Learn how this year’s tax reform will affect your small business in 2020.
When the most recent tax reform went into effect in 2018, many taxpayers received a surprise. The amount of taxes they had to pay changed, even though their financial situation did not.
Individuals were not the only ones who were affected. The Tax Cuts and Jobs Act (TCJA) also included a few dozen tax law changes that applied to businesses. Some of these changes can be confusing for small businesses, but they can also present new opportunities.
We sat down with accountant Juan Llantin, a member of FINSYNC’s Service Network, to help shed light on the changes. In this article, we will cover some of the most significant tax changes for small businesses in 2020.
Qualified Business Income Deduction
If you operate your small business as a sole proprietorship, partnership, or S corporation, you can deduct up to 20% of your qualified business income. You can also deduct 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. C corporations are not eligible for this deduction.
For example, if you are a single-filer, sole proprietor with a taxable income (adjusted gross income (AGI)) of $100,000, you can deduct $20,000.
Deduction of Net Operating Losses
Starting from Dec. 31, 2017, only 80% of any net operating losses may be deducted for the previous tax year. This means that the two-year carryback rule for net operating losses is no longer in effect. Only a few farming and insurance-related businesses are exempt from the new regulations. For businesses that experience losses, you will see a decrease in deductions associated with these losses.
Business Expense Deductions
There have been a few changes to the kind of expenses that are considered deductible business expenses. Any expenses that are for the purpose of entertainment, amusement, or recreation can no longer be deducted. This excludes food to some extent. As long as the meals are not lavish or extravagant, you can deduct 50% of the cost.
When it comes to interest expenses, any business that has average gross receipts of 25 million or less can deduct all of their interest expenses. According to Juan, “This is a good deduction to utilize if your company has many loans.”
Fringe Benefit Deductions
Deduction of fringe benefits has also been changed to a certain degree. First, reimbursement for transportation related to commuting can no longer be deducted. However, you as an employer can deduct qualified bicycle commuting reimbursements. In addition, moving expenses must now be included in employees’ salaries.
For example, if one of your employees is reimbursed for daily travel expenses, these do not qualify as a deductible expense for your business. However, if you cover an employee’s moving expenses if they relocate for the job, these expenses are deductible as part of the employee’s salary.
Changes in Employer Credit for Paid Family and Medical Leave
Small business owners can now claim a credit for a percentage of paid wages related to any leave employees take because of their own health or the health of their family. The credit can be between 12.5% and 25%. The exact percentage depends on the amount of paid wages in a tax year.
For example, an employee with a monthly salary of $2,500 takes two weeks off as a medical leave. If you pay only 50% of their wage ($625), you may deduct 12.5% of that sum. However, if you pay 60% ($750), you may deduct an additional 2.5%, making a total of 15%.
To claim this credit, a small business must:
- Have a written policy about family and medical leave
- Offer at least two weeks of paid family and medical leave
- Pay at least 50% of the wages normally paid to the employee
Only leave taken by full-time employees can be used in the calculation of the credit. Benefits for part-time employees must be prorated.
Changes to Depreciation Deductions
The new depreciation laws are much more generous. In general, small business owners can now expense more, because:
- The maximum deduction increased from $500,000 to $1 million
- The phase-out threshold increased from $2 to $2.5 million
The new law also allows you to deduct the improvement of nonresidential real estate properties, with a few minor exceptions. Improvements that can be deducted include changes to the exterior of the building, as well as roofs, HVAC, fire protection systems, alarm systems, and security systems.
First-year bonus depreciation was increased from 50% to 100%, which is now also applicable to used property. To qualify for this bonus depreciation, the property must be acquired and placed in service between Sept. 27, 2017 and Jan. 1, 2023.
The allowed depreciation deduction for luxury automobiles and personal-use property has also been reduced, both when the first-year bonus is applied and in general.
How to Prepare for Next Tax Season
In order to maximize your deductions next tax season, it’s important to prepare. “Make sure you document any deduction you want to include,” says Juan. “It’s very important to keep all the details about the deductions in case of an audit.”
With FINSYNC, you can track all your expenses in a complete general ledger, which makes it easy to access any necessary documentation when you need it for tax purposes. If you’re unsure what deductions are applicable to your business, talk to your bookkeeper or accountant. They will be able to help you figure out the correct documentation and fill out the correct forms.