Top 3 Tax Law Changes Affecting Small Businesses

1. 20% TAX DEDUCTION FOR PASS-THROUGH ENTITIES

The net profits of S-corporations, LLCs, and sole proprietorships “pass through” the entity and are taxed at the owner’s personal income tax rate. The tax bill allows a 20% tax deduction for these businesses (limited to 20% of the lesser of net qualified business income or taxable income before the deduction and after reduction for any net capital gains). The available deduction is phased out based on income ($315,000 to $415,000 per year for married couples, and $157,500 to $207,500 for all others), and for specified service trade or businesses (lawyers, accountants, doctors, etc.). Critics indicate this deduction is poorly drafted, and caution should be used when claiming this deduction.

2. FLAT 21% INCOME TAX RATE FOR C-CORPORATIONS

C-corporations (read about the difference between C and S corporations here) have a flat 21% corporate income tax rate, instead of the previous graduated rates based on income levels (15%-35%). There is no limitation for personal service corporations. When shareholders withdraw dividends, taxes apply again to those dividends. While most of the individual provisions of the new tax bill sunset on December 31, 2025, the business provisions generally do not sunset.

3. REDUCTION/ELIMINATION OF BUSINESS ENTERTAINMENT & EMPLOYEE FRINGE BENEFITS DEDUCTIONS

Under the prior law, taxpayers could generally deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee were up to 100% deductible by the employer and tax-free to the employee. Under the new law, deductions for business-related entertainment expenses are completely disallowed, although many critics argue taxpayers will categorize these as advertising or marketing costs. Meal expenses incurred while traveling on business are still 50% deductible. The new law also eliminates employer deductions for certain fringe benefits (e.g., parking and mass transit passes), but these are still tax-free to employees.

If you have any questions or concerns regarding these matters, please do not hesitate to contact the Law Offices of Tyler Q. Dahl.

Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a qualified attorney regarding any specific legal problem or matter.