Learn how your business can reap the rewards of the new tax law.
When President Trump signed the Tax Cuts and Jobs Act (TCJA) on Dec. 22, it became the nation’s first major tax overhaul in 30 years.
Most business leaders and organizations laud the cuts as beneficial, and Republicans hope that slashed taxes will spur corporations and small business owners to reinvest the savings back into their businesses, sparking economic growth. Many believe the reduced corporate tax rate could also make the U.S. a tax haven country for corporations, stopping U.S. companies from relocating and inciting new businesses to set up shop within our borders.
Although it did not support initial versions of the new tax bill, the National Federation of Independent Businesses, an organization that represents more than 300,000 small businesses, praised the TCJA for providing significant tax relief. “NFIB fought for decades for a real tax cut for small business owners. The Tax Cuts and Jobs Act dramatically improves the way small businesses are treated, delivering hundreds of billions of dollars in tax cuts,” stated NFIB President and CEO Juanita Duggan.
As 2018 begins, businesses are scrambling to understand the impact of the new regulations on their bottom lines. Read on to determine what the new tax plan means for your company.
- Pass-through businesses get a break.Much of the new bill deals with a change to the tax structure for pass-through businesses, which comprise about 95 percent of U.S. companies, including partnerships, limited liability companies, sole proprietorships, and S corporations. These businesses pay no taxes themselves, rather profits are “passed through” to the owners, who pay tax on them at their individual rate, which could be higher than the rate for C corporations.
The new law grants a 20 percent tax deduction for most pass-through businesses; put simply, that means if you have the annual business income of $100,000, the IRS will only tax $80,000. There is one limitation: individuals who own service-based businesses like law firms or doctors’ offices can only claim the deduction if their annual income falls below $315,000 for married couples and $157,500 for single people. That’s because the bill is meant to provide a break on capital income, which comes from assets that accrue value over time, instead of labor income, which is generated by workers.
- The main event: lower taxes for corporations.The hallmark of the TCJA is a new lower rate for regular C corporations, which include all Fortune 500 companies and some small businesses. By changing the corporate tax rate from its previous range of 15 to 35 percent to a flat rate of 21 percent, lawmakers hope to transform the U.S. into a tax haven for corporations and make it more competitive in the global economy. The hope is that increased profitability due to lower taxes will make U.S. headquarters attractive and incentivize businesses to bring overseas money back home.
- 100 percent bonus depreciation.The new tax bill increases the bonus depreciation amount to 100 percent, meaning that business owners can write off the total cost of many types of equipment purchases up front, instead of depreciating the cost over many years. Previously, businesses could only deduct 50 percent of the cost of an asset in the first year. The new regulations also allow businesses to apply bonus depreciation to the purchase of used property for the first time. The increase can be used for long-term assets placed in service after Sept. 27, 2017. The 100 percent amount remains in effect until Jan. 1, 2023, after which the bonus depreciation number decreases.
- Increased benefits for company cars.The new regulations raise the annual limits on the amount of depreciation that can be claimed on passenger automobiles used for business. The new limits are $10,000 for the first year the vehicle is used, $16,000 for the second year, $9,600 for the third year, and $5,760 for every year after that.
- $1 million expensing.Under the prior tax law, Section 179 allowed business owners to deduct up to $510,000 in a single year of the cost of personal property they purchased and used for their business. The TCJA raises this amount to $1 million.
- Caps on interest deductions.The new tax plan prevents larger companies (average revenue of $25 million or more) from deducting interest payments that exceed 30 percent of their taxable income. Instead, those amounts must be carried forward to the next five taxable years. Companies with less than $25 million in annual revenue may continue to use the full deduction. Landlords also may fully deduct mortgage interest.
- No more carrybacks for net operating losses.A business suffers a net operating loss (NOL) when its expenses surpass its income for the year. Under the old tax law, NOLs could be carried back two years, causing a full or partial tax refund. The new regulations eliminate carrybacks, meaning NOLs can only be deducted in current and future years. The TCJA also only allows businesses to deduct NOLs for up to 80 percent of taxable income. Unused amounts may be carried forward and deducted in future years.
- The elimination of the corporate AMT. The TCJA keeps the alternative minimum tax (AMT) at a reduced rate for individuals, including business owners, but abolishes it for corporations. Previously, the corporate AMT invoked a 20 percent tax rate if tax credits pushed a firm’s rate below that level. The AMT also prevented companies from deducting research and development costs or investments in low-income neighborhoods.
- A tax holiday for money stockpiled overseas. The TCJAaims to encourage companies to repatriate the estimated $2.6 trillion they hold in foreign cash stockpiles with a one-time tax rate of 15.5 percent on cash and 8 percent on equipment.
- The end of certain deductions.The new tax bill cuts many business tax deductions, including:
- local lobbying expenses
- payment of employee parking, mass transit, or other commuting expenses
- business entertainment expenses, except meals
- domestic production activities
- beginning in 2026, meals given to employees for the benefit of the employer
The impact of the new tax plan upon your business is complex. A trusted financial advisor or accounting firm will help ensure that your business fully complies with the new regulations and reaps the benefits of the full extent of the tax law.
No Boundaries has been helping businesses like yours grow and thrive for over 25 years. Contact us today to find out how our expert staff can help you meet your financial goals.
