The recent tax legislation mean small businesses everywhere are getting a break on their taxes. The legislation, which is one of the most significant tax overhauls passed in decades, provides pass-through businesses and corporate entities with lower rates.
Insureon, an insurance company that works with small businesses, partnered with Manta to poll 2,700 small businesses about the new tax legislation's potential impact. The survey found that 83 percent of small businesses owners are optimistic about the tax bill and 38 percent 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 … what we wanted to understand was, what does this mean for small business and what's the general attitude and tone among small businesses 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 2018.]
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 percent of U.S. businesses. The new bill provides a 20 percent deduction for all 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 percent. 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 percent. 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 up front, 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."
"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 extends net operating losses' life span indefinitely. This can only be applied to 80 percent 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.
Elimination of transportation fringe benefits
Two minor changes are the elimination of transportation fringe benefits and entertainment expense deduction. These two employee perks, which take the form of tax-free employee commuter plans and reduced-rate entertainment plans, can still be provided by employers, but businesses can no longer write these off as business expenses.
The elimination of these fringe benefits, while it may change the structure of some companies, is likely less impactful compared to some of the other changes seen in 2018.
In addition to some structural changes, there are some important deadlines to keep in mind as well:
- 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, September 17 and January 15.
If you've just 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, make sure you're paying everything you owe. 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 keep 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 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 a best picks page for accounting software. These two pages provide resources for business owners looking for tax and accounting software for their business.