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How Does the New Tax Law Affect My Small Business?The new tax law affects individuals, C Corporations and businesses that operate on a pass through basis (Sole-Proprietorships, Partnerships, S Corporations and LLC’s) in different ways. In this article we examine the effects on business taxpayers.
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This Is Not True Tax Reform or SimplificationThe new tax bill provides potential tax reduction for most business taxpayers, especially large corporations, beginning in 2018. There is no change for 2017. It is not, however, true tax reform or simplification, although there can be some simplification for some taxpayers. The Internal Revenue Code spells out the rules that the government follows to collect the money it needs to pay its obligations. It is also a political tool. This bill is almost 1100 pages long, yet it does little to change the fundamental structure of the tax code or simplify it. In fact, many of the changes affecting individuals were put in place to offset projected lost revenue to the government due to significant decreases in the tax on some corporations also included in the bill. A better term, then, might be tax tinkering.
Who Are the “Winners” and “Losers”?Unfortunately, there is a lot of hype that surrounds a new law such as this and there is always demand to know who wins and who loses. This is almost always driven by the agenda of the person or persons asking the question. However, for the business taxpayer, the only consideration should be how the law affects the business given its unique situation, especially if the business is a pass through entity mentioned above. In this article, we attempt to cover the basics so that businesses can plan accordingly. As with any financial, business, or tax situation, the taxpayer should evaluate all aspects of any transactions they either are already involved in or are thinking about and, if necessary, consult a competent professional such as a Certified Public Accountant or an Enrolled Agent. Proper tax planning doesn’t take into account how it affects someone else. The goal is for the taxpayer to come out as the winner.
How Has the Corporate Tax Rate Changed for 2018?Perhaps the most significant change in the new law relates to the corporate tax rate. Regular, or C Corporations, are taxed at different rates than individuals and all other forms of businesses that are pass through entities where the income of the business is taxed at individual rates. The new law replaces a series of tax brackets for C Corporations with a permanent flat 21% tax rate for all taxable income of the C Corporation. This will result in less taxes for any C Corporation that has taxable income of more than $90,385, based on 2017 corporate tax rates, beginning in 2018. Above that figure, the corporation is getting a tax break, below that figure it would owe more taxes. This will have a significant effect on very large C Corporations, which is the intent of the new law, by freeing up more profit to be invested as the corporation sees fit.
What If My Business Is Not a C Corporation?Most small and medium-sized businesses are not C Corporations, and the new corporate tax rates do not affect them. Rather, they are pass through entities where, as was mentioned above, the profit or loss of the business is taxed on the owner(s) individual tax return. The new tax law outlines separate rules for the taxation of these types of businesses.
How Are Pass Through Entities Taxed in the New Tax Law?In general, the new tax law allows owners of Sole-Proprietorships, Partnerships, S Corporations, and LLCs to deduct, on their individual tax returns, 20% of qualified income from the entity. For example, a sole-proprietor whose business had qualified income of $50,000 would get a deduction on their personal tax return of $10,000 in determining their taxable income which, again, would then be taxed at their individual tax rate. This is a very simple example. In reality, there are a number of definitions, thresholds, and limitations that apply to this deduction which may serve to make it a very complicated calculation at best. If you have an ownership interest in any of these types of entities, you should proactively consult a competent tax professional such as a Certified Public Accountant or Enrolled Agent to see how the provisions apply to your business and the effect it will have on your individual tax situation.
What Other Changes in the New Tax Law Affect My Business?The only other rather significant change affecting businesses under the new tax law relates to the deduction for depreciation of business assets.
- Businesses are allowed to accelerate the amount of depreciation they can take on the purchase of new property and equipment through bonus depreciation and Section 179 expensing.
- In general, Section 179 allows a business to write-off up to $500,000 of the cost of new and used property and equipment in the year of acquisition used in a trade or business (not including rental property) with certain restrictions. The new tax law increases this amount to $1,000,000.
- Bonus depreciation, under the old law, applied only to new property and equipment and, in general, allowed an additional 50% deduction after taking a Section 179 deduction. The new law increases this amount to 100% and extends it to used property as well.
- The limitations on depreciation of passenger vehicles used in a trade or business is increased under the new law.