What the recent Tax Act Means for Small Businesses
The New Rule
The recent tax act is now in effect for the 2018 tax year, and while you may have some idea of what that means generally, you may not know what it means for your small business. For sole proprietors, S-corporations, LLCs and partnerships, the recently passed tax law provides you with a substantial, across-the-board 20% reduction of your business income. For example, a sole proprietor generating $200,000 of business income would be able to deduct $40,000 on his Schedule C. Instead of adding $200,000 to his adjusted gross income, he would add $160,000.
The exception to the rule
The exception for the 20% business income reduction is for service-based businesses, such as doctors and lawyers, earning more than $315,000 a year. The reasoning behind this exception is to keep the deduction from being a loophole for certain businesses that weren’t intended to benefit from the tax break or that taxpayers would look for ways to convert income from other sources into business income to receive the tax break.
Providing Small Businesses with More Room to Grow
The tax break is intended to provide small businesses with some much-needed breathing room as they struggle to compete with larger businesses and global competitors that have a smaller tax burden. Business owners can use their tax savings to hire new employees, increase employee wages and incentives, purchase inventory, expand their workspace, pay down debt or reduce their prices. Or hey – you could just give yourself a raise!
Many Business Owners Also Benefit from Lower Tax Rates
Beyond the reduction in business income, business owners may also benefit from the reduction in individual tax rates. Business owners living in high-tax states (such as California, New York and New Jersey) who itemize deductions may benefit less due to the new caps on state and local taxes and mortgage interest. However, for those in low-tax states (such as Florida, Nevada and Wyoming), the combination of reduced business income and lower individual tax rates is likely to result in a lower tax bill.
So for those business owners who consistently pay estimated self-employment taxes throughout the year, your estimated payments may need to be reduced to keep from overpaying throughout the year. While you may receive a hefty tax refund at the end of the year, keep in mind that you’re essentially loaning the government your money interest free. And that’s money you could be using to purchase new inventory, bring on a new employee or give raises.
If you’re wondering how to handle your self-employment taxes in 2018 with all of the recent tax act reforms, please reach out to me. I’d be happy to take a look over your previous income and tax returns and give you sound advice on what you should be paying based on your projected income and the new rules.