The Impact of the Tax Cuts and Jobs Act on Small Businesses
Posted on 22-01-2023 08:59 PM
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The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, and it brought about significant changes to the U.S tax code. One of the main goals of the TCJA was to provide relief for small businesses. Here's a breakdown of some of the ways the TCJA impacts small businesses.
Lower Corporate Tax Rate: The TCJA lowered the corporate tax rate from 35% to 21%. This means that small businesses that are organized as C-corporations will see a significant reduction in their tax liability.
Pass-Through Deduction: The TCJA created a 20% pass-through deduction for small businesses organized as pass-through entities such as S-corporations, partnerships, and sole proprietorships. This deduction allows small businesses to deduct 20% of their qualified business income (QBI) from their taxable income.
Expensing: The TCJA increased the Section 179 expensing limit from $500,000 to $1,050,000, and the phase-out threshold from $2,000,000 to $2,620,000. This allows small businesses to expense a higher amount of their capital investments in the year they are made, rather than depreciating them over a number of years.
Interest Deduction Limitation: The TCJA limits the amount of business interest that can be deducted. Businesses with average annual gross receipts of $26 million or less are not subject to this limitation.
Bonus Depreciation: The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. This allows small businesses to deduct a higher percentage of their capital investments in the year they are made.
Net Operating Losses: The TCJA limits the amount of net operating losses (NOLs) that can be carried forward to offset taxable income in future years. Businesses with average annual gross receipts of $26 million or less are not subject to this limitation.
In conclusion, the TCJA has brought about significant changes to the U.S tax code that impact small businesses. The corporate tax rate was lowered to 21%, the pass-through deduction allows small businesses to deduct 20% of their qualified business income, the expensing limit was increased, bonus depreciation percentage was raised, and limits were imposed on interest deduction and net operating losses. These changes have the potential to provide significant tax relief for small businesses, but it's important to note that the rules and qualifications for these provisions can be complex. It's important for small business owners to consult with a tax professional to determine how the TCJA will affect their specific business and to ensure compliance with the tax laws and regulations. Additionally, it is important to monitor future changes in the tax laws as it is a dynamic process. It is also important to note that the TCJA provisions are temporary and are set to expire after 2023, unless Congress acts to extend or make them permanent.