Tax Reform Impact on Businesses

The December of 2017 has seen legislative action form the new administration that many people did not believe would take effect. After multiple decades of the tax code as most citizens know it, 2018 filling will be completed in accordance with the latest rules that include changes to the standard and itemized deductions, corporate tax rate, asset depreciation, and much more.

The code is written do guarantee a tax break to every layer of the society, except people in the first bracket who make less than $9,525 (single) or married fillers ($19,050). Nevertheless, those individuals can expect the same 10-percent rate as before. Another major change is the corporate tax rate that has been dropped to 21 percent. What most people are very curious about, however, has to do with the impact that the new tax code will have on small business. After all, one of the driving reasons for such a large-scale change is to help the economy and facilitate investments.


Asset Depreciation

A very resolute change will come from the manner that depreciable assets will be handled. Over the past, businesses that rely on any type of equipment had to manage depreciation expense on an on-going basis throughout multiple years. This meant that their income statement would show additional expenses which, in turn, would reduce their bottom-line profit. Now, the new law will allow people to take all of the necessary depreciation in the first year of the asset’s operation. A faster write-off is appealing as it simplifies matters and saves money in the long run. Expectedly, however, some limitations will apply to areas like real estate.


The Territorial Approach

Although individuals will not see any changes in this area, businesses can certainly celebrate. This is because the U.S. will be switching to the so-called “territorial” system that avoids taxing profits made outside of the country. Thus, if a business is based in the United States yet it creates 50 percent of its revenues in China, it would not be liable to pay the IRS on those 50 percent made outside.


Employee Deductions

A notable downside is the amount of work that payroll departments in all businesses are anticipating. Since the standard deduction has been doubled and the personal exemption is not applicable anymore, the money people get withheld from their paychecks will have to be adjusted. Moreover, the new tax code allows for a maximum of 28 percent to be deducted form bonuses, commissions, or additional wages, which will affect millions of Americans who get these every year.


A Common Deduction With Employers

Most business owners have found themselves taking their employees or associates to some type of work-related lunch or dinner. Up until now, these costs were fully deductible until a certain threshold. Moving on, however, only 50 percent of those costs would be classified as deductible business expenses. What is even more unfortunate is that this provision expires in 2025, which means that no deductions related to food and beverage for employees will be allowed after the fact.


Pass-Through Entities Get a Boost

A business that is classified as a pass-through entity is not taxed at its own level. All the profits made from that type of business are taxed at the owner’s personal tax rate on his own from 1040. Now, people who run companies that belong on the list of pass-through entities like partnerships, per se, will be able to deduct another 20 percent of their income. This means less taxable income and a lower tax liability. Sadly, once again, this provision is only valid for another seven years and does not apply to any “professional service”.


A Spike in Demand

Even though there are multiple parts of the new tax code that are set to expire in 2025, people can expect to keep more of their money in 2018. This comes from the increased deductions that will yield in less money being subtracted from regular paychecks. Although it may not seem like a lot of money on an individual level, it will be a great boost to the economy when millions of people start getting paid a little more. Consequently, businesses should prepare to handle any new demand that might arise from additional funds being available to the public!