Trump’s Tax Reform: How Will It Affect Businesses in 2018?

In 2018, American business owners will be paying taxes according to new tax rates. The GOP’s tax plan coming into effect in 2018 contains a number of changes that may impact such pass-through entities as S corporations, limited liability companies, partnerships and sole proprietorships.

Paul Ryan, the House Speaker, claims that they have prepared a once-in-a-generation tax law that will deliver a considerable tax relief to all Americans. Let’s take a look at the changes American businesses should expect in the upcoming year.

Tax Rates Under the Old Law

Those wishing to operate a business in the U.S. have a choice. They may choose from such entity types as C corporations, partnerships, S corporations or sole proprietorships. 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% under old law. 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.

To avoid double taxation, those involved with C Corporations may choose to operate their company as a S corporation, partnership or sole proprietorship. The U.S. Congress treats these entities as small businesses and does not subject them to double taxation. The corporate tax rate for S corporations, partnerships and sole proprietorships was 40.8%.

New Corporate Tax Rates Under The GOP’s Tax Law

One of Trump’s goals for 2018 is to decrease the corporate income tax from its old standing of 35% to 21%. This would be the lowest rate since 1939. The GOP has decided to make this cut permanent, differentiating it from individual cuts that are valid only until 2025.

The qualified business income deduction will be raised from 17% to 20% This rate will expire in 2025. IRS Form 1120 is used to report your business’ income to the IRS no matter the rate of tax your company is required to pay.

How Businesses May Take Advantage of Trump’s Tax Law

If you currently operate your own business, we’ve prepared a short list of items for you to take into account:

  1. You have an opportunity to deduct the full amount your company will spend on equipment or software purchases during the period of January 1st, 2018 to December 31st, 2018, according to Section 179 of The Tax Cuts and Jobs Act. We highly recommend to claim deductions on your Schedule C by December 31st, 2018 as the percentage you can deduct will be gradually reduced after that day.
  2. A new tax overhaul will allow 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 will be subject to a 10.5% tax rate compared to the domestic rate of 21%.
  3. Due to the corporate tax cut, company owners have a good chance to increase capital investments and raise minimum wages. This may help to significantly speed up American economic growth.

Generally, the tax law is aimed at benefiting the highest-income earners and largest businesses as well as provide some relief to individual taxpayers. Reducing corporate tax rates was one of Trump’s biggest promises during his campaign. As the reform has already gone live, the hope is that business owners will have more opportunity to expand their business operations on U.S. territory and abroad as well as pay higher salaries to their employees.

Read here to learn more how Trump’s tax plan will affect individual taxpayers in 2018.