How the New Tax Bill Will Impact Business Owners
If you have been following the news over the past month, you know that Congress just passed a new tax bill that is being touted as the largest overhaul of the federal tax system since 1986. Under this new bill, there are some big changes for both individuals and corporations. But how will this bill impact you if you own a business? Depending on the way that your business is structured and the kind of services or goods you provide, this bill could impact you in a number of ways. The biggest changes will come if you a) have a pass-through entity such as an LLC, sole proprietorship, partnership, or S Corporation or b) have a larger corporation that holds assets overseas.
The new tax bill will go into effect almost immediately. Most provisions apply to the 2018 tax year, which means you will see the differences when you file in the spring of 2019. This also means that it’s time to take a close look at how the bill may impact your business this year. While the corporate taxation changes in this bill are permanent, most changes to the individual taxes are temporary and are set to expire in 2025.
Pass-through entities are any business structures that allow the business owner to claim income through the business on their own personal tax returns. This eliminates the need to file a separate tax return for the business and to pay taxes twice: once on the income to the business and once to you, as the business owner. Sole proprietorships, limited liability companies (LLCs), partnerships, and S-Corporations all fall into the category of pass-through entities.
Under the new tax bill, pass-through entities will see two major changes. One is in the taxation rate. The new tax bill changes the tax rates for individuals by creating seven new brackets. Because business owners with pass-through entities include business income on their personal tax returns, the tax rate will be determined by these new brackets. The second change for pass-through entities is that businesses will now receive a deduction amounting to 20% of pass-through income. However, this deduction is subject to limitations and restrictions, so you will have to look closely at the provisions of the bill to determine if your business qualifies for this deduction.
If a pass-through entity earns less than $157,500 for single filers and $315,000 for those who file a joint return, there are no restrictions on the 20% of profit deduction. A business owner making less than these limits through an LLC, for example, may simply reduce their taxable income from the LLC by 20%. However, if the earning rise above these cut-off profits, a few significant limits kick in.
First, there is a cap on how much of a deduction pass-through entities can take that is tied to the amount invested into the business. The limitation is the higher of:
50% of total wages paid
25% of wages plus 2.5% cost of tangible, depreciable property
This prevents individuals from creating a pass-through entity simply to gain the benefit of the deduction. Instead, these calculations encourage business owners to invest further in their own businesses.
Secondly, if you own a pass-through entity that provides certain professional services, such as a lawyer, doctor, consultant, or other professional services provider, there will be a phase-out income limit on how much you can deduct. These limitations are:
$157,500 for single filers
$315,000 for couples who file a joint return
Under the new tax bill, individuals, including business owners of pass-through entities, will be subject to a cap on state and local tax deductions as well. Deductions for state and local taxes will be limited to $10,000.
If you own a business and file separate corporate taxes for that entity, such as a C Corporation, you are sure to see a difference in your taxation rate in 2018. This is the most widely-discussed aspect of the new tax bill, so you’ve probably already read about it. This bill dramatically lowers the corporate tax rate to a flat rate of 21% on all profits. This cut was designed to make US corporations more globally competitive and puts US corporate taxation below the worldwide average of 25%. Under the new tax bill, there is no alternative minimum tax for corporations.
The new bill also ends the global corporate tax, meaning that, if a corporation earns profits abroad, it will only need to pay taxes in that country, not in the US as well.
In a provision designed to bring more US corporate-held assets back into the country, this bill creates a one-time repatriation tax of 15.5% on cash and foreign-held liquid assets. There is also a one-time repatriation tax of 8% for all illiquid assets such as equipment, which is payable over an 8 year time frame.
Other Changes that May Impact Business Owners
There are many other provisions in this new bill that may impact how you do business. One such provision extends the bonus depreciation deduction. Under the new bill, businesses can deduct the full cost of certain qualified property and expense up to $1 million of qualified property per year. Another provision that will have profound impacts on businesses is the new limit on deducting interest expenses.
If you own a business, regardless of structure, it is time to take a closer look at this new tax bill. A few weeks into 2018, your business is already being impacted by these new provisions. It will be essential to sort through the bill and figure out how these new provisions will impact your bottom line. Contact Faulkner Law at (770) 685-9501 to do a full analysis of how this bill will impact you and your business.