5 Changes to the U.S. Tax Law That All Business Owners Should Know

It’s difficult to keep track of all aspects of your business, but when applicable laws change, it can be all the more challenging. Since Congress passed the new Tax Cuts and Jobs Act (TCJA) last December, which was implemented in January 2018 (for tax returns filed in 2019), many business owners are still trying to comprehend what the changes are and ultimately how they will affect their livelihood.

Under the TCJA, set to run from 2018 through 2025, business owners can expect to pay less in taxes. And while this reduction is clearly beneficial, there are still changes that may require further explanation and details. Here are five of the most important things that business owners should be aware of concerning the new law and its effect on 2018 returns.

1. The New Corporate Tax Rate is Lower 

The new corporate tax rate of 21 percent is a flat rate, meaning that each C Corporation is taxed at the same percentage. While most other new tax law changes are currently good until 2025, the new corporate tax rate is not set to expire.

The previous corporate tax rates were 15, 25, 34, and 35 percent. So while those businesses that were only subject to a 15 percent tax will be paying more, the majority of all businesses are set to pay less, as those that qualified for the lowest rate had taxable income of less than $50,000 – low for most corporations.

However, the rate changes from flat to blended when a corporation has a fiscal year that includes Jan. 1, 2018. Fiscal year corporations that have already filed their federal income tax returns using a flat rate instead of a blended rate may wish to consider filing an amended return.

2. Some Business Entities Will Get a Large Deduction

Pass-through business owners may now be eligible for a 20 percent deduction of their business’s net income. Pass-through businesses consist of S corporations, partnerships, and sole proprietorships. The deduction is contingent upon a couple of factors:

Your Taxable Income. Whether the deduction you may take is partial or full depends upon how much you make. Business owners who are married, file jointly, and make less than $315,000 will likely be eligible to receive a 20 percent deduction. Those single filers who make less than $157,500 may also be eligible for a full deduction.

If you and your spouse file joint taxable income between $315,000 and $415,000 or if you file individually with a taxable income between $157,500 and $207,500, you are likely to receive a partial pass-through deduction.

However, if you file jointly and have $415,000 or more in taxable income, or file individually and have $207,500 or more in taxable income, your ability to take any deduction at all comes down to the type of business in question: service or non-service.

Type of Business. A service business is one in which its principal asset is the skill and reputation of its owners or employees. However, this does not include engineering or architecture firms. It is important to also be aware that service businesses phase out of the pass-through deduction once they have surpassed the upper income limit.

It follows then, that a non-service business is any business whose principal asset is not skill or reputation. Once a non-service business surpasses the upper income limit, it is still entitled to a deduction, but the amount in question will be the lesser of two calculations:

• 20 percent of the business’s net income; or
• The greater of either 50 percent of your W-2 wages, or 25 percent of your W-2 wages plus 2.5 percent of the business’s real estate and equipment (qualified property cost).

However, what can muddy up the waters even more is that it the type of business may be unclear. In fact, depending upon whether you offer services and sell other tangible assets, your business could be considered both a service and non-service business. For these businesses, the jury’s still out. 

3. Certain Business Deductions Are Limited or No Longer Available

As of 2018, many of the historically relied-upon deductions that businesses have taken either no longer exist, or have been made more difficult for which to qualify. These include:

Business Interest. Though historically any interest that a business paid on its loans was deductible, under the TCJA a business may only write off interest expenses that are equal to 30 percent of its adjusted taxable income. However, there are some exceptions. You may no longer wish to finance your business through debt since you may not get any or all of that deduction going forward.

Entertainment Expenses. Unfortunately, you can no longer deduct 50 percent of costs for entertaining clients. In fact, they are no longer deductible whatsoever. However, your office holiday party is still 100 percent deductible.

Net Operating Loss & Deduction. Prior to the TCJA, if your business recorded a loss, it could opt to use it to reduce taxes paid in the last two tax years, or to reduce future taxable income for the next 20 years. Now, a business’ net operating loss may only be carried forward and is limited to 80 percent in a given year.

4. Fringe Benefit Deductions Have Changed

Deductions that used to be kosher may now no longer exist. Employer deductions are no longer allowed for any activities that are generally considered to be entertainment, amusement, nor are membership dues for clubs that have been organized for business, pleasure, recreation, or other social purposes. The same also goes for any facility that is used in connection with any of the above purposes, regardless of whether or not it is related to the active conduct or trade of the business itself.

Additionally, unless necessary for the safety of employees, deductions are no longer allowed for expenses incurred for providing transportation for commuting. However, under the new law, employers may deduct for qualified bicycle commuting reimbursements as a business expense; these expenses are no longer excluded. From 2018 through 2025, employers must now include these reimbursements in the employee’s wages. Likewise, employers must also now include moving expense reimbursements in employee wages. However, active duty U.S. military may still exclude moving expenses from their income.

5. There Are New (and Revised) Tax Credits

Family and Medical Leave Act. Employers may be able to claim a business credit based upon wages that have been paid to qualifying employees while they are on family and medical leave. Eligible employers who set up legitimate paid family and medical leave programs no later than Dec. 31, 2018 will be entitled to claim an employer credit for such, that is also retroactive back to the beginning of the employer’s 2018 tax year for qualifying leave that has already been provided.

Rehabilitation. The new tax law eliminates the 10 percent credit for buildings placed in service before 1936. Though it still allows for a 20 percent credit for any expenses necessary to rehab a certified historic structure, it now requires that taxpayers prorate that credit over a period of 5 years – not just the year that they placed the building into service.

However, owners may still be allowed to use the old tax law if the project meets the following conditions:

• The taxpayer owns or leases the building on Jan. 1, 2018 and beyond; and
• The 24- or 60-month period for the substantial rehabilitation test is initiated by June 20, 2018. 

Consult with an Experienced Advisor

While these are some of the most important changes that have come from the TCJA, from depreciation to opportunity zones, there are many more of which it is wise to be informed. And though a lot of the new tax law changes should prove beneficial for business owners, it is still important to consult with tax and financial advisers in order to ensure that you are in the best position to run your business as efficiently and effectively as possible. Have you taken advantage of these changes?