It’s that time of year: tax season. If you’re a business owner, taxes are one of the most critical issues you face, but this year, tax season feels even more cumbersome. With the enactment of President Trump’s Tax Cuts and Jobs Act, you may be questioning the new plan and its impact on your bottom line.
A tax break could free up more of your funds for hiring additional staff, adding a second location or helping you cushion your cash flow. But don’t start making big plans just yet. The truth is the impact of the new tax plan is both positive and negative, depending on many factors, including your industry and the way your business is structured. While I’m no accountant, here are a few things I’ve learned about the new tax code:
C-corps get a sweet deal
One of the most high-profile changes is that under the Tax Cuts and Jobs Act, C-corps are taxed at a flat rate of 21%—a cut from the previous range of 15%–35%. If your small business is structured as a C Corporation, generally, your taxes will go down. If your business is not structured as a C Corporation, this change will not affect you.
Most small businesses in the U.S. are structured as pass-through entities (partnerships, limited liability companies or S Corporations). While these entities are effectively taxed at individual tax rates, the new tax law adds a new deduction on qualified business income.
The new pass-through deduction is generally 20% of the qualified business income of partnerships, S Corporations and sole proprietorships. If the taxpayer’s taxable income is less than the threshold amounts of $157,500 (or $315,000 if married and filing a joint return), there is no limitation on the deduction. If the taxpayer’s income exceeds the threshold amounts, the deduction may be limited based on the amount of wages paid by the business and the unadjusted amount of qualified property in the business.
Solopreneurs can’t catch a break
There is another catch. If your small business generates revenue through the professional services of one individual (think physicians, dentists, nurses, lawyers, accountants, actuaries, performing artists, athletes, consultants, individuals providing financial services and any trade or business where the principal asset is the reputation or skill of one or more of its employees) your eligibility for this deduction phases out for income between $315,000 and $415,000.