What are the most significant 2019 tax law changes? We’ll summarize the biggest new tax law changes and how they affect small businesses.
2019 Tax Law Change Summary
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced dozens of tax law changes that took effect in 2018 and affect taxes filed from 2019 forward. Other tax law changes in 2019 reflect standard adjustments.
Some of the most important changes you should be aware before filing your small business taxes include:
- Corporations now get taxed at a flat rate of 21%
- Corporate alternative minimum tax20 has been eliminated
- Social Security maximum wages for withholdings have increased to $132,900
- Medicare rates and withholdings for higher-income individuals have changed
- New deductions apply to income from pass-through businesses
- More midsize and large businesses can use cash method accounting and avoid complicated inventory accounting
- A 100% first-year bonus depreciation deduction is available for certain qualifying assets
- Depreciation maximums are increased to $1 million for certain other assets
- Depreciation deductions for vehicles used in business have been updated
- Most business entertainment deductions have been eliminated, except for certain meal expenses
- Business interest expense deductions are subject to a maximum of 30% of adjusted taxable income, with some exceptions
- Excess business losses claimed by individual, noncorporate taxpayers are subject to new limitations
How will new tax laws affect small businesses? We have more details on these changes below.
Note the information presented here summarizes changes to rules that can be complex when applied to actual tax returns. Consult your tax professional when determining how these new tax laws for small businesses apply to you. Make sure you review any estimated tax payments you’ve already made in light of these changes.
Small Business Tax-Rate Changes
Among the most important tax law changes, small business tax rates for 2019 have been simplified. Before the TCJA, corporations were taxed according to a graduated tax structure that started at 15% of a corporation’s income and increased to 35%. Under the TCJA, corporations now are taxed at a flat rate of 21%.
To calculate your corporate tax, multiply your taxable income by 0.21.
The TCJA also repealed the corporate alternative minimum tax (AMT). Previously, an AMT of 20% was in effect for companies whose tax obligations fell below this designated minimum.
Other Important New Tax Law Changes
Some of the other most important changes affect the way payroll is calculated, impacting both Social Security and Medicare taxes. Additionally, new deductions are available for owners of businesses structured as pass-through entities, as explained more below.
Social Security Maximum Taxable Earnings
In 2018, the maximum taxable earnings for calculating Social Security withholdings were set at $128,400. In 2019, this increased to $132,900. This affects both employers who withhold wages from employees and employers who pay self-employment taxes.
Additional Medicare Tax Caps
An Additional Medicare Tax of 0.9% for higher-income individuals implemented in 2013 under the 2010 Patient Protection and Affordable Care Act remains in effect in 2019. The additional tax applies to wages, compensation and self-employment income that exceeds designated thresholds. Thresholds for income where the tax becomes applicable are set at:
- $200,000 for single taxpayers
- $250,000 for married couples filing jointly
- $125,000 for married individuals filing separately
- $200,000 for heads of household with qualifying persons
- $200,000 for qualifying widowers with dependent children
Employers must withhold the Additional Medicare Tax for pay exceeding $200,000. Self-employed business owners must factor the additional tax into their own tax calculations.
Qualified Business Income Deductions
The TCJA also introduced a qualified business income (QBI) deduction on income from pass-through business entities. This applies to business structures where income from the business “passes through” to individuals for tax purposes, such as sole proprietorships, partnerships, limited liability companies treated as sole proprietorships or partnerships, S corporations and some trusts and estates.
Under previous tax law, income from these entities simply passed through to individuals to be taxed at their normal personal rates. Under the new law, owners of pass-through entities may now qualify for deductions of up to 20% on income from these businesses. Income from C corporations or earned as an employee isn’t eligible for the deduction.
How Else Will New Tax Law Changes Affect Small Businesses?
