By Brandon Miller, CFP–
If you’re a business owner like me, you probably dread adding anything else to your plate. But it might be worthwhile to spend a moment seeing how the recently passed Tax Cuts and Jobs Act of 2017 will affect your tax bill. You might even like what you learn!
The much-vaunted drop in the corporate tax rate—it’s now a flat rate of 21% versus ranging from 15–35%—is great if your business is a C-Corporation. But it’s more likely that your company is structured as an S-Corp, Limited Liability Company (LLC) or sole proprietorship. So this tax cut probably doesn’t help you.
But here are some changes that may actually work in your favor:
Pass-through Deduction
Before telling you how great this benefit is, let’s first look at who is eligible for it. A pass-through entity means that the profits and losses of the business flow through to the owner, who reports it as personal income. Accountants, consultants and mom-and-pop shops are all perfect examples of pass-through entities.
If your company falls into this category, the new law says you don’t have to pay taxes on 20% of your business’ earnings. That’s a pretty sweet benefit.
And you don’t even have to itemize your taxes to get this deduction. Your taxable income just has to be below $157,500 if you’re a single filer and $315,000 if married, filing jointly. If you earn more than that, you can’t claim this 20% deduction if your business consists of professional services from one individual. (Think doctors and lawyers.) There may be ways to defer some of your income, though, so you can qualify for the deduction. If you don’t offer professional services—you sell products, for example—you qualify for the deduction no matter how much money you make.
Large Expense Write-offs
This one is good news if your company needs to purchase vehicles, furniture, machinery or even computers. You can now deduct 100% of the cost—it used to be only 50%—in the year you buy the equipment instead of having to depreciate it over several years. You can also take the deduction over five years versus the old law that only let you take the deduction in the year the equipment was put into service.
But wait, it gets better. You can write off up to $1 million, which is a significant jump from the previous threshold of $510,000. And, it’s not just new equipment that’s eligible. You can also write off used or old equipment that you purchase for your business.
Accounting Method Changes
If you deal with a lot of inventory, you’ll like this part of the new tax law. Previously, if your company made more than $5 million, you were forced to use the accrual accounting method. The threshold has now been bumped up to $25 million. So, if you make less than that, you now have the option to use a cash accounting method. Why is that good news? Because cash accounting lets you deduct the cost of inventory when your business pays for it, instead of when you sell it.
Corporate AMT Repeal
The Alternative Minimum Tax has been eliminated for businesses, leaving you with one less potential headache.
Of course, not everything about the new law will benefit your business. There are several business deductions that the new law eliminates altogether or makes harder to take advantage of.
You can no longer write off your expenses for entertaining business clients. But don’t worry, office parties are still fully deductible.
If you offer transportation benefits to your employees, such as a public transportation pass or parking fee reimbursement, that’s no longer deductible either.
The Net Operating Loss (NOL) deduction, which used to be unrestricted, is now limited to 80% of a business’ taxable income. In years past, if your business sustained a loss, you had the option of using those losses to reduce any taxes paid in the past two tax years or to reduce any future taxable income for the next 20 years. Now you can only carry the NOL forward.
And there’s also bad news if your business carries a lot of debt. Previously, there were no restrictions on the amount of interest you could write off for small business loans. But the new law reduces the deductible amount to 30%.
The main takeaway is that there are some great opportunities to leverage and some pitfalls to avoid. Consulting with your tax or financial professional early on (especially this year) could translate into a significant break on your taxes.
Brandon Miller, CFP® is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
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