The biggest modification to tax law in 30 years brings a lot of positive changes to small business owners overall. However, in some areas, there are reductions in tax breaks as well as some deductions that disappear altogether. It’s important to understand how the 2018 tax law changes impact your business filing of 2018 taxes.
Corporate Tax Rate Reduction
If your business is registered as a C-corp, then good news! Your tax rate dropped from 35% to 21%. While this change can benefit largely-profitable corporations, small corporations might not make out as well. While the old tax code allowed for a 15% tax rate on the first $50,000 of taxable income, the new law means that corporate taxable income is taxed at a flat rate of 21%
S-Corp, Partnership, and LLC Tax Rate Reduction
If you qualify as a pass-through business, meaning you pay taxes on your business earnings as if it is personal income, then based on provisions in the 2018 tax law, you can probably deduct 20% of your qualifying income before doing the rest of the math on what you owe. However, there are a lot of rules and restrictions, which mostly apply to earners in excess of $157,500 on an individual return and $315,000 on a joint return. Consult with a certified public accountant (CPA) if this applies to you to make sure you take the correct deduction.
Meals and Entertainment
Meals during which business is discussed with coworkers or clients are 50% tax deductible. Meals eaten during business travel are also 50% deductible.
Company events such as parties and picnics are 100% deductible. However, client entertainment, recreation, or amusement—such as golf outings, cover charges, theater, and sporting events—are no longer considered tax deductible.
Net Operating Loss Deduction
The new tax rules reduce the deduction for net operating losses (NOLs). The IRS states the net operating loss deduction is limited to 80% of taxable income for losses arising in taxable years after Dec. 31, 2017. NOLs can be carried forward indefinitely, while NOL carrybacks are generally prohibited. Under the old law, NOLs could be carried back two years and carried forward 20 years.
Capping Business Losses on Individual Returns
A joint return is limited to $500,000 in business losses. Single filers are capped at $250,000 in business losses. While trade or business losses exceeding these amounts aren’t deductible in a single tax year, amounts over these caps can be carried forward. Ask your CPA to take into consideration current passive-activity loss rules to make sure you stay on the right side of tax regulations.
Expensing vs. Depreciation of Business Asset Purchases
If you purchase assets for your business that qualify, you can deduct the entire cost of these assets. If you would rather expense business assets rather than depreciating them, the cap on that amount has been raised to $1 million.
There are more subtleties to the changes of this law, so if you’ve purchased business assets and put them into service after September 27, 2017, it’s wise to consult with your CPA or business planner to determine whether you should expense the purchases outright or deduct the depreciation of the assets. If you expect your business tax bracket to rise in the future, the deduction could help you out down the road by keeping your future tax rates lower.
Vehicle Tax Breaks
The new tax law gives tax breaks to buyers of new or used business vehicles. Bonus depreciation is a tax incentive designed to allow the deduction of a large percentage of a qualifying business purchase, which comes into play with auto purchases. The first-year deduction of a percentage of the cost of the vehicle is larger, followed by smaller deductions allowed for depreciation in the following years. The first-year cap is $18,000 for passenger cars purchased after Sept. 27, 2017, and put into service in 2018. If you purchase a heavy SUV or heavy pickup truck for business use, you can deduct up to 100% of the cost.
An End to the Domestic Production Deduction
In past years, there was a 9% deduction of income gained from U.S.-based production activities. This write-off has been done away with under the new tax code, with no phase-out period. However, if your business’s fiscal year straddles 2017 and 2018, you might still qualify for the deduction. Check with your CPA.
The new tax law includes a wide array of changes, many of which don’t apply to every business out there. Other tax law changes that may or may not apply to your business include changes in the following areas:
- Employee commuter benefits
- Family medical leave
- Like-kind exchanges
- Settling sexual harassment claims
- Cash method vs. the accrual method of accounting
- Interest paid on business loans
Many changes to the 2018 tax law are of big benefit to business owners. As you file taxes this year, reflect on how you can change the way you do business in the coming years to take full advantages of these changes in the future. As always, be sure to consult with a professional to ensure you are filing taxes correctly and conducting business above board in the legal sense.