At the end of 2017 when the 2018 Tax Cuts and Job Act (TCJA) passes, it effectively begins the most sweeping overhaul of the U.S. tax system in 30 years. Some of the clear winners are American businesses. For instance, the TCJA lowers the tax rate for C-corporations, meaning companies that are taxed separately from the owners, from 35% to 21%. However, what do the new tax cuts mean for the 90% of registered businesses that have one or two owners and a few employees? Will the new TCJA benefit your small business?
What is the Biggest Tax Benefit for Smaller Companies?
The new TCJA offers a 20% reduction of taxable income for pass-through businesses. These are companies where owners claim their business income on their tax returns rather than corporate filings. Exclusions and thresholds to the law may prevent you from using it. Some job classifications (like doctors, lawyers, athletes, artists and financial service providers) have restrictions. A certified public accountant (CPA) or tax lawyer can determine whether your business qualifies.
What are the Types of Pass-Through Businesses?
- Sole Proprietorship – This is an unincorporated business owned by one person and is not considered a legal entity. Income and losses are handled through the owner’s tax filing.
- Limited Liability Corporations (LLCs) – The IRS considers this a legal entity. Many individuals form these to protect their personal assets from business losses or liability. Regulations vary by state.
- S-Corporations – The company shares profits and losses, with up to 100 shareholders. The shareholders get taxed on their returns.
- Partnerships – Formed between two or more people who share the profit and liability of a corporation. There are three basic types – general, limited liability and limited partnerships.
With the New Corporate Tax Reduction, Should I Incorporate to Save Money?
Depending on the tax entity you choose (sole proprietorship, limited liability corporation (LLCs), S-corporations and partnerships), incorporating can result in lower business taxes than your personal rates. Incorporating may offer more opportunity to obtain third-party funding like loans. If you have a sole proprietorship or are self-employed, forming a business entity can protect your assets, but it will not save you money on your taxes.
How Does the TCJA Affect Employees’ Withholding Taxes?
The new law eliminates the personal exemptions workers list on their W-4 forms. Employees’ wages are now taxed based on where their wages fall in the seven tax withholding brackets. These are the same seven wage groups from 2017 except the TCJA has adjusted the tax percentage on five of these levels.
What Deductions Are Eliminated?
There are changes to a few deductions. If you typically deduct business entertainment expenses, they now only cover meals. Companies can no longer supplement their employees’ transportation expenses and use it as a deduction. Employees can use the cost of commuting as a deduction on their returns.
Dutton Legal Group – Indiana’s Tax Resolution Law Firm
Dutton Legal Group helps the people and businesses of Indiana navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Stop worrying about your company taxes and get back to business. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.