HOW THE NEW TAX LAW AFFECTS SMALL BUSINESSES
Why It Matters:
There are many changes affecting small business in the new tax law.
Small business owners can take advantage of many depreciations and deductions this year.
Some tax breaks for small business have been eliminated.
Heading into tax season, many small businesses are eager to see how the new business-friendly tax law will affect their filing for tax year 2018. There’s mostly good news but some bad news as well. Here are some of the most significant changes:
Tax cut for pass-through businesses
S corporations, LLCs, partnerships, and sole proprietorships are all pass-through businesses, in which the income is “passed through” to the business owner’s individual tax return. The net income of pass-through entities is effectively taxed at individual tax rates.
The new law creates a 20% deduction on certain income for pass-through entities, which means that many of these companies get to deduct 20% of their income, right off the top of their tax returns. In some instances, there are additional restrictions on who can take the deduction and the amount of the deduction they can take. For example, certain service businesses such as law firms, doctor’s offices, and financial advisors can take the 20% deduction only if they make less than $315,000 (for married couples filing joint returns).
Changes to corporate tax rates
Taxes for C corporations have been simplified but not necessarily reduced. Under old law, C corporations paid graduated federal income tax rates ranging from 15% to 35%. For tax years beginning after December 31, 2017, there’s a flat 21% corporate rate, so some lower-income business will see their rate go up.
Changes to deductions and depreciations
Section 179 deductions: Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of certain types of equipment and software. If you’re a small business and you (or your clients) buy (or lease) a piece of qualifying equipment, you can deduct the purchase price from your gross income. That’s good enough, but the new tax law doubles the maximum allowance to $1 million from the previous limit of $500,000, with phaseouts kicking in above $2.5 million instead of $2 million. But the maximum allowance can’t exceed the amount of income from business activity.
Bonus depreciation: Bonus depreciation allows a business to take an immediate deduction on the purchase of eligible new business property. The new law raises the bonus depreciation deduction from 50% to a full 100% for the next five years, before phasing it out over the following five years. The deduction also now includes used property, according to CPA Practice Advisor.
Some deductions, though, are moving the other way. Under the new law, most businesses cannot deduct interest expenses in excess of 30% of adjusted taxable income. The 50% deduction for entertainment expenses related to the conduct of business has been repealed. The deduction for employee transportation benefits — including mass transit passes and parking privileges — has also been repealed. The annual depreciation limits for “luxury cars” intended for business use has been raised to $10,000 in the first taxable year.
New tax credit for family leave
There is a new temporary tax credit for employer-paid wages disbursed for family or medical leave. The amount of the credit ranges from 12.5%-25%, depending on the amount paid. But take advantage of it while you can, because the credit disappears after 2019.
Business losses
For business net operating losses, the maximum amount of taxable income that can be offset with deductions has been reduced for most instances from 100% to 80%. In addition, losses can no longer be carried back to an earlier tax year. But there is some good news for this year: Net operating losses can now be carried forward indefinitely.
Things to Consider:
Your clients should consider talking to a tax expert for more details on changes in the new tax law for small business.
Your clients may be able to use some of the deductions and depreciations this year.
If you’ll miss being able to use the entertainment deduction, here are some ideas for affordable client events they’ll tell their friends about.