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SMB Experts | January 25, 2018

What the New Tax Law Means for Business Owners

By: Barbara Weltman

Attorney and best-selling author of J.K. Lasser’s Small Business Taxes and J.K. Lasser’s Guide to Self-Employment. Barbara also serves as a member of SMB Experts, an Oracle-sponsored panel comprised of today’s SMB thought leaders.

The Tax Cuts and Jobs Act (TCJA) of 2017 has been touted as a measure to dramatically cut taxes for businesses and eliminate loopholes. Most of the law’s changes begin in 2018, so it’s important for you and your CPA, or other tax advisor, to figure out the impact of these changes and how your business can take advantage of them. However, because the law contains so many provisions, it’s practically impossible for businesses to determine whether these changes will raise or lower their taxes.

To gain a better understanding of the TCJA and how it will affect your business, you’ll need to understand these key highlights first.

Tax Rates

The tax rates on regular C corporations has indeed been lowered significantly– from a rate of 35% to 21%. However, the former graduated tax rates for corporations have been replaced by a flat tax; all C corporations now have one tax rate of 21%. Also repealed: the corporate alternative minimum tax (AMT).

When it comes to owners of pass-through entities who pay tax on their share of business profits on their personal returns, things are more complicated. Owners of sole proprietorships, partnerships, limited liability companies, and S corporations pay a tax based on seven graduated tax brackets as they have always done. These brackets have been lowered to 10%, 12%, 22%, 24%, 32%, 35%, and 37% (down from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%).

While there’s no special tax rate for income from pass-throughs, there is a new deduction that effectively lowers the tax rate, called a qualified business income deduction–roughly 20%. However, the deduction phases out, or is eliminated, once a business owner’s total taxable income exceeds the threshold amount ($157,500 for singles; $315,000 for married business owners filing jointly). Those in service-type businesses with substantial income may not be able to claim the new deduction at all.

The deduction is not an offset to business income, but is instead deducted on the owner’s personal return in the same way as standard or itemized deductions. Given that, it appears this deduction won’t reduce a self-employed owner’s net earnings for purposes of self-employment tax.

What does this all mean? You may be able to claim a new deduction if you’re profitable, but if you’re not, the treatment of business losses may limit what you can write-off. Beware of the new “excess business loss” limitation.

Greater Write-offs for Equipment Purchases

If you want to invest in new equipment, software and hardware, furniture, or other items for your business, you likely will be able to write-off the entire cost in the year you place them into service. The following deductions apply even if you finance the purchase in whole or in part:

  • First-Year Expensing, or Section 179, covers up to $1 million in qualified property each year, but phases out once a business’s new property purchases reach $2.5 million.
  • Previously, businesses were able to immediately write off half of the expense of various properties, instead of deducting it in increments over a period of up to 20 years. This bonus depreciation was set to phase out over the next three years. The changes to the law extend this bonus depreciation through 2022 and expand its coverage to 100% of the cost. The bonus depreciation will decrease by 20% over the next five years, of the percentage over the next five years. This deduction now applies to both new and pre-owned items, instead of just new items.

There are also more generous write-offs allowed for the purchase of business vehicles and more favorable rules apply for writing off the cost of certain improvements to your facilities.

Simplified Accounting Rules

The ability to use the cash method of accounting (which is easier to track) can now be used by businesses with average annual gross receipts in the three prior years of $25 million or less, otherwise known as the “gross receipts test.” Per this test, businesses with inventory don’t have to account for them if they meet certain criteria. Instead, inventories can be treated as non-incidental materials and supplies, which are usually deductible in the year they’re sold to customers.

Changes to Various Deductions

With some deductions ending, others have been curtailed. Businesses can no longer write-off certain employee benefits and other expenses, including:

  • Transportation fringe benefits and reimbursements to employees for moving expenses (though employees can still get tax-free treatment if the company continues to provide them)
  • Domestic production activities deduction
  • Entertainment expenses

The net operating loss deduction is now cut down to 80% of taxable income and it can no longer be carried back by most businesses. But the carryforward, which had been capped at 20 years, is now unlimited.

Tax Credits

There’s a new credit for employers that pay employees at least 50% of their pre-leave wages while on family and medical leave (the credit amount increases as the amount of paid pre-leave wages increases). But, the credit only applies for 2018 and 2019, and only for employees earning no more than $72,000 in 2018 (it could change for 2019).

The tax credit for rehabilitating certain old businesses has been repealed. The credit for rehabbing certified historic structures remains.

Conclusion

Even with this brief overview, you can see that there are winners and losers. You may benefit from one change but are no longer able to take other tax breaks. It’s essential to work with your tax advisor to determine how the new law affects you and your business. Factor in these changes in business planning for 2018, including decisions about hiring and employee benefits, investments in capital assets, and more.

For more information on SMB Experts and to read their latest content, click here. Get news and insights from the SMB Experts by joining Ask the SMB Experts, a LinkedIn group where growing businesses and industry experts come together to discuss key issues in the SMB space.

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