Most small businesses hire an expert to handle their accounting, as taxes are sometimes challenging to understand. Small business owners should educate themselves regarding the basics of the TCJA as its changes to the federal tax code have a profound impact on their businesses. Here is what you should know.

What Is the Tax Cuts and Jobs Act?

The code lowered the income tax rates of C corporations from 35% to 21%. Other changes introduced by the TCJA affect S corporations, sole proprietorships, and partnerships, and the changes reduced the maximum tax rate for certain taxpayers. Such numbers may suggest that the TCJA has various benefits for your business as lower tax rates theoretically allow you to keep more revenue, increasing your profitability. However, the changes brought by the TCJA does more harm than good for small businesses.

What the TCJA Means for Small Businesses

The TCJA affects small businesses in various ways. These changes may feel concerning and surprising, but you are not alone in this. The 2018 tax year was the first year to be affected by the TCJA.

Smaller Net Operating Loss Deductions

You could forward unused losses for 20 years or back for two years. The TCJA limits the deduction to 80% of the net operating loss, and you are not allowed to carry unused losses back. There is no limit on how long you may carry them forward, but the overall effect results in a smaller deduction, which results in higher tax rates.

Smaller Business Interest Deductions

Before the TCJA was implemented, investors could deduct the interest accrued or paid on certain business debts. The TCJA has capped the deduction at 30% of your company’s accrued or paid interest. The maximum deduction would be the sum of 30% of your adjusted taxable income and the business interest income.

Lower Tax Payments

The TCJA indicates that C corporations owe 14% less yearly taxes. If your business is an S corporation, sole proprietorship, or partnership, it could owe less in annual taxes. However, surveys done by investors indicate that the deductions the TCJA eliminates have always resulted in higher tax payments.

Due to the many changes brought by the TCJA, small business owners may feel uneasy, especially when tax time approaches. However, online tax software platforms are updated regularly to reflect the latest tax codes. Contact a small business accountant from Dorra Financial Group to calculate and file your taxes to minimize your future tax liabilities.