Historical guide: 2018 tax year. This article is retained for historical reference, with corrections to its original explanations. Its rates and thresholds are not guidance for current returns. For current information, see the IRS small-business tax resources.
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 enacted in December 2017, several significant changes took effect for the 2018 tax year.
But first, let’s talk about the new business tax rates for the 2018 tax year.
What are the 2018 business tax rates?
For tax years beginning after December 31, 2017, the Tax Cuts and Jobs Act generally replaced graduated federal C-corporation tax rates with a flat 21% rate. Special transition rules applied to fiscal years spanning the change. See the IRS corporate income-tax guidance.
Your tax rate will ultimately depend on your taxable income, with several factors coming into play to determine that.
Sole proprietors report business income on their individual returns. For 2018, the ordinary federal individual income-tax rates were 10%, 12%, 22%, 24%, 32%, 35% and 37%; the applicable brackets depended on filing status and taxable income. See the IRS 2018 rate guidance.
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
Estimated tax is a method of paying tax during the year. Individuals, including sole proprietors, generally must make estimated payments if they expect to owe at least $1,000 when filing; corporations generally use a $500 threshold. Exceptions and withholding rules apply. These payments are credited against the year’s tax liability. See IRS estimated-tax guidance.
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
The TCJA introduced a deduction of up to 20% of qualified business income (QBI) for eligible owners of pass-through businesses. This reduces taxable income; it is not a 20% reduction in the owner’s tax rate. The law also generally set the federal C-corporation tax rate at 21% for tax years beginning after 2017.
Eligibility and the deductible amount depend on the owner’s taxable income, the type of business and other limitations. The deduction is not automatic for every pass-through business.
For 2018, additional limitations began above taxable income of $157,500, or $315,000 for married couples filing jointly. Specified service trades or businesses had a phaseout over the next $50,000 or $100,000, respectively; not every service business was excluded. See 2018 IRS Publication 535, chapter 12.
2. Updated first-year bonus depreciation deduction
The TCJA increased bonus depreciation to 100% for qualifying property generally acquired and placed in service after September 27, 2017, subject to the applicable dates and restrictions.
That allowed immediate expensing of certain eligible assets on 2018 returns, including some new and used equipment. It did not make every equipment or electronics purchase fully deductible. See the IRS comparison of TCJA business provisions.
3. Net operating loss changes
The TCJA generally replaced the former two-year NOL carryback with indefinite carryforwards for covered losses, subject to limitations. The two-year period described carrying losses back to earlier tax years, not the full period for using a loss. Later, the CARES Act generally permitted a five-year carryback for NOLs arising in tax years beginning in 2018, 2019 or 2020.
A net operating loss may arise when allowable deductions exceed income, after the adjustments required by the tax rules. It is not necessarily the same as an accounting loss.
How a loss can be used depends on the year it arose, later legislation and applicable elections and limits. See the IRS explanation of the NOL changes before relying on this historical summary for an amended return.
4. Repeal of the former corporate AMT for 2018
The TCJA repealed the former corporate alternative minimum tax for tax years beginning after December 31, 2017. Its former 20% rate applied to a separately calculated alternative minimum taxable income, rather than creating a simple 20% floor on regular taxable income.
This describes the 2018 reform. It should not be read as a statement that no corporate minimum-tax rules can apply in later years.
2018-2019 Tax season deadlines
These filing seasons are historical. Filing and payment deadlines depend on the return type, tax year and any applicable extensions or relief.
Returns reporting 2018 income were generally filed in 2019. Individuals, partnerships and corporations did not all share one filing deadline.
For current estimated-payment dates and filing requirements, use the IRS estimated-tax guidance and the instructions for the relevant return.
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.
