Last year, Congress passed a new business tax law that overhauled the entire financial system. Not only does the law impact individuals, but it also affects small business owners as well. As the year comes to a close, it’s critical that small business owners understand how the new business tax law will impact the returns that they file before April 2019. Small business owners should find the tips and guidelines we’ve provided below beneficial.
C-Corporations Will File Under A Lower Rate
One of the most significant changes under the new business tax law is the fact the corporate tax rate dropped significantly. In year’s past, the corporate tax rate was 35 percent. Under the new tax code, the rate is 21 percent. This is a significant change that could impact how businesses conduct business. Retaining more of their profits could allow small business owners to invest in growth that would not have been possible before this year.
If you are a young entrepreneur who has recently started a company, you may not see any drastic changes quite yet because, if nothing else, many startups are not profitable in their first few years. But, the new tax code will be in place for at least the next decade. Factoring this rate into your business decisions could alter your long-term strategy.
Lastly, the fact that the corporate rate was reduced could impact how new business owners could choose to register their company. For instance, many small business owners elect to register as an LLC, which allows for pass-through taxation. However, any individual income earned more than $38,700 is taxed at a 22 percent rate.
So, some new business owners may find it more beneficial to form their company as a C-Corporation rather than an LLC because the tax rate is lower. Each individual’s situation could vary, and owners will want to consider dynamics such as double taxation. We recommend talking with an accountant or similar tax expert who can advise on which formation strategy is best. That’s because, as you’ll see in the section below, there are some new perks for LLC and S-Corp owners as well.
Some S-Corporations And LLCs Could Be Eligible For A Reduced Tax Rate
Under the new tax code, S-Corporation and LLC owners could qualify for a 20 percent deduction on “any income attributable to the entity.” However, the company must not be listed on a particular exclusions list. Generally speaking, any company whose sells to customers based on the reputation of the owner is excluded from this deduction. For instance, a small coffee shop would be eligible for the deduction but “Jane Doe’s Consulting” or “John B’s Financial Advice” would not. Excluded services and entities include:
- Health companies
- Consulting services
- Financial services
- Brokerage service industries
However, if the taxable income for an owner is less than $157,500 for single filers or $315,000 for joint filers after pass-through, they can still take the deduction. No one, regardless of the industry in which they work, can take the 20 percent deduction if income exceeds $207,500 for single filers or $415,000 for joint filers.
There Is No More Alternative Minimum Tax
In the past, the alternative minimum tax was a significant part of corporate taxation. Those who made more than the AMT exemption amount were required to calculate their taxes twice. Prior to the new law, five million Americans were impacted. Now, only an estimated 200,000 tax filers will be affected. Additionally, there is no longer an AMT for corporations. Contact your tax professional to see if you could potentially be someone impacted by the AMT.
Equipment Depreciates Faster
If you’re a small business owner who purchases expensive equipment for your company, you could be in luck thanks to the fact that the new tax code increases the rate at which items depreciate. Under the former law, business owners were required to amortize the cost of equipment over the useful life of the asset.
Under the new law, owners can fully deduct up to 1 million in equipment in the year in which the company purchased it. Those who have current tax liabilities and substantial fixed asset costs will benefit most from this change. The depreciation of assets is only in effect over the next five years, as it will phase out after 2022. Until then, business owners will find that they can expense nearly twice as much as they could previously.
Owners Can No Longer Expense Transportation And Entertainment
If you’re a small business owner who frequently treated clients to concerts and sporting events, we have bad news for you. Whereas you could deduct these expenses in the past, you can no longer deduct them from your taxes. Your meals, however, remain 50 percent deductible, just as they were in the past. Additionally, owners can no longer deduct travel to and from work. This also includes bicycle commuting reimbursements, which were formerly allowed.
If you’re an employer who provides your employees with paid medical or family leave, you could benefit from a deduction over the next two years. In 2018 and 2019, employers can deduct up to 12.5 percent of the wages they pay during this time. Additionally, those employers who pay employees more than half of their regular salaries are eligible for an even larger credit.
Many stipulations determine who is eligible for this program, however. For instance, if an employee’s total wages exceed $72,000, employers will not be able to take the credit. Additionally, the policy that declares paid medical and family leave must be written in a document such as the Employee Handbook.
Consult A Tax Expert
Taxes are already tricky for small business owners, but they will become much more challenging this year because of new regulations. We highly recommend that business owners contact a trusted tax professional to help guide them through the process. Licensed professionals can help maximize your return and profits, allowing you to invest more money in your company. They’ll also ensure you remain compliant with the new regulations which were put in place.