- The Tax Cuts and Jobs Act cuts the corporate tax rate to 21 percent.
- Small and midsized businesses might be able to take advantage of this tax cut depending on how the business is structured.
- Due to the changes in the tax code, now could be the right time to reinvest in your business.
In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), and it was signed by President Donald Trump, effectively making it a major piece of legislation passed by the Trump administration.
Arguably, the highest-profile update under the TCJA is the corporate tax rate as it’s been cut from 35 percent to 21 percent. However, many small businesses are structured as flow-through entities — sole proprietorships, partnerships and S corporations — and these enterprises are not subject to the corporate income tax. Instead, profits go directly to the owners and are taxed under the individual income tax. So what kind of perks are small businesses getting with these tax plan changes? Well, a 20 percent deduction on qualified business income has been added under the new tax law.
Read on to find out how to file self-employment tax forms.
This change should make small-business owners jump for joy considering that under the old tax plan, income was subject to rates as high as 39.6 percent. The deduction does come with one glaring stipulation: Generally, taxable income must be below $157,500 if you’re single and $315,000 if you’re married and file jointly. If business is booming and a business owner’s taxable income exceeds the thresholds, the deductions might not be applicable.
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Below are details on other tax items that are staying the same or changing under the new plan.
Here’s what’s the same in the tax plan:
- The seven tax brackets are still intact, but the new brackets are generally broader.
- Deductions for charitable contributions and student loan interest are in place.
- Health savings account (HSA) and individual retirement account (IRA) deductions remain.
- Educator expense deduction up to $250 per year for K-12 educators for unreimbursed classroom supplies remains.
- Deductions for those who are self-employed — like tax, health insurance and qualified retirement plan contributions — are still there.
Here’s what’s different in the tax plan:
- Tax rates are lowered.
- The corporate tax rate is cut from 35 percent to 21 percent.
- The standard deduction is increased, meaning that a single filer’s deduction jumps from $6,350 to $12,000. For married couples filing jointly, it increases from $12,700 to $24,000.
- Personal exemptions are out. Families with a lot of children are likely to pay higher taxes. The deduction for each person claimed — which was valued at more than $4,000 in 2017, according to CNBC — is out.
- Several itemized deductions are out. Moving expenses (except for active military personnel), tuition and fees and certain alimony payments are no longer permitted deductions.
- Mortgage interest deduction is limited to the first $750,000 of a loan taken out after Dec. 14, 2017. This doesn’t apply to certain current mortgage holders, but interest on home equity loans are no longer deductible.
- Obama-era laws like the penalty on those without health insurance are repealed beginning in 2019.
As a product of the new tax law, taxpayers generally have more money in their wallets.
If good fortune prevails, consumers will hopefully spend it on services or goods at small or midsized businesses, thus allowing owners to reinvest money back into the business by hiring additional staff, adding another location or socking away money.
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With extra money added to these businesses’ bottom line and 100 percent write-offs on new or used equipment, now is the time to reinvest in your business. Purchases of new equipment, new vehicles or new qualifying property since September 2017 are eligible for this write-off, according to Fundera.
This is also an opportune time to use the cash windfall to pay bills in full and on time, which can effectively raise a company’s credit score and position it for more attractive interest rate offers in the future.
Click through to read more about the tax write-offs you don’t know about.
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