Congress passed the Tax Cuts and Jobs Act (TCJA) in December 2017 and it took effect January 1, 2018, making this the first tax season after one of the biggest tax reform bills in decades. The TCJA means major changes in taxes for both individuals and businesses. Notably, the TCJA decreased the number of tax brackets from fourteen to two, and decreased the maximum tax rate. If you’re a business owner, make sure you’re aware of the changes coming in 2019 and how your company may be affected.
Single corporate tax rate
Under the TCJA, all C corporations have a single tax rate of 21 percent. Previously, C corporations paid anywhere from a 15 to 35 percent tax rate.
New deduction for pass-through entities
Not all businesses are C corporations; sole proprietorships, limited liability corporations, partnerships and S corporations are pass-through entities. These businesses do not pay taxes as a corporation, so the tax is passed through to the owner and subject to individual tax rates, which under the TCJA is as high as 37 percent. However, these owners can now take a deduction up to 20 percent of their business income on their individual returns. They may also continue to claim deductions for other business expenses. Whether an individual qualifies for the deduction and the amount of the deduction depends on income earned, marital status, number of employees and type of service or product provided.
Business interest deduction limits
Businesses earning more than $25 million are not allowed to deduct interest payments of more than 30 percent of their taxable income. However, any payments not allowed by this law would be carried forward for the next five years. Business smaller than this would still be able to deduct all of their interest payments.
Higher limits on personal expenses
Business owners can now deduct up to $1 million of the cost of personal purchases used more than 50 percent of the time for businesses. This almost doubles the previous limit of $510,000.
Bonus depreciation now 100 percent
Depreciation allows businesses to deduct some (or now all) of the cost of a long-term asset. Previously, businesses could only claim 50 percent of the cost, with the remaining cost spread out over the life of the asset. Bonus depreciation incentivizes business to purchase capital assets. Listed property, or assets that can be used for both personal and business uses, must be used for business at least 50 percent of the time. To qualify for 2019, the asset must be have been put into service as of September 27, 2017.
Changes to deducting net operating losses
Previously, if a business had a net operating loss it could receive all or part of a tax refund for the past two years. Under TCJA losses can only be deducted in current and future years, and only up to 80 percent of taxable income.