Business owners, take heart! The Tax Cuts and Jobs Act of 2017 is now in effect and may offer a boost to your bottom line. Changes in the new tax law affect business owners of both large and small companies in significant, and in most cases, positive ways. We will focus on the big picture changes in this blog post.
We’ll look first at C corporations which are taxed at the entity level. The corporate income tax rate has dropped from 35% to 21%. This change is permanent and does not ‘sunset’ in 2025 as the individual tax changes do. Owners of C corporations also pay tax at their individual income tax rates for dividends or other distributions from the company, resulting in the still present double taxation effect. Depending on your situation, it may benefit you to change your company’s status so that it can be taxed as a C corporation; however, the new rules for pass-through entities attempt to make any change in classification tax neutral to the business owner.
The next major change is a new deduction for owners of pass-through entities such as LLCs, S corporations and sole proprietorships. If you own one of these businesses, you can deduct 20% of your “Qualified Business Income” (QBI) from your taxes, leaving only 80% of it to be taxed at ordinary income rates.
This new deduction does not fully apply to all pass-through businesses, however, and has limits for those in the following fields: health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, or any other trade or business where the principal asset of the business is the reputation or skill of one or more of its employees. For married owners of these businesses who file jointly, the 20% deduction is phased out between $315,000 and $415,000 of taxable income and the phase-out occurs between $157,500 and $207,500 for single filers.
(A detailed overview of the subtleties of this change can be found here: Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017.)
Most business owners will find some tax relief because of these two significant changes in the new tax law. Planning for these changes with your CPA can help you uncover tax planning opportunities and position you to benefit when tax time comes around.
