The Tax Cuts and Jobs Acts Law (TCJA) – a sweeping tax overhaul that passed in December 2017 – includes trillions of dollars in tax cuts and benefits for both workers and business owners. The changes took effect in 2018 for taxes that will be reported by April 2019 and will expire for individuals by the end of 2025. Most of the corporate provisions, however, are permanent.
Impacting both corporate and individual taxes, the new law most notably:
- Slashed the corporate tax rate from 35 percent to 21 percent
- Lowered individual tax rates for five of the seven tax brackets
- Nearly doubled the standard deductions but also suspended all personal and dependent exemptions
- Lessened the tax burden by 20 percent on pass-through businesses like S-corporations, LLCs, and partnerships
Significantly, the percentage of taxpayers who itemize should sharply drop, given the new substantially higher standard deductions of $12,000 versus the previous $6,350 for single filers and $24,000 instead of $12,700 for married couples filing jointly. Itemizing, of course, is only advisable if your deductions exceed your standard deduction.
Generally speaking, the massive Internal Revenue Code amendments lower and simplify taxes for business owners and corporations. Watch this informative webinar to find out how the Tax Cuts and Jobs Act has impacted payroll processing.
Here are the key takeaways from TCJA for these groups:
- Lower tax burden for pass-through businesses
TCJA changes lowered the tax burden of owners, partners, and shareholders of S-corporations, LLCs, sole proprietorships, and partnerships by a first-ever 20 percent deduction. These classifications are known as pass-through organizations because owners pay their share of business taxes through their individual tax returns. Now, these business owners may be able to deduct up to 20 percent of their qualified income, that is, the net income directly generated by their businesses.
The 20 percent deduction is prohibited for everyone in a service business unless their taxable income is less than $315,000 (married) and $157,500 (single).
- Lower corporate rate
The new tax code slashed the corporate rate from 35 percent to 21 percent and repealed the AMT on corporations. The new rate also is a flat tax, so it’s the same for all C corporations, contrary to previous corporate tax rates of 15, 25, 34, and 35 percent. Because the 15-percent tax rate applied to net income that equaled between $0 and $50,000 and because most corporations report incomes higher than $50,000, most corporations will see a lower tax burden under the new law.
- Limiting business deductions
Some deductions businesses have taken for decades have been either eliminated or restricted. For example:
- Entertainment expenses – Taking clients to the big game or providing other perks no longer qualify for 50 percent deductions. Under TCJA, entertaining clients is not considered a deductible expense. Office holiday parties remain 100 percent deductible, and employers also generally are still permitted to deduct 50 percent of the food and beverage expenses associated with operating their trades or businesses, such as meals for employees who travel on the company’s behalf. For IRS guidance on entertainment expenses click here.
- Business interest – Now, a business only may write off interest expenses that are equal to 30 percent of its adjusted taxable income. Previously, any interest a company paid on a business loan was generally deductible.
- Net operating loss (NOL) – TCJA stipulates that NOL is limited to 80 percent in any given year and may be carried forward only to reduce taxes paid in future years. Previously, business owners had the option to use losses either to reduce taxes paid in the past two years or to lower any future taxable income for the next 20 years.
If you use part of NOL for one year, the remainder may be carried over to future years. So, if you record $100,000 of NOL one year and make $100,000 the next year, you may reduce the profitable year’s taxable income by $80,000 – or 80 percent of your prior year’s NOL. You would still have $20,000 of the initial NOL to apply to any future years you report another NOL.
Related Reading: How the Tax Cuts and Jobs Act Affects Businesses
4. Changes in Depreciation
- Business owners may now elect to expense the cost of any property they purchase for their businesses and deduct it the year they place it in service. The maximum deduction jumped from $500,000 to $1 million.
- The phase-out threshold increased from $2 million to $2.5 million.
- For more information on changes to depreciation under the Tax Cuts and Jobs Act, be sure to read this blog.
5. Changes to Fringe Benefits
The TCJA law generally eliminated the deduction for entertainment or qualified transportation, but there are exceptions. Additionally, qualified moving expense reimbursements, bicycle commuting reimbursements, and employee achievement awards are now treated differently. To learn more, visit the IRS site's article Tax Reform Brings Changes to Fringe Benefits.
6. Farmers & Ranchers
Farmers and ranchers are also impacted by TCJA. There are changes relevant to net operating losses, qualified business income deductions, accounting methods, and depreciation. For the details, download our primer, How Tax Reform Affects Farmers and Ranchers.
Many of these changes stand to benefit small businesses, but owners may have to make financial strategy adjustments to take full advantage of them.
Did you know it is especially important for seasonal, temporary, and part-time workers to check their paycheck withholding following the Tax Cuts and Jobs Act? Find out more in this Ask the Payroll Expert.
NOTE For a full and complete review of how the Tax Cuts and Jobs Act impacts businesses visit the IRS Tax Tip page: Tax Cuts and Jobs Act: A comparison for business.
The top five TCJA individual changes include:
- Lower individual rates
The law retained seven tax brackets but lowered the rate for five of them. These lower rates will expire in 2025 unless Congress votes to extend them. TCJA cut the highest rate from 39.6 percent to 37 percent. And while the bottom rate remains 10 percent, it now covers more income. Read more from the IRS here.
The IRS has recommended everyone perform a paycheck checkup to ensure proper federal tax withholding - here's how. Also, Jo McClure, director of payroll administration, weighs in on how the Tax Cuts and Jobs Act may have impacted your state withholding.
- Expanded child tax credit
The new law doubled to $2,000 the credit for children under 17. This credit is now available to high earners because TCJA raised the income threshold under which filers may claim the full credit to $200,000 for single parents – up from $75,000 – and to $400,000 for married couples – up from $110,000.
- Lower mortgage interest deduction cap
Beginning with mortgages obtained in 2018, first- or second-home buyers may deduct the interest only on debt up to $750,000, down from $1 million previously. The interest on home equity loans is no longer deductible.
- Alternative Minimum Tax (AMT)
TCJA changes significantly reduce the odds that you will owe the AMT for tax years 2018 through 2025. And if you do have to pay it, chances are you will owe less than you would have under the prior law.
- Affordable Care Act penalty
The new tax code eliminates the mandate to buy health insurance beginning in 2019, at which time people who do not have minimum essential coverage no longer will have to pay a penalty. The change takes effect with taxes filed in 2020. For reference, IRS data shows about 4 million taxpayers paid the penalty tax for the tax year 2016.