As a small business owner, changes to the federal tax code and new federal business tax deductions will have you feeling like you have homework to do. But sweeping changes in the recently passed federal tax plan has entrepreneurs (and tax accountants) everywhere feeling like they are cramming for midterms. Have no fear! We have been researching and writing a series of articles to help you decode the changes.
President Trump signed the Tax Cuts and Jobs Act into law in December of last year. But, it bears repeating, the legislation passed last year has no bearing on taxes you will file this spring (which are only for the year 2017.) Savings as a result of new federal business tax reductions will not be in your pocket until next year. But planning and forecasting are paramount to efficient operations. Keep these deductions in mind as you are planning for the coming year. Might one of these deductions enable you to finally invest in that shiny new piece of equipment or make a strategic new addition to your team? This particular cheat sheet details new federal business tax deductions you should plan on for 2018.
Many people are talking about the newly qualified business income deduction. But do you know what it means for you and your business? Most businesses are structured as LLCs, partnerships or S-corporation — organizations known collectively as pass-through entities. This means that rather than the federal government taxing their income at a business rate and then again at an individual tax rate, income passes through directly to a business owner. That owner then reports the income on individual returns and pays the individual rate. This is, of course, after computing any deductions for expenses to run the business. In short, income is treated like direct income to the individual business owner. The feds tax the income in question at the individual rate only, adding to the impact of federal business tax deductions for pass-through entities.
Under the new federal tax plan, Section 199A holds that business owners with companies organized can deduct the first 20 percent of qualified business income. Sounds great, right? But the deduction does come with some significant restrictions. The law treats differently specified services or businesses like attorneys, consultants, performance artists and others who provide services under the tax plan. For those types of businesses, the deduction is not available unless the total amount of qualified business income falls below the phase-out thresholds, set based on marital status.
The deduction phases out based on total income levels (not just business income). If you are single, the phase-out of the deduction starts at a total income level of $157,500 and is completely phased out at $207,500 and above. For married couples filing jointly, the phase-out begins and is complete at $315,000 and $415,000 respectively.
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A new federal business tax deduction under Section 179 of the tax code, allows businesses the opportunity to deduct 100 percent of the costs to buy certain qualifying equipment and software that support company operations. This comes with a couple of caveats that (according to some) work in favor of small businesses in most industries. First of all, the deduction is limited to $1 million. Second, the largest amount a company can spend on these types of investments and still qualify for the deduction is $2.5 million. That means that in most cases, large businesses cannot spend $4 million on new equipment and still take advantage of the deduction. The investment in question must be for equipment or software purchased and put into use before the end of the year.
After caps are reached for Section 179 deductions, businesses typically move on to bonus depreciation deductions. Before passage of the tax legislation, the bonus depreciation deduction required property in question to be “original use.” The new law eliminates this rule, meaning that you can now deduct bonus depreciation on new and used property. And while this is not permanent, the deduction is not slated to begin phasing out until 2023, phasing out for good in 2026. Under this section of the tax law, business owners can immediately deduct half of the expense of certain types of property. Before this law was enacted during the Great Recession, companies took smaller federal business tax deductions over the course of years. This section of the tax law was supposed to begin phasing out this year, but the Tax Cuts and Jobs Act extends it.
What do you think? Will these new tax deductions have a big impact on the way you run your business in 2018 and beyond? Or, do you need some help assessing what it means for your business?
If you have any questions about these deductions specifically, or the new federal tax law in general, do not hesitate to reach out. We have got your back! Our Arizona accounting professionals have tons of experience in helping business owners like you succeed. How can we help you in 2018?