There's a lot of confusion and concern about how much, how little or if any money at all will be saved by the new tax laws. Here's a quick look at five things you need to know about the new tax bill for your vet-owned small business. We're not tax or financial advisors so this is just for your information and is not meant to be professional financial advice. However, this informative article can be a great conversation starter over coffee with your accountant or lawyer.
See our CEO Mark Rockefeller on Fox News discussing a recent survey from the National Federation of Independent Business (NFIB) and the impact of President Trump's tax cuts on small businesses.
1. You might have less taxable income
Under the new corporate tax laws, certain corporation types are now eligible for 20% deduction on qualified business income. These types, such as S-Corporations, Sole proprietorships, and partnerships, are pass-through entities, which means they don't pay income taxes. Instead, the individual owner is directly taxed.
Before, they would be taxed on the full amount. Now, they are taxed at 80%, up to a certain limit. For example, Jill owns a sole proprietorship. In 2018, her company made $100,000. She will only be taxed on $80,000. The deduction is only eligible for individuals with taxable income up to $157, 500 or married couples with taxable income up to $315,000. Once you exceed those thresholds, you may still qualify for a lower deduction, based on your type of business and if there are any W-2 wages involved in your calculations. Of course, you will want to consult your accountant to make sure you are calculating the correct deduction.
2. You can fully expense most new business equipment purchases
In previous years, you had to depreciate your business equipment purchase deductions on your taxes, which could have been a hindrance to buying needed office equipment or machinery. The new small business tax laws allow you to take the full deduction in one year for most purchases that are intended to last for less than 20 years. So, this might just be the year to upgrade your computer systems or get new machinery. Not only is this great for your taxes, but it's predicted to cause a boom in the economy, as more businesses make the purchases they need to expand operations and hire more people.
3. You might not be able to deduct the full interest on your veteran business loans
You need money to grow your business and the easiest way to get that small business funding is often through loans. While you could deduct the full interest from your loans in 2017, now there's a slightly complex equation to determine how much of it will be disallowed. The new regulations state that any net interest expense over 30% of your companies earnings before interest, taxes, depreciation, and amortization will be disallowed. This doesn't apply to businesses with average gross receipts of under $25 million.
4. You can't take the full offset for net operating loss carrybacks and carryforwards
Operating at a loss is not always such a bad thing. In years where your business is not doing as well as you would like, you can carry that loss forward to reduce income and taxes during years when taxable income is higher. In the past, you could also apply the loss to a previous year's taxes and get a refund on taxes that were paid, to help offset the income loss. This process was called carryback.
The new small business tax laws state that you will no longer be able to carryback losses. It also limits the net operating loss carryforward to 80% of taxable income. Here's a simple way to look at it – if you had a $1,000,000 loss in 2018 and you have taxable income of $1,000,000 in 2019, you can apply $800,000 of your 2018 net operating loss to give you taxable income of $200,000 for 2019, if you decided to carryforward. The remaining $200,000 will carryforward until all has been applied to future years taxable income.
5. You might be able to take advantage of the cash method
The cash method is a way of determining income that is relatively simple- when you get money from an invoice, you mark it down as income for the month you received it. When you make a payment, you mark that down as a deduction for the month you sent the money. Easy, right?
However, there are many restrictions on what kind of corporations and businesses can use the cash method. If you maintain inventory, have receipts over $5 million, have a C-corporation or partner with a C-Corporation that has receipts of over $5 million, you could not use the cash method in previous years. Instead, you had to use the accrual method, which involved some complicated bookkeeping. Income is recognized based on the earliest of when it was either earned, due or received, while expenses are only recognized when the liability is fixed and determined to the best accuracy possible and after the economic performance has occurred.
Basically, if you invoiced a customer in March and she paid in June, the income would be counted for March. If you had to buy a new computer and received the invoice in March, but paid in June, then the expense is marked down for the month you received the invoice. Starting in the 2018 tax year, all businesses with less than $25 million in receipts in the three prior tax years, even if they have inventory, will be able to make use of the cash method.
Small Business Funding: Download the ebook or Apply Today
At StreetShares, we want to support you as you navigate the world of small business funding, especially with all of the new tax changes. There are many different ways to raise money for your veteran-owned small business, whether you choose to investigate accounts receivable financing through a factoring company or pursue the veteran business loan options that are available to you.
We've created a special guide to help you understand what your financial needs are and the resources that are available to you through our ebook the Basics of Small Business Financing. You will learn how to determine when you need funding, what kinds of funding are applicable to your situation and all the paperwork you'll need to complete before you approach lenders. Click here to download the ebook. If you're ready to grow your business, get started with small business funding options catered to your business needs. Choose from a business term loan, the Patriot Express® line of credit or accounts receivables financing for government contractors.
This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation. This is not an offer of credit. All applications are subject to approval, no guarantee of funding. StreetShares is not a bank. Bonds are not FDIC insured, not bank guaranteed, and not a bank deposit product or account. May lose value. This communication is not an offer to sell nor a solicitation of an offer to buy securities. See Offering Statement and related SEC Filing Documents.