New Tax Laws for Small Businesses: You Need to Know These

New 20% tax break on qualified business income

Good news for most small business owners: TCJA created a new qualified business income deduction. Certain businesses, including sole proprietorships, S-corporations, and partnerships can deduct up to 20% of their qualified business income, plus 20% of qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership (PTP) income.

But do you qualify?

To get the deduction, you must:

• Have taxable income under $157,500 (single) or $315, 000 (married)
• Have “qualified business income” (profit, but not interest income, dividends, capital gains or losses, or income earned outside the U.S.)

If you’re over the income threshold and part of a “specified service trade or business,” you might still get the tax break. This can be complex, so to be sure, ask an accountant. You can also check out the IRS’s website for more details.

100% first-year ‘bonus’ depreciation

If you acquired “qualified property” (either new or used property) after September 27, 2017 and before January 1, 2023, you’re in luck. You get to deduct 100% of the cost in year 1. The qualified property includes depreciable business assets, like machinery, equipment, computers, and business appliances with a recovery period of 20 years or less.

Section 179 first-year depreciation deductions

Did you remodel your business or make improvements to your building last year? How about add a new roof, install HVAC equipment, or a fire or alarm system? If so, you can get the Section 179 first-year depreciation deduction, which is increased to $1 million. Like with everything else, talk with your accountant to make sure you qualify.

Goodbye, corporate alternative minimum tax (AMT)

The TCJA repealed the corporate AMT for tax years beginning after December 31, 2017. This is good news—it means small C corporations can get bigger savings and have a simpler tax process. Here’s a great article on the repeal of the corporate AMT , but if you have questions, seek an accountant.

Cash method of accounting now allowed

TCJA now allows medium and larger size businesses to use the cash method of accounting (also known as the cash-basis accounting), rather than inventory accounting. Sound like Greek? This just means your in-house accountant or local hired CPA is happier. The cash method can simplify bookkeeping, which in turn saves time and money.

New deductions for company vehicles

Don’t miss this deduction, as it will begin to phase out in 2023 and eventually expire in 2027.

If you bought a passenger vehicle before September 28, 2017, that qualifies for bonus depreciation, the deductions are:

• 2018: $14,900
• 2019: $16,100
• 2020: $9,700
• 2021 and after: $5,760

If you bought a passenger vehicle after September 27, 2017, that qualifies for bonus depreciation, the deductions are:

• 2018: $18,100
• 2019: $16,100
• 2020: $9,700
• 2021 and after: $5,760

If you have a passenger vehicle that doesn’t qualify for bonus depreciation:

• 2018: $10,100
• 2019: $16,100
• 2020: $9,700
• 2021 and after: $5,760

Limits on interest expense deductions

Do you pay interest on a mortgage or a business credit card? Many small business owners do. In the past, this interest was fully deductible. But, in 2019 the TCJA created limits on what you can deduct. Starting with the 2018 tax year, small businesses can’t deduct interest expense that’s more than 30% of “adjusted taxable income.”

Limits on business losses

New tax laws make it incredibly important for small business owners to watch how the business is doing financially. If your business isn’t as profitable this year, you may have to face limits on what you can deduct. If you have excess business loss, you can’t use it to offset other personal income. This is pretty complex, so be sure to pull in an accountant. It also helps if you work with an accountant throughout the year—a professional can guide you in the right direction if you’re having a tough year business-wise.

No more deductions on entertainment meals

It used to be that you could deduct up to 50% of the expenses from most entertainment expenses and meals. Not anymore. TCJA limited the entertainment expense deduction, including most entertainment meals. Keep in mind, you can still deduct up to 50% of expenses related to meals with customers and vendors. But, they have to be business-related and can’t be lavish.

Whew. There’s a lot here. I know. The new tax laws made the 2019 tax season pretty complicated for the average business owner. That’s why hiring a good accountant really pays off. A professional can walk you through the changes and help you find the best deductions for your business. In time, we’ll get used to the changes. 2020 is our second chance to make the most of it—let’s get started now.