How the Tax Reform Has Affected Small Business Accounting

The Tax Cuts and Jobs Act is the first significant tax reform in over thirty years, and it affects everyone. Business owners, freelancers, employees, and individual taxpayers all need to learn the ropes on the new rules to keep ahead of the curve. The new tax code is intended to provide benefits for middle-income households and small business owners. While only time will tell how it will affect the market in the long run, we’ve learned a few things since the new tax law was passed.

Lower Tax Rates

Pass-through entities, such as limited liability companies and partnerships, no longer have the same tax rate as individuals. Instead, the new tax laws give these entities a 20 percent deduction. Exceptions for taxable income levels start at $157,500 for individual filers and $315,000 for joint filers. Anyone who is under those income levels is able to take the deduction.

Employee Benefits

Tax laws do not support employee benefits as much as they did before the change. Deductibles for fringe benefits such as parking spots are no longer 100 percent deductible, and the act completely removed the transportation benefit for public transit passes. Having onsite eating facilities is now 50 percent deductible instead of 100 percent.

Employee Pay

This depends a bit on the company management, but the options for giving employees bigger bonuses, more frequent bonuses, and increased pay are now much more feasible. Companies such as Fifth Third Bank and BB&T have stated that they are both providing one-time bonuses and increasing their minimum hourly wage.

Entertainment Deductions

Starting in 2018, deductions for entertainment expenses are gone for everyone from sole proprietors to C corporations. While not many companies were buying company skyboxes, they did purchase less extravagant entertainment — such as membership dues to clubs or social events; any activity considered entertainment, amusement, or recreation; and facilities to use for any of these purposes — that are no longer itemizable. Even meals are excluded now.

Net Operating Losses

Net operating losses occur when your deductions for the year are greater than your income. Years when this happens are called NOL years. Before, small businesses were able to deduct such losses from their income on another year.. Generally, it meant that if you made money, you paid taxes; and if you did not make any money, you could have some tax relief.

Before, you were able to carry your losses two years back and up to 20 years forward. After the tax reform, business are no longer able to use them retroactively. However, the bill has waived the 20-year limit, and you can deduct as much as 80 percent of your applicable taxable income.

New Opportunities

The new tax reform plan increases the business expensing cap up to $1 million to support companies in increasing their capital investments. Small businesses that are flexible in their planning can take advantage of all the new changes this year, including the ability to immediately deduct the cost of new equipment for a five-year period.

Next Steps

Fully taking advantage of the new tax code changes requires working with someone who knows them inside and out. Count On That can do the legwork to provide you with those benefits. To dodge the new pitfalls this upcoming tax season while making the most of the new code, call us at (206) 734-6080, send an email to [email protected], or use our Contact page to find out how much money you can save.

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