In December, President Donald J. Trump and Congressional Republicans made good on their promise to pass a sweeping reform of the U.S. tax code.
The Tax Cuts and Jobs Act will go into effect for the 2018 tax year. The bill contains several changes to tax rates, brackets and deductibles that can help reduce taxes for most U.S. citizens and businesses.
What follows below are the key components of the tax reform that may affect you and your business. Some of these changes will be clarified in the coming months by the Internal Revenue Service. It is a good idea to consult a CPA or tax advisor to fully understand the impact of the tax reform on your business.
The Corporate Tax Rate
The biggest change under the new tax plan is that the tax rate for U.S. corporations will be slashed from 35% to 21%. This cut was designed to make the U.S. more competitive with countries that have lower corporate taxes. Companies that are C corporations can benefit from the new 21% tax rate while also deducting state and local taxes.
The “Pass-Through” Loophole
Another change that could have a big impact on some businesses’ tax exposure is a new deduction on “pass-through” income. This rule allows people with pass-through profits from a partnership, sole proprietorship or a limited liability corporation to write off 20% of that income before calculating their taxes.
For employee-driven businesses like manufacturers, retailers or trucking fleets, the 20% deduction can be applied to 50% of the cost of payroll. The deduction is designed to encourage companies to hire additional employees, pay down debt or purchase new equipment.
More Write-Offs for Capital Expenses
The tax reform bill permanently increases the amount of expenditures that small businesses can deduct under Section 179 from $500,000 to $1 million. Businesses can now also claim bonus depreciation on new and used equipment or property acquired between Sept. 27, 2017 and Jan. 1, 2023.
Per Diem Rates Stay Intact
The new tax bill makes no changes to per diem rates for truck drivers and other workers. For trucking companies, that means drivers can still claim 80% of expenses they incur for dining and lodging while working away from home. The standard per diem rate for U.S. transportation workers will remain at $63 per day. Workers can declare 80% of that daily amount as a tax deduction.
Brackets for Individuals
Many business owners will benefit from a reduction in the individual tax rates.
The U.S. tax code will continue to have seven income brackets. However, the percentage of taxable income has been reduced for all but two of the brackets. For 2017, the tax rates were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Starting in 2018, those rates will be 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Here’s a breakdown of the income brackets and the percentage each will pay in taxes under the new plan:
| Single Filer Income | Married, Filing Jointly | Head of Household | 2018 Rate |
|---|---|---|---|
| 0 to $9,525 | 0 to $19,050 | 0 to $13,600 | 10% |
| $9,525 to $38,700 | $19,050 to $77,400 | $13,600 to $51,800 | 12% |
| $13,600 to $51,800 | $77,400 to $165,000 | $51,800 to $82,500 | 22% |
| $82,500 to $157,500 | $165,000 to $315,000 | $82,500 to $157,500 | 24% |
| $157,500 to $200,000 | $315,000 to $400,000 | $157,500 to $200,000 | 32% |
| $200,000 to $500,000 | $400,000 to $600,000 | $200,000 to $500,000 | 35% |
| $500,000 and up | $600,000 and up | $500,000 and up | 37% |
Employee Withholdings
With the tax rates changing for most income brackets in 2018, the IRS is expected to issue new guidance on the tax withholdings for employees’ paychecks. That guidance could come as early as January 2018. Employers will be expected to implement the new tables on employees’ paychecks by February. The IRS guidance is expected to work with W-4 forms on withholdings that employees have already filled out.
A New Standard Deduction
For many individuals used to itemizing their deductions, their tax form in 2018 could become a lot simpler. The tax reform bill includes a new standard deduction of $12,000 for single filers and $24,000 for married couples filing jointly. That nearly doubles the standard deductions of $6,350 and $12,700 that individuals and married couples can claim on their 2017 taxes. If your itemized deductions are less than those amounts in 2018, you will be taking the standard deduction.
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Sources: Forbes, CNBC, Landlinemag.org, TheHill.com, Kiplinger.com