You'll need help filing your 2018 tax return

The 20% Pass Through Deduction & Your Handmade Business

This week we’ll talk about how the Tax Cuts and Job Act will impact those of  you who are running a real business.  Last week we talked about how the new Tax Laws impact those of you who treat your handmade business as a hobby – you can read that article here.

Let me clarify – a real business …….. one that files a Schedule C – Profit or Loss from Business with your personal tax return OR are an S-Corporation, Partnership, or an LLC that is not taxed as a C-Corporation.  When you have this type of business the money (income) you receive from your business is “passed through” to you on your personal 1040 Tax Return.

I also want to stress – that if you previously didn’t think that you needed a CPA or other Tax Professional to do you taxes – YOU CERTAINLY DO NOW!

The Tax Cuts and Jobs Act includes a 20% Pass Through Deduction for the types of business owners mentioned above.  But man, is it tricky!  I’ll try to explain, but will warn you – you may need a Costco sized bottle of Advil/Tylenol/or Aspirin by the time I’m done.  And I would certainly suggest that you make an appointment with your tax preparer – OR – find one to discuss this with, because I’m only going to give you a very general overview.  You need to find out how this will impact you personally!

The Tax Cuts and Jobs Act allows for a 20% pass through deduction – but there are stipulations.

First, the 20% Pass Through Deduction.

The owner of a business that files a Schedule C or are an S Corporation, Partnership or an LLC  are considered to be self-employed can deduct 20% of their “qualified business income” or the net income from the business (or from each business if you own more than one – if you own multiple businesses you calculate the net income from each business individually).  So, when you look at your Profit & Loss report from your accounting software – the Net Income is the bottom line number.  

Your CPA will take this deduction after they have determined and  calculated your adjusted gross income – which means that it will not lower your self employment taxes – you will still be paying those in full.

In a nutshell, your CPA will calculate the 20% deduction on the lessor (lower amount) of:

  1. your net business income or
  2. your taxable income BEFORE any deduction.

Ok, now SOME of the the stipulations – seriously, you need to talk to your tax preparer:

  • Your Net Income does NOT include any investment income (capital gains, capital losses, dividends, non-business related interest income and a few other things)
  • Loss carry-forwards ARE included in calculating Net Income
  • There are two additional rules that apply to those that have higher taxable income – specifically MORE than $315,000.00 for married people filing jointly and $157,500.00 for others.  But I’m not going to go into those – contact your own tax preparer for additional information as it relates to your specific situation.
  • The 20% deduction cannot be more than 20% of your taxable income – not including the actual pass through deduction or capital gains.

Again, I want to stress – that if you previously didn’t think that you needed a CPA or other Tax Professional to do you taxes – YOU CERTAINLY DO NOW!  This stuff is tricky and you want to make sure  you do it right!

Ready for that Advil now?

 

About Nancy Smyth, The YarnyBookkeeper

Hi, I'm Nancy. Yarn addict, career bookkeeper, and handmade business owner. I get the same feeling of joy when working with yummy yarns as I do when working with a column of numbers that all add up correctly. Bookkeeping for your handmade or creative business doesn't need to be scary. I can help you learn to handle your bookkeeping and other behind the scenes STUFF with confidence!

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