5 Ways The Tax Cuts and Jobs Act Affects Your Maryland Business
The Tax Cuts and Jobs Act (TCJA) became effective on January 1, 2018. The TCJA changes many of the tax laws related to business taxes. It is important to understand how the TCJA will affect your Maryland business for 2018 and beyond.
Loss of Business Interest DeductionIf you relied on a large tax deduction for the interest paid on loans used to operate your business, you might see an increase in your tax liability. The TCJA placed a cap on the deduction for this business expense for any business with $25 million or more in average gross receipts. Under the new law, businesses are only permitted to deduct an amount that does not exceed 30 percent of their taxable income. The interest that is not deductible under this provision can be carried forward for five years.
Lower Corporate Tax RatesIf you operate a C-Corp, you could see a dramatic decrease in corporate taxes owed by your company. Instead of a 15 to 35 percent tax rate, all C-Corps are now taxed at a flat rate of 21 percent. For some businesses, the new corporate tax rate could reduce their tax obligation substantially.
Pass-Through Tax Deduction for Some Business OwnersThe owners of some partnerships, sole proprietorships, and limited liability companies may be eligible for a new tax deduction. If the profits and losses from the company *pass through* to the individual owners for tax purposes, the owners might be able to deduct up to 20 percent of their net business income. An owner who meets all criteria for the pass-through tax deduction may only be taxed on 80 percent of the business income instead of the full profit received from the business. This deduction is in addition to the other business deductions the owner may claim.
However, the pass-through tax deduction expires January 1, 2026. In addition, there are special rules for some service-related business owners, including, but not limited to, businesses related to law, financial services, investment management, health, and brokerage services.
Bonus Depreciation of Business AssetsThe TCJA allows businesses to deduct 100 percent of the cost of a long-term asset in a single year. Before the TCJA, businesses could only deduct up to 50 percent of the cost of a long-term asset in the first year with the remaining cost being deducted over the following years. The law applies to long-term assets placed in service after September 27, 2017. The deduction is also set to phase out beginning in 2024. By 2027, the maximum bonus depreciation will be 20 percent for long-term assets placed in service between December 31, 2025, and January 1, 2027.
Elimination of NOL CarrybacksThe TCJA eliminated carrybacks for net operating losses (NOL). Now, a company may deduct an NOL only during the current tax year and future years. Any NOL that exceeds 80 percent of the taxable income for the business must be carried forward.
The Tax Cuts and Jobs Act has had broad effects across the nation. If you are a business owner, this may be a good year to have your finances reviewed by a tax professional. You may have deductions you didn*t know you had or liabilities that might cause unpleasant surprises.