The 2017 tax reform act has made a lot of big changes to the tax code.
And with our proactive approach, we felt it would be good to email you the changes we think are most relevant to the small business owner and individual taxpayer.
Because there are so many changes, we are going to send you a daily email for 5 days. Our intention is to keep each email in a digestible chunk instead of overwhelming you with 10 pages.
So, if you didn’t want a tax professional to tell you about the tax reform changes, then feel free to not read these emails. I’m not sure you want to miss the one that goes over the change in entertainment expenses though.
If you think you might find some value out of these….please continue reading.
Let’s start with 2 changes that have happened to small business tax rates.
Corporate Tax Rates
Before, if your C corporation had more than $75k of income, you were taxed at 34%.
After, there is a flat tax of 21%.
These changes apply only to C corporations.
We have had clients ask if it makes sense then to change their business to a C corporation. In this case, for most people we still don’t think the C corp makes sense if your goal is to lower your tax burden.
That’s because you still have the double taxation problem from before. What this means is that while the C corp pays 21% tax, in order for a shareholder (presumably you) to get money out of the C corp, you need to pay yourself a dividend or pay yourself a wage. Both of which end up forcing you to pay taxes on that money at your personal income tax level. So you add the 21% corporate tax rate to your personal tax rate, probably between 15 – 30%, and your total tax rate on that money is 36 – 51%.
Pass Through Tax Treatment
Before, if you have a partnership, S corporation, or sole proprietor, you claimed 100% of the businesses taxable income on your personal return.
After, as long as your total personal income (AGI) is less than $315k ($157,500 if you are single), then you will only have to claim 80% of your businesses taxable income. If your income is above the $315k or $157,500, there are lots of tests you have to go through to see if you get the 20% deduction, a portion of it, or nothing at all.
This is a “YUGE” tax savings for small business owners! You don’t have to do anything differently, you are just going to get a 20% reduction of your businesses taxable income.
Before, the NOL, which means “net operating loss”, happens when your taxable losses are more than your taxable income. You could carry these NOLs back 2 years and forward 20 years to offset taxable income in those years.
After, for NOLs that happen after 2017, you will only be able to use your NOL up to 80% of your taxable income. The rest will be carried forward forever or until used.
Sometimes an example helps.
Lets say in 2016 I ended up with an NOL of $15k. That means in 2017, I could have 15k of taxable income and not pay any tax on it because I can use my $15k NOL from 2016 to offset the 2017 income. But with the new change, if in 2018 I have an NOL of $15k, and in 2019 I have $15k of taxable income, I can only use $12k (80% of my 2018 NOL) to offset the $15k of my 2019s taxable income.
Our next post will go over changes that affect vehicle purchases and other asset purchases.