President Trump signed into law the Tax Cuts and Jobs Act (TCJA) in December 2017 putting into effect sweeping changes to the tax code in the United States.
What may be less clear to you is how these tax changes will impact you and your small business. In a nutshell, the act doubles the standard deduction. It also cuts individual income tax rates and does away with personal exemptions.
The TCJA brings corporate tax rates down from 35 to 21 percent and drops the top individual tax rate to 37 percent. While some of the changes prove permanent, namely the corporate cuts, revisions affecting individuals will expire in 2025.
Read on to learn more about 2018 small business tax cuts and the pros and cons for your company.
Trump Small Business Tax Breaks for Corporations
How does your business stand to gain from the Trump Tax Act? In several key areas. Let’s break them down.
If you own a corporation, the income tax rate reduction will have a big impact on what you’ll pay. The corporate tax rate used to sit as high as 39.6 percent for the most profitable companies. But the new rate brings it down to just 21 percent.
That said, if you own a small business that brings in less than $260,000 each year, then you probably won’t see much of a difference. Why? Because the personal tax rate is now nearly equivalent to the corporate tax rate.
Small Business Benefits from the Trump Tax Act
When it comes to the small business tax break for non-corporate entities, the consequences appear a bit different.
Called a Section 199A deduction, this portion of the law stands to give small business owners a 20 percent deduction from net business income. This falls on top of other deductions for business expenses.
These regulations relate specifically to businesses categorized as receiving so-called “pass-through income” because business owners get taxed on the individual owners’ tax level rather than on the corporate level.
In other words, the income passes through on the business owner’s tax return.
But here’s the caveat. The new laws and regulations prove complicated. Only certain types of income can be counted.
Consult with your tax professional to make sure you’ve dotted all of your I’s and crossed all of your T’s before sending in your final submission.
A Return to Cash Accounting for Many
One of the most convenient developments to come out of the TCJA is a return to cash accounting for many.
Previously, the IRS mandated that businesses with inventory must use accrual accounting. But now accrual accounting will only be required of businesses making $25 million or more in annual revenues.
This will prove a welcome relief to many business owners. What’s the difference between cash accounting and accrual accounting anyway?
With accrual accounting, the moment you send an invoice, you must count the sale, regardless of whether or not you’ve received the money. You must also record expenses when you receive a bill.
With cash accounting, however, expenses and income get counted only when they are paid or received. This change will simplify accounting practices for many small businesses as well as allow them to recognize expenses and sales earlier.
Deductions and Depreciation for Business Assets
In recent years, there has been significant fluctuation when it comes to how much small business owners can write off for business equipment such as vehicles and machinery.
With the Trump small business tax, you can now deduct up to 100 percent depreciation for qualified property. To qualify, you must have acquired the property and put it into use after September 27, 2017, and prior to January 1, 2023.
Your small business can now also benefit from a bigger expense write-off on a company vehicle. Find out more about how the deduction works and what vehicle depreciation will look like.
Changes have also been made to Section 179 deductions. You can now deduct up to $1 million although these rates remain subject to inflation after 2018.
Section 17 depreciation will now extend to building improvements, too. These include upgrades such as the installation of new security systems, fire protection, alarms, and HVAC.
Find out more about common monthly expenses businesses face so that you can stay ahead of the game this tax season.
The New Family Leave Tax Credit
The TCJA includes a new family leave tax credit that will prove beneficial to small businesses with employees. Beginning in 2018, your small business will enjoy a tax credit simply for providing workers with family leave benefits.
Only available for 2018 and 2019, you’ll need a written family leave policy outlining paid time off. You’ll also need to provide your workers with two weeks of paid leave.
How is the credit calculated? It gets added directly to your business taxes for 2018. This represents one of the most exciting ways that the Trump small business tax will help employers.
Where the Trump Tax Act Could Hurt Small Businesses
While the Trump Tax Act increases some deductions and adds the family leave tax credit, it also cuts from other areas and imposes limits. These sacrifices will help fund the corporate tax cut and the pass-through tax deduction.
But you need to have a thorough understanding of the changes in order to avoid common pitfalls.
Beginning in 2018, companies will now face caps when it comes to interest rate deductions. For larger businesses, this cap tops out at 30 percent of the company’s earnings before interest, taxes, depreciation, and amortization.
This new regulation will have no impact on companies who average less than $25 million in revenue per year. They can continue to take interest rate deductions with no caps or restrictions.
Meal and entertainment expenses have also changed. Instead of being 100 percent deductible, you may now deduct 50 percent. By 2025, the meal and entertainment deduction will be phased out entirely.
Of course, exceptions to the rule exist. Company holiday party and annual picnic expenses will still remain deductible at 100 percent.
More Deduction Eliminations to Watch Out For
For companies who manufacture and sell goods, another huge deduction has met with the chopping block, the domestic products activities deduction.
Formerly, companies could claim up to a three percent deduction for engaging in production activities that qualified. But the rule got abused by some companies leading to its untimely end.
It may come back around in 2025 when the TCJA expires. But only time will tell.
Other tax deductions that have gone the way of the Dodo bird include:
- Alimony payments
- Casualty and theft losses (except for federally declared disasters)
- Employer-subsidized parking and transportation
- Tax preparation expenses
- Unreimbursed employee expenses
The employer-provided child care tax credit has also been eliminated as has the commuting expense deduction. While you are more than welcome to continue incentivizing these activities, you won’t see any mercy from the IRS.
What You Need to Know About the TCJA’s New Small Business Tax Cuts
One of the most important things to remember about all of these new tax code changes is that many of them remain in flux. The IRS has not issued final rulings on some of them. What’s more, the TCJA will expire in 2025.
How do you stay prepared and give your business the best chance of coming out of tax season without a massive headache?
Keep excellent records of all of your business transactions and expenses. Be sure to note a business purpose for all expenses.
Organize and compile these business documents and then take them to a qualified tax professional who knows the TCJA inside and out. A good tax professional will have knowledge of all of the latest changes.
That way, they can ensure your business remains in compliance and takes full advantage of the new deductions and credits.
The TCJA remains the biggest tax shakeup since the Tax Reform Act of 1986. Like other tax reform bills, it promises to stimulate the economy and relieve some of the tax burden for working class Americans and small business owners alike.
It also claims to simplify the tax code. While it may represent a step in the right direction, it still comes with a complex collection of regulations.
And because the changes remain so new (with some still in flux), it makes sense to enlist the services of a tax professional this year.
The tax software currently available has yet to fully encompass the planning and reduction opportunities posed by the TCJA.
In fact, as you face your first tax season within the constraints and limitations of the TCJA, you’ll need your tax professional more than ever.
The Right Information When You Need It Most
Whether you’re relishing the idea of returning to cash accounting or mourning the loss of the domestic products activities deduction, the TCJA has finally come into full effect. And you’re likely to benefit from the small business tax cuts.
Fortunately, with the right business information, you can navigate the choppy waters of a new tax season with new tax rules.
Ready to learn more about ways to put your business ahead? Read on to find out about getting business financing right for your next equipment purchase.