With 2018 drawing to a close (already!), many small business owners are wondering what to expect in the 2019 tax year given the recent sweeping tax reforms. The IRS has stated that the Tax Cuts and Jobs Act (TCJA) passed last December 2017 “made tax law changes that will affect virtually every business and individual in 2018 and the years ahead.”
What’s changing? What do you need to know as a small business owner? Since it’s impossible to cover every change that’s rolling out, I’m highlighting 4 big changes below for you. Ready? Let’s go!
A 20% business income deduction (if qualified) for small business owners using a pass-through taxation model. In a business using this model – whether it’s a sole proprietorship, partnership, or S-Corp – the business itself is not taxed. Rather, taxes are essentially “passed through” to the shareholders and owners.
The tax deduction will be applied on the taxpayer’s personal income tax return. Wondering if you’ll qualify for the new 20% tax deduction? Your income will need to be under $157,500 (single filers) or $315,000 (joint filers). If your income is higher, Intuit Quickbooks suggests consulting with a tax professional and reviewing the tax bill (in full here) to fully understand qualifications and associated guidelines.
100% first-year bonus depreciation for qualified new and used property. What does this mean for small business owners? If the asset additions you make this year qualify, you may be able to write off the full cost. That said, if it makes sense for your business, you may want to make additional asset additions before the end of the year.
Since there is some misinformation circulating out there as far as what property is eligible and what dates qualify, it’s important to consult with your financial professional and to refer to the IRS guidelines – here’s a helpful resource here. Here’s a very quick summary:
- For qualified property acquired and placed in service after 9/27/2017 and before 1/1/2023, the bonus depreciation rises from 50% to 100%.
- For qualified property acquired prior to 9/28/2017 and placed in service before 1/1/2018, the bonus depreciation stays at 50%.
Be sure you know what falls into the IRS definition of eligible property, and also know that certain types of property are ineligible for the bonus depreciation benefit in any taxable year after 12/31/2017.
For C-Corps, the corporate tax rate has been slashed a whopping 14%, from 35% to 21%. Obviously, this is expected to have a substantial effect on the bottom line for C-Corporations nationwide, giving them more money to infuse back into business operations and growth, in employees, and in distributions to shareholders.
The downside? If you’re a small business owner, it’s likely that you’re not taxed as a C-Corp (most aren’t) and therefore wouldn’t realize any benefits. Keep in mind that if you’re an LLC, you chose either C-Corp taxation or pass-through taxation at the time of formal business filing with the IRS.
This of course means that you cannot benefit from both the 14% C-Corporation tax cut and the 20% deduction for businesses using the pass-through taxation model. If you are unsure whether your LLC elected to be taxed as a C-Corp or chose the pass-through taxation model instead, consult your tax professional.
Big breaks behind the wheel. Whether your business could use a new vehicle or a whole fleet, now might be a better time than ever to invest in a new set of wheels. Why? Thanks to the TCJA, tax breaks abound for the purchase of both new and used vehicles.
Kiplinger reports that the annual depreciation caps for passenger automobile purchases have increased substantially. For instance, if you claim bonus depreciation,
- The first-year ceiling is $18,000 with bonus depreciation for passenger autos purchased after 9/27/2017 and put into service in 2018.
- Your first-year cap with bonus depreciation is $16,400 if your automobile was purchased before 9/28/2017 and placed into service in 2018.
And remember that whole bonus depreciation perk I talked about above? If you purchase a heavy SUV or heavy pickup truck for business purposes, you can write off up to 100% of the cost if you qualify.
Key Tax Reform Links for Small Business Owners
As you can see, some major tax law changes have already rolled out – and there is so much more than any single article can cover. I’ll leave you with 5 key IRS resources you can reference. If you’re local to Maine, you may want to bookmark the Maine Revenue Services website.
IRS Tax Reform Resources for Business Owners:
1. Tax Reform Provisions that Affect Businesses
2. Tax Cuts and Jobs Act: A comparison for businesses
3. IRS Tax Reform Page (for the latest guidance and info)
4. Tax Reform Resources (general resources page)
5. IRS’s Tax Tips email-subscription program
Bonus! Looking for actionable strategies to reduce your 2018 tax burden? Check out this article from MarketWatch that gives you 7 year-end tax strategies to think about.
Because of the complexity of the tax law changes, I can’t stress enough how important it is to consult with a qualified tax professional who can guide you as you make smart decisions for your business.
Whether you’re just starting your business, you have questions about your existing business, or you’re ready to step things up to the next level, I can help! I’m right here in Brunswick, Maine, and you can reach me anytime with your small business tax questions.