The new tax law, known as The Tax Cuts and Jobs Act (TCJA), is a major overhaul of the US tax system. Don’t kid yourself—It is complex. Small business owners owe it to themselves to get informed on TJCA in order to better manage the cash flow of their business.
In that spirit, small business owners should seek advise from a tax professional who understands the new law and can assist you with this changed landscape.
Here is summary of the key provisions for you to consider:
- Corporate Tax Rates
TCJA provides a new lower rate of 21% for businesses that operate as C corporations (C corporations are separate, standalone entities for tax purposes). Prior law had graduated rates that ranged from 15% to 35%.
- Pass-Through Tax Deduction
For businesses that operate as pass-through entities (sole proprietors, partnerships or S corporations), TCJA created a new tax deduction of up to 20% of the net business income.
Calculating the deduction can be complex – there are income limitations and limitations based on the type of business!
TJCA allows for a more generous write-off for qualified property.
○ Bonus Depreciation:
TCJA increases the bonus depreciation amount to 100% from 50%.
○ Section 179 Expensing:
TJCA increases the maximum Section 179 deduction to $1,000,000 from $510,000.
○ Automobile Depreciation:
TJCA increases the annual depreciation limits allowed for vehicles.
TCJA increased these limits to $10,000 for the first year the vehicle is placed in service,
and $16,000 for the second year, for example. Old law limited depreciation to $3,160 for
the first tax year and $5,100 for the second tax year, in contrast.
Realize there are new complexities regarding depreciation that are not summarized here!
- Limits on Deducting Net Operating Losses
A business posts a net operating loss (NOL) if expenses exceed income for the year.
Under old law, if a business had an NOL, it could go back two years to claim a full or partial refund of income taxes paid.
TJCA now only allows a NOL to deducted in current or future tax years.
No going back for refunds!
- Elimination of Certain Deductions
TCJA eliminates some business tax deductions including:
○ Deduction for business entertainment expenses, except for meals
○ Domestic production activities deduction
○ Deduction for payment of employee parking, commuting or mass transit expenses
Note that the changes outlined above are only a summary of the ones that would impact most small businesses. It is worth noting that there are other provisions of the new tax law not mentioned here that could affect YOUR business.
Seek a tax advisor well-versed in the new tax law for more information on how the new tax law affects YOUR business.
Kasperek & Co. Accountants would be happy to bring YOU and YOUR business up to speed on TJCA and assist you with making sound business decisions with this changing landscape.