5 Tax Law Changes That May Impact Your Business
The Tax Cuts & Jobs Act of 2018 was the most extensive tax reform bill passed in nearly 3 decades. While the bill included a number of provisions that will impact personal income taxes for the 2018 tax year, it also has some very important implications for businesses. If you own a corporation or small business, you will want to familiarize yourself with these changes and how they may impact your business in the years ahead.
Here are 5 of the greatest changes impacting business owners:
1.) A Flat Corporate Tax Rate
The previous tax code contained graduate tax brackets of 15%, 25%, 34% and 35%. The new legislation has done away with these brackets, and has established a single, flat corporate rate of 21%. This is a good thing for businesses previously in higher tax brackets, but for small businesses that previously fell into the lowest bracket, it is a fairly significant increase.
The new tax act also permanently repealed the corporate alternative minimum tax (AMT).
2.) New Pass-Through Business Income Deduction
This is the most significant change for small businesses in the new tax code. For pass-through entities, which include sole proprietors, partnerships, LLCs, and S corporations, you can now deduct 20% of qualified business income, depending on your personal income threshold.
You can claim the full 20% deduction if you are filing single with a taxable income of less than $157,500, or $315,000 if married filing jointly. If your taxable income is higher than these thresholds, you may be able to claim a partial deduction, and the deduction is limited further for single filers with taxable incomes above $207,500, or married joint filers with incomes above $415,000.
This change is especially beneficial for real estate owners and businesses that require a lot of capital. However, the deduction is disallowed for service businesses, including those in health, law, accounting, athletics, performing arts, consulting, and financial services.
This deduction is set to expire in 2025.
3.) Bonus Depreciation Doubled
For tangible property used in a trade or business, business owners usually must recover the costs through annual depreciation deductions. The previous tax law allowed an up-front “bonus” amount of 50% of the cost basis of any qualified property that was acquired and placed in service before 2020 to be deducted.
The new tax law expands the first-year bonus depreciation, and extends the bonus to cover qualified property placed in service between September 27, 2017 and January 1, 2027.
According to the TCJA, you may now deduct 100% of the adjusted basis of the property in the year that it is first placed in service. This bonus percentage will be reduced by 20% per year starting in 2023, and eliminated entirely in 2027.
4.) Business Expense Changes
According to Internal Revenue Code Section 179, small businesses may elect to expense the cost of qualified property rather than deducting it. The new law raises the amount that can be expensed from $520,000 to $1 million, and also expands the types of property that are eligible for expensing. Again, this change is more likely to benefit larger businesses, rather than small ones.
Also, some items that were previously eligible for expensing such as meals and gifts for clients, may no longer be expensed.
5.) Treatment of Foreign Income
The TCJA has fundamentally changed the way that foreign profits are taxed. Instead being taxed on worldwide profits and receiving a credit for foreign taxes paid, which encouraged companies to keep profits outside the U.S. to avoid taxation, now corporations must pay U.S. taxes on prior-year foreign earnings that have accumulated outside of the United States in foreign subsidiaries. After paying this one-time “repatriation” tax, foreign earnings can then be brought back to the U.S. without paying any additional tax. This new provision is intended to encourage shareholders of foreign corporations to bring production back to the United States, in the hopes of stimulating our domestic economy.
While this change can to all U.S. shareholders, it will mostly impact large multi-national corporations rather than small businesses.
Business owners will want to make sure to consult with a qualified tax planner to learn how the new tax law will impact your specific business in the years ahead, and if there are any new strategies you can take advantage of for your business.
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