What Companies Need to Know About the New Tax Bill
With the latest tax bill becoming a law, there is now a plethora of changes that are scheduled to take effect. For companies, however, most of the new rules originate from the same underlying concept that aims to save their money. Whether it is one of the new provisions that doubles the depreciation expense which businesses are entitled to or makes them eligible for the so-called “qualified business deduction”, it seems that every company, regardless of their status, can find a way to benefit from the new law.
First, in case of incorporated entities, the progressive tax system for corporations has been replaced with a flat fee of 21 percent on their earnings. This constitutes a 14-percent reduction in how much most large companies will be paying to the IRS annually. Additional, unlike some other provisions that are in this bill, the new corporate tax rate is not subjected to the “sunset” rule. This means that it will not go away come 2026.
Expectedly, not all business owners in the U.S. opt to incorporate their companies. Given the never-ending amount of paperwork and filing that must be done, one cannot exactly blame them for choosing to retain the status of a small business. Nevertheless, they will still see some positive changes that are directly related to the Tax Cuts and Jobs Act passed in December of 2017. One of those is the aforementioned business income deduction.
For sole proprietors who are self-employed, the biggest concern is to reduce the amount of taxable income that will be reported on a form called “Schedule C”. This is because their taxes will be calculated as a percentage of those earnings. Thus, the relationship between their net income and tax liability is directly proportional. Hence why the U.S. tax system is called progressive or “the more you make, the more you pay”. With the latest changes, however, entrepreneurs can now deduct as much as 20 percent of their income on a no-questions-asked basis. It is a flat deduction that they have been allowed so that their tax liability would be reduced.
Additionally, companies should know that all of their profits generated outside of the United States will no longer be taxed by the IRS. The idea behind this provision was to avoid double taxation of those entities that may have already gotten taxed by the foreign country in which they operated. Not to forget that the so-called “bonus depreciation” has been increased from 50 to 100 percent. That means that business owners can deduct the entire cost of their new assets placed in service during the tax year. This comes as an addition to the Section 179 depreciation deduction that went up from $500,000 to $1 million limit. Meaning, business owners can deduct twice as much in depreciation now!