How the New Tax Laws Affect Small Businesses

How the New Tax Laws Affect Small Businesses

As a small business, you may always feel anxious around tax time, wondering if you paid your estimated taxes correctly, unsure if you will owe or receive a refund this year. With the passage of the Tax Cuts and Jobs Act, this tax season may seem even more uncertain as to how your bottom line will be affected. While all small businesses are of course hoping for a significant tax break in light of the new plan, there are, unfortunately, both positives and negatives to the new plan depending on the structure of your business and your industry. Below are several impacts the new tax laws could have on a variety of small businesses:

  1. C-Corporation Tax Rate Changes

    Previously, C-corporations could have a tax rate between 15-35%, but under the new laws, C-corps will be taxed at a flat rate of 21%, which means that many businesses structured this way will see a decrease in rate. Although most small businesses in the U.S. are structured as pass through entities, such as LLC’s or S-corporations, and may not be affected by this rate change, the new law adds a new deduction on qualified business income.

    This new pass-through deduction is approximately 20% of qualified business income for sole proprietorships, S-corps and partnerships. Depending on your income level, the deduction may be limited. If you your income falls under the threshold of $157,500 (or $315,000 if married filing jointly), there is no limitation. However, if your income exceeds this threshold, the deduction can be limited based on the unadjusted amount of qualified property in the business and the amount of wages paid by the business. If you are a “solopreneur” – i.e. your business generates revenue based on the service offering of one individual – this deduction phases out for income over $315,000.

  2. Other Deductions Take a Hit

    While a pass-through deduction has been added under the new law, other deductions are eliminated. The ability to deduct entertainment expenses has been eliminated under the new laws. Another major removal for small businesses is the Domestic Production Activity Deduction (DPAD), which was highly beneficial for businesses that produced domestically.

  3. Equipment Write-offs Improve, For Now

    The new plan is promising for businesses who recently purchased or are looking to purchase new equipment in the coming years. Businesses who purchase new or used equipment or qualified improvement property between September 27, 2017, and December 31, 2022, will be able to write off 100% (“full expensing”). When it comes to property purchased, the bonus depreciation percentage phases-down from 80% for property placed in service during calendar year 2023 and to 20% for property placed in service during calendar year 2026.

Depending on the structure of your business, what deductions you qualify for and the purchasing plans you may have in your business’ future, the new tax laws could bring about positive or negative developments. Although it is difficult to assess whether the new plan will provide significant advantages in the long-term, it does appear that many small businesses will see some benefits from the changes in the short-term.