In my last post, I covered how the new tax law affects individual taxpayers. In this post, I’ll review how these revisions affect businesses. Hint: Major changes ahead.
1. Corporations will now be taxed at a flat rate
The new legislation does away with the old tax brackets and institutes a new flat tax rate of 21%. This is both a hefty tax cut and a considerable simplification over the previous tax structure.
2. There’s no more corporate alternative minimum tax (AMT)
This tax method added a layer of complexity to corporate taxes in order to prevent tax avoidance. The new law simplifies things by removing that additional step.
3. Deductions for entertainment expenses have been eliminated
Under the old law, 50% of any entertainment expenses that were directly related to the active conduct of business could be deducted. The new law wipes out deductions for entertainment, amusement and recreation as well as membership dues related to most clubs.
4. There’s a new deduction for pass-through income
First, what is pass-through income? Corporate tax rates don’t apply to sole proprietorships, LLCs and partnerships. Instead, the income is “passed through” the business and taxed at the owner’s individual tax rate.
The new legislation enacts a 20% deduction on pass-through income. So if you own a small business that makes $100,000 in profits, you will now be able to deduct $20,000 of it before the individual tax rates apply. As usual, exclusions apply. Owners of professional services businesses (doctors, consultants, etc.) will face phase-out income limits of $157,500 for single filers and $315,000 for married filers.
5. The rules have changed for net operating loss (NOL) deductions
What is a net operating loss? Simply put, it’s when a company’s expenses exceed its revenues. Too much money out, not enough money in.
Amazingly, this loss can time travel. Under the old laws it could be used to offset income generated in both past and future years – up to two years back and twenty years forward. The new law prevents it from traveling back in time, but it can now travel into the future indefinitely.
One more change – the loss could previously offset 100% of taxable income. Now the deduction is limited to 80% of taxable income.
6. The rules for expensing and depreciating assets have gotten more generous
Previously, up to $510,000 of qualified property could be expensed. That limit has nearly doubled to $1 million. The definition of qualified property has also been expanded to include lodging facility furniture and equipment as well as improvements to nonresidential property such as roofs, HVAC upgrades, fire protection systems and security systems.
As far as depreciation goes, bonus depreciation has increased from 50% to 100% for 2018 with phase downs in future years. This incentive helps small businesses offset the cost of new equipment.
Passenger vehicle depreciation amounts have also increased – from just over $3,000 to $10,000 for the first year (read more about vehicle depreciation here).
7. Businesses won’t be able to write off sexual harassment settlements
Companies will no longer be allowed to deduct any settlements, payouts or attorney’s fees related to sexual harassment cases involving non-disclosure agreements.
Unlike the changes to the individual tax code, the business changes are permanent. That means most businesses will see significant tax decreases for the foreseeable future.
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