Top 5 tax changes affecting small businesses

There are some changes to the tax law that will affect your 2019 business return. We have identified the top five changes that you need to be aware of for your business.

Being a small business owner, entrepreneur, or freelancer has its benefits. You own your time, and you love what you do. You can also take advantage of significant deductions come tax time.

You cannot claim business losses higher than your income for a particular year. 

#5 Excess business losses

As with anything related to taxes, your filing status defines the limitation. The law limits your losses to $250,000 if you file as single and $500,000 if you file as married filing jointly. This means that if you are single with business losses of $300,000, you can take up to $250,000 in losses. You can then carry over the remaining $50,000 to the next year.

#4 Net operating losses

There are two changes related to net operating losses. 

a. You can no longer use your current year losses to offset prior year taxes. Yes, this used to be a thing. You could previously carry losses backward two years and forward up to 20 years. 

Donald Trump used the carry-forward method and avoided paying taxes for many years. His companies had losses of almost $1 billion in the 90s. His tax professionals legally spread those losses over the next 20 years of tax returns. You can do the same if you don’t leave taxes until the last minute. We all have losses at some point, why not take advantage of the law?

b. Your current net operating loss is limited to 80 percent. This means that if your business has a loss of $10,000, you can only claim $8,000, or 80% in losses. 

#3 Qualified Business Income (QBI) Deduction

The QBI deduction allows most business owners to claim an additional 20 percent of the qualified business net income, aka profit. For example, a sole proprietor with qualified business income of $120,000 is entitled to a deduction of $24,000 ($120,000 x 20%), under section 199A. As with anything tax-related, there are thresholds, limitations, and qualification to the QBI deduction. 

#2 100% first-year bonus depreciation

Businesses can write-off 100 percent of new and used qualifying assets. This includes most categories of tangible depreciable assets other than real estate. This change is a major tax-saving benefit for many businesses, including sole proprietors and owners of pass-through entities.

#1 Reduced or eliminated deductions for business entertainment

The deduction for expenses related to activities generally considered entertainment, amusement, or recreation has been removed. However, under the new law, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer – or an employee of the taxpayer – is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant, or similar business contact. Basically, don’t make stuff up! 

If you need help with your taxes, books or want to create a plan to save on taxes, schedule a free consultation with one of our experts today. 

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