As a small business owner, it’s important to be able to gauge how much you’ll pay in taxes for the upcoming year.
The last thing you want is to go file your business taxes for the previous year only to be utterly surprised by how much your tax situation has changed from last year because you failed to factor a recent legislation change in.
Knowing what changed is important in your budgeting and planning.
And changes there have been.
With the Tax Cuts and Jobs Act made active in 2018, several significant changes were implemented that change the way you’ll file and pay you small business taxes moving forward into the future.
But first, let’s talk about the new business tax rates for 2017-2018 and beyond.
What are the new business tax rates?
Under the Tax Cuts and Jobs Act, the new small business tax rates for 2017- 2018 and beyond are 15%, 25%, 34%, 35%, 38%, and 39%.
Your tax rate will ultimately depend on your taxable income, with several factors coming into play to determine that.
However, keep in mind that if you’re a sole proprietor, you pay taxes based on the personal tax rate, which are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Types of business taxes
So, what different types of federal tax will your business have to pay?
There are several different types of business taxes which the IRS may require you to pay, depending on the structure of your business and various other factors.
These are the five main types of federal taxes for businesses:
Income tax
Assuming you’ve ever worked a job, you’re familiar with income tax. As a business owner, you must pay tax your net income unless you’re a pass-through entity, in which case that tax burden will be “passed through” directly to the owners.
Estimated (quarterly) tax
Less its own type of tax and more a different method for paying existing taxes, as a business, the IRS suggests (and in the case of a corporation, can require) you pay quarterly tax payments based on your estimated taxes due for that period. Later, when you go to file your business taxes for the year, that amount paid is deducted from your total taxes due.
Employment tax
Any business with employees must pay employment taxes on those employee’s wages. Those taxes include federal income tax withholding as well as Medicare, Social Security, and unemployment taxes.
Self-employment tax
As a self-employed person, you’re also responsible for paying self-employment tax, which includes a combination of your own Social Security and Medicare taxes.
Excise tax
The least common form of business tax, your business only has to pay excise tax if it is involved in certain industries or products or services. For more information on excise tax rates and to find out what industries and products are included, see IRS.gov/excise-tax.
Keep in mind that it all depends on the structure of your business whether you have to pay one or all of these different types of taxes, so you won’t necessarily be required to pay them all.
Factors for determining your small business tax rate
With all of this in mind, you’re probably now wondering exactly what you’re business’ tax rate is or will be.
However, calculating your business’ tax rate is a bit complicated as it includes much more than just multiplying your net income by your tax percentage. There are special deductions on business purchases, net operating loss deductions, and credits which can adjust your tax rate and total taxes due.
Ultimately, you need to know what your taxable income is before you can get a good idea of how much you’ll be paying come next tax season.
For this reason, make sure you’re working with a tax professional such as a CPA that can help you along the way to make sure you’re taking every step possible to reduce your tax burden and follow through with your tax responsibility.
2018 Guide to small business taxes: What changed from 2017?
As mentioned earlier, the Tax Cuts and Jobs Act, which came into effect December of 2017, has made several significant changes to business taxes from reduced rates for certain corporations to new and extended deductions.
Here are the most important of those changes and how they might affect your business:
1. New deductions for pass-throughs entities and corporations
Easily the most significant legislative change of all, pass-through entities have received a significant 20-percent reduction in their tax rate while the C-corp tax rate has been reduced from 35% down to 21%. In addition, the alternative minimum corporate tax rate has been eliminated entirely.
Pass-through entities make up roughly 95 percent of all U.S. businesses, so this reduction is expected to have a significant impact on U.S. businesses over the next several years.
The only exception to this are serviced-based businesses, who can only receive the same 20% deduction if they make less than $157,500 as a sole business owner and $315,000 if two married individuals.
2. Updated first-year bonus depreciation deduction
In addition to these changes, the first-year bonus depreciation deduction is increasing from 50% to 100%.
That’s big for owners looking to invest in their business as it means that all equipment and electronic purchases can be written off entirely on your 2018 tax return, allowing U.S. businesses to invest more upfront to spur economic growth.
3. Net operating loss changes
The final significant change is that net operating losses (or NOL) can now be applied for an indefinite amount of time as opposed to the previous two years.
Net operating losses occur when tax deductions from your business are greater than your taxable income. The difference between the two is your net operating loss.
This is useful for business owners as it acts as a method of relief for future tax payments, incentivizing them to take more risks– and it can now be used whenever you choose.
4. Corporate AMT has been eliminated
The corporate AMT, or alternative minimum tax, was a minimum tax rate of 20% which corporations would have to pay if deductions would have dropped a company’s tax rate below 20%.
In addition, AMT barred companies from deducting R&D (research and development) expenses in low-income neighborhoods.
What does all that mean? More potential deductions for your business, especially if you were to push your tax rate below 20%.
2018-2019 Tax season deadlines
With the above-mentioned changes in mind, it’s important to keep in mind the upcoming tax season deadlines.
The deadline for 2019 tax returns is April 15.
Also, if this is your first year paying business taxes, it’s important to keep in mind estimated (quarterly) tax deadlines as well, which are April 17th, June 15th, September 15th, 2018 and January 15th, 2019 for the 2018-2019 season.
For more information, including tips for filing your taxes and the difference between a calendar and fiscal tax year, read Small Business Taxes: Tips for Filing Your Taxes as a Small Business Owner.
Always work with a tax professional
Filing your business taxes can be a complicated process, so it’s important to have a tax professional by your side every step of the way.
Take the time to find someone who understands your business and how to best file your taxes, including what credits and deductions you might be able to make use of.
By doing so, you’ll make the most of the upcoming tax season and reduce the chance of any nasty surprises.
