NOTE: This article is intended to help readers understand the impact of the Tax Cuts and Jobs Act on small businesses in 2018 and does not provide financial advice. For in-depth tax advice, please consult your accountant or financial consultant.
The burden of federal taxes on small businesses is very real. But, it turns out the amount of taxes they owe isn’t as big a drain as the amount of time and money they’re spending just to get their taxes filed. And, to make things more complex, in 2018, small businesses must adapt to an entirely new tax code.
Failing to streamline and automate financial processes as you plan for 2018 taxes will position you to be among the 2 in 3 small businesses that are paying more than $1,000 per year to file their taxes.
One in 3 small businesses is actually paying over $5,000 per year to file taxes.
However, there are some steps you can take to spend less time and money on tax planning, allowing you to shift those resources to other areas for business growth in 2018.
In this article, we’ll take a look at the TCJA and how it will impact your small business. Then, we’ll give you some tips on how you can prepare to file federal taxes in 2018 in light of the changes introduced by the TCJA.
What is the new Tax Cuts and Jobs Act?
The Tax Cuts and Jobs Act (TCJA), enacted on December 22, 2017, is the largest piece of tax reform legislation passed in the U.S. in more than three decades. Its impact on small business tax planning in 2018 is slated to be huge, giving it the potential to affect growth, hiring, and financial strategies.
Just as the name suggests, the objective of the Tax Cuts and Jobs Act is to reduce taxes in order to create more business growth, which should in turn result in more hiring. To facilitate these tax cuts, the act has amended the Internal Revenue Code (IRC) to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.
Key tax changes
Here’s a brief summary of some of the key tax changes cited in the TCJA:
- Overall reduction in tax rates for businesses and individuals.
- Simplification of the current tax structure by increasing the standard deduction and family tax credits, removing personal exemptions, and making itemized deductions less incentivized.
- A cap on the number of deductions for state and local income taxes (SALT) and property taxes.
- Limit on interest deduction for mortgages.
- Repeal of the alternative minimum tax for corporations and a reduction for individuals.
- Removal of the individual mandate from the Affordable Care Act (ACA).
How will the Tax Cuts and Jobs Act impact small businesses?
The “Subtitle CーSmall Business Reforms” section of the TCJA focuses on the key components that will impact small businesses.
So far, there have been mixed reactions. Some industry analysts say the act favors tax breaks for individuals and corporations with higher net worth, while organizations such as the National Federation of Independent Business (NFIB) and the U.S. Small Business Administration (SBA) have pointed to the small businesses benefits of lower tax rates and a simpler tax code.
Regardless of the varying opinions about who benefits most from the TCJA, there is no question that corporations (aka “C-corps”), pass-through entities (aka “S-corps”), and individuals will be impacted in 2018.
Reduced expense and capital management cost
Previously, small businesses deducted depreciation on capital such as equipment, spreading it out over several years. Now, small businesses can reduce the cost of new equipment by deducting the entire amount of the cost of the equipment in the first year they purchase it.
Small businesses will then have more to invest in long term goals, since they can claim more expenses.
In the previous system, interest was considered a business expense. However, under the new tax act, net interest deduction is limited to 30 percent of EBITDA for up to four years, which was previously unrestricted on 12-month reporting of EBITDA.
Many industry analysts feel that the capping of interest that can be deducted will make it more difficult to borrow money, which could make it tougher for businesses to make large purchases.
However, on a significant note for small businesses, taxpayers that have an average annual gross receipts of $25 million or less based on the previous three tax years are exempt from the interest deduction, excluding tax shelters.
No big tax breaks for S-corps
Pass-through organizations such as S-corporations are not getting a bit tax cut compared to C-corps, despite the fact that small businesses account for approximately half of the GDP and private sector workforce.
Analysts argue that the tax breaks favor C-corps, because the TCJA repeals progressive taxation for C-corps which were initially taxed based on income level at a rate ranging from 15 to 39 percent.
Under the TJCA, all C-corps will pay one tax rate of 21 percent on any income level, and in certain circumstances, shareholders can avoid double taxation. In comparison, S-corps will continue to pay the individual tax rate, minus a 20 percent deduction.
These changes could affect the tax planning strategies of small business, which may be able to adjust their status for increased tax benefit. (Check out Tip #2 in the next section.)
3 tips to plan for your 2018 taxes now
Despite the mixed reactions among analysts, the most important thing to keep in mind right now is that this bill has passed, and it will affect your 2018 taxes.
Here are three things you can do now to prepare for tax planning in 2018:
Tip #1: Automate your tax filing with accounting/tax software
If your small business is still not using accounting software, it’s time to make that shift. Accounting and tax management tools offer specialized modules to help you file federal taxes by calculating things such as the correct deduction amount based on the tax range your business falls in.
In addition, many accounting tools can help you calculate your tax returns, whether you own a business, are self-employed, or work as an independent contractor. To find the right accounting or tax software for your business, checkout GetApp’s checklist for choosing an accounting solution.
Note: Be sure you’ve upgraded to the latest version of your existing software to reflect the changes made by the TCJA.
Failing to automate your tax filing based on the new tax regulations means you could incur higher administrative expenses on filing your taxes than the actual amount of taxes owed.
Tip #2: Consider the benefits of adjusting your tax filing status as a C-corp
With the lower tax rate of 21 percent for C-corps, small businesses must consider whether it’s still beneficial to file as a pass-through entity. In light of the recent changes, many pass-through entities might consider incorporating their businesses as C-corps.
You may consider filing as a C-corp to reduce your small business tax burden if you are a pass-through business with a taxable income above the threshold amount ($157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly) and are a service-based business.
Failing to incorporate your small business as a C-corp for 2018 (based on the criteria mentioned above) could mean paying a higher tax rate.
Tip #3: Ensure you file the right tax forms
The Internal Revenue Services (IRS) lists a variety of tax forms that small businesses need to be aware of. You must choose the right tax forms based on your role as an independent contractor, self-employed individual, sole proprietor, etc.
Failing to file the right tax forms with the changes in tax brackets and parameters mentioned above (EBITDA and depreciation on capital) could lead to an audit of your tax filing, which is costly.
Prepare for 2018 taxes with the right tools
Tax regulations have a tendency to change over a short period of time; however, with the TCJA being the biggest major tax overhaul in three decades, it’s more important now than ever to examine your tax plan and strategies to maximize the income for your business.
Start by getting your financial reporting automated and under control by shifting from manual accounting methods to accounting or tax management software. Check out these GetApp resources for help selecting the best platform for your business:
- Read reviews, view screenshots, and learn more about the features of accounting and financial management software on GetApp’s directory page.
- Select from the top-rated accounting software featured in GetApp’s Accounting Software Category Leaders.
- Having trouble narrowing down the options? Check out GetApp’s accounting software scorecard to choose accounting software based on your individual requirements.