Many small business owners are coming to terms with the new tax reform 2018 bill. It has made drastic changes to income taxes associated with individuals and businesses, and below are the most important new tax rules that business owners should be aware of this year.
Expensing and Depreciation Of Bonuses Has Been Expanded
Businesses that invest in fresh equipment may deduct one hundred percent of business assets which are eligible, until 2022. This can be done immediately, and after 2022 the depreciation of bonuses will phase down about twenty percent per year until reaching twenty percent by 2026. Expensing for equipment has been increased to $2.5 million, and will now consist of any personal property that is used for hotels.
Pass Through Companies Can Get A Deduction Of 20 Percent
Statistics show that roughly ninety five percent of U.S. businesses are classified as entities which are pass through. This includes partnerships, LLCs, sole proprietorships and S corporations. Traditionally, taxes for these entities have been lower when compared to corporate taxes, and don’t involve double taxation. The most recent deduction is designed to assist small businesses and freelance individuals who are just beginning their careers and who are in a lower income bracket. It gives people an incentive to work for themselves rather than looking for a job.
A specific investment formula is required, which depends on depreciable assets which one has invested, as well as the W-2 wages they’ve received within a year. Knowledge based workers (with the exception of engineers) may be exempt from the benefit. However, exceptions are made if an individual’s total income is beneath $157,000 or $315,000 for joint filers who are married. The deduction of twenty percent will lower profits which are taxable, while not impacting the self-employment tax amounts that a pass through company will owe.
Total Corporate Tax Has Been Lowered To 21 Percent
Previously the highest rate for corporate tax was thirty five percent, but has now been reduced to twenty one percent. Any tax payer who passes the threshold for the income deduction of twenty percent may be able to reduce their taxes by re-launching their business in the form of the C Corporation. The new tax bill has also greatly simplified the process of converting an entity which is pass through into a C corporation.
Deductions For Entertainment Or Business Meals Have Been Removed
Any freelancer or business owner who is used to conducting work while drinking or dining will lose an important deduction. Neither meals or other forms of entertainment associated with business functions can be deducted, irrespective of who is responsible for payment. An exception was made for those employers who are hosting parties or events related to holidays. Deductions may also be given for drinks or meals that are purchased during actual business travel.