Small Business Tax Deductions Under Tax Cuts and Jobs Act

Any development is significant when it impacts small businesses, which account for 99.7% of U.S. employer firms.

The tax effects of the Tax Cuts and Jobs Act (TCJA) of 2017 was a universal development, and small businesses are, indeed affected. As such, it’s further felt by a lot of people: owners; employers; vendors; employees; families; and – anyone along the chain that touches small business.

Data released several years ago illustrates the power of U.S. small business and why the loss or gain of tax benefits has far-reaching effects:

  • 7% of U.S. employer firms
  • 64% of net new private-sector jobs
  • 2% of private-sector employment
  • 9% of private-sector payroll
  • 46% of private-sector output
  • 43% of high-tech employment
  • 98% of firms exporting goods
  • 33% of exporting value

Additionally, firms with fewer than 20 workers make up just under 90% of total businesses. 

The most well-known tax reform change is the lowering of the corporate tax rate from 35% to 21%. But what is out there for small businesses? Here are four:

1. Section 179 business equipment expensing: Businesses can now expense up to $1 million of the costs of business equipment qualifying under the Internal Revenue Code. As such, the purchase isn’t capitalized or depreciated; for accounting purposes it’s treated as an expense.

The previous amount eligible for the tax break was $500,000, with a phase-out starting at $2 million. The TCJA raised the phase-out limit to $2.5 million.

Examples of property qualifying under Section 179:
 
  • Equipment (machines, etc.) purchased for business use
  • Tangible personal property used in business
  • Computers
  • Office Furniture
  • Office Equipment
  • Property attached to your building that is not a structural component of the building (i.e.: a printing press, a 3-D printer, large manufacturing tools and equipment)
  • Partial Business Use (equipment that is purchased for business use and personal use: generally, your deduction will be based on the percentage of time you use the equipment for business purposes).
  • Certain improvements to existing non-residential buildings: fire suppression, alarms and security systems, HVAC, and roofing.
 2. Lower tax rates for individuals: Some 90% of small businesses are pass-through entities, meaning they are partnerships, sole proprietorships, or S-corporations. As such, the businesses aren’t taxed; instead, the owners in each case (with, of course, varying rules depending on income and specific type of business) are taxed according to their individual income. With the TCJA’s lower tax rates, this results in a direct tax liability reduction to pass-through principals.
 
Additionally, the 20% business income deduction is another tax reform element potentially enabling small business owners to pay less in taxes.
 
3. Luxury car deductions: Perhaps less intensively exercised than others, this first-year deduction increased to $10,000 from the previous $3,160, based on how much the vehicle is used for business.
 
4. Bonus Depreciation: Depreciation expands to 100% (over the former 50%) over five years – including previously ineligible used property.
 

A suggestion: As each of these small business-related items has rules that apply to them, see a tax professional for advice on the best strategies and tactics for you and your business. 

I have questions about tax reform and would like to speak to a CPA.

 

Tagged Small Business, Small Business Accounting, Small Business Tax, Tax Reform