Trump’s New Tax Breaks: Impacts on Small Businesses
Tax regulations seem to change quite frequently, making it a challenge for business owners to keep up with it all. A recent bundle of tax benefits signed into law by President Donald Trump, known as the Tax Cuts and Jobs Acts (TCJA), has left companies with new opportunities to save, but the exact perks and specifics can be confusing.
When do the benefits go into effect? How will it change your tax bill? Which businesses qualify? Here’s a quick recap of the latest round of tax breaks and what you can expect when filing.
Summary of Tax Breaks
As with most laws, there are pages of fine print and tax code included in the TCJA rules, but the benefits can be summed up in a few major changes. The advantages that small businesses can enjoy from the legislation, starting with this spring’s tax filing, include:
- C corporations pay a flat 21% corporate income tax, regardless of size or revenue.
- A new 20% tax deduction for qualified sole proprietors, limited liability companies, S corporations and partnerships.
While there are many tax benefits, they come at the expense of some commonly enjoyed deductions. Certain standard business deductions are cut in half or eliminated completely under the new law. Changes include:
- Reimbursable transportation costs are still 100% deductible (such as off-site event parking), but employee transit and parking benefits (sometimes referred to as “fringe benefits”) can no longer be deducted at all.
- You may still take a 50% deduction for client meals, but entertainment expenses — such as buying a client tickets to a concert — are not deductible under the new rules.
- Snacks provided to employees in the office are now deductible at 50%, instead of the previous 100% rate.
Does the 20% Apply to You?
One of the most buzzworthy changes to the tax law is the 20% pass-through deduction for small businesses and sole proprietors that aren’t a C corporation. Given that the change has the potential to significantly cut the amount owed with this year’s filing, it’s important to know if you qualify. The law put the following rules in place:
- Most pass-through entities can get some form of the deduction.
- Specified Service Businesses may be limited in what they can claim. (This is any business that mainly sells the expertise or skill of employees, such as lawyers, financial advisers, actors and artists.) The deduction phases out at $157,500 ($315,000 for married couples) and stops at $207,000 ($415,000 for married filers).
- You cannot use the “pack and hack” method, which breaks up a company into several lower-earning entities to skirt income limits.
- The 20% deduction applies to your qualified business income, the amount of income after capital gains or losses, annuity payments, dividends/interest, owner salaries, foreign currency gains/losses, and certain other fees.
- The depreciation rate for business vehicles has gone up from $10,000 to $18,000 a year.
Planning for 2019
Some businesses may find that adjusting their tax structure is the best way to take advantage of the new rules, such as converting their sole proprietorship into a C corporation. Seeing as the tax changes are nuanced, however, it’s best to check with your financial professional before spending any of next year’s projected tax savings or making significant structural or budgetary alterations. Every business is unique, and there is no one-size-fits-all advice, so make sure to do your due diligence for 2019.