As I am sure you are aware, there have been some changes to our tax code in the past year. The Tax Cuts and Jobs Act is the biggest tax overhaul in many years. You might have heard from some politicians that it would make tax filing easier. Unfortunately for many Americans, especially small business owners, that is not the case. In fact, for many, the tax law changes make everything even more complicated.
Outlined here are some of the major high-level changes. As an initial disclaimer, please note that this new tax law is very detailed and complicated. This means that the topics here are just a starting point and if you think you may be affected by any items, take some time to research or contact a professional to learn how they may affect you or your business specifically. Also be aware that some of these changes are not permanent.
Personal Tax Changes
- Standard Deduction Nearly Doubles – The new standard deduction for those married filing jointly is $24,000 and for those filing single is $12,000. Note that this change means that many taxpayers will not be able to itemize because it will be lower than the new standard deduction, making it more advantageous to take the standard deduction.
- Itemized Deductions
- State, local, and property taxes are now capped at just $10,000 total.
- The charitable contribution cap moved to 60%, up from 50% previously.
- All of the 2% deductions are no longer allowable. These deductions include: tax preparation fees, investment fees, legal fees, and unreimbursed employee expenses.
- NOTE: This is a major change for those of you that are employees paying for business-related items that were not reimbursed by your employer. This can include but is not limited to: business mileage, home office, travel, etc. If you previously had a large amount of unreimbursed employee expenses, this change will negatively impact you, so be sure to talk to a tax professional for possible options available.
- Miscellaneous Changes
- Health Care Requirement – Starting in the 2019 tax year you will not be penalized on your personal return for not having full-coverage health insurance.
- Moving Expenses – These are no longer deductible on your personal return except for military personnel.
- Alimony – For divorce agreements or renegotiations after 2018, alimony is no longer deductible by the payer, nor is it income to the recipient.
- Tax Brackets – Most of the tax bracket rates have been decreased.
Business Tax Changes
If you are a small business owner, there is definitely potential for a lot of good to come from this tax bill. Be careful when researching and applying this to your specific business because this is where things get more complicated.
- Section 199A Deduction – This is the big one for business owners. It is a deduction that can be taken on Qualified Business Income (QBI). Below is a very high-level breakdown of how this affects business owners, but this is one item you will want to look into further or bring on a professional to really see how it matters to you and your business specifically.
- This is only for pass-through entities (Sole-Proprietor, LLC, Partnership, S-Corp).
- Taxpayers can deduct 20% of their QBI.
- The deduction is taken after the adjusted gross income (AGI), based on Taxable Income.
- Self-Employment tax is NOT reduced by the deduction.
- There is a phase-out that starts at $315,000 for those filing jointly ($157,500 for single filers). If you are above these numbers, things get trickier and again should be researched further.
- Section 179 and Bonus Depreciation – The new law increased the Section 179 expense limit to $1 Million for 2018 forward and the limit for equipment purchases has also increased to $2.5 Million. Bonus depreciation now includes used equipment and is also now 100% for qualified property placed in service after September 27, 2017, and before January 1, 2023.
- Entertainment Expenses – This one is a bit of a stinger so prepare yourself for it. No longer can businesses deduct entertainment, amusement, recreation, and membership dues to clubs. Used to taking clients to sporting events? Not a business expense anymore. You can still pay for these things under your business name, but it is no longer deductible.
- Net Operating Loss – There are three major changes to the NOL rules: no two-year carryback period, they can now be carried forward indefinitely, and they are limited to 80% of taxable income.
- Corporate Rate – The tax rate for C Corporations is now a flat 21% instead of the various tiers previously, which had a 35% maximum.
In conclusion, the new tax law is anything but simple and this article should be used as a starting point to understand how you or your business may be affected. Many Americans will be satisfied with these changes, while others may be disappointed. Either way, it is the law and you should be aware of these changes. If you are interested in learning more about this topic or any other bookkeeping or tax-related items, send me a message. I would be more than happy to chat!
This guidance is for informational purposes and does not constitute legal or tax advice. We also recommend you speak with a professional regarding your specific scenario. JETRO and Associates shall not be responsible for any liability related to the guidance herein.