4 Big Tax Law Changes That Will Impact Business Owners in 2018
The New Corporate Tax Rate Is Lower — and Permanent
The new corporate tax rate is 21 percent. And this change will live on past 2025, which is when most of the other tax-law changes are set to expire. The new rate is also a flat tax, meaning it’s the same for all C corporations — that’s different from the previous corporate tax rates, which were 15, 25, 34, and 35 percent.
The Corporate Amt Is Gone for Good
Similar to the individual alternative minimum tax, corporate AMT was an additional way to calculate taxes to help ensure corporations paid a minimum amount of tax. Eliminating the corporate AMT also means getting rid of some of the tax liabilities for corporations that used to factor into the AMT calculation.
Some Pass-Through Businesses Get a Big Deduction
Pass-through businesses are entities like S corporations, partnerships and sole proprietorships whose profits pass through to the business owners, who then pay ordinary income tax on their personal returns. If you’re a pass-through business owner, the good news is you may be able to deduct up to 20 percent of your qualified business income (the net income that comes directly from your business).
Here are the two biggest factors that impact whether or not you can
How much you make helps determine whether or not you can take a full or partial deduction. Business owners who are married, file jointly and have taxable income of less than $315,000. Single filers who make less than $157,500 may also qualify for the full deduction.
But if you have taxable income between $315,000 and $415,000 (for married filing jointly) or between $157,500 and $207,500 (for single filers), then you’ll likely get some portion of the 20% pass-through deduction. Once you reach $415,000 or $207,500, however, whether or not you can continue to take any deduction depends on whether you’re considered a service or non-service business.
The Type of Business You Own
If you own a service business, you’ll phase completely out of the pass-through deduction once you surpass the upper-income limit. “If you’re an accountant, actuary, attorney, doctor, etc., and you make over $415,000, you’re not getting a pass-through deduction,” Roemaat says. There are specific professions that are defined as service businesses, but the catchall definition is when a business’ principal asset is the reputation or skill of one more of its owners or employees. (The exceptions are architecture and engineering firms, who are exempted from this definition.)
But if you own a non-service business, the answer is a little more complicated. Once you reach the upper income limit, you can still take a deduction, but it will be the lesser of two calculations:
20 percent of your qualified business income, or the greater of: 1) 50 percent of your W-2 wages or 2) 25 percent of your W-2 wages plus 2.5 percent of your qualified property cost (i.e., the cost of certain real estate or equipment you own).
What qualifies as a service or non-service business isn’t etched in stone. For example, what if you run a software business that also sells some hardware? In this case, you could be considered both a service and non-service business. In other words, keep in mind that determining what you owe in taxes as a pass-through business owner is going to get a lot more complicated. In some cases, it may even be worth changing the type of business entity you have. So it’s important to consult with your tax advisers before making any moves.
Some Business Deductions Are Gone or Harder to Take
Starting in 2018, some key deductions that businesses have relied on are either going away or getting stricter requirements.
Entertainment Expenses. Those courtside tickets for clients on the company dime used to be 50 percent deductible, but no more — entertaining clients is no longer considered a deductible expense. (Good news: Office holiday parties are still 100 percent deductible.)
Business Interest. Previously, any interest a business paid on business loans was generally deductible. Now, a business can only write off interest expenses that are equal to 30 percent of its adjusted taxable income. The rules around this can be complicated, though, and there are exceptions. A big one is for small businesses with average annual gross receipts of $25 million or less for the three-tax-year period ending with the prior tax year.
Net Operating Loss (NOL) Deduction. In the past, if a business recorded a loss, it had the option to use those losses to either reduce any taxes paid in the past two tax years, or to reduce any future taxable income for the next 20 years. Under the new tax law, that NOL can only be carried forward, and is limited to 80 percent in any given year.
Example: Let’s say your business records an NOL of $100,000 in 2017. But in 2018, you end up making $100,000. You can use your NOL to reduce your taxable income for 2018, but only 80 percent of it, or $80,000. That means in 2018, your taxable income would be reduced to $20,000. Whatever you didn’t use of your NOL can be carried over to future years, so your business could apply that remaining $20,000 NOL to its 2019 tax return.