Celtic Bank Blog

Tax Breaks, Equipment Deductions, and More: How to Use Trump's New Business Tax Reforms to Expand Your Small Business

Since President Trump took office almost two years ago, the media has exploded with stories, press releases, and memes about the tweeting Trump.

But how have his policies—especially his tax reform policies—really impacted the growth of your small business? Nine months in, and sorting past the noise of the news, let’s take a look at what the 2018 tax reform means for different small businesses all over the country.

Tax Reform (and why it’s a big deal)

Before we jump into the nitty-gritty, it’s important to point out how huge these changes really are.

Trump’s tax reforms are the first large tax reform initiatives since Reagan… over thirty years ago! Which means you can’t expect your business to run status quo anymore. Things you’re used to deducting may not be deductible anymore. And improvements that have seemed just too expensive may actually help you save on your yearly bill from Uncle Sam.

Knowing what has changed can help you leverage these new laws to your advantage—capitalizing on the growth these changes were designed to create. And while the thought of taxes usually makes us squirm—depending on your business structure and the tax, you may actually find a few of these surprisingly helpful!

New Tax Rates and Structures

New Methods of Accounting

With the new 2018 tax reforms, more companies are able to utilize the cash method of accounting. Unlike the traditional accrual method of accounting, the cash method of accounting allows inventory costs to become tax deductible as soon as the owner purchases the inventory. With the traditional accrual method, that money is not actually something that can be deducted until the inventory has been sold.

This is particularly important for manufacturing companies, which have a lot of their revenue tied up in inventory. But any company that holds a lot of value in inventory can also benefit. To qualify, they just need to have an annual revenue threshold below $25M (previously, this threshold was $5M!). Companies bringing in revenues of over $25M are required to stick with the traditional accrual method of accounting.

Corporate Tax Rate Cuts

With the Tax Cuts and Jobs Act, the tax rate for C-corps changed from a 15%-35% rate to a flat rate of 20%. That’s the largest corporate tax reduction in the history of the U.S.! Since most small businesses are not set up as C-corps, you may not be affected by this. But it’s good to be aware of, just in case!

Changes in Your Tax Deductions

Pass-through Income Reduction

For non C-corp entities (think S-corp, Sole Proprietorships, and LLCs), you may be able to qualify for 20% income tax reduction.

To qualify, you must have a taxable income below $157,500 if you’re single—or $315,000 if married and filing jointly. If you qualify, the deduction will be applied to either your qualified business income, or your taxable income minus capital gains (whichever is lower).

That being said, if your business revenue comes from professional services provided by one individual (i.e. consultant, doctor, lawyer, accountant), you are not eligible for this deduction. But if you’re providing something else, like a good, you are eligible for the deduction!)

Equipment Deductions

Equipment deductions were already in place, long before Trump ever set foot in office. But up until now, they’ve functioned a little differently.

Previously, a percentage of the cost for qualified equipment purchases could be deducted from a business’s taxes over a period of time. However, with the new tax reforms, 100% of your equipment costs can be deducted from your taxes upfront. Better yet, this bonus depreciation isn’t just for new equipment purchases; any equipment that is still in use—new or used—can be covered by this deduction for up to $1M. That’s $490K more in claimable deductions than in previous years!

Repealed Deductions

While there are some definite benefits to the new tax laws, it’s important to note that a number of changes have also been made that limit the deductions you’re able to make:

  • Deductions that have been limited
  • Business interest deductions (once 100% deductible, now only 30% deductible)
  • IRA contribution deductions Deductions for providing employee meals (once 100% deductible, this is now only 50% deductible)

Deductions that have been eliminated

  • Deductions for providing employee transportation
  • Investment tax credit
  • Deductions for entertainment expenses for clients
  • Section 199 Manufacturing Loophole (originally allowed manufacturing companies to take a 9% deduction on income from production activities that promote domestic manufacturing)

Additional Tax Credits

Family Leave Credit

You can now get tax credit for providing paid family and medical leave to your employees—an expense most small businesses were previously unable to afford.

