What do you as a small business owner need to know regarding the tax changes that took effect with the passing of the Tax Cuts and Jobs Act? Well, lets break down the top 5 changes that you should be aware of.
Corporate tax rate has been lowered. If you have a C Corporation the tax rate has been set at a flat 21%. This does constitute an increase in the tax rate for those C Corporations that had income of $50,000 or less, for all the others it is a reduction from 25-35 percent.
Pass-Through Business Deduction. A Pass-Through business is one where the profits are passed-through to the business owner’s personal tax return, these include Sole-proprietorships, Partnerships, LLCs and S Corporations. This new deduction is a 20% deduction on qualified business income. But there are some factors that determine whether you can take this deduction. Those factors include:
Your income: How much you make will determine if you can take the full or only a portion of the deduction
The type of business you own: Service businesses such as attorneys, doctors, accountants may phase out of being able to take the deduction if they surpass the upper income levels. Non-Service business take the lesser of two calculations.
Entertainment expenses are no longer deductible. Taking clients to sporting events or golfing is no longer considered a deductible expense. The Client meal deductions are still being debated and it may depend on your tax preparer as to whether those make it onto your tax return. There has been no change to Office & Holiday parties, those are still deductible.
Business Interest deduction is now capped. You will only be allowed to deduct business interest up to 30 percent of the business’ adjusted taxable income. There are exceptions and the rules can be complicated, but it is a good benchmark to keep in mind. Especially if you were considering taking out a large loan to finance your business.
Net Operating Loss Deduction changed. Starting in 2018 if your business posts a Net Operating Loss you will only be able to use that loss to offset future taxes up to 80% in any given year. In the past, businesses could opt to use the loss to offset taxes from the previous two years. That is no longer an option.
This list is a very brief overview of a few of the changes that have taken place with the new tax laws. If you see something here that you think will affect your business, there is still time to adjust your tax strategy for this year. It is important to consult with your tax and financial advisors to make sure you are taking advantage of all the changes and not placing yourself and your business at a disadvantage come tax time.
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