Typically, the first few months of the year are the perfect time to gather financial statements and receipts to prepare for tax season, and to prepare for the year ahead. However, with the passage of the Tax Cuts and Jobs Act (TCJA) in late December, many business owners—big and small—may find themselves caught off guard. The changes, which impact all U.S. taxpayers, are numerous and even the tax professionals are still trying to sort out their implications.
For small business owners, the Tax Bill does appear to offer some relief, but to what degree depends on the size of your business, your legal structure and your industry.
What We Know
Here is a summary of the main implications reform is expected to have on small business owners.
- Pass-through business entities will have access to a new 20 percent deduction. This is good news for many business owners; however, because of the nature of the associated limitations, the actual benefit individual business owners can realize will vary widely. Many self-employed (sole proprietors) business owners working in the gig economy will be able to access this deduction for their “qualified business income” along with those involved in partnerships and S corporations. However, the deduction phases out for business owners with incomes above $157,000 (if they are single-filers) and $315,000 (for those who file jointly). This phase-out could lead small business owners with higher earnings to switch to a C corporation where the tax laws could be more favorable.
- The corporate tax rate structure will flatten to a single 21 percent bracket. This will reduce taxes for many companies. Also, C corporations with average gross receipts for the last three years totaling $5 million or more may now be able to opt for cash accounting. The ceiling for the gross receipts test is being lifted to $25 million.
- The alternative minimum corporate tax is no more. Elimination of this complicated tax should make tax preparation more straight-forward and give you one less thing to be concerned about at tax time.
- More Section 179 business expenses will be deductible in the year they incur. This should provide substantial relief for companies—from construction to dental practices—that invest heavily in equipment to maintain their competitive advantage.
- Many more… From the rules surrounding “bonus depreciation” to the treatment of net operating losses and the deductibility of interest expense, how you will account for business actions and transactions will change based on your size and legal structure.
What This Means
While the new tax bill may ultimately provide relief, expect an increase in the degree of difficulty when making decisions involving your tax-related activities and business decisions this year. If you currently do not use a tax professional, now could be a good time to start. If you do, you may want to revisit your business plans with your accountant, as well as your banker, to ensure you are making the most cost-effective moves on an after-tax basis for your business. With changes in the deductibility of interest expenses, in particular, managing your debt may require greater focus.
You may also want to rely more heavily on other, independent sources familiar with the needs and challenges small business owners face. Remember, your NFCC® Certified Small Business Owner Coach is also available to help guide you especially when it comes to strategies for more effectively managing your debt.