Depending on what you pay for leave, your business may be eligible for a 12.5%-25% tax credit—which makes a big difference at the end of the day. But offering paid family and medical leave for your employee has other benefits, too.

Employees who are offered flexibility to take needed personal time, without sacrificing pay, report greater job satisfaction. And companies offering these perks are viewed as better, more desirable employers. Together, these things help boost hiring and retention—both of which are important in today’s competitive search for talent.

But act fast! These credits aren’t permanent. The bill only allows these credits to be paid out through 2019!

What all of this means for you

So what? You know the laws and changes. But at the end of the day, what does this mean for your business?

The Downsides

Let’s start with the negative. As you consider the changes in tax reform, you’ll need to:

Reevaluate the expenses you normally write-off, and reevaluate your budget if necessary. If it’s important to wine-and-dine your clients to be successful, without the write-off perks, you’ll have to start creating a larger budget for it. But for many of the extra expenses you’re used to writing off, you may find other, more cost-effective, ways to accomplish the same things.

Perhaps instead of providing transportation for your employees, you could provide a weekly lunch (since those are at least half deductible) to help boost employee morale and retention. Or instead of individually treating each client to box seats at the nearest pro-baseball game, host a nice open house at your location with hors-d’oeurves, drinks, nice decorations, and some subtle music to set the mood.

While it may take some time and creativity to figure out new ways of improving employee perks or building client relationships, you may find these new incentives even better than the last!

Make sure you’ve correctly classified your business. C-corp, S-corp, LLC, sole proprietorship—the way you classify your business can make all the difference when it comes to your tax breaks. If you end up deciding to reclassify your entity, you’ll need to file the Form 8832 with the IRS.

Consider your income structure. Professional services that generate all income from one individual are ineligible for many of the benefits of Trump’s tax reform. Which means individual consultants, accountants, or medical practices (like a dentist running a practice on his own) will still be subject to heavy taxes.

While this definitely won’t be the case in every scenario, if it makes sense to go into business with another person (i.e. a family law firm, or small accounting group), you’ll be able to take advantage of tax breaks you would otherwise not qualify for.

The Growth Opportunities

These tax reforms are set up to help small businesses be successful. Take advantage of them while they last. Right now is a great time to:

Invest in employees. Raises, bonuses, paid leave for family events, even hiring new employees—as you run into unexpected savings from tax cuts, consider using the opportunity to invest in your employees. Doing so boosts employee retention and morale, which contributes to your productivity and builds a reputation that makes employees want to come and work for you!

Upgrade your equipment. If there was ever a time to update your equipment, it’s now. With 100% of your purchase being deductible (up to $25 million), take advantage of the opportunity to upgrade any slow, inefficient, or outdated equipment. Work faster, accept more projects, and increase your profits—all without ruining your cash flow.

Grow your business. Tax cuts, changes in the Affordable Care Act requirements, and new international tax laws mean you could find yourself with more money left at the end of the day. Invest this back into your business to update furniture, fixtures, and equipment, expand inventory, strengthen your employee pool, or even as the downpayment to a brand new location. That extra working capital can go a long way—especially when invested wisely!

Final Thoughts

Ultimately, your individual business and circumstances will determine how helpful these tax breaks are for you. But generally speaking, of people surveyed by the U.S. Chamber of Commerce Small Business Index, 48% of small business owners felt confident about their local economies and business.

“Main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes,” says Juanita Duggan—president of the National Federation of Independent Businesses. “For years, owners have continuously signaled that when taxes and regulations ease, earning and employee compensation increase.”

With some of the highest reported levels of owner optimism in 45 years, record low unemployment, the lowest small business tax rates since WWII, and more funding options available than ever—there’s never been a better time to start growing your business. Although the jury is still out on the ultimate effects of the 2018 tax reform, a majority of small business owners report improvement in the economy over six months, a year, and five years ago.

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