If you file a tax return, you will be affected by the Tax Cuts and Jobs Act of 2017. This major tax reform makes changes across the board, from shaking up the seven individual tax brackets to classifying businesses. Those who will likely be affected most are business owners, since many of the 2018 tax updates change business tax preparation. And many business owners may see real benefits on the horizon.
Business Benefits from the 2018 Tax Updates
USA Today cites four categories of business owners who stand to win big starting on their 2018 tax return (minus service businesses):
- Small business owners who make under $37,500. As noted above, taxes are lowered to 9% on the first $37,500 (single) or $75,000 (married filing jointly) of business income.
- Small business owners who make over $260,000 a year, since the max tax rate becomes effectively lower when 30% of income may be taxed at 25% (lower than current rate).
- Passive investors in small businesses. Passive pass-through income qualifies for the lower 25% rate on the entire 100% of income.
- Companies purchasing expensive equipment. If purchased in the next five years, you can immediately write off 100% of business equipment purchases, rather than the old standard of depreciating over many years. Section 179 also raises direct expenses of capital assets for small businesses from $500,000 to $1 million.
Big businesses stand to benefit the most from the tax reform. The 2018 tax updates cut the tax rate applicable to “C” corporations from 35%to 21%. The alternative minimum tax rate for corporations has also been repealed. Ideas behind the new permanent, flat 21% rate is that it will make corporations more globally competitive while encouraging investment in the economy.
The lower corporate tax rate benefits may trickle down to employees of corporations, as well. In January, Wal-Mart said it would raise its minimum wage to $11/hour. American Airlines, AT&T and Bank of America were among many big businesses that promised employees $1,000 bonuses. Wells Fargo also announced its intention to increase charitable giving by about 40%.
Who Stands to Lose with the Tax Reform?
Although there may be several winners after the 2018 tax updates, there are certainly some people who stand to lose. While pass-through entities like LLCs and S Corps will take advantage of a lower tax rate, pass-through entities categorized as a service business or consultants are explicitly denied the lower rates.
Then there are the layoffs. Ironically, many of the big businesses that initially announced bonuses, crediting the Tax Cuts and Jobs Act, later announced layoffs. Employees at startup and tech companies may no longer reap the benefits of stock options, either. Stock options will now be taxed when vested instead of when sold.
At the broad macro level, the 2018 tax updates essentially benefit everyone, since as Forbes.com puts it, “a rising tide floats all boats.” However there are many businesses and individuals that may feel a strain. It will be important now more than ever to plan ahead for tax preparation. To benefit from the business tax changes and make the most of your tax return, enlist Stableford Capital tax services by calling our main tax line at 480.998.0911.