The Tax Cuts and Jobs Act of 2017 is a historic law that reduced the rates of most personal income and corporate income tax brackets.
Although it can affect the top three sources of tax revenue in the United States, based on the data from Fortunly, the legislation is designed to help entrepreneurs be more liquid and assist them in increasing wages and creating more employment opportunities in America.
Otherwise known as Trump Tax Cuts Act, the law has been in effect for business taxes since 2018. However, many entrepreneurs are still confused about its implications for their ventures.
Today, let us explore what the Tax Cuts and Jobs Act of 2017 really means for small businesses.
Qualified Business Income Deduction – AKA the Section 199A deduction, it applies to sole proprietorships, partnerships, LLCs, small corporations, and other pass-through businesses. This section states that you can deduct 20% off your net income and pay tax just on the remaining balance.
Increased Write-Offs for Equipment Purchases – This change encourages you to buy capital assets such as automobiles and pieces of machinery by allowing you to deduct higher levels of expenses immediately.
It increased the accelerated depreciation deduction limits and raised bonus depreciation for any applicable equipment (brand-new and used) put into service between September 26, 2017, and January 1, 2023.
Advantageous Cash Accounting Provisions – Businesses with less than $25 million in annual revenue can use cash accounting, a method that counts only paid invoices and settled expenses. In other words, you are allowed not to factor in accounts receivable and unpaid bills into your tax computation.
Businesses with an annual revenue of $25 million must use accrual accounting where every single sale and bill is taken into consideration.
Family Leave Tax Credit – Available until the end of 2019, small businesses that provide paid family medical leave benefits to employees can receive a general business tax credit. It applies to entities not required to Family Medical Leave Act policy.
To become eligible for this tax credit, you must have a written policy spelling out your family leave benefits. It should include a minimum of two weeks of paid time off for qualified full-time employees every year. Part-time workers may also receive the benefit, albeit pro-rated. The payment should also at least be equivalent to 50% of an employee’s normal wage.
Limited Interest Rate Deduction – Prior to 2018, the law allowed any business to deduct their interest expenses as much as possible. Now, the deduction is limited to 30% of a company’s earnings before interest, taxes, depreciation, and amortization.
Fortunately, enterprises with $25 million (or less) in annual gross receipts for the last three years are immune to such a restriction. If your business falls into this category, you may continue deducting interest expenses with no limits.
Tax Loss Carryback Removal – Any net operating loss from the past years can no longer be used to offset profits in the future. Since the 20-year limit was eliminated, however, indefinite tax loss carryforwards are now allowed. The new provision limits the amount that can be carried over to future years to 80%, though.
All of the tax reform’s said advantages and disadvantages for small businesses discussed in this piece are simplified. It pays to consult a tax professional to understand the rather confusing limitations and restrictions of each to precisely find out which ones are relevant to your enterprise.