Minding Your Own (Small) Business: How the New Tax Plan Affects You

Though the new tax plan certainly means changes for individual Americans, small business owners can also expect to see notable differences in their company’s taxes in the coming years.
Updated January 19, 2023
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Americans rang in this new year with more than just champagne and another list of resolutions - 2018 also ushered in the Tax Cuts and Job Act, more popularly known as the Trump Tax Plan. And though the new tax plan certainly means changes for individual Americans, small business owners can also expect to see notable differences in their company’s taxes in the coming years. Just as one man’s garbage is another’s man cool monkey lamp, what may be great for some business owners may mean more headaches for others. Even so, it’s better to know now so you are prepared. So here’s the skinny:

That Whole 21% Deal

One of the most talked about tax cuts in the Trump Plan is the new corporate tax rate, which is going from a sliding scale of 15-35% to a flat “across the board” 21% rate. While some C-Corp small businesses may exist, this particular tax benefit will be mostly for the Fortune 500 companies.

Personal service corporations (PSC) will also benefit from the new tax rate - think the accounting, consulting, health, engineering, and performing arts fields. This is where small business owners can get some relief, especially since the next business-related tax cut excludes many of the PSC-related professions.

The Big Deal for Small Business

LLCs were not forgotten in the new tax plan; qualifying “pass-through” businesses registered as an LLC or S-Corp can take advantage of a 20% tax deduction on their business’s income. This means if your company brings in $100,00 annually, you will now only be taxed on $80,000. Seems almost too good to be true? Although not a unicorn, the pass-through deduction has a few stipulations:

  1. For business owners with taxable income under $157,500 single and $315,000 joint

  2. Businesses that bring in revenue from professional services (medical, law, accounting, consulting fields) are excluded.

Other than the obvious 20% deduction benefit, this break comes with a few extra perks:

  1. The deduction does not lower the company’s adjusted gross income (AGI)

  2. Business owners do not have to itemize on their taxes in order to get the 20%.

The deduction will automatically be applied to either your business’s annual income or the taxable income without capital gains, whichever is lower. And you are still in the clear for getting the deduction even if you are a sole proprietorship - as long as your profits do not come from offering a professional service.

Get All the Stuff

Another noticeable change from the Trump Tax Plan is how much businesses can now deduct for their equipment purchases. In the past, the tax benefit for any company investing in equipment came in stages, with the business owner only being able to write off 50% during the first year. Additionally, said equipment had to be brand new. But now, businesses are able to claim 100% of the cost of any equipment purchased during the year - so the same year you buy a $5,000 car for your business, you can also claim the total cost on your taxes. And even better, the equipment no longer has to be new, so business owners have more options when it comes to buying the necessary equipment to grow their business.

Extra perks for this bonus include:

  1. Covers all equipment still in use.

  2. Covers old and used equipment as well as qualifying property purchases.

  3. The equipment purchase cap was raised from $510,000 to $1,000,000.

  4. Businesses are allowed to take the deduction at 100% for five years. After 2022, the deduction drops by 20% each year.

  5. Any equipment purchased after September 2017 is eligible for this year.

Who Wants a Different Accounting Method?

The new tax plan, in addition to offering tax breaks, is also giving businesses a break with which accounting methods can be used. Especially helpful for manufacturers and companies that carry inventories, the Trump Plan lets businesses switch to the cash accounting method instead of the accrual method. While both methods have their own benefits, the cash method allows business owners to record revenue as soon as the money is received. Additionally, businesses can record their expenses immediately after paying vendors/suppliers and employees.

Where does this save the company? Perhaps the savings have less to do with dollar signs and more to do with the clock. The benefit for any business (especially small business) that has an inventory to deal with is in the time saved by using the cash method. There is certainly less double work involved. The revenue threshold went from $5 million to $25 million, so more manufacturing companies are able to take advantage of this option.

The Family Leave Credit

Another aid for business owners, both large and small is the tax credit for any family/medical leave wages paid from 2017 - 2019. Business owners can get anywhere from 12.5% to 25% tax relief.

The Deduction Stops Here

With all of the new incentives being released by the Tax Cut and Jobs Act, there are also a few current deductions that have been reduced or eliminated altogether. Among the changes that might be good news for some business owners are a cap on the business interest deduction and the elimination of entertainment, transportation, and employee meal deductions.

Under the previous tax plan, business owners were able to write off the interest on their business loans as a business-related expense. The new plan puts a 30% ceiling on how much interest can be claimed. Those most affected by this adjustment are C-Corps and business that carry a substantial amount of debt. The silver lining here is that any company with less than $25 million in average gross receipts each year is exempt.

No longer being able to claim entertainment expenses may affect some business more than others, especially client services companies. They can still wine and dine, but those dinners can no longer be written off at the end of the year. The same almost goes for employee meals - the tax deduction has been reduced from 100% to 50% for the next seven years. However, after 2025, this deduction will no longer be available for businesses.

The loss of the transportation tax deduction may be something that most businesses can commiserate over. Businesses can no longer write off the cost of employee parking or public transportation and bike commute reimbursements.

The Bottom Line

While most small businesses seemingly stand to gain more than they will lose, all business owners are assured to see noticeable changes over the next few years. While the debate is still up in the air about whether those changes will translate to more revenue for small businesses, Washington has already cast its votes. Hopefully, it’s a win for business owners as well.

Note: If you have any concerns about whether you might miss something when checking your records and doing your taxes, you may consider using a professional service like 1-800-Accountants to handle all of the tedious tax issues for you. They stay up-to-date on all of the current tax laws and will help you and your business remain fully compliant throughout the year.

Originally published on November 18, 2022, and last edited on January 19, 2023.

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