Get Started: How tax bill agreement affects businesses
Tax agreement and small businesses
The Republican agreement on a tax bill gives many small company owners breaks on their business income taxes and allows them to deduct a larger portion of their equipment purchases. But many owners are also losing out on savings including the ability to deduct all of the interest they pay on loans.
The agreement includes a potential tax break for business owners who have sole proprietorships, partnerships and companies structured for tax purposes as S corporations; these owners report business income on their individual 1040 returns. Under the GOP deal, they can deduct 20 percent of their business income, but the size of the deduction starts to decline when an individual owner's taxable income reaches $157,500. Accountants, lawyers, financial advisers and some other professionals won't be able to take the deduction.
Companies that are C corporations — which include all of the Fortune 500 companies as well as some small businesses — will be taxed at a rate of 21 percent, compared to the current range of 15 percent to 35 percent.
Some small business advocacy groups have long campaigned for all businesses, ranging from the tiniest to C corporations — to have equal tax treatment. Their concern was that some owners were taxed at individual rates as high as 39.6 percent while corporations had lower rates. But some researchers including those at the Urban Institute, a think tank based in Washington, D.C., say upward of 85 percent of owners of sole proprietorships, partnerships and S corporations are currently taxed at rates well below the top brackets.
The agreement increases what's known as the Section 179 deduction that lets companies write off many types of equipment purchases up front rather than depreciate them over a period of years. Companies would be able to deduct $1 million in purchases, up from the current level of $510,000. Companies use the deduction to help finance the purchase of equipment ranging from computers and office chairs to vehicles and manufacturing machinery.
Depreciation rules for larger equipment and property purchases are also more generous. Currently, many investments in equipment or real estate must be depreciated over a period ranging from 2.5 years to decades, depending on what kind of property it is. The agreement generally allows for full up-front deductions of purchases each year for the next five years, subject to limitations on some purchases.
The agreement retains the provisions in both bills to generally limit the deductibility of business interest expenses to 30 percent of a company's taxable income, but companies with up to $25 million in average annual revenue keep the full deduction. Landlords will be able to continue fully deducting their mortgage interest.
The alternative minimum tax, or AMT, which some lawmakers had promised to eliminate, remains at a reduced level for individuals, including business owners, under the agreement, but the corporate AMT would be abolished. The tax requires high-earning individuals and corporations to compute their tax liability in two different ways and pay whichever amount is higher. Under the agreement, an individual's income up to $70,300 is exempt from the AMT, compared to the current level of $54,300. The exemption begins to decline when an individual taxpayer's income reaches $500,000. The AMT affects many business owners who pay high state and local taxes; under the agreement all taxpayers are limited to $10,000 in state and local income and property taxes, which means some owners won't be able to deduct a significant part of those levies.
The agreement allows more companies to use the cash method of accounting rather than the more complex accrual method. Under cash accounting, a company records income when it's received and expenses when they're paid. Under accrual accounting, income and expenses are booked when they are owed rather than when they're received or paid. Manufacturers and other companies with inventory are generally required to use the accrual method, but the agreement exempts businesses with average annual revenue of $25 million or less, up from $5 million under current law.
Joint employer rule
The National Labor Relations Board last week reversed a 2015 NLRB ruling under which franchisors like McDonald's and companies that subcontract work to others are considered joint employers with the franchisees and subcontractors. The NLRB overruled a decision in an Obama-era case involving Browning-Ferris Industries that said one company's indirect control over another's workers could make both joint employers.
Small business owners including franchisees had opposed the 2015 ruling, saying it would take away their control of their companies.
A statement last week from the NLRB said it was returning to its standard of joint employment that existed before the Browning-Ferris case. Under that standard, two companies will be considered joint employers only if one has exercised control over the other's staffers "and has done so directly and immediately (rather than indirectly) in a manner that is not limited and routine," the agency said.
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