3 Ways Tax Reform Will Affect Your Small Business
The Tax Cuts and Jobs Act that was passed by Congress and signed into law in late 2017 affects all taxpayers in at least some way, but the sweeping legislation has profound implications for small businesses — both positive and negative.
The vast majority of the changes took effect on Jan, 1. Accountant Quintina Ricks, managing partner at Ten40 Solutions in Baton Rouge, a tax firm with a focus on small businesses, says with so many new tax regulations already on the books for this year, now is the time for companies to begin understanding the effect those changes will have on their operations.
Here are three ways the tax-reform measure is already affecting small businesses.
Under the legislation, the top tax rate for large businesses registered as C corporations dropped permanently from 35 percent to 21 percent starting in 2018. This will have a limited impact on small businesses since relatively few are structured in this way.
There are, however, other benefits in the tax measure that apply across the board to businesses of all sizes — specifically provisions that offer more generous write-offs for certain expenses. For example, qualified property purchases for business — such as cars, computer equipment or office space — are now fully deductible through Jan. 1, 2023. The limit for expensing equipment purchases also doubled to $1 million starting in 2018.
Tax Break for Pass-Throughs
Besides the lower tax rate for C corporations, perhaps the most sweeping change in the tax law involves pass-through entities such as limited liability companies (LLCs) and S corporations, which allow business owners to “pass through” business income and claim it on personal tax returns.
The law created a new tax deduction of up to 20 percent of income from partnerships, sole proprietorships and other pass-through entities such as LLCs and S corporations. There are some limitations on the deductions, but most small businesses will be able to benefit. “This is a positive aspect of the tax plan,” Ricks says.
There are a number of stipulations. To qualify for the pass-through deduction business owners must have a taxable income below $157,000 if they’re single or under $315,000 if they’re married. “A lot of times they have to be mindful of the salary they’re taking to know if this benefits them or not,” Ricks says. The tax break also expires in 2025.
Also, certain types of service businesses can’t take advantage of the pass-through provision, such as doctors, lawyers, brokerage services or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
Meals and Entertainment Expenses
Under the old rules, qualified expenses for entertaining clients, such as sporting events and concerts, were deductible at 50 percent of the face value of the ticket. The new rules eliminate the entertainment deduction entirely — including commonly claimed costs related to taking clients out to dinner. And tickets to qualified charitable events — previously fully deductible — can no longer be claimed.
“A lot of people take their clients out out dinner or lunch, and that was a huge expense for many business owners, but that is going away [as a deduction],” Ricks says.
There are other changes related to business meals and entertainment as well: The cost of providing meals for employees on-site was previously 100 percent deductible, but the new law only allows 50 percent of those costs to be claimed. “By 2025 it won’t be deductible at all, so businesses need to keep that in mind,” Ricks says.
Office holiday parties are still 100 percent deductible, and employee meals while traveling can still be claimed at 50 percent, although many tax professionals expect the IRS to issue more specific guidance for these types of expenses moving forward.