Pass-Through Entities

If your company falls under a pass-through entity, one of the major TCJA change is to allocate 20% deduction for qualified entities. In summary, any company that doesn’t have a business structure of a C corporation is qualified to be a pass-through entity. And that means sole proprietorships, limited liability companies (LLCs), partnerships, and S Corporations are viewed as pass-through entities.

The entire point of a pass-through company is its ability to transfer income. And the income of an owner is generally reported on his or her tax returns. During the inception of the tax law, Specified Service Businesses were expected to gain the most from the tax law, but the limitations on how much SSBs can apply the 20% deduction is vague.

Moreover, a pass-through deduction becomes obsolete for SSBs that exceed an income of $207,000. The joint filers, however, have the flexibility to get the deduction on an income of $415,000.

How will the New Tax Reform Bill Affect Small Businesses?

Expect Lower Rates on Income

As per TCJA, the entity level tax C corporations are liable to pay was reduced from 35% to 21%. As a result, the decreased rate affected the income earned by a C corporation from 48% to 36.5%. It’s undeniable that the run-through entities got a shabbier deal as compared to S corporation.

Lower Tax Rates for Corporations

As per TCJA, corporate taxes can range between 15% – 35%. It couldn’t be more obvious that the flat rate is made to facilitate corporations alone. But neglecting pass-through entities would be harmful to the economy as they account for more than 90% of the entire businesses in the U.S.

What about Net Operating Losses?

With the implementation of the TJCA, your net operating loss (NOL) can’t carry the losses. What’s more, is that your businesses will have to carry NOLs permanently for a 90% taxable income. Prior to this tax bill, small business owners had enough time to carry back losses for two years and move ahead for 2o years offshore taxable income.

Expense Deduction for Business Personal Property

Under normal circumstances, businesses are allowed to capitalize and depreciate long-term value assets for several years instead of having to face an entire year’s cost of the purchased item. Small business owners, however, can benefit from Section 179 of the Tax Code to depreciate the personal property to avail the immediate deduction.

Unfortunately, long before TCJA came into effect, the Protecting Americans from Tax Hikes (PATH) had already increased the total limit of deductions for Section 179. Therefore, pass-through entities will be required to pay expenses on the qualified property from $500,000 to $1,000,000.

Robust Depreciation for Real Estate Property

The deduction limits for accelerated depreciation have been increased. Subsequently, the bill aimed to help SMEs to write-off bigger expenses. Apart from car purchases, the bonus depreciation has also been increased to a full 100% for qualified properties purchased between Sept. 27th, 2017 – Jan. 1st, 2023.

At the moment, all contemporary commercial real estate properties have to be depreciated for 39 years. For example, if your company purchased a building for $1 million, it would inevitably receive depreciation reduction of $25,641. Simply divide the amount by 39 years to get the total deduction. Residential properties, on the other hand, are depreciated over 27.5 years.

The End of Domestic Production Activities

According to Section 199 of the IRS Tax Code, commercial business owners that sold products or services used to have a wiggle room of 3% tax deduction on their net income. Sadly, this benefit has been revoked by the TCJA until 2025.

The purpose of that deduction was to incentivize and engage businesses for more production of activities.

Other Imposed Limitations

The TCJA made some cuts in the meal and entertainment deductions. As per new tax regulation, meals are deductible at 50% instead of 100%. Also, meals allocated to your employees are unfairly 50% deductible until 2025.

If you can thoroughly present the expense documentation at a restaurant or hotel, the entertainment cost associated with your client wouldn’t be deductible. Furthermore, most of the commuting perks such as parking facility, bike assistance, and carpooling have canceled as well. It’s not a ban on the service, but the tax deduction and the cost that incurs to provide the service.

Conclusion

Review what part of the TCJA has affected you the most, and take the necessary information to your tax professional to ascertain positive measures that can take for your business. Seeking the guidance of a tax expert is a wise choice since he or she will be able to see the discrepancies that are generally hard to detect. The question that needs to be answered is why the tax bracket for corporations have been set permanently, while pass-through entities will have to bear the tax cost until 2026.

That said, small business owners are more curious than ever to find out what tax reforms and amendments democratic caucus intends to propose in the coming 2020 presidential election of the U.S.

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