It’s likely that U.S. entrepreneurs—including black small business owners—are now trying to figure out how the $1.5 trillion Tax Cuts and Job Act will affect them and their businesses.
The new provisions are effective beginning this year through 2025. Small business owners should now be planning for the 2018 tax year and setting up their operations to minimize their tax liability.
Thomas Jones Jr., the lead tax partner for the black-owned public accounting firm of McConnell & Jones L.L.P. in Houston, says American business owners are trying to understand the impact of the new tax law on their businesses, themselves, and their families.
His firm is recognized by the Houston Business Journal as one of the city’s largest public accounting firms and by Accounting Today as one of the largest CPA practices in the nation’s Southwest region.
Jones started as a tax manager with Ernst & Ernst in 1977. He teamed with Wayne McConnell in 1996 to establish McConnell & Jones L.L.P. In 1999, Odysseus Lanier and Sharon Murphy merged with the pair, creating the largest African American-owned accounting and consulting firm in Texas.
With over 40 years of experience in investment and financial management, Jones provides the firm’s clientele with tax planning, retirement and estate planning, and other services. He works with entrepreneurs and small business owners to help them achieve long-term success.
The bottom line is the new tax law has arrived and will bring big changes.
“Whether you like Trump or not, the “Tax Cuts and Job Act of 2017” is the most significant and radical change in tax law since the 1980s and is sure to impact you and your business in the coming year,” Jones says.
Jones cited the most important elements he sees coming out of the tax reform package that small business owners and individuals should know more about:
For corporations and individuals, Jones says the Tax Cut Act remains true to its name. It cuts the corporate tax to a simplified flat rate of 21%. This is a big change from the previous multi-bracket structure with a 35% top rate! Individual rates are also cut with the new law. Though seven brackets remain, the Tax Cut Act has reduced rates with the highest bracket now at 37%, almost a 3% drop.
Reduction of Pass-through Income
Most owners of pass-through entities, including S corporations, partnerships, and sole proprietorships, will see their income tax lowered with a new 20% income reduction calculation. The Act increases the amount of income allowed to be claimed as pass-through from 17.4% to 20%. There are many variables to the reductions depending on your business structure. This is especially important for individuals looking to start a new business in 2018 as your entity choice will impact your tax situation. The provision for pass-through entities will expire in 2025.
Deductions and Exemptions Have Reformed
These changes could affect sole proprietorships, S corporations, and partnerships. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
Personal Exemptions Removed
Previously, you could claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents. But the under the new tax law, the personal exemption is no longer available to anyone.
State and Local Tax Deductions Capped
State and local tax deductions are limited to $10,000 total for all property, income, and sales tax. Where you live and your state tax structure will determine the impact of this change on your taxes.
Alternative Minimum Tax (ATM) Exemption Raised
The alternative minimum tax, a parallel tax system that ensures people who receive a lot of tax breaks still pay some federal income taxes, stays in place. But the exemption changes to $70,300 for single filers and $109,400 for joint filers and the phase-out threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
Estate and Gift Tax Exemption Doubled
Jones calls this a major win for small business owners! The estate tax, which applies to the transfer of property to decedents, either as a gift or through a will or trust, has been doubled. The basic amount of the exemption for individuals has jumped from $5 million to $10 million.
Business Tax Credits
Several business credits are maintained but modified, including the orphan drug credit, the rehabilitation credit, the employer credit for paid family or medical leave and the research and experimentation credit. Jones recommends business owners review all available credits with their tax adviser.