Business and Taxes: What Business Owners Need to Know About the Changes to 2017 Business Tax Laws

Changes to the 2017 tax code may have a serious impact on your 2018 business taxes. In addition to learning about changes to the tax code, you should work closely with a business lawyer to ensure that your company is ready for the financial implications of these changes.

Changes to Income from Pass-Through Entities

One significant change that affects small business owners is the pass-through deduction. The Tax Cuts and Jobs Act of 2017 introduced a deduction that affects families with income from pass-through businesses. Pass-through income goes from a pass-through entity to its owners, where it is taxed at the individual’s tax level—not the corporate level.

Only some business structures allow you to benefit from pass-through business income. These structures include sole proprietorships, S corporations, partnerships, and LLCs that are treated like partnerships and sole proprietorships for tax purposes.

The amount of the deduction is based on your qualified business income, also known as QBI. The deduction permits taxpayers to exclude 20% of their pass-through income from their federal income tax. Note that this does not reduce your adjusted gross income, but does reduce your federally taxable income.

Corporate Tax Rate

If your business is a C corporation, you may see a serious change in your federal tax liabilities. Previously, C corporations had graduated tax rates between 15% and 35%. Now, under the Tax Cuts and Jobs Act, there is a flat corporate tax rate of 21%. If your corporation fell under the 15% tax rate in previous years, this change could have a negative impact on your bottom line. If you paid 25%, 34%, or 35% under the previous tax code, you may enjoy a much lower tax liability with this new flat rate.

Net Operating Losses

In addition to the pass-through income deduction, there are several other types of deductions that could positively affect your bottom line. Companies that report net operating losses can deduct up to 80% of their taxable income to cover their losses. The tax law allows companies to carry net operating losses forward.

Accounting Methods

The Tax Cuts and Job Acts of 2017 also allows more taxpayers to use the cash method of accounting. This accounting method is only available to taxpayers that have average annual gross receipts of $25 million or lower in the last three years. Companies that meet this standard do not have to account for inventory and are exempted from some uniform capitalization rules.

Whenever tax law changes, it’s crucial to work closely with legal and financial professionals to ensure you’re ready for changes to your state and federal taxes. If you have a question about your business’s taxes, call Wilson Law Group, PLC at (804) 864-5268 to discuss your company’s legal needs.

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Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.

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