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How Recent Tax Reform Impacts Small Businesses and Pass-Through Entities

What does trump tax bill mean for small business and pass through?

The Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, comes into effect for tax years beginning 2018. In most cases the TCJA will benefit business, but with those benefits come complications.  While a one-page blog isn’t sufficient to outline those changes and complications, it can highlight some of the more significant changes.

  • Corporate tax rates were graduated in the past, with a top tax rate of 35%. Under TCJA, corporations now have a flat rate of 21%. Additionally, the threshold for requiring corporations to file tax returns based on accrual accounting was $5 million in gross receipts over the last three years – that threshold is now $25 million.
  • Pass-through entities (PTEs), which tax income at the individual partners’/shareholders’ rates:
    • benefit from the overall lower individual rates
    • non-service businesses can take a new deduction of 20% of income, subject to certain limitations
    • the 20% of income deduction is also available for service businesses with taxable income below $207,500 single and $415,000 joint, although the deduction is subject to phase-out limitations once income reaches $157,500 single – $315,000 joint
    • The PTE deduction depends on the lesser of 20% of income or the greater of (50% of wages, or 25% of the wages plus 2.5% of the unadjusted basis of all qualified property)

In addition to the “simplification” above, there have been significant changes to many allowed deductions/expenses, such as:

  • Depreciation (both Section 179 and Bonus)
  • net operating losses (NOLs)
  • restrictions on meals & entertainment (M&E)

Most businesses and the owners stand to benefit from TCJA, but figuring out how to best calculate that benefit will be challenging. Burdette Smith & Bish, LLC can help. We offer tax preparation and planning for businesses and we know how to properly determine your deduction. Please contact us to set up a consultation.

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