Now that the new tax law is in effect, many people may be wondering how it will impact their business. One of the biggest changes that the new tax law brings is undoubtedly the reduced corporate tax rate from a top rate of 35 percent to a flat rate of 21 percent. However, the new tax law brings many additional changes. Business owners should especially be aware of the following:
- Two separate provisions (Section 179 and 100 percent bonus depreciation) allow for immediate expensing of business assets such as equipment, furniture, or machines. The bonus depreciation was actually introduced for assets purchased after Sept. 27, 2017.
- The cap for the immediate write-off for business vehicles was almost tripled.
- To make up for the fact that flow-through entities whose income is taxed at the individual level do not benefit from the reduced tax rate a special business income deduction was introduced. It allows business owners with certain types of business income from partnerships, S corporations, or Limited Liability Companies to take a 20 percent deduction on that income. This deduction is subject to limitations based on W-2 wages paid and taxpayer income. It also includes provisions to limit the benefit from this deduction for certain service providers (accountants, performing artists, doctors, lawyers, etc.).
- The new law eliminates the alternative minimum tax for corporations and the domestic production activities deduction.
- Limitations were introduced for business interest expense (at 30 percent of business income) and for loss carry forwards (at 80 percent of business income).
This new tax plan is so new that many resources are not quite complete at this point. The Internal Revenue Service is working on providing guidance as quickly as possible but, even still, its website does not provide much information. People looking for additional information should consult a Certified Public Accountant or tax expert.
Sonja Pippin is an associate professor in the Department of Accounting and Information Systems at the University of Nevada Reno. She teaches tax and financial accounting classes at the undergraduate and graduate level. Her research includes the evaluation of different tax systems, the (unintended) impact of new tax legislation on different types of taxpayers as well as their effect on stock market and the economy in general.