How New IRS Laws Could Affect a Small Business Like YoursSusan Letizia
If you run a small business, you are responsible for filing your taxes by a specific due date every year. The date you are required to send in your tax filings depends on your business structure and industry. However, no matter what type of small business you run, you should be aware of all the latest tax laws that could affect your business.
As you may know, tax law can be incredibly complicated and occasionally there are changes that could affect how your company pays taxes, what deductions and credits you are allowed to list, and other details that could end up saving or costing you money. Sounds confusing, doesn’t it? Well, this post is designed to keep you informed as a responsible and tax-paying business owner.
Here are a few of the latest tax law changes that could affect your business. Keep them in mind so that you remain compliant with all IRS tax laws and regulations.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act was passed into tax law in December 2017 and will affect nearly every business in the next few years. The law effectively changed small business tax rates and the estimated tax payments you are required to make to remain compliant for the tax year.
New Deductions, Taxes & Credits
The new tax law created a 20% qualified business income deduction, helping business owners reduce their tax obligations. There have been other deductions and credits developed, as well, including altered depreciation methods and increased options for expensing business property.
Other new rules include those for like-kind exchanges and fringe benefits. In addition, if yours is a small business that provides paid family leave for your employers, along with medical leave, you may qualify for a new business credit.
Why Were These Changes Made?
The IRS developed these changes because of its ongoing efforts to help self-employed individuals and small businesses comprehend and meet their tax obligations. In addition to the self-employed, sole proprietorships, and LLCs, other organizations that are affected by the new tax laws include C-Corporations, Schedule C filers (independent and gig economy workers) and farmers.
Small Business Tax Reform and Your Business
Here are other ways the Tax Cuts and Jobs Act (TCJA) can affect your business. Pay special attention to any laws that pertain to your industry and type of business, whether you’re a sole-proprietorship, C-corporation or LLC.
Income (Gains and Losses)
Participation Exemption System for Foreign Income Tax
The new tax law creates a participation exemption system for the taxation of certain types of foreign income. The regulations are designed to ensure the application of section 956 on the tax forms are consistent with the tax law system. Furthermore, the tax law seeks to reduce the amount determined under section 956 with regards to domestic corporations and any stock they own in controlled foreign corporations or CFCs.
Global Intangible Income
If you own at least 10% of the value or voting rights in one or more CFC, you will be required to include its global intangible low-taxed income as income that is currently taxable. This is to be done under the new tax reform whether or not any amount is distributed to the shareholder.
Carried Interest Limitations
The new tax law granted an extension of three years to the holding period with regards to certain carried interests, which are ownership interests in a partnership that share the organization’s net profits.
Carried interests are often issued to investment managers in connection with services rendered. In most cases, the interests result in the holder receiving capital gains, which are taxed at a lower rate, as opposed to ordinary income.
Like-Kind Exchanges 1031
The changes to the tax law that have to do with like-kind exchanges only apply to exchanges of real property and not to exchanges involving personal or intangible property. In addition, an exchange of real property that is held primarily for sale does not qualify as a like-kind exchange.
Excess Business Losses
The new tax law put a limit on the amount of deductible business losses organizations can claim are incurred by non-corporate taxpayers.
Net Operating Losses
If your businesses is affected by Net Operating Loss (NOL) rules, you should be aware that there have been some changes made. Read IR-2018-254 to learn about the tax reform changes regarding Net Operating Losses.
Deductions and Depreciation
State and Local Income Tax (SALT)
The Treasury and IRS have mandated that a $10,000 cap should be placed on state tax and local tax deductions. However, the new tax law provides a safe harbor under section 162 that applies to C-Corp or pass-through entity to a 170(c) company in return for a state tax or local tax credit.
Business Interest Expense
Section 163(j) of the IRS tax code puts a limit on the deductions large businesses can claim for interest incurred. For most larger businesses, the number of business interest expenses are limited to interest income plus 30% of the adjustable taxable income.
Depreciating and Expensing
The tax law changes make it so that businesses can expense more. Business owners can expense the cost of any section 179 property and then deduct it in the year the property is placed in service. The law increased the max deduction from $500,000 to $1 Million. The law also increased the phase-out threshold from $2 Million to $2.5 Million.
100% Depreciation Deduction
Under the new tax laws, proposed regulations have been made on the new 100% depreciation deduction that allows businesses to write off the most depreciable assets in the year they are placed in service.
Recovery for Residential Rental Property
The typical recovery period for residential rental property is 27.5 years, but now the law has been changed so that the recovery period for residential rental property is from 40 years to 30 years.
Employer Deductions for Fringe Benefits
Tax law disallows employer deductions for certain fringe benefits. These benefits include activities considered to be entertainment, amusement or recreation; membership dues for clubs organized for recreation, pleasure, social purposes or business; and facilities used in connection with the above items, even if the activity relates to the active conduct of business or trade.
The tax law also disallows deductions for expenses that deal with transportation fringe benefits or expenses incurred through transportation for commuting.
There is also a prohibition on cash, non-tangible personal property, and gift cards as employee achievement awards. Special rules exist that allow employees to exclude certain achievement awards from their wages if the awards are considered tangible personal property.
The IRS has suspended the deduction for moving expenses for most small business taxpayers between December 31, 2017 and January 1, 2026. The suspension doesn’t apply to active duty service members or those who move because of a military order to a permanent change of station.
Employers may exclude any 2018 reimbursements from employee wages for those who had moving expenses prior to January 1, 2018, as these taxes would have been deductible had they been paid before that date.
Passenger Automobile Depreciation
For businesses that utilize passenger vehicles, there are now dollar limits on the depreciation deduction for the year the automobile is placed in service and for each succeeding year thereafter.
Sexual Harassment Settlement Payments
If your business is forced to make payments due to sexual harassment or a sexual abuse case, no deductions can be made for those payments under the new IRS tax law.
Standard Mileage Rate
The IRS has suspended the miscellaneous itemized deductions that were subject to the 2% of the adjusted gross income limit. That means that the standard mileage rate for businesses that was issued before the TCJA passed can’t be used to claim an itemized deduction for unreimbursed travel expenses beginning December 31, 2017 through January 1, 2026.
Employer Credit for Paid Family and Medical Leave
A business credit may be claimed on wages paid to qualifying employees who were placed on paid family and medical leave.
Rehabilitation Tax Credit
The tax reform laws require taxpayers to take the 20% credit over five years instead of in the year where they placed the building into service. This effectively eliminates the 10% rehabilitation credit for any buildings built before 1936.
New Deductions for Passthrough Entities
If you run a sole proprietorship, partnership, corporation or a trust or estate, you may be eligible for a new tax deduction. This deduction is referred to as the Qualified Business Income Deduction and allows business owners to deduct up to 20% of their qualified business income plus 20% of the aggregate amount of qualified real estate investment dividends and partnership income.
There have been other changes to the tax laws regarding how taxes are calculated. For instance, there has been a repeal of special estimated tax payments, changes to blended federal income tax, and changes to the transition tax on foreign earnings. You should also note any changes to the withholding rules so that you’re withholding the correct amount of taxes from employees.
Changes to Accounting Methods
There have been changes under the new tax laws to accounting periods and methods of accounting for certain businesses, including corporations. For instance, eligible terminated S-corporations are required to change from the cash method to accrual method of accounting.
Industry Specific Tax Laws
Aircraft management services, Alaska Native American corporations, Alaska settlement trusts, farmers, ranchers, insurance companies, life insurance companies and companies that produce beer, wine and distilled spirits all have unique tax laws that affect their businesses. Check the tax law reforms to determine if your business has tax law changes that could affect you.
Other Important Tax Information to Note
If you feel that you have been placed under a wrongful IRS levy, you now have additional time to bring a civil action or file an administrative claim.
In addition, the IRS has made it impossible to deduct certain fines and penalties if those were paid due to the violation of one or more laws.
There are also new tax laws relating to Health Savings Accounts, Employee Stock Options, and Pension Plans.
How Will Your Business Be Affected by These New Tax Laws?
Many of these new tax law changes may not affect your business specifically, but one or two might. It is important that you read the tax laws carefully so that you can list the proper deductions and credits, and pay the proper amount of tax to fulfill your business tax responsibilities. Failure to know or comprehend the tax laws as they have been written is no excuse, and the IRS won’t tolerate business owners filling out forms incorrectly or underpaying their tax obligations. Therefore, take your time to examine the tax reform laws that pertain to your type of organization and industry so that you can remain compliant for this tax year and every year that follows.
Of course, many business owners find the act of running and growing their businesses incredibly time-consuming. This lack of time doesn’t bode well for the complete reading and understanding of new tax law changes, especially those pertaining to the new Tax Cuts and Jobs Act.
Instead of trying to understand complex tax law, it might help to obtain the services of skilled and experienced business tax experts. With proper business accounting throughout the year and a certified professional filing your business taxes by the due date, you’ll ensure a proper tax return and that your tax obligation will be fulfilled without late fees or penalties of any kind.
Get in touch with a business tax expert today by calling SCL Tax Services, now serving business owners throughout the areas of Yonkers, Eastchester and Mount Vernon, New York. Contact us for a free quote.