The Trump administration passed significant tax code changes in 2017, which went into effect in 2018. The latest changes to the US Tax Code present profound tax reform, particularly as they affect business owners. Overall, the impact on businesses is largely positive, with a number of new mandates and allowances that help business owners pay less tax and write off more of their expenses, reducing their overall tax liability and minimizing tax-related expenses. Offering new tax breaks to businesses is a strategy that has been used in the past to drive business growth, keep or bring business activity to US soil and create more domestic jobs. While the actual impact on the US economy will become clearer at a future point, it is important for US businesses to be aware of the changes, and knowledgeable about how to fully take advantage of them.
Tax Changes and Small Businesses
Tax reform in 2018 has caused a significant amount of changes for small business taxes. A survey conducted in 2018 polled 2,700 small businesses about the new tax reform’s perceived potential impact. It showed that 83 percent of small businesses owners are experiencing optimism about the changes, with 38 percent sharing plans to hire additional employees because of the anticipated savings. This can work to effectively grow the economy through small business growth.
Specific Wins for Small Businesses
The positive aspects of the tax code changes are outlined below. A number of substantial wins exist, for business of various sizes:
Win #1 – Business Vehicle Depreciation
The tax reform affects depreciation rules for business vehicles. The new law nearly quadruples the Sec 280F limitations, meaning businesses can now write off more for vehicle depreciation, thus reducing their tax liabilities. There is also now an extra $8,000 in the first year for depreciation. It is recommended that businesses check the vehicle history report of each business vehicle so that depreciation can be estimated accurately. Businesses with multiple vehicles / fleets can plan their vehicle purchases strategically, knowing that the first depreciation year for each will deliver a substantial write off.
Win #2 – 20% Business Income Deduction
Business owners may now deduct as much as 20 percent of certain types of business income from domestic businesses. This applies to sole proprietorships and partnerships, S corporations, trusts, and estates. The deduction may also be claimed on certain dividends. This includes entrepreneurs, who regardless of industry, may take the 20 percent deduction if they have taxable income that’s under $157,500 for a single household, or $315,000 if they’re married. Some types of businesses do not qualify for this deduction. Businesses that fall into “specified service trades or businesses,” such as doctors, lawyers and accountants, do not qualify for the deduction at all if their taxable income exceeds $207,500 if single or $415,000 if married. The businesses that aren’t in the “specified service trades or businesses” category get a lesser deduction if their taxable income exceeds the $157,500/$315,000 threshold and is still under the $207,500/$415,000 threshold. If a business that is not a “specified service trade or business” has an income over the $207,500/$415,000 threshold, the deduction is usually capped as a percentage of W-2 wages paid to its employees.
Win #3 – New Tax Credits for Businesses
Businesses now have a number of new deduction options when filing taxes:
- Eligible businesses may now be able to deduct 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.
- Under the new tax laws, employers can also deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. This allows businesses to pass through this benefit to its employees, and thus become a more coveted and sought-after employer.
- The Tax Cuts and Job Act changed the rules surrounding depreciation and expensing, with most of the changes offering some degree of a tax break, depending on each business’s particulars. This includes:
- Businesses now being able to expense more costs overall
- There now being a temporary 100 percent expensing for certain business assets, such as first-year bonus depreciation
- The treatment of certain farm property changes, as well as a different depreciation system for farming businesses
Win #4 – Significant Reduction in Business Tax Rate
The US corporate tax rate was formerly 35%, but the tax law changes reduced it to 21% as of 2018. This change places the U.S. business tax rate just below the weighted average for European Union countries, which is 26.9%. This 14% tax rate cut carries a huge impact for businesses and is one of the most significant changes to business tax laws. In paying less tax overall, companies can enjoy having extra operating income. Economists hope that they use this savings to increase hiring and / or increase wages, which would boost the economy. Another factor why this is very significant is that these corporate tax cuts are permanent, unlike other changes to the tax code.
Win #5 – Immediate Expensing
The new tax law now allows businesses to fully expense short-lived capital investments rather than requiring them to be depreciated over time. Short-term investments were previously depreciated for five years, with phasing the change out by 20 percentage points per year thereafter. The deduction cap has been doubled to $1 million under the new law, and phase out now starts after $2.5 million of equipment spending, which was formerly $2 million.
Win #6 – Deduction for Pass-Through Income
The majority of US businesses are taxed as pass-through (or flow-through) entities that, unlike C corporations, are not subject to the corporate income tax or any other entity-level tax. Their owners instead include their allocated shares of profits in taxable income under the individual income tax. Pass-through businesses include sole proprietorships, partnerships, and S corporations. Owners of pass-through businesses now have a 20% deduction for pass-through income. Certain industries are excluded from this deduction, including health, law and financial services, unless their taxable income happens to be below $157,500 for single filers. High earners are discouraged from representing regular wages as pass-through income, therefore the deduction is limited to 50% of wage income or 25% of wage income plus 2.5% of the cost of qualifying property.
Win #7 – Higher Thresholds for Cash Accounting
Cash Accounting is a method where revenues are recognized when cash is received and expenses when they are paid. This method was previously available only to businesses with up to $5 million in average annual gross receipts over the preceding three years. The new tax code changes raise that threshold to $25 million, making a whole new category of businesses eligible to use cash accounting. The cash method can create long-term, permanent benefits by deferring income to a later period, which allows taxpayers to receive the time value of money for deferred tax payments.
Win #8 – Section 199 Termination
The new US tax law eliminates the section 199 deduction for businesses that engage in domestic manufacturing and certain other production work. Section 199 provided a deduction for businesses with domestic production activities, in order to promote homegrown industry. This is also known as the domestic manufacturing deduction, U.S. production activities deduction, and domestic production deduction. This is a win for businesses that produce outside the US, in that they can be more competitive with the businesses with production in the US. This in turn is a loss for businesses with US production. The tax code always offers nuance in its regulations, and benefits are not universal.
Win #9 – Less Tax on Foreign Earnings
Businesses with foreign earnings receive some relief with the 2018 changes. The law changes implement a repatriation of overseas profits at a rate of 15.5% for cash and equivalents and 8% for reinvested earnings. This introduces a territorial tax system, under which only domestic earnings are subject to tax. Companies with over $500 million in annual gross receipts are subject to the base erosion anti-abuse tax (BEAT), which is designed to counteract base erosion and profit shifting, a tax-planning strategy that involves moving taxable profits made in one country to another with low or no taxes. Tax credits, however, can offset up to 80% of BEAT liabilities. In the US, it is estimated that business hold around $3.1 billion in foreign earnings, and these changes can help them pay much less tax on them.
Win #10 – Ending the Individual Mandate for Health Insurance
Businesses in the US, particularly small businesses have been strongly impacted by the Affordable Care Act (ACA). The new tax law ends the individual mandate for health insurance, a provision of the ACA that provided tax penalties for individuals who do not obtain health insurance coverage. Technically, the mandate still exists, but the penalty falls to $0 under the new tax code. This is a win for employers in that there is less pressure to provide affordable health insurance for employees, and their health insurance benefit expenditures could therefore go down.
The tax code is a complicated, frequently changing law that can be applied and interpreted differently, depending on the situation. Businesses that spend time and effort understanding how tax law changes apply to them can often navigate their obligations more efficiently and in many cases, help their bottom lines.
Ben Hartwig is a Web Operations Executive at InfoTracer who takes a wide view from the whole system. He authors guides on entire security posture, both physical and cyber. Enjoys sharing the best practices and does it the right way!