One topic that’s been on the minds of many business owners over the last several months is the $1.5 trillion tax cut that went into effect at the end of 2017. As is the case with any tax cut, there are winners and losers. The good news for many technology companies is that they’ll be on the winning side of the deal and could see significant tax cuts this year. According to a recent article from Business Insider, application software developers, which have an average annual salary of $104,300 and used to pay $16,040 per year in taxes under the old plan will now pay $1,221 less this year (a 7.6% tax cut).
Here’s a summary of three changes ISV business owners should pay attention to:
A lower corporate tax rate and pass-through business tax cuts.
In 2018, C corporations will be taxed at a rate of 21%, compared to the previous rate, which was as high as 35%. Additionally, there are tax benefits for “pass-through businesses,” which includes partnerships, LLCs, S corporations, and sole proprietorships filing a Schedule C. The Tax Cuts and Jobs Act (TCJA) provides for a 20% deduction on non-wage portions of pass-through income. According to tax attorney Jeffrey M. Verdon, “This means that pass-through businesses will be effectively taxed on only 80% of their pass-through income – or, put another way, on only 80% of their normal rate on all business income!”
Overseas tax shelters are going away.
One of the loopholes many corporations have taken advantage of for years is opening offices overseas and transferring their profits (about $3 trillion in all) there (a process called deferral) to lower their tax burden. The new tax bill will force those companies to gradually bring deferral money home, but it will be taxed at rates ranging from 8% to 15.5%, which is far lower than the current 35% tax rate on corporate profits — and even lower than the new 21% rate.
Depreciation rules are becoming more generous.
Previously, tax deductions from business asset purchases such as office equipment and computers were depreciated over several years. With the new tax laws, however, many business purchases now can be written off immediately. Depreciation rules for larger equipment and property purchases are more generous, also. The new tax laws allow for full upfront deductions of purchases each year for the next five years, subject to limitations on some purchases.
While the new tax plan was intended to stimulate economic growth and simplify the current tax system, it’s having the opposite effect on the latter goal. Business owners will have to meet with their tax planners to evaluate the pros and cons of changing the structure of their business to determine which one makes the most financial sense. There are still many uncertainties about the new tax change, but the one thing that remains certain is the fact that business owners (and high-income individuals) will always benefit from tax planning advice and expertise to weigh their financial options.