On December 22, 2017, President Trump signed new tax laws. These laws stemmed from the Tax Cuts and Job Act. These new tax laws affect all aspects of the way the tax system works, changing tax deductions, tax exclusions, and even the existing tax brackets. Let’s narrow this discussion to evaluate one aspect of the new tax law – how does this impact small business owners?
There are 30.2 million small businesses in the U.S. as of 2018. The amount of taxes small business owners pay depends on the capacity in which you do business. Small business owners may also have to pay other taxes during this time as well, including federal and state taxes, income taxes, and property taxes.
Business owners, of businesses of all sizes, benefit the most from this decision. How, exactly?
Here are 5 ways the New Tax Laws will Impact Small Business Owners.
1. New Dates for Filing Taxes
In order to talk about how the new tax law will affect your business, you first need to know when your business needs to file their taxes by. The new laws will enact changes to the due dates of your taxes. Depending on your business’ fiscal year, these due dates are subject to change.
Federal income taxes due dates for small businesses of different small business classifications are…
Sole Proprietorship and Single Member LLCs – April 15, 2019
Sole Proprietorships and LLCs will be taxed as individuals, so tax due dates for these small business types are due on the same day as individual taxes as due.
Partnerships and S Corps – March 15, 2019
Because both of these small business classifications deal with partnerships, the partners have to file Schedule K-1 forms in order to include the business’ income on their personal tax returns.
Multi-Member LLCs – March 15, 2019, OR April 15, 2019
As a Multi-Member LLC, you have the option to file as a partnership or as a corporation. Whatever classification your business falls under, be sure you know which date you need to file by.
2. Employees Can No Longer Deduct Personal Expenses at the Same Capacity.
Sometimes you need to get crafty as a small business owner. One of the ways many small business owners make money on the side is by doing some kind of freelance work. If your business is very small, the employees are changing often, or you have several part-time employees that also have other jobs, you may be paying them as a freelancer. Regardless of what the situation is, if you are receiving or giving out 1099 forms, pay attention.
According to the the IRS, a freelancer is someone who does not have taxes automatically taken out of their pay. Before the new tax laws were put in place, freelancers could deduct out-of-pocket personal expenses when tax season came around. However, this no longer as easy as it once was. Let’s break this down.
- Before the New Tax Laws – Freelancers were able to deduct personal expenses on their tax return using a 2106 form.
- After the New Tax Laws – This option has been eliminated. However, there may be a workaround to this depending on which state your business resides in. Do your research before you stop saving all of your expense receipts.
3. 20% Deduction for Pass-Through Income
Pass-through income is any income that is reported on a personal tax return instead of as a business. Pass-through income is only applicable to small businesses that are classified as:
- Sole proprietorships
- S Corps
Because of their size, corporate level taxes are not applied. Therefore, business profit are passed through to the business owners and taxed as personal income. With the new tax laws, business owners get an even bigger break – hooray!
- Before the New Tax Laws – All business profits are taxed as personal income. Business profits received a maximum of a 39.6% deduction.
- After the New Tax Laws – A 20% tax deduction for all small business profits labeled as pass-through income.
4. Writing Off Business Equipment Expenses
As a Small Business owner or Freelancer, you know how much equipment a business needs to function. Business Equipment is a capital asset. A capital asset is any type of business asset that has a useful life of longer than a year. For example, this would cover computers for your office, any software needed to do your job, or a company car.
With the new tax laws, it will be easier to make the decision to invest in larger, more expensive pieces of equipment to help your business function better, fast, and smoother.
- Before the New Tax Laws – When buying business equipment, you couldn’t write off the full amount in any one year. Instead, you had to spread the cost out across multiple years in order to deduct it.
- After the New Tax Laws – Business expenses defined as a “capital expense” can be written off upfront come tax time.
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5. Allowance of the Cash Method of Accounting
The new tax laws will allow more small business to take advantage of the cash method of accounting instead of the accrual method. In the cash method of accounting revenue is recorded as soon as cash is received and records expenses to be recorded as soon as payments are made.
With the new tax laws, the annual revenue amounts increased. This allows more small business owners to take advantage of the cash method of accounting. This mainly impacts small businesses in the manufacturing industry.
- Before the New Tax Laws – Small Businesses with annual revenue of $5 million or less are able to use the Cash Method of accounting.
- After the New Tax Laws – Any small business with annual revenue of $25 million or less is exempt from the requirement to use the accrual method of accounting, allowing them to adopt the cash method of accounting.
If you are a small business owner, make sure you know how the new tax laws will impact you and your business ventures. Overall, small business owners are catching a bit of a break this tax season with the new laws.
If you have extra income this year due to the new tax laws and are looking to grow your business, we would love to talk about how Wise Business Loans can help make your business dreams come true.