February is the month when employees receive their W-2s and independent contractors get their 1099s. If they care to, they can get a pretty quick idea of what April holds, and if a refund is due, claim it right away. But what about your business? Most businesses and their owners will feel a significant impact under the Tax Cuts and Jobs Act (TCJA), which went into effect last year. But do you know what that impact will be?
Below is a brief recap of the major changes affecting business income taxation. We start with the positives for taxation of pass-through entities, such as sole proprietorships, S corporations, partnerships and limited liability companies (LLCs) treated as partnerships:
- Reductions in the individual income tax rates range from 0 to 4 percentage points, depending on the filers bracket. The new brackets are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
- Eligible business owners also can claim a new 20 percent qualified business income deduction, also known as the Section 199A deduction.
If you are passing through income, you also have to be mindful of other changes affecting tax breaks for individuals that will impact your overall tax liability.
As for the taxation of corporations, these positive changes generally affect C corps, personal service corporations (PSCs) and LLCs treated as C corporations:
- A new flat corporate rate of 21 percent replaces the graduated corporate rates of 15 to 35 percent
- A new flat rate of 21 percent also replaces the flat PSC rate of 35 percent
- The 20 percent corporate alternative minimum tax (AMT) has been repealed
Finally, the following positive changes apply generally to both pass-through entities and corporations:
- Bonus depreciation is doubled to 100 percent
- The deduction for qualified assets expands to include used assets
- The Section 179 expensing limit is doubled to $1 million
- The expensing phaseout threshold is increased to $2.5 million
- A new tax credit for employer-paid family and medical leave is introduced
However, not all the changes in business tax law are positive. Here are the negatives, starting with changes that apply generally to pass-through entities and corporations:
- The new law disallows deductions for net interest expense that exceeds 30 percent of the business’s adjusted taxable income, but exceptions apply
- New limits are set on net operating loss (NOL) deductions
- The Section 199 deduction for qualified domestic production activities (commonly referred to as the “manufacturers’ deduction” and not to be confused with the new Sec.199A deduction) is eliminated
- A new rule limits like-kind exchanges to real property that is not held primarily for sale, so there are generally no more like-kind exchanges for personal property
- New limitations are placed on deductions for certain employee fringe benefits, e.g. entertainment and, in certain circumstances, meals and transportation
Contact Breon & Associates in Harrisburg
The list above is not meant to be exhaustive and should not be understood as comprehensive business tax advice. To get the most out of the new tax law, consult Breon & Associates for knowledgeable, individualized assistance in preparation and filing. With offices in Harrisburg and North Central PA, Breon & Associates provides business, accounting and tax services throughout Pennsylvania. Call us at 1-888-516-8476 or 717-273-8626, or contact one of our offices online to schedule an appointment.
415 Market Street, Suite #205
Harrisburg, PA 17101
North Central PA Office:
86 Municipal Drive
Avis, PA 17721-8941
Camp Hill Office:
3461 Market Street, Ste 101
Camp Hill, PA 17011