People are calling the Tax Cuts and Jobs Act the first major tax shake-up in three decades. While the full scope of the changes brought about by this new act is yet unseen, there’s no denying the sweeping effects these new tax laws touch every aspect of American life. But how can these laws potentially affect the startup world? We took a deeper dive below:
C-Corp Tax Reduction
Most startups, especially those looking to raise third-party investment, register as C-Corporations. The Tax Cuts and Jobs Act cuts C-Corp tax rates from 35% to 21%. Early-stage startups not yet generating meaningful profits may not see the intended benefits for some time, but those making money should feel a generous alleviation come tax time.
S-Corp and LLC Changes
Startups registered as S-Corps as LLCs qualify for a 20% deduction on business income. The law excludes a number of industries from the deduction (Law, Health, Financial services, Brokerage services, Consulting). However, businesses from those industries can still qualify if your income falls below a designated level (Single filers- $157,000/Joint filers- $315,000) with specific phase out clauses.
Prior to the Tax Act’s implementation, startups had to depreciate the cost of equipment over an asset’s useful life. With the new tax laws in place, companies can deduct $1 million in equipment in the year it is purchased. Essentially, you can expense twice the amount in 2018 through 2022 than in 2017. While startups are not always asset-rich, this represents yet another potential positive for the startup community. Deduct while you can – accelerated depreciation gets phased out in 2022.
Entertainment and Transportation Deductions
Entertainment expenses (read concerts, sporting events) are no longer deductible under the new tax laws. Transportation expenses, be they mass transit, ride-sharing apps, or any other provided transportation, are also no longer allowed.
Goodbye, AMT Tax
The Tax Cuts and Jobs act removed the AMT (Alternative Minimum Tax) entirely for corporations, and raised the threshold for individuals significantly. This promises to alleviate financial pressure on entrepreneurs by helping them to avoid paying the AMT.