If there’s one thing you can count on as a small business owner, it’s that tax and business laws change every year. Although 2018 is just weeks old, it has proven to be no exception so far. The first is the Tax Cuts and Jobs Act that affects both business owners and individuals. Because this law went into effect on January 1, 2018, it does not affect your tax returns for 2017. Here are the main provisions you need to know:
New corporate tax rate:
This will likely impact you favorably if you operate a C corporation, which is a separate entity for tax paying purposes with specific tax rates. The new law sets a flat rate of 21 percent across the board, replacing the previous rates that ranged from 15 to 35 percent.
Pass-through tax deduction for businesses not organized as a C corporation:
This law applies to sole proprietors, partnerships, limited liability corporations, and S corporations. Although you do not pay taxes yourself as the owner of one of these types of businesses, any profit passes through your business entity and you must pay tax on the profits. Under the current regulations, this can be as high as 37 percent. Starting in 2018 and ending in 2026, you may be eligible to deduct up to 20 percent of the net income from your business profits. Special rules apply depending on your income and type of business.
Other Business Tax Changes in 2018
The Internal Revenue Service (IRS) also enacted several other laws for 2018 that could affect your business. For example, you can depreciate 100 percent of an asset in a single year rather than spreading it out over several years. You must have placed the long-term asset into service after September 27, 2017. This law is scheduled to end on January 1, 2023 with the depreciation credit reducing by 20 percent each year.
If you use a personal vehicle for business, you can claim depreciation of up to $10,000 for the first year. It increases to $16,000 for the second year and then goes down to $9,600 for the third year and $5,760 for every year after that.
Under Section 179 of federal tax code, business owners could deduct up to $510,000 of personal property that they purchased and used for business more than 50 percent of the time. In 2018, the amount will be $1 million.
Prior to 2018, a business that posted a net operation loss could go back two years to claim a full or partial refund of business taxes paid those years. The new law only allows this in the current tax year.
Lastly, you should know about the elimination of certain tax credits starting in 2018. These include:
- Local lobbying expenses deduction
- Deduction for the commuting, parking, or mass transit expenses of employees
- Deduction for domestic production activities
- Business entertainment expenses other than meals
Of course, many new changes unrelated to taxes will also occur this year. Doerhoff & Associates would be happy to bring you up to speed on anything affecting your organization during a personal review session.