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The 20% Pass Through Deduction & Your Handmade Business

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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?

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