The Tax Cuts and Jobs Act of 2017 (TCJA), also known as the Trump Tax Cuts Act, has many benefits—and some drawbacks—for small businesses. All of these parts of the new tax law went into effect for the 2018 tax year and beyond.
How the TCJA Benefits Small Businesses
The TCJA may benefit your small business in several ways. The first two discussed here are primary tax cuts for corporations and small business owners. The corporate tax reduction is for corporations only, while the new pass-through business deduction is for other business types (including S corporations).
Income Tax Rate Reduction for Corporations
The new corporate tax rate, beginning in 2018 and continuing indefinitely, is 21%, down from a schedule in which the highest corporate tax rate was 39.6%. For small companies with an income of less than $260,000, the personal tax rate is equal to the corporate rate and thus not much of a benefit, according to Entrepreneur.
New Additional Tax Deduction for Other Business Types
A new Qualified Business Income (QBI) deduction (or Section 199A deduction) is available to small businesses beginning with 2018 taxes. Income taxes for small businesses are called pass-through taxes because the tax paid by the business passes through to the owners' tax returns. This part of the new tax law gives many small businesses a 20% deduction from net business income—in addition to all other business expense deductions.
Taxpayers at higher income levels may have additional limitations or exceptions. At higher tax levels, professional businesses, for example, are excluded. Only certain types of business income may be included. This new deduction is extremely complex.
There are many limits and qualifications to meet this new deduction. Talk to your tax professional if you think you might be able to take this deduction.
Higher Levels of Write-Offs for Buying Equipment and Autos
In the past few years, Congress has changed the amount businesses could write off (deduct) for buying business assets like equipment, machinery, and vehicles in the first few years. These accelerated depreciation deduction limits have been increased as an incentive for businesses to buy.
Your business can take a bigger expense write-off for buying a car for business use. Iowa State University has a comprehensive article describing how the new depreciation works under the Trump Tax Cuts Act.
For other large purchases, depreciation deductions have been increased. Bonus depreciation has been increased from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Bonus depreciation is now available for buying used assets .
Section 179 deductions have also been increased. For 2018, the maximum deduction has increased from $500,000 to $1 million, with amounts adjusted for inflation for years after 2018. The new law also expands Section 179 depreciation to building improvements like HVAC, fire protection, alarms, and security systems.
There are many limitations and restrictions on taking these depreciation deductions. See this article by the IRS on depreciation deductions under the new Trump Tax Cuts law.
New Cash Accounting Provisions
The new law allows more businesses to use cash accounting rather than accrual accounting methods. In cash accounting income and expenses are counted only when they are received or paid. In accrual accounting, you must count a sale when you send the invoice, even if you haven't received the money, and you must record expenses when you receive the bill.
Previously the IRS required accrual accounting for businesses with inventory. Under the new provisions, only businesses with $25 million in annual revenue need to use accrual accounting. Thus, more small businesses can use cash accounting and recognize both sales and expenses earlier.
Family Leave Tax Credit Until December 31, 2020
One of the best benefits of the TCJA is a new family leave tax credit that allows small businesses to get a tax credit for providing family leave to employees, under the provisions of the Family and Medical Leave Act (FMLA).
This family leave tax credit was extended to December 31, 2020.
To get the credit, your business must have a written family leave paid time off policy and give employees two weeks paid time off. The tax credit is calculated and added to your business taxes for the year. Read more about the tax credit and how to get it.
Drawbacks of the TCJA for Small Businesses
The Trump Tax Act also cut some deductions and tax credits and imposed limits on others. Some of these are a trade-off for the lower tax rate for corporations and the pass-through tax deduction for other businesses and a way to "simplify" taxes.
Lower Interest Rate Deduction
Before 2018, there was no limit on the amount of interest expense tax deduction a small business could take.
Getting an interest deduction is important because it helps businesses pay for loans and get a tax deduction too.
Starting in 2018 and beyond, the interest rate deduction for larger businesses is limited to 30% of the company's EBITDA (earnings before interest, taxes, depreciation, and amortization). But smaller companies with annual average gross receipts of $25 million or less for the past three years are exempt from this restriction, meaning they can take all interest expense deductions with no limit.
Tax Loss Carry Backs Eliminated
If your business has a tax loss (called a net operating loss), you may be able to carry it forward to future years, but you can no longer carry a net operating loss back to past years. The tax loss carryforward provision is also limited to 80% of taxable income, but the 20-year limit has been removed, so you can carry tax losses forward indefinitely.
This provision is only available to pass-through businesses that include business taxes on their personal tax returns. Tax loss carryforwards are complicated, so get the help of a tax professional if you want to use this tax-saving device.
End of the Domestic Products Activities Deduction
Businesses that make and sell products were formerly able to get a tax deduction of 3% of their net income, under Section 199 of the IRS Code. The idea was to give an incentive to engage in "qualified production activities" (basically selling, leasing, or licensing things made in the U.S.). But some companies were working the system, so this benefit was eliminated (until 2025, when the TCJA expires).
Meal and Entertainment Expense Deductions Limited
Previously, a business could deduct 50% of meals and entertainment for business purposes. The new law has made some cuts in this deduction, eliminating the deduction for entertainment, amusement, or recreation activities. You can still deduct the cost of business meals if you or an employee are present and the food or beverages aren't "lavish or extravagant." The meals must be for current or potential customers, clients, consultants, or other business contacts.
Meals are still 50% deductible, but they may be 100% deductible in certain specific situations, like a holiday party or annual picnic.
The IRS is still making changes to this section of the tax code. Continue to collect information about meal expenses and check with your tax professional before you attempt to take this deduction.
Commuting Expense Deduction Eliminated
Employers had been able to deduct the expense of commuting benefits reimbursed to employees, like carpooling, and parking. But you can still deduct bicycle commuting reimbursements through 2025. These benefits are no longer deductible as a business expense for employers. You can still provide these benefits, but your business won't get a tax deduction for the costs.
Get Help With These Tax Law Changes
Portions of this law are in flux, and other portions are complex. Prepare for tax season by making sure you have excellent records and you can show a business purpose for any expenses. Then take everything to your tax professional. They have the latest changes to regulations and can help make sure you aren't missing anything important.