The Tax Cuts and Jobs Act is a tax reform bill that will provide tax cuts for both corporations and small business owners and will restore some tax benefits to individuals. This tax reform will not affect 2017 taxes, and some provisions in the final tax bill will remain until 2025.
70 percent of Americans claim a standard deduction when filing taxes and they will see slight increases in income with the 2018 tax reform bill, which is still being fleshed out as of January. Many people are unaware how their taxes are calculated and what deductions mean for them. Businesses have a different set of tax codes and many businesses employ the expertise of an experienced tax attorney to ensure their business taxes are properly calculated and paid.
What The Tax Cuts and Jobs Act means for business owners is substantial. The new tax reform changes both tax brackets and income ranges. The IRS has published an announcement which lists many new provisions, some of which are unrelated to the new reform bill. Individuals, as well as business owners, will see these changes in the 2018 tax year.
Some of the reform’s changes which will affect business owners in 2018 include:
- Lowers the tax burden on pass-through businesses (owners of a business who pay taxes on income derived from that business on their personal income tax returns)
Small business owners can start deducting 20 percent of their qualified business income in 2018 whether that is a sole proprietorship, partnership or S corporation which already sees lower taxes. There are some limits such as a limit of $157,500 individually claimed and a $315,000 limit of jointly claimed income.
- The tax reform includes a rule to prevent abuse of the pass-through tax break
If a partner in a pass-through also earns a salary from the jointly-owned business, their income would be subject to regular income tax rates. To prevent people from claiming their salary income as a business profit in order to take advantage of the pass-through deduction, the bill places limits on how much income qualifies for the deduction.
- Territorial tax system
U.S. corporations are required to pay U.S. taxes on profits they have earned abroad, The new system will end the double taxation and they will pay one tax.
- Repatriation of foreign assets
Many corporations and businesses hold assets abroad. U.S. Corporations have approximately $2.5 trillion in foreign profits. The new tax reform bill provides an incentive to bring these assets back to the U.S., assessing a one-time repatriation rate of 15.5 percent on cash and equivalent assets and 8 percent on liquid assets over a period of 8 years.
- Dividend Reduction and Net Losses
The reform bill reduces 80 percent deductions on dividends received to 65 percent deductions, and 70 percent deductions on dividends received to 50 percent deductions. The reform also limits the deduction for net operating loss carryovers up to 80 percent of the business’s taxable income.
If you are a small business owner, you may want to consult one of our experienced tax attorneys regarding these new changes for what they may mean for you both individually and as a business owner. We can help interpret the tax law as it applies to your situation, and help you navigate your way through the changes.