Every year, tax laws change and certain IRS regulations affecting businesses change, too. This article describes the most recent changes you need to know about to do your business tax planning and to prepare your small business taxes for the current year.
Some of the changes for the 2018 tax year include updates to the Social Security maximum, IRS standard mileage rates, and new additional Medicare taxes that affect self-employed individuals.
New Tax Law Changes That Affect Your 2019 Taxes
Many parts of the Tax Cuts and Jobs Act of 2017 may affect your 2019 taxes. In addition to the changes mentioned in this article, here are some other important changes:
- A new family leave tax credit is available for 2018 and 2019 only, for businesses with a family leave paid time off policy.
- The business tax deduction on interest expenses is now limited for larger businesses.
- Your business can still carry forward business losses to get tax benefits, but these losses can no longer be carried back to earlier tax years.
- Your business can no longer deduct business entertainment expenses as a business expense. There have also been some changes to the meal expense deduction.
- If your business has been reimbursing employees for their costs of commuting to work, you can no longer deduct those expenses.1
New Qualified Business Income Deduction
A new deduction for small businesses (effective 2018) allows small businesses to take an additional 20% deduction from “qualified business income. “This deduction can be taken in addition to the usual business deduction, for owners of sole proprietorships, LLCs, and S corporations. Corporations can’t take this deduction.
Qualified business income starts with your business net income, with some limits and excluded types of income. Another limit is the total income of the owner: $157,500 a year for single filers and $315,000 for married couples. 2
Business Tax Rate Changes: Effective Dates
This information is for your business taxes for your 2019 business tax return that you are preparing in 2020.
The 2019 tax year ends on December 31, 2019, for sole proprietors filing business tax returns on Schedule C and for partnerships and S corporations.
If you are filing taxes for a corporation, your 2019 business tax year may end on a different date, depending on when the fiscal year for your business ends.
Federal income taxes are due for different business types on the following dates:
- For sole proprietors and single-member LLC’s preparing their business taxes on Schedule C: April 15, 2020
- For partnerships and S corporations: March 16, 2019 (March 15 is a Sunday in 2020)
- For corporations; April 15, 2020
The dates reflect the changes for due dates that fall on a weekend or holiday. In these cases, the due date for that year is the first weekday.
This article on business tax return due dates gives more details on the due dates for the current tax year for business taxes for different business tax returns, including due dates for filing extended returns.
2019 Personal and Business Tax Rates
The 2019 personal income tax rates (for pass-through businesses that pay business taxes on their personal returns) have the same levels, but the rates are decreased. The levels start at 10% and gradually increase to 12%, 22%, 24%, 32%, 35%, and finally reach a top rate of 37%. These rates are in effect through 2025.
The 2019 corporate income tax rate is now a flat 21% for all corporations, effective with tax years beginning January 1, 2018, and after.
Business Mileage Rates
The IRS standard mileage rate for 2019:
- 58 cents per mile for business miles
- 20 cents per mile for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations3
These rates are in effect for the entire year for businesses taking the standard mileage deduction.
Businesses may decide to deduct mileage using either the standard mileage rate or actual expenses. If you drive less than 50% for business, you probably want to use the standard rate, but if you drive over 50% for business purposes, adding actual expenses might be better.
Social Security Maximum
The tax rate for Social Security remains the same but the maximum amount of wages on which withholding is based has been increased for 2019, to $132,900. This maximum affects also affects small business owners who must pay self-employment tax for Social Security and Medicare.4
If a business owner has both business and employment income, the employment income is considered first, then earnings from self-employment, up to the Social Security maximum amount.
Additional Medicare Tax
For higher-income individuals, an additional Medicare tax rate of 0.9% is applied to combined employment income and self-employment income. The additional tax begins at these levels:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single: $200,000
- Head of household (with qualifying person): $200,000
- Qualifying widow(er) with dependent child: $200,000
This additional tax must be withheld from employee pay above $200,000. For self-employed business owners, this additional Medicare tax should be included in self-employment tax calculations.5
Net Investment Income Tax
In addition, a net investment income tax of 3.8% on investment income is imposed on higher-income individuals who have capital gains as a result of selling assets or on other business trade or activity. It can include passive activity (for owners who don’t actively participate in a business),
This tax is levied on individuals, not businesses, but it does affect people with dividend income as shareholders of a corporation, and it can include business owners who don’t actively participate in the business (called passive activity).
The income thresholds for this additional tax for 2019 (based on Modified Adjusted Gross Income are:
- $200,000 if you’re single or file as head of household,
- $250,000 if you’re married and filing jointly, or
- $125,000 if you’re married filing separately.
You can see the calculation for this tax on IRS Form 8960.6
Increases in Depreciation Deductions
Congress approved two accelerated depreciation benefits for businesses, permanently increasing Section 179 deductions on purchases of business assets and increasing bonus depreciation on purchases of new equipment.
- Section 179 deductions: Effective for tax years beginning Jan. 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital property, with a limit of $2.5 million. After 2018, the limits are indexed to inflation.7
- Bonus depreciation: This has been increased from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Bonus depreciation is now available for buying used assets. 8
All of these tax changes are complex, with many details, limitations, and restrictions. Get the opinion of a tax professional before you make any tax decisions based on this information.
Author: Jean Murray