The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22nd, 2017 and is the most significant overhaul of the U.S. tax system in more than 30 years.
It brought sweeping changes that will affect all types of businesses and individuals across the economic spectrum. It’s also commonly referred to as the GOP Tax Plan or Republican Tax Plan.
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What changes are in the Tax Cuts and Jobs Act?
It’ll be easier if we divide the changes into two distinct groups:
For businesses, the TCJA:
- Reduces the top corporate income tax rate from 35 percent to 21 percent;
- Introduced a new 20 percent deduction for income from pass-through businesses;
- Eliminates the corporate alternative minimum tax (AMT);
- Allows for what’s known as “full expensing” (aka “bonus depreciation”) of short-lived assets (stuff like equipment, furniture, computers and the like) for five years;
- Expands a popular deduction for small businesses, the Section 179 deduction, for five years;
- Limits the amount of interest expense (i.e., the cost to borrow money) some businesses can deduct;
- Allows businesses with profits earned overseas to bring them back to the U.S. and pay a special low tax rate;
- Expands the use of the cash method of accounting to corporations that meet certain conditions.
As for individuals, the TCJA:
- Reduced the top individual tax rate from 39.6 percent to 37 percent and re-configures other tax brackets;
- Nearly doubles the 2018 standard deduction to $12,000 for single filers, $18,000 for head of household, and $24,000 for those married filing jointly;
- Eliminates the personal exemption;
- Expands the child tax credit from $1,000 to $2,000 and increases the phase-out limit from $110,000 to $400,000.
- Repealed the individual mandate to purchase insurance under the Affordable Care Act.
These are just the highlights and are in no way a comprehensive list of the changes.
How does the Tax Cuts and Jobs Act affect small businesses?
There a few changes that small businesses should look into closely:
- The 20 percent deduction for pass-through business income
This is a new provision in the tax law that will benefit many business owners. Fair warning, though, the rules are complicated, and you’ll want a tax professional to look into it for you to see if your business qualifies.
- Expanded Section 179 deduction This allows small businesses to fully deduct the cost of certain property (e.g., machines, furniture, computers, and software, among other things) in the year it’s put to use. Under the TCJA, a business can deduct up to $1 million under Section 179. But be careful, this rule will start to phase out after five years.
- Bonus depreciation Before the TCJA, bonus depreciation wasn’t offered every year and it usually allowed only a portion of new property to be deducted. Now, under TCJA, similar to the 179 deduction, bonus depreciation allows a business to deduct 100 percent the cost of eligible property. Also, the TCJA allows used property and certain improvements to real estate to qualify for bonus depreciation. Like the Section 179 deduction, the bonus depreciation provision will start to phase out after five years.
There are lots of details behind these rules, check out this article on the changes for businesses for more.
When does the tax plan go into effect? Will this affect my 2017 tax returns?
The TCJA officially went into effect on January 1, 2018, and the vast majority of this stuff will apply to 2018 tax returns and beyond. Most of the tax plan won’t affect 2017 tax returns.
So what can I do now to prepare my business?
There’s a lot to wade through, so talk to your CPA or payroll provider to learn how the TCJA will affect your business specifically.
Want to learn how it affects your business? Check out this live recording where two tax experts break the tax reform down.