Many of our clients and customers own or operate small businesses, including corporations, partnerships and LLCs. The Tax Cuts and Jobs Act of 2017, or TCJA, provides a number of tax breaks that benefit small businesses as well as individual investors in self-directed retirement accounts.
Most notably, the TCJA reduces the corporate income tax rate from 35 percent to 21 percent. This is a substantial reduction which dramatically reduces the effects of double taxation on C-corporations.
But that is not all. The TCJA also allows for much more generous tax provisions for businesses making capital investments. The new law increases the tax benefits available to small businesses under Section 179. Beginning January 1st, small businesses can expense up to $1 million in deductions on qualified property immediately. This provides a significant cash flow benefit for any company putting qualified capital equipment to work.
Previously, the limit was up to $500,000. The remainder had to be depreciated gradually over time – up to 27.5 years for many investments in residential real estate. The relaxed depreciation rules allow businesses much greater cash flow than they otherwise would have enjoyed.
The new tax law also expands the types of property and capital equipment that is eligible for first-year expensing or bonus depreciation.
Additionally, the new law allows for simplified accounting. Previously, most businesses with less than $5 million were permitted to use the simpler cash method of accounting. Under the TCJA, businesses with qualified revenues of up to $25 million are allowed to use the cash method. This method recognizes revenues and expenses as they actually come in, and not as they are contracted.
Luxury car fans get a treat: Business owners can now expense a greater dollar amount for luxury cars. Under the previous rule, business owners could only deduct up to $15,000 for cars over five years. However, the new rule lets you deduct up to $47,000 over five years.
It is much easier to deduct costs for computers as they have been removed from the definition of listed property. This means that you do not have to jump through hoops to show IRS officials that you actually used the computer in your business. Just keep the receipts!
The new tax law has a couple of drawbacks for small businesses. First, interest deductions are limited to 30 percent of the business’s adjusted taxable income. Interest expenses are deductible against income dollar for dollar.
Businesses that have been taking operating losses, or have uneven revenues from year to year, should beware of the restriction on claiming net operating losses against income. Previously, businesses with a net operating loss in a given year could use that loss to offset income. Businesses could offset income going back two years, or going forward 20 years.
The new rules say you can only offset 80 percent of your business income in a given year with net operating losses. You can carry these losses indefinitely into the future, but only certain losses can be carried backwards to offset income in prior years.