Tax Reform! Major changes to the US tax code for individuals and businesses.
I will be posting a series based on my research on the changes you should know about for both businesses and individuals.
Reform Changes For Businesses
The pass-through deduction
Does it apply to you?
The new tax code makes a big change to the way pass-through business income is taxed. This includes income earned by sole proprietorships, LLCs, partnerships, and S corporations.
Under the new law, taxpayers with pass-through businesses like the ones mentioned above will be able to deduct 20% of their pass-through income. In other words, if you own a small business and it generates $50,000 in profits in 2018 (Net Income), you’ll be able to deduct $10,000 of it before the ordinary income tax rates are applied.
If you are above the threshold amount, you are subject to limitations and exceptions which are determined by your occupation and a wage (and capital) limit.
The threshold amount is the amount above which both the limitation on specified service businesses and the wage limit apply. The threshold amount is $157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly. Phase-ins apply: that means that the benefit decreases as income increases.
If you are a specified service business and your taxable income exceed the threshold amount plus the phase in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly), then you lose the deduction completely. In that case, the old pass-through rules apply meaning you pay tax using your individual tax rate.
So…What is a specified service trade? A specified service trade or business is any business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” I like to think of it this way: if the success of your business depends on you and not on something that you sell, you’re pretty much included (except for engineering and architecture services, which were specifically excluded). The definition also includes a business where the performance of services consists of investing and investment management trading, or dealing in securities, partnership interests, or commodities.
For all other businesses, if your taxable income exceeds the threshold amount, the wage (and capital) limits begin to kick in. The wage (and capital) limit applies fully for a taxpayer (other than a specified service business) when taxable income exceeds the threshold amount plus the phase in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly).
And yes, there are a million “what ifs?” to be considered there is no one size fits all, each business has different circumstances to consider.
Remember, these deductions from income reduce your taxable income on your individual return. It does not change how you calculate your taxable income inside your business. Business expenses remain deductible.
If you have any questions regarding tax planning let’s setup a meeting to chat.