Your Guide to the Corporate Tax Reform
The Trump Tax Reform takes place in 2018. With the clock ticking, your business should understand the new way of doing taxes. Here's everything you need to know.
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The Republican Tax Plan brought the biggest tax overhaul in a generation. Not only will it have a huge effect on everyday Americans but on businesses as well.
Business taxes are already difficult for the average business owner to understand. Now there's a whole slew of corporate tax reform to add to the mix.
Luckily for you, we're here to untangle this mess and make sense of this new tax plan. Read on to learn what you need to know about how the new Republican Tax Plan will affect you and your business.
Change to the Corporate Tax Rate
The most talked about feature of the new tax plan is that it lowers the highest corporate tax rate from 35% to 21%. Republican lawmakers lowered the rate in the hopes of enticing foreign and domestic corporations to do more business within our borders. Before this bill, The United States had the highest corporate tax rate in the industrialized world.
The corporate tax rate only applies to C corporations which are corporations that pay their own taxes separate from their owners.
However, the vast majority, over 90%, of business in the United States are S corporations. These businesses don't pay taxes at all, and instead, their owners pay taxes after receiving the profits as income. You may have also heard these businesses referred to as pass-through businesses.
The Tax Plan and Pass-through Businesses
Most small businesses are pass-through businesses. As an owner of a pass-through business, you earn tax write-offs when you make business-related purchases, but you don't actually pay taxes on behalf of your business. Instead, you treat your business income as your own personal income and pay income taxes accordingly.
The tax plan allows you to deduct 20% of your pass-through income. This means that if your business income is $200,000, you'll pay taxes as if it were $160,000, giving you $40,000 of untaxed income.
Republicans hope you'll use that extra money to hire new employees (which 38% of small business owners say they'll do) or buy new equipment and supplies. Either will stimulate the economy.
There is, however, one large exception to these new pass-through rules. Service-based pass-throughs -- such as law firms, doctors, and accountants -- don't qualify if they make over a certain amount of money. That amount is $315,000 a year if you're married and $157,500 if you're single.
Republicans added this rule to cover a glaring loophole. Given the change in pass-through taxation, a wealthy lawyer could reincorporate as a pass-through company and pay fewer taxes than he would at his normal income tax rate.
By adding this exception for people making over a certain amount, it prevents wealthy professionals with savvy tax attorneys from taking advantage of the law to lower their tax bill.
Incentives to Invest in Your Company
Republicans want to make sure you're going to spend all that money you save, so they've added provisions to incentivize you.
The biggest provision allows you to write off all business purchases immediately. Under the old system, if you bought a car for your company, you would write the cost off over the course of a few years.
But under the new tax plan, you can write off the entire cost of the car all at once as soon as you buy it. Republicans hope this will encourage you to spend your money right away, stimulating the economy and creating new jobs.
Changes to the Use of Net Operating Losses
You experience a "net operating loss" (NOL) when your operating expenses exceed your revenue. In other words: when you lose money. These losses are tax deductible and that can be a huge boon to struggling businesses.
In the past, you could apply current losses to past income and receive a tax rebate. But from now on, you can only apply NOL to future income.
The benefit to the new plan is that NOL doesn't expire. But not being able to apply it to past income will hurt businesses that need the money sooner rather than later.
Other Miscellaneous Changes
Of course, there are hundreds of small changes in the tax plan.
Employers can't write-off their employees' transportation cost like they used to, nor their child-care costs. The new tax plan calculates inflation differently which will cause tax bracket thresholds to rise more slowly. And you'll no longer be able to deduct your local taxes when you file your federal taxes.
Those are just a taste. The new tax plan is a behemoth, and if you really want to understand it, you need to hire a professional.
Will This Corporate Tax Reform Benefit Small Businesses?
There is some debate over how much this tax bill actually helps small business owners.
Opponents of the bill claim that the tax cuts being given to the middle class make the pass-through cuts inconsequential for business owners making less than a few hundred thousand dollars a year. These business owners will get more of a tax cut due to the income tax break than they will from the pass-through break.
These detractors claim the tax reform bill really only benefits the rich shareholders of C corporations and the pass-through changes are nothing but a smoke-screen.
Will It Benefit You?
The truth is that the effects of this plan will vary from person to person and business to business. The only way to find out if you benefit is by diving into the details.
Unfortunately, that's easier said than done. That's why we're here.
We offer comprehensive business tax services from professionals who understand corporate tax reform. We'd love to sit down with you and get started, so contact us today and let's set up an appointment.