots at the package for failing to do enough to rein in rising federal deficits, and Republicans with concerns related to imperiled energy projects in their districts where the revised cap on the state and local tax deductions registered their own complaints.

“It is not beautiful yet,” said Representative Lisa Murkowski from Alaska of the legislation.

House Republican leaders disclosed the legislative text of these new tax cuts just this past week. Republican panels were debating and finalizing the various pieces of the GOP plan, still working to advance the bills to the floor of the House to be passed by Memorial Day. The measure would then go to the Senate, and Trump wants it on his desk by July 4.

So, how does this impact your business? Significantly! There are many, many parts of this tax bill that will have business implications and provide a lot of benefits, actually, I believe to small businesses, although some people say that there are also some downsides to this.

We do not have enough time to go through all of the particulars of the “big, beautiful tax and spending bill.” But just to draw your attention to one big part of it is what's called the small business tax deduction – the qualified business income tax deduction. That is where you can take 20% of your income if you are a pass-through or a partnership and deduct that amount so that you are only being taxed on 80% of your remaining income that flows through to your individual tax returns.

That amount has been proposed to be increased to 23% – a 23% deduction on your income before it flows through to your individual return if you’re a pass-through business again, like a subchapter S corporation or a partnership. Right now, I mean, if nothing happens, that small business income tax deduction would go away at the end of 2025.

I personally believe that it will pass. There was a lot of support both in the House and Senate for the small business income tax deduction, and I do think that ultimately this tax bill is going to go through. There will be some compromise in resolutions. The Republicans still with a small majority in both the House and the Senate, I'm sure we'll see that, you know, the bill itself does get passed, and I do expect the president to sign it by July 4.

How does it impact us? Well, we need to be talking to our accountants now. Some of the things that are in here not only impacts, like we said, the small business income tax deduction, but also our spending on capital equipment or our spending for research and development, as well as other deductions that we are able to take and that are going to impact our businesses.

So, talk to your account now. Get familiar with what these changes are going to be. Get ready to jump and act when this bill gets passed. If it happens by July 4, we will still have another six months to go before the end of the year, which does give us plenty of time to make some strategic decisions like making investments, spending, buying capital equipment, spending on research and development, things like that, that will definitely impact our tax bill for 2025.

So, keep an eye out, taxes is a big issue and that is something that is going to be reality in just the next few weeks.

The next bit of news has to do with small business confidence. The National Federation of Independent Businesses released their monthly Small Business Optimism Index, and it fell again. In fact, it fell for the fourth straight month, although it is below the historical average, as well.

Let me give you some highlights of this index. The net percent of small business owners expecting better conditions fell to its lowest level since October. The net percent of small business owners expecting higher sales volume fell for a fourth consecutive month. The percent of small businesses planning capital outlays fell to its lowest level since April of 2020. Labor quality remained the top issue for small businesses for a third straight month, while inflation ranked as the third top issue with its lowest readings in September of 2021.

The number of small business owners reporting the loss or availability of insurance as their single-most important problem since has reached its highest level since March of 2020. Overall, health of their businesses, 13% of the small businesses that were survey said it was excellent and 56% said good, while only 4% said it was poor.

So, mixed numbers coming in from the NFIB this month, but clearly a downward trend of optimism. I think a lot of businesses facing labor shortages, facing higher costs, dealing with tariffs and now, of course, insurance becoming a bigger issue, these are the things that are on all of our minds this year as we're navigating our way around some of the challenges that this year's economy is facing us.

Finally, talk a little bit about a company called Klarna. Klarna is a buy-now pay-later service, which means as if you're not familiar, that is a service where you can purchase something of a certain size and then Klarna gives the ability to pay off that purchase in a two-, three- or four-month period of time without the consumer paying any interest on it. It's become extremely popular.

Well, Klarna itself, according to a report in Bloomberg, had taken a big position on AI just two years ago. Back in 2023, the CEO of Klarna basically threw himself and the company at AI saying that he wanted his company to be OpenAI's favorite guinea pig. Again, according to Bloomberg, the company instituted a hiring freeze and set out to replace as many humans on its payroll as possible with AI.

By 2024, the CEO is bragging about cutting the company's workforce nearly in half, dropping from a headcount of 3,800 to 2,000 by shifting to AI alternatives. He called the cutbacks natural attrition rather than the results of layoffs.

However, all of that has changed. Again, according to Bloomberg, Klarna is now hiring back humans. “As soon as these AI-powered chat bots seem functional enough, this buy-now, pay-later service Klarna went in all over them on all of them, promising to swap as much of its human workforce with robotic replacements.”

But according to Bloomberg, now it's on a human hiring spree after running into the limitations of AI.

Now the company's CEO announced that the company intends to make sure that customers will always have the option to speak to a human when they need service. It is, of course, doing that in a way that presents its own concerns, claiming that it will structure its new human-powered customer service cohort, but to be fully remote and be with like an Uber-type of setup that seems like it will rely on contract work and will reportedly tap into an employee pool of students and people in rural populations.

The CEO says that they are going to be putting more of an effort in human hiring over using their AI tools. Fascinating report only because I have spoken and written about Klarna in the past and how they were almost gleefully adopting AI and using it to cut back on employees. But it turns out that people like to speak to people.

Although AI is a great and powerful tool that will significantly change our lives and businesses in the not-too-distant future, for now, at the very least, leveraging AI and replacing your employees with AI, not the best strategy in the world. And I think the people at Klarna have learned that which is why they are retreating on their AI use when it comes to their customer service and putting more human employees in place because they've discovered that people do indeed like to talk to people.

That's a lesson for all of us that are employing AI this year. It is great, can definitely add to our people's productivity, but I personally don't feel that it's at a level where it's replacing people just yet.

My name is Gene Marks, and you have been watching or listening to this week's episode of the Paychex THRIVE Week in Review. If you need any help or advice or tips in running your business, sign up for a Paychex THRIVE newsletter. Go to paychex.com/thrive.

Thanks so much for watching and listening. We will see you again next week for more news that impacts your business. Take care.

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I'm your host, Gene Marks, and thanks for joining us.

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