Independent Business Owners and the New Tax Law

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Independent Business Owners and the New Tax Law

