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August 27, 2018 | Posted in:

A Summary of the New Tax Law’s Changes for Small Businesses

The most sweeping tax overhaul in decades brings lots of changes in federal tax code for businesses, ranging from a lower corporate tax rate to big tax savings for asset purchases. But there are also some deductions that disappear and other breaks that are pared back to offset part of the massive cost of the tax cuts.

New Tax Rates

The new law reduces the income tax rate on regular corporations from a top rate of 35% to a flat rate 21%. Personal service corporations also get the 21% rate. Although this low rate is an advantage for most companies, some small C-corporations could actually end up paying a bit more. The corporate alternative minimum tax is gone.

While cutting the corporate rate to 21% lawmakers decided to offer a different kind of relief to sole proprietors and farmers who report income on Schedule C and F of their income tax returns, and to individuals who own pass-through entities – such as S-corporations, partnerships and LLCs – which pass their income to their owners for tax purposes. Starting with 2018 returns, many of these people can deduct 20% of their qualifying income before figuring their tax bill.

Depreciation Changes

The first-year bonus depreciation deduction is going from 50 to 100%. Companies can write off the entire cost of qualifying assets that they buy and place in service after September 27, 2017. It generally lasts until 2022 and then phases out 20% for each year thereafter. The break applies to new and used assets with lives of 20 years or less.

There is also a higher cap on expensing business assets. The maximum amount a taxpayer can expense for new or used business assets instead of depreciating them is $1 million. This limitation phases out dollar once more than $2,500,00 of assets are placed in service during the year. More property is eligible for expensing (personal assets used to furnish lodging such as beds, refrigerators, stoves in hotels, apartments; improvements made to commercial building roofs, HVAC equipment, fire protection and alarms, security systems).

New farm equipment can be depreciated over 5 years instead of 7 years, as long as the original use of the asset begins with the taxpayer. This doesn’t cover grain bins, cotton ginning assets, fences or land improvements.

The buyers of new or used business vehicle gets lots of breaks under the new tax law. The annual depreciation caps for passenger autos have risen.

Entertainment and Meals

The new tax law eliminates tax write-off for half of their business-related entertainment costs (show tickets, golf course fees, sporting events and etc.).

Holiday parties are still fully deductible. There are no changes to employee meals while on business travel as they are still 50% deductible by the employer. The cost of an employer-operated eating facility is now subject to 50% (the cost will be completely disallowed after 2025).

Miscellaneous Changes for Businesses

Companies get the new tax credit of employer-paid for family or medical leave. The credit can range from 12.5% to 25%, depending on the amount paid. This credit will disappear after 2019.

Businesses that settle sexual harassment claims cannot deduct the settlement amounts they pay if the payments are subject to a nondisclosure agreement.

The new law raises the threshold amount to $25 million for C corporations, partnerships, LLCs with C corporation owners to use the cash method of accounting.

The new tax disallow write-off for 9% of income derived from U.S. production activities.

The NOLs can not longer be carried back for 2 years, but can now be carried forward indefinitely.

Under the new law, a couple filing joint return is limited to $500,000 in business losses, while single filers can take no more than $250,000 in losses. The amount of trade or business loss that exceeds these caps is nondeductible, but any excess can be carried forward. This limitation applies after application of the current passive-activity loss rules.

 

Further Reading:

 

This was the first major tax overhaul in nearly 30 years. These tax cuts are a good thing for business, but it is important to keep in mind that these cuts will have a broad impact on the economy and future economic policy. Contact an Alloy Silverstein accountant and advisor for a tax planning checkup to rethink and retool your return before next tax season.

 

 

Author: Valentina Efremova

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