On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act”. This tax reform was built by Republican leaders over the last couple of months. Because of the speed in which this bill was created, many are still wondering how it will affect their taxes. We, in particular, want to inform you on the impact of the new tax law on small businesses.
What is the New Tax Law?
Introduced in early November of 2017, the main objective of the law is to reduce taxes for businesses and individuals. It provides tax simplification by increasing standard deduction and family tax credits. However, it does eliminate some personal exemptions and makes it less beneficial to itemize deductions. In short, the devil is in the details. Here’s the breakdown of the most important ways the tax law will impact business owners:
- Increases standard deductions: A standard deduction is an amount you can deduct from your taxes based on your income and marital status. With the new tax law, the standard deduction amounts will increase to $12,000 for individuals and $24,000 for married couples filing jointly.
- Limits state and local income tax deduction: taxpayers who itemize will be able to deduct their state individual income, sales and property taxes up to a limit of $10,000 in total starting in 2018. Until now the deduction was unlimited.
- Limits the mortgage interest deduction: Until now, the interest you paid on any mortgage loan up to $1 million was tax deductible. Under the new bill, you can only make this deduction for mortgages up to $500,000.
- Eliminated tax penalty if you don’t have health care: The new tax law repeals the individual mandate of the Affordable Care Act (ACA) which penalizes people for not having healthcare.
- Pass-through entities can qualify for a 20% deduction: Pass-through entities are LLCs, S corporations, and sole proprietorships. In these entities, the income made by the business is passed through the owner’s individual tax return. Owners of most pass-through businesses will get a 20% deduction on their business income. The deduction, however, does not apply to service businesses (e.g. law firms, doctors with private practice offices and financial services business). Income thresholds and other conditions limit the use of this deduction, so consult your tax advisor to learn more.
- Lower C-Corp tax rate: The tax rate of big corporations went from 35% to 21% permanently and without any conditions.
- Increase the amount you can deduct for qualifying property and equipment purchases: When you purchase equipment, the IRS generally won’t let you deduct 100% of the purchase price in the same year you bought it. The new tax law allows you to deduct up to $1 million (from the previous $500,000, see section 179) or 100% in special circumstances (see section 168k).
From what you can see, there are pros and cons to this tax bill. Make sure you get the most out of it by consulting your tax advisor. If you don’t have a tax advisor, email us at [email protected] or leave a comment and we’ll refer you someone in your area.