Tax Guy: The top 10 tax changes affecting small business owners
The Tax Cuts and Jobs Act (TCJA) included a bevy of changes that will affect the 2018 federal income tax returns of many small and medium-sized businesses and their owners. As tax return time approaches, here are the 10 changes that are most likely to affect your business or you as an owner.
1. New flat 21% tax rate for corporations
Before the TCJA, C corporations paid graduated federal income tax rates of 15%, 25%, 34%, and 35%. Personal service corporations (PSCs) paid a flat 35% rate. For tax years beginning in 2018 and beyond, the TCJA establishes a flat 21% corporate rate, and that beneficial rate applies to PSCs too. So the tax cost of doing business as a profitable C corporation is greatly reduced, and this favorable development will show up on 2018 corporate returns. Enjoy.
2. No more corporate AMT
Under prior law, the corporate alternative minimum tax (AMT) was imposed at a 20% rate. Corporations with average annual gross receipts of less than $ 7.5 million were exempt, but the corporate AMT still snared quite a few medium-sized businesses. For tax years beginning in 2018 and beyond, the TCJA repeals the corporate AMT, which eliminates the need to make a bunch of complicated tax return calculations in addition to possibly owing more tax. We won’t miss the corporate AMT.
3. New deduction for income from pass-through business entities
Under prior law, net taxable income from so-called pass-through business entities (sole proprietorships, partnerships, LLCs that are treated as sole proprietorships or as partnerships for tax purposes, and S corporations) was simply passed through to individual owners and taxed at their personal rates.
For tax years beginning in 2018, the TCJA allows a new deduction for individual owners of pass-through entities based on the owner’s share of qualified business income (QBI) from those entities. This new break is also available to estates and trusts that own interests in pass-through business entities. The deduction can be up to 20% of QBI, subject to restrictions that can apply at higher owner income levels. For details see here.
4. 100% first-year bonus depreciation
For qualifying assets placed in service between 9/28/17 and 12/31/22 (or by 12/31/23 for certain assets with longer production periods and aircraft), businesses are allowed to deduct 100% of the cost in Year 1. The 100% instant write-off is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate. This change will be a major tax-saving benefit on many 2018 business returns, including returns for sole proprietors and owners of pass-through entities.
5. Section 179 first-year depreciation deductions
For qualifying assets (including expenditures for certain building improvements) placed in service in tax years beginning in 2018, the maximum Section 179 first-year depreciation deduction is increased to $ 1 million (up from $ 510,000 for 2017). The TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging (furniture, appliances, etc.).
The definition of qualifying real property eligible for the Section 179 deduction was also expanded to include eligible expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property.
These favorable Section 179 deduction changes will deliver tax-saving benefits on many 2018 business returns, including returns for sole proprietors and owners of pass-through entities. However, Section 179 deductions are subject to several limitations. Consult your tax pro for full details.
Key Point: When both 100% first-year bonus depreciation and the Section 179 deduction privilege are available for the same asset, you should generally claim 100% bonus depreciation because there are no limitations on that break.
6. Depreciation deductions for passenger vehicles used for business
For new or used passenger vehicles that were placed in service in 2018 and used over 50% for business, the maximum annual depreciation deductions allowed under the TCJA are:
* $ 10,000 for 2018 or $ 18,000 if you claim first-year bonus depreciation
* $ 16,000 for 2019
* $ 9,600 for 2020
* $ 5,760 for 2021 and thereafter until the vehicle is fully depreciated
Key Point: Under prior law the 2017 limits for passenger cars were $ 11,160 for Year 1 for a new car or $ 3,160 for a used car, $ 5,100 for Year 2, $ 3,050 for Year 3, and $ 1,875 for Year 4 and thereafter. Slightly higher limits apply to light trucks and light vans. So the TCJA limits are much more taxpayer-friendly.
7. More businesses can use cash method accounting and avoid inventory recordkeeping hassles
For tax years beginning in 2018 and beyond, the TCJA allows many more medium-sized and semi-large businesses to use the taxpayer-friendly cash method of accounting and excuses businesses from the chore of complicated inventory accounting for tax purposes. Consult your tax pro for details.
8. New limit on business interest expense deductions
Subject to some restrictions and exceptions, prior law generally allowed full deductions for interest expense incurred by a business. Under the TCJA, however, affected businesses generally cannot deduct interest expense in excess of 30% of “adjusted taxable income,” starting with tax years beginning in 2018. Business interest expense that is disallowed under this new limitation is carried over to the following tax year. Consult your tax pro for details.
Exceptions: Business taxpayers with average annual gross receipts of $ 25 million or less are exempt from the new interest expense limitation. Real property businesses that elect to use a slower depreciation method for their real property assets are also exempt. Farming businesses that elect to use a slower depreciation method for farming assets with a normal depreciation period of 10 years or more are also exempt.
9. New limit on business losses of individual taxpayers
Another new limitation applies to deductions for “excess business losses” incurred by individual taxpayers. Business losses that are disallowed under this rule are carried forward to later tax years. This new limitation only applies to your business loss to the extent it exceeds $ 250,000 or $ 500,000 for a married joint-filing couple.
10. Reduced or eliminated deductions for business entertainment
Under prior law, you could generally deduct 50% of business-related entertainment expenses. For amounts incurred in 2018 and beyond, the TCJA completely disallows deductions for business-related entertainment. However, meal expenses incurred in connection with business entertainment (like meals at games) and meal expenses to wine and dine customers and clients and potential customers and clients are still 50% deductible. Consult your tax pro for full details.
The last word
This is not really the last word. Over the next few weeks, I’ll cover in more detail how some of the aforementioned business tax changes affect 2018 returns. Please stay tuned.