Taxes are the major cost that needs to be accounted for when making financial decisions for CEOs, Founders, and Managing Partners. They must understand the latest tax reforms in the United States to plan properly and budget accordingly.
Troy Renkemeyer, Principal at Renkemeyer Financial Consulting, takes a look at what these changes mean for business owners.
The US tax code has undergone significant reform over the last few years, with the most recently enacted in December 2017. The new law—the Tax Cuts and Jobs Act (TCJA)—made substantial changes to both personal and corporate tax rates and deductions. Here are some of the key points you should know about how this affects business owners.
Corporate Tax Rates
One of the primary changes is a reduction in corporate tax rates from 35% to 21%. This rate applies to both C corporations—the traditional corporate structure used by most businesses—and pass-through entities such as partnerships and limited liability companies (LLCs).
Small businesses organized as pass-through entities have a 20% deduction available on up to $315,000 of their taxable income per year. That means their effective tax rate can be even lower than 21%.
Personal Income Taxes
The TCJA also changed personal income taxes, which can significantly impact business owners who pay themselves through salaries or distributions from LLCs or S Corporations. There are new brackets with rates ranging from 10% to 37%, depending on your income level and filing status.
Additionally, if you have investments such as stocks or bonds outside retirement accounts, you may qualify for lower capital gains taxes due to adjustments made by the TCJA.
Tax Deductions
The TCJA also changed many deductions available for individuals and businesses. For example, state and local income taxes were limited to $10,000 per year; unreimbursed employee expenses such as mileage reimbursement have been eliminated; and home office deductions have been reduced significantly, if not outright removed in some cases.
Furthermore, certain itemized deductions like medical expenses will only be allowed under some circumstances if they exceed 7.5% of your adjusted gross income (AGI). All business owners need to be aware of these changes so they don’t pay more taxes than necessary due to missing out on these deductions or credits when filing their returns each year.
Opportunities For Foreign Earnings
The recent law has opened up opportunities for foreign earnings. Companies can utilize a territorial tax system in which only domestic payments are liable to taxation. That allows corporations with significant foreign profits to repatriate their earnings at set rates – 15.5% in cash and equivalents and 8% if the funds are reinvested.
Depreciation Allowances
One of the key areas impacted by the TCJA is depreciation allowances. Businesses now have an excellent opportunity to capitalize on considerable tax savings with the new 100% bonus depreciation on qualified property placed in service after September 27, 2017, and before January 1, 2023.
In addition, if a written binding contract is already in place when acquiring certain types of property, businesses may benefit from extended bonus periods. Further, for property placed into service after the December 31 deadline, a 20% phase-down is expected each year until 2027.
Businesses can deduct more for certain investments than they could before the TCJA. Furthermore, companies now have more flexibility regarding how they choose to depreciate their assets—they can opt for straight-line or accelerated methods depending on their needs.
Financial Planning Strategies
Due to the complexities of tax reform and its impacts on businesses, business owners should consult a financial planner or accountant knowledgeable about these changes before making big decisions regarding taxes or finances.
That said, there are some strategies that financial planners may suggest when helping business owners plan their finances in light of recent tax reforms:
– Purchasing large assets as soon as possible while taking advantage of bonus depreciation rules
– Maximizing retirement contributions so that funds are invested sooner rather than later
– Accelerating deductions while deferring income where possible
– Refinancing debt under lower interest rates
– Taking advantage of other deductions such as Section 179 expensing rules or research credits
Conclusion
The US taxation system constantly evolves based on current events and economic trends. Business owners must stay informed about any updates or changes that may affect their operations–especially those regarding tax reform laws like the TCJA. Passed in December 2017, the bill included significant reductions in corporate tax rates along with other modifications related to personal income taxes and deductions.
Troy Renkemeyer suggests keeping yourself informed about these changes so that you can make informed decisions about how best to manage your finances while still complying with all applicable laws and regulations set forth by federal or state governments. With this knowledge, you should have no problem navigating the ever-changing landscape of taxation in America today.
