Are you self-employed or a small business owner? The sweeping changes ushered in by the Tax Cuts and Jobs Act (TCJA) aren’t just for big corporations. Here’s what you need to know for your 2018 return.
New 20% Business Income Deduction for businesses operated directly or as pass through entities
Many small businesses are operated directly or as pass-through entities (including Sole Proprietorships and LLCs) where the owners pay their business taxes on their personal returns using the regular individual tax brackets. For those who own businesses structured this way, if your taxable income is less than $157,500 for single filers or $315,000 for taxpayers filing jointly you can enjoy a 20% deduction on Qualified Business Income (QBI). For incomes over these thresholds or for certain service business types the deduction may be limited. The IRS proposed regulations clarify these businesses. The specific details are complex, so talk to your tax professional if you have question about your eligibility.
100% Depreciation of qualifying assets
The TCJA increased the allowable first year depreciation deduction for qualified property from 50% to 100%. The full cost of the eligible property can be deducted the year it is placed in service through 2022. It will be phased out by 20% a year through 2026. Qualified property must be acquired after Sept. 27, 2017 and includes depreciable business assets with a recovery period of 20 years or less (such as machinery, computers, appliances, and furniture) and certain other property.
Increased depreciation deduction for business vehicles and additional first year bonus
Small business owners will notice a significant increase in depreciation allowances for passenger and heavy vehicles going forward. A vehicle acquired in 2018 and used solely for business may qualify for up to $10,000 in regular depreciation and $8,000 in first year bonus depreciation. Vehicles you already own do not fall under the new rules.
Entertainment expenses are no longer deductible
You might not have a team of salesmen schmoozing clients on your dime, but even smaller expenses are no longer fully deductible. Event tickets, membership to social clubs, and rounds of golf are no longer deductible at all, while meals with clients (when purchased separately from any entertainment) or pizza day at the office are reduced to 50% deductible. Office holiday parties remain fully deductible.
Lower individual tax rates
Because these pass-through entities are taxed on the owners’ personal return, they are subject to the new lower individual tax brackets, after the business income deduction.
You can view the IRS summary of these changes at IRS.gov.
If you’re already a small business client of Bacon & Gendreau you’re in good hands! Call our office or email your tax professional if you have questions specific to your business. If you handle your own books and are feeling a little overwhelmed by the changes, give us a call to talk about how our bookkeeping and financial services can make the 2018 tax season no sweat.