Small-Business Owners Win Big in New Tax Law With 20%-Off Deal
While small businesses don’t get as hefty a tax break as corporations do, they do get a 20% reduction of taxable business income. Here's how that works, and some other benefits they could enjoy in 2018.
With last week’s passage of the hotly debated Tax Cuts and Jobs Act, proponents and opponents are offering different versions of the “winners and losers.” How any particular taxpayer will fare depends on a number of factors, including marital and family status, amount and type of deductions and in which state they live. However, one type of taxpayer, in particular, stands to gain more than most: small-business owners.
For most of the year, the focus of the tax bill had been on the reduction of corporate tax rates — from 35% down to 21% — to bring them in line with the tax rates of some of the more competitive countries. This cut is significant for C-corporation filers.
20% Blanket Reduction of Taxable Business Income
Original versions of the tax bill sought to extend a similar provision to pass-through businesses, such as sole proprietors, S-corporations, LLCs and partnerships. The final version didn’t go so far as to reduce the tax rate on pass-through filers, who pay income taxes based on their personal tax rates. But it did provide them with a substantial, across-the-board 20% reduction of their business income. So, a sole proprietor generating $200,000 of business income would be able to deduct $40,000 on his Schedule C. Instead of adding $200,000 to his adjusted gross income, he would add $160,000.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The exception for the 20% business income reduction is for service-based businesses, such as doctors and lawyers, earning more than $315,000 a year. The thinking is that the deduction could become a loophole for certain businesses that weren’t intended to benefit from the tax break or that taxpayers would look for ways to convert income from other sources into business income.
It should be noted that the pass-through deduction was included as an individual income tax provision, which means that it expires at the end of 2025, along with the other individual income tax reductions. (Meanwhile, the corporate tax cut is permanent.)
Providing Small Businesses with More Room to Grow
The tax break is intended to provide small businesses with some much-needed breathing room as they struggle to compete with larger businesses and global competitors that have a smaller tax burden. Business owners can use their tax savings to hire new employees, increase employee wages and incentives, purchase inventory, expand their workspace, pay down debt or reduce their prices. Or they could just give themselves a raise.
More Tax-Planning Opportunities
The tax bill made very few changes to the Schedule C, keeping in place most of the deductions businesses can take for eligible expenses. The biggest change favors businesses that invest in equipment, allowing full expensing for five years and increasing the Section 179 small-business expensing cap to $1 million from $500,000.
Many Business Owners Also Benefit from Lower Tax Rates
Beyond the reduction in business income, business owners may also benefit from the reduction in individual tax rates. Business owners living in high-tax states (such as California, New York and New Jersey) who itemize deductions may benefit less due to the new caps on state and local taxes and mortgage interest. However, for those in low-tax states (such as Florida, Nevada and Wyoming), the combination of reduced business income and lower individual tax rates is likely to result in a lower tax bill.
The new tax law is expected to take effect Jan. 1, 2018, which leaves little time to make adjustments to your 2018 strategic plans and budgets. However, it is advisable to review your plans with the guidance of your CPA to ensure you understand the full impact of these tax changes on your business and personal tax situations.
Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Save Over $40 on Audible With Amazon's Latest Deal
Amazon’s latest promotion lets you score three months of Audible for just $0.99 a month.
By Erin Bendig Published
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Charitable Remainder Trust: The Stretch IRA Alternative
The SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
By Brandon Mather, CFP®, CEPA, ChFEBC® Published
-
Three Ways to Take Control of Your Money During Financial Literacy Month
Budgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
By Craig Rubino Published
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?
And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
By John M. Goralka Published
-
What Not to Do if an Employee or Loved One Is Kidnapped
Businesses need to have a crisis plan in place so that everyone knows what to do and how to do it. Sometimes, calling the authorities isn’t recommended.
By H. Dennis Beaver, Esq. Published
-
Why You Shouldn’t Let High Interest Rates Seduce You
While increased interest rates are improving the returns on high-yield savings accounts, that may not be an effective place to park your money for the long term.
By Kelly LaVigne, J.D. Published