Trying to make sense of the 2018 tax reform bill? Same, same. This bill, which brought on some of the most drastic changes made to personal and business income taxes in decades, leaves many small businesses scratching their figurative heads as we move into the new fiscal year.
To help you make sense of it — and get a jump on your 2018 business decisions — we asked the tax experts at Intuit QuickBooks to explain the top changes affecting small businesses and self-employed taxpayers. Here are four things we learned.
Businesses and freelancers who tend to get work done over dinner or drinks unfortunately lost a major deduction (even if it was limited to 50% of the actual costs before). Meals and entertainment for business purposes are no longer deductible regardless of who pays. The only exception to this is for employers hosting holiday parties and similar events at the workplace for their employees. Deductions are still allowed, of course, for meals and drinks purchased during bonafide business travel.
Business taxpayers looking to invest in new equipment can immediately deduct 100% of eligible business assets through 2022. After 2022, bonus depreciation phases down 20% every year until it reaches 20% in 2026. Full expensing of equipment under Sec. 179 has been raised to $2.5 million; it also now includes personal property used in the hotel business and types of real property eligible for the 179 deduction.
About 95% of American businesses (large and small) are pass-through entities. Pass-through entities include sole proprietorships, S corporations, partnerships, and any LLCs taxed as one of those entities. Generally, pass-through tax rates have been lower than corporate tax rates and without the double taxation aspect. However, this new deduction is meant to give small businesses and the self-employed in lower income brackets (or just starting out) an incentive to work for themselves instead of for an employer. There is a required investment formula based on certain depreciable assets invested in and W-2 wages paid during the year. Knowledge workers (except engineers) are also exempt from this benefit. However, there's an exception to both of these rules if total income is less than $157,500 ($315,000 married filing jointly). This 20% deduction reduces taxable profits, but will not impact the amount of self-employment tax owners of pass-through entities will owe.
The previous maximum corporate tax rate was 35%. With a new maximum rate of 21%, taxpayers exceeding the income threshold for the 20% pass-through deduction who want to cut self-employment taxes may find benefits in relaunching as a C corporation to take advantage of the new lower tax rate for C corporations and personal service corporations. The tax bill is also making it easier to convert pass-through entities to C corporations on account of these changes.
The IRS will issue new rulings and interpretations of the Tax Cuts and Jobs Act throughout 2018, and updates in 2019 are inevitable. What’s more, it’s not always obvious which rules are in effect from 2017, but not moving forward. What’s a small business to do?
Before you yank your hair out, try Intuit's small business tax center. It’s full of expert tips to help small businesses and self-employed taxpayers navigate their 2017 taxes and map out 2018 decision-making. Let it be your resource now and throughout the year.
Looking to grow your small business? Learn how Salesforce and Intuit are partnering to give you the tools to help. And don’t miss out on our small business resource library to explore how other small businesses are using technology to get smarter and grow bigger.
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