2018 Tax Changes That May Impact Your Small Business Return

The new Tax Cuts & Job Act that was signed into law just before 2018 has quite a few changes that small businesses owners need to be aware of. These changes were intended to provide benefits for business owners and impact business tax rates, business mileage rates, Social Security maximum, and the allowed limits for equipment purchases.

Here is a closer look at the tax changes that could impact your 2018 small business return:

1) Personal and business tax rates

One of the most important changes is the new 20 percent deductible rate of for a pass-through business. This change includes S corporations, partnerships, and sole proprietorships. Corporations will also see a change in their deductible rate, which is now a flat rate of 21 percent.
When it comes to personal income tax rates (for pass-through businesses) the rates have been decreased and start at 10 percent, with the highest rate reaching 39.6 percent. These rates are in effect through 2025.

Here’s how the newly qualified business income deduction works. Business owners can deduct up to 20% of their qualified business income or, if lower, 20% of their taxable income net of any capital gain. This deduction is claimed on the business owner’s individual return.
Generally, qualified business income refers to the business’s profits. Qualified business income does not include salary or wages paid to the taxpayer either as W-2 wages from an S corporation or guaranteed payments from a partnership.

This basic formula applies if the taxable income business owners report on their individual returns does not exceed certain thresholds. The thresholds for taxable income are $157,500 for single filers and $315,000 for people filing joint returns.

If taxable income does exceed these thresholds, the deduction factors in limitations relating to the wages the business pays to its employees and depreciable assets the business owns. And, for certain businesses that provide services such as law firms, accounting firms, and doctors’ offices, the limitations are steeper and the deduction is phased out altogether when taxable income reaches $207,500 ($415,000 for joint filers)

2) Business mileage rates

The new rates for standard mileage deduction for 2018 are as follows:

  • 54.5 cents per mile for business miles
  • 18 cents per mile for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

If your business is taking the standard mileage deduction, these rates will be in effect for the entire year. You have the option to choose to deduct mileage using the standard rate or using the actual expenses. Keep in mind that it might be better to opt for using actual expenses rather than the new standard rates.

3) New Social Security maximum

For 2018, the first $128,400 of combined wages, tips and net earning is subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax. If you’re a small business owner who pays the self-employment tax, you will be affected by the change in the Social Security maximum.

4) A substantial increase in depreciation deductions

The previous $510,000 maximum for Section 179 deductions is now increased to $1 million. This change pertains to purchases of new equipment and business assets. In addition, the bonus depreciation is now increased to 100 percent for property that was purchased and placed in service after Sept. 27, 2017.

To learn more about how your business might be affected by the qualified business income deduction or by tax reform overall, visit IRS.gov.

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Posted in: Business Law, Employment Law