The Tax Cuts and Jobs Act was passed on December 20th, and the President is signing the bill into law today. We want to give you some perspective about it and how it will change your tax bill in 2018. It’s a big bill and, depending on who you ask, this may or may not be a ‘tax cut’ for the right people. But we’ll avoid the politics and stick with the topics that will help you know what to do next. Read on, and Merry Taxes!
There are a number of tax changes related to families and kids, but we’ll focus more on the strategies you need to know as business owners. But before we get to the strategies for business, let me list a few key changes for individuals:
Now to speak to our small business clients. The bill permanently lowers the corporate tax rate from 35% to 21%. But that is for corporate entities. Many small businesses (and all of our clients) are paying taxes on their business income at the individual tax level because their business income is pass-through income. So if you hear that corporate tax rates have been cut, this does not apply to sole proprietorships, LLCs, partnerships or S corporation owners.
Pass-Through Business Owners
Though the corporate tax cuts mentioned above are permanent, the tax cuts on pass-through entities only last through 2026. For pass-through business owners, there will be new 20% deduction against the business income flowing into your individual tax return. Further, after the deduction, your pass-through income will only be taxed at the highest rate of 29.6%, instead of the highest ordinary tax brackets pass-through income is normally taxed at. Though this benefit phases out at $157,500 (for single taxpayers) and $315,000 (for joint taxpayers) of personal total income, this law will spell a huge tax savings for business owners with pass-through businesses.
New Business Expensing
Small businesses can deduct up to $1,000,000 in Section 179 deductions (it used to be $500,000). Section 179 allows for small businesses to write off the complete purchase of equipment. This ability to expense the cost of new investments in your business starts to go away in 2023 (lowering by 20% per year).
Small Business Tax Strategies
Tax strategists like us typically adhere to the basic strategies of ‘accelerate expenses, defer income.’ That means that we typically try to bring future expenses into this current year to get a larger write-off, while also pushing income to future years if we can. But that may be changed this year end since tax rates are lower in the future than they are this year. Ultimately, it may not make a huge difference unless you are playing with large amounts of money. And you may want to consider what your personal life looks like next year, too, as you decide which year you want your income taxed. If things change significantly for you individually from this year to next, it may allow you to push income to future years to realize the tax benefits of being in different situations from year to year (for example, if you were getting a divorce and would file as Single next year, or would be having a new kid next year).
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Still confused? We serve small business owners, and help them wade through this stuff. Email us at [email protected] to see if we can help you navigate these rules and how they may affect you.