In addition to these changes, numerous other miscellaneous new tax law changes for small businesses apply in 2019. These include changes to:
- Cash method of accounting qualifications
- Depreciation deductions
- Business entertainment deductions
- Business interest expenses
- Excess business losses
Cash Method of Accounting Changes
One change expands the number of small businesses that are eligible to use the cash method of accounting. With cash accounting, you record revenue when you are paid and you record expenses when they are paid. This is in contrast to accrual accounting, where revenue gets recorded when it is earned and expenses get recorded when they are billed.
Cash accounting can help businesses reduce tax obligations. Under current tax law, small businesses with average annual gross receipts up to $25 million over the previous 3 years can use the cash method of accounting.
Depreciation Deduction Changes
Several rules for deductions on depreciation have changed under the new tax law. Normally, depreciation of assets such as buildings and equipment occurs over time. However, previous regulations allowed a “bonus depreciation” for certain assets, providing an immediate partial deduction on eligible items. The new law temporarily allows an immediate first-year 100% deduction on eligible items acquired and placed into service between Sept. 27, 2017, and Jan. 1, 2023.
Additional depreciation deduction changes apply under revisions to IRS Section 179, which allows certain property costs to be treated as expenses rather than requiring them to be capitalized and depreciated. For certain qualified assets such as machinery, equipment and software, as well as for certain improvements to nonresidential real property, the maximum depreciation deduction increased from $500,000 to $1 million. This deduction previously began to phase out on a dollar-for-dollar basis after businesses had spent $2 million on expenses, but this phase-out threshold has been increased to $2.5 million.
Rules governing depreciation deductions for business vehicles also have changed. Limits for depreciation on passenger vehicles have increased. If the taxpayer doesn’t claim bonus depreciation, the largest allowable deductions are now:
- $10,000 for the first year
- $16,000 for the second year
- $9,600 for the third year
- $5,760 for each following taxable year in the allowable period
If the taxpayer claims a 100% bonus depreciation, the maximum is $18,000 for the first year and the same as above for subsequent years.
Business Entertainment Deduction Changes
Business entertainment deductions have been restricted under the new tax law. The previous law allowed deductions on 50% of entertainment expenses directly related to the active conduct of a business.
Under new regulations, most entertainment expenses aren’t allowable, with the exception of 50% of costs for meals related to business. The taxpayer or their employee must be present and the food and beverages can’t be lavish or extravagant. Meals can be provided to current or potential customers. If purchased as part of entertainment events, meal deductions must be itemized separately from other, ineligible entertainment expenses.
Business Interest Expense Changes
Business interest expenses are subject to new limits under the updated tax law. Under previous regulations, deductions for net interest were limited to 50% of adjusted taxable income for companies with a debt-to-equity ratio exceeding 1.5.
Under the new rules, in general, for companies generating more than $25 million in gross annual revenue, business interest expense cannot exceed business interest income plus 30% of adjusted taxable income and floor-plan financing interest (a special type of financing for car dealers). Some exceptions apply to these general guidelines.
Excess Business Loss Changes
The new tax law also imposes new limits on deductions for excess business losses. Previously, farmers could claim deductions for excess losses when their annual total deductions exceeded their total income, subject to certain caps on how much deductions could be claimed for a given year. Deductions exceeding this threshold could not be claimed for that year and had to be carried forward to future years.
Under the updated rules, excess farm loss rules have been generalized into excess business loss rules applicable to non-farm businesses as well. With the new rules, an excess business loss occurs when a taxpayer’s total deductions from all trades and businesses exceed the sum of their gross income from those trades and businesses plus $250,000 (or $500,000 in the case of a joint return). Excess business losses that can’t be claimed in the current tax year are treated as a net operating loss to be carried over to the next tax year.
Turn Tax Law Changes to Your Advantage
Keeping up with tax law changes can be challenging, but if you invest the time to stay updated, you may be able to save yourself money as well as extra labor and expenses from making mistakes. Before filing your taxes, consult with your tax professional about how you can turn 2019 tax law changes to your benefit.