Part of our small business tax preparation and planning services includes staying up to date on tax laws. Tax laws are constantly changing, and it’s important you have someone on your side that’s looking out for you.
The Tax Cuts and Jobs Act (TCJA) brought forth many changes in taxes. While this legislation was enacted three years ago, it still has a big impact on your taxes today. Thus, it’s important, as a business owner, that you or your CPA understand key provisions.
So, let’s jump into a few key aspects of the TCJA that you should be aware of.
A Reduced Corporate Tax Rate
The TCJA reduced the corporate tax from 35% down to 21%. Now, if you don’t currently have a corporation you may be thinking, “I’ll just go and incorporate to pay fewer taxes!”
While that sounds great in theory, it may not be the best option for you and your business. The legal entity your business is and also the tax classification for your business entity are important considerations. Confused yet? If you are, don’t worry; it is confusing. Your legal entity can be different from your tax entity.
For example, your legal entity could be a legal liability company, while your tax entity could be an S corporation.
Due diligence should be performed to ensure both your legal and tax are chosen with intention. There is not a one size fits all answer here, and simply incorporating to gain access to the lower tax rate is not always the best way to go.
Be Careful When Deducting Interest
While the TCJA reduced the corporate tax rate, the Act also reduced how much interest can be deducted. Previous to the TCJA, all business interest was deductible. Thanks to the passing of the TCJA, interest expense is now limited to 30% of business income. As a result, if you have interest in your business, make sure you’re aware of this come tax time – you may not be able to deduct it all!
Of course, with most tax laws, there are exceptions to the 30% interest limitation. For both 2019 and 2020, businesses can deduct up to 50% of their business income in interest expense. This is all thanks to the CARES Act, which provided that taxpayers can elect to use their 2019 adjusted taxable income when calculating the 2020 limit. This will benefit taxpayers whose income has decreased in 2020.
Not to get off on a tangent, but the CARES Act brought forth many other changes. To read more about the CARES Act and its impacts, be sure to check out our webinar here.
Consider Investing in Capital Assets
It’s no secret that investing in capital assets has been a strategy to reduce taxable income for years. The TCJA expanded bonus depreciation and Section 179 expensing, which allows taxpayers to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.
Curious to learn more? You can read more about bonus depreciation in our 5 Tax Saving Strategies blog. While it may sound too good to be true, it’s not! Investing in capital assets can provide tremendous write offs for you and your business.
Work with Someone You Trust
The changes brought forward by the TCJA impact how much tax you pay. Those discussed in this blog highlight a few items to be aware of, but there are many more. It’s important that you work with a CPA who specializes in tax planning to make sure you’re strategically planning how to reduce your tax burden.
Tax law is constantly changing, making it difficult for you to know if you’re maximizing your deductions and also following the rules. Luckily, when you work with us, you don’t have to worry about all the changes! Our job to stay current on these changes so you don’t have to. If you need a hand with your small business tax preparation, schedule a call today.