The 2018 tax reform was the largest tax overhaul in the past three decades, ranging from a new corporate tax rate to the cutting of some deductions, and brings a good deal of change to many companies’ accounting. With the new laws already taking effect here are some the most important ways they can affect your business.
One of the biggest changes is the reduction slashing of the income tax rate for C Corporations from a top rate of 35% to a flat rate of 21%. This rate is applied to personal service corporations as well. The law however, did not keep the 15% corporate tax rate on the first $50,000 of taxable income, so some businesses could end up paying more in the end.
The corporate alternative minimum tax is repealed completely. Companies that have an Alternative Minimum Tax Credit for AMT paid in prior years will be allowed to use the credit, subject to limits, in full before 2022. The credit is refundable during the period from 2018 to 2021.
Furthermore, the new tax law also brought back 100% bonus depreciation, so firms can write off the entire cost of qualifying assets that they buy and place in service. This generally lasts until 2022 and then decreases by 20% for each year after. This applies to new and used assets with lives of 20 years or less. With this however, there is also a higher cap on expensing business assets. A taxpayer can expense new or used assets instead of depreciating them for maximum amount of $1 million. Once more than $2.5 million of assets are placed in service during the year the limitation phases out dollar for dollar.
Pass through entities, such as S corporations, partnerships, and LLCs, which pass on their income to their owners for tax purposes and account for around 95% of US entities also got a boost. Many of these businesses will be able to deduct 20% of their qualifying income before calculating their tax bill. This is one of the more complex parts of the new law, as it has certain restrictions in order to prevent a one-man law or accounting firms from benefiting from a tax break that isn’t meant for their business
Taxpayers who own service based businesses, such as law or accounting firms, and have taxable incomes greater than $157,500 for individuals and $315,000 for joint returns are subject to two rules. First, the tax break phases and if you’re in an affected field and your taxable income exceeds $415,000 for joint returns or $207,500 for all others, the deduction is zero for that business. Second, there is a W-2 wages-paid limitation for high-income earners that applies even if the person isn’t engaged in a specified service business. This maxes the deduction at the original 20% or, if lower, a figure that looks at W-2 wages paid by the firm and the basis of certain assets.
One of the last things we are going to touch on in this post are the new vehicle tax breaks. Buyers of new or used business vehicles are getting a lot of breaks under the new law, making now the best time, tax-wise, to purchase a vehicle for your business. The annual depreciation caps have risen greatly, as if bonus depreciation is claimed, the first-year ceiling is $18,000 for cars acquired after Sept. 27, 2017, and put into service in 2018. The second and third year ceilings are $16,000 and $9,600, with $5,760 after that. Moreover, with bonus depreciation, if you buy a heavy SUV, you can write off up to 100% of the cost, and if you buy a heavy pickup truck for business use, you can expense up to the full cost.
The new tax law has been the most comprehensive change to our business tax system in the past few decades and so far mostly beneficial to small businesses. These were just a few of the changes in the new law and there could be other ways your business is affected. However, we here at Silicon Valley Hitech Accounting are dedicated to finding the perfect accounting solution for any client, allowing you to get the most out of your business.