As the income tax filing season gets underway, many small business owners wonder what differences they can expect on their personal income taxes this year. If you're not sure what changes affect you and your company, here are a few key items that may increase or reduce your tax bill.
1. Qualified Business Income Deduction
Is your business a pass-through entity? This type of business - generally a sole proprietorship, partnership, or some LLCs - doesn't directly pay taxes. Instead, individual owners pay taxes on their personal income tax returns. Pass-through businesses received a new deduction that may lower owners' taxes.
Called the Qualified Business Income Deduction, this new addition is a deduction equal to 20% of your taxable income received from your business activities. It's a simple deduction of basic math, so it will be easy to take. If you have taxable income over $157,500 (or $315,000 for married filers), your deduction may be limited, so consult your tax professional.
2. Standard Deductions
The standard deduction and personal exemptions are changing, and how it affects you will depend on your personal circumstances. The new standard deduction amounts replace both the old standard deductions and the personal exemptions. To adjust the new amounts for families, the Child Tax Credit was boosted to compensate for the loss of personal exemptions.
If you generally use the standard deduction, you may see a slight overall increase in the value of your deduction. However, if you previously itemized deductions, you may find that itemizing is no longer as beneficial. This may also affect tax planning efforts such as accelerating deductions, deducting large mortgages, or prepaying taxes.
3. Bigger Estate Tax Exemption
Have a valuable business, farm, or investment portfolio? Then there's good news about avoiding taxes when passing your wealth on to kids and grand kids. Under new tax rules, you can now pass on an estate worth up to $11.9 million (for single individuals) without having to pay estate taxes.
This is a huge jump from 2017's threshold, so those with significant assets should meet with their tax attorney to determine how it affects their estate plans.
4. 100% Bonus Depreciation
In simple terms, depreciation spreads out the benefits of deducting the cost of an asset over the full course of its lifetime rather than all at once. But what if you need to boost your business expenses in the year of purchase and enjoy those tax savings right now? Enter bonus (or accelerated) depreciation.
Bonus depreciation is the allowance for a business to deduct the entire cost of the asset in the year of purchase. In the past, up to 50% of the cost could be deducted in the first year, but tax reform has increased that allowance to 100%. If you made major purchases last year, this could be a big help.
5. Lower Business Tax Rates
What if your business is a more traditional C corporation structure? You may get an easy way to see lower taxes in the form of lowered tax rates. The top tier for corporation income tax will be reduced to 35%, leaving more of your business's money available for other, better uses. In addition, the corporate AMT (Alternative Minimum Tax) has been eliminated completely, simplifying business tax returns.
Which of these tax law changes can help you as a business owner? Whether it's reduced tax rates, faster depreciation, or being exempt from the estate tax, understanding the specific adjustments that tax reform brings to your life is key to making the most of them. At Coffman, DeFries and Northern, P.A., we're here to help you navigate tax reform and start planning for 2019. Call today to make an appointment.