The upcoming tax year brings in a lot of changes for self-employed and business taxpayers.
Taxpayers with sole proprietorship, partnerships, trusts, and S corporations will face some difficulties when they’re ready to file for the 2019 tax season because of the Tax Cuts and Jobs Act (TCJA).
Read below for the changes you need to know for your business taxes.
Here’s what qualifies as business income.
In order to have qualified business income (QBI), it must be domestic income from a trade or business. Your qualified business income (QBI) is calculated into a net amount and does not include employee wages, capital gain, interest and dividend income.
The maximum deduction increases.
Prior to the TCJA, you could deduct up to $500,000 for any section 179 property. It has now increased to $1 million. The phase-out threshold also increases from $2 million to $2.5 million. (Subject to change due to inflation.)
The new 20% deduction.
There’s been a lot of talk about the new tax deduction for businesses. As a result of the TCJA, all pass-through entities now qualify for a deduction of up to 20% of their QBI. (See Section199A) Most importantly, in order to be eligible, your taxable income must be under $315,000 for joint filers and $157,500 for other taxpayers.
On the other hand, once your QBI (prior to deduction) exceeds $207,500 for single filers and $415,000 for joint filers, you must claim the 20% deduction or the equivalent of one of the following:
- 50% of wages paid to W-2 employees for the financial year or
- The sum of 25% of W-2 wages plus 2.5% of the cost of the qualified property
However, if you have a specified service trade or business (SSTB), you cannot claim the QBI deduction if you exceed $315,000 if you’re filing jointly, or $157,500 for individuals.
C Corporations are taxed at a new flat rate.
Instead of double taxation as an entity and then as a shareholder at a tax rate of 35%, the TCJA reduced the tax to a flat rate of 21%.
Temporary 100 percent expensing for certain business assets
If you obtain a business property and place it into service after Sept. 27, 2017 and before Jan. 1, 2023, your bonus depreciation percentage increases to 100%. Additionally, you can now deduct expenses for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.
Take a look at what the TCJA eliminates for 2019.
Although businesses have a bigger tax break for their deduction, some major deductions were eliminated with TCJA. Here’s whats no longer available to claim.
- Entertainment expenses
- Local lobbying expenses
- Carrying back a net operating loss (NOL)
- All miscellaneous itemized deductions subject to the 2% of adjusted gross income floor (AGI)
- Computer and peripheral equipment (mouse, keyboards, monitors, printers etc.) as a “listed property”
- Employee transportation fringe benefits deduction for employers
- Payments for sexual harassment or sexual abuse cases
Here are some other tax changes.
- Meal expenses remain at 50% deductible if the taxpayer or employee of the taxpayer is present and the food isn’t “extravagant”
- Employers can deduct qualified bicycle commuting reimbursements as a business expense
- Employers must include moving expense reimbursements in employees’ wages (excluding members of the U.S. Armed Forces)
- Net operating loss (NOL) is only allowed in current and future years up to 80% of your taxable income
- Vehicles in service after Dec. 31, 2017, can claim the maximum depreciation of $10,000 for the first year ($18,000 under the 100 percent bonus depreciation)
- Small businesses under the average annual gross income of $25 million in the prior three-year period can use the cash method of accounting
- Large businesses under an annual gross income of $25 million have a business interest expense limit of 30% of the business’ AGI
- S corporations have an extended three year holding period for certain partnership carried interests, which will be clarified by the IRS
- Like-kind exchanges only applies to the exchange of real property; but disallows personal, intangible property, and real properties held for sale
- Residential rental property for alternative depreciation system recovery period changes from 40 years to 30 years
- Qualified restaurant and retail improvement property have a 15-year recovery period
- The IRS extends filing an administrative claim for wrongful levy or seizure from nine months to two years
Keep your eyes peeled for more information.
We get it. Trying to get a hold of the constantly changing tax laws can be nerve wracking. That’s what we’re here for. File your late taxes if you haven’t by creating your account going back to 2005!