Tax Cuts and Jobs Act -What Business Owners Need To Know

Tax Cuts and Jobs Act

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) legislated in December of 2017 has had positive impacts in the lives of citizens and the corporate world as well. It has reduced the income tax for the majority of people until 2025. Businesses and corporations, on the other hand, have received a remarkable cutback in their income tax rates. Other changes include a reduction in taxes for individuals that own pass-through entities, a rise in estate tax exemptions as well as alternative minimum tax. The negative side of TCJA includes its eradication of tax breaks and certain deductions.

The Tax cuts and Job act is expected to generate more job opportunities, increase the economy’s growth by 1.7%, raise wages by 1.5% and capital stock by 4.8%. These expectations are a result of the decrease in corporate income tax. As a business owner, it is essential that you are familiar with these laws and their impact on your trade.

Tax Cuts and Jobs Act

20% Deduction

The TCJA bill lowered business tax to 21% for large corporations. This deduction, however, does not apply to small businesses such as partnerships and Sole Proprietors as they are pass-through business entities. Since these entities are taxed through their owners’ individual tax return, the legislature introduced a 20% deduction on their ‘Qualified Business Income’. Domestic business owners then pay tax on only 80% of their income. This deduction, however, applies to income below $157,000 for single taxpayers and $315,000 for married people. The TCJA, therefore, offers something for every kind of business regardless of its size. Consult a professional to check if you are eligible for the deduction or how you can take advantage of this new bill.

Bonus Depreciation

Business assets such as machinery wear out and tear over time. For this reason, the asset’s cost is spread over its service life by the depreciation process. While this process is useful for a business’s accounting reasons, it also helps in taxation as business owners can deduct the amount spent on an asset as expenses by IRS rules. Bonus depreciation, on the other hand, entails a significant deduction on the cost of a long-term fixed asset made instantly in the first year instead of over its useful/service life. This deduction has been 50% of the asset’s cost from 2015 until 2017 when the TCJA increased it to 100%. The change will, however, only last up to 2023.

Assets that qualify for the new bonus depreciation rate include private property such as cars, furniture, and equipment that is used in the business and can last for almost 20 years. It, however, does not apply to real property like real estate. Business owners should discuss with their accountants to know if and how they can benefit from this new deduction.

Changes in Net Operating Losses

Losses are normal in business. When the income of a company in one year is less than the expenses it has incurred, the business then has a Net Operating Loss. Before TCJA, a business could get a refund of the taxes it has paid for the past two years by carrybacks. The bill has however removed carryback except for losses in the agricultural industry. The NOL is now deductible on 80% of income in the future years.

Removal of Some deductions and Certain Credits

The new tax bill has also scrapped off deductions such as expenses on entertainment and local lobbying as well as domestic production.  Deductions in meals offered by employers to their workers remain but only until 2026. It is therefore essential for business owners to plan and budget for these expenses. The bill has also established a tax credit for employees on leave. This credit involves 12.5% of an employee’s leave salary on the condition that the payment is 50% of the regular wage. If the employee receives more than 50%, the credit also raises. This tax credit, however, applies in 2018 and 2019 only and for leaves that last for a maximum duration of 12 weeks. Employers and business owners should thus consider this tax credit when paying employees on leave.

Reforms in Estate Tax

For most business owners, their acquired wealth is usually passed down to their younger generations after death. This wealth, in the hands of a different owner, is taxed on if it exceeds the exclusion amount. The exclusion amount has varied in different years, and in 2017, it was at 5.49 dollars. The Tax cuts and Jobs Act raised this amount to $11.9 million in 2018 for single taxpayers and 22.36 million dollars for married people. This new exclusion amount was twice the amount in 2017, and hence more people, especially those who own small businesses can pass down their estates for free. However, this exclusion amount will last only up to 2026, where it will go back to $ 5million. The new estate tax will, therefore, make it easier for heirs of small businesses to take over the business.

Learn More

In conclusion, the Tax Cuts and Job Act was created to boost trade, develop small businesses, and consequently improve the economy. Business owners should hence familiarize themselves with these laws and use them to grow. Learn more by scheduling a consultation with Ash CPA. You may call 617) 462-6651 or request an appointment online. Also, we are located at 945 Concord Street, Suite 100 Framingham, MA 01701.