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One of the main hot topics today is this new trump tax reform. Whether you’ve been in business for a day or forever, you really need to understand how this plan will affect your business today and tomorrow.
Now, let’s get this out of the way. This article is simply to provide you with information and does not constitute legal, business or tax advice. You will still need to consult your accountant, attorney or tax advisor regarding this topic. Thank you!
Now that we got this out of the way, put on your seatbelt and let’s get this going. There are over 200 pages and who has the time to look through every single page. We went through it and came out with a few points that you’ll be interested in knowing about.
Tax Cuts & Job Acts (aka TCJA)
The trump tax reform went into effect on January 1st, 2018 and if you own a C-corporation, you’re in for a huge surprise. The income tax for corporations has now been reduced to 21%. 14% less than 2017.
Let’s put this into prospective:
If your business made $500.00 in 2018, you’ll pay 21% in income tax; $100,000.00 in 2018, you’ll pay 21% in income tax; $2 in 2018, you’ll pay 21% in income tax.
Did the Trump Tax Reform affect pass-through entities?
Before answering this question, what exactly is a pass-through entity?
According to investinganswers.com, a pass-through entity is a special business structure that is used to reduce the effects of being taxed twice or double taxation. This type of entity does not have to worry about paying income taxes at the corporate level.
Under the tax cuts and job acts, you can expect a deduction of up 20% should you qualify for it.
If your business is:
- a sole proprietor
- a limited liability company
- an S corporation
- a partnership
Then, you are a considered a pass-through entity.
How do you qualify for this 20% reduction?
Generally speaking, just about everyone can qualify for this 20% tax deduction. However, there are certain guidelines in place to make sure that not all can qualify for this tax deduction.
Your taxable income will need to be less than $157, 500 if you are single or $315,000 if you are married and filling jointly.
However, if your income is too high, you will not be able to take advantage of this tax deduction.
- Attorneys
- Doctors
- Financial Advisors
- Athletes
- Accountants
For a better breakdown of this, take a look at this article on how to figure out this 20 percent tax break.
On another note, this tax break is applied only to qualified business income from your partnership, S corporation or sole proprietorship.
A qualified business income is defined as your total net income. For a total breakdown of this, check out this article.
W-2 wage limitations
This comes into effect in your business income is more than $207,500 or $415,000 if you are married and filling jointly. Then again, the W-2 wage limitation will phase in over a $50,000 range or $100,000 if you are married and filing jointly.
At the time of filing your taxes, you’ll have 2 options:
- Claim the 20% deduction or
- An amount that is equal to one of the following options:
- 50% of wages paid to employees that are W-2 earners from the financial year or
- Sum of 25% of W-2 wages, plus 2.5% of what your qualified property costs.
Note: A qualified property is pretty much anything that your business owns. For a more thorough explanation of this, visit the tax adviser site.
Tax Deductions
Congratulations! You made it this far to the article and boy a lot of changes for 2018. We’re just scratching the surface.
For 2018, a lot of the most used expense deductions are no more for businesses. Some of the other commonly used deductions are dropped down in half.
For example, if you took a client out to golf or to a theme park, that expense used to be 50% deductible. Today, you can’t deduct that all. In fact, you can’t deduct any client entertainment expenses.
But, if you take that client out to eat, then the 50% expense deduction still applies.
This table shows some of the changes for the new trump tax reform:
Note: Car Depreciation Change.
If you purchase a vehicle for work purposes, you now can enjoy a higher depreciation allowance.
If your vehicle is an SUV, truck or minivan, your deduction can be even higher. For a better break down on this, check out this article written by MileIQ.
Should your bookkeeping change for 2018?
If you are an miplly client, we’d definitely recommend that you make a few changes to your bookkeeping. Generally speaking any bookkeeper or accountant, should study this new law and make the necessary adjustments for your business.
In reality, depending on the type of business that you run, becoming familiar with the new law is very important to avoid unnecessary fines.
If you are a business and perhaps you handle your own bookkeeping, be very diligent to make sure that you are staying on top of all the new laws.
If you are one of our clients, we will make sure to provide you with the necessary recommendations for you to take advantage of all the things that this new tax law has to offer.
Money Saving Tips for 2018
No doubt, under the trump tax reform, there are many changes but there are things that you can still can do to make sure you stay ahead of these changes and save money at the same time.
- Keep an eye on your spending to track tax deductions
- Deduct your home office
- Deduct your auto expenses if used for business
Final Thoughts
You can be sure that the IRS is going to be very busy in 2019. No doubt you have more questions, or you are still confused about these new laws. Laws are always revised so it should come as no surprise that there is a new tax law.
The trump tax reform for 2018 has a lot of people talking. You definitely will need to consult your accountant or tax attorney to make sure that you 100% on the same page with them or with this new law.
From the looks of it, C-corporations are winners, with this 21% reduction. What seems to have a lot people talking are the deductions we’ve come to enjoy that are no longer around.
Even with a 21% reduction, you can be sure that the government will make it up some other way.
Keeping track of all your expenses will prove to be beneficial to make sure you take advantage of all the available deductions that are allowed on this new plan.
We haven’t even touched on other changes on this plan like:
- Will your mortgage affected
- How is your Health Savings Plan affected?
- What about self-employment expenses affected?
- If you are an educator, how are these expenses affected?
To know more about these changes, check out this article by MoneyTips.
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