Taxation, just like many things in the world, is governed by the laws of change. For many years, the Internal Revenue Code served as the benchmark of all tax policies in the US. Now, the new tax law of 2018 has completely changed the Internal Revenue Code.
If you want to know how the Tax Cuts Jobs Act (TCJA) can affect your business, this article can help you.
The Major Changes Caused By the Tax Cuts and Job Act
Individual Income Tax Changes
As expected by numerous professionals and experts, the individual income tax is the first section affected by the TCJA. Basically, all individual income taxes were reduced but they may be subjected to change by 2025.
This is a quick summary of the individual income tax reduction:
Bracket A: $0-9,525 (10%)
Bracket B: $9,525-38,700 (12%)
Bracket C: $38,700-82,500 (22%)
Bracket D: $82,500-157,500 (24%)
Bracket E: $157,500-200,000 (32%)
Bracket F: $200,000-500,000 (35%)
Bracket G: $500,000 up (37%)
Married Couple Filers
Bracket A: $0-19,050 (10%)
Bracket B: $19,050-77,400 (12%)
Bracket C: $77,400-165,000 (22%)
Bracket D: $165,000-315,000 (24%)
Bracket E: $315,000-400,000 (32%)
Bracket F: $400,000-600,000 (35%)
Bracket G: $600,000 up (37%)
Even though the TCJA has introduced numerous tax changes, one thing remains the same: high-income individuals will still be taxed more. Despite this, any taxpayer will be able to take advantage of flexible deductions.
Under the itemized deductions category, you can take advantage of several deductible options. However, this is only applicable if the total of your itemized deductions exceeds your standard deduction rate.
The common itemized deductions are the state and local tax deductions, home equity interest, mortgage interest, medical expense, personal casualty, theft loss, charitable contributions, and miscellaneous options. Before taking the itemized deduction route, it’s advisable to seek the expertise of a tax accountant.
If you’re an individual taxpayer, you should also be aware that personal exemptions have been lifted. But don’t worry – even if the personal exemptions were removed, the improved standard deduction is a clear advantage.
Along with these standard deduction improvements, the TCJA will also give way to the annual inflation adjustment. One implication of this adjustment is that you might go up the tax bracket at a faster rate. This will possibly render the tax breaks less valuable over time.
And if you have a family of your own, you can take advantage of family tax credits. One advantage of tax credits is that they can reduce your tax on a dollar per dollar basis, unlike standard deductions. With the family tax credits provision, the refundable amount is limited to $1,400 per child.
Experts believe that the Tax Cuts & Job Act has become more family-friendly. The family tax credits won’t phase out under certain thresholds, and they won’t be indexed for inflation. This can be a good thing at the moment, but the credits will lose value over time.
So, keep track of your income properly. Understand your taxes on a deeper level so that you’ll know how to maximize your tax breaks.
Business Tax Changes
While individual taxpayers don’t seem pleased with the changes, small business owners can breathe easily. The TCJA will open the way for larger tax returns – unlike the previous years.
One major deduction that will be favorable for your business is the “pass-through” provision. This simply means that pass-through organizations like sole proprietorships, S Corporations, and partnerships will have a deduction of up to 20% of qualified income.
For many business owners, this is a game changer. The additional tax deduction on your business can boost your financial standing. But keep in mind that not all businesses are qualified for the deduction.
Some tax professionals, however, believe that the rules have become more complicated than before. The deductions may be large, but some specialized businesses might lose deductions if their assets aren’t sufficient. In effect, tax accountants may need to work long hours to solve such problems for business owners.
Another important matter is the provision of the SSTB or Specified Service Trades or Businesses. It states that businesses in the fields of law, health, accounting, actuarial science, performing arts, financial services, and consulting aren’t eligible to deductions if their income exceeds $207,500 (single-filer) or $415,000 (married filer).
One specific deduction that helped many small businesses in the past is depreciation deduction. Back then, your business is eligible to a 50% first-year depreciation deduction rate. The rate covers many business essentials such as costs of computer systems, equipment, software, office furniture, and other things.
TCJA improved the depreciation deduction rate to 100%.
Also, entertainment deductions were removed. You can no longer file deductions for entertainment items such as the ones used for representing and meeting potential clients. However, employee gatherings and celebrations are still deductible.
Regarding W-2 wages, TCJA has implemented a limitation barrier. Pass-through entities other than sole proprietorships can’t have a Qualified Business Income ( QBI) deduction which exceeds the owner’s share of W-2 wages paid to employees. Additionally, 25% of W-2 wages paid are included in the computation, as well as 2.5% of the qualified property cost.
Corporate Tax Changes
Under TCJA, corporations fare better. Along with the lowered corporate interest rate, the Alternative Minimum Tax or AMT was removed. For many years, the AMT has affected small and medium businesses nationwide.
One of the advantages of AMT’s repeal is lesser tax calculations. This is a good thing for your business. Plus, the tax reduction can improve your company’s financial shape.
In terms of corporate income tax, a corporation can save more money if it has subsidiaries in other countries. This is because of the fact that TCJA turned U.S. global tax system into a territorial tax system. So if you’re planning to expand into a corporation someday, the odds are possibly in your favor.
