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:
- your net business income or
- 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?