Tax reform: Prepare your business for these 4 tax law changes in 2018

Maximizing deductions

There has been quite a bit of press around the Tax Cuts and Jobs Act signed into law in December 2017. Much of the attention has been paid to the effects the provisions have on individuals, but there are some provisions that could affect you as a business owner. Let’s take a look at how you could be affected by the tax reform.

Keep in mind that the changes apply to activity starting in 2018.

 

So when you sit down with your accountant, don’t expect to see any changes to your 2017 return you need to file in April 2018. However, be sure to have a conversation about how the tax reform will affect you and what actions you can take to make the most of the tax law changes.

Tax reform: Prepare for these 4 tax law changes

Here are a handful of items in the Tax Cuts and Jobs Act that could affect your business in 2018:

  1. Capital purchases.

  2. Net operating losses.

  3. Unreimbursed employee expenses.

  4. Business income.

These are just a few of the changes included in the Tax Cuts and Jobs Act. Check the IRS’s Tax Reform site for more information.

1. Capital purchases

You need to purchase equipment for your business. Whether it is something small like a laptop for the office, or something large such as a mechanical press to make parts for your metallic products, you need these items to keep your business running. These types of deductions are referred to as Section 179 deductions, and under the new law, the deduction limit is increased to $1 million for 2018 and future years, with the limit of equipment purchases upped to $2.5 million.

This means that you can buy as much as $2.5 million in equipment, and take up to $1 million in depreciation for the equipment in the year you purchased it.

In addition, you can also take some bonus depreciation on new purchases that occurred between Sept. 27, 2017, and the end of 2022.

Bonus depreciation allows you to take an additional deduction of 50 percent of the cost of the equipment purchased in the year purchased.

 

Keep in mind that this is only for new equipment. It does not include buildings, which are depreciated over the life specified under previous laws. Check out this website for more information

2. Net operating losses

Hopefully you won’t experience this, but net operating losses (NOL) are one risk of doing business. The tax reform adjust the rules on net operating losses, limiting them to 80 percent of net taxable income.

However, you will be able to carry over any amounts you cannot take in the current year to a year in the future when you have net operating income.

In addition, this amount can be increased by a factor that takes into account the effects of inflation. The old rule allowed you to take these losses against income from a prior year, but that provision has been eliminated.

3. Unreimbursed employee expenses

A big question that has been circulating is whether you will lose any deductions since the deductions for unreimbursed employee expenses were eliminated with the tax reform.

Let me put your mind at ease.

 

These deductions will only affect taxpayers who claim an employee-related deduction on Schedule A. Since you are a business owner who files a Schedule C, your business-related deductions will not be affected by the elimination of these deductions.

4. Business income

Lastly, and maybe most importantly, if you are an LLC or sole proprietor, you can take a 20-percent deduction of your income from your business income calculated on your Schedule C before it gets put on your 1040.

If you made $100,000 in 2018, you will put income of $80,000 on your 1040.

 

However, there is a wage and income limit on the deduction if you make, combining the income from W-2s and your business, $207,500 as an individual taxpayer, or $415,000 if you file as married filing jointly. So if your income and any wage amount is more than those limits, you will see a reduction in the amount you can deduct.

Also, if you are a service-based business, the phase-in amounts are reduced to $157,500 as an individual taxpayer, or $315,000 if you file as married filing jointly. In addition, if you exceed these thresholds, you lose the deduction completely. Many freelancers will benefit from the deduction, as well.

Everyone’s situation is different, so talk to your CPA and insurance agent about the changes initiated by the tax reform and the options available to you.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.


Also published on Medium.

Image by: Steve Corey on VisualHunt.com / CC BY-ND

Chris Peden
Chris Peden, CPA, CMA, CFM has spent more than 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information.