Another effect of the TCJA to corporations is the reduction of corporate dividend deductions. Before TCJA, corporations that received dividends issued by other corporations can file for dividend deductions. The original 80% deduction rate is now changed to 50%.
Other Miscellaneous Changes
For years, the manufacturer’s deduction has become a significant tax break for business owners. Now, TCJA has removed the deduction. The removal has taken effect since December 2018.
A new limitation was also implemented for excess business loss deductions. These losses were typically incurred by non-corporate taxpayers. Under TCJA, such losses will carry over to the upcoming tax years wherein they pass off as deductions – provided the losses exceed a certain threshold.
Perhaps one important change in TCJA is the prioritization of cash-based accounting. Small and medium businesses thrive on this accounting method because of its easy process and flexible nature. Some qualified businesses are even exempted from inventory accounting, thus bringing relief to business owners and accountants alike.
If you’re used to large compensations for executive officers, there will now be a limit. With the limit imposed by the new tax law, executive compensation deductions cannot exceed $1 million dollars per year. More importantly, a special transition rule is set for amounts paid covered by binding contracts which took effect on November 2017.
Does your business have an R&D department? If so, then you need to prepare for some tax changes. With TCJA in full swing, research and development expenses should be capitalized over 5 years. If the R&D is conducted outside the country, the capitalization period is up to 15 years.
Roth IRA accounts are also affected by the TCJA. Taxpayers are now prohibited to convert pre-tax IRA to a post-tax account. This is commonly known as recharacterization. You might consider talking to your employees about this limitation, especially if they’re serious about their retirement accounts.
Significant changes were also made with home equity loan taxation. Previously, any taxpayer with home equity can assign the amount as a deduction. This is no longer possible under the new tax law. Many financial experts are now certain that home equity loans will become more expensive over the years.
Regarding personal property assets, TCJA has removed like-kind exchanges. But if there’s still a pending leg of exchange which dates back to December 2017, prior policy is implemented for such exchange. Practically, property assets are now heavily regulated.
And last but not the least, the new tax law has adjusted the impact of federal gift and estate taxes. The tax exemption amounts for gifts and estates can reach as high as $10 million for singles and $20 million for married couples. Since many estate owners will take advantage of the exemption, this could lead to a great demand for estate planning professionals.
How Can Your Business Adapt to TCJA?
Adaptability is one of the strongest traits that any business can have. Also, it’s one of the hardest to keep. With the introduction of the TCJA, many small businesses and companies tried their best to adjust and recuperate.
If you need to reposition your business due to TCJA, here are some of the initial methods that you must try:
Analyze Your Company’s Tax Situation
The Tax Cuts and Job Act has changed many policies regarding taxes. It may be confusing at first, so you need to spend ample time on understanding the terms.
Once you’ve caught the full gist of TCJA, you should start analyzing your company’s tax situation. To do this, you can check the financial records of your company, dating back at least one year ago. If you want to save time and energy, a tax accountant can help you with the task.
Next, you should try your best to run a projection analysis of your company’s possible tax expenses and returns. Even if you don’t have an accountant yet, you can run a ‘projection draft’ on your own. Revise this draft accordingly as soon as the numbers keep pouring in.
Review Company Goals and Milestones
A company’s list of goals will keep changing and improving for years. With the full effects of TCJA in play, you must set down new goals and milestones that your company can strive for.
Making new goals with the help of an accountant has better results than planning on your own. This is because of the new ideas that an accountant can offer, particularly in the field of taxation. Make sure that you also strive to consider the ideas and opinions of your managers.
Before gunning for a new milestone, always ask yourself if the company move can affect your taxes for better or for worse. Since a company is always moving towards a certain path, it’s more effective to have an accountant that you can consult. Aside from synchronizing your company’s goals with the new tax law, the accountant can also help optimize cash flow.
Note: if you’re having troubles setting new goals because of the effects of the new tax law, then you can seek a management consultant. The consultant can provide accounting support, but his or her expertise is focused on general company improvement.
Coordinate With Your Team
Many taxpayers were surprised with the effects of the TCJA. To mitigate its impact on your business, you should coordinate with your team.
In the meeting, you must highlight important matters like general tax effects, company tax adjustments, changes in benefits, and new tax-filing procedures. The information might be too much for others, so do your best to keep the explanation as concise as possible. It’s even better if your accountant can help you explain the effects of the new tax law.
Some, if not most, of your employees will try to approach you or your HR representative regarding withheld income concerns. To avoid potential issues and compromises, keep your withheld tax documentation updated. Be prepared to answer questions about withheld income as well.
Partner Up With a Competent Accounting Firm
While you can learn about these tax changes brought by TCJA, nothing beats the expertise of an accounting firm. A CPA can guide you with general taxation and other factors related to TCJA.
Once you have a trustworthy CPA by your side, don’t hesitate to share the information about your business. This will help the CPA in preparing accounting strategies and tax solutions. The new tax law won’t be too confusing if you can seek the expertise of a reliable accountant.
Now that you’re aware of the full implications of the TCJA, you can adjust your small business strategies properly. Just remember that you’re not alone in making key financial adjustments. Contact us today – our accountants are always willing to help!