What's Hot in Small Business – Chris Crum
|Chris Crum writes for Small Business Resources about what's new for small business. Chris was a featured writer with the iEntry Network of B2B Publications where hundreds of publications linked to his articles including the Wall Street Journal, USA Today, LA Times and the New York Times.|
The New Tax Law's Effect on Small Business
The Tax Cuts and Jobs Act was signed into law by the President in December 2017, and many businesses are still trying to process what it all means for them.
For starters, the corporate tax rate has been lowered to 21%, and there will no longer be an alternative minimum corporate tax. The alternative minimum tax is also eliminated for about 96% of individuals, with just 200,000 expected to owe it in 2018, compared to the 5.25 million who would have under the old law (1). This will prove incredibly beneficial to pass-through business owners, who pay taxes on business income on their personal tax returns.
Additionally, for pass-through businesses, which include LLCs and S-Corporations, who have business income of up to $315,000, a business owner will now receive a new deduction of 20 percent from their taxes, or up to $63,000. That money can be used directly for business purposes (i.e. growth, payroll, etc.).
According to the House Committee on Ways and Means (2), businesses with higher income can also receive the 20 percent deduction if they meet certain criteria for wages paid or capital invested. The deduction reduces the effective tax rate for small businesses to no more than 29.6 percent for pass-throughs, which is 10 percentage points lower than the previous tax code. According to the Committee, the tax relief goes to local job creators, and taxpayers will not be able to use it to reduce the tax rate on wage income.
Section 179(d) expensing limits will increase from $500,000 to $1 million under the new law, but the higher limits will phase out when a company invests $2.5 million (3). Meanwhile, the Section 199 domestic production deduction was repealed.
A Research & Development tax credit is still available, however, and more companies than ever should be able to take advantage. While there will be certain requirements to do so, businesses in agriculture, architecture, construction, engineering, manufacturing, software, and systems will be able to qualify.
The new law retains the previous plan's export benefit as well, which means that companies that export, including exports of software, and architectural or engineering work, will continue to see significant tax relief. The Work Opportunity Tax Credit (WOTC), with its incentives for hiring, also remains intact. This lets businesses who hire veterans and the long-term unemployed gain some tax relief. It also applies to those who hire people who receive federal support.
In addition to the above tax breaks, there have also been some changes to accounting methods, including allowing an increased threshold for businesses to qualify for the cash method (from $5 million to $25 million of gross receipts). For inventories, those with gross receipts of up to $25 million will also now be able to utilize the cash method. This is a significant change compared with the old law, which capped gross receipts at $1 million.
In December President and CEO Juanita Duggan of the National Federal of Independent business, the nation's largest small business organization, said this on the Tax Cuts and Jobs Act becoming law:
"NFIB fought for decades for a real tax cut for small business owners. The Tax Cuts and Jobs Act dramatically improves the way small businesses are treated, delivering hundreds of billions of dollars in tax cuts."
"Small business optimism has been near record highs all year long in anticipation of this moment. Starting in 2018, millions of small businesses will have substantially more money to convert their optimism into investments. They can buy new equipment, increase inventory, pay workers more, create new jobs, and engage in the economic activities that drive the U.S. economy."
"The Tax Cuts and Jobs Act is a once-in-a-generation achievement. This is a historic day for small business and the country. We are grateful to President Trump for his leadership on this issue, which started even before he took office. Today he fulfilled his promise to cut taxes for American small businesses."
It's clear that many stand to benefit significantly from the changes.
The information provided is meant for general informational purposes only and does not constitute tax, business or legal advice.