Small business gets last-minute good news in Trump tax overhaul
LOBBYING FOR A CHANGE: Complaints from groups like the National Federation of Independent Business, says Dawn Starns, who heads the Louisiana chapter, resulted in a final bill more friendly to small business. (Photo by Don Kadair)
As they were hashing out their landmark tax bill, congressional Republicans all wanted to slash the nation’s corporate income tax rate. But early on, the House version didn’t include much help for millions of small businesses, says Dawn Starns, who directs the Louisiana chapter of the National Federation of Independent Business.
“It was mostly geared toward corporations,” she says. “We put our foot down and said, ‘No, this is a non-starter for us.’”
But the final version contains a major tax break for “pass-through entities,” so named because the company’s revenue passes through the to the owner, who is taxed at the appropriate individual rate. Partnerships, S corporations, and limited liability companies treated as partnerships for federal tax purposes will get a 20% deduction on qualified business income.
Starns says the bill’s temporary expansion of the Section 179 deduction for new equipment and software from $500,000 to $1 million also will be a boon to small businesses.
“That puts more money in their pocket to hire people, create jobs and expand their business,” she says.
Technically, the United States had a top federal corporate income tax rate of 35%, among the highest in the world, but U.S. corporations didn’t actually pay that much. Once tax breaks were taken into account, the average effective rate for profitable companies with more than $10 million in assets was 22%, according to the U.S. Department of the Treasury. So it remains to be seen whether the new rate of 21% will have much impact, notes Norman Massel, an assistant professor with the accounting department at LSU.
Some corporations paid a nominal rate as low as 15% under the old system. But while some small C-corps may now face a higher rate than before, says Kathryn Pittman, an associate director with Postlethwaite & Netterville’s tax services group, capital-heavy corporations still can expect to pay less by taking advantage of more generous expensing.
“It really will depend on what type of business you are in and what your assets are,” Pittman says. “On the whole, you would expect businesses that are organized as C-corporations to experience lower tax rates.”
The tax break for S-corps will benefit many of certified financial planner Chad Olivier’s clients, he says. But he’s disappointed the 20% deduction phases out for couples making more than $315,000 a year.
“Looks like they are playing favorites giving this tax deduction to one group or profession and not to another,” Olivier says.
But he’s very intrigued by a provision that provides for 100% expensing of qualifying property acquired and placed in service before Jan. 1, 2023.
“If you’re thinking about expanding your business and buying a lot of equipment, buildings, or a new fleet of vehicles,” Olivier says, “you can write the whole thing off that year and still put it on a payment plan. That’s going to be incredible.”
It might be worthwhile for business owners to sit down with their tax professionals to examine whether their businesses are structured in a way that best utilizes the new system, Pittman adds, although in most cases it’s probably still beneficial for pass-through entities to remain as such.
“Once the dust settles, take a look at your specific tax situation,” Pittman advises.
KEY PROVISIONS OF THE NEW GOP TAX BILL
THAT WILL IMPACT BUSINESSES
Corporate tax rate: Permanently set at 21%, down from a top rate of 35%
Corporate alternative minimum tax: Repealed
Pass-through entities: An individual can deduct 20% of “qualified business income” from a pass-through entity. Does not apply to income deemed to be wages or salary from the business. Once a taxpayer reaches $157,500 in taxable income, or $315,000 for joint filers, service businesses are excluded, and for others deduction is limited to the owner’s share of the greater of 50% of W-2 wages paid to employees of the business or 25% of W-2 wages plus 2.5% of unadjusted basis in certain qualified property. C-corp owners may want to discuss with their legal and tax advisors whether it might be advantageous to convert to an S-corp, partnership or LLC.
Business expensing: Provides for 100% expensing for the current year of qualifying property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023, and expands expensing to used property. Percentage decreases by 20% each year thereafter until reaching zero.
Section 179 expensing: Raises the limit from $500,000 to $1 million and expands the definition of eligible properties. Amount will be indexed to inflation after 2018.
Business loan interest expenses: No longer fully deductible for businesses with more than $25 million in annual revenue. For such businesses, the deduction is limited to the sum of business interest income, 30% of the taxpayer’s adjusted taxable income, and floor plan financing interest for the taxable year.
Meals and entertainment: Repeals the deduction for entertainment and recreation related to a trade or business, although the 50% deduction for business-related meals and beverages (such as meals consumed during work trips) remains.
Net operating losses: Limits this deduction to 80% of taxable income. The two-year “carryback” provision is eliminated, but losses can be carried forward to future years indefinitely.
Cash method of accounting: Expands the list of taxpayers that are eligible to use the cash method of accounting to all those with average annual gross receipts of $25 million or less in the three prior tax years. The threshold will be tied to inflation after 2018.
Automobile depreciation: For passenger automobiles placed in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is now $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years.