The government recently approved some of the most significant tax reforms seen in recent years. These reforms will affect all taxpayers, including small businesses. As you get ready to prepare your 2018 tax return, be aware of the following changes.
- Changes to tax rates.
If you are a sole proprietor, you may be able to take advantage of a lower tax rate when you prepare your tax return in 2019. New, lower tax rates for individuals are in effect until 2025 because of the most recent tax bill.
Corporations may also enjoy a lower tax rate because of these reforms. The corporate income tax rate has been lowered from 35 percent to 21 percent for 2018 and subsequent years, which represents significant savings.
- More bonus depreciation.
Certain types of deductible expenses must be depreciated over a number of years, which means it takes a long time for your business to fully deduct the expense. Bonus depreciation, however, is a provision that allows you to deduct a large portion of the expense during a single tax year. The new tax bill increased bonus depreciation to 100 percent for 2018, which means you may be entitled to larger deductions when you prepare your tax return in 2019. This provision applies to most purchases of equipment or other similar assets that will be useful to your business for no more than 20 years.
- Business income deduction.
If your business qualifies, and you operate as a pass-through entity, you may be able to deduct as much as 20 percent of your qualified business income when you complete your 2018 tax return. To qualify for this deduction, your business must be structured as a sole proprietorship, LLC, partnership or S corporation. To claim the full 20 percent deduction, your taxable income must also fall beneath a certain threshold. If your taxable income exceeds the threshold, you may still be able to claim the deduction, but there are additional restrictions to meet.
- Changes to expense deductions.
The recent tax reforms also made some significant changes to deductible business expenses. For example, certain types of transportation expenses that were once fully deductible are no longer deductible at all, such as employee parking. Likewise, expenses incurred while entertaining clients are no longer deductible. However, you can still deduct 50 percent of the cost of client meals and meals provided to employees at work.
With all of the changes to tax law, many businesses will need to seek professional help when preparing their 2018 tax returns in 2019.
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