With President Trump officially signing The Tax Cuts and Jobs Act into law, individuals and businesses will be seeing the most significant tax changes in thirty years. The new tax reform bill aims to stimulate economic growth and encourage expansion of small business across the United States. The tax bill includes provisions such as modified tax brackets, changes to credits and deductions, new corporate tax rates, and a host of other components.
Because of the focus on small business growth, many business owners may notice a positive impact from the new tax reform bill. In order to gain a more comprehensive understanding of the bill, we will explore three of the more substantial elements of the bill that could affect small business owners.
A Brief Review: LLC and S-Corp
First, it may be helpful to outline the distinctions between an LLC and and an S-corp, as explained more thoroughly in our previous blog post.
The main benefits cited for the creation of an S corporation are the inherent protection from personal liability, the allowance for pass-through taxation, and an easier conversion to a C corporation designation. Another advantage is that an S corporation owner can receive both a salary and dividend payments from the company, which can result in a lower tax bill.
Moving on to an LLC, it’s important to know that the flexibility of an LLC is one of the main draws to such a business structure. For example, the advantages include less paperwork and record-keeping than a corporation, protection from personal liability, and the straightforward division of profits among members.
Three Key Tax Provisions That Will Affect Small Businesses
This post will focus on three key tax provisions that are slated to make the most noticeable differences on small businesses.
As always, it is advised that you speak with your accountant or tax advisor in order to more effectively understand the complexities of this new law and how it may apply to you.
One of the most fundamental features of the new bill is a change to the tax structure for business entities that allow pass-through taxation (such as partnerships, S-corps and, and sole proprietorships). Pass-through taxation refers to the allowance for these entities to avoid paying corporate taxes. The main reason this component of the new tax law is meaningful is that 95 percent of U.S. businesses fall under the category of a pass-through business.
Under the new plan, such businesses would receive a 20 percent tax deduction, thus lowering their taxable income. This deduction excludes married individuals who own service-based businesses like law firms or doctor’s offices and earn more than $315,000 a year.
The idea behind such a deduction is that it will provide small business owners the potential to reinvest money back into their business that they saved via the deduction. Such investments could include the purchase of new equipment or technology upgrades, hiring of additional staff, or an increase in marketing or advertising budgets.
Overall, the tax deduction should reduce financial strain on the small business sector and generate opportunities for growth.
Elimination of Certain Deductions
One modification made to the new Tax Cuts and Jobs Act is the elimination of a number of itemized deductions, along with an increase in the standard deduction. One likely consequence of these changes is that fewer taxpayers will choose to itemize.
This section will briefly highlight three of the provisions that will no longer be available in 2018 and which might have direct repercussions on a small business.
The costs that a small business owner may incur for career and job-related expenses may no longer be deducted. This includes medical tests that may be required for your job, regulatory fees and licenses, and continuing education expenses.
Subsidized Transit and Parking Reimbursement
Also being eliminated is the corporate deduction that allowed businesses to deduct up to $255 per month spent on subsidized parking and transit passes provided for their employees. This prior provision also allowed those employees that took advantage of this program to not have to include the costs in their income. As a result, small business employers may no longer offer this type of subsidized program.
Tax Preparation Fees
In previous years, costs related to having your taxes prepared were available as an itemized deduction. While many small business owners relied on this provision, with the new change in the tax law, such costs will no longer be deductible in 2018.
Withdrawal of Health Care Penalty
One change that will not go into effect until the 2019 tax year is the repeal of the individual mandate on health care insurance. This refers to the provision of the Affordable Care Act that requires most Americans to carry a minimum level of healthcare coverage. Individuals who choose not to comply with the mandate face paying a penalty tax fine.
Starting in 2019, the new tax bill stipulates that the penalty around the individual mandate be removed.
Preparation for What’s Next
With all the recent changes and updates to the The Tax Cuts and Jobs Act, it is challenging to fully comprehend the implications it may have on your small business. As always, we recommend reviewing your unique situation, as well as your business needs, with your accountant in order to feel prepared for 2018 and beyond.