As you may have heard, the 2017 Tax Cuts and Jobs Act is the biggest change to tax laws in 31 years. Big business is thrilled to see their corporate tax rate cut for 2018.
But what about small business owners? What does the new tax reform bill do for you?
There are many changes, and some of those changes are still being studied by accountants and the IRS alike, so it’s impossible to detail them all here. But we can give you 5 big wins for small business owners right now, right here:
#1: Most Small Businesses Can Now Enjoy a 20% Business Income Deduction
The new tax reform bill gave a big tax cut to C corporations. Most large companies, like those listed on the stock exchanges, are C corporations. And they saw their tax rate drop from 35% to 21%.
But most small businesses don’t structure themselves as a C corporation. If you are a small business, you are more likely to be a Sole Proprietor, an S corporation, a Partnership, or a hybrid like an LLC.
Congress didn’t want to leave small businesses out in the cold without a tax break, but they couldn’t simply lower the tax rate either. That’s because Sole Proprietors and S corps and so on are pass-through-entities.
Pass-through-entities don’t pay taxes themselves. Instead, as the business owner, you pay your business taxes on your personal tax return at the same individual rates as everyone else.
So to give small businesses a tax cut, Congress had to come up with a new tax deduction: the 20% Qualified Business Income Deduction.
If your taxable income is less than $157,500 for individuals, or $315,000 for married taxpayers filing jointly, then your deduction is generally 20% of the net income of your business.
So if your business’ taxable income was $100,000, then after the 20% deduction, you only have to pay taxes on $80,000.
If your taxable income is higher than these threshold amounts, then you still get a deduction but limitations and exceptions apply based on your occupation and wages. Talk to your accountant for more information specific to your situation.
#2: Limited Opportunity to Pass More Wealth Tax-Free to the Next Generation
At Wealth Factory we spend a lot of time and energy focusing on living and leaving a legacy.
Estate planning is a big piece of the legacy you’ll leave. And the Estate Tax can play a big role in that.
To review, the estate tax applies when a deceased person’s estate is transferred to new owners and the estate is worth more than a certain exclusion amount.
That exclusion amount is constantly changing: it was $675,000 in 2000, it was $5.49 million in 2017, and there was no exclusion amount in 2010 when the estate tax briefly expired.
The new tax reform bill doubles the exclusion amount in 2018 to $11.9 million for individuals or $22.36 million for married couples. This means many more small business owners, whose estate is valued under those exclusion amounts, will be able to pass on their businesses and financial legacy tax free — at least for a while.
The estate tax exclusion amount is set to return to $5 million in 2026 unless Congress intervenes first.
Under the tax reform bill, the annual Gift Tax exclusion amount also increased to $15,000, allowing you to gift anyone up to that amount once per year without triggering any taxes.
#3: 100% Bonus Depreciation
Depreciation is a common tax deduction which allows you to write off the gradual wear, tear and obsolescence of certain property. The rules can be quite complicated, with different types of property depreciating on different schedules.
For example, many types of property take 39 years to get the full benefit of depreciation.
Fortunately, in 2002 Congress introduced Bonus Depreciation to speed up the process and get your tax savings faster.
Bonus Depreciation allows you to immediately deduct a large percentage of the depreciation in the first year. Originally you were allowed to deduct 30% of qualifying personal property used for business purposes, like a computer or a car.
In 2015, Congress increased the Bonus Depreciation deduction to 50% in the first year.
Now, the new tax reform bill bumps the deduction to 100% — and it will stay that way until 2023 when the rate slowly ramps down each year to 80%, 60%, 40% and so on.
What types of property qualify?
Personal property used for business purposes that remains useful for 20 years or less does qualify. That includes cars, computers, software, machinery, equipment, office furniture and more.
Real property which is permanently tied to a location, like real estate, does NOT qualify.
Again, it’s best to talk to your accountant or work with our Accredited Network of financial professionals to find out if the Bonus Depreciation strategy will work for you.
#4: Is the Mortgage Interest Deduction Gone?
No, the mortgage interest deduction still exists. But far fewer people will be claiming the deduction on their tax returns.
Deductions can either be itemized individually or you can take the Standard Deduction — which is just a specific dollar amount set by Congress.
Whichever method gives you the larger deduction is what goes on your return.
Well, the tax reform bill nearly doubled the Standard Deduction from $12,700 to $24,000 for married couples filing jointly (and from $6,350 to $12,000 for single filers).
And that means it won’t be worth it for many Americans to itemize their deductions, even with the mortgage interest deduction, because the Standard Deduction will still be higher.
There was one major change to the mortgage interest deduction, however. The deduction is now limited to new mortgages of $750,000 or less — down from $1 million in 2017. Mortgages originating before 2018 of $1 million or less are grandfathered in and keep their mortgage interest deduction.
#5: Retroactive Refunds Are Still In Play
One important tax benefit for business owners, especially for new Wealth Factory members, are retroactive tax refunds.
If you paid taxes in 2017, 2016, 2015 — or possibly even 2014 — you can get a 3-year review of your tax returns to look for missed tax savings.
And if you find that you’re one of the 93% of business owners who paid too much in taxes, you qualify for a retroactive tax refund. Fortunately for you, this law was not changed in the tax reform bill. And it could mean a big refund check for you, just like it did for CJ & Michelle Varney:
“Wealth Factory helped us get a retroactive tax refund of $37,000 and will help us save $23,500 on our tax bill every year going forward. It’s been the greatest investment we have ever made in ourselves. They helped us discover our soul purpose, gain security and peace of mind, and renewed our passion for success. Within the first 8 months we saw 130% growth in our business and for every dollar we have invested into Wealth Factory we have had a 900% return.” ~ CJ & Michelle Varney
What to Do Next
The 2017 Tax Cuts and Jobs Act is a major piece of legislation, and it’ll most likely take years for all the details to get ironed out.
There are even a few mistakes made that will likely need to be fixed — like the “Qualified Improvement Property” deduction that was supposed to move to a new section of the tax code, but instead was accidentally deleted.
In the meantime, here are 3 things you can do right now to take advantage of the new tax bill.
- Talk to your CPA to find out if you qualify for the new 20% Business Income or Bonus Depreciation deductions — or if there’s anything you can do or change in your business to take advantage of the savings.
- If you’re looking for ways to pass your estate on while you’re still alive, take advantage of the increased Gift Tax exclusion that allows you to gift $15,000 per year, per person, without triggering any taxes.
- Want to dial in your taxes to pay the least amount possible — AND possibly even get a retroactive refund from the IRS? Click here to see if our Wealth Factory Services can help you save big on your taxes.
Build the life you love,
The Builders at Wealth Factory