The Tax Overhaul: What Every Business Owner Needs to Know
If you are wondering where your business deductions stand, you are not alone. In fact, questions abound about everything from employee withholding to how to determine what “qualified income” is for your business.
Where to start? Most businesses are interested in the promised 20 percent tax reduction. Whether you operate your business as a sole proprietorship, partnership, or S corporation, your business can qualify for some, or all of the new 20 percent deduction.
You can also include income you receive on your real estate investments, real estate investment trusts (REITs), publicly traded partnerships, and qualified cooperatives.
How to Determine Qualified Income for Deductions?
First, you need qualified business income from one of the sources mentioned before you can apply the 20 percent.
Second, to avoid complications, you need “defined taxable income” of:
- $315,000 or less if married filing a joint return, or
- $157,500 or less if filing as a single taxpayer.
As a small business owner, the new changes may provide for a kinder tax treatment. However, if you’ve been thinking about incorporating, you may want to do some calculations before taking that step.
While the new law does provide a 20% deduction on that qualified income received from pass-through entities, like limited liability companies and S corporations, the income limits may affect your decision.
Income from these businesses entities would essentially pass-through to the owner on his or her own individual taxes, under the old tax code at rates up to 39.6%
Now that business owners qualify for the 20% deduction on the profit their businesses produce, the question becomes, does incorporating still make sense?
Steps You May Want to Take
What if you make more than the threshold allows? It gets even more complicated because further restrictions apply to what Section 199A identifies as specified service trades or businesses. These include (but aren’t limited to) accountants, actuaries, paid athletes, lawyers, doctors and actors. If they have taxable income that is less than the thresholds above, he or she qualifies for the full 20 percent deduction.
If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for.
Remember, to qualify for the full 20 percent deduction on your qualified business income under the new tax code you need defined taxable income of less than $157,500 (single) or $315,000 (married).
Questions and Answers to Think About
The questions about the effects of the new tax law don’t stop there. I’ve heard the following with increasing frequency:
- Should I be an S Corp? – It depends.
- Is the self-employment liability calculated before or after the 20% deduction? –
- Is my retirement before or after the 20% deduction? –
- Has the charitable deduction been reduced/eliminated? – No, it’s gone up from 50 to 60%.
- Does the elimination of the Entertainment deduction affect business travel and meals? – No, meal expenses incurred while traveling on business are still 50% deductible.
- How do I know if I am correctly calculating the withholding for my employees? – Stay tuned for the definitive answer on that one.
Many of the changes included in the new tax law will require business owners to rethink aspects of the way they do business. To stay ahead of these changes, you may want to visit a tax professional earlier, rather than later. Planning this year’s tax strategy will prepare you for whatever actions are needed to dodge those avoidable mistakes and pitfalls.
Call our Corte Madera office today, and make an appointment to learn how the new tax law will affect you and your business’ bottom line.