Tax season is officially in full swing. For those in the small business world, there are a lot of questions surrounding the recent 2017 Tax Cuts and Jobs Act and how those changes to the tax code could positively or negatively affect this year’s filings. These are some of the biggest changes seen in three decades and the overall result is a big win for small businesses. We looked at the changes and pulled out the five most important tax changes for small business owners.
1. 20% Deduction for Many Small Businesses
The first major change that is happening for 2019 is the 20% deduction for small businesses. The government decreased the income tax rate on C corporations from 35% to 21% which is a huge deduction for large, public companies, but what about most small businesses that don’t structure themselves as C corporations? Congress created a new tax deduction; the 20% Qualified Business Income Deduction for Partnerships, S corporations, Sole Proprietors and LLCs. This new deduction was created to benefit pass-through-entities, since a traditional tax break wouldn’t have the desired effect. Pass-through-entities are unique since they themselves don’t pay the taxes, but rather the business owner pays business taxes on their personal tax return at the same individual rates as everyone else. This new tax cut is great for small businesses, just make sure you check with your CPA since there are some income and industry limitations.
2. 100% Bonus Depreciation
Another big change for 2019 that came out of that 2017 tax law is increasing the Bonus Depreciation from 50% to 100% until the year 2023. This figure has been ratcheting up over the past 15 years with the intention of speeding up the common tax deduction to help people get their tax savings faster. This deduction covers the wear and tear of property. With the changes, personal property used for business purposes, including cars, computers, software, machinery, equipment, office furniture and more, that remains useful for 20 years or less qualifies. What’s even better, is that it jumped up from $500k to a $1m limitation. That is a large deduction for small businesses and allows you to invest in machinery, equipment and other things that depreciate quickly, so you’ll be able to save a lot in taxes. There are some limitations, so again, make sure to check with your CPA to see if this strategy works for you.
3. SALT Deduction
One of the biggest negatives out of the 2017 tax law affecting you if you’re a small business owner is the reduction of the SALT tax deduction. SALT is the State and Local Income Tax deductions and allows taxpayers of high-tax states to deduct local tax payments on their federal tax returns. If you live in a high-income tax state like California or New York this is really going to hit hard because your income tax bracket has in effect gone up since your state income taxes that you used to be able to deduct, are no longer deductible to the full amount. While the deductions used to be limitless, they have now been capped at $10,000. This is definitely something you need to plan for when you’re thinking about your 2018 and future 2019 income taxes.
4. Estate Tax Exemption Increase
The estate tax exemption amount is going up! As a reminder, the estate tax applies when a deceased person’s estate is transferred to new owners and the estate is worth more than a certain exclusion amount. The new tax reform bill doubles the exclusion amount in 2018 to $11.9 million for individuals or $22.36 million for married couples. That means if your business is worth anything less than $22 million, you can gift it to your children estate tax free, at least for the time being. This is going to make exit planning much easier by taking many of the estate tax issues off the table and giving you the ability to pass your business on to whomever you want.
5. Retroactive Refunds
The last major change is retroactive refunds. The government reinstated that if you paid taxes in 2017, 2016, 2015, even 2014, you can get a 3-year review of your tax returns to look for missed tax savings. Up to 93% of business owners paid too much in taxes and if this is you, this change could help you retroactively capture that savings in a refund. This could be a great boost to your cash flow, improve your bottom line long-term and return some of the money that you overpaid to the IRS.
There are many more tax changes taking place this year, so be sure to speak with your CPA or tax preparer to make sure you are filing correctly in order to take advantage of the new deductions.