On December 20, 2017, Congress passed the Tax Cuts and Jobs Act, designed to cut taxes on businesses, stimulate the economy and create jobs. While the long-term impact on the government’s deficit is unclear, what is certain is that many small business owners may benefit from kinder tax treatment under the new law.
Once of the major changes from the Tax Cuts and Jobs Act (TCJA) includes a 20% deduction for qualified business income from pass-through entities, which are special business structures used to reduce the effects of double taxation. These entities are called pass-throughs because profits are passed directly through the business to the owners and are taxed on the owners’ individual income tax returns. Examples of pass-through businesses include sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations.
The Tax Cuts and Jobs Act
Under the old tax code, income passed through to the owner was subject to individual income tax rates as high as 39.6%. The TCJA allows owners to deduct 23% of their income, which helps them save a substantial amount on taxes. While the benefits are clearly there, is it time for you to incorporate your business? If so, which entity should you choose?
Things to Consider
Before you run off and become an LLC, there are caveats to saving on taxes under this new plan. In general, your taxable income must be under $157,500 (single) or $315,000 (joint) to qualify for the full deduction. If taxable income does exceed either one of these limits, the law places limits on who can utilize the break, such as entrepreneurs with service businesses (doctors, lawyers, etc.). Owners may also find themselves out of the 20% deduction—while their partners enjoy it—because of high-income spouses. Finally, in exchange for these lower rates, owners may take on more responsibility and expenses in bookkeeping and payroll needs.
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