When you are a small business owner you need to be on top of everything. And we don’t mean that you only need to be on top of what is happening inside your company. You also need to pay attention to your competitors, to the overall market, and also to the new legislation that sometimes affects your small business. This is where the best business news this year, and really the best business news in decades comes into play.
There are a lot of things changing this year for small businesses. As a result of Covid 19 our legislators have given lots of relief to small business owners. Some of the biggest help has been PPP loans(which are 100% forgivable) and EIDL loans(which are at very low interest rates and amortized over 30 years. You are probably aware that recently congress passed new tax laws help businesses. There is another round of PPP loans which are helping many more businesses. While there are many things changing, the overall opinion of most small business owners like yourself is that this new legislation is good for you!
Of course, there are still many changes that need to be done and that still require clarification from the IRS. Nevertheless, we can definitely state that there is great news on four main aspects of this new tax law that passed Congress in the past few years:
#1: The New Corporate Tax Rate Is Permanent And Lower:
One of the main changes in this tax law is related to the corporate tax rate. It is now 21% and it is a flat tax. This means that this rate is the one applied to all corporations. You may be aware that the previous corporate taxes were 15, 25, 34, and 35%. In addition, this tax rate is to be permanent at least up until 2025.
So, what does this exactly mean?
Simply put, all business owners are paying a flat tax rate of 21%. While some businesses may be affected – the ones that used to pay 15%, the reality is that this included a minority of businesses. After all, if you think about it, in order to pay a 15% tax rate, your small business needed to have a net income between $0 and $50,000.
#2: No More Corporate AMT:
The corporate AMT used to work in a similar way to the individual alternative minimum tax. The corporate AMT was an alternative way that companies had to calculate taxes. This made sure that all corporations paid a minimum amount of tax. However, this is no longer possible.
What does this imply?
Simply put, by eliminating the corporate AMT, you are also getting rid of some tax liabilities for corporations that you used to include in the AMT calculation.
#3: Get A Big Deduction If You Have A Pass-Through Business:
In case you don’t know, some examples of pass-through businesses include sole proprietorships, partnerships, and S corporations whose profits pass through to the business owners. These owners will then pay the ordinary income tax on their personal returns.
One of the main news about pass-through businesses is that you can now deduct up to 20% of the net income that comes directly from your business. However, not all are roses. The reality is that you can only take this opportunity if you meet some specific criteria. The two most important factors are:
– Your Type Of Business:
If you have a service business you lose this benefit as when your profits grow above $415,000. This, of course, includes businesses such as doctors, attorneys, accountants, actuaries, among others. Nevertheless, there are some exceptions to this rule as it is the case of engineering or architecture firms.
In case you own a non-service small business, things can become a bit more tricky. After all, as soon as you reach the upper limit of income, you’ll still be able to make a deduction. However, it will be the lesser of:
– 20% of the net income that comes directly from your business;
– the greater of either 50% of your W-2 wages, or 25% of your W-2 wages plus 2.5% of the cost of the equipment that you own or the cost of the real estate you own.
While the difference between service and non-service businesses has been established, you need to wait for more details from the IRS. After all, your business can belong to both categories. Just think about a company that sells hardware but who also runs a software business.
– Your Income:
The truth is that depending on how much you make will allow you to determine if you can do a partial or full deduction. According to the tax law case the business owner is married, files jointly, and has a taxable income of less than $315,000, then he will most likely qualify for the 20% deduction. This is also the case for business owners who are single and who make less than $157,500.
In case you have a taxable income between $315,000 and $415,000 in the case you are married and filing jointly, you’ll probably get a partial deduction. This is also the case for single business owners who have a taxable income between $157,500 and $207,500.
If your taxable income is above these limits, the deduction will depend on the type of business that you own.
#4: There Are Fewer Deductions And They Are Harder To Take:
If you were used to taking advantage of some business deductions, you may have fewer options as of 2018. After all, there are fewer deductions available and the ones that are maintained are harder to get. Some of them include entertainment expenses, business interest, and even the NOL (Non-Operating Loss) deduction.
As you can see, there are a lot of changes that you need to take into consideration. In fact, this was the first major change in taxes in almost 30 years. So, it’s not that strange that you may have some questions. So, before you make any decision, make sure to consult with your financial and tax advisers. For more information on increasing your cash and profits in your business, check out the article The Top Ten Ways to Improve Your Cash Flow.
What are your thoughts about these tax changes. Have they helped your business. Answer below in the comments area.
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