The recent Tax Cuts and Jobs Act was the first major shakeup of the country’s tax system in about three decades. In addition to bringing change for individuals, the law will also affect small businesses. Below we summarize some of the most important changes.
Reduces C-Corporation Taxes
The new law reduces tax rates for C corporations to 21% (from 35% previously). Although many startups do not generate profits early on and will not benefit fully from this change, they will benefit later once their company starts producing more income.
Reduces Taxes for Certain S Corporations
If your startup is an S corporation or a limited liability company (LLC), then you could qualify for a 20% deduction on income attributable to your business. Most companies will qualify, though there is a list of exclusions, including businesses in the following sectors:
- Financial services
- Brokerage services
Even if your business is on the list of exclusions, you can still take your 20% deduction if your income is below $157,500 for single filers and $315,000 for joint filers. The deduction is then gradually phased out until income exceeds $207,500 for single filers and $415,000 for joint filers.
Startups should be aware that you cannot increase your wages to qualify for the deduction. The 20% deduction is also phased out if you report W-2 income in excess of $157,500 (or $315,000 for joint filers).
Eliminates the Entertainment Deduction
Previously, entertainment expenses such as sporting events were deductible as a business expense. No more. The 50% deduction for business meals survived, but now eating facilities provided by the employer are subject to the same limitation.
Accelerates the Depreciation of Equipment
Under the old law, a startup would have to depreciate the cost of equipment over the useful life of the asset. Now, you can fully deduct $1 million in equipment for the year that you purchase it. As a result, you can spend twice the amount in equipment from 2018 to 2022 that you could in 2017. After 2022, however, increased expensing is phased out.
Alternative Minimum Tax (AMT) Removed
The AMT has been entirely removed from the corporate tax code. Individual taxpayers are still subject to the AMT, but the threshold has increased dramatically to $500,000 for individuals and $1,000,000 for married filers.
Your taxes overseas will be taxed at 15.5% for cash and 8% for non-cash. You will be taxed regardless of whether your company repatriates the funds. However, after paying the one-time charge, companies can bring the profits back to the U.S. tax-free. This change will likely hit large multinationals that have stored cash offshore and will not likely affect most startups.
Speak with a Silicon Valley Startup Lawyer
Every change to the tax code provides startups with new opportunities to save on their taxes. If you have a question about business formation, please contact Kalia Law P.C. as soon as possible. You can reach us by calling 650-701-7617 or submitting an online message.