Small Business Tax Rates : Historical Tax Bracket Analysis
Confusing laws, changing regulations and lengthy forms can make tax time a tough time for small business owners. But thanks to the Tax Cuts and Jobs Act (TCJA), which officially went into effect for the 2018 tax season, many businesses are now eligible for lower tax rates and new deductions.
How much of a break does this really amount to for your company? A look at the historical tax brackets in the U.S. highlights the potential benefits of the new law.
Past Tax Rates for Small Businesses
The federal tax brackets for the highest and lowest earners have fluctuated a great deal since the inception of the income tax in 1913. That first year, the lowest earners paid only 1 percent of their incomes in taxes; the highest rate was 7 percent. From there, social and economic changes sent tax rates on a roller coaster ride:
- The 1916 Revenue Act raised top tax rates from 15 percent to 67 percent, and the 1917 War Revenue Act created an additional increase to 77 percent to cover the expense of World War I.
- Following the war, top tax rates dropped to 25 percent.
- The Great Depression saw another jump in tax rates for high earners, topping out at 63 percent.
- World War II brought the most expensive tax rates of all at 23 percent for low earners and 94 percent at the high end.
- Rates remained relatively stable throughout the 70s at 14 to 22 percent at the bottom and 70 percent at the top.
- The Tax Reform Act of 1986 reduced tax rates to between 11 and 50 percent.
- After hovering between 35 and 39.6 percent for higher incomes throughout the 1990s and early 2000s, expenses related to the Affordable Care Act added an additional 3.8 percent. Low rates remained between 10 and 15 percent.
These rates applied to individuals, sole proprietorships, limited-liability companies (LLCs), partnerships and S corporations. During the same time period, the flat rate for corporate taxes fluctuated between 15 and 39 percent.
Historically speaking, the tax rate for small companies in the recent past has been fairly high, but the TCJA includes several reforms that could offer big breaks for your business.
What Changed with the Small Business Tax Rate in 2018?
Adjustments to tax brackets may have the biggest effect on what percentage a small business pays in taxes. There are still seven brackets, but all have new rates, new income ranges or both. This could mean you save or wind up paying more depending on your business income.
Here’s a breakdown of the new brackets and the rates you can expect to pay:
- 10% – $0 to $9,525
- 12% – $9,526 to 38,700
- 22% – $38,701 to $82,500
- 24% – $82,501 – $157,500
- 32% – $157,501 to $200,000
- 35% – $200,001 to $500,000
- 37% – $500,001 or more
Further adjustments will go into effect for the tax brackets in 2019 to account for inflation, raising the qualifying amounts by an additional $175 to $10,300 according to income levels.
What does this look like as an average percentage? Typically, you can expect to pay 13.3 percent of your income if you run a sole proprietorship, 23.6 percent if your business is a partnership and 26.9 percent if you own an S corporation, with an overall effective tax rate of 19.8 percent for small businesses. The current flat rate for C corporations stands at 21 percent.
More Ways to Save on Taxes as a Business Owner
Fortunately, there are a few other perks in the TCJA small business owners can take advantage of:
- Pass-through entities, defined by the IRS as “a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate,” may be able to take a 20 percent deduction if qualifying business income falls beneath a given threshold.
- Depreciation expensing laws now allow for 100 percent expensing for certain types of business property, and deductions for expensing depreciable assets have been increased to $1 million.
- Paid family and medical leave and rehabilitation expenses for employees are now eligible for a tax credit.
- Businesses making up to $25 million a year can now use the cash method of accounting.
You can also continue to take the majority of deductions available to businesses in the past, although the TCJA did introduce new restrictions on deductions for entertainment and dining expenses.
Business Services Make Small Business Tax Time Easier
Getting the most out of the new tax law requires keeping clear, accurate records throughout the year. This can be a challenge when things are crazy and you’re working long hours, but bookkeeping services are available to handle time-consuming accounting tasks. Then when tax time rolls around, you know exactly which small business tax deductions and benefits you’re eligible for.
Changing your business structure might also help reduce tax payments, especially if your business has experienced a great deal of growth in the recent past and you’ve been thinking about incorporating. But if things have been tough and cash flow isn’t sufficient for tax payments, a short-term business loan might be necessary to cover your expenses.
Whatever you need this coming tax season, consider getting in touch with National Business Capital and Services for help. With the right services in place, you can be ready for tax time in advance and get all the benefits of the new laws and regulations.
With 24/7 support from a staff of expert advisors, National is ready to get you on track so that you can focus on running your business.
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