How does the new tax law impact deductions for small businesses?

President Donald Trump pushed major tax reform into law at the end of 2017. These changes to the tax code will impact tax filings for the 2018 tax year. It is very likely that the changes will impact most small businesses throughout the country.

Small businesses and deductions: The difference between 2017 and 2018

Various provisions will impact the use of tax deductions for small businesses. Two examples recently discussed by the Internal Revenue Service (IRS) include:

  • Pass-through deduction. This new provision allows qualifying businesses to deduct up to 20 percent of certain business income for business owners. The Tax Cuts and Jobs Act (TCJA) specifically excludes certain types of businesses, such as most medical practices.
  • Business interest deduction. In the past, the tax code limited the tax deduction for net interest to 50 percent of the adjusted taxable income for certain businesses. This included those with a debt-equity ratio over 1.5. The previous law also allowed businesses to carry forward interest over that limit for an indefinite period of time. The TCJA adjusted the business interest expense to allow for the deduction of business interest income along with an additional 30 percent of the business’ adjusted taxable income. This is specifically applied to large businesses, though the IRS notes some businesses can elect out of the limit.

The IRS has stated that the changes to the tax code are complex. The agency has also noted that it will provide guidance throughout the year to help taxpayers better understand the law.

Entrepreneurs and taxes: Consider revisiting your tax plan

Due to these complex changes, it is wise for entrepreneurs to revisit their tax planning strategies. Businesses will likely experience a new set of tax obligations in 2018. A failure to adjust for these changes could result in an unexpected tax bill. An attorney experienced in the interplay of business and tax matters can provide some guidance.

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