Trump’s new tax reform plan officially called the Tax Cut and Job Act (TCJA) included a series of changes that will affect the federal tax returns of 2018 for many small and medium-sized business owners.
The new tax code gets underway new deductions and credits that will influence distinctively the tax commitment of every small organization. Also, the most significant thing is that those changes have just started. The Internal Revenue Service (IRS) is reminding entrepreneurs that the tax change impacts practically all organizations.
Remembering this, every industry will be affected by the changes in Trump’s tax law in an alternate manner. Some of these tax changes could affect your small business by increasing your tax burden:
Negative tax break/deductions
These changes generally also apply to all businesses i.e. C-corporations, S-corporations, partnerships, LLCs, and personal service corporations (PSCs):
1. A new cancellation of deductions for net interest expenses in excess of 30% of the income subject to adjusted taxes of the company (exceptions apply).
2. New limits on deductions for net operating losses (NOLs).
3. Elimination of the deduction from Section for the manufacturers.
4. A new rule that limits Like-kind exchanges to real property that is not maintained primarily for sale.
5. New limitations on deductions for certain supplemental benefits for employees, such as entertainment, meals, and transportation.
Here are these changes discussed that could affect the final outcome of many small businesses:
1. Deduction reduced for Business Interests
The new law changed tax rates and brackets, eliminated personal exemptions, expanded the standard deduction, reviewed the cost of business expense deductions, and constrained or ended certain deductions. Deduction for business interest was significantly reduced to 30% in the Donald Trump tax plan, which could increase the taxes of small business owners over previous years.
This will affect the manner in which private or small businesses to file your taxes this season. You can now just deduct a premium cost of interest expense up to 30% of your organization’s EBITDA (earnings before interest, taxes, depreciation, and amortization).
If your private company has normal yearly gross receipts of $25 million or less in recent years, you’re fortunate because it excludes your organization from this rule.
2. Net Operating Loss
TCJA also limits the amount of net operating loss (NOL). Most taxpayers never again have the alternative to transport an NOL. They can just exchange NOLs that emerge in tax year finishing after 2017.
This change is effective for losses that arise in taxable years after 2017, the new law limits the deduction of NOL that can be used in a taxable year to 80% of taxable income. Change to the extension rules will affect them first in different fiscal years. Taxpayers will now have to track the NOLs that emerged before 2018 separately from the newly generated NOLs after 2017.
3. Section 199 for Manufacturers
This was one of the biggest gaps cited by criticizers of the previous tax code. In Section 199 of Trump’s new tax plan eliminated a deduction commonly claimed by manufacturing companies. Manufacturers can never again claim this advantage since it was revoked on this tax reform bill.
It enabled entrepreneurs to make a 9% deduction on income from qualified production actions, planning to empower domestic manufacturing in the United States.
4. Like-kind Exchanges to Real Property
The TCJA made changes to the tax law that will affect practically all companies after 2018. Change in the new law permits similar treatment for certain exchanges of individual or immaterial property.
Trades of personal or immaterial property, for example, equipment, vehicles, machinery, fine arts, collector’s things, copyrights, and other protected innovations don’t fit the bill for the exchanges of Like-kind. It just applies to the exchange of land used for investment, trades, or for business.
If the taxpayer disposed of or received a replacement of personal or intangible property before 2017, the exchange may qualify for a Like-kind action.
5. Deduction for Expenses on Entertainment, meals, and transportation to employees
Before the TCJA, business owners could deduct up to 50% of the expenses they had paid for entertainment related to the business. The new tax plan eliminates deductions for entertainment expenses overall.
Sadly, that implies that many entrepreneurs should make good on regulatory expenses on things like clerks and meals with customers. Or drop them off their business plans strategies totally.
Another employee benefit that used to be deductible was meals to employees. In that circumstance when you feed your staff in the business premises, that foods are now only 50% deductible that was previously 100% deductible under the previous tax law. By 2025, it won’t be deductible by any stretch of the imagination.
This is straightforward and the one that many entrepreneurs will miss. Under the new expense plan, entrepreneurs can never again deduct the expense of giving worker public transport, bicycle travel, and parking repayments.
To handle all these problems, you have to consult a Tax Advisor or hire a professional Accounting Firm. Which can be your tax ally to handle all these cumbersome tasks and make your small business more productive.