With the new tax bill in place this year, you’re probably wondering how it might affect you and your small business. As the 2017 Tax Cuts and Jobs Acts (TCJA) is the largest overhaul to the tax code in over 30 years, experts predict it could take months (or even years) for all the tax strategies to emerge. But to help you start making sense of it, here are some of the ways the TCJA affects businesses and individuals.
Changes That Affect Individuals
1. New tax brackets. There are new seven new tax brackets, which equals lowers taxes for all taxpayers. The top tax rate is bumped down from 39.5 percent to 37 percent.
2. Personal exemption is repealed. The personal exemption is the amount every taxpayer gets to deduct for themselves and their dependents. In 2017 this amount was $4,050 per person, and it began phasing out when adjusted gross income (AGI) hit $261,500 for individuals, $287,650 for head of households, and $313,800 for married couples filing jointly.
This loss in tax deductions is offset by a new higher standard deduction: $12,000 for single filers, $18,000 for head of households, and $24,000 for married couples filing jointly.
3. Higher child tax credit. The loss in tax deductions from the personal exemption could also be offset by a higher child tax credit, which has increased from $1,000 to $2,000 per qualifying child.
Plus, there’s also a $500 non-refundable credit for dependents other than qualifying children. Note that if your tax bracket is above 24 percent and your income falls below the level where personal exemptions start to phase out, this could increase your tax liability.
4. A $10,000 cap on deducting state and local taxes. These taxes include state sales tax and real estate tax on a personal residence.
5. Change in mortgage deductions. For mortgage debt incurred after December 15, 2017, the deduction is limited to interest on $750,000 for personal residences. Before the TCJA was passed, the limitation for mortgage deductions was $1 million.
6. Deduction for miscellaneous itemized deductions is repealed. That’s right: taxpayers won’t be able to deduct unreimbursed employee expenses, investment expenses like portfolio management fees, and tax preparation fees.
Changes That Affect Businesses
1. Decrease in the corporate tax rate. The biggest change outlined in the 2017 Tax Cuts and Jobs Act affecting businesses is the decrease of the corporate tax rate for C Corporations from 35 percent to 21 percent. Note that whereas before the first $50,000 of corporate income was only taxed at a 15 percent rate, the first $50,000 of corporate income will now be taxed at a 21 percent rate.
2. Twenty percent tax deduction for pass-through entities. Businesses that operate as a pass-through entity — such as a partnership or S Corporation — will be able to deduct 20 percent of their qualified business income. This means a business owner’s top marginal tax bracket on business income could go down from 37 percent to less than 30 percent. While this is a valuable deduction, it gets phased out when income levels are over $315,000.
3. The corporate alternative minimum tax will be repealed. Before, a corporation had to calculate its tax burden as both a regular corporate tax and the alternative minimum tax (AMT), and it was obligated to pay the higher of two. Corporations with a net operating loss carryover will reap the benefits from this change.
4. Change in bonus depreciation of property. For certain assets acquired after September 27, 2017, the 50 percent bonus depreciation has been increased back to 100 percent, meaning businesses can now fully expense these assets. This bonus depreciation now applies to both used and new property. However, the rules surrounding it are complicated, especially in relation to real estate — so contact a tax professional before you make any large investments hoping to deduct them.
5. Two-year carry back period for net operating losses will be repealed. This means companies cannot carry back 2017 losses into future years as a way to offset tax liability. In addition, the deduction for net operating losses incurred in 2018 or later will be carried forward, but it will be limited to 80 percent of a company's income.
6. The Domestic Production Activities deduction will be repealed. This was a tax incentive for businesses to produce most of their goods and services in the U.S. rather than overseas.
These changes go into effect for the 2018 tax filing year, so it’s important to get your head around them now and start preparing. If you have any questions about how the TCJA affects your business or you as an individual, you can speak to an Incfile representative. We even have professionals who are ready to help you with your business accounting if you need assistance.