Every year, tax laws change and certain IRS regulations affecting businesses change, too. The Tax Cuts and Jobs Act (TCJA) included a bevy of changes that will affect the 2019 federal income tax returns of many small and medium-sized businesses and their owners. Small business tax preparation services from a local CPA can help your business understand and maximize on deductions.
Some of the changes for the 2019 tax year include updates to the Social Security maximum, IRS standard mileage rates, and new additional Medicare taxes that affect self-employed individuals. As tax return time approaches, here are the 10 changes that are most likely to affect your business or you as an owner.
New Tax Law Changes That Affect Your 2019 Taxes
Social Security maximum
The tax rate for Social Security remains the same but the maximum amount of wages on which withholding is based has been increased for 2019, to $132,900. This maximum affects also affects small business owners who must pay self-employment tax for Social Security and Medicare.
New flat 21% tax rate for corporations
Before the TCJA, C corporations paid graduated federal income tax rates of 15%, 25%, 34%, and 35%. Personal service corporations (PSCs) paid a flat 35% rate. For tax years beginning in 2018 and beyond, the TCJA establishes a flat 21% corporate rate, and that beneficial rate applies to PSCs too. So the tax cost of doing business as a profitable C corporation is greatly reduced, and this favorable development will show up on 2018 corporate returns. Enjoy.
No more corporate AMT
Under prior law, the corporate alternative minimum tax (AMT) was imposed at a 20% rate. Corporations with average annual gross receipts of less than $7.5 million were exempt, but the corporate AMT still snared quite a few medium-sized businesses. For tax years beginning in 2018 and beyond, the TCJA repeals the corporate AMT, which eliminates the need to make a bunch of complicated tax return calculations in addition to possibly owing more tax. We won’t miss the corporate AMT.
Buying Business Assets
100% bonus depreciation is back. Firms can write off the entire cost of qualifying assets that they buy and place in service after Sept. 27, 2017. It generally lasts until 2022 and then phases out 20% for each year thereafter. The break applies to new and used assets with lives of 20 years or less.
Additional Medicare Tax
For higher-income individuals, an additional Medicare tax rate of 0.9% is applied to combined employment income and self-employment income. The additional tax begins at these levels:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single: $200,000
- Head of household (with qualifying person): $200,000
- Qualifying widow(er) with dependent child: $200,000
This additional tax must be withheld from employee pay above $200,000. For self-employed business owners, this additional Medicare tax should be included in self-employment tax calculations
Business Mileage Rates
The IRS standard mileage rate for 2019:
- 58 cents per mile for business miles
- 20 cents per mile for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
These rates are in effect for the entire year for businesses taking the standard mileage deduction.
Businesses may decide to deduct mileage using either the standard mileage rate or actual expenses. If you drive less than 50% for business, you probably want to use the standard rate, but if you drive over 50% for business purposes, adding actual expenses might be better. The IRS standard mileage rate for 2019:
New limit on business interest expense deductions
Subject to some restrictions and exceptions, prior law generally allowed full deductions for interest expense incurred by a business. Under the TCJA, however, affected businesses generally cannot deduct interest expense in excess of 30% of “adjusted taxable income,” starting with tax years beginning in 2018. Business interest expense that is disallowed under this new limitation is carried over to the following tax year. Consult your tax pro for details.
Exceptions: Business taxpayers with average annual gross receipts of $25 million or less are exempt from the new interest expense limitation. Real property businesses that elect to use a slower depreciation method for their real property assets are also exempt. Farming businesses that elect to use a slower depreciation method for farming assets with a normal depreciation period of 10 years or more are also exempt.
Reduced or eliminated deductions for business entertainment
Under prior law, you could generally deduct 50% of business-related entertainment expenses. For amounts incurred in 2018 and beyond, the TCJA completely disallows deductions for business-related entertainment. However, meal expenses incurred in connection with business entertainment (like meals at games) and meal expenses to wine and dine customers and clients and potential customers and clients are still 50% deductible. Consult your tax pro for full details.
All of these tax changes are complex, with many details, limitations, and restrictions. Get the opinion of a tax professional or local CPA before you make any tax decisions based on this information.
Limitless Investment and Capital Tax Preparation Services in Denver.
The new tax reform law increases both the complexity and potential opportunity in your tax planning. Limitless Investment and Capital tax preparation and assistance services in Denver leverage its deep tax and industry experience to look in broad scope and great detail at your business so you can navigate the changing path ahead. Call us TODAY to get started!