4 ways the Tax Cuts and Jobs Act benefits small businesses
According to Tom Hood, CEO of the Maryland Association of Certified Public Accountants (MACPA) and one of the top 100 most influential people in accounting, CPAs are looking like the coolest kids in the room. And he’s not the only one taking notice.
The Wall Street Journal recently declared, “Accountants face long hours, anxious clients, but it’s never been a better time to be a CPA.” Likewise, the Chicago Tribune titled a December article, “‘I’m a rock star’: Thanks to the tax bill, America’s accountants are suddenly very popular people.”
“We’re hearing things like ‘rock star,’ ‘center of attention,’ ‘sexy’ — CPAs are back in vogue, and that’s kind of exciting,” says Hood.
As you might guess, the reason for this unexpected popularity has a lot to do with the recently passed Tax Cuts and Jobs Act, largely considered to be the most significant tax law passed since 1986. “CPAs have been business as usual for the last 30 years,” says Hood, “but now, with all this stuff in a bit of a flux, clients are saying, ‘I need to know what this means.’”
It’s a challenge CPAs all over the country are attempting to meet, as they acquaint themselves with over 500 pages of new tax law, just in time for tax season. Now, in the midst of preparing 2017 taxes for individuals and businesses alike, they’re tasked with the role of determining how the new law may affect their clients’ finances next year and beyond.
In an effort to better understand what the 2017 Tax Cuts and Jobs Act will mean for small businesses, we’ve partnered with three Maryland CPAs: Dan Thrailkill, director at Ellin & Tucker; Jim Wilhelm, director at SC&H Group; and Beverly Bareham, president of Bareham CPA. With their help, we’ll attempt to examine the good, the bad, and the confusing of this new tax law, in the form of a three-blog series designed to answer this question:
Is the Tax Cuts and Jobs Act good for small businesses?
In part, it depends on what you would call a “small business.” On one hand, the Tax Cuts and Jobs Act effectively reduces tax rates by 40 percent for C corporations. On the other, while small businesses certainly can file as C corporations, most are classified as “pass-throughs,” meaning they file as S corporations, partnerships, LLCs, and sole proprietorships. And there are tax benefits for these as well.
In the end, the Tax Cuts and Jobs Act, like most tax laws, is full of complexities. It’s difficult to make blanket statements about how the law will affect businesses, based on size or income. There are plenty of potential benefits (and pitfalls) that could impact your small business, but they’re largely tied to location and industry.
Complexities or no, we’ve dived deep into the Tax Cuts and Jobs Act in an effort to understand the (mostly) beneficial parts of the law and the parts that aren’t as positive. This article can’t take the place of a one-on-one meeting with your company’s “rock star” CPA, but it’s a step toward understanding how this new tax law could affect you and your small business.
4 ways the Tax Cuts and Jobs Act benefits small businesses
1. New deductions
You may have heard the new tax law got rid of a lot of deductions, and that’s true (you can read about a few of them here). But there’s one major deduction — the qualified business income deduction, or QBI deduction — that’s brand-new and absolutely should be on your radar as a small business owner.
This deduction applies to those aforementioned pass-throughs and does not include C corps. “It’s a fairly complex topic with many caveats,” says Wilhelm, “but profitable small businesses should be eligible to have their owners take a 20 percent deduction against their personal income.”
That’s a big deal. Imagine you own your own nursery. At the end of the year, you’ve sold $50,000 worth of trees and shrubs. You had $25,000 worth of expenses, so your profit is $25,000. As a sole proprietor or small business owner, you know it’s not the business that pays taxes, it’s you. You pay taxes on the money you’ve earned.
In years past, that would mean, for simplicity’s sake, you’d pay taxes on all of that profit — the whole $25,000. Not so anymore. Now, as the business owner, you’re able to take 20 percent off that profit, then pay taxes on what’s left over. So in the case of that $25,000, you’d only pay taxes on $20,000.
“Generally speaking, this 20 percent deduction is a benefit to small businesses,” says Beverly Bareham, “but I can’t say it’s going to benefit every small business. It is convoluted, complex — there are phase-out limitations — it certainly isn’t an easy thing, but it definitely is a pro-business, pro-taxpayer tax incentive.”
2. More exceptions to the percentage-of-completion method
The percentage-of-completion method has long been a thorn in the side of small construction, manufacturing, and installation business owners who’ve been required to use it.
For those unfamiliar, the percentage-of-completion method requires companies to pay taxes on their ongoing long-term contracts. In contrast, the completed-contract method allows companies to pay taxes on a project only once it’s completed (even if they’ve been receiving payments throughout the year or years prior to completion).
In the past, companies with average annual gross receipts of $10 million or less weren’t required to use the percentage-of-completion method. Now, this exception has been expanded, so businesses with up to $25 million in gross receipts have the option of also using the completed-contract method, rather than the percentage-of-completion method.
These exceptions apply to contracts started in 2018 and beyond, provided they are (1) expected to be completed within two years of the contract’s start date, and (2) the contract owner is a taxpayer who meets the $25 million gross receipts test.
3. Expansion of depreciation and expensing
“Businesses will benefit from more generous depreciation rules,” says Bareham. One example of this is Section 179. The old Section 179 allowed businesses to expense the cost of an asset, up to $500,000.
Today’s broader Section 179 allows businesses to expense up to $1 million and expands the list of qualifying assets, particularly related to non-residential improvements, and certain specified assets, such as a new roof, new HVAC, and new alarm systems or security systems for the business.
Bareham notes the new tax law also expands the bonus depreciation deduction to include used assets, and it increases the deduction from 50 percent to 100 percent for assets placed in service between September 27, 2017, and December 31, 2022.
For those who need a refresher in Tax Terms 101, depreciation is different than other expenses, in that most other expenses are deducted when you buy them. Office supplies are one example. As a business owner, you would expense them upon purchasing them. For larger assets, though, like manufacturing equipment, businesses take depreciation deductions.
To start the deduction, you actually have to place the asset into service. That means not just purchasing the asset or having it delivered, but actually plugging it in, setting it up, etc.
4. New limits on UNICAP
“Businesses with gross receipts over $10 million, who meet a more generous threshold, may no longer be subject to the onerous 263A UNICAP rules,” says Bareham. That’s good news for small businesses with gross receipts of $25 million or less.
UNICAP is one of those tax concepts businesses hate. Essentially, the government requires businesses to classify some of their regular expenses as capitalized, writing them in as part of the company’s inventory, even though they’re not physical inventory.
“It is a complex calculation which is prone to errors,” says Bareham. “The new law exempts most small businesses with gross receipts of $25 million or less from the burden of UNICAP.” For small businesses and CPAs alike, fewer complications make for an easier filing, and this is one benefit that’s sure to positively impact a number of companies.
These are just a few of the more positive points of the Tax Cuts and Jobs Act. Be sure to check out Part two, 3 Limits to Deductions: A Major Downside of the Tax Cuts and Jobs Act for Small Businesses, to read up on some of the more negative points of the law.