For the first time in 31 years, legislators overhauled the U.S. tax code. This significant tax reform known as The Tax Cuts and Jobs Act made some sweeping changes.
Aimed at spurring economic growth across the nation, the Tax Cuts and Jobs Act resulted in adjusted tax structures for corporations and small businesses. As of January 2018, the following significant changes have taken effect.
- The corporate tax rate has dropped significantly, from 35 to 21 percent.
How this will affect your business depends on its size. Big businesses are the ones that will benefit from this cut. According to the Small Business Association (SBA), to be a big business in the general construction industry, you require at least $33.5 million in annual receipts. Specialty trade contractors must have annual receipts of at least $14 million.
- Pass-through businesses receive a 20 percent tax deduction.
Small business owners generally fall into the category of pass-through businesses, which make up 95 percent of U.S. companies. This refers to a business structure where owners don’t pay income taxes at the corporate level. Instead, income is allocated amongst all owners and income taxes are charged to the owner or owners. These business structures include sole proprietorships, partnerships and S corporations.
Starting in 2018, business owners are able to deduct 20 percent of qualified business income. This applies to up to $157,500 for individual income and $315,000 for couples who file jointly. This tax provision is set to expire in 2025.
How exactly the tax reform will affect contractor businesses is not yet fully known. “The tax bill states that only ‘qualified trade or businesses’ get any flow-through tax reduction,” says Anne Zimmerman CPA, president of Zimmerman & Co. CPAs, Inc. and co-chair of Businesses for Responsible Tax Reform.
“The IRS tax code in this area (Section 1202(e)(3)) excludes service businesses in many fields, such as health, engineering, accounting and architecture, as well as a trade or businesses where the principal asset is the reputation or skill of one or more of its employees,” says Zimmerman. “Whether contractors will lose any or all tax reductions because their businesses are mainly selling their skills is not yet defined for this situation.”
While the jury is still out as to how all of the tax changes will play out and whether the tax bill will help or hinder contractor businesses, there are changes you need to make right now so that your company complies. Here’s what you need to know about the new tax plan.
“Your employees may see slightly bigger paychecks starting February 1, 2018,” says Zimmerman. “This is when the new withholding tables will be implemented.”
How this affects your business now: Before running your first payroll of the year, download all available updates to your payroll system. If you do payroll manually, get the new tax tables.
As of December 26, the IRS stated they were “working to develop withholding guidance to implement the tax reform bill signed into law on December 22.” They stated that they anticipate issuing the initial withholding guidance in January, so that employers and payroll services can implement the changes in February.
How this affects your employees: If your employees have questions, explain that the new tax changes are expected to go into effect at the beginning of February. When the changes are implemented, the W-4 forms may change. In that case, employees may need to fill out new forms.
Paid family or medical leave credit
In 2018 and 2019, eligible employers can claim a tax credit equal to 12.5 percent of the amount of wages the company pays to qualifying employees when they take family or medical leave and receive at least 50 percent of their normal wages. The tax credit rises 0.25 percentage points for each percentage point above the 50 percent. This caps out at 25 percent.
How this affects your business now: If you have employees on leave within the next two years, consider the tax credit when determining how much you want to pay them while they’re out of the office.
Beginning in 2018, the average gross receipts threshold for using the cash method of accounting has permanently increased substantially—from $5 million to $25 million. This is of significance, as many construction companies use this method of accounting. When customers make payments, the money is reported as income at that time and expenses are deducted when paid. This differs from the accrual method, which matches project expenses to the income from those projects.
How this affects your business now: If you’ve been using the cash method of accounting and are nearing $5 million in sales, you won’t be hitting the new threshold anytime soon.
Sweeping tax reforms bring change and uncertainty. In the coming months, we’ll inform you of how the Tax Cuts and Jobs Act is likely to affect your contractor business long-term.