As businesses gear up to file their returns for the 2018 tax year, they will feel the full impact of the tax law changes implemented by Congress in December 2017. While the tax bill is projected to be favorable to most businesses, it is important that they pay attention to several key changes that will impact their 2018 returns.
The corporate tax rate for all C-Corporations has been lowered from 35% to 21%.
Additionally, this 21% rate is now a flat tax for C-Corporations. Under the prior tax law, corporate tax rates followed a progressive scheme with rates of 15%, 25%, 34%, and 35% depending on the corporation’s income. Now, however, all corporate income is taxed at 21%. Also, the Alternative Minimum Tax for Corporations has been eliminated.
Pass-through businesses may be able to deduct up to 20% of their pass-through income.
Owners of pass-through businesses such as S-Corporations, Partnerships and Sole Proprietors may be able to deduct up to 20% of the income on their personal returns depending upon the amount of income and nature of the business. For single filers, this 20% deduction is available to those with an income of less than $157,500. For joint filers, the deduction is available to those with an income of less than $315,000. After that, both single and joint filers may still be able to take a partial deduction on income up to $207,500 and $415,000 respectively. After those thresholds, whether a deduction can be taken depends on the type of business the filer owns. Special Service Businesses—businesses whose principal asset is the reputation and/or skill of one or more of its owners or employees (e.g., doctors, lawyers, accountants, etc.)—are completely phased-out of the deduction after the upper income threshold is met. On the other hand, businesses that don’t fall into the category of Special Service Businesses may still be able to take advantage of the deduction.
Certain popular deductions have been eliminated or greatly reduced.
Under the prior tax laws, entertainment expenses were 50% deductible, but the new tax law changes have completely eliminated a deduction for these expenses. Fear not, however, because office holiday parties are still 100% deductible. Additionally, deductions for interest on business loans have been reduced from 100% to 30% of adjusted taxable income.
Changes have been made to deductions for Net Operating Loss.
Previously, a business with Net Operating Loss had the option of choosing whether to apply that deduction retroactively or to reduce any future taxable income for the next 20 years. Now, however, the deduction may only be taken to reduce future taxable income. Moreover, the deduction is limited to reducing a business’ taxable income by 80% in any given year. If, after reduction by 80%, the business has remaining Net Operating Loss, it may be used the following year.
This article was written in collaboration with the Piedmont Tax Clinic in Winston-Salem, North Carolina. The Piedmont Tax Clinic is a nonprofit organization that works with taxpayers to inform them of their current tax situation, educate them regarding compliance moving forward, and consult with them as to how to resolve back tax issues. Piedmont Tax Clinic serves a variety of taxpayers, including, low and middle-income families, small businesses, widows/widowers, divorced taxpayers, multi-state taxpayers, professionals with client tax problems, and nonprofit organizations.