As a contractor, you are likely to see a number of changes to your tax bill because of the most recent reform. Some of the most notable changes include:
A new pass-through deduction
If you operate as a pass-through entity, the new tax reform will allow you to deduct up to 20 percent of your business income, thus reducing your total tax liability. This deduction will be limited for taxpayers whose income exceeds a certain limit. If your income is greater than this threshold amount, your deduction will be limited to the greater of 25 percent of your W-2 wages plus 2.5 percent of qualified property or 50 percent of your W-2 wages.
Bonus depreciation has increased
The new law increases the bonus depreciation to 100 percent for most types of property. Previously, the limit was 50 percent. You can apply this new limit to any property placed in service after September 27, 2017. However, this increase will last only until 2023, when it will begin to be phased out by 20 percent per year until it disappears entirely.
The section 179 deduction is increased
The recent tax reform leaves the section 179 provision intact and increases the annual limit to $1 million. However, because of the increase to bonus depreciation, it is unlikely that this deduction will be used as frequently in coming tax years.
Tax rates were reduced
The new legislation reduced tax rates for pass-through entities and corporations. Corporations will now pay a tax rate of 21 percent, down from the prior top rate of 35 percent. The top tax rate for individuals and pass-through entities fell from 39.6 percent to 37 percent. Some of the other tax rates applied to individuals and pass-through entities also changed.
No more Alternative Minimum Tax for corporations
After the new legislation was enacted, the Alternative Minimum Tax was eliminated for C corporations. However, if you operate your business as a pass-through entity or a sole proprietor, the AMT remains intact. Owners of these types of businesses may still benefit from the legislation, as the AMT phase-out limits and exemptions have increased significantly.
These are just a few of the changes from the most recent tax legislation that will affect contractors. If you are concerned about how these new provisions will affect you, it’s best to consult an experienced accountant. Please contact Klein Hall CPAs today to learn more.