The new Tax Cuts and Jobs Act (TCJA) legislation has the primary goal of stimulating economic growth. The implementation of “supply-side” economic theory suggests that tax cuts for business owners will provide extra capital and financial breathing room to allow business owners to reinvest their saved tax dollars back into their businesses by buying new equipment, hiring new workers or expanding operations.
One of the bill’s primary provisions is the lowering of C Corporation tax rates from 35% to 21% with the aim of attracting large corporations to set up shop in the United States. Some believe that this will be the largest consequence of the new legislation.
Another main component of the new bill deals with a change to the tax structure for what are known as “pass-through” businesses. Pass-through businesses account for roughly 95 percent of all U.S businesses. Sole proprietorships, partnerships and S corporations are all examples of pass-through businesses.
Owners of pass-through business entities now may be eligible to deduct an amount up to 20% of their net business income. Thus, pass-through owners are effectively taxed on 80% of their business income. For example a business owner earning $200,000 would only be taxed on $160,000. This would be in addition to all their other business deductions.
This is a personal deduction pass-through that owners can take on their returns whether or not they itemize personal deductions. The deduction is presently scheduled to end on Jan. 1, 2026.
However, the change with the 20 percent tax deduction for all pass-through businesses does have limitations. Specifically, individuals who own service-based businesses like law and accounting firms, financial services or doctor's offices can only claim the deduction if their annual income is below $315,000 filing joint returns and below $157,500 filing single returns.
There are many other changes involving such items as: Bonus Depreciation, Automobile Depreciation Limits, Section 179 Expenses, Limits on Deducting Business Interest, Limits on Deducting Net Operating Losses, Elimination of certain other Deductions and Credits. For more complete and detailed information, you are strongly advised to consult with your licensed Tax Planner. The changes are complex. However, FactCheck.org provides a useful summary of the law as it affects individuals and businesses.
Other tax incentives and small business tax breaks such as “Cost Segregation,”“Work Opportunity Tax Credits” (WOTC),“Startup Tax Credits,”“Research and Development Tax Credits,” and “Property Tax Mitigation” are still viable tools for reducing small business taxes, especially for “pass-through” business owners.
Typical CPA Firms and Accountants will be very busy deciphering and apply the new tax law, but for the most part they will still need our specialized tax consulting services to be totally successful in reducing the bottom line in tax obligations for small business owners. Click here to estimate your extra tax savings using our service.