2018 Tax Reform: What Small Business Owners Need to Know

As a small business owner, it’s important to stay on top of your finances and the economic changes around you. In January 2018 Congress passed a new tax reform that will lower taxes for business owners, with multiple provisions.  These new changes are said to benefit small business owners:

One of the changes with the new tax reform is tax rates are lower. The corporate income tax rate will be reduced to a flat 21%. This pertains to C corporations and personal service corporations. However, some small C corporations may pay more due to a 15% corporate rate on the first $50,000 of taxable income. Sole proprietors, farmers and S corporations will be allowed to deduct 20% of their qualifying income. Therefore, if your business taxable income is $120,000, after the 20% deduction you only must pay taxes on $96,000.

Another change is larger write-offs for large expenses. Previously small business owners could write off purchase over time each tax season. The new tax plan will allow businesses to write off a larger portion of equipment purchased. This new tool called “bonus depreciation” allows you to write off the entire cost of the purchase for the year it is bought. Now you can deduct 100% of the cost instead of 50%. In addition, the new law will allow you to write off small and large deductions if it pertains to your business. Rather it’s a copier or a facility you can now write off 100% of the cost for the year.

Also, as of December 31, 2017, the percentage of net operating losses will be reduced to 80% instead of 100%. For example, if a business’s net operating losses is $50,000.00 the business is only allowed to deduct $40,000.00. Additionally, net operating losses incurred from previous tax years can no longer be backdated from earlier tax years. However, the net operating losses can be carried forward indefinitely instead of for 20 years.  For an individual taxpayer loss that is disallowed for excess business, losses can be carried forward to later tax years. This only applies if the excess business loss exceeds a certain point. Even though this provision is not necessarily a benefit, it is a change that can affect business owners.

These are just a few of the many provisions for the 2018 tax reform. Overall it will benefit small business owners. However, up incoming business owners should seek professional guidance on the type of corporation to start that fits their services and needs. The new law is said to be more complex and may probably change. Therefore, working with a professional will allow you to accurately report the right deductions.

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