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Small Business Owners Confused by Tax Reform: Don’t Be!

We’re almost midway through 2018, and yet many owners of small and mid-size businesses still are in the dark about how the Tax Cuts and Jobs Act will impact them and their companies.

A new survey by the National Association for the Self-Employed recently collected input from 389 self-employed respondents about the new tax reform law, and here’s what it found:

  • Eighty-nine percent said they do not have a “complete understanding” of how the Tax Cuts and Jobs Act will affect their business.
  • Fifty-nine percent said they think their tax preparations will be made more difficult because of the tax changes.
  • Ninety-one percent said the government didn’t adequately prepare them for this new set of tax rules.

That’s a problem, because those laws are in effect regardless of anyone’s preparedness. The majority of the self-employed are now behind the 8-ball on the Tax Cuts and Jobs Act, which could mean they’re setting themselves for a larger-than-necessary tax bill come next year, and even be in trouble on the compliance front.

The following is some guidance to help you better understand the new tax laws.

What the New Tax Law Means for Small Businesses

The headline you’ve probably come across the most is the one focusing on the new corporate tax rate. Before the new tax law, U.S. businesses paid corporate taxes in a wide range as low as 15 percent and as high as 39 percent. Under the new law, that corporate tax rate becomes a flat 21 percent.

However, depending on how your business is structured, you might need to pay attention to a different number: 20 percent. That’s the deduction on qualified business income received from pass-through entities such as S corporations, limited liability companies, partnerships and sole proprietorships – structures used by many small businesses.

The income from these structures used to pass through to the owner, to be taxed at personal income tax rates, which reached up to 39.5 percent. Now, however, business owners can deduct 20 percent of that qualified business income – with some provisos. For instance, taxable income must be less than $157,500 (single) or $315,000 (married filing jointly). Once income reaches those thresholds, certain types of professions (including financial advisers and lawyers) are shut out of the deduction.

The new tax law isn’t all sugar and roses, either. For instance, whereas taxpayers once could (with few exceptions) deduct business interest expenses, there’s now a cap on that kind of deduction of 30 percent of adjusted taxable income. Also, businesses can no longer carry back net operating losses two years, and while they can carry forward those losses 20 years, there’s a limit on that carry-forward, at 80 percent of taxable income.

Sound Confusing? It Is.

Another troubling finding from the survey: Despite the complexities of the new tax laws, more than half of respondents said they haven’t spent a dime in finding outside assistance in understanding and dealing with the new tax laws. While we know small business owners often try to wear many hats, we strongly advise all businesses to seek out professional tax assistance to better understand the new tax code.

Need help? McManamon & Co.’s experts can assist with everything from filing returns to drawing up full-year tax strategies that you can use to squeeze every last cent out of the new, business-friendly rules.

Don’t go it alone in this important tax transition period. Connect with one of our tax experts by getting in touch with us online or calling us at 440.892.9088.


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