What Will the New Tax Law Mean for Your Business?

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act bill into law, and taxpayers are still trying to figure out how it might affect them. This is especially true for business owners, as the most dramatic changes under the law are aimed at how businesses are taxed.

We’ve highlighted the most significant changes to business taxation that will likely affect you here, but to clearly understand the law’s full effects and take advantage of the benefits offered, you should contact us as your Creative Business Lawyer®, so we can meet with you and your CPA right away.

The new law sets a flat 21% tax rate for corporations. However, this flat rate only applies to C corporations, and not so-called “pass-through” businesses, which are taxed at the business owner’s individual rate.

Obviously, this would eliminate the competitive benefit of the pass-through status if the individual rates were higher than 21%, so the law was revised to provide a new deduction for pass-through entities, which is covered below.

Owners of pass-through businesses—sole proprietorships, partnerships, Limited Liability Companies (LLC), and S corporations—now qualify for a straight 20% deduction on their taxable income. However, this deduction is subject to several restrictions and limitations, so not all pass-through entities will qualify.

For example, the deduction comes with a threshold amount that begins at $157,500 for individual taxpayers and $315,000 for married couples. If your income is above the threshold amount, you are subject to additional limitations and exceptions that are determined by your occupation type as well as wage and capital limits.

These limits and exceptions are extraordinarily complex and vary greatly depending on the type of business you run and where your business income comes from. Given the complexity of this new change, it’s crucial that you meet with us as your Creative Business Lawyer® now to discuss how this deduction affects your unique situation.

The corporate alternative minimum tax (AMT)—which was aimed at ensuring business owners pay at least some federal income tax—has been completely repealed.

Under the new law, a company can only deduct interest expense of up to 30% of its earnings before interest, taxes, depreciation, and amortization (EBITDA). Any amount in interest expense beyond that amount is no longer deductible.

In 2022, the deductibility of corporate debt will be capped at 30% of earnings before interest and taxes but after depreciation and amortization expenses.