Updated: Nov 5, 2018
Recent changes in the United States tax code have caused concern for small business owners, because they fear that they will suddenly have to pay much more than they did in the past. That is not surprising, since this has generally been the case when there are changes to tax laws.
However, the changes are not always necessarily bad, as there can be hidden benefits for small business owners in the changes to the tax code, as well.
These benefits may not be as common as the concerns, but they are still available, important, and worth consideration for all small business owners.
One of the biggest changes that is seen with the recent tax code is the raising of the cap on expensed property, and using the full value of this raise can be an important small business move. The cap used to be $500,000, but now it has been raised to $1 million. That is a very big benefit to small business owners, and a significant way for them to use the newer tax law codes to their advantage. The bonus depreciation that is a part of the new tax law also helps these small businesses by allowing them to accelerate their write-offs.
Originally this would have actually decreased from 50% to 40% in 2018 and disappear completely after 2019. Now, however, the bonus depreciation has been raised to 100% through 2022, and will be eventually phased out from 2023 to 2026.
This will make a difference for small businesses right now, and will continue to help them perform better and keep more of their money for a number of years.
While there are some concerns with the new tax laws, these particular issues are not part of those concerns for most small businesses.
Another important small business move is to carefully consider whether converting to a corporation or a pass-through entity would be a better choice. With the corporate tax rate at only 21%, which is below the majority of marginal tax rates, businesses with the right forms of governance or formation can save a great deal of money on their taxes. Twenty percent of taxable income or business income is the cutoff for taxation, and the calculations are not necessarily that easy, but for some small businesses it can be well worth making a change.
Not every business can qualify for the move to a corporation or a pass-through entity and the tax breaks that come with it, but there are reasons for many businesses to talk about the issue with their tax advisors. That way they can make the right decision, and can make the change to another type of legal structure if it is truly warranted. The largest hurdle is the onerousness of administrative tasks where changing a company's legal structure is concerned. Once this has been worked through, the potential savings is often well worth the effort that has put in to ensure the company changed over correctly.
Not all of the tax code has changed, however, and small business owners should take the time to work with their tax advisor to go over important issues.
These include: • making a plan for the estate tax • knowing when to defer or accelerate deductions and income • optimizing group healthcare
How much money a business has matters, but it is mostly how much they can keep that is the most important. Tax planning is a big part of that, and something that any small business should address. That is especially true in light of the tax law changes that can be used to these business' advantages, along with the areas of tax law that remain unchanged and that can also be beneficial just the way they are.
This content created by Rick Durkee in conjunction with Fusion Capital Management.