- The Tax Cuts and Jobs Act (TCJA) changes to the tax code have impacted deductions for pass-through companies.
- Deductible losses are limited to $250,000 if you file as a single person or $500,000 if under a joint filing.
- State and local tax (SALT) deductions are limited to $10,000.
- Transportation fringe benefits, like those afforded to commuters, can no longer be deducted as a "qualified transportation fringe benefit."
The start of a new year means a new slate of challenges and goals for small business owners everywhere to tackle. While it's easy to set your eyes on future goals, there's one thing that almost immediately deserves your attention as a small business owner: your personal and business taxes.
As you operate throughout the tax year, you're responsible for sales tax, payroll taxes, Social Security, employment taxes, the federal income tax, Medicare taxes and a slew of other tax obligations. Doing your business's taxes may not be the most appealing task, but it's an incredibly important one in the grand scheme of things. After all, the IRS always gets its cut to help fund the federal budget. One misstep in your tax filing efforts can lead to lofty fees, and if left unattended, the eventual closure of your business.
As you get ready to file your small business taxes, it's imperative that you keep pace with changes to the federal tax code to avoid those pitfalls. To help you, we've compiled the most pressing small business tax changes. With this information, you should be one step closer to ensuring you are ready to file your taxes before the deadline on Wednesday, April 15.
How to file your small business taxes
If you've filed personal taxes before, you've likely collected your W-2s (and any additional documentation), filled out a 1099, plugged some numbers into an online tax application and waited for your return to come in.
Tax preparation for your small business taxes isn't too dissimilar from that same process.
You want to collect all your small business documentation. Any records you have detailing your business's income and expenses, such as the previous year's capital expenses, are crucial to this endeavor, as accurate record-keeping will keep you and your business out of trouble with the IRS. [Want to learn more about tax software to help you fill out your taxes? Check out our best picks and reviews on our sister site Business News Daily.]
Once you have all of the documentation in front of you, including your gross receipts, make sure that you're filling out the right paperwork. The U.S. Tax Code is complicated, and it comes with a slew of forms to fill out depending on various tax realities. Depending on the structure of your business, you'll need to fill out a certain tax form based on the type of small business tax that applies. As a small business owner, you'll likely fill out a Schedule C form.
If you run a limited liability company (LLC), you're a sole proprietor, or you're one of the millions of self-employed individuals, you can also use a Schedule C form, but if you run a corporation, you must use Form 1120.
After completely and accurately filling out the correct form, it is up to you to ensure the documentation gets to the IRS on time. Schedule C forms are part of your personal IRS tax files, so it becomes part of a regular 1040 return. Your deadline is the same as everyone else's on April 15.
S corporations must file by the 15th of the third month following the close of the tax year. For small businesses that file quarterly, your estimated tax deadlines are April 15, June 15, September 15 and January 15.
You can always seek the help of a tax professional or tax advisor who can guide you through the process. If you're worried that you'll make a costly mistake that could result in hefty levies and potentially spelling doom for your business, making sure you have someone who can at least double-check your return is a huge boon to any small business owner.
Trump's tax law, small business tax deductions and pass-through businesses
Ever since he took office in 2017, President Donald Trump has tried to position himself as a leader for the working class. While his opponents challenged that notion, especially after the passage of the Tax Cuts and Jobs Act (TCJA) and its corporation-friendly provisions, some changes to the tax code have impacted small businesses.
If you're at the helm of a small pass-through business, there are some major changes you should be aware of. For the uninitiated, pass-through businesses are among the most prevalent type of business in the U.S. If your business is a sole proprietorship, a partnership or an S-corp, then you have a pass-through business. In this sort of structure, your business doesn't immediately send a portion of its revenue to the IRS, and, instead, sends it to you and any co-owners for you to file later.
While the TCJA cut corporate taxes from 35% to 21%, pass-through companies were not subject to that kind of reduction. Instead, the legislation changed the limits on interest deductions and net operating losses. Scheduled to expire by 2025, these changes introduced a new deduction for pass-through business income. Under the previous tax law, pass-through business income could be taxed at ordinary rates with a max rate of 39.6%. According to the Tax Policy Center, under the TCJA, "joint tax filers with taxable income below $315,000 ($157,500 for other filers) can deduct 20% of their qualified business income (QBI)." With this deduction, the top individual income tax rate on business income dropped from 37% to 29.6%.
