How Your Business Can Keep More of What It Earns Under the New Tax Law

How Your Business Can Keep More of What It Earns Under the New Tax Law

by Gary Milkwick, February 2018

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The Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017, represents the most significant changes in tax law in more than 30 years. This article will explore the changes to business taxation and hopefully provide you with some insights to help you minimize your taxes under the new law.

Pass-Through Entity Deduction

Business owners who own a pass-through (also referred to as a flow-through) entity, such as a sole proprietorship, partnership, or S corporation, report the profits and losses from those entities on their personal tax returns. Beginning in 2018, business owners will continue to report these profits and losses on their personal returns, but they will also be able to offset profits with a 20% deduction. For example, if a business owner reported profits of $50,000 generated by an S corp., he or she would be able to offset those profits with a deduction of $10,000, resulting in a net of $40,000 in profits on which the business owner will pay taxes.

There are some limitations. If the business provides certain professional services, such as accounting, law, or engineering, and the business owner makes more than than $157,500 as a Single or $315,000 for Married Filing Jointly, the deduction phases out.

C Corporation Tax Rate Decrease

Do C corporations now make more sense for small business owners? Perhaps the largest change from a business tax perspective is the significant decrease in the tax rate for C corporations. Before the new tax law was passed, corporations had graduated tax rates ranging from 15 percent to 35 percent. Beginning in 2018, the tax rate for C corporations is a flat 21 percent.

C corporations have often not been an optimal choice for small business owners due to the fact that C corporations have been subject to double taxation. In other words, corporations must pay taxes on their profits, and owners must pay taxes on dividends received from C corporations.

In the past, many business owners have been able to reduce their taxes by structuring their businesses as S corporations or other pass-through entities. Now that C corporations will pay a flat tax of 21 percent on their profits, it may actually reduce some business owners' taxes to structure their businesses as C corporations, depending on the profits generated by the business and the owners' personal tax situations, particularly the high income professional services providers phased out of the pass-through entity deduction described in the previous section.

Section 179 Depreciation Increase

Before the new law was passed, businesses could immediately expense up to $500,000 of equipment purchased in a given year. Beginning in 2018, businesses will be able to expense up to $1 million per year in equipment purchases. For 2018, the effect is retroactive: The new tax law allows for 100% expensing for qualified property purchased after September 27, 2017.

In addition to increasing the amount of equipment that can be expensed annually, the new tax law also expands the type of real estate-related equipment that can be immediately expensed. Beginning in 2018, items such as roofs, heating, ventilation, air conditioning improvements, and alarm and security systems can be immediately expensed, while they could not prior to 2018.

Changes to Net Operating Losses

Before the new tax law, businesses with net operating losses could carry back the losses to the prior two tax years, and then carry forward any remaining losses for 20 years. Beginning in 2018, the carryback provision for business losses is eliminated, and losses generated in 2018 and future years that carry forward are limited to 80% of taxable income. (Losses claimed as of 12/31/2017 carry forward at 100%.)

Conclusion

While this article highlights several areas of the new tax law that may affect your small business, there are many more that may be relevant. This legislation represents the most sweeping modifications to the U.S. tax code since 1986. While these changes take effect for the 2018 tax year, now may be a good time to engage professional help specific to your personal or business taxes so that you're prepared for the changes.

If you have questions about how the tax bill affects you, contact our service partner, 1-800Accountant, for a free consultation at (800) 222-6868, or check out our business legal plan, which offers both independent attorney consultations and appointments with tax professionals from 1-800Accountant.