The answer to that question could depend on weather or not your business is incorporated.
Republican lawmakers say that one of the largest tax cuts in their tax bill, a 20 percent deduction for pass-through income, is for small businesses and job creators. But there are also millions of other tax filers — many at the highest income levels — who would benefit significantly. It appears that small businesses that are incorporated stand to benefit from the “pass-through income” provision, while many others may not.
Pass-through income is business income that is taxed once at the individual rates of the business owner, instead of through the corporate tax structure. Nearly 40 million taxpayers claimed pass-through income on their individual tax returns for 2014.
Some Republicans pushed to include the cuts in the bill so that pass-throughs, which make up more than 95 percent of business tax filings, will get similar tax relief as corporations, which are receiving a large rate cut. While “pass-throughs” is a term often used to refer to small businesses, a Treasury Department analysis found that many are not actually businesses at all. And 69 percent of pass-through income goes to the top one percent of households.
Less than half of all people who claim pass-through business income on their tax returns conduct traditional business activity, according to the Treasury analysis.
Some “non-business” pass-throughs claim a small amount of income or losses, indicating that they may be claiming earnings from hobbies or vacation home rentals, for example. Others deduct a small amount of expenses and are most likely to be independent contractors who solely provide labor services, like an IT specialist who operates as a sole proprietor and contracts with another company.
Because pass-through rates will be lower than rates for individual income taxes, the bill would provide an incentive for people to find ways to classify their earnings as business income to take advantage of the lower rates. One inexpensive way to do is to become a ligament business by forming a LLC.
For example, a journalist could cease to be a direct employee of a company and then contract as a sole proprietor with that same company to benefit from the pass-through tax deduction (though, they would have to pay for their benefits and more of their own payroll taxes).
The bill includes some limits on who can take the deduction, but they would begin to kick in at $157,500 in taxable income for singles and $315,000 for couples. Most “non-business” pass-through filers make less than that and would qualify for the full 20 percent deduction.
If you are a small business owner who haven’t yet decided to become incorporated, maybe this new tax law can be an incentive to do so. If you’re ready to take that step, The Kyle Group can assist you in making that move.
Getting started is as easy as filling out your contact information on our Contact Us Page, and briefly state your goals. Someone will contact you in 24 to 48 hours.
Allen Kyle, Vetrepreneur
Portions of this posting was taken from a recent New York Times article written by
By ALICIA PARLAPIANO DEC. 20, 2017