In 2018, the Tax Cuts and Jobs Act in America changed quite a few things for businesses and how they manage their taxes. While many of the rules don’t apply to every type of business, it’s important that business owners who pay taxes in America understand the ones that do apply to their businesses. A thorough understanding of what’s different and how it affects you will help you save money, meet your obligations, and have many successful years to come.
Certain types of businesses will be able to take larger deductions with the new rules. The benefit of tax deductions is that it reduces the total amount of your taxable income. When you reduce your taxable income, you can often reduce your tax rate and save a great deal of money. The types of businesses that will get to deduct a lot of their qualified business income are called pass-through entities.
What is a Pass-Through Entity?
America’s tax structure recognizes lots of business types. Each business registers as what type it is depending on things like the number of employees, the number of locations, the legal liabilities, and other factors.
Types of pass through businesses include:
- Sole proprietorships
- S corporations
- Limited liability companies
Each of these companies will be able to use the new deduction. It may result in significantly lower taxes for the people who file as these types of businesses.
Pass-Through Entities and Taxes
An interesting thing about pass-through entities is that they pay taxes on the same brackets as individuals. So the tax brackets that apply to the owner’s filing status — like single versus married filing jointly — apply to the pass-through entity as well. Usually owners take a certain salary from their business depending on what kind of money the business is making. This can be claimed separate from profits, however.
For example, if a person makes $100,000 in profit but pays themselves a salary of $60,000, then the remaining $40,000 is business profit. This remaining profit is what the new tax break applies to.
The New Deduction
Once you know what your qualified business income is, you can calculate how much the new tax break will save you. It allows you to remove 20 percent of the qualified business income before you calculate your tax bracket. So if your qualified business income is $40,000, you can deduct $8,000 dollars from that total, which makes your taxable income $32,000.
This is important because it means that you are only being taxed on $32,000 instead of $40,000. You don’t pay taxes on $8000 worth of income. This means that you may be pushed into a lower tax bracket which can potentially save you quite a bit of money.
As of 2018, the corporate tax will be 21 percent for any business that files as a corporation. The alternative minimum tax won’t exist anymore either. This should result in lower taxes for almost all businesses that file as corporations. In the past, tax rates varied depending on various factors and could be anywhere from 15 to 35 percent.
Section 179 Filing
Another change comes in the way that business equipment is listed and considered on taxes. It’s designed to let a business deduct the total cost of something even when the actual purchase price will be spread out over many years through leasing or financing. If you’ve been using Section 179 to reduce your taxes, speak to your accountant about whether new and different kinds of equipment will be covered under the new tax plan. Chances are you will be able to save a significant amount if you’re making big purchases that are covered.
In the past, assets worth $500,000 could be covered by the plan. Now, though, that number is doubled so assets worth $1,000,000 can be considered. It should help businesses that buy large, expensive pieces of equipment save a great deal of money. If you’re buying tablets to get people to sign up on email forms at presentations or conferences for example, you can easily expense the entire cost and save money at the end of the year.
There are some changes to entertainment deductions too. They used to be deductible and now they aren’t. While office parties are still deductible, there are changes to meals too. Business meals, travel meals, and meals provided for the convenience of the employer are still 50 percent deductible. Convenience meals won’t be deductible at all after 2025. If you’re deducting a lot of entertainment expenses when you spend time with clients, you may have to reconsider how you spend your money. It won’t be advantageous when it comes time to file your taxes and figure out your deductions.
The changes in the American tax code are wide-ranging and complicated. If you aren’t well-versed in tax law, you should consider speaking with your tax professional about how the changes will affect you before it gets near the time to file your taxes. There may be things you need to save or a different way to keep records that makes things easier when it’s time to deal with the IRS. When it comes to taxes, it’s always better to be prepared so that your business can thrive and continue contributing to the community.