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30 January 2018

Critical Tax Changes for Small Business Owners

Critical Tax Changes for Small Business Owners
Small business owners are overcome with questions surrounding the recent tax changes. Foremost, will it help us or hurt us? While we don’t have all the answers (the IRS still needs to issue its interpretations of the changes), we have been spending time reading and analyzing various business aspects of this legislation. For an overview, take a look at our recent Bankler Report

along with the following additional highlights on what aspects of your business may be affected.

Your business structure matters

Corporations will see one of the biggest changes, with a flat 21% tax rate replacing the traditionally tiered schedule of 15-35%. We’ve all read the headlines about large corporations saving billions in taxes under this new law, but the biggest winners here may be small corporations with incomes between $100,000 and $335,000 (here’s an explanation). 

Rules for those with pass-through entities like S-Corps, some LLCs, partnerships, and sole proprietorships aren’t as straight-forward. The new law does create some great opportunities, like a 20% business tax deduction on Qualified Business Income (QBI) for those earning less than $315,000 for married filed jointly or $157,500 for single filers. Exceed these amounts, and the deduction is subject to several limitations. For instance, it’s not available to high-earning service business owners such as accountants and lawyers, but it is still available to architects and engineers. Tax changes for individual taxpayers may offset any fallbacks for these business owners with pass-through entities, however, so it’s important to consider the pros and cons with your tax advisor before jumping to conclusions.

The business property you buy (or have already purchased) matters

Depreciation and expensing of qualified business property deductions have changed, with some of these changes allowing for retroactive savings. You can now immediately expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017. Plus, changes to Section 179 have increased the maximum amount a small business can expense to $1 million and increased the phase-out threshold to $2.5 million for qualified property/assets. This includes some property that had previously been outside the definition of tangible personal property including roofs, HVAC, fire protection and alarm systems and security systems acquired after the property was first placed into service as well as some previously used property.

Your expenses matter

Employers who offer meals and entertainment will see a big “bite” out of their allowed tax deductions. The new law limits in-house cafeteria and meal deductions to 50% (down from 100%, and set to be non-deductible by 2025) and eliminates the 50% deduction for business entertainment including sports, concerts and other events, which had been deductible at 50%. However, there’s no change when it comes to a 50% deduction on business-related meals and 100% deduction on in-office holiday parties (with the same restrictions as before). Transportation deductions also take a hit, with fringe benefits like parking no longer deductible.

Other areas like net operating loss, qualified production activity, and interest deductions have changed, as well, which we also address in our Bankler Report. Contact us to discuss how these and other changes may affect your business for the 2018 tax year.

Image Copyright: tumsasedgars / 123RF Stock Photo

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