2019 may not see major changes to the small business tax code, but there are some important things to keep in mind. Last year, Congress introduced some major adjustments to business tax law, including a lower corporate tax rate, new rules for pass-through businesses and a tax break for some industries. As these laws and regulations continue to be implemented, 2019 will be a year of adjusting to change as opposed to incorporating new ones.
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"The tax changes were so significant, I would imagine that there's still a lot of issues in terms of digesting what has occurred," said Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute and managing editor of EconoSTATS.
This adjustment means your taxes could be different from last year. If you're a small business operating domestically, Anthony Parent, founding partner of Parent & Parent LLP, said you should experience mostly positive changes.
"People haven't seen most of the impact of it yet, and you're not going to see it until next year," Parent said. "This is really when you're going to get surprised – sometimes for good, sometimes for bad. Generally, if you're a domestic business owner, this should be good news for you."
Tax reform in 2018 resulted in a major overhaul for small business taxes. Last year, small business insurance company Insureon partnered with Manta to poll 2,700 small businesses about the new tax legislation's potential impact. The survey found that 83% of small businesses owners are optimistic about the tax bill, and 38% said they would hire additional employees because of the savings. This kind of positivity, combined with the actual benefits from the legislation, can act as a catalyst for small business and economic growth.
"With respect to the current tax law changes … we wanted to understand what this meant for small business and what the general attitude and tone among small businesses are as they contemplate the impact that this might have on their future growth" said Jeff Somers, president at Insureon.
As a small business owner, it's important to stay up to date on current tax laws so you can ensure you're paying the right amount each year. [Doing your taxes on your own? Find the best software to use in our reviews of the Best Tax Software for Business 2019.]
Things to remember in 2019
International business: If you run a small or medium-size business that operates overseas, there have been some major regulation developments that are important to be aware of. Parent said many SMBs could have a rude awakening in 2019 if they have significant operations abroad. "There are a lot of small and medium businesses that have some sort of international components," he said. "We're trying to get ahead of it and warn people." International taxation and regulation are very complicated, so it's important to work directly with a professional to ensure you're being taxed at the correct rate.
- SALT cap: Filers can now only deduct up to $10,000 in state and local property and income taxes. While this applies to more than just small business owners, many business owners operating a pass-through entity in a high-tax state can take advantage of SALT deductions. Winegarden said all business owners should be aware of this new cap. "I really think in the high-tax states, the SALT cap is going to be meaningful, more for small businesses just because they're going to be filing through their personal taxes," he said.
These are two minor aspects of tax law to keep in mind in 2019. 2018 tax reform is still taking effect, and understanding all of the regulations that will be implemented is important for working with your tax professional. The noteworthy changes include deductions for pass-throughs, first-year bonus depreciation and net operating loss changes.
Deduction for pass-throughs and corporations
The biggest change all businesses are facing this year is a significant deduction for both pass-through and corporate entities. Pass-through businesses are small businesses structured as S corporations, limited liability companies, sole proprietorships and partnerships. Pass-throughs make up about 95% of U.S. businesses. The new bill provides a 20% deduction for all of those businesses. The only limitation is on service-based businesses, like law and accounting firms making more than $315,000 per year ($157,500 if single).
C corporations are also getting a big deduction: The new legislation lowers the tax rate from 35% to 21%. This slashed rate aims to bring major corporations back to the U.S. to employ workers and create wealth.
First-year bonus depreciation
The first-year bonus depreciation deduction is going from 50% to 100%. In other words, businesses making eligible equipment and property purchases can deduct the full amount of the purchase, instead of writing off a portion of the expense each year. This provides businesses with more money upfront, which lawmakers hope will be invested back into the business or used to hire workers.
"The new tax plan will allow businesses to write off the cost of assets in one shot," said Josh Zimmelman, founder of Westwood Tax & Consulting. "A company can invest in vehicles, computers and equipment, and claim the entire expense on their 2018 tax return."
Winegarden said the break is an incentive for businesses to spend more.
"Anything that gets you closer to complete expensing is going to increase the value of the depreciation, lower the tax burden and reward those capital-intensive firms," he said.
Net operating loss changes
Net operating losses (NOL) can no longer be carried back for two years, but instead can be applied for an indefinite amount of time going forward. Net operating losses occur when a business's tax deductions are greater than its taxable income. It functions as a form of tax relief for businesses, where business owners can apply a NOL to future tax payments.
The change eliminates the ability for businesses to restructure taxes completed in years past, but it extends net operating losses' lifespan indefinitely. This can only be applied to 80% of taxable income.
Winegarden said the thinking behind this change is to incentivize businesses to take risks and spend more money.
"Knowing you can carry [net operating loss] forward and carry it forward indefinitely … lowers the cost of failure," he said.
In addition to some structural changes, there are some important deadlines to keep in mind:
- S corporations need to file their business taxes by March 15.
- The deadline for 2018 tax returns is April 15.
- Quarterly estimated tax deadlines are April 17, June 15, Sept. 17 and Jan. 15.
If you've just bought a business, or are new to small business tax structures, there are a few things you should keep in mind. While it is possible to do your taxes on your own, you should seriously consider working with a CPA. A tax professional can ensure your business is taking advantage of all the deductions available and, more importantly, can ensure you're paying everything you owe. Here are some other tips:
- Think about taxes all year long. Small business owners should not treat income taxes as a once-a-year event. Rather, tax planning should be a year-round activity. Waiting until the last minute makes tax preparation more complicated, and it limits your money-saving options.
- Be aware of law changes. Even with the help of a skilled professional, a small business owner must keep up with news related to laws. This will ensure your tax professional is doing the best possible job, and it keeps you informed as a business owner. Read the business papers and keep up with Congress' work on tax laws.
- Don't make assumptions. Tax planning, to some extent, is a gamble. Never make business decisions assuming that particular tax breaks will pass, or that certain policies will be enacted.
Here are some additional resources for learning about taxes:
- The U.S. Small Business Administration maintains a guide on navigating the tax code and staying up to date on your tax responsibilities as a business owner. Click here for more information.
- The IRS website has more information about how the Affordable Care Act (ACA) affects small business owners' taxes here. Note that changes to the ACA may be on the horizon.
- The IRS also maintains its own information center on self-employed and small business taxes. You can find the guide here.
- In addition to the best tax software article, Business News Daily also has its recommendations for the best accounting software. These two pages provide resources for business owners looking for tax and accounting software for their business.