Favorable or not, the tax reform brings new changes that are important for every entrepreneur to be aware of when filing their 2018 taxes.
Deadlines, deductions, fees and enough acronyms to confuse even the most experienced cruciverbalist. It’s no wonder that smart business owners, big or small, work alongside tax advisors to help them sort out their tax work so they can stay focused on, well, their business. This coming tax season (April 2019) will be the first to implement U.S. President Donald Trump’s tax reform, Tax Jobs and Cuts Act, signed in December of 2017. We previously discussed changes for individual tax filers, but what about business owners?
If you consider yourself an entrepreneur and business owner, here are four important questions you should consider when filing your taxes:
What will be your corporation’s tax rate?
The new corporate tax rate is 21%, a fixed rate (across all C corporations) that will likely remain for some time (despite many other tax changes which will expire by 2025). The new flat rate is far lower than the rates reached in previous years (25%, 34%, 35%), yet exceedingly higher than what was once the lowest possible corporate tax rate, 15%. This low rate was given to corporations who had an income between $0 and $50,000 and was uncommon as most corporations manage to pull in more than that per year. This year, however, the income of your corporation will not have any effect on the tax rate.
What about deductions?
In years past, corporations have greatly relied on deductions to minimize (or even completely diminish) any payment owed on taxes. Business owners may be disappointed to see some of their beloved write-offs have grown more complicated this tax season. This includes the Business Interest Expense (which now has limits based on sum of business interest income, plus 30% of adjusted taxable income) and Net Operating Losses (can only offset 80% of taxable income, rather than 100%, and no longer includes income in carryback years).
Gone are deductions for Entertainment Costs (i.e. taking your client to theater or sporting events), as well as certain Fringe Benefits (i.e. your employees’ Commuting Fringe Benefits and Moving Expenses).
Where has the AMT gone?
The corporate alternative minimum tax (AMT), much like the individual AMT, was designed to ensure that companies drawing in big incomes would pay at least a small amount of tax. However, the tax reform has eliminated the AMT and, consequently, some of the related tax liabilities. Additionally, an unused minimum tax credit can be refunded if certain criteria are met.
When the owner of a company considers the company’s profits on their personal tax return, the business then becomes an entity and is termed a ‘pass-through business.’ With the new law, businesses that meet certain requirements may be able to deduct as much as 20% of the net income that comes directly from the business (also known as ‘qualified business income’).
There are two major deciding factors of whether you qualify or not: Income (for taxpayers who are married and filing jointly, the income needs to be below $415,000 in order to receive at least a portion of the 20% income; single filers exceeding a $207,500 income are less likely to get the full return), and is your business is considered non-service (i.e. sells a product).
Every business is different, and with enough time to organize and get prepared, we can help you and your business get the most out of the upcoming tax season.
I hope you found this helpful. For more information on this and other topics:
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