Many small business owners are unaware of the new tax cuts and jobs act.
Small business owners need to acquaint themselves with the new laws as it will impact their 2018 tax return. For instance, one of the largest changes is in regards to itemized deductions. Businesses can no longer hoard receipts in the name of getting a tax deduction. The standard deductions have doubled up, thus eliminating the personal exemptions. The doubled deductions for married joint filers is $24,000; for singles, it is $12,000.
What Do The Tax Cuts & Jobs Act Mean For Small Businesses?
Large corporations continue to receive tax deductions on their income tax. The rate has decreased from 35% to 21%. For small businesses that are not listed as C Corporations (i.e. partnerships, hybrid LLC, sole proprietors, or the S-corporations), there was a reduction in their business income tax as well.
Small business owners now need to pay their business tax on their tax returns however. They pay the taxes at the same individual rate as any other person which means a 20% reduction. The law provides a 20% qualified business income deduction. The rule applies for the married joint filers who get an income less than $ 315,000 and individuals who get less than $ 157,500.
However when you have an income higher than the stipulated above you still receive deductions which vary. The variations rise depending on various factors such as your wages or occupation.
Other deductions include:
1. Dental And Medical Expenses
The tax laws lowered the threshold regarding the medical expenses deductions. Business owners now can claim itemized deductions they incur out of pocket whenever they exceed 7.5% of the adjusted gross income. The deductions only apply when one files the 2018 tax returns. It is not yet crystal clear as to whether the same rule will apply in 2019. The chances are that it may go back to 10% as it has always been.
2. Losses Due To Casualty Or theft
Previously, the laws allowed one to claim deductions on itemized property losses not reimbursed by insurance. The policy applied to the circumstances happening unexpectedly such as natural disaster, fires, or theft. The law allowed individuals to file until it exceeded 10% of the adjusted gross income.
The current legislation allows individuals to claim personal casualty losses for natural disasters declared by the president. The 10% threshold of AGI will continue to be applied.
3. Charitable Giving
The tax laws have always protected the people with a heart of giving generously to the charitable organizations. However, there have been some slight changes. The changes are with regards to the number of people who will be claiming the deductions. The deductions apply to married joint filers with $ 24,000 and above and to single fillers with $ 12,000 and above.
4. Home Mortgage Interest
With the new laws, you can claim deductions on interests up to $750, 000 as long as you are in the qualified residence loans. The rule applies to combined loans used on buying, building, and improving homes. Some of the restrictions imposed are those regarding interest claimed for lines of credit and home equity loans. Note that the breaks only apply when using the money for building and improving homes and not on personal expenses.
5. State And Local Tax
The state and local taxes mostly affect people living in New York, California, and New Jersey. In the previous system, one could take advantage of an itemized deduction called the state and local tax deductions (SALT). However, the breaks no longer apply to the extent they used to in the past. Now there is a $ 10,000 cap on the SALT deductions. The regulations adversely affect the residents in high tax regions.
How Can Small Businesses Save Money?
Do Not Hire Full-Time Employees
Most of the time, small businesses (and especially startups) cannot afford to keep full-time employees. The full-time employees have many needs including insurance, pension, and allowances. A way for a small business to save money is by looking for temporary employees. They can work for a few hours, and get paid their wages. It is not economical to hire employees when there is not much work to be done.
The most important thing for small businesses is to conserve cash as much as possible. The habit helps a company to focus on its growth. One way is to monitor the business cash flow keenly and avoid excessive expenses. The enterprise can look for a tax advisor to interpret the new tax laws. The information helps in financial planning and conserving cash. Try exchanging goods for goods to avoid the expenses involved in making payments to and from place to place. The practice works for small businesses as it emphasizes growth.