Business tax planning is always complex, but the Tax Cuts and Jobs Act signed into law by President Donald Trump in December 2017, threw even more confusion into the mix. The new tax provisions went into effect on January 1, 2018, but even now, halfway through the year, business owners are scrambling to understand the best way to tackle their taxes.
Below is a brief description of the law’s two main effects for small business owners of sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations.
The 20% Deduction
The business entities listed above are pass-through taxable entities, which means their business income “passes through” their owners and is taxed on their personal tax returns. Under the Tax Cuts and Jobs Act, owners may deduct 20% of qualified business income from their personal tax return.
Although that sounds simple, there are several qualifiers to this basic formula, including taxable income thresholds. For single taxpayers, the threshold is $157,500 and for married taxpayers filing jointly, it’s $315,000.
Beyond that, single taxpayers who work in “specified service trades or businesses” are ineligible for the deduction, if their taxable income exceeds $207,000 (for married couples filing jointly, the threshold is $415,000). This group includes many professionals, such as attorneys and doctors.
Overall, various definitions and limitations work together to make this deduction more confusing than it seems at first glance, so you should strongly consider individualized tax planning regarding this deduction.
Depreciation of Business Assets
Depreciation of assets has also changed—but perhaps for the better. You can now accelerate depreciation for new property purchases. Under Section 179, you may write off up to $1,000,000 for the cost of new or used equipment and property in the year you purchased it; the previous limit was $500,000.
Moreover, bonus depreciation rules now permit a 100% deduction (instead of the previous allowed 50% after a Section 179 deduction), and it also includes used property instead of only new.
Overall, remember that the new tax law is over 1,000 pages long, and even tax professionals are finding it to be complex. Simply put, there may be a lot more in the law that affects your business.
There’s no substitute for personalized tax advice, and if you’re ready to learn more about tax planning for your enterprise under the new laws, call us at (314) 454-9100 or send a message today.
About the Author
Mr. Robert Gold is head of AEGIS Chicago office. He has close to 25 years of experience in structuring and executing transactions on both his own behalf and for a wide variety of primarily middle-market enterprises in healthcare, technology, real estate development, manufacturing and intellectual property.