For the first time since its signing into law in late 2017, the Tax Cut and Jobs Act (TCJA) impacted returns this year. As expected, it also brought about considerable changes, which caused confusion among taxpayers and preparers.
Among those who stand the chance of most significantly benefiting from the tax reform are business owners and investors, especially since one of the biggest changes in the tax law is the increase in business deductions. But, due to insufficient information and education regarding these changes, many entrepreneurs may have failed to take full advantage of these changes.
Below are a few of the legal tax deductions under the TCJA, which may save business owners millions of dollars.
1. Inventory deductions
The processes of buying, making, and storing of inventory all cost enterprises money. Fortunately, many inventory-related expenses are tax deductible, especially under the new tax law. Small retailers, or those with less than $25 million in gross sales, may now deduct inventory under $2,500 per line item as the inventory is purchased. Previously, if you still had inventory on hand, you had to wait until it was sold before it could be deducted.
2. Automobile depreciation deductions
If a business purchased a vehicle in 2018, they may be able to claim the new 100 percent first-year bonus depreciation deduction. This is an incentive that allows businesses to accelerate depreciation and save when purchasing vehicles and other assets.
According to MarketWatch, “100% first-year bonus depreciation is only available when an SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds.” What’s more, the bonus depreciation deduction only applies to vehicles that are used more than half the time for business purposes.
3. Real estate depreciation deductions
According to Entrepreneur, the bonus depreciation deduction for real estate investments was one of the biggest tax deductions that small businesses missed during the recently-concluded tax filing season. This is why business owners in Utah need tax help.
Now, businesses can claim Section 179 deductions for qualifying real property expenditures at a higher amount. From the old tax law’s threshold of only $510,000, the Section 179 deduction threshold has increased to $1 million with the enactment of TCJA. This means that much of a property can be written off completely in the year it was acquired even if the property has been used.
4. Up to 20 percent qualified business income deduction
One of the newest features of the TCJA is the introduction of qualified business income deduction. Under the new tax law, sole proprietors, partnerships, S corporations, Schedule Cs, and other pass-through entities, can get tax deductions of up to 20 percent of their qualified business income.
However, the IRS issued limits so this new deduction doesn’t become a free-for-all. For example, regardless of industry, entrepreneurs qualify for the 20 percent tax cut if their taxable income is under $157,500 if they’re single or $315,000 if they’re married. The rest of the qualifications are explained by the IRS.
If entrepreneurs missed any of these deductions, plus several others, during the recent tax season, it’s not too late. Some of these deductions are retroactive, which means their tax filings can be reevaluated to include the deductions they missed. Businesses should seek an accountant’s help regarding this.
The bottom line is, there are more tax deductions now that are beneficial to businesses, especially SMEs. It’s important to keep updated about these deductions to save money and make better financial decisions.