As the latest ruling in tax reform, business owners will start to feel the effects of this legislation in 2018. While many people consider this act to be particularly kind to entrepreneurs and businesses, you need to know what’s going on in order to maximize the benefits. Rather than making you read through the entire tax bill, we’ve picked out the pieces that will (most likely) alter your finances and summarized them here. For a full consultation and planning session, just give us a call!
The Pass-Through Deduction
While they changed the corporate tax rate for traditional C corporations from a varying scale to a flat 21%, that provision doesn’t affect many small business owners. Sole proprietors, LLCs, and S corporations are all considered pass-through entities. This means, the profits made just pass through the company, but aren’t taxed. Instead, the owner pays taxes on these funds, which can mean a higher effective tax rate.
In order to help people in these categories, there’s a new deduction that allows business owners to deduct up to 20% of their net income—on top of the regular business deductions. To qualify, you just have to have less than $315,000 in annual income (if married) or $157,500 (for singles). Once your income exceeds $415,000, you may still be able to take advantage of additional deductions, but with certain restrictions.
If your income falls somewhere between these thresholds, or you’re in a service-based industry, this provision becomes a little more complicated. In that case, we’re happy to help advise you on an individual basis, so you can plan through the deduction’s phase out in 2026.
This has always been a pretty popular deduction for business owners, since it allows you to deduct a larger amount of a newly-acquired asset (like equipment) within the first year, rather than waiting for the value to decrease long term. Previously, you could only deduct 50% of the value initially. The other 50% had to be spaced out over a period of years. Thanks to the new “100% Bonus Depreciation” inclusion, though, you can now double that deduction—at least until 2023.
After that, it reduces rapidly. In 2023, it drops to 80%, then 60% in 2024, then 40% in 2025, and it goes down to 20% by 2026. So, your window to capitalize on this tax reform is rather limited. They also raised the limits for automobile depreciation deductions, but (again) with time restrictions in place. If you need help creating a timeline for your asset acquisition, take advantage of our above-and-beyond style accounting services.
You can also deduct a great amount of your personal property (which you use for business) under the revised Section 179 Expensing Provision. Before, this benefit available to business owners capped at $510,000. Now, it’s nearly doubled to $1 million, which can result in significant tax savings.
While these two are the main advantages for small business owners, there are also a few limitations in place, especially for larger businesses. We’ll continue to share information related to the Tax Cuts and Jobs Act of 2017 (or TCJA) that may be related to you, but you’re always welcome to work with us directly at ENSO Accounting to resolve any questions/concerns you may have related to tax reform and your business.