Small business wins from the 2017 tax act

Small business wins from the 2017 tax act

As a small business owner, you likely heard of the Tax Cuts and Jobs Act of 2017 (aka the tax act). Not only did it serve as the biggest overhaul of the United States tax code in over thirty years, for many small business owners it has created new excitement.

In fact, 75 percent of small business owners believe the tax act will be a positive for their business and over 87 percent think it will benefit the economy at large.1

That’s probably not surprising as many view the tax act as a win for business, but specifically a win for small business owners.

Positives for pass-through entities

Roughly 80 percent of small business owners file as pass-through entities, meaning, their share of the business's taxable income passes through to their individual tax returns.2

That can provide two potential wins for small business owners. First, the new Tax Act lowered individual tax rates for many people, so if you file as a pass-through entity, you may benefit from lower individual taxes. On top of that, you may qualify for up to an additional 20 percent deduction on qualified business income (QBI). While you may not qualify for all of the deduction, you know every little bit can help.

While the 20 percent QBI deduction will benefit many business owners, there are some business professions, such as accountants and attorneys, who will not qualify due to income phase-outs. Be certain to discuss this aspect of the plan with your tax advisor to see how your situation fits.

And while new tax rates and a deduction were added, many previous business expenses are no longer eligible for a deduction. These may include certain travel costs, entertainment expenses and membership fees to professional organizations.

It’s important to consider the impact these changes will have on your future business plans.

A new appreciation for depreciation

One of the bigger headline grabbing changes from the new tax act was that businesses will no longer be able to write off certain entertainment and travel expenses.

What you may have missed is you will have a new way to write off business related purchases.

Certain qualifying small business expenses in equipment or real estate can be depreciated up front over the next five years. In the past, that period of depreciation could only be done over decades in some cases. Now your depreciation write off can happen up front and that could positively impact your bottom line.

Similar to the QBI deduction, there are some limitations to this benefit. Be certain to discuss your situation with your tax advisor before making any plans.

Consider these existing tax concepts for your business

Three tax concepts left intact may help your business move in a new direction, especially since your business may re-deploy or re-position tax savings:

1. Tax-free death benefit of life insurance. There are a number of strategies that allow you to protect your business with life insurance, including Key Person Insurance. The business can receive life insurance proceeds free from income tax where structured properly, including compliance with IRC section 101(j).

2. Tax-deferred growth of life insurance cash values. Cash values in a life insurance policy can grow tax-deferred, making permanent life insurance a great part of a benefits package you can offer to select employees. See how this works with an Executive Bonus Plan.

3. Access to cash value without current taxation. When properly structured, life insurance policy cash values may be accessed through loans and/or surrenders to basis without current taxation assuming policy is not a modified endowment contract (MEC). This can be a key resource for your business, especially if you need an influx of cash for a critical business purchase. 

Navigate with a expert

A new tax landscape brings new opportunities, but you shouldn’t navigate alone.

Let your tax or legal advisor work with you to determine where you can benefit from the changes to the new tax act. That way you can see where your business wins, and where you can take it from there.

Information accurate as of May 2018., May 2018 “Will small business benefit from the new tax law?” February 2018

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This provides general information that should not be construed as specific legal or tax advice nor the law of any particular state.  Please seek the advice of a qualified legal or tax professional for your specific situation.