Archives for November 2018

The federal Tax Cuts and Jobs Act, which represents the first major U.S. tax code overhaul in 30 years, seems to provide small businesses everywhere with a break on their taxes. For NJ business owners and managers, it’s critical to understand how the new mandates will affect your organization.

Pass-through business deduction
Pass-through companies account for 95 percent of all U.S. businesses. These entities allocate corporate income among the owners, rather than paying income taxes at the corporate level. Effective this year, pass-through companies will receive a 20 percent tax deduction. This deduction lowers a business’s taxable income by 20 percent, providing small business owners with more financial breathing room and freeing up money for hiring new workers and expanding operations.

There is one limitation: Married individuals who own service-based businesses (e.g. law firms or doctor’s offices) can only claim the deduction if their annual income is below $315,000 ($157,500 if single).

First-year bonus depreciation
This depreciation deduction is increasing from 50 to 100 percent. This allows businesses to deduct the full amount of eligible equipment and property purchases, rather than writing off a portion. Lawmakers hope this change will encourage business owners to put more money back into their companies — increasing R&D, expanding staff or branching out into new geographic markets.

Net operating loss window
Previously, net operating losses (NOL) — when a business’s tax deductions are greater than its taxable income — could be carried back for two years. Now, they can be applied for an indefinite amount of time. Net operating losses occur when a business’s tax deductions are greater than its taxable income. While this can only be applied to 80 percent of taxable income, it can help businesses to take risks and spend more money, essentially lowering the cost of failure.

Elimination of transportation fringe benefits
Businesses must now do without the transportation fringe benefits and entertainment expense deduction — tax-free employee commuter plans and reduced-rate entertainment plans. These perks can still be provided by employers, but can’t be written off as business expenses.

Lower corporate tax rate
The corporate tax rate is decreasing from 35 to 21 percent. That means corporations may be more inclined to set up shop and stay put, and less likely to move overseas. The new tax rate gives companies an opportunity to make more money, and can give the U.S. a competitive edge on a global level.

Keep in mind, this is just a general summary of new tax laws and should not be considered financial or legal advice. Be sure to consult with your CPA or tax advisor for advice specific to your business.

Congress has ushered through the biggest tax reform law since 1986, when President Reagan signed major legislation for corporations and individuals. The new law will affect the way you, your family and your business calculate your federal income tax bill — and the amount of federal tax you will pay.

As we prepare for the changes in 2018, here are a few highlights of the new law to keep in mind:

• Lower tax rates are coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers. Additionally, many businesses, including those operated as pass-through, such as partnerships, may see cuts in their tax bill.

• Seven tax brackets for individuals will remain, but rates will change. Rates will be lowered to: 10%, 12%, 22%, 24%, 32%, 35% and 37%, respectively.

• The child tax credit has nearly doubled. Parents will receive $2,000 for each child under 17, and the entire credit can be claimed by single parents who make up to $200,000 or married couples who make up to $400,000.

• There’s a new tax credit for non-child dependents. Taxpayers may now claim a $500 temporary credit for non-child dependents, such as children over age 17, elderly parents or adult children with a disability.

• Expect disappearing or reduced deductions, and a larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act will also suspend or reduce many popular tax deductions in exchange for a larger standard deduction.

• The itemized deduction for charitable contributions will remain. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction, charitable contributions may not yield a significant tax benefit.

• The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). However, next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated.

• The standard deduction has nearly doubled. For single filers, the standard deduction has increased from $6,350 to $12,000; for married couples filing jointly, it’s jumped from $12,700 to $24,000.

This is a general summary of the new law and should not be considered tax advice. Be sure to consult with your CPA or tax advisor for advice specific to your situation.