The Impact of Trump on Tax Reform and What It Means for Your Business
On December 20, 2017, the U.S. government ushered in a new tax policy. Months of bitter, partisan fighting ended in a victory for President Trump. Officially referred to as the Tax Cuts and Jobs Act, Trump's plan rattled some people and elated others.
President Trump on tax reform is still a heated subject. Push aside the politics, however, and the new policies will have a big effect on your business.
It doesn't matter if you're a struggling freelancer or giant corporation raking in billions. You have to pay your business taxes.
If you have an accountant, go over the changes with them. If you don't, start studying.
Let's start breaking down the changes.
1. Life Is Good for Corporations
A lot of the people who fell in love with the Trump tax reform plan work for large companies. The new plan dramatically slashed the corporate tax rate, reducing it from a hefty 35% to a relatively meager 21%.
How is your business structured? If it's a C-Corporation, the new rate applies to you. The benefits are so juicy that small businesses are reclassifying themselves as c-corps in droves.
2. Small Businesses Benefit as Well
The average business in America is a pass-through entity, which means that the profits and losses are "passed" onto the business owner. The resulting sum is taxed as personal income. Financially, the owner and the business are one and the same.
Under the Trump plan, pass-through business owners are eligible for a whopping 20% business income deduction. That means you'll only be taxed on 80% of the income that your business generates.
To qualify you must:
- Have "Qualified Business Income" (QBI).
- Have a taxable income below $157,500 if filing by yourself or $315,000 if filing jointly.
- Rely on the work of multiple of people. If your business depends on one person, you're not eligible for the deduction.
3. No More Alternative Minimum Tax (AMT)
The AMT was designed to cripple a company's ability to take unnecessary deductions in an attempt to avoid paying taxes.
Trump's plan gets rid of the corporate AMT, allowing businesses to jump on the host of newly available deductions. Skilled accountants are now combing through the tax code in search of every single deduction and exemption that may be applicable.
4. New Accounting Methods
Speaking of accountants, Trump's plan allows more businesses to the use the cash method of accounting. That means that revenue and expenses are recorded instantly.
The alternative is the accrual method, which sees owners recording revenue when it's genuinely earned and expenses when they're used. A business using this accounting strategy wouldn't deduct the cost of their supplies until they were actually sold or consumed.
Trump on Tax Reform
The U.S. tax code has never been an easy subject to digest, and determining the impact of Trump on tax reform is no exception. There's a reason accountants go to college. Trump's tax code is has a lot of benefits but it also has plenty of drawbacks.
Instead of wading into the complicated world of business taxes, why not hire a professional accountant to do it for you? Let us take the stress off of your shoulders. We'll make sure your business remains compliant with the government.
Contact us today for a free consultation.