The new Tax Cuts and Jobs Act (TCJA) law passed by Congress in 2017 has reshaped the landscape for not only individuals but also for business owners – especially those who own small businesses. The most significant change that will impact a proprietor may be the new deductible rate of 20 percent. This will include pass-through businesses such as S Corporations, partnerships and sole proprietorships. Revenue and expenses that they incur are “passed through” to the individual’s income tax return, which are subject to individual rates. This is a hefty reduction, considering that C Corporations pay a flat 21 percent.
Overview: You may be eligible to receive a 20% deduction on your pass-through income of your business
First-year bonus depreciation
One way businesses capitalize on tax savings is by depreciating property. The Act has doubled from 50 percent to 100 percent. Simply stated, businesses may now deduct the full amount of expenses on eligible equipment and property purchases, instead of writing off only a portion annually. Some of the qualified property includes business property such as computers and passenger automobiles and items used in a home-based business.
This applies to property purchased and placed in service after September 27, 2017. It is important to note that it will expire in 2022. Afterwards, the deduction percentage will be reduced.
A new cap on State and Local Tax Deductions (SALT)
If you have been able to lower your tax liability by deducting a significant amount in state and local taxes, you may be in for a big surprise this year. The IRS has now set a limit as to how much you can deduct: $10,000 annually.
This will include property, income and sales tax. If you itemize property tax you must choose between taking a deduction in either your income tax or sales tax. Since income tax is normally larger, most people choose to take the income tax deduction. Those who will be negatively impacted by this $10,000 cap are those who earn in excess of $100,000.
Deductions for pass-throughs and corporations
The government notes that nearly 95 percent of all businesses in the U.S. are pass-throughs. Most of these should all see a 20 percent deduction for pass-through and corporate entities.
Limitations on high-earners
The Act sets limits on how much people with high incomes can deduct:
- Professional service. In certain professional service industries, (health, law, consulting, etc.) the 20 percent deduction will start to phase out for individuals earning more than $315,000 (couples) and $157,500 for single filers. The deduction is completely phased out for couples earning $415,000, and for those filing single, it is $207,500.
- All industries. The Act has applied a different formula to calculate the limit for high-earning taxpayers in other industries. It is 50 percent of total wages paid or 25 percent of wages, plus 2.5 percent of the cost of tangible depreciable property.
- Other significant changes:
- For most taxpayers, income averaging has been discarded
- Unemployment income is now fully taxable ☹
- IRA contribution deductions are limited
- Social Security numbers are now required for all dependents on personal returns
- Investment Tax Credit has been eliminated
- Dividend exclusions have been repealed
Should you use a tax preparer?
You have invested more time, money and energy than you can recall in building and growing your business. To protect its solvency and integrity, you should give serious consideration to engaging a tax professional. Your schedule is already packed with time-consuming, high-energy meetings geared toward gaining a competitive advantage in the marketplace. The last thing you need is to miscalculate deductions or thresholds.
Many business owners rarely think about taxes until the deadline approaches. In reality, it shouldn’t be viewed as a once-a-year frantic event. Instead, it should be top of mind all year long. Procrastination makes the entire tax return process more cumbersome than it should be. If your last-minute struggle leaves you bewildered, it may unfortunately be too late to engage a reputable tax preparation service; they may be burning the midnight oil with hundreds of other clients.
Accurate bookkeeping = peace of mind
Established in 1976, Tax Leaf, has been helping business owners and individuals with much more than tax return preparation. Their diverse professionals provide clients with professional, accurate bookkeeping and payroll services. Their cloud-based software will consolidate all the data at tax time. Finally, they are multi-lingual, speaking English, Spanish, Portuguese and Russian.font>
Ready or not, tax season is quickly approaching. Do yourself a favor; let us help you get organized and compliant.
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