1. Cutting the Corporate Tax Rate
Although the headline corporate tax cut from 35% to 21% primarily benefits C corporations, many small businesses structured as corporations enjoy this lower rate. However, many small businesses operate as pass-through entities — sole proprietorships, partnerships, S corporations — and don’t pay corporate taxes directly.
2. The New Qualified Business Income (QBI) Deduction
One of the most impactful provisions for small business owners is the 20% Qualified Business Income deduction:
- What is QBI?
Qualified Business Income refers to the net income from qualified pass-through businesses after expenses. - The 20% Deduction
Eligible business owners can deduct up to 20% of their QBI from their taxable income on their individual tax returns, reducing their overall tax burden. - Limitations and Phaseouts
This deduction is subject to income limits. Above certain thresholds, the deduction is limited or phased out based on wages paid to employees and the value of qualified property owned by the business. - Specified Service Trades or Businesses (SSTBs)
Certain service businesses like law, consulting, or health services face additional restrictions or exclusions from the deduction if their income exceeds the threshold.
3. Immediate Expensing and Bonus Depreciation
The TCJA significantly expanded the ability of businesses to deduct the full cost of qualifying capital expenditures in the year they are made:
- Bonus Depreciation Increased to 100%
Businesses can immediately write off 100% of the cost of eligible new and used property acquired after September 27, 2017, through 2022. - Section 179 Expensing Limits Increased
The maximum amount businesses can expense under Section 179 rose to $1 million, with a phase-out threshold of $2.5 million, making it easier for small businesses to deduct equipment and property costs upfront.
4. Changes to Interest Expense Deduction
- The bill limits the deduction for net business interest expense to 30% of adjusted taxable income.
- This may impact highly leveraged businesses, encouraging more careful debt management.
5. Net Operating Loss (NOL) Changes
- The TCJA restricts NOL deductions to 80% of taxable income.
- Carrybacks of NOLs were generally eliminated, but unlimited carryforwards are allowed, changing how businesses manage losses for tax purposes.
6. Impact on Business Structure Decisions
The new rules have influenced many small business owners to reevaluate their entity structure:
- Pass-through entities gain the QBI deduction, potentially making them more tax-efficient than C corporations for many.
- However, C corporations benefit from the flat 21% rate, so business owners should consult professionals to decide which structure best fits their tax and business goals.
7. Additional Tax Compliance Considerations
- The TCJA introduced new reporting requirements, particularly related to pass-through income and the QBI deduction.
- Small businesses need to ensure proper documentation and accounting to comply and optimize tax benefits.
Conclusion
Trump’s Big Beautiful Bill brought sweeping tax reforms that offer substantial opportunities for small businesses to reduce their tax burdens and reinvest savings into growth. However, navigating the QBI deduction’s complexities, maximizing expensing benefits, and considering business structure changes require careful planning. Small business owners should work with tax professionals familiar with the TCJA to optimize their tax strategy and ensure compliance.