How Does the Tax Cuts and Jobs Act Affect Your Small Business Taxes?
The information in this article is current through tax year 2018.
You’ve probably heard a lot about the Tax Cuts and Jobs Act and how it could change your personal tax return. But, have you thought about whether it will affect the tax return for your small business? Keep reading to learn more about how it might.
Is your business a corporation?
If your small business is registered as a corporation, your taxable income will now be taxed at a fixed rate of 21 percent. This is a permanent change.
Is your business a pass-through entity?
If your small business is registered as a pass-through entity (sole proprietorship, partnership, LLC, or S Corp), you can now deduct 20 percent of your qualified business income (QBI). Your QBI is your gross revenue minus any business expenses. This deduction is currently set to remain through 2025.
If your total taxable income for the year is less than $157,500 (if you’re filing single) or $315,000 (if you’re married, filing jointly), then you can take the full 20 percent deduction. There is a caveat – your deduction cannot exceed 20 percent of your total taxable income, including wages and investments.
If you’re filing single and make between $157,500 and $207,500, you can still get a portion for the deduction. If you’re married filing jointly and make between $315,000 and $415,000, then you’ll also likely be able to take a portion of the deduction.
Read also: How to Choose a Business Structure
Five small business tax break changes
The Tax Cuts and Job Act also removed or changed some of the tax breaks you might be used to:
- Entertainment – Previously, you could deduct 50 percent of your expenses when entertaining your customers, vendors, or suppliers. Now, you cannot deduct those entertainment costs, even if they’re reasonable or essential to your small business.
- Parking and transit fringe benefits – Any parking and transit fringe benefits you offer your staff are no longer deductible.
- Office snacks and meals – If you stock your office’s kitchen with snacks or cater meals to thank your team, you can still deduct the costs. However, you can only deduct 50 percent, as opposed to the previous deduction of 100 percent. Read also: 9 Wellness Program Ideas for Your Small Business
- Business interest – In the past, you could deduct any interest paid on business loans. Now, you can only write off interest expenses that are equal to 30 percent of your adjusted taxable income. There is a small business exception to this new rule, however. If your gross receipts were $25 million or less over the last three tax periods, you’re exempt from these changes.
- Net operating loss – If you have a net operating loss, you can carry it forward indefinitely – you can no longer use it to reduce previous tax bills. And, you can only use the loss to reduce your taxable income by 80 percent.
Read also: 4 Tax Deductions You Don’t Want to Miss