The jury is out on whether the Tax Cuts and Jobs Act of 2017 will help or hinder U.S. taxpayers. For many, whether or not it will help or hurt you depends on your circumstances. When it comes to small businesses, there is good and bad news.
What are the most common impacts on businesses from the Trump tax changes?
#1 Reduced Tax Rates for Corporations
Corporations are easily some of the biggest winners from the Tax Cuts and Jobs Act of 2017. The new corporate tax rate is 21%, a substantial reduction from where it previously stood at nearly 40%.
The tax reduction on large corporations is an attempt to stimulate the economy with more jobs, investment, and production. The tax cuts are so recent that it will take a few more years to see if that is the case, but for now, corporate board members are certainly appreciating the lower tax rates.
The reduced tax rate mostly benefits corporations as smaller companies with less than $260,000 in profits do not get any extra forgiveness on their tax rate.
#2 Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction, or Section 199A deduction, is a new tax benefit offered to businesses under the tax reform. Unlike the reduced corporate tax rate, the QBI deduction benefits small businesses more than large corporations.
The QBI deduction works by granting pass-through entities (sole proprietorships, partnerships, etc.) an opportunity to deduct 20 percent from net business income from their taxes. Furthermore, the Qualified Business Income deduction can get combined with other business expense deductions.
QBI deductions are more limited the higher your business income is. There are additional limitations or exceptions larger businesses also need to follow. The biggest problem with the QBI deduction is its complexity, which is why it’s not the worst idea to consult a tax professional over it.
#3 Cash Accounting Provisions
The Trump tax changes allow more businesses to use cash accounting as opposed to accrual accounting methods.
Cash accounting enables businesses to count income and expenses only when they are received or paid. However, accrual accounting requires businesses to count a sale whenever an invoice is sent, paid, or unpaid.
The new law permits any business with less than $25 million in annual revenue to utilize cash accounting, therefore reducing time spent on taxes and hopefully lower tax liability.
Additional benefits for businesses under the Trump changes include higher levels of write-offs for buying equipment and vehicles, as well as the new family leave tax credit (only available for 2018 and 2019 taxes).
#4 Lower Interest Rate Deduction
While there are positives regarding the tax changes, there are also some drawbacks concerning business taxes.
Before the Tax Cuts and Jobs Act, there was no limit on the amount of interest expense tax deduction a business could claim. The deduction was especially important for small businesses since these types of organizations often relied on the tax break to cover loans.
Through the new changes, the interest rate deduction for larger businesses has been capped at 30 percent of the organization’s earnings before interest, taxes, depreciation, and amortization (EBITDA). However, some businesses with smaller earnings are still not capped.
The Trump tax laws also ended or limited traditional business deductions like Domestic Products Activities and Commuting Expenses.
#5 Limited Meal and Entertainment Expense Deductions
Another big drawback under the Tax Cuts and Jobs Act is the limitations set forth on business-related meals and entertainment. Previously, businesses could deduct 50 percent of meals and entertainment, which was critical for industries that rely on things like client dinners.
The new limitations on meal and entertainment expense deductions are kind of confusing. In certain cases, the 50 percent rule can still apply while other meals and entertainment can’t have a single dollar deducted on taxes.
Levy & Associates – Tax Consulting You can Depend On!
The 2017 Tax Cuts and Jobs Act signed by President Trump is the most widespread and sweeping change to tax law in several decades. Businesses (of all sizes) are still learning how to navigate around many new tax changes.
You should hire a professional who can make sure your business is taking advantage of every new break for businesses, as well as avoid pitfalls based on a lack of understanding of new tax code.
Schedule an initial consultation (free of charge) today at www.levytaxhelp.com or call 800-TAX-LEVY.