There are several changes in the 2020 tax law that small businesses should be aware of. The changes are not major, but they are still important and relevant to small businesses.
The Congress made some changes in the tax law in 2018. This includes new policies for pass-through businesses and low corporate tax. Also, some industries got a tax break. Here are the 2020 tax law changes.
Changes for the Pass-Through Businesses
Every pass-through business does not send a portion of its income to the IRS. Instead, the revenue comes to you or your co-workers to file it later.
There was a reduction in corporate tax rates by TCJA from 35% to 21%. But this did not affect pass-through businesses. However, the limits on interest deductions were changed by the legislation.
There were also changes in the net operating losses. The changes will expire by 2025. According to the legislation, the pass-through businesses will need to pay taxes of 39.6% as it was under the previous tax law.
Also, the Tax Policy Center ruled that a business with a minimum of $ 315,000 and $ 157,000 taxable income will pay 20% of their income. The business income tax rate dropped to 29.6% from 37%.
However, in a case where the revenue is higher than the income threshold, there will be a 50% deduction of employees’ wages.
Alternatively, the employee will be charged 25% of the wages with an additional 2.5% from the business property. However, there can be a decrease in the tax rate depending on the business type that pays its wages and the property owned. The deduction is no longer viable when the taxable income hits $415,000 for joint and above $207,500 for single filers.
There were also changes in the state and local tax. As of 2019, filers could not go beyond $10,000. People who are most likely going to get the most out of these changes are the high-tax state pass-through companies. The business deduction is based on your local and state tax laws.
Additionally, TCJA deducts all active losses from other income for the pass-through businesses. TCJA limits the deductible losses up to $250,000 for a single filer or up to half a million for joint filers. However, if you have unused losses, they can be used in the future.
Changes in Employee Fringe Benefits
There are new rules on fringe benefits given to employees. The changes come together with other business tax deductions like social security and unemployment taxes.
In 2020, there are no longer transportation fringe benefits for employees. Also, there are reductions on qualified bicycle commuting reimbursements. The reimbursements come as part of employee wages.
Also, you can exclude achievement awards from employee wages due to taxation. However, according to the IRS, this is only possible if the award was a physical personal property. The employee can also get dedication rewards up to a specific limit.
The tax law requires you to pay taxes if your business operates internationally. However, there are now better considerations when filing taxes.
Initially, you’d pay tax from the general income generated from your international business. But today, there are various territorial tax policies. Your company dividends are not affected during taxation from your foreign business.
The new income tax for a foreign business stands at 10.5%. However, you can use your foreign tax credits to offset the taxes.
Managing Business Losses and Expenses in 2020
There are new guidelines on the small business tax code. The recent changes affect how to account for business losses during taxation.
Apart from corporation entities, you’re likely going to experience changes in business loss limits. Business losses happen when your total deduction exceeds your gross income. This is according to the IRS. There is no more carryover of net operating losses from the previous year. The only losses carried over are those before December 2017.
There are also changes in some business expenses. Today, your business won’t cater to entertainment or recreation expenses. Additionally, TCJA eliminated food and beverage expenses purchased during the entertainment.