Important New Tax Law Changes Affecting Small Businesses

Important New Tax Law Changes Affecting Small Businesses

A recap of the major changes impacting corporations and closely held firms.

5/29/2018
tax planning

The Tax Cuts & Jobs Act changed the tax picture for business owners. Whether your company is incorporated or held closely, you must recognize how the recent adjustments to the Internal Revenue Code can potentially affect you and your workers.
 
How have things changed for C corps? The top corporate tax rate has fallen. C corps now pay a flat 21% tax. For most C corps, this is a big win; for the smallest C corps, it may be a loss.¹

If your C corp or LLC brings in $50,000 or less in 2018, you will receive no tax relief – your firm will pay a 21% corporate income tax as opposed to the 15% corporate income tax it would have in 2017. Under the old law, the corporate income tax rate was just 15% for the first $50,000 of taxable income.^1,2

Another notable change impacting C corps involves taxation of repatriated income. Prior to 2018, American companies paid U.S. tax rates on earnings generated in foreign countries; those profits were, essentially, taxed twice. Now they are being taxed differently – there is a one-time repatriation rate of 15.5% on cash (and cash equivalents) and 8% rate on illiquid assets, and those taxes are payable over an 8-year period.²

By the way, the 20% corporate Alternative Minimum Tax (AMT) is no more. The tax reforms permanently abolished it.²
 
What changed for S corps, LLCs, partnerships, and sole proprietorships? They can now deduct 20% of the qualified business income they earn in a year. Cooperatives, trusts, and estates can do the same. This deduction applies through at least 2025.^2,3

The fine print on this deduction begs consideration. If you are a lawyer, a physician, a consultant, or someone whose firm corresponds to the definition of a specified service business, then the deduction may be phased out depending on your taxable income. Currently, the phase-out begins above $157,500 for single filers and above $315,000 for joint filers. Above these two thresholds, the deduction for a business other than a specified service business is limited to half of the total wages paid or one quarter of the total wages paid plus 2.5% of the cost for that property, whichever is larger.²

Salaried workers who are thinking about joining the ranks of independent contractors to exploit this deduction may find it a wash: they will have to pay for their own health insurance and absorb an employer’s share of Social Security and Medicare taxes.²
 
What other major changes occurred? The business depreciation allowance has doubled and so has the Section 179 expensing limit. During 2018-22, the percentage for first-year “bonus depreciation” deductions is set at 100% with a 5-year limit and applies to both used and new equipment. The maximum Section 179 deduction allowance is now $1 million (limited to the amount of income from business activity) and the phase-out threshold begins $500,000 higher at $2.5 million. Also, a business can now carry forward net operating losses indefinitely, but they can only offset up to 80% of income.⁴

The first-year depreciation allowance for a car bought and used in a business role is now $10,000; it was $3,160. Claim first-year bonus depreciation, and the limit is $18,000. (Of course, the depreciation allowance for the vehicle is proportionate to the percentage of business use.) The TC&JA also created a new employer tax credit for paid family and medical leave in 2018-19, which can range from 12.5%-25%, depending on the amount paid during the leave.^4,5

Some longtime business tax deductions are now absent. Manufacturers can no longer claim the Section 199 deduction for qualified domestic property activities. Business deductions for rail and bus passes, parking benefits, and commuter vehicles are gone. Deductions have also been repealed for entertainment costs linked directly to or associated with the conduct of business.⁴

Business owners should also know about the new restriction on 1031 exchanges. A like-kind exchange can now only be used for real estate, not personal property.³