Tax Reform Bill and Small Businesses

Back in 1986, a former employer of mine was sitting in a class about the new Tax Reform Act that had just been passed. An older man sitting next to him kept shaking his head while it rested on the table. Finally he looked up rubbing his eyes and said ‘Now I will have to buy a Computer’.

Thirty Two years later as we approach the first major tax reform since 1986 (which was thirty two years after the prior tax reform in 1954), everyone has computers. In fact we’ve come a long way from the day when my father prepared tax returns by hand, handing off to my mother and her trusty typewriter complete with carbon paper.

The tax bill that President Trump signed into law on December 22 has many changes for both Individuals and Businesses. I can easily write an article just on the Individual side but for now let’s focus on some ways that this affects businesses.

Corporate Tax Rate – The current corporate tax rates range from 15% to 35%. The new rate effective in 2018 will be a flat one of 21%. For the big corporation that will be a huge tax saving. Corporations with net income below about $90,000 will actually pay more in tax. Those businesses may want to convert their entities to a Pass-Through such as an S-Corporation or a Limited Liability Company (LLC).

Pass-Through Entities – Most small businesses are already pass-through entities. That means they are not taxed at the Corporate or Partnership level but rather the Net Income gets passed to the Individual’s personal tax return. Currently that income is passed at the taxpayer’s individual tax rate. The new law allows a 20% deduction of domestic qualified business income from partnerships, S-Corporations or Sole proprietorships. 

There are limitations and thresholds and you should discuss these with a qualified tax professional. This deduction is temporary and is due to expire at the end of 2025 when things will go back to the way they were in 2017.

Bonus Depreciation – Currently when you purchase qualified property you receive a 50% of the total cost immediate depreciation deduction. The balance is depreciated over time. Effective September 17, 2017 and through December 31, 2022, you will be able to expense the entire cost of your property purchases. These phase out to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. By 2027 Bonus Depreciation will be gone.

Net Operating Loss – The new law will only allow you to carry forward any loss. You will no longer be able to carry it back.

So for those of you who thought the new tax law was going to be simpler, you can put away your carbon paper and hop into your self-driving car straight to your qualified tax professional!