This article was originally published on SavannahNow.com:
As a tax preparer, I have received countless questions from business owners regarding the new tax law, known as the Tax Cuts and Jobs Act of 2017. While the specific questions vary, they can be summarized as, “how will this affect me and my business’s bottom line?” Unfortunately, the general answer is – it depends. Each business is unique with regards to the deductions, credits, and laws that apply to that entity. Because of this, there is no one-size-fits-all answer. However, it is fantastic that business owners are asking. Staying informed, planning, and seeking advice is critical to a company’s success.
While the new tax bill covers tons of aspects for business owners, there are two key items that I inform owners of that will most likely affect their bottom line:
For C-Corporations, your new tax rate is 21 percent. Prior to this, there was a graduated system where most C-Corporations paid between 25 percent to 39 percent to the United States Treasury, thus giving many C-corp. owners a benefit of up to 18 percent in reduced taxes.
Most business owners are pass-through entities (partnerships, s-corps, sole-proprietors, and the majority of LLCs), which has the new 20 percent deduction on qualified business income.
While the IRS is still hammering out some of the details, the general terms of this deduction are set. The premise of the deduction is that you may get up to an additional 20 percent deduction on net income. Hypothetically, the company makes $100,000 — you may get a deduction of $20,000 (100,000 x 0.2), resulting in $80,000 of taxable income from that entity.
However, this deduction is not simple or straightforward as the entity could be subject to limits of the deduction based on wages, capital investment, or industry.
To elaborate, if your company is a “specified service trade or business,” the deduction will phase-out based on your personal taxable income. At this time, the IRS is still refining the definition of what a “specified service trade or business” is, but it currently includes: fields of law, health, accounting, actuarial science, performing arts, consulting, athletics, and financial and brokerage services. For the “specified service trade or business” companies, the deduction will gradually decline to zero as income exceeds certain thresholds based on filing status.
The nuances do not end there, if a taxpayer is not a specified service trade or business, they may still be subject to limits but not a complete phase-out of the deduction. Again, these limits take effect as that taxpayer’s taxable income hits certain thresholds and are based on a portion of the sum of wages paid and/or capital assets owned of the entity.
It is crucial to pay wages. This deduction can become more complex if a taxpayer owns multiple businesses. I strongly encourage working with a knowledgeable tax preparer when navigating and planning with this particular deduction.
Regardless of the simplicity or complexity, these are great benefits to the majority of business owners and can have a positive effect to the bottom line — if you plan ahead.