HOW IT EFFECTS “PASS THROUGH” BUSINESSES
Under the new tax act, starting with the 2018 tax year, Pass-through businesses may be eligible for a 20% deduction for which they pay nothing. This is a very generous tax break for small businesses and almost every restaurant and bar will be included.
If you are operating as an S corporation, partnership, schedule C or schedule E rental then you are a “pass-through” business and eligible for this benefit. C Corporations are not eligible.
Stated another way, if you qualify for the full benefit, you are only taxed on 80% of your business profit starting with the 2018 tax year.
If you qualify for the full benefit, you are only taxed on 80% of your business profit starting with the 2018 tax year.
If you own more than 1 business you may be able to take the deduction on each business.
There are several limitations to the amount of the deduction depending on your taxable income and other factors such as W-2 wages paid by your business and furniture fixtures and building costs. Taxpayers fall within 1 of 2 brackets used to calculate the deduction. For single taxpayers, if your taxable income is less than $157,000 you get the full deduction. If it is more than $157,000, you may get the full deduction depending on other factors mentioned above. For married filing joint taxpayers, if your taxable income is less than $315,000 you get the full deduction. If more than $315,000, you may get the full deduction depending on the other factors mentioned above.
The calculations are very complex and require your tax preparer to pull information from multiple sources. Adjusting certain factors such as your W-2 income and/or guaranteed payments can generate a larger deduction.
Tax planning becomes more complicated and more important than ever before.
Here is a simple example: You are single and earn a wage of $30,000 from your S corporation and have $80,000 in profits. That equals $110,000 in income. Due to the new 20% deduction, you can deduct $16,000 ($80,000 X 20%) from your income and are taxed on $94,000 instead of $110,000. If you are in the 32% tax bracket (Fed and State), that equals a dollar savings of $5,120 ($16,000 deduction times 32% tax bracket). Tax planning note: if you decreased your W-2 earnings and increased your profit, your deduction could be more.
Another example: You have the same income above but you are married and your wife has income from Ford Motor Company of $100,000. You would still get the $5,120 tax savings even though your income is now $210,000 (your $110,000 and her $100,000) because you are under the income threshold for married people which is $315,000.
Another example: You are married and your wife makes zero. You have a restaurant organized as a partnership. Your partnership makes $500,000 in profit of which you get half. Your $250,000 is eligible for the 20% deduction because you are under the income threshold of $315,000. So instead of being taxed on $250,000, you are taxed on $200,000 (20% deduction on $250,000 = $50,000). If you are in the 37% tax bracket (Fed and State), the tax dollars saved is $18,500.
You can see how powerful this deduction can be. This will generate huge tax savings when applied across the country and allow small businesses extra money to invest, expand and hire people.