Tax season is fast approaching, and that means another year for businesses to learn about tax changes, especially now when some of the new provisions in the federal tax overhaul that was signed into law in 2017 will take effect.
One of the biggest changes that will apply to small businesses is the flat rate tax. C corporations (businesses that pay their own income taxes) will pay a flat rate of 21 percent. Prior to the federal tax overhaul, C corporations had a top rate of 35 percent. Shareholders in C corporations will pay the same dividend top rate of 23.8 percent as they did in previous years.
Although the dividend tax rates did not change, Aaron VanSoest, a partner in tax services at Crowe LLP‘s Grand Rapids office, said the income brackets to pay taxes at those rates have changed.
Tax rates for S corporations, partnerships and sole proprietors also have decreased. Shareholders now pay a top rate of 37 percent in taxes for their pass-through income. Before the law, shareholders of S corporations had to pay a top rate of 39.6 percent.
However, those shareholders may be able to pay fewer taxes. According to Grand Rapids-based accounting firm Rehmann, owners of pass-through entities may be eligible for a 20 percent deduction for pass-through business income, which is generated from sole proprietorships, S corporations, partnerships and limited liability companies.
But not all entities are eligible for the deduction. Rehmann stated that law firms, accounting firms, medical practices and any other firms involved in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, or dealing in securities partnership interests or commodities are not eligible for deductions.
After the pass-through deductions are taken out, shareholders are able to pay a top rate of 29.6 percent. There also are some other changes in the tax law that benefits small businesses taxpayers, according to Ryan Bryker, managing principal for Rehmann’s Muskegon office.
“There are more flexibilities with how taxpayers do accounting for tax purposes,” he said. “Taxpayers can elect to be treated under the cash basis of accounting instead of accrual. They can change the way they account for inventories, they can change the way they account for UNICAP (uniform capitalization). Another major change is how long-term contracts are accounted for. There is more flexibility in completed contracts versus percentage completion.”
According to Rehman, the new law increases the cash method of accounting from a $5-million threshold to $25 million. The cash method records sales when they are received, and expenses are paid as opposed to accrual accounting, which records when revenues and expenses are earned regardless if the money is actually received or paid.
Under the new law, when accounting for inventories, businesses with an average gross receipt of $25 million or less would be permitted to use the cash method of accounting even if the business has inventories.
Businesses with an average gross receipt of $25 million or less would be fully exempt from UNICAP, which require the capitalization of all direct costs and certain indirect costs allocable to real property and tangible personal property created by the taxpayer, according to the Internal Revenue Service.
As far as accounting for long-term contracts, Rehmann stated under the act, the $10 million average gross receipts exception to the percentage-of-completion method would be increased to $25 million for eligible contracts entered in after 2017.
There also is adjusted bonus depreciation included in the new law. VanSoest said the law changed, in some respect, which properties are eligible for bonus depreciation.
“Bonus depreciation in 2017 was 50 percent of the cost of the property, and in 2018, it is 100 percent,” he said. “So that is one big change because instead of being able to deduct half of the cost of the property for bonus depreciation, you can now deduct the entire amount. Also, in 2017 the properties that were eligible for bonus depreciation had to be a new property, so it had to be a new piece of equipment, for example. But in 2018, both new and used properties will qualify.”