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Small Business Taxes: 2 Major Changes for 2018

The passage of the Tax Cuts and Jobs Act effectively changed the tax world for just about every American business, large and small, when it was passed in late December 2017. Broadly speaking, corporate America received a tax cut, which is fantastic on its face.

But it could be a complicated few years as businesses adjust to some of the new rules, which will begin to take effect for the 2018 tax year.

The simplest rule change is the one that was most widely publicized: Corporations are going from a complicated range of rates between 15 percent and 39 percent to one flat rate of 21 percent.

Past that, it gets a little tricky.

Small Business Taxes: Pass-Through Entities

The broad stroke is that sole proprietors or owners of other pass-through entities, such as limited liability corporations (LLCs) or S-corporations, will be able to deduct 20 percent of their qualified business income – essentially, the basic profits of a business, excluding things such as capital gains or dividend income.

So, for instance, if you own an S-corp, and your company makes $150,000 in profits, of which you take a $60,000 salary, you’re left with qualified business income of $90,000. Your deduction, then, would be 20 percent of that, or $18,000.

But there are numerous asterisks business owners need to consider.

There are caps, first and foremost. Single taxpayers can only take the 20 percent deduction on up to $157,500 of total taxable income, and that’s raised to $315,000 for married filing jointly. This number begins to phase out at $207,500 individually and $415,000 married filing jointly, then caps out.

In that phase-out area, you actually get a partial deduction that’s the greater of 50 percent of W-2 wages the business paid in the year, or 25 percent of wages plus 2.5 percent of the unadjusted basis of all qualified property. Once your QBI climbs above the phase-out thresholds, you’re no longer eligible for any deductions.

This gets even more complicated when you consider that not every business is treated the same. Architects, doctors, lawyers, accountants, engineers – they seem like they’d all take similar adjustments, but that’s not quite the case based on another provision dealing with certain “specified service businesses.”

Sound complicated? It absolutely is. While this tax plan was sold as “simplifying” the tax code, there are plenty of complexities for small businesses. That’s where McManamon & Co. comes in. We offer a full suite of tax services, including figuring out federal, state and local tax obligations – and, of course, helping you decipher the new tax code.

Learn more about the sweeping corporate tax overhaul and what it means for your small business. Call us at 440.892.9088 or contact us online.

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