On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act bill into law, and taxpayers are still trying to figure out how it might affect them. This is especially true for business owners, as the most dramatic changes under the law are aimed at how businesses are taxed.
We’ve highlighted the most significant changes to business taxation that will likely affect you here, but to clearly understand the law’s full effects and take advantage of the benefits offered, you should contact us as your Creative Business Lawyer®, so we can meet with you and your CPA right away.
Reduced corporate tax rate
The new law sets a flat 21% tax rate for corporations. However, this flat rate only applies to C corporations, and not so-called “pass-through” businesses, which are taxed at the business owner’s individual rate.
Obviously, this would eliminate the competitive benefit of the pass-through status if the individual rates were higher than 21%, so the law was revised to provide a new deduction for pass-through entities, which is covered below.
New Deduction for Pass-Through Businesses
Owners of pass-through businesses—sole proprietorships, partnerships, Limited Liability Companies (LLC), and S corporations—now qualify for a straight 20% deduction on their taxable income. However, this deduction is subject to several restrictions and limitations, so not all pass-through entities will qualify.
For example, the deduction comes with a threshold amount that begins at $157,500 for individual taxpayers and $315,000 for married couples. If your income is above the threshold amount, you are subject to additional limitations and exceptions that are determined by your occupation type as well as wage and capital limits.
These limits and exceptions are extraordinarily complex and vary greatly depending on the type of business you run and where your business income comes from. Given the complexity of this new change, it’s crucial that you meet with us as your Creative Business Lawyer® now to discuss how this deduction affects your unique situation.
Limit corporate AMT
The corporate alternative minimum tax (AMT)—which was aimed at ensuring business owners pay at least some federal income tax—has been completely repealed.
Changes to tax credits & deductions
Under the new law, a company can only deduct interest expense of up to 30% of its earnings before interest, taxes, depreciation, and amortization (EBITDA). Any amount in interest expense beyond that amount is no longer deductible.
In 2022, the deductibility of corporate debt will be capped at 30% of earnings before interest and taxes but after depreciation and amortization expenses.
Enhanced Depreciation
Bonus depreciation has been expanded, and businesses can now deduct 100% of the cost of property acquired after September 27, 2017 and placed in service before December 31, 2022. And for the first time, bonus depreciation also applies to “used” property purchased by a taxpayer, meaning the property no longer needs to be first original use to qualify for bonus depreciation, as long as the property is “new” to the taxpayer.
Because the new law puts in place such sweeping changes, it’s vital that you contact us immediately if you want to ensure your business is structured in the best way possible to take advantage of (or not be negatively impacted by) the new tax laws.
By planning ahead and working with us, we can help you implement tax strategies that could potentially save your business huge amounts of money. Don’t miss out on this opportunity—contact us today!
We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.