Despite the controversies over the new Tax Cuts and Jobs Act passed by U.S. Congress back in December, small business owners are looking at it from a slightly different perspective. While it's certainly not perfect, those of you who own a small business might find a few things to cheer about. On the other hand, it has other aspects you might not like.
Things like the Section 179 deduction, pass through expenses, and a more attractive reduction of taxable business income are just some things to keep in mind when filing your taxes.
Let's take a look at the pros and cons of these details in the tax plan and see how they can help your small business this year.
Pro: The 20% Reduction
No doubt you rejoiced when you found out you'll be able to get a 20% blanket reduction of taxable business income. It gives a little bit of reality that small businesses are going to benefit just as much as the big corporations are.
In the original bill, the intention was to extend this same reduction rate to sole proprietors, S-corporations, LLCs, and partnerships. Still, small businesses like yours certainly need this boost. You've likely felt you've been on the short end of the tax stick for far too long.
The reduction finally gives you some room to get ahead of all your global competitors you know you can't compete with financially.
With your tax savings, you can probably hire new employees, purchase new inventory, reduce debt, and expand your workspace.
Con: Income Thresholds
Some small businesses go beyond the income thresholds outlined in the new tax plan, so they'll be shut out of the benefits. Also, small accounting, law, or consulting firms can't take advantage.
While these limitations aren't in most cases, hopefully you've opened a modest small business with your own branded products. You'll most likely fit into the income bracket easily if so.
It's not to say many small businesses aren't probably confused about how the tax law affects them. To date, IRS has yet to write up regulations on what small business owners can do to make the most of the law.
Pro: Section 179 Deduction
One of the big pros to the bill is the ability to take larger equipment deductions on Section 179. Now you can deduct all equipment up to $1 million after being at $500,000 for years.
This is a big deal for small business owners like you who increasingly need equipment and vehicles to stay competitive. You may still need better computers or business cars just to keep up with local competitors alone. Plus, other office supplies help keep your employees working more efficiently. Some of this might include newer apps, and updated mobile devices if you're developing a BYOD policy.
Particularly with business cars, the expansion means you no longer have to waver buying a car out of financial fear.
Con: The Pass-Through Deduction is Only Temporary
Those of you who own pass-through businesses (where profits pass to owners), might gain some immediate advantages in enjoying a 20% deduction. However, they won't last forever. This is where the real con of the bill lies.
These are going to expire in 2025, where the corporate tax cuts stay permanent.
Of course, this creates a lot of debate about who really benefits in the new tax laws.
Whether you think it truly aids the wealthy over small business owners like you all comes down to who you read.
USA Today notes a number of small business losers on the pass-through deduction, notably professional service businesses and above-mentioned consultants.
Contact us at Sean Hugo, CPA so we can help you sort through what's possible for your business throughout 2018.