Tax reform for business owners

The Tax Cuts and Jos Act of 2017 (TCJA) was enacted with the intention of spurring economic growth and stimulating business investments.  All business owners will see changes in their tax returns.  It is important to sort out the key points of the tax reform.

  • C Corporations: Entities that file their taxes on Form 1120 are C Corporations. The tax rate for C Corporations was reduced from 35 percent to a flat 21 percent.
  • Passthrough entities: Sole proprietors, S corporations, partnerships and LLCs (that elected to be taxed as any of the previous entities) are passthrough entities. The tax reform created a tax deduction called the 20 percent Qualified Business Income Deduction (QBID). I will explain in  another blog the intricacies of the new deduction, but for now, in general terms, net business income could be reduced by 20 percent.
  • Depreciation: The new law allows bonus depreciation of 100 percent. Business owners can deduct in the first year the total cost of any qualified property. Allowable property includes office equipment and furniture, computers, machinery, software, cars and more.
    • Section 179 assets were increased to $1 million and the phase-out threshold to $2.5 million.
    • Depreciation limits for luxury automobiles were also increased. If the bonus depreciation was not claimed, $10,000 depreciation deduction is allowed.  If 100% bonus depreciation is claimed, the limit is now $18,000 for the first year.
  • Meals and entertainment: This previous deduction has been changed to only meals. Yes entertainment, amusement or recreation expenses are no longer deductible under the new law. However, business meals can continue to be deducted as long as they are not lavish or extravagant.
  • Business interest: The business interest expense is now limited to any business interest income plus 30 percent of the business’ adjusted taxable income.
  • Paid Family and medical leave: This new tax credit for employers was created by the TCJA. If the company offers paid family and medical leave to their employees, it can claim a credit as a percentage of wages paid to the employee while on leave.
  • Opportunity zones: Opportunity zones were newly created as an incentive for business owners to invest in economically-distressed communities around the US. For their efforts, investors get preferential tax treatment.
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