by Allison Hester (from eClean Magazine, Issue 50)
This past December, Congress passed a new tax plan that has several direct changes impacting small business owners. Here
are the primary things you, as business owners, need to know about the new tax plan:
1. Reduces corporation (C-Corp) tax rate structure.
Note that this is exclusively for C-corporations. The tax bracket, which previously topped out at 35%, is being replaced with a flat
2. Eliminates employee-paid tax deductions. If your employees are required to purchase certain things for work out of pocket, such as equipment or uniforms, they can no longer deduct those expenses on their taxes. As an employer, however, you can pay for them and take the deduction.
3. Removes entertainment deductions. Before this year, taxpayers could deduct 50 percent of business meals and
entertainment. Effective January 1, the 50 percent meal deduction remains, but you can no longer deduct entertainment, such as tickets to games or shows for clients.
4. Discontinues transportation fringe benefits for employees. Under the new laws, you can no longer deduct expenses that pay for your employees’ travel to and from home, including transit passes or “qualified parking” (i.e., parking provided to an employee near the business premises or near a mass transit station). The exception is if the transportation is deemed “necessary for ensuring the safety of the employee.” However, the meaning of this “safety clause” is still unclear. If you are going to provide these benefits, you need to document it’s necessity for safety.
5. Allows for full deduction (i.e., bonus depreciation) of equipment. Through the year 2022, the new law allows businesses to immediately deduct 100 percent of the cost of equipment in the year it is placed in service. So if you buy a new $10,000 pressure washer, you can deduct the full cost in the year you buy it rather than stretching the deduction out over several years. After 2022, this allowable bonus depreciation will be phased down over four years: 80% for property placed in service in 2023, 60% for 2024, 40% in 2025, and 20% in 2026.
6. Adding a 20 percent exclusion for many pass-through entities. A pass-through entity refers to sole proprietorships, partnerships, s-corporations, and limited liability companies. The new plan will allow most of these types of entities to save 20 percent off their earnings before paying taxes on it. There are exclusions for higher income providers of personal services, such as lawyers, accountants, etc.
These are the main changes for small businesses, but there may be others that affect your specific situation. This article serves only as a guide. To learn more about how the new tax plan will impact your business specifically, talk to your financial and legal specialists.