Last year on Jan. 1, 2018, Congress enacted the Tax Cuts and Jobs Act (TCJA)—the first significant tax reform in 30 years. The law lowered the corporate tax rate to 21% and cut rates for closely held businesses, meaning these businesses are able to keep more of their profits.
Many savvy business owners took advantage of the tax cuts and reinvested in their companies and employees. To help businesses get a jumpstart on making the most of these changes in 2019, we’ve summarized how the tax reform may affect your business and outlined a few business investment approaches to consider in the new year.
What Business Owners Need to Know about the New Tax Reform
With the TCJA being 250+ pages long, we’ve cherry-picked the most important changes you should know about depending on what type of business you own:
C corporations: The corporate tax rate dropped from 35% to 21%, so whether your business makes $1 or $1 million in 2019, you’ll get taxed the same flat rate of 21% on income.
Pass-through entities: Pass-through businesses, such as sole proprietorships, partnerships and S corporations, get a 20% tax deduction, meaning if your qualified business income is $100,000 in 2019, the IRS only taxes you on $80,000 (-20%) of it.
Specialized service businesses: Most service-based companies, such as accounting and law firms, cannot receive this 20% deduction. Only individuals (married or single) who own service-based businesses and have an annual income below $315,000 ($157,500 if single) can claim the deduction.
All businesses: Companies can no longer deduct common expenses, including client entertainment (golf games, concert tickets, etc.) and transportation fringe benefits (transit passes, employee parking, etc.). Meal expenses are still deductible but there are changes.
For a deeper dive into these changes, see this video and article by Bench.
Smart Ways to Reinvest Tax Savings
After you fully understand exactly how much your business may benefit from the new reform, your business (and your employees) can reap the rewards.
Here are a few ways business owners are reinvesting this money back into their companies to foster growth in the new year:
- Focus on making key new hires to increase your company’s production capacity or to improve an area of your business that could be strengthened.
- Increase workers’ hourly wages which in turn can improve your company’s recruitment and retention efforts as well as employee productivity.
- Prevent unforeseen financial hardships and protect your company through the right business and commercial property insurance package.
Contact your local Rural Mutual agent today to discuss how to leverage your company’s tax savings to keep your business safe.