A new tax bill has officially been passed, and the numerous changes it enacts will affect everyone’s yearly filings. If you’re a small-business owner, three primary changes will new pass-through provision will allow you to deduct up to 20 percent of your business income and the amount you can expense for business-related equipment has doubled.
Lowered individual tax rates
The rules around standard business deductions are among the significant changes made by the new tax bill. If you file your business’s taxes as a pass-through entity, you follow many of the same tax rates that apply to individuals. Individual tax rates have been lowered in the new bill, which offers a sigh of relief to many small-business owners. As Hannah Grabenstein, of PBS News Hour, writes, “When individual rates are slashed, small-business owners pay less.”
The extent to which you will benefit from this cut depends on the state in which you live. According to Pete Woodring, a contributor at Kiplinger and founding partner of Cypress Partners, states with high taxes — examples being Florida, Nevada and Wyoming — will see less of a change thanks to “the combination of reduced business income and lower individual tax rates.”
20 percent business income deduction
A new provision introduced in this tax bill creates an across-the-board 20 percent deduction on your business income for S corporations, partnerships and sole proprietorships. According to Keith Collins and Ron Lieber, writing for The New York Times, limits to this deduction include “a phaseout . . . that begins at $157,500 of individual income and $315,000 of income for couples filing jointly.”
This rule is not permanent, however; it was introduced as a pass-through provision, meaning it is only valid until 2025. Individual tax reductions, as mentioned previously, will also expire in 2025.
It is worth noting that not everyone will qualify for this 20 percent deduction. Some individuals will only be able to deduct a portion of that percentage, while another handful won’t be able to take advantage of the deductions at all. Grabenstein notes that while the official list of exemptions is set to be released later this year, three occupations are already understood to be exempt: lawyers, doctors and tax accountants.
Another change implemented by this bill is Section 179 of the tax code. Prior to the new bill, business owners could expense up to $500,000 in equipment purchases for their businesses. Under the new tax bill, that number has doubled to a maximum $1 million during the tax year. According to Grabenstein, “The total spending cap per year, which is expensable over multiple years, is at $2.5 million.”
As these changes took effect at the start of 2018, you will need to become familiar with the effects they will have on your business’s situation as soon as possible. Talk to your accountant to see how these changes to the tax law affect you.