The 2017 Tax Cuts and Jobs Act significantly changed the way businesses are taxed. Although the tax cut for C Corporations (to 21%) garnered the most attention, small business owners should see big wins, also. Below, we summarize some of the more significant tax changes you can take advantage of. For more information, call us today to speak to a small business attorney in Silicon Valley.
100% Depreciation—For Now
The tax code allows you to write off the wear and tear or reduction in value of certain types of property. However, the code has limited the amount you can deduct each year, depending on the type property. For years, small business owners could only deduct 30%. Then, in 2015, Congress decided you could deduct up to 50%.
Thanks to the recent 2017 Act, you can now deduct 100% for certain property. Unfortunately, the new rate does not stay at 100% forever—only until 2023. It then decreases gradually, year by year, to 80%, 60%, etc.
The 100% bonus depreciation does not apply to all property. For example, real estate is excluded. But if you are hoping to buy business machinery, furniture, or equipment, then it can be cost effective to do so now.
Higher Exclusions from the Estate Tax
For many entrepreneurs, their small business is their largest asset and the principal legacy they will leave to their family. Small businesses are subject to estate taxes, which can dramatically decrease the value that beneficiaries inherit.
Helpfully, the federal government excludes a certain amount of property. In 2017, for example, the first $5.49 million was excluded. With the new tax bill, the first $11.59 million is excluded for individuals—a dramatic increase. Married couples will be able to exclude double—$22.36 million.
Like the depreciation allowance, the estate tax exclusion lasts for only a limited time. In 2026, it will return to $5 million.
A New 20% Business Income Deduction
Many small businesses are not formed as C Corporations but instead as a different entity that passes income through to its owners. For example, you might have a sole proprietorship, partnership, S Corp, or LLC, all of which are pass-through entities.
With the C Corp tax rate falling to 21%, Congress did not want other small business owners left out. Unfortunately, they couldn’t just lower their taxes because pass-through income is taxed on the owners’ individual returns.
Instead, Congress gave a 20% deduction for qualified business income, called QBI. This amount will reduce the net income of your business that is subject to taxation. To qualify, your taxable income must be under $157,550 for an individual or $315,000 for married taxpayers who file jointly.
Speak with a Silicon Valley Small Business Attorney Today
Changes to the nation’s tax laws present opportunities for savvy business owners to save money, but you will need an experienced business attorney to guide you.
At Kalia Law, we help startups in Silicon Valley form businesses in the most efficient manner for them. To find out more about how we can help, please contact us today by calling 650-701-7617 or send as an online message.