If revenue exceeds those income thresholds, the deduction is limited to either 50% of the business's employee wages or 25% of the wages with 2.5% of the business's qualified property, whichever is greater. Further, the tax rate deduction can be lessened "depending upon the type of business, the wages paid, and the investment property owned by the business," according to the Tax Policy Center. Once taxable income reaches $415,000 for joint filers or $207,500 for other filers, the deduction no longer exists.
Being able to deduct from your tax burden is a great way to ensure you're taking the most advantage of the tax code. As a small business owner, recent changes to small business deductions could have a huge impact this year.
Perhaps one of the biggest deduction changes is the state and local tax (SALT) deduction. As of last year, filers are limited to $10,000 in SALT deductions. If you're running a pass-through company in a high-tax state, you're more likely to get the most out of these deductions. As the name implies, this deduction relies on your local and state tax laws, so be sure to refresh yourself on those.
The TCJA also deals with the amount of losses a pass-through business can use to offset alternative income sources. Under the prior law, all active losses were deductible from other income. Under the TCJA, deductible losses are limited to $250,000 if you file as a single person or $500,000 if it's a joint filing. Unused losses, however, can be used in future years.
Fringe benefit deductions have changed
Fringe benefits, like those afforded to employees to entice them to join the company or to retain them, have also had deduction rules changed. These come alongside your other tax obligations, like unemployment taxes and Social Security.
Transportation fringe benefits, like those afforded to commuters, are no longer allowed to be deducted as a "qualified transportation fringe benefit." Conversely, qualified bicycle commuting reimbursements can be deducted as a business expense from 2018 to 2025. These reimbursements are required to be included in the employee's wages.
Achievement awards can also be excluded from employee wages for the purpose of taxation, though this can only be done if the award was "tangible personal property," according to the IRS. The employer can also deduct rewards, subject to certain deduction limits.
International considerations
If your small business conducts operations overseas, you know you're in a special tax situation. Thanks to the TCJA, your business has additional considerations to deal with when filing taxes. Previously, the income generated at multinational businesses were done so with all income in mind. As a result, all income was taxed regardless of where it was earned, though the government offered a tax credit for foreign taxes that were also paid.
The TCJA, however, now operates on a special territorial tax system where American corporations still owe taxes on profits they earn at home. What's exempted, however, are dividends that U.S. companies receive from foreign corporations in which they own at least 10%. The minimum tax on "global intangible low-taxed income" was imposed at 10.5%. Up to 80% of a company's foreign tax credits can be used to offset that tax, however.
When it comes to international taxes, it's probably best if you hire a CPA, tax advisor or other tax professional to ensure you don't experience any problems down the line.
Managing your losses and business expenses
Losses are a natural occurrence for small businesses. They're unavoidable. Recent changes to the small business tax code mean there are guidelines and limitations on how those losses are accounted for when tax season rolls around.
Unless you're running a corporation, you're likely going to be subjected to excess business loss limitations. According to the IRS, an excess business loss is "the amount by which total deductions, attributable to all their trades or businesses, exceed their total gross income and gains, attributable to those trades or businesses, plus $250,000 (or $500,000 in the case of a joint tax return)."
Net operating losses (NOLs) can no longer be carried over from a previous year. The only NOLs that can be carried forward, according to the IRS, are those that took place in tax years ending after Dec. 31, 2017.
Along with losses, certain business expenses have been altered since the TCJA's passage. Entertainment or recreation expenses were pretty much eliminated, even though taxpayers can still deduct half of the cost of business meals if the taxpayer or an employee was there and the food or beverages "weren't extravagant," according to the IRS. Any food and beverages purchased during entertainment events as an entertainment expense isn't allowed either.
Moving expenses and any expense reimbursements should be included in employee wages. This was formerly not the case, though active-duty members can still deduct moving expenses from their income.
Fines and penalties paid to the government can't be deducted, nor can payments made in sexual harassment or abuse cases. [Still have questions about tax changes in 2020? Check out our accounting Q&A on the business.com forums to ask your specific questions. Real-world experts are here to help.]