It’s officially spring, and while that means sunny days, it also means the occasional storm. While you may be prepared for spring storms, there is one storm on the horizon that has slowly been getting closer and closer. Yes, that storm is tax day. Just like the rain, if you are not prepared, it can really ruin your day. During this time of year, Kussmaul Legal gets a lot of questions about taxes. While we always say to consult your tax professional, we do try to provide some insight on any recent changes. This year, with the passing of the Tax Cuts and Jobs Act (TCJA), we felt it necessary to highlight some of the bigger changes to the tax code. Hopefully this post can help you feel more prepared for that impending storm.
20% Deduction On Taxable Income For All Pass Through Entities
One of the biggest changes is that all pass through entities receive a 20% deduction on their taxable income. What does this mean for you? Well if your business is either a Sole Proprietorship, Partnership, Single Member Limited Liability Company (since the IRS labels you as a “disregarded entity” and treats you as a Sole Proprietorship for tax purposes only), Multi-Member Limited Liability Company (that elected to get taxed as a Partnership versus a C Corp), or S Corp then this change benefits you.
Ex: If your annual taxable business income for the year is $100,000, the IRS will only tax you on $80,000 of it.
However, there are some limitations for this regarding service based businesses. Service based businesses can only receive the 20% deduction if they make under $157,500 (single filer) or $315,000 (joint filer) per year. If you are in the business of providing any personal service to consumers (SaaS, consulting work, window washing, etc.) then this limitation applies to you.
Decrease In The Corporate Tax Rate
The corporate tax rate has been decreased from 35% to 21%. This is great news if you are a C Corp, as it lessens the burden of the double taxation scheme your business is subject to.
Deduction For Interest Business Expenses Are Capped At 30%
This new rule affects your business if you have taken out any loans, lines of credit, or if you have any investors in your business through the use of a convertible note. If you have any of the above debt instruments attached to your business, then you can only deduct up to 30% of the interest paid on said instruments. Anyone else feel some stinging rain in that storm? Ouch! However, there is a caveat. If your business has annual gross receipts of $25 million or less for the past 3 years, then you are exempt from this new deduction limit.
Net Operating Losses Can Now Be Carried Forward Indefinitely And Are Subject To A Limit At 80% Of Taxable Income
What exactly does this mean? Well it can get a bit complicated, but we tried our best to simplify things. A net operating loss (NOL) is when a corporation has operating expenses that exceed the revenue brought in. If this is the case, the corporation can use the NOL to offset some of its tax liability up to 80% of it’s taxable income.
Ex: ABC corp has a NOL of $15 million in 2018 and expected 2019 taxable revenue of $15 million. Under the new NOL rules, ABC can only use $12 million of its NOL (80% x $15 million 2019 pre-NOL income). As a result, 2019 taxable income would be $3 million with a $3 million NOL carryforward.
Still confused? That’s ok. It’s a complex accounting concept that your tax professional will be able to walk you through should you have any NOLs.
Changes To The Business Related Meals And Entertainment Expenses Deduction
The deduction for entertainment and meal expenses related to your business has changed, and it has many business owners scrambling for an umbrella. With the new law, you can no longer deduct client entertainment expenses related to your business. The business meals (i.e. Employee travel meals) deduction remains the same at 50%, and meals provided for the benefit of the employer (cafeterias, etc.) deduction has been reduced to 50%. It is important to note that this last deduction (meals provided for the benefit of the employer) is going away in 2025.
Other Noteworthy Changes Regarding 179 and 199 Deductions
179 Deductions: ThIs is the deduction that allows you to deduct the purchase price of qualifying equipment and/or software purchased during the taxable year for the business. This limit has been raised for next year’s taxes to $1 million from $500,000.
199 Deductions: This deduction has been repealed. This used to be a deduction of 9% on taxable income for businesses that were engaged in domestic manufacturing.
Those are the changes in the new tax law that we at Kussmaul Legal, PLLC feel will affect the majority of business owners. As always, please consult your tax professional to see what parts of the TCJA affect you and your business. We all dread paying taxes, but if we are properly prepared for them, we can weather the storm. Remember, just like with spring storms, the sun always comes out afterwards.