Business Owners and the Tax Law
Posted: Farrah Gandhi
As seen in the Fort Bend CEO magazine
The changes from the Tax Cut and Jobs Act (TCJA) passed at the end of 2017 vary for businesses depending on the structure of the organization (i.e. C Corporation versus a pass-through entity such as a sole-proprietorship, partnership, S Corporation or limited liability company).
Owners of pass-through entities such as a sole-proprietorship, partnership, S Corporation or limited liability company, will be able to deduct 20% of qualified business income from the entity on their individual tax returns. Qualified business income is defined as the net income of the pass-through business after all business deductions have been claimed. As a simple example, an owner of a pass-through business that had qualified business income of $100,000 would receive a deduction of $20,000 from that amount on their personal tax return. That reduced amount of $80,000 would then be taxed at the business owner’s personal tax return rate. However, there are certain requirements, thresholds and limitations that do apply to this deduction. The flow chart below is a great resource to help determine whether a pass-through entity is eligible for the qualified business income deduction:
A specified service business is defined as one that is involved in the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees. It also includes businesses that involve the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
Other significant changes in the new tax law relate to business asset depreciation. Businesses will now be able to accelerate the amount of depreciation on new property and equipment through new limitations on bonus depreciation and Section 179 expensing. Beginning in 2018, Section 179 expensing allows a business to write-off up to $1,000,000 of the cost of new and used property and equipment in the year of purchase. Bonus depreciation will also increase to 100% of both new and used property. The bonus depreciation for previous years allowed only a 50% deduction. This bonus depreciation is retroactive to property placed in service after September 27, 2017 and before January 1, 2023.
Consult with a tax professional or Certified Public Accountant to ensure you are taking advantage of every applicable deduction and tax benefit in order to minimize your company’s tax liability.
WJ Interests, LLC, has provided Fee-Only financial advice to individuals, families and businesses since 1996. For more information, please contact us at firstname.lastname@example.org or 281-634-9400