How Do the New US Tax Laws Impact Small Businesses?

Business Meals and Entertainment Deductions Eliminated
Businesses and freelancers who tend to get work done over dinner or drinks unfortunately lost a major deduction (even if it was limited to 50% of the actual costs before). Meals and entertainment for business purposes are no longer deductible regardless of who pays. The only exception to this is for employers hosting holiday parties and similar events at the workplace for their employees. Deductions are still allowed, of course, for meals and drinks purchased during bonafide business travel.

Pass-Through Businesses Get 20% Deductions
About 95% of American businesses (large and small) are pass-through entities. Pass-through entities include sole proprietorships, S corporations, partnerships, and any LLCs taxed as one of those entities. Generally, pass-through tax rates have been lower than corporate tax rates and without the double taxation aspect. However, this new deduction is meant to give small businesses and the self-employed in lower income brackets (or just starting out) an incentive to work for themselves instead of for an employer. There is a required investment formula based on certain depreciable assets invested in and W-2 wages paid during the year. Knowledge workers (except engineers) are also exempt from this benefit. However, there’s an exception to both of these rules if total income is less than $157,500 ($315,000 married filing jointly). This 20% deduction reduces taxable profits, but will not impact the amount of self-employment tax owners of pass-through entities will owe.

Maximum Corporate Tax Rate Reduced to 21%
The previous maximum corporate tax rate was 35%. With a new maximum rate of 21%, taxpayers exceeding the income threshold for the 20% pass-through deduction who want to cut self-employment taxes may find benefits in relaunching as a C corporation to take advantage of the new lower tax rate for C corporations and personal service corporations. The tax bill is also making it easier to convert pass-through entities to C corporations on account of these changes.