The new tax law passed by Congress last year, formally known as The Tax Cut and Jobs Act (Public law no. 115-97), has attracted its fair share of both champions and critics for the drastic changes it makes to the Internal Revenue Code. However, many experts have appropriately pointed out that the act has some specific benefits for small businesses that meet certain criteria. Here are some of the key provisions that are likely to affect small businesses in the near future.
Pass-Through Entities Get a Big Break
In the past, the net income of pass-through entities like partnerships, S corporations, limited liability companies (LLCs), and sole proprietorships were effectively taxed at the same rate as individual taxes. The new law creates a 20 percent deduction on income for pass-through entities, with the intention that small businesses reinvest this savings in their enterprise to help grow the business.
However, there are a number of constraints on the deduction including the type of business, its financial state, and the taxpayer’s income. The deduction only applies to “qualified business income,” and can’t be claimed by taxpayers in a number of service industries, notably health care, law, performing arts, and most financial services, among many others. Family businesses may be affected by this provision.
The qualifying industries are eligible for the pass-through deduction if the taxable income is less than $315,000 if married filing jointly, or $157,000 if single. While the tax cut has justifiably drawn scorn for its benefits to large corporations, this deduction throws a small carrot to hard-working entrepreneurs.
Corporate Taxation Slashed
For those running their small businesses under a formal corporate structure, the tax bill offers a huge change. The graduated tax rate for corporations has been reduced dramatically from 35 percent to a flat rate of 21 percent. In addition, the law makes cash accounting an option for corporations making less than $25 million in gross receipts.
Section 179 Deductions Expanded
Under Section 179 of the Internal Revenue Code, a business could traditionally expense up to half a million dollars of the cost of qualified business property, subject to a phaseout above $2 million. The new law doubles the maximum allowance for property to $2.5 million, limited to the amount of income from business activity.
Watch Out for Disappearing Deductions
As a caveat, these massive reductions in corporate tax rates have to be supported by other rules. The new tax law effectively eliminates many of the deductions and exclusions that small businesses have traditionally enjoyed, including business interest deductions, entertainment expenses, expenditures to provide access for disabled individuals, and many more. Be sure to read over the changes at the IRS website or consult a professional for more details.
Strategies for Navigating the Tax Code Changes
Because these changes are coming fast and furiously, it can be challenging to stay informed of all the new rules. First, you’ll want to employ technology to ease your pain—there are tons of new digital and web-based tools that can help you automatically stay on top of the new withholding codes.
There are also online resources that have assembled summaries and examples of how the new tax law affects each type of business, whether it’s a sole proprietorship, a corporation, or even a franchise.
Another way to push the easy button is simply to hire a tax professional like an accountant or a bookkeeper to help you navigate the stormy changes in the tax law. Finally, it’s important to keep an eye on forthcoming guidance from the Internal Revenue Service by checking their website or setting an alert for “IRS.gov.”