Tax reforms are one of the biggest changes an administration can make in the whole country. In 2017, President Donald Trump dropped a big tax reform, and this bill is expected to affect a lot of individual and business taxpayers in the coming years. This tax reform has been the biggest one after the last which is the Tax Reform Act of 1986.
The Tax Cuts and Jobs Act, or better known as the Trump Tax Reform, was signed on December 22, 2017. A lot of things has happened since it was signed. The reform will take effect from 2018 through 2025. Although some of the changes will only last from 2025, it would be enough to change a lot of business dynamics that exist today. There are advantages and disadvantages that will be brought to some business owners, especially for multinational businesses and corporations. Small businesses are also affected, but more in a good way.
Because of the big changes in the business climate, a lot of business owners are having a lot of huge adjustments in their businesses. Prospective business owners are also wondering how creating a business right now can affect their chances of growth. What are the biggest changes in this tax reform? What changes will affect businesses in the country? How different will the effect be in small and large businesses?
1. Business corporate tax rate slashed from 35% to 21%
This is one of the biggest changes in the tax system from the Trump Tax Reform. With the 14% reduction in the corporate tax rate, corporate entities will have more after-tax income that will increase the money the business can spend. Business will have 14% more money after taxation, a figure that seems small but is actually big in terms of big businesses which pays taxes in terms of millions.
The intent for this is to encourage more investments and spendings from the business and spur economic growth in the whole country by increasing the overall GDP. A lower tax rate will also encourage the big taxpayers to pay the taxes.
2. Pass-through deduction of 20% for the first $315,000 of qualified business income
A pass-through deduction is when the owner of a business entity decided to pay the corporate entity’s taxes through his or her personal fund. Because of this, the tax rate that will be used is the individual rate, which is lower than the corporate tax rate.
With the Trump Tax Reform, there’s even a 20% deduction for the first $315,000 tax amount. The winner for this change is the small businesses. However, to qualify for the 20% deduction, the business owner should have a taxable income of below $157,500 for single and $315,000 for married and is efiling jointly.
3. Repealment of the corporate alternative minimum tax
Alternative Minimum Tax or AMT is the alternative to the standard income tax for businesses. This item is paid by taxpayers who pay above the exemption and is using a lot of deduction. Because of the Trump Tax Reform, the AMT has been removed for the corporate entities by the Congress.
The effect of this is it will only affect 200,000 tax filers, instead of 5 million. Only individual taxpayers will be required to pay the AMT (if they pass the requirement). The cost of living adjustments is also included in the bill.
4. Changes in the accounting system
With the changes in tax from the Trump Tax Reform, more corporate entities changed their methods of accounting. According to Fundera, the accrual method, which is the usual way of accounting before, will be replaced with the cash method of accounting.
In cash method of accounting, revenues are recorded as soon the cash was received from customers and expenses are recorded as soon as the expense was paid. With the average annual revenue of $25 million or less, a lot of businesses will not be required to use the accrual method.
5. Write-offs are bigger
With the new tax reform, businesses will not be required to depreciate equipment purchases over the years. The full purchase price of purchase will be directly written off in the tax season when it was purchased. This way, the cost of the asset can be spread out and be used for more years than its computer life span. This is called the bonus depreciation, a tax saving tool that is not used before because equipment should be depreciated in the number of years of its calculated lifespan.