2018 Tax Law Changes

2018 Tax Law Changes: How the New Law Will Impact Small Business Owners

It was a headline-making story to have tax reform go through in Washington D.C. While there are many news stories about these laws, it can be a challenge to find non-biased information that breaks down the facts. What do these new tax laws mean for your company?

As a business owner, you need to stay ahead of the changes that happen in the accounting and tax industry. But, you don’t need to do the footwork to read the fine print of the new laws. Instead, let your accountant do the hard work to ensure that your business is staying current with the changes that are happening this year.

The unofficial title for the new tax law is The Tax Cuts and Jobs Act, and these new rules went into effect on January 1, 2018. Accountants are facing the task of decoding the rules that have been established by the IRS. The document has about 1100 pages, although these changes may or may not simplify your tax filing. Here’s an overview of a few differences that could impact your business:

What Type of Business Do You Own?

The structure of your company will impact the way the tax changes will impact your business. For example, sole proprietors will experience a different change compared to those who have partnerships or corporations.

The good news is that there are potential decreases in the taxes that will need to be paid for your business. These changes are most favorable for large corporations.

Talk to your accountant about 2018 tax strategy to understand how these changes will impact the type of business that you own. Depending on your current business trends, it might make sense to restructure the company to strategically maximize the tax benefits that are available in the future.

2018 Tax Reform and Depreciations

There are some changes to tax rates, which will be discussed in more detail in the next section of this article. Here is a highlight of some of the other changes that have been put in place with this new tax reform:

  • According to Section 179, businesses could previously write off the cost of used or new equipment and property up to $500,000 in the year the acquisition occurred. This number has been changed, now capping the amount at $1 million.
  • Businesses can choose to speed up the depreciation amount when purchasing new equipment or property. Or, Section 179 expensing can be used if desired. 100% of the cost of the property can be used as bonus depreciation (compared to the previous rules of 50% depreciation).
  • Increases were made to the passenger vehicle depreciation limits.

Losers and Winners of Tax Reform

With the bill being so long, it can be hard to tell who the true winners and losers are. Many people have been asking the question about whether these changes will reduce their tax burden. But, there aren’t clear-cut lines about who will win or lose. As mentioned above, the business changes are impacted by the way the company is structured. There are also individual factors that need to be considered regarding the way your personal tax returns will be impacted.

Consulting an experienced accounting team is the most effective way to ensure that you have the right plan in place for your taxes this year.

  • Corporate Tax Rates: There is good news for you if you have a C Corporation. Instead of using tax brackets, C Corporations now follow a tax rule of a flat 21% rate on all taxable income. The new rates will likely decrease your tax burden, as long as the corporation has a taxable income of $90,385 or more each year. If your taxable income is less than that amount, then your taxes will likely go up since there is no longer a bracket system in place.
  • Pass-Through Entities: Sometimes, businesses are set up as pass-through entities, such as S Corporations, LLCs, Partnerships, and Sole-Proprietors. These types of companies will not be impacted by the changes to business taxes. But, there are individual tax changes that might affect your outcome each year. The deduction is based on 20% of income from the entity, which can be used as a deduction on the personal tax return. As an example, if you have an income of $100,000 in 2018, then your deduction would be $20,000. This deduction is calculated in before the calculations are made for your individual tax rate. There are many nuances to the tax law that need to be considered, but this simplified example will give you a general idea of how the system works.

Small businesses that are structured as pass-through entities will also benefit from the AMT relief as well as other provisions that might apply to the circumstances.

At the same time, certain deductions were reduced, which could impact your business taxes. For example, there is a limitation of $10,000 in deductions on state and local taxes.

Tax Changes for Individual Filing

In addition to filing your business taxes, it is also necessary to file an individual tax return as well. A few small changes might impact your personal filing, depending on your current financial situation.

The new tax laws maintained seven brackets for individual taxes, with changes to those tax rates. At the same time, many of the individual changes were focused on allowed deductions. Tax rates in all seven brackets have decreased, while the dollar amount for each bracket has increased.

Even though the tax rates have been reduced, you need to talk to an experienced accounting team to understand the full impact of these changes. For example, your rates have gone down, but you might be limited in the deductions that are used when calculating your income. As a result, there is a possibility that you might have a higher income on paper, which changes the rates that you will need to pay.

Standard Deductions for Individual Tax Returns

The standard deductions have been increased, which changes some of the itemizations that could be used on a schedule A. The standard deduction is the base amount that a taxpayer can deduct for tax liability if they don’t use a Schedule A for deductions.

Your accountant will help you compare the itemized deductions with the standard deduction; then you can choose the higher amount for the deductions that are used on the filing of your individual tax return. Using the standard deduction can simplify the process for many families because they don’t have to worry about additional tax paperwork and calculations. The goal of this reform to the tax law was to reduce the work that goes into the preparation of individual tax returns.

Whether you are single, married filing jointly, or head of household, the standard deductions have almost doubled. So, many people will find it beneficial to simply take the standard deduction so that they can manage their taxable income in the best way possible.

There were a few changes to itemized deductions. One notable change was the capped mortgage interest. The debt cap for mortgage interest write-offs is now $750,000. Also, joint filers can no longer use active passthrough losses of $500,000.

How Long are the New Tax Laws in Affect?

Most of the changes for business taxes are indefinite, which means that these changes will stay in place until the laws are changed at a future date. On the other hand, many of the individual tax laws have a deadline.

For example, many of the provisions for pass-throughs and individuals expire after December 31, 2025. It is possible that more adjustments could be made in the future which will make these changes permanent.

Putting Together the Best Tax Strategy for Your Business and Family

Taxes can be complicated and confusing, and many people get heartburn when they think about everything that needs to go into a tax filing. There is no reason for you to carry this stress! Instead, hire an expert who can handle the calculations, paperwork, and filing.

As a business owner, it is better for you to focus on the daily tasks that will help your business grow. It takes too much time and effort for you to read through and understand the laws. Instead, lean on the support of an experienced accounting team who will guide your strategy and ensure that you maximize tax write-offs as much as possible.

Outsourcing these accounting tasks will free up your time, giving you the ability to focus on employee management and product development. At the same time, you will be able to enjoy more time with your family because you don’t need to spend the long hours in the office. Let the pros handle your tax preparation so that you can stay focused on the most important aspects of your life.

For more information about tax preparation and accounting services, talk to our team here at Easier Accounting. We specialize in small business accounting, and we will gladly help you put together the best tax strategy for 2018. Call to schedule a consultation to learn more: (888) 620-0770

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