2018 is now in full swing, which means it’s time to step preparing for tax season. Some significant changes happened at the end of 2017 which impact individuals and business owners.
The Tax Cuts and Jobs Act was passed by Congress as 2017 came to an end. It ushers in some change with the potential to affect small business owners pretty heavily.
The following are some highlights of what small business owners, in particular, should know about the tax act.
Expanded Depreciation Deductions
For small business owners with real estate, the newly passed legislation may prove to be pretty helpful.
For landlords and rental property owners, it’s now allowable to deduct the cost of personal property. This includes things like furniture or appliances that are used in rental properties and units.
There’s also now the advantage of being able to receive up to 100 percent bonus depreciation. Under the plan, there is an annual phasing down of this until 2026. It applies to new and used personal property designated for business use.
It’s recommended small business owners consider a review with a professional to ensure you maximize what’s available under the new law, and restructuring may be advantageous in some situations.
What small business owners need to realize is that the tax law does have its share of benefits for them, but also complications. That’s why working with a team of professionals can be helpful as we go into the remainder of 2018.
Pass-Through Business Rates
What the recently passed tax act doesn’t do is lower the rate on all pass-through businesses. Instead, pass-throughs can now deduct up to 20% of income. However, there are distinctions as to who can deduct what based on the type of business a person operates.
According to analysts and financial professionals, the pass-through changes require small business owners rely on advisers more than ever before. While there are benefits, again there are complicated elements to figure out as well.
Just to provide an example, for owners of personal service businesses, such as real estate agents or lawyers, the 20% deduction only applies to married couples who file jointly. They can have incomes up to $315,000, and it’s $157,500 for single people paying taxes.
Since the majority of personal services businesses are S corps, what you save and what you pay depends on what’s salary and what’s pass-through income in your business.
If you run a business that relies on employees, S corporation deductions are based on your payroll. For example, the 20% deduction applies to half your payroll.
The Affordable Care Act
A big tax-related element of the Affordable Care Act is gone, and that’s the mandate requiring people buy health insurance or pay a fee.
As a result, it’s highly likely insurance companies will raise their costs, and that could require small business owners to pay more to provide insurance to employees.
If you’re a small business owner with employees, you’re also going to need to make changes to what you withhold from their checks. Since the standard deduction is doubled and there aren’t personal exemptions, it means that there could be up to 28 percent of federal taxes withheld from employees’ bonuses, commissions, and other supplemental compensation.
There’s a lot of back and forth entrepreneurs are having with themselves and their advisers as to whether or not it’s the right time to become an LLC. Because of changes ushered in by the law, an LLC can help save money, but with considerations.
As was touched on above, if you’re making above a certain threshold and in a certain industry, there are limits to the deductions you can take advantage of.
Also, if you are a business owner with a partner, it could end up that one of you gets a 20 percent deduction and one doesn’t. This scenario would be the result of one partner having a spouse earning a high income.
A final note that may be a little less rosy than some of the other change small business owners have seen in taxes this year relates to what you’re spending on additional employee perks.
You can no longer deduct the total cost of these. For example, if you’re providing food to your employees, you can only deduct a maximum of half those costs. By 2025 you won’t be able to deduct these at all.
For small business owners there are upsides and downsides to the new tax law, but if you work with a professional to navigate the right scenarios for you, there are opportunities to save on what you pay in taxes.