Introduction: Tax reforms can have a significant impact on small businesses, influencing
their financial planning, operations, and overall profitability. Understanding the
implications of tax reform is crucial for small business owners to make informed
decisions and maximize their tax benefits. In this blog post, we will explore the key
aspects of tax reform and discuss its impact on small businesses.
1. Lower Corporate Tax Rates: One of the notable changes in tax reform was the
reduction of corporate tax rates. Small businesses structured as C-corporations
now benefit from a lower federal tax rate, which can result in increased after-tax
profits. This reduction provides small businesses with more resources to invest in
growth initiatives or reinvest in the business.
2. Qualified Business Income Deduction: The Tax Cuts and Jobs Act introduced the
Qualified Business Income (QBI) deduction, which allows eligible pass-through
entities, such as partnerships, S-corporations, and sole proprietorships, to deduct
up to 20% of their qualified business income. This deduction can significantly
reduce the taxable income of eligible small businesses, providing a substantial
tax benefit.
3. Changes to Depreciation Rules: Tax reform expanded bonus depreciation and
increased the Section 179 deduction limits. Small businesses can now deduct a
larger portion of the cost of qualifying assets immediately instead of spreading it
out over several years. This change incentivizes businesses to invest in new
equipment, technology, and other eligible assets to stimulate growth and
productivity.
4. Limitation on State and Local Tax (SALT) Deductions: Tax reform introduced a
$10,000 cap on the deduction for state and local taxes paid by individuals and
businesses. This limitation may have a greater impact on small businesses
operating in high-tax states, as it reduces the deductibility of state income taxes
and property taxes. Business owners should factor in this limitation when
assessing their overall tax liability.
5. Changes in Net Operating Loss (NOL) Rules: Tax reform imposed restrictions on
net operating loss deductions. It limited the carryback of NOLs and introduced a
carryforward limit of 80% of taxable income. Small businesses with NOLs should
understand these changes and their implications for offsetting future taxable
income.
6. Impact on Pass-through Deductions for Professional Service Businesses: Tax
reform created limitations on the availability of the QBI deduction for certain
professional service businesses, such as law firms, accounting firms, and
consulting practices. These businesses may face stricter eligibility requirements
or phase-outs for claiming the full QBI deduction. Understanding these limitations
is essential for small businesses operating in these industries.
7. Changes to Employee-Related Taxes and Benefits: Tax reform introduced
changes to employee-related taxes and benefits. For example, it lowered the
corporate tax rate but eliminated certain employee deductions and benefits.
Small businesses should review the impact of these changes on their payroll
taxes, employee benefits, and compensation structures.
8. Compliance and Reporting Requirements: Tax reform introduced new
compliance and reporting requirements, including changes to tax forms, record-
keeping obligations, and reporting certain transactions. Small businesses
should ensure they stay updated on these requirements to avoid penalties and
comply with tax regulations.
9. Potential State-level Tax Changes: While tax reform primarily focused on federal
tax changes, some states have responded with their own tax law adjustments.
Small businesses operating across state lines should be aware of any state-level
tax changes that may affect their tax liability or reporting obligations.
10. Seeking Professional Guidance: Navigating the complexities of tax reform can be
challenging for small business owners. Engaging the services of a qualified tax
professional or accountant can provide valuable guidance and help businesses
understand the specific impact of tax reform on their unique circumstances.
Conclusion: Tax reform has brought significant changes that impact small businesses.
Understanding the implications of tax reform enables small business owners to adapt
their tax planning strategies.