The recently passed Tax Cuts and Job Act (TJCA) has led to major shifts in how taxation is handled for individuals and businesses alike. Many are still talking about the changes. However, most discussions focus on only one or two sections of the act. Selecting only a few sections skews the way the bill’s effects come into play. Many sections restrict exemptions and raise taxes—but many more create exceptions and lower taxes. As such, the best way to understand the Tax Cuts and Job Act is to view the biggest changes all in one place.
The most well-known effect of the recent tax law is the new corporate tax amount. Previously, the amount of income a business had to pay in taxes was between 15 to 39 percent depending on the size of the business. Starting this year, the corporate tax rate is 21 percent regardless of size. At first the corporate tax revision may seem detrimental to smaller corporations who would be losing revenue. But that tax increase is only taking the corporate tax change into account.
The TCJA features additions made with small businesses in mind. Take for instance the creation of the Qualified Business Income exemption. The QBI exemption applies to small businesses such as qualified S corporations, an individual in a partnership or sole proprietorships. Any company that qualifies as one of the above will receive a 20 percent deduction for taxes on qualified business income. This deduction is limited once wages surpass $157,500 for single filers or $315,000 for joint filers. Corporations in the specialized service fields may still receive the deduction. However the amount at which the deduction phases out is lower—$50,000 for single filers or $100,000 for joint filers.
Likewise, Section 179 has received some revisions. Section 179 refers to the deduction that allows certain business equipment and software to be removed from taxation costs to incentivize updating technology. The amount of purchases that can be written if in this manner has doubled, from up to $500,000 in equipment to up to $1 million. For small to medium sized businesses, more technological improvements can be made because of the extra money saved by the tax right off. The deductible starts to phase out once the total amount spent on equipment is above $2.5 million. The phase out rate is one per one, meaning the deductions becomes completely unavailable to corporations spending more than $3.5 million on equipment and software. The threshold for phase out was also an increase from the year prior, going up by $500,000. Therefore, more corporations can take advantage of the Section 179 deduction.
Businesses that pass the gross receipt threshold test are exempt from certain provisions. Gross receipts are the total amount of revenue earned from all sources without any costs or provisions being subtracted. Any company that within the past three years of its operation has a gross receipt under $25 million is considered to be below the receipt threshold. For example, deductibles available to a company for this year must be no greater than the combined total of the business interest income, the interest on motor vehicle debt, and 30 percent of the taxable income of the tax payer for that tax year. Those below the gross receipt income do not have this limitation placed on them.
The cash accounting availability was also raised to go alongside the amount of the gross receipt threshold, a stark shift from the previous $5 million. The cash accounting method records revenue only when the cash has been paid. The more standard accrual method is instead based on when the revenue or expense is recognized, regardless of if it’s been physically paid or not. While hard to manage, cash accounting can be very beneficial for avoiding taxes on money yet to be earned, making it a fair option for small corporations. Now that the threshold has increased, even more businesses can take advantage of the cash accounting method of financing.
On a more general note, certain business property purchased between Sept. 27 2017 and Jan. 1, 2024 will have any damages be 100 percent expensed. The same principle applies to fruit or nut bearing plants planted within that time frame. Starting at 2024, the re-imbursement given for damages will decrease to 80 percent and drop by 20 percent until completely phasing out in 2028. By expensing damages for new plants and equipment, companies of all sizes are encouraged to buy new equipment and stay updated.
Personal accounting has experienced changes, too. The personal exemption, set at $5,400 the year prior, has been removed entire meaning all of one’s income will be considered for taxes. Meanwhile the medical exemption tax has changed to start applying to medical treatments above 7.5 percent of the person’s adjusted gross income instead of 10 percent. These are far from the only changes to personal taxes, but they are some of the more important shifts when relating to business as well.
In short, there have already been a lot of changes to how taxes are structured and managed. Many of these shifts are tailored to help support economic growth. Now that you know the major changes, the next step is to take advantage of them.
Rachael Ruszkowski is a student at the Bergen County Technical High School in Teterboro. She serves as a contributing editor for Meadowlands USA.