January 28, 2019 | Last Updated on: January 17, 2024
DISCLAIMER: This article was written in 2019 and has not been updated. For more up to date information on economic impacts to small business funding, please read this recent article Small Business Tax Preparations Tips for Next Year
It’s no secret that taxes are a huge burden for many small businesses around the nation. A survey completed in 2018 by the U.S. Small Business Administration found that 57% of small businesses think federal taxes have a moderate to significant impact on their day-to-day operations, while “one-in-three small businesses report spending more than 40 hours each year on federal taxes”. One effort to address similar feelings from past years was the new tax bill passed under the Trump administration in response to one of his cornerstone campaign promises. Now that the Tax Cuts and Jobs Act (TCJA) was passed in 2017, this year’s tax filings represent the first time the entirety of the bill will be in effect. While the big cut that most people were paying attention to was the corporate tax rate cut for large companies, small businesses also look to benefit from the new changes. In this post, we’ll cover some of the big changes that you should be aware of when figuring out your business taxes in 2019.
With the change in taxes, the corporate tax rate has been lowered for most corporations to a flat rate of 21%, moving away from the tiered rate schedule that existed before. That said, this particular change will be of no consequence for most small businesses, which are traditionally not set up as C Corporations but instead are usually a kind of pass-through entity. As a result, we’ll mainly be focusing on how these types of businesses are affected by the new tax rules in this article.
S corporations, sole proprietors, limited liability companies (LLCs), and partnerships are all examples of pass-through entities. The big difference between C corporations and pass-through entities is the way they are taxed by the government and the idea of being “taxed twice”. C corporations are “taxed twice” because the corporation is taxed on its income, and then the corporation’s owners are then taxed on the income they receive from the corporation in the form of dividends or capital gains. On the other hand, the income of pass-through entities is not taxed on the business level and then passes through to the owner, who reports it on their individual tax return.
With the new tax laws, most pass-through entities are now eligible for a 20% tax deduction via section 199A of the TCJA. The way this is calculated is through Qualified Business Income (QBI). You can calculate your own QBI by taking total business income minus expenses such as the following: capital gains and losses, interest, dividends, and reasonable compensation for services rendered. The new deduction primarily helps small business owners who report their business income on their personal returns each year. Lawmakers hope this will help to stimulate even more entrepreneurship. However, there are limitations. Individual taxable income must be below $157,500 to qualify for the deduction if you are filing as an individual. For couples filing jointly the limit is $315,000. Once incomes pass this threshold, the new law places limits on who is eligible for the tax deduction, along with what percentage they can deduct.
Specified Service Businesses, which are businesses whose primary assets are the skills of its owner or employees, are an example of a common type of businesses that are restricted from using the full deduction once passing the QBI threshold. Examples include lawyers, accountants, actuaries, and brokers. At $207,000 for single filings and $415,000 for joint filings, the deduction becomes entirely inapplicable for Specified Service Businesses, and limited or eliminated for all other pass-through entities depending on various factors. If you are not a Specified Service Business and exceed the $207,000 for single filings or $415,000 for joints, you’ll have to do a bit of calculation based on the new W-2 wage limitation. This requires that when you file your taxes, you need to claim the lower of two calculations. These calculations are the standard 20% deduction and then, separately, 50% of wages paid to W-2 employees or 25% of wages paid to W-2 employees plus 2.5% of qualified property, meaning anything your business owns including real estate.
Many owners need to acquire vehicles for their business. Under the new tax law, heavy SUVs, pickup trucks, and vans qualify for a 100% first-year bonus depreciation deduction. That’s a mouthful, so let’s unpack it. For new and used vehicles that are first placed into service between September 28, 2017 and December 31, 2022 any calculated depreciation that has been applied during the current tax year can be doubled when the business is filing their tax return. and used 50% for business. That said, the vehicle must be new to the taxpayer or their business to qualify and used at least 50% of the time for business. Passenger vehicles also have new deductions coming their way. The TCJA has increased “luxury auto” depreciation deductions allowances significantly. However, keep in mind that the allowances are cut back as the percentage the vehicle is used for your business decreases.
One of the aspects of the new bill that was disappointing for many business owners was the loss of deductions for client entertainment. Prior to 2018, client entertainment was eligible for a 50% deduction. However, this has now been eliminated, with the exception of client meals. For service-based businesses and companies that work as suppliers for large corporations where client entertainment is a large part of selling expenses, the lost deduction will certainly hurt the checking account come tax time. However, the move simplifies the tax code and closes loopholes that had been exploited in the past.
Now that the corporate business tax rate has been lowered to 21%, many small business owners are reconsidering what the best legal structure is for their companies. In 2019 or beyond, it may make sense based on your business’ earnings to restructure your company as a corporation. This could be especially beneficial if you are not planning on taking large payouts from your business as a salary and are instead interested in reinvesting profits and growing your business. However, this is a decision you should consider carefully, most likely with the help of an outside professional such as an accountant with well-developed knowledge of the tax laws.
There’s been a lot of positive outlook on the new tax bill from small businesses. This past August, Wells Fargo found that small business optimism is at a 15-year high in their Q3 Wells Fargo/Gallup Small Business Index. According to a Q4 poll conducted by CNBC and Survey Monkey, a third of small businesses said they are planning to use the windfall from the tax cut to pay off debt, while 22 percent said they would invest in new technology, facilities and equipment to grow their business. As taxes come due, the whole country is interested to see how small business owners feel after their first full year under the new system.
Many of the recent changes can be confusing, especially when it comes to the different restrictions that many businesses face. A few things you should be cognizant of are specific dates that are important in terms of filings for your business. You should also strive to keep organized and neat records. While doing your own business taxes may save money, it can be a wise decision to hire a tax accountant this year to help with your filings. This will enable you to make sure you have someone doing your business taxes that fully understands the new changes and how they impact your business. Then next year, when you are feeling more confident, you can switch back to filing your own taxes again.
