Tax Changes and Small Business What to Know Before You Buy or Sell
The 2017 Tax Cuts and Jobs Act was one of the most sweeping tax reforms in several years. There were a lot of advantages afforded to large corporations, and most saw their tax rates drop/ However, what do these changes mean to small businesses?
Congress did not want to leave them out, but straight tax cuts were not possible for small, non-C corporations like S-Corps and LLCs, so they had to get a little more creative. Still, there are some changes you should know before you buy or sell a business. Here are five of them.
The 20% Business Income Deduction
While C-corporations saw tax rates fall, smaller businesses were instead given a greater business income tax deduction, since with an S-corp or LLC, you pay your business taxes as part of your personal income taxes, as they are considred to be pass-throughs.
To help, Congress passed a 20% business income deduction. What does that mean to you? If your taxable income is less than $157,000 for individuals or $315,000 for those who are married and filing jointly, you can take this deduction. That means if your business income was $100,000, you only have to pay taxes on $80,000.
Estate Tax Changes
You can pass more wealth to the next generation tax free in the event of your death. The estate tax exemption is constantly changing, but this year it is $11.9 million for individuals and $22.36 million for couples. However, this is for a limited time, as the exclusion returns to $5million in 2026 unless Congress changes it.
The individual gift amount also rose this year to $15,000 which means you can gift that amount to any one individual once a year without incurring any taxes.
This means many small business owners whose business is not valued at greater than these limits can pass them on tax-free, at least for now.
This is a common and often complicated deduction in which you can deduct the depreciation of large equipment purchases over time. Some equipment depreciates at different rates, but there is something called a bonus depreciation that lets you deduct a large percentage of the depreciation in the first year.
That amount is now 100% until 2023 when it will start to ramp down annually to 80%. 60%, and then 40%. Of course, by then it is likely that new tax laws will have been passed.
This includes any personal property used for business that does not remain useful for more than 20 years. Sorry, real estate does not count. Computers and phones do, though.
Increase in Standard Deduction Rates
The standard deduction for individuals went to $12,000 and for couples filing jointly went to $24,000, nearly doubling. What this means is that fewer people will be taking the mortgage interest deduction and some other common deductions, but what it also means for small business owners is that unless your itemized deductions exceed $12,000, you taxes just got much easier.
Retroactive Refunds Stayed
The likelihood is that if you as a business tried to file your own taxes in the last few years, you missed some deductions and paid too much. This means you can still have those taxes reviewed by an accountant if you wish, and still get an amended refund.
This is often important if you just started a business or are thinking of selling, and don’t know if you might have missed something over the last few years. Are you ready buy a franchise? Ready to sell your business? Know the new tax laws and the advantages they offer small business owners. Have questions about the buying process or about which franchise is right for you? Contact us at firstname.lastname@example.org see if we can help you.