How does the new tax law affect small business owners?

2018 is the first tax filing year to apply the changes implemented with the Tax Cuts and Jobs Act (TCJA). The following could impact small and medium sized business owners:

  • Pass-through deductions. Business owners of pass-through entities can now deduct up to 20 percent of qualified business income. This tax break was not available in the past and could translate to big savings for small business owners.
  • Depreciation for business vehicles. The TCJA also allows for depreciation deductions on vehicles used for business. The new law sets the deduction levels at $10,00 for 2018, $16,000 for 2019, $9,600 in 20 and $5,760 in 2021. These limits are higher than previous depreciation values. One catch: the new law requires the vehicle must be used for business at least 50 percent of the time to qualify for the deduction.
  • Changes to business entertainment deductions. Unlike the previous two points, this change is not as tax friendly. The TCJA removed the ability for businesses to take deductions for entertainment expenses. However, in many cases the new tax law will still allow certain deductions for meal expenses. The change is complicated and it is wise to review the full details with a tax professional before taking the deduction.

Business owners who chose to incorporate as a corporation should note two key changes under the new law. The first is the change to federal income tax rates. In the past, the tax code included federal income tax rates at a graduated level ranging from 15 to 35 percent. Under the new law, one flat rate applies. The TCJA sets this rate at 21 percent.

The law also changed the corporate alternative minimum tax. Prior tax law placed a 20 percent rate on corporations with annual gross receipts at or above $7.5 million. A recent report by MarketWatch notes that this tax often “snagged” medium sized businesses. The new law repealed the corporate AMT — translating to big savings for medium sized businesses.

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