This legislation was enacted three years ago, and it affects significant areas of law including real estate and taxation. When it comes to your small business tax preparation, here are a few things you need to know.
Corporate Tax Rate Reduction
If your business is incorporated, you’ll benefit from the reduced corporate income tax rate introduced by the TCJA. The top corporate tax rate has been reduced from 35% down to 21%. This brings the US corporate tax rate below the average when compared to other Organisation for Economic Co-operation and Development countries.
The graduated corporate tax rate (the increase in tax rate as income increases) has been eliminated.
Interest Expense Limitation
Along with the corporate tax rate reduction, the TCJA brought an interest expense limitation. Prior to the introduction of the TCJA, business interest was fully deductible. This includes interest paid on business debt incurred to earn income.
When it comes to small business tax preparation, this means you may no longer be able to deduct all of the interest you pay in your business. Interest expense is now limited to 30% of business income, excluding depreciation after 2022.
However, for 2019 and 2020, businesses can deduct up to 50% of their business income in interest expense. Under the CARES Act, taxpayers can elect to use their 2019 adjusted taxable income when calculating the 2020 limit which will benefit taxpayers whose income has decreased in 2020.
The business interest expense deduction limitation doesn’t apply to some small businesses whose gross income is $26 million or less.
Qualified Real Property Expense
The TCJA revised the definition of qualified real property to mean qualified improvement property. This includes some improvements to nonresidential property. Roofs, heating, ventilation, air-conditioning systems, fire protection, and security systems are included in this definition.
This means improvements to nonresidential real property can be expensed immediately, reducing your income. However, the CARES Act amended this to include building capital spending from 2018-2022 only.
What This Means for You
Changes made by the TCJA apply to property placed in use after 2017. This is just a small sampling of some of the changes introduced by the TCJA. Because they impact small business tax preparation, It’s important to consider them when doing your taxes.
Some of these changes require you to make an election under certain sections of the Internal Revenue Code. Errors in tax return preparation often result in penalties and interest that aren’t necessary. Avoid these errors by understanding the credits and deductions available to you.
Tax law is constantly changing, making it difficult for you to know if you’re claiming everything you’re eligible for. It’s our job to stay current on these changes so you don’t have to. If you need a hand with your small business tax preparation, schedule a call today.