This year, your small business will be in the most advantageous place if you have a comprehensive understanding of the Tax Cuts and Jobs Act from back in December of 2017. The overall goals of the tax reform were to make the United States an attractive place to do business, to simplify the deductions process to make it less time consuming and thus costly, and to incentivize small business. However, some of the deductions you hold dear and have structured your expenses around may be going away, so it is wise to know how the cuts and 2018 tax law changes will affect you. We will explore all of these changes below, offering examples of how each might affect your business.
Corporate Tax Rate Cut to A More Competitive Level
One of the biggest changes is the shift from a 35% corporate tax rate and a variety of brackets to a flat, 21% tax on profits; this is much closer to other countries who have low corporate tax rates. This is generally good news – it makes the system less complicated, and most small businesses will pay lower taxes as well.
20% Business Income Deduction for Small Businesses and Pass-Through Entities
A 2018 tax law change that is a huge benefit for small businesses, including most pass-through entities, is the ability to deduct up to 20% of your business income off the top (the amount varies once you are hitting a fairly high-income level). This amounts to a major reduction in taxes paid, even before you make your itemized expense deductions. Passthrough businesses, including sole proprietorships where all income for the business is eventually “passed through” as income to the individual, will see major tax relief from this rule.
Buying Business Assets
100% Bonus Depreciation
For a few years after the Tax Cut and Job Act goes into effect (until January 1st, 2023), it will be possible to claim more (100% instead of 50%) of one’s qualified property purchases upfront, rather than having to calculate their depreciation every year. There are exceptions to this 2018 tax law, but for many qualified capital expenses, your business can experience the tax benefits now, rather than having to wait a number of years, each year receiving the value of depreciation as a deduction from your taxes.
This offering is part of the broader goal of incentivizing small businesses (and others) to expand here in the United States, making it less risky to do business here and potentially less costly. If you were considering expanding or purchasing equipment that would make your work faster and more efficient, now might be the right time.
Bigger Vehicle Tax Breaks
If you use a vehicle for your small business, you will now be able to claim much larger “depreciation” per vehicle each year per the 2018 tax law changes. You do have to note if the vehicle is used for some percentage of personal travel, but here are the new limits for claiming depreciation for company vehicles or 100% company travel in vehicles:
- $10,000 for Year 1 or $18,000 with the new temporary option for 100% bonus depreciation.
- $16,000 for Year 2
- $9,600 for Year 3
- $5,760 for Year 4 (this continues until the entire value of the car is depreciated)
If you were holding off on getting a higher quality car for your business, the ability to pay fewer taxes on it over time may be the boost you needed to choose a different corporate vehicle for your business.
Write-offs for Golf Club Outings Axed—Client Meals a Grey Area
A big part of business culture, golfing trips, now is going to be a bit more expensive for small business owners according to the 2018 tax law changes. In the past, if you were entertaining clients, you could take a 50% expense deduction on the cost of the activities to entertain them. This might apply to sports competitions, concerts, or even (yes, sadly) golf rounds.
A grey area when the TCJA first came out was business expenses and beverages; after all, meals are both a cost of doing business and a form of entertainment. However, the IRS has confirmed that the past 50% expense deduction is still in play for client meals and beverages, as long as the costs are fully separated from any entertainment. One example to avoid would be a dinner cruise with music; the cost of the ticket would include both entertainment and meal, so you would be on shaky ground to deduct any portion of it. Find ways to pay for meals and beverages separately and keep good records to show how they are business-related meals.
Only Real Estate, Not Other Capital Equipment, Can be Like-Kind Exchanged
The 2018 tax law benefits of “like-kind exchanges” kept from triggering the idea of “sale” along with all of the taxes involved. Now, real estate can be traded in this way, but items like heavy equipment and artwork will no longer be eligible with the 2018 tax law changes.
Removed Domestic Production Deduction
In an effort to create jobs back in 2004, the Domestic Production Deduction offered businesses the chance to take a 3% deduction on any of their activities that qualified as “U.S.-based business activities.” At this point, this deduction has gone away; the other provisions of the TCJA will hopefully result in a more favorable and more streamlined tax process for your business, but it is sad to see a deduction disappear.
Changes to Commuter Benefits
By lowering the tax rates overall, the TCJA hoped to reduce the nickel-and-diming process of having small benefits here and there. One of them was for businesses to provide commuter benefits; they had expense deductions for paying commuter benefits. With the 2018 tax law changes, there is still an allowance for commuters to pay their commute expenses with pre-tax dollars, up to $260 each month, but for businesses that in the past actually paid for the commute expenses of their employees to receive a tax deduction, that deduction has gone away.
Net Operating Loss Deduction and Business Loss Caps
The big changes to Net Loss Operating are that the offset rate for taxable income used to be 100% and involve a carryback period, but for most businesses, the available offset is now 80% and can only be carried forward (and even that is sometimes limited as well). This is one section of the tax code that, if possible, has gotten more complicated; if you expect an NOL, read more here.
In a similar vein, if you experience high business losses, with the 2018 tax law changes, you can now claim them only up to a point ($500k jointly, or $250k as an individual); excesses of loss can be carried forward, but this represents a curtailing of massive business loss claims.
New Family-Paid-Leave Credit
There are a lot of nuances to the new incentive being offered for tax years 2018 and 2019 for offering paid family and medical leave, but here are some of the basics:
- If your employees earned less than $72,000 in 2018, they may qualify.
- If you offer your employees at least 2 weeks of paid leave, with “paid” meaning at least half their typical earnings.
- You then qualify for a credit of about 1/4 of the paid leave, i.e. 12.5% as a tax credit if you pay half their earnings, up to 25% as a tax credit if you give full paid leave.
This credit could be extended, but there has never been a better time to offer family paid leave to your employees, who might really benefit from it.
Sexual Harassment Claim Settlements
With the 2018 tax law changes, if an NDA is involved in sexual harassment claim settlements, those amounts of money are no longer deductible; the legal fees involved are also not deductible. This could impact companies in a variety of ways, but recognize the situation before choosing the NDA route or a particular settlement amount.
2018 Tax Law Change Tips and What to Do Next
- Evaluate how the cut tax rate and the pass-through deduction of 20% will affect your business tax expenses.
- Talk to an accountant about what kinds of 100% bonus depreciation or other incentives could benefit your business.
- Figure out if it makes financial sense to start expanding: can you hire a new employee, offer better paid medical and family leave, or purchase a new piece of equipment, given the savings you stand to gain?
- Do your homework: make sure that the deduction or the credit you have your eye on won’t expire quickly. Many of the provisions of TCJA only extend through 2025 or even sooner, so long-term planning should still be an open question.
April 15th, 2019 and Other Important Deadlines
This year, the deadline for sole proprietorships falls on April 15th, a Monday, which is also the first estimated tax deadline; plan to get both of those in as early as you can! The other tax deadlines this year include:
- Deadline to file W2s or 1099-MISC to freelance contractors: January 31st, 2019
- Deadline to file for S-Corporations and Partnerships: March 15, 2019.
- Deadlines for Estimated Taxes: June 17th, September 16th, and January 15th, 2020
Here are some of the places where you can learn more about the tax changes and make sure you maximize your savings:
One of the best ways to quickly and easily maximize your return is to use high-quality Tax Software with excellent customer support. Try the CUE Marketplace recommendation engine to find out which tax preparation software is best for your small business.