As 2018 comes to a close, business owners are likely gathering paperwork and reviewing documents in preparation to navigate the first set of tax filings under the new laws passed with the Tax Cuts and Jobs Act (TCJA). Although changes are complex, three specific things to keep in mind that impact a large number of businesses include:
- Pass-through entities. The TCJA created the ability for pass-through entities to deduct 20 percent of qualified business income. There are exceptions—most notably those who operate in the medical and financial industries are unlikely to qualify for the deduction unless their taxable income is below $315,000 for those who file joint tax returns or $157,500 for single.
- Business expenses. In the past, the ability to deduct entertainment expenses was often seen as a perk of doing business. This is no longer the case. The TCJA removed this deduction for 2018 tax returns.
- Change to C Corp rates. Under previous law, business that were formed as a C corp paid a graduated corporate tax rate at 15 percent for taxable income under $50,000, 25 percent for $50,001 to $75,000, 34 percent $75,001 to $10 million or 35 percent on taxable income over $10 million. The TCJA established a flat 21 percent corporate rate for C corps and personal service corporations beginning in 2018. This will likely prove easier to navigate then the previous, graduated federal income rate.
Application of these new laws is not easy. As such, business owners are wise to act to reduce the risk of a business tax audit. An attorney experienced in these matters can help.