How the Trump Tax Reform Will Affect Small Businesses
By now, the ink is dry on the tax plan that will mandate changes for the 2018 tax year and there are some nice benefits to be had if you meet certain criteria. We’ll take a deeper look at those in a moment, but it is important to remember that, prior to this tax bill, there were already over 70,000 pages in the U. S. Tax Code. Despite a few nice perks for small business, the passing of Trump’s tax reform and tax plan was far from an overhaul of the tax process.
The rules are still largely unchanged – if you own your own business, no matter what type of entity structure you use, the services of a good accountant and bookkeeper are of far more benefit than the help afforded by Washington politicians.
The biggest news of the entire plan is the so-called “pass-through reduction” wherein a qualifying company can take a 20% reduction that will be applied to whichever is lower—your qualified business income (the ordinary income of the business), or your taxable income minus capital gains. The downside? Let’s look at those…
Do You Qualify for the 20% Reduction?
The new tax law's 20 percent deduction on qualified business income is subject to limitations that keep it from being a free-for-all for every entrepreneur. In general, to qualify for the full deduction, your taxable income must be below $157,500 if you're single or $315,000 if you're married and file jointly.
Filers who are below those thresholds may take the deduction no matter what business they're in, said Jeffrey Levine, a certified public accountant and director of financial planning at BluePrint Wealth Alliance in Garden City, New York.
However, once taxable income exceeds those thresholds, the law places limits on who can take the break. For instance, entrepreneurs with service and professional businesses — including doctors, lawyers and financial advisors — may not be able to take advantage of the deduction if their income is too high.
One truly fascinating aspect of the deduction is that the situation exists where partners may not both be able to take the deduction for the same business due to a spouse that has a higher income that exceeds the threshold, placing their taxable incomes outside the range where the partner can take the deduction
The Section 179 Write Off
While everyone likes the idea of a tax reduction of 20%, there were some other gems buried in the tax bill, too. Notably, an increase in what most bookkeepers and accountants would know as the Section 179 deduction. This is the spot where companies can write off many types of equipment up front instead of depreciating them over the useful life of the equipment. Currently, the maximum value was a little over half a million dollars, but the Trump Tax Reform bumps the total that can be written off to one million dollars. The range of items that qualify for this can be as small as an office chair up to heavy manufacturing equipment.
At the same time, the new tax bill also made some changes to the depreciation rules for larger equipment purchases as well as real estate. The new agreement allows for full up-front deductions of purchases each year for the next five years, subject to limitations on some purchases.
Cash Method Accounting Approved
One really far-reaching change that many business owners don’t realize is great was the provision in the new law that allows more small businesses to use simpler accounting techniques, notably, the cash method of accounting. In the Cash Method, the business can recognize revenues and expenses when the check is actually written rather than when a deal is made (the so-called accrual method). Most professionals consider the cash method to be less accurate and, as a result, most corporations, and partnerships that include a corporation, couldn't use cash accounting, except when average annual revenues were below $5 million.
Businesses that trade in merchandise are normally required to keep inventory, which also requires adopting the accrual method of accounting, but the law also exempts companies with less than $25 million in sales from that rule as well. These businesses are also freed from more complex processes to recognize expenses (known as uniform capitalization) and, separately, income from long-term contracts. Sure, it may seem like accountant-speak, but for us as bookkeepers, this provides new and powerful tools for many of our clients.
Estate Tax Exemption Doubled
It’s easy to think that any changes to the estate tax only benefited the truly rich – and it does – but isn’t that one of the reasons you opened your own business? To get rich? The Trump Tax Bill created a seven-year window for doubling the exemption amount for estate taxes from $5 million to a $10 million base; at the same time, providing for inflation in those calculations, so the actual value actually over 11 million dollars of potential shelter from taxes for estates, gifts, and generation-skipping taxes.
Hidden in the law is another provision for couples who plan properly, where the total benefit can be doubled, allowing up to 22 million dollars to be excluded. Since there is a distinct window of opportunity here, unless Congress takes action, in 2025, the estate clause will revert to $5 million.
Any time changes are made, bookkeepers and accountants wring our hands trying to make sure that we are able to give the right answers to our clients’ questions. The very nature of President Trump’s tax reform means there are vast areas that we haven’t covered and are still being clearly understood. A great resource we’ve come to recommend for business owners and entrepreneurs who need a clear “snap shot” of the tax bill can be found here.
As the totality of the tax bill comes into sharper focus for all of us, by all means, schedule a time to meet with us and discuss the concerns you might have with the law and how it impacts you and your business. There are always questions when new tax laws are enacted, so never think that you have a “dumb question” – there’s no such thing when it comes to your money and taxes!
By: Chris Groote
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