Fact: 2018 is quickly coming to a close.
Almost a year after the Tax Cuts and Job Act was passed, the effects on small businesses are still ever-present and evolving. For starters, the new law may change tax rates and impact taxpayers’ quarterly estimated tax payments. Deductions and credits have been changed as well, so the IRS is urging small businesses to review all the updates.
We’ve done the basic groundwork for you and broken it down below. If you’d like to read in thorough detail, head to this page on IRS.gov.
Tax Reform Changes Affecting Small Business
Limitations on Carried Interest
The Act extended the holding period to certain carried interests (ex. applicable partnership interests) to three years.
What is a carried interest? Ownership interests in partnership that share in the partnership’s net profits. These are often issued to investment managers in connection with said manager’s services.
Section 1031 of the Tax Cuts and Jobs Act changes like-kind exchanges. Now, it applies only to exchanges of real property – not to personal or intangible property. However, an exchange of real property held primarily for sales still doesn’t qualify.
Deduction for Passthrough Businesses
If you’re an owner of a sole proprietorship, partnership, trust, or S corporation, you may be eligible for a new deduction. Known as the Qualified Business Income Deduction, it allows you to deduct up to 20 percent of your qualified business income.
Business Interest Expense
A recently amended section of the IRS code imposes a limitation on deductions for business interest incurred by large businesses. A business interest expense is limited to any business interest income, plus 30 percent of the business’ adjusted taxable income.
Depreciation and Expensing
Under the new law, businesses can immediately expense more. The new law increased the max deduction from $500,000 to $1 million and increased the phase-out threshold from $2 million to $2.5 million.
Proposed regulations have been issued on the new 100 percent depreciation deduction as well. This allows businesses to write-off most depreciable business assets during the year they’re placed in service.
Employer Deduction for Certain Fringe Benefits
The new law disallows certain employer deductions:
- Activities generally considered to be entertainment, amusement, or recreation.
- Membership dues for clubs organized for business, pleasure, recreation, or other social purposes.
- A facility used in connection with these activities, even if they are related to the active conduct of trade or business.
- Expenses association with transportation fringe benefits or expenses incurred providing transportation for commuting (except if needed for employee safety).
Standard Mileage Rate
All miscellaneous itemized deductions that are subject to the two percent of adjusted gross income floor are suspended under the new law.
The business standard mileage rate (which was issued before the Tax Cuts and Jobs Act passed) cannot be used to claim an itemized deduction for un-reimbursed employee travel expenses in taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2026.
Employer Credit for Paid Family and Medical Leave
Eligible employers who set up qualifying paid family leave programs (or amend current ones) by Dec. 31 2018, are eligible to claim an employer credit. It’s retroactive to the beginning of the employer’s 2018 tax year, for qualifying leave already provided. We wrote an entire blog post dedicated to this here.
More on this from the IRS here.
Of course, this list is not comprehensive. If you’d like to read the full outlook from the IRS, you’ll want to check out this page.