The good news: lower tax rates. The bad news: fewer deductions.
Although you won’t be filing a tax return based on the new law until 2019, you will have to abide by its provisions starting right now. Here’s an overview of the top 5 changes that could significantly affect your small business operations.
- Lower tax rates.
Pass-through entities (S corporations, LLCs, sole proprietorships and partnerships): This means that the net income from your business is “passed through” to your personal tax return. Until now, this income was taxed at the same rate that individuals pay. Under the new law, you can take a 20% deduction on that income. There are some exceptions, though, such as most service businesses whose taxable income exceeds $157,500 for single filers and $315,000 for joint filers.
C corporations: Until now, there was a graduated tax structure, up to 35% of income. All that has been replaced by a flat rate of 21% for all C corporations.
- Higher bonus depreciation.
Over the past several years, it seems like the rules changed every year for what percentage of “up-front” depreciation you could deduct on equipment or real estate purchased for your business, rather than writing it off over a period of years. This may make not only figuring your tax, but also tax planning for capital expenditures, pretty tricky. For your 2017 return (which you’ll be filing this year), bonus depreciation is 50%. Starting with your 2018 return, it’s 100%; and it will then be phased out completely over the next 5 years.
What’s more, this deduction can now be applied to “used” as well as new items, as long as they comply with the other terms of the provision.
- Expanded availability of cash accounting.
Cash accounting means that a company records income and expenses when they’re received or paid. With accrual accounting, a more complex system, income and expenses are recorded when they are owed. Under the old tax laws, a business couldn’t use cash accounting if its annual gross receipts averaged $5 million or more for the prior 3 years. That ceiling has been raised to $25 million. This should simplify things especially for businesses that carry inventory.
- Fewer deductions and credits.
We’ve listed a few of the ones most often claimed by small businesses:
- Business interest expenses: Reduced to 30% of taxable income. However, this rule doesn’t apply to businesses with average annual gross income of $25 million or less.
- Entertainment expenses associated with the conduct of business: Repealed.
- Transportation fringe benefits (mass transit passes, parking privileges, etc.): Repealed. However, if you continue to provide this benefit, it will be tax-free for your employees.
- Per diem rates at which you reimburse your employees for business travel expenses: No change.
- On-site eating facilities: Reduced from 100% to 50%. However, if you continue to provide this benefit, it will be tax-free for your employees.
- Domestic property activities (Section 199): Repealed.
- Net operating losses: You can no longer carry them back for 2 years, but the 20-year limit on carrying them forward is eliminated. You can deduct up to 80% of taxable income.
- Paid family or medical leave: There’s a new credit ranging from 12.5% to 25%, depending on the amount you paid your employee.
- Business property costs (Section 179): A bit of good news is that the amount you can deduct has doubled from $500,000 to $1 million; of course, that amount can’t be more than your income. And the phaseout ceiling has increased from $2 million to $2.5 million.
- Higher contribution caps for retirement plans.
If you offer a retirement savings plan to your employees, the amount you and they can contribute may have been increased.
- 401(k), 403(b) or 457: Increased from $18,000 to $18,500. The maximum for participants over the age of 50 making “catch-up” contributions has also increased, from $24,000 to $24,500.
- IRA and Roth IRA: No change, $5,500 for those up to age 49 and $6,500 for ages 50 and up.
Xendoo stands ready to help you sort out these complex new tax provisions, and take full advantage of the breaks they offer to small businesses. The time to start planning is now!