How the Tax Cuts and Jobs Act Affects Corporate Income Tax

If you own a business or are thinking about going into business, one thing you’ll need to familiarize yourself with is the corporate income tax rate. This is income tax levied on business profits at both the state and the federal level.

The good news is that, just like with regular taxes, business owners do have many options to legally lower the amount of taxes they owe. And, with the right understanding of tax law and the right professional advice, business owners can easily save themselves a large sum of money. However, a recent Act has brought about some changes to corporate income tax rates that people need to be aware of.   

Recent Changes

Right now, the corporate tax rate is 21%, which is lower than it has been in quite some time. This is due to a recent change made by President Trump, who signed the Tax Cuts and Jobs Act into effect in December of 2017. Under this act, the tax rate dropped from 35% to its current rate, and other changes went into effect as well.

One of the changes affects pass-through businesses, which include sole proprietorships, limited liability companies, real estate companies, private equity funds, and more. If you’re not sure whether or not your business qualifies as a pass-through business, check with your financial adviser. If it does, then you should know that your deduction for qualified income has been raised to 20%, a rate that will continue until 2024.
Another change made by the Act limits a corporation’s ability to deduct interest expense. Now, only 30% of income can be deducted as interest expense. During the first four years, corporations must calculate income based on their earnings before interest, tax, depreciation, and amortization. After that, however, income is calculated based on earnings before interest and taxes.

These are actually just a few of many changes that have occurred due to the Act being signed. If you are concerned about how this Act may affect you in these or other ways, work closely with a financial adviser. Even when changes like these happen, they still know how to help you save money on corporate income taxes and pay the lowest amount possible.