Key Things Every Small Business Owner Should Know
Key Things Every Small Business Owner Should Know
Coupled with unlimited equipment expensing, the small business flow-through deduction provides the most significant tax relief that the small business community has seen in a long time. This TaxFax will look at these and several other tax issues which should be at the top of your list of things to know.
Small Business Flow-Through Tax Deduction
It has been a while since a tax break has generated this much discussion. For those that operate a flow-through business (partnership, LLC, S- corporation, sole proprietor) this new tax break allows up to a maximum 20% deduction of your net small business income.
Here’s where it can get complex: although the deduction is based on your net business income, the deduction is actually taken on your individual return (Form 1040) and the full availability of the 20% can be limited by other factors on your personal return. Also, when your individual taxable income exceeds certain levels ($315,000 joint), and/or you operate in certain service industries, other factors come into play that may limit or fully negate the use of the entire 20% deduction. We will have an expanded look at the small business tax deduction coming soon.
For additional information on the 20 percent deduction for passthrough businesses
Expanded Business Equipment Write-Offs
Beginning this year, businesses can now write-off many of their 2018 business equipment acquisitions thanks to the new and improved bonus depreciation and Sec 179 rules.
Bonus depreciation has been upgraded to include 100 % (used to be 50%) of the cost of qualified business equipment used in your business operations. Maybe more importantly, bonus depreciation can now be taken on used equipment purchases. Previously it only applied to off-the-showroom-floor new.
Expanded rules for Section 179 now allows for the expensing of up to $1 million on 2018 business purchases such as equipment, furniture, and qualified improvement properties, but with unlimited bonus depreciation it is likely that Sec 179 would only be needed for additions involving restaurant, retail and leasehold improvements. These expanded equipment tax breaks generally goes through 2022.
Additional First Year Depreciation Deduction (Bonus) - FAQ
Estate Tax
Yes, it’s still around, but it doesn’t really impact most small business persons due to an increase in the exemption amount. The new tax bill increases the total value of your estate that is exempt from the tax to $11.2 million per person. In effect, you and your spouse have a combined exemption of $22.4 million that is free from estate tax. How does this happen?
A little thing called the “unlimited marital exclusion” allows you to leave all of your estate to your spouse without using any of the $11.2 million exemption. Further, because the surviving spouse can “port” any unused exemption to his/her own $11.2 million, the maximum exemption is effectively doubled to $22.4 million for the surviving spouse.
CAUTION: portability is an election that must be made by filing Form 706 even if there is no tax due on the deceased’s estate.
Frequently Asked Questions on Estate Taxes
Expanded Protection From The Personal Alternative Minimum Tax (AMT)
Should a small business owner care? You bet. The alternative minimum tax is notorious for sneaking up on individuals, especially those in certain sectors of the construction industry and those having high property tax deductions. Moving forward, the amount of income protected from the dreaded alternative minimum tax has been increased for individuals, which specifically includes small business owners who operate flow-through-entities and pay calculate the tax on personal return.
Corporate Tax Rate
Statistically, there aren’t many C-corporations still around as most small business’ use the flow-through model of partnerships, such as S-corporations and sole proprietors. Nevertheless, for those who still operate as a C-corporation, the new corporate tax rate decreased to 21% from 35%. Plus, the dreadful alternative minimum tax (AMT) is gone for C-corporations.
Overall Cap On Business Losses On Personal Return
Surprisingly, there hasn’t been much on this topic but starting in 2018 and going forward there is an overall limit of $500,000(joint) and $250,000 (single) on the amount of net combined business losses an individual can deduct in any one year on the personal tax return. This includes net losses from flow-through entity on your K-1 and Schedule C. Single filers, in particular, will need to be mindful of this limit due to a lower threshold ceiling.
Excess losses can be carried forward to succeeding years as net operating losses.
