Tax Changes Affecting Small Business




As we head into tax season, many small businesses are eager to see what changes the new tax law has in store for them. Here are some of the most significant changes:


Tax Cut for Pass-Through Businesses


S corporations, LLCs, partnerships, and sole proprietorships are all considered pass-through businesses, in which the income from the business is “passed through” to the business owner's individual tax return. The net income of pass-through entities is effectively taxed at individual tax rates. The new law lets many of these companies deduct 20% of their income, right off the top of their tax returns.


If your business is a C corporation, and those taxes have been simplified. Under the old law, C corporations paid graduated federal income-tax rates ranging from 15% to 35%. There’s now a flat 21% corporate rate - so some lower-income business will see their rate go up.


Changes to Deductions and Depreciations


Section 179 deductions: If you buy (or lease) certain types of equipment and software, you can deduct the purchase price from your gross income. That’s good enough, but the new tax law doubles the maximum allowance to $1 million, from the previous limit of $500,000.


Bonus depreciation:  Businesses can take an immediate deduction on the purchase of eligible new business property. The new law raises the bonus depreciation deduction from 50% to a full 100% for the next five years, before phasing it out over the following five years. The deduction also now includes used property.


Some deductions, though, are moving the other way:


  • Most businesses cannot deduct interest expenses amounting to more than 30% of their adjusted taxable income.
  • The 50 percent deduction for entertainment expenses related to the conduct of business has been repealed.
  • The deduction for employee transportation benefits – such things as mass transit passes and parking privileges – has been repealed.
  • The annual depreciation limit for luxury cars intended for business use has been raised from $3,160 to $10,000.


New Tax Credit for Family Leave


There is a new temporary tax credit for employer-paid wages paid out for family or medical leave, ranging from 12.5 percent to 25 percent. But take advantage of it while you can, because the credit disappears after 2019.


Business Losses


For business net operating losses in future years, the amount of taxable income that can be offset with deductions has been reduced, and losses can no longer be carried back to an earlier tax year. But there is some good news for your tax planning this year: Net operating losses can now be carried forward indefinitely.


End of the AMT


Much has been made of the fact that the new law gets rid of the corporate alternative minimum tax, which was set at 21%. But the AMT only applied to businesses making more than $5 million per year, which excludes most companies that think of themselves as “small businesses.”


Our Knowledge Place article has more detail on these tax changes. Which of them is likely to have the biggest impact on you and your business?