Business owners are preparing to file for taxes under a whole new federal income tax regime. The Tax Cuts and Jobs Act (TCJA) passed last year led to the biggest change to the tax code in decades. A number of these changes directly impact small and medium sized businesses. Three specific changes to keep in mind when gathering data and documents for your returns include:
- Qualified business income (QBI). As noted in a previous post available here, the TCJA changed how the IRS treats QBI. Essentially, the new law provides for a deduction of up to 20 percent of QBI for pass-through business entities. The post noted above provides more details on the criteria to qualify for the deduction and various exceptions.
- Corporations. A business that is incorporated as a corporation should keep an eye on two big changes. First, the new tax law has changed the federal income tax rate. In the past, this rate was set on a sliding scale. It began at 15 percent and topped off at 35 percent. This is no longer the case. The TCJA has created a flat 21 percent corporate rate–potentially leading to big tax savings and less confusion. The second change involves the corporate alternative minimum tax. The TCJA repeated this tax, likely to the benefit of small and medium sized businesses throughout the country.
- Business vehicles. Business owners who use a vehicle more than 50% for business can take advantage of a dramatically increased luxury auto depreciation allowance. The new tax law sets deduction limits for vehicles placed in service after December 31, 2017 at $10,000 for the first year ($18,000 if you claim first-year bonus depreciation), $16,000 for year 2, $9,600 for year 3, and the $5,760/year until it is fully depreciated. The allowance is prorated if the vehicle is not used 100% for business. There is also a 100% first year bonus depreciation option available for certain new heavy SUVs, pickups and vans.
These are just a few of the many changes that impact small businesses as they file their tax returns for the 2018 tax year. We will provide additional posts in the future touching on other ways the new tax law could impact your business interests.