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As you’ve undoubtedly heard by now, taxes for millions of Americans, and their businesses, will be changing for the 2018 tax season. Regardless your feelings about the new tax bill, or your political leanings, it is important to understand how the new tax structure could affect your business, and what you can do to prepare.
Although final regulations and guidance from the Internal Revenue Service (“IRS) remain forthcoming, certain aspects of the new tax law are clear. While this post will discuss these changes and how they may generally impact business owners both small and large, this should not be construed as tax advice. Every business owner will need to consult with their personal accountant to determine precisely how these changes are likely to impact them.
The Changes for University Place Corporate Owners
Businesses can take many forms, but the primary structure for many small businesses owners is a corporation. Unlike some other business forms, C corporations must pay taxes on their earnings, rather than passing through those profits to a business owner.
Prior to the new tax law, corporations paid a tax rate of 35 percent. They were also often required to pay taxes on money made both in the United States and overseas, if United States companies. Beginning in 2018, this corporate tax rate is being lowered to 21 percent of corporate income.
Additionally, corporations will be taxed under a “territorial” structure, which means they are only required to pay US taxes on income earned within the United States. The new tax bill does impose a one time “repatriation” tax on profits and earnings held overseas, which should be carefully evaluated by those companies that work abroad.
Corporations will also benefit from some other forms of tax benefits. For example, many corporations that might previously have had low tax liability had to calculate an additional corporate alternative minimum tax, and to pay this alternative tax if it was higher. Under the new 2018 tax structures, this alternative minimum tax has been eliminated, so corporations no longer have to worry about it in their tax planning.
If your business is considering some larger asset purchases in the coming years, you will also be happy to know that the new tax changes allow for you to make significantly higher claims for asset depreciation deductions.
For example, greater amounts of depreciation on property purchased on behalf of a business can now be made, and businesses may also make greater claims for depreciation deductions for vehicles purchased for their businesses.
A qualified accountant or CPA will be able to help you review how these changes may impact your business growth strategies through 2018 and in the coming years, particularly for those businesses that are considering expansion into new locations, or even abroad.
Important Changes for Pass Through Business Entities
Many business structures outside of the C corporation handle taxes much differently. Their profits are not taxed at the corporate level, but instead earnings pass through to the business owners and are taxed at the individual owner’s tax rate.
This is the case with S corporations, sole proprietorships, LLCs, and other corporate forms that are traditionally known as “pass through entities.” Pass through entities account for the majority of business forms in the United States and are particularly popular with small business owners who do not want to deal with the additional complexities of C corporations.
Pass through entities also include many individuals who provide specialized services, such as accountants, lawyers, and doctors. For those pass through entities that have significant income, this often meant taxation at one of the higher personal income tax rates.
Under the 2018 tax changes, many business owners using pass through entity structures will be able to claim a new 20 percent deduction on their income before it is taxed. This means that they get to “shave” 20 percent off of their business income, thereby reducing their overall tax liability.
There are important caveats to this deduction, however, which may have some small business owners evaluating their corporate structures. In certain circumstances, it is possible that business owners may pay more in taxes as pass through entities rather than C corporations, in light of the drastic reduction in the C corporation tax rate.
The qualifications and limitations of the pass through entity deduction are too lengthy to explain here. Therefore, those business owners with questions about this tax change and how it may impact them are advised to speak with their local tax professional.
Raising the Bar on Small Businesses
Finally, both the tax code and the government provide numerous incentives to businesses that qualify as “small businesses” in the United States, in order to promote entrepreneurship and small business growth.
Under the new 2018 tax changes, the income threshold for a business to qualify as a “small business” will rise from ten million dollars in gross receipts to twenty-five million, meaning that more businesses will now qualify for these types of incentives.
Washington Attorneys Helping You Evaluate Your Business Strategies in Light of These Changes
Despite the recent efforts to simplify the tax code through the passage of a new tax law, evaluating the tax impacts of different business decisions remains a complicated and difficult endeavor, especially because the 2018 tax changes are so new.
While a tax attorney or accountant can walk you through the specifics of how the tax changes may affect you, an experienced business attorney can help you weigh the impacts of these changes against your current corporate organizational structure – and consider whether it is time to alter your business strategy.
While taxes are important, they are not the only thing to consider when deciding how to best encourage your business growth. At Blado Kiger Bolan, PS, our business law attorneys believe in considering the entire picture, and carefully evaluating the pros and cons of all competing options.
Our goal is to create the company that works best for you. To talk with a knowledgeable lawyer about your options, contact us online or at 253-272-2997.