How the Tax Cuts and Jobs Act (TCJA) Impacts Small Businesses

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Operating a small business is a challenge, and under-the radar tax changes can make things all the more complex. Here’s what entrepreneurs should know to avoid any costly mistakes

In 2017, the Tax Cuts and Jobs Act (TCJA) was enacted, bringing changes for both businesses and individuals in the 2018 tax year and beyond. As a small business owner, how does the TCJA directly impact you? What are the most important changes to be aware of and how can you avoid making mistakes come tax time?

Here are some key things you need to know about the TCJA changes and impacts.

Qualified business income deduction

For the first time, a qualified business income deduction provision was introduced under the TCJA. This means that if you run a pass-through entity—a business that operates as a sole proprietorship, partnership, S corporation, and some trusts and estates—you can now deduct a maximum of 20 percent of business income.

This deduction was available beginning with 2018 tax returns, and there are limits that may apply depending on the type of business you run and your income.

Corporate income tax rate

The TCJA also made a substantial change to the corporate tax rate. The top tier was 35 percent prior to the TCJA, and it is now 21 percent. C corporations previously had tax rates ranging from 15 to 35 percent, and personal service corporations (PSCs) had a flat 35 percent tax rate. PSCs can now take advantage of the 21 percent rate as well.

Entertainment expense deductions

Before the TCJA, businesses could deduct half of entertainment expenses that were directly related to business conduct. Those deductions are now eliminated for any activities that are considered entertainment or recreation, but you can still deduct 50 percent of meals related to business, as long as they aren’t considered “lavish or extravagant.” This only applies to food and drinks, and so these costs would have to be separate from any entertainment expenses if the two were combined in a business-related activity.

Depreciable business assets

Changes were also made to the maximum deduction related to qualified business assets for your business, which can include equipment, machinery, software, and the like. The deduction previously capped out at $500,000, with a phaseout threshold of $2 million, but the TCJA raised the maximum to $1 million and the phaseout threshold to $2.5 million.

The new law also added certain nonresidential real property improvements to what qualifies as an asset under this section.

Bonus depreciation

The TCJA implemented a temporary bonus depreciation percentage that is 100 percent for qualified property acquired after September 27, 2017 and before January 1, 2023. This means you can write off the full cost of qualifying depreciable property in the first year that you use it in your business.

Property that falls under this category has a “recovery period” of 20 years or less, and could be machinery, equipment, computers, appliances, etc. Some film, television, and live-theatrical productions could also qualify.

Corporate AMT repealed

The TCJA repealed the corporate alternative minimum tax (AMT), which was previously 20 percent. This applied to corporations with more than $7.5 million in annual gross receipts. While this didn’t apply to many small businesses, it still impacted some medium-sized organizations and is thus a win for many business owners.

Employer credit for paid family and medical leave

If you have employees, you may now be able to claim a credit for paid family and medical leave, depending on qualifying conditions. This is a new provision added by the TCJA, and applies to wages paid after December 31, 2017 and before January 1, 2020.

The credit is a percentage of employee wages that were paid while he or she was on family or medical leave for up to 12 weeks per applicable tax year. This percentage ranges from 12.5 percent to 25 percent, and is determined based on the percentage of wages that were paid during the employee’s qualifying leave.

Opportunity zones

Another new provision that the TCJA added was for opportunity zone investments. Tax benefits for these investments are meant to help improve economic conditions and the creation of jobs in distressed U.S. communities.

Under the new law, investors may defer capital gains tax temporarily on gains that are reinvested into Qualified Opportunity Funds (QOFs). The deferment can last until the earlier of the selling or exchanging of the QOF or December 31, 2026.

If the investment is kept in the QOF for at least ten years, a permanent exclusion of capital gains from selling or exchanging may apply. Participants can be either individuals or businesses.

Any time the tax law changes, small businesses will likely see some kind of impact, whether positive or negative. The most important thing you can do is to understand the revisions so you don’t make any mistakes when filing your tax returns—or leave money on the table because you weren’t aware of deductions or credits you qualify for.

The professionals at Provident CPA & Business Advisors are ready to meet with you so that you don’t miss any changes or opportunities. Contact the team today to get started, and learn why we specialize in helping business owners like you minimize their taxes.