Tuesday is Tax Day, the last day to file income taxes for the 2017 income tax season.
The old tax code was replaced by the tax cut legislation passed by Congressional Republicans late last year. This seems like a good opportunity to reiterate the tax changes for the country’s 29 million small business owners.
New Tax Structures
The new tax structure lowers tax rates and expands the income thresholds for anyone who pays individual income tax. This includes small businesses that are structured as pass-throughs. (These include sole-proprietorships, partnerships, LLCs, and S-Corps.)
Under the new tax structure, rates fall across the board. Income thresholds under these new rates are greater. For instance, the 15 percent tax bracket, which used to kick in at just $18,650 ($9,326 for single filers) has been eliminated in favor of a new 12 percent bracket that extends all the way to $77,400/$38,700.
The income threshold for the zero tax bracket, also known as the standard deduction, has risen from to $24,000/$12,000.
The tax legislation also introduces a new 20 percent tax deduction for small businesses pass-throughs. This allows these to shield one-fifth of their earnings from taxation. However, this provision is complex, with permutations based on business type, size, and income.
Here’s what we do know: All small business pass-throughs no matter the type, which earn less than $315,000 ($157,500 for single filers), can write off 20 percent of their earnings. According to IRS data, roughly 95 percent of small businesses earn less than $315,000, meaning the tax relief is directed at the small businesses that need it most.
Above this income threshold the deduction phases out based on business type and size. For professional services businesses—any business whose model relies on reputation or knowledge—the deduction begins to phase out at $315,000/$157,500 of earnings. That means law, consulting, PR, accounting, financial advisory, healthcare can only get the full 20 percent deduction if they earn less.
For these businesses, the deduction phases out between $315,000 and $415,000 of earnings ($157,500 and $207,500 ). Above this, you can take point zero deduction on any earnings.
Other Business Types
For other types of businesses, including manufacturers, food & beverage, the deduction for those earning above the $315,000/$157,500 income threshold is based on the size of the business. This applies to greater of 50 percent of wages paid or 25 percent of wages paid plus 2.5 percent of tangible, depreciating property.
Finally, the tax legislation allows businesses to immediately and fully write-off the costs of capital investment. This includes used equipment, significantly reducing costs. This provision eliminates the requirement that businesses deduct these costs over several years according to complicated depreciation schedules.
Keep in mind these major new provisions. Let the data and provisions speak for themselves in terms of their effects on small businesses.
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat about your small business tax health.
Source: Inside Sources