There are a lot of debates regarding the newly established tax brackets. New tax brackets mean new rates thereby affecting the income ranges as well. Much of the arguments refer to how it would impact the middle class and those who own small businesses. Although most people would focus on the negative effects, small business owners will be glad to know that they could benefit from the tax reform provisions.
New Qualified Business Deduction
Small businesses will have a chance to become more competitive with the provision of 20 percent small business deduction. If the taxable income is less than $157,500 which is the threshold amount, or $315,000 for married taxpayers and is filing for a joint return, then there will be no limitation on how much the QBI deduction will be.
This will level the playing field since wealthy firms will not gain a competitive edge against small enterprises. This is a significant benefit since two-thirds of small companies in the US barely hits the threshold.
Professional Services Businesses
If a small business gains incomes from the professional services of another individual or when the principal asset is the skill of one or more employees, deductions are allowed which will depend on the left over income after the owner collects a salary.
Depreciation and Expensing
Before the new tax law, deducting machineries and other business essentials takes time. After completely deducting the costs, the equipment has already depreciated or has lost some of its value. But now, full expensing is allowed so that 100% of the cost can be written off granted that the qualified improvement properties were acquired after September 27, 2017 until December 31, 2022.
A higher small business expensing cap at $1 million is also provisioned. This will be great for those who are planning to expand their businesses and purchase advance technologies like automating payroll and time keeping systems.
Strategic Tax Planning
These tax provisions are actually lenient among small business owners. This is why it is important to plan ahead and create a strategic tax plan in order to benefit from these provisions. An average of $20,000 can be saved with the new tax laws. This amount is a huge help compared to when it will be paid to unnecessary taxes. More money will be left in the pocket which can be used to facilitate expansion and additional equipment. Consequently, this could also mean adding more work opportunities as jobs are created with every expansion.
Overall, the new tax law seems to be an advantage among small businesses. At least starting this year, more small companies will be able to appreciate higher incomes due to lesser taxes to pay. However, it must also be considered that there will also be negative implications.
One example of a negative consequence is that with the new tax law, there are many deductions that will not be allowed anymore. Examples are travel costs, professional organization membership fees, and any activities that are considered to be recreational, social, or mainly for pleasure purposes. Transportation costs benefits are also eliminated except when there is an extreme need to provide transportation because an employee’s safety is at risk.
Eliminate the confusion over the new tax laws. Make TRAXPayroll your partner in payroll solutions to ensure that you are able to maximize the benefits from the tax reform.