7 Small Business Tax Reform Tips You Should Learn About Now
This post covers how to navigate small business tax reform as an entrepreneur or small business owner, brought to you by Block Advisors.
The most extensive tax code overhaul was passed in the past year – the Tax Cuts and Jobs Act (TCJA). It impacts tax deductions, depreciation, expensing, tax credits and other tax items that affect businesses.
Taking effect on Jan. 1, 2018, TCJA was enacted partly to help businesses grow, so for many small businesses tax reform is a good thing! However, there are some new limitations you also need to be aware of.
Here is a brief overview of small business tax reform changes:
1 – 20% deduction (Qualified Business Income Deduction | Passthrough Deduction)
Starting in 2018, small business owners and independent contractors can deduct up to 20% of their net business income before computing federal income tax. Under the new law, business income generally means the profits from your business. That includes income from Schedules C and F, as well as passthrough income from partnerships and S corporations.
The 20% deduction is a “below the line” deduction. That means it doesn’t reduce your adjusted gross income (AGI) or impact other AGI-related tax items that .
NOTE: The deduction is reduced for taxpayers with taxable income greater than $157,500 ($315,000 if married filing jointly) for 2018.
2 – New tax rates
If you are self-employed or your business is a pass-through entity, you are privy to new tax brackets on your personal tax return. Take a look at our recent post on 2018 tax brackets, which will impact your upcoming return.
In it, you’ll notice the numbers for tax year 2018 that you’ll use for the return you’ll file in 2019. They are different from the numbers and tables that you used to prepare your 2017 tax return in 2018. Similar to previous years, there are still seven tax rates, broken down by filing status. The top tax rate is now 37%, while in prior years it was 39.6%. The other marginal rates are: 10%, 12%, 22%, 24%, 32%, and 35%.
The TCJA also permanently lowers the corporate rate paid by most C corporations to 21%, beginning in 2018.
3 – Business purchase deductions
Business purchases, including technology equipment, furniture, and other qualifying property, are now fully deductible if acquired or placed in service after September 27, 2017 and before January 1, 2023. After that, the deduction for bonus depreciation will be limited.
Alternatively, the maximum section 179 deduction increased from $500,000 to $1 million in 2018 and now includes certain building improvements.
4 – Net Operating Loss Requirements
When your business’ operating costs exceed the revenue generated on your business tax return, it creates a net operating loss (NOL). While the TCJA generally no longer allows businesses to carry those losses back, you may now carry NOLs forward indefinitely and use them to offset 80% of taxable income in a future tax-reporting period.
There are exceptions to the no-carryback rule for farming losses and certain other businesses. Also, excess business losses, (generally, business losses greater than $250,000 or $500,000 for joint filers) are not deductible in the year they arise but must be added to the taxpayer’s NOL which is carried forward.
For many businesses this is NOT a perk b/c current year losses are limited, they can’t be carried back, and are only 80% deductible going forward.
5 – Standard Deduction Increase
The new tax law nearly doubled the standard deduction and eliminated exemptions claimed for you and your dependents. While the higher standard deduction and removal of exemptions are two major changes in tax reform, they alone won’t determine whether you’ll pay more or less taxes.
6 – [New Provision]: Opportunity Zones
New to TCJA is Opportunity Zones, which provides tax benefits to business investors. Investors can elect to temporarily defer tax on capital gains that are reinvested in a Qualified Opportunity Fund (QOF). The tax on the gain can be deferred until the earlier of the date on which the QOF investment is sold or exchanged, or Dec. 31, 2026. If the investor holds the investment in the QOF for at least ten years, the investor may be eligible for a permanent exclusion of any capital gain realized by the sale or exchange of the QOF investment.
7 – Cash method of accounting
Cash accounting is the most straightforward method of accounting, where you only account for income when the money is received and expenses when they are paid. Thanks to the TCJA, qualifying C corporations with up to $25 million (for 2018) in average annual gross receipts may now use the cash method of accounting. Previously, the gross receipts test was $5 million.
Tax planning is a big part of managing your small business, so it’s important to understand how the changes from TCJA impact you. Connect with a trusted tax advisor to learn how your unique situation may be impacted.
Make an appointment now.
Small business owners should also review tax reform changes for individuals and determine how these provisions complement their business’ tax situation. Find additional details on small business tax reform with the IRS resource: “Tax Reform Provisions that Affect Businesses”.