Five things business owners need to know about taxes this year
After the debates and uncertainty surrounding the final form of the Tax Cuts and Jobs Act (HR 1), including rounds of changes after its advancement through the House and the Senate, President Donald Trump signed the bill into law Dec. 22, 2017.
The final tax law has plenty of changes impacting an individual’s filing, including a doubling of the standard deduction, elimination of personal exemptions, and an expansion of the child tax credit, but many CEOs, CFOs and business owners wonder how it will impact their business.
Here are some of the specific tax cuts and added deductions business leaders need to know.
Decreasing the corporate tax rate
Before the passing of HR 1, the corporate tax rate was 35 percent, although not all businesses paid this amount.
Although the corporate tax rate has fluctuated over history, in the last 70 years, the corporate tax rate has gradually been reduced from over 50 percent to its current 35 percent, according to data from the IRS.
The new tax law lowers the corporate rate even further to 21 percent, taking effect starting in 2018, and is permanent, unlike many provisions of the bill slated to expire in 2025. This lower rate also applies for personal service corporation.
Eligible business asset deductions with ‘bonus depreciation’
If you’re an owner or CEO and you want to invest in equipment to improve your product or service offerings, the new tax bill offers you a valuable “bonus depreciation” increase that could help.
“When a business makes an acquisition, such as the purchase of machinery, the transaction cost is spread out across the useful life of that asset. This process is known as depreciation, and works in company’s favor,” according to Investopedia.
The new tax bill increases “bonus depreciation” allowance to 100 percent for property placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (Jan. 1, 2024, for longer production period property and certain airplanes).
Formerly, the bonus depreciation rate was 50 percent for the year in which the equipment was purchased, with the rest of the property value bonus added on in succeeding years.
This rate isn’t unprecedented, but it is on the highest end of these types of asset deductions. Over the last 15 years, this rate has gone from as low as zero percent to as high as 100, noted Investopedia.
Unless you’re an accountant, this element of the new tax bill may have gone over your head, but with this knowledge, you might want to schedule large business machinery or equipment purchases for the period in which this allowance increases.
Abolishing the corporate alternative minimum tax
The abolishment of the AMT is another interesting change to the tax law as a result of the new law.
Last year, accountants advised that corporations calculate its tax burden under both the regular corporate income tax and the AMT, and pay the higher of the two. AMT is intended to make sure that a corporation pays at least some minimum amount of tax by limiting or eliminating certain deductions, credits and other tax preference items.
However, with the overall deletion of the AMT, the guarantee of corporations paying tax goes away.
Abolishing this minimum tax could result in some businesses with many deductions and credits paying no taxes or very low taxes in a given year.
Business vehicle write-offs
If you use vehicles for your business, the new tax law could help you with your vehicle depreciation write-offs.
After Dec. 31, 2017, the caps will be $10,000 for the first year a vehicle is in service (up from a current level of $3,160); $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and $5,760 for each next year (up from $1,875) until costs are fully recovered, as stated in the final tax law.
Home repair, pest control, taxi services and many other types of businesses will likely tax advantage of this change.
Pass-through business deductions
If you are a sole proprietor, a single-member LLC, part owner of partnerships, part of a multiple-member LLC or a member of an S corporation, the new pass-through deduction could apply to you.
Pass-through tax treatment means that the taxes of a business are “passed through” to the tax return of the individuals owning the business.
The new tax bill establishes a 20 percent deduction of qualified business income from certain pass-through businesses.
However, the deduction from some industries like health, law and professional services is phased out from taxable income starting at $315,000.
For more detailed analysis on how the new tax laws may affect your business, take a look at this special report on the Tax Cuts and Jobs Act and schedule an appointment with a qualified CPA to go over your business deductions and taxes.
BeachFleischman, one of Arizona’s largest locally-owned CPA firms, provides services that help Phoenix and Tucson Arizona business owners save taxes, preserve wealth, improve accountability, enhance profitability and achieve compliance. If you are interested in learning more about how their team of certified public accountants can help your business, please contact BeachFleischman.com or call Tracy Hughes, CPA at (602) 265-7011.