For most small businesses, the 2018 tax season is now over. Whew! You can take a deep breath. With the first tax year following the Tax Cuts and Jobs Act of 2017 under our belts, it’s time to look back to see what affect Trump’s historic tax reform had on businesses.
Did My Small Business Benefit From Tax Cuts?
While large corporations, typically called C corps, saw their tax rate drop from 35% to 21%, most small businesses got a tax break of their own. The Qualified Business Income Deduction was available for business owners who report business income on their personal tax forms.
What this tax cut meant is that you could generally deduct 20% of the net income of your business, as long as your taxable income was less than $157,500 ($315,000 for married taxpayers filing jointly). For example, if the net income from your business, after deducting expenses, was $80,000, you only had to pay taxes on $64,000. If your taxable business income was higher than this threshold amount, you might have still qualified for a deduction, but depending on your occupation, there were limitations to what you could deduct.
Did My Business Qualify for the 20% Business Income Deduction?
The 20% business income deduction applies to virtually all non-C corp businesses, such as sole proprietors, partnerships, limited liability companies (LLCs), and S corps (which have limited shareholders). These business entities don’t pay taxes on their own, but instead, pass the income through to those with a stake in the business. That’s why it’s called pass-through income and why it’s reported on personal income tax forms.
All businesses with pass-through income up to the above thresholds qualified for the business income deduction in 2018. But once you got into a higher income bracket, things got a bit messy. If your business was deemed a “specified service trade or business” whose income exceeds the limits, you didn’t qualify for this tax break. Specified service trades include doctors, lawyers, accountants, and even actors and athletes, among others.
Particularly for higher-income earners, the calculation for this deduction can become quite complex. You may want to seek the advice of an experienced tax accountant to make sure you’re taking full advantage of this deduction.
How Does Estate Tax Reform Help My Business?
For 2018 filers, Trump’s tax plan doubled the estate tax exclusion to $11.9 million for individuals ($22.36 million for married couples). This was good news for many small business owners hoping to pass their businesses on to their heirs. If your business was valued below the above limits, you were able to give your business to someone else without them having to pay estate tax.
Be aware, though, that the amounts for this estate tax exclusion, barring action by Congress, are set to return to $5 million in 2026. Given the up-and-down nature of this number, you will want to be flexible and plan accordingly in the future.
What Expenses Did I Lose?
Businesses rely on deductions to offset some of the taxes they would otherwise pay. In 2018, small businesses retained most of these deductions, including a deduction of 50% on meals you had with a current or potential client, as long as it wasn’t lavish and was directly related to your business. However, you also lost some expenses you could have previously deducted.
The Tax Cuts and Jobs Act of 2017 eliminated deductions for entertainment, amusement, or recreation expenses. So, you could no longer treat your clients with tickets to a big game or other leisure-time activity. It also modified a number of other business deductions, including:
- Limiting deductions for business interest incurred by certain businesses
- Changing like-kind exchange treatment so that it now applies only to certain exchanges of real property
- Disallowing deductions for certain payments made in sexual harassment or sexual abuse cases
- Repealing an exception that previously allowed you to deduct local lobbying expenses
- Instituting excess business loss limitations on non-corporate taxpayers
- Eliminating the option to carry back a net operating loss (NOL)
Consult with the IRS or with a tax accountant on what each of these may mean to your business.
What Expenses Did I Gain?
While you may have lost expenses in one area, you may have gained them in another. The new tax law changed how some depreciation was handled.
The new law temporarily allowed you to depreciate certain new assets more quickly. If you purchased new business assets – computers, machinery, vehicles, property – after September 27, 2017, you were able to depreciate it 100% in the first year rather than spreading it out over several years. This is called accelerated depreciation or bonus depreciation. The 100% allowance stays into effect through the 2022 tax year, after which it generally decreases by 20% per year from the 2023 to 2027 tax years.
The new law also increased the maximum deduction for new assets from $500,000 to $1 million. Deducting more assets in the 2018 tax year put more money in your pocket, which you can now invest back into your business.
What’s Ahead for My Business Taxes in 2019?
How the IRS treats your business taxes in 2019 should be pretty much the same as it was in 2018. The difference is that you now know the overall and specific impact of the new law and can adjust accordingly.
Getting the assistance of qualified tax accountant can help you optimize your tax situation in 2019 and beyond, helping to drive your business to higher success.