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2018 tax reform

Moments from the 2018 tax reform your business could have missed

We are right on the verge of a new tax season. So it’s time to remind ourselves about the new tax law President Donald Trump enacted in 2018.  Starting from December 20, 2017 – American business owners pay taxes according to these new tax rates.

The GOP’s tax plan contained a number of changes that were supposed to impact pass-through entities such as S corporations, limited liability companies, partnerships and sole proprietorships. According to the new tax law, C corporations were supposed to reap the biggest benefits.

Let’s check whether you understand exactly what has changed and how the 2018 Tax Law affects your business today.

 

Tax rates under the previous law

Under the previous tax law, C corporation owners were subject to double taxation.

At a business level, the income of a C corporation was taxed at a rate of 35%. Once a corporation distributed earnings to its shareholders, the latter had to pay tax on dividends at a rate of 23.8%. Generally, the overall entity had to pay a 50.47% tax and report it to the IRS on their Form 1120.

S corporations, partnerships and sole proprietorships were designated by the U.S. Congress as small businesses and were therefore not subject to double taxation. The tax rate for such businesses was 40.8%, which is less than the tax rate for C corporations.

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The main aspects of the new (2018) tax rates

One of Trump’s goals for 2018 was to decrease the corporate income tax from its old standing of 35% to 21%. This is the lowest rate it’s been since 1939.

The GOP decided to make this cut permanent, differentiating it from individual cuts that are valid only until 2025.

According to the new law, pass-through entities don’t receive such as large a tax cut. However, the final bill was supposed to reduce pass-through taxes via a 20% deduction, after which a lower rate would be applied.

IRS Form 1120 is used to report your business’ income to the IRS no matter what tax rate your company is required to pay.

 

How businesses may take advantage of the 2018 tax law

If you operate your own business, you have the chance to take advantage of 2018 tax law. This is a short list of items for you to take into account:

  1. You still have an opportunity to deduct the full amount your company will spend on equipment or software purchases until December 31st, 2018, according to Section 179 of The Tax Cuts and Jobs Act. We highly recommend that you claim deductions on your Schedule C by December 31st, 2018 – since the percentage you can deduct will gradually be reduced after that day.
  2. A new tax overhaul allows company owners to cut their tax bills even further. A 21% tax rate may be reduced by half if you move your company abroad. The income made by subsidiary companies operated by Americans abroad are subject to a 10.5% tax rate – compared to the domestic rate of 21%.
  3. Due to the corporate tax cuts, company owners have a good chance to increase capital investments and raise minimum wages. This was designed with the goal of helping to significantly speed up American economic growth.

Generally, the new tax law was aimed at benefiting the highest-income earners and largest businesses, as well as at providing some relief to average individual taxpayers.

Reducing corporate tax rates was one of President Trump’s biggest promises during his campaign. As the reform has already gone into effect, the hope is that business owners do really have more opportunities to expand their business operations at home and abroad, as well as to pay higher salaries to their employees.

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