Recently, Congress voted to pass the Tax Cut and Job Act, representing the most significant tax overhaul in nearly 30 years. The provision promises to give U.S. small businesses much-needed relief with a tax cut boost and expanded deductions. It also helps smaller companies to better compete against big businesses, who currently face lower tax burdens than most small businesses. As a small business owner, here’s how it will impact you specifically (this is an initial review as experts are just digging into the details of the new regulations):
The 20 percent deduction for pass-through businesses.
Tax deductions may lower your business’s taxable income. Under this new plan, business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship may be taxed at individual tax rates less a deduction of up to 20% to bring the rate lower. So, if your annual business income is $200,000 per year, the IRS would only tax you on $160,000 of it. Pass-through entities include:
- Sole proprietorships
How it impacts you
We speak to business owners every day about their cash flow gaps. They come to us to help them fund emergency repairs, take advantage of growth opportunities and flash deals on inventory, equipment upgrades and more. Without that extra cash flow, small business owners risk missing business growth opportunities. The bottom line: this reduction will essentially give small business owners like you some much-needed wiggle room. And if the time is right, the opportunity to reinvest that saved money back into the business in the following ways:
- Buying or upgrading new equipment
- Hiring new workers
- Expanding operations and more
Equipment Purchase and Real Estate Changes
The new act increased the maximum amount a taxpayer may expense from the previous amount: $500,000 to $1,000,000 for 2018 and beyond. The limit on equipment purchases has also increased, from $2 million to $2.5 million. The act also expanded the definition of qualified real property eligible for Sec. 179 expensing to include the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
How it impacts you
Almost anything you buy for your business operations can be deducted as an expense on your business tax return. Now, this includes improvements and upgrades to business, which is beneficial to the owner looking to invest in their business. If your company buys or leases a piece of qualifying equipment, you may deduct the full purchase price from your gross income.
Not sure what equipment qualifies? Check here. For more information on how to depreciate (or deduct) property, check out this guide.
While your budget strategy for 2018 may already be in place, there is an opportunity to reinvest the money you will save the tax act into your businesses. And as small business advocates, we are here if you need any information about how you can invest in upgrades or new equipment with our funding.