Tax Changes Affecting Small Businesses

In 2018, the Tax Cuts and Jobs Act entered into effect. Though this act was primarily billed as helping large corporations, it also made changes relevant to small and mid-sized businesses. For small business owners, these tax law changes are best countered by planning ahead for the year to come — and, in general, it’s good news. Here are some basics that you need to know.

Corporations now have a flat tax rate of 21%.

By far, the most significant change in the TCJA was creating a flat tax rate of 21% for corporations. Before TCJA, corporations had graduated tax rates, with the top bracket at 35%. This is going to apply to corporations of all sizes, not just large enterprises. Most small business owners are going to find themselves paying less in taxes due to this, even if they no longer can expense some of the items they are used to expensing. 

The bonus depreciation amount has been increased to 100%.

In prior years, a depreciation amount of up to 50% could be expensed at once when dealing with a long-term asset’s costs. After 09-27-17, 100% of the cost of the asset can be depreciated at once. This covers assets that are used for over 50% business-related work (though computers that are used less than 50% of the time may still qualify). Bonus depreciation qualifies for both used and new equipment and is a valuable incentive for many businesses. 

Automobile depreciation limits have increased.

Many references have been made to “small business owners in luxury cars,” due to the new automobile depreciation limits. Automobile depreciation limits have increased overall, increasing the amount of money you can deduct related to vehicle expenses.

For the first year the vehicle is placed in service, the automobile depreciation limits are $10,000. It is $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and fifth years. Bonus depreciation is set at $8,000. Essentially, it has become more affordable to acquire a more expensive, more reliable vehicle.

Section 179 deductions have increased from $500,000 to $1 million.

Before 2018, businesses could deduct up to $500,000 of the cost of a qualified business property. This amount has been adjusted to compensate for inflation. The cap is now at $1 million, which should be considered by businesses looking to invest directly in business property.

Fewer corporations need to file tax returns on accrual basis.

Corporations with above $25 million in gross receipts over the next three years will need to file using accrual basis accounting, but now businesses can file a simpler, cash-based accounting system if they are under this $25 million amount. Previously the cutoff limit was $5 million.

In simple terms, cash-based accounting systems log expenses and income when money changes hands, whereas accrual-based accounting systems log expenses and income when they actually occur. Accrual systems are often more complex because they need to track vendor bills and client invoices.

Net operating losses can no longer be carried back two years.

Net operating losses can be carried forward indefinitely, with a limit of 80% of taxable income. Prior to this, net operating losses could only be carried forward for 20 years and carried back 2 years.

Pass-through entities have acquired a number of benefits.

  • Non-service businesses are able to take a deduction of 20% of their income.
  • Service businesses making less than $207,500 (single) or $415,000 (joint) may also be able to take a deduction of 20% of their income.

Some business-related expenses have been eliminated.

Some business tax deductions have been eliminated. Deductions for business entertainment expenses — except for meals — are no longer going to be allowed. Further, the deduction of meals that are provided to employees for the convenience of the employer will also not be allowed to be deducted from the tax return after 2025.

Deduction for the payment of employee transportation — including rental vehicles, parking, and mass transit — will no longer be allowed on the corporate side. However, employees are not going to be taxed on the value of these benefits; the benefits remain the same to the employees. Local lobbying expenses and domestic production activities will also be eliminated.

Overall corporate taxes have been streamlined, adjusted for rates, and decreased. Though there are some deductions that have been removed, most corporations are going to benefit quite a lot from the overall decrease in corporate tax rates. Small business owners are going to find that they can expense at higher limits though they may not be able to expense as many individual line items, and they will find themselves paying less in overall taxes.

Of course, any small business owner concerned about how their taxes are going to look in the coming year should consult with a tax professional. There are many adjustments being made to corporate taxes, and small business owners will want to plan ahead about the financial choices they’re going to be making in the coming year.