It’s tax time! As you likely know if you’re a business owner, taxes are one of the most critical issues you face. This year, with the enactment of President Trump’s Tax Cuts and Jobs Act, things may seem even more confusing.
The impact of the new tax plan is both positive and negative, depending on your industry and the way your business is structured. Here are a few things you should note about the new tax code. Please keep in mind that these changes will go into effect next year, when you submit your 2018 taxes:
C-Corps Get a Good Deal
C-Corporations (C-Corps) are taxed at a flat rate of 21%—a cut from the previous range of 15%–35%. If your small business is structured as a C-Corp, generally, your taxes will go down. If your business is not structured as a C-Corp, this change will not affect you.
New Pass Through Deduction
The new pass-through deduction is generally 20% of the qualified business income of partnerships, S-Corporations and sole proprietorships.
There are restrictions depending upon your business is defined as a “service” business. Further restrictions may apply depending on your taxable income. Calculations unfortunately are not simplifying the tax code, quite the opposite.
For non-service businesses, if the taxpayer’s taxable income is less than the threshold amounts of $157,500 (or $315,000 if married and filing a joint return), there is no limitation on the deduction. If the taxpayer’s income exceeds the threshold amounts, the deduction may be limited based on the amount of wages paid by the business and the unadjusted amount of qualified property in the business.
Solo Entrepreneurs Can’t Catch a Break
If your small business generates revenue through the professional services of one person, your eligibility for this deduction phases out for income between $315,000 and $415,000.
Equipment Write-offs are Better, For Now
If you’ve been waiting to buy new equipment for your business, you should be excited about the new tax plan. You’ll be able to write off 100% (“full expensing”) of the cost of your new or used equipment and certain qualified improvement property bought after September 27, 2017 through December 31, 2022. However, the bonus depreciation percentage will phase-down from 80% for property placed in service during calendar year 2023 to 20% for property placed in service during calendar year 2026.
Deductions take a Hit Under the New Tax Law
One of the negative impacts for small business owners is the elimination of certain deductions, such as entertainment expenses. The Domestic Production Activity Deduction (DPAD) is [also] eliminated in the new tax law.
So, what’s the real impact on the average small business owner? We shall see as the future unfolds.
This is intended to be a very high level overview of the new tax law.
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