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At this point I'm sure most everyone is aware of the Tax Cuts and Jobs Act going into effect for the 2018 tax season. One of the big changes for this tax year involves small businesses. Businesses that meet certain qualifications will be eligible for a 20% deduction in taxable net profits. Because of this, businesses will want to make sure to plan accordingly to maximize these tax benefits.
Who is Eligible for the Deduction?
All types of businesses except C-Corps. This will include most types of small businesses. Single-Member LLC's, Sole-Proprietors, S-Corps, and Partnerships. That being said, there are some profit thresholds where parts of this discount start to "phase-out".
What are the Limitations?
For a married filing joint tax return, the total income can not be higher than $315,000. For individual filers, the total income can not be higher than $157,500. If your income is under those amounts, you are eligible for the 20% discount in income (Hooray!)
What happens if I make more than the limit?
If your income is above the limits listed above, your deduction is the lessor of:
20% of your business income OR
The greater of:
50% of your share of your business's W2 wages or
25% of your share of your business's W2 wages plus 2.5% of your unadjusted basis in the business property.
If you are a service industry business (accountants, lawyers, health professionals) you will use the above equation, but the deduction is phased out completely at $415,000 MFJ and $207,500 all other returns.
This means as we approach the end of the year, it is important to know where you are so you can plan accordingly. For small businesses under the threshold, a Roth IRA may be more beneficial than a traditional as long as the 20% small business deduction is in place, for example.
If you'd like to get your bookkeeping in order before the end of the year to know where you stand or to discuss tax planning please contact me!