In December 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) that amended the Internal Revenue Code of 1986 and altered the tax framework in the United States. Since then, there has been a lot of speculation and debate on how the Act is affecting and will continue to affect the business world.
Let’s understand how the tax cuts can affect your business:
What are Tax Cuts?
Tax cuts are deductions in the tax rate by the government. The government lowers the tax rates for businesses as an incentive for their owners and investors to encourage them to do more business, which strengthens the national economy.
Revised Corporate Tax Rate for C-Corporations
The U.S. has one of the highest tax rates in the world but most of the big corporations aren’t the highest paying tax entities because they navigate their ways around it. TCJA lowered the corporate tax rate from 35% to 21% and introduced a flat-tax rate for all the C-Corporations.
The act also changed the U.S. tax system from global to territorial so if your business is legally registered in another country, you no longer have to pay taxes according to the U.S. tax rate. Instead, each of your business’ subsidiaries will pay the tax rate of the country it’s incorporated in. This will encourage business owners who offshore their companies in other countries to bring some of their business operations back to the U.S.
New Tax Rate for Small Businesses
Most small businesses in the U.S. don’t structure themselves as C-Corporation but they can still benefit from the tax cut. Most small businesses are organized as pass-through entities and unlike C-Corporations, they aren’t taxed entities themselves but their owners pay taxes on their profits at their individual tax rate.
So, if you’re the owner of a small business, according to the new act, you can deduct an amount up to 20% of your company’s net income in addition to all other deductions.
You can learn more about taxation and different tax reforms on our website. We post about the latest news pieces from the financial world and help our readers understand how these developments can affect their business.