The U.S. Senate and House of Representatives passed H.R. 1 (also called the “Tax Cuts and Jobs Act”) on December 22, 2017. With the passing of this legislation, the government made some big changes to tax law that could impact small businesses.
H.R. 1 is just about 500 pages long. To help you parse through it, we rounded up some of the sections of H.R. 1 that are most relevant to business owners. Read on to discover important provisions that you may need to be aware of for your business.
H.R. 1 cut the corporate tax rate from around 40% to a flat rate of 21% on all businesses, which became effective on January 1st, 2018. There is no longer a special tax rate on professional or personal service corporations, for example, legal consulting or outsourced design work.
Pass-through entities, such as S-corporations and limited liability companies (LLCs), are, in effect, taxed according to each owner's individual tax rate. Under the new tax law, business owners of pass-through entities may deduct up to 20% of their income, which will help them save on taxes. (This Forbes article offers a detailed breakdown.) Bear in mind, these benefits are temporary, and are set to expire after 2025.
H.R. 1 cut the corporate tax rate to a flat rate of 21% on all businesses, effective January 1st, 2018.
The legislation also eliminated the personal income tax exemption between 2018 and 2025, and nearly doubled the individual standard deduction. For instance, for a single taxpayer, the standard deduction went from $6,350 in 2017 to $12,000 in 2018.
In addition, the withholding rate for supplemental wages less than or equal to $1 million decreased from 25% to 22% beginning in 2018. This means that employers should withhold a flat 22% on any any bonus, commission, or other supplemental wage payment, less than or equal to $1 million. If the amount of a supplemental wage payment is over $1 million, the excess amounts should be withheld at a flat rate of 37% instead of the previous 39.6%.
This all means that you may need to change what you withhold from your employees' paychecks.
The individual mandate penalty set forth in the Affordable Care Act – the requirement that individuals purchase health insurance or pay a penalty – is now cut to 0% beginning in 2019. Because of this, more individuals may opt not to purchase health insurance. The Congressional Budget Office estimates as many as 13 million fewer people will have health coverage by 2026.
The impact of this is far reaching, and may affect your business. With fewer people in the health insurance pool, insurance companies may have to raise premiums on individuals and employers, and pass along costs to people who do have health insurance.
What this all means is that offering health insurance to your employees may become more expensive. We will notify customers if there are any changes to the cost of health insurance employees access through Justworks.
The individual mandate penalty set forth in the Affordable Care Act was cut to 0% beginning in 2019.
Employers will now receive a tax credit if they pay employees while they are on a Family and Medical Leave Act (FMLA) leave, as long as the employer has a written policy that allows full-time employees no less than two weeks of annual paid FMLA leave, and the wages paid are at least 50% of the employees’ normal wages. The credit will be equivalent to 12.5% and up to 25% of the amount of the wages paid to the qualifying employees, depending on the percentage of the employees’ normal wages that are paid to them during the FMLA leave.
In 2018, there are also increased limits for health savings accounts (HSAs) and flexible spending accounts (FSAs). The maximum amount of tax-free contributions allowed for individual HSAs increased to $3,450 and $6,900 for family HSAs. The tax-free amount for qualified FSAs increased from $2,600 to $2,650.
On Other Perks
Small businesses offering additional perks to their employees will also see the impact of this new tax law. Food and beverage provided to workers is no longer fully tax deductible. Between the tax years of 2018 and 2025, businesses can only deduct up to 50% of those costs, and after 2025 they won’t be able to deduct food and beverage costs at all.
Between the tax years of 2018 and 2025, businesses can only deduct up to 50% of the cost of food and beverages provided to workers.
There are also some changes to commuter benefits. The maximum monthly amount an employer may provide to employees tax-free for transit passes and qualified van pools increased $5 to $260, and the parking exclusion was also increased to $260. However, the tax-free reimbursement of up to $20 a month for commuting to work by bicycle was eliminated beginning in 2018 until 2026. Most importantly, businesses will no longer be permitted to take deductions for any qualified transportation fringe benefit costs (other than for bicycle commuting reimbursements that are taxable to employees).
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Similarly, employees will no longer be permitted to deduct qualifying moving expenses between 2018 and 2026, other than a limited exception for active duty members of the Armed Forces. Consistent with this, individuals will generally no longer be permitted to exclude from income employer-provided qualified moving expense reimbursements between 2018 and 2026.
Finally, the standard mileage rate for transportation or travel expenses involving the business use of an automobile is now 54.5 cents.
As always, it is best to consult with a tax professional to determine the specific impact that this tax law will have on your business. They will be better positioned to help you stay fully compliant and avoid any penalties.
Remember, there is a long road ahead for the IRS toward implementing regulations and other guidance on how all these new provisions will operate and be enforced. Stay tuned for further information as the law continues to develop.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.