A quick recap for small business owners and entrepreneurs
If you’re one of those who’re still trying to figure out the tax law changes in 2018, this article will be a perfect read for you. While 2018 saw some of the biggest tax law changes in the U.S., some of them still require clarifications from the Internal Revenue Services. With the year almost about to end, let’s look at a quick recap of the 4 major changes in the Tax Law of 2018.
The latest corporate tax rate is lower and perpetual
The new corporate tax rate is 21% and will remain so until 2025 (most of the U.S. tax laws will expire in 2025). Moreover, this latest corporate tax rate will be the same for all C corporations. Earlier years’ corporate tax rates were 15%, 25%,34%, and 35% respectively.
How does this affect business owners? The new flat corporate tax rate implies that corporations that qualified for the15% tax bracket in prior years will now have to pay more tax, i.e., 21%. However, the impact will not be very widespread as very few corporations fall into this category.
The corporate AMT is dead
Corporate AMT was a method to calculate taxes to ensure that all the corporations are paying a minimum tax amount. This has been eliminated entirely.
How does this affect business owners? Elimination of the corporate AMT has come has a blessing for corporations. Several tax liability calculations that were a part of the AMT calculation are now gone. Let’s look at a classic example to help you understand the corporate AMT change.
For instance, before the elimination of the corporate AMT, all death benefit payouts and cash value of life insurances were calculated as taxable income under the corporate AMT. These are generally not taxed under the traditional corporate law system.
A few pass-through businesses will welcome huge deductions
First things first, what’s a business pass-through anyhow?
Pass-through businesses are corporate entities such as sole proprietorships, partnerships, and S-corporations. They’re known as a pass-through business because the profit component passes onto the business owner. The business owner is then responsible for paying tax on their personal returns. They usually hire tax filing services to do the job for them (like us!).
If you’re a pass-through business, we have some awesome news for you in 2018. You may now be able to deduct up to 20% of your net business income. However, this good news comes with a condition. You will qualify for the deduction only if you meet certain criteria. The two factors on which your qualification will depend are:
- Your income
How much money you’re making will decide the extent of deduction you can take – full or partial. Here’s a quick table to help you identify the extent of deduction you can claim.
| Condition | Deduction |
| Business owners who have taxable income < $315,000, are married, and file tax jointly | 20% |
| Business owners who have taxable income < $157500 and file tax individually | 20% |
| Business owners who have taxable income between $315000 and $415000, are married, and file tax jointly | Partial |
| Business owners who have taxable income between $157500 and $207500, are single, and file tax individually | Partial |
- The type of business you’re running
Here’s a quick table to help you identify the extent of deduction you can claim based on the type of business you own:
| Condition | Deduction |
| Service business with income > $415000 | No deduction |
| Non-services business | 20% or 50% of your W-2 wages or 25% of your W-2 wages + 2.5% of your qualified property cost |
Some critical business deductions are getting tougher or going away
Some significant business deductions that corporations have relied on are either being removed altogether, or the rules pertaining to them will become stricter. Let’s look at them one by one.
- Business interest
Earlier, any interest paid on a business loan was mostly deductible. From now on, businesses can only deduct interest that is 30% of their adjusted taxable income.
- Entertainment expenditures
Entertaining your clients is no longer deductible as per the recent tax law changes. Nevertheless, office holiday celebrations are still 100% deductible.
- NOL deduction
Till now, businesses that recorded losses had the option to use their losses to reduce the tax amount paid in the previous 2 tax years (or minimize the taxable income for the following 20 years). Under the changed tax laws, the Net Operating Loss deduction can be carried forward in perpetuity, but the cap is 80% in any year (previously 90%).
Final thoughts
All the tax law changes mentioned in the above will wind-up benefiting many small business owners and entrepreneurs. However, you may have to tweak your business strategy to make some of them. Make sure you get in touch with us at HWB Services before the end of year. We already working on our client’s estimates, so there won’t be any surprises and we can maximize benefits come filing time!