Happy 2019! With a new year comes new resolutions, exciting changes, and the dreaded tax season. And while every business owner is trying to recover from the busiest time of the year, it’s important that you start getting ready for tax season now.
You probably recall the 2017 tax law and how that law changed a lot about tax time in 2018. Rest assured, you shouldn’t have any big surprises this tax season as little has changed. Still, as you start preparing your taxes this month, it’s important to remind yourself of the changes made that could affect your small business.
Here is a refresher on the tax changes that particularly affect small businesses.
Net Operating Loss (NOL)
Net operating losses (NOL) occur when your losses exceed your revenue. In other words, NOL happens because your tax deductions exceed your taxable income. In 2017, the tax law made changes affecting how you could apply your net operating losses.
Before 2018, businesses could carryforward or carryback their NOL to offset their income tax payments. In some cases, businesses were able to fully offset their taxable income, exempting themselves from future or past income tax payments depending on if they chose to carryforward or carryback.
The Current Rules
Starting January 1, 2018, most businesses can no longer carryback a net operating loss. Additionally, businesses are no longer allowed to deduct 100% of their taxable income. The net operating loss is now capped at 80% of taxable income.
Employee Deduction for Certain Fringe Benefits
Fringe benefits are ways businesses can compensate their employees besides salary. With the 2017 law, however, employers are more restricted with how much they can provide.
Before 2018, employers could deduct the cost of some employee achievement rewards and those costs could be excluded from employee income. Additionally, an employer could reimburse their employees who bike to work up to $20 per month and could reimburse an employee’s moving expenses. Both kinds of reimbursements were also not subject to the employee’s income or taxes.
The Current Rules
Beginning in 2018, employer deductions are no longer allowed for the following:
- Activities related to entertainment or recreation*
- Membership dues for organized clubs for business or other social purposes
- Facilities used for any activities related to entertainment or recreation, or organized clubs
- Expenses for transportation fringe benefits or providing transportation for commuting (except if needed for employee safety)
- Qualified parking is no longer deductible and will be non-taxable to the employee up to $260 per month
- Expenses for bicycle commuting and moving expenses (both must now be included in employees’ wages)
*You can continue to deduct 50% of the cost of business meals if the taxpayer or employee is present.
Depreciation and Deductions
Depreciation and deductions are designed to help businesses afford their assets by subtracting costs and requiring businesses to pay for their assets over time. Bonus depreciation, specifically, was created by Congress to incentivize businesses to invest in capital assets.
Prior to the Tax Cuts and Jobs Act, the law said that qualified property purchased before September 27, 2017 and implemented before January 1, 2018, received a bonus depreciation of 50 percent.
The Current Rules
Under the Tax Cuts and Jobs Act, businesses can expense more and do it quickly. The law increased the bonus depreciation to 100 percent. In turn, anything purchased after September 27, 2017 and before January 1, 2023 can be 100 percent expensed.
After 2023, the bonus deduction will be reduced as follows:
- 2023: 80 percent deduction
- 2024: 60 percent deduction
- 2025: 40 percent deduction
- 2026: 20 percent deduction
Additionally, the new law allows businesses to expense specified improvements made to nonresidential buildings. The law also introduced a new deduction for qualified incomes of pass-through entities. The new provision, Section 199A, permits up to 20 percent deductions for eligible businesses.
2019 Tax Time
In 2017, the tax reform law passed and changed the way small businesses approached tax time. While the law hasn’t changed since, it’s always smart to refresh yourself before the upcoming tax season as you never know when adjustments or changes will be made.
If you’re a business owner, we encourage you to keep these changes in mind as you prepare for tax time. Need help? Consult a tax advisor to help you stay compliant and get organized!
What specific tax laws apply to your business? And how do you get prepared for tax time? We would love to hear from you. Drop us a line and let’s chat. For everything else, be sure to check out the ScaleBlog for more content on all things small business!
*The tax rules and regulations featured in this post are the most current and up-to-date at the time of publishing.