Love it or hate it, the new tax reform is here to stay. It’s important to understand how this new system will affect businesses from large businesses to the small startup company, especially if you own one. From comptroller tax audits to pass-through rates, here’s what you need to know.
The Tax Cuts and Jobs Bill has been called many things, but it’s main draw is the intent to provide benefits for the middle-class and business owners. In an effort to “deliver relief to the American people,” according to Paul Ryan, deductions and rates have been changed across the board.
Small business owners will notice that the largest change to take place is a new tax rate of 21% for what are considered pass-through businesses. These include S Corporations, partnerships, and sole proprietors. If your profits act as individual income and you pay taxes on them through your return, then your business counts as a pass-through.
Some businesses are excluded from that rate, however. Accounting, consulting, and law firms are a few examples. This is due to their usual lower number of employees and earnings. So, a business entity in Wyoming that acts as a sales consultant wouldn’t count as a pass-through.
In order to classify, many small businesses would have to hire on additional employees. The goal is to encourage job growth and expansion, but there’s a lot more to the bill than just that.
There are a number of other changes that affect small businesses in the Tax Cuts and Jobs Bill. The first aspect to consider is whether or not you conduct business internationally. Any portion of your profits made overseas are not taxed by the US, making the concept of international sales enticing.
Businesses that purchase equipment can now take advantage of higher deductions thanks to a change to Section 179 of the tax code. Purchases made after the start of 2018 can reach a million-dollar deduction as opposed to the traditional $510,000. Depreciation claimed on your property has also been increased to 100% instead of 50%.
While this sudden increase has many business owners excited, it won’t last forever. After the year 2022, those deduction percentages begin to decrease until they reach zero. Exclusions will still apply to specific properties, but the majority will no longer be able to claim depreciation.
Since your business’ yearly earnings are passed through to you, there are a few other points of interest you may want to know as an owner. Aside from the decreasing the number of tax brackets from fourteen to two, here are some other major changes taking place in 2018 onward.
● IRA contribution deductions have been limited
● There is no longer an Investment Tax Credit
● Dividend Exclusions are repealed
● Income Averaging is eliminated
Understanding the intricacies of a new tax law can be daunting, and you may want to consider comptroller audit defense by a firm like Monshaugen & Van Huff to keep your business safe from the IRS for now. With so many changes taking place at once, both good and bad, this will be a tricky tax year for small business owners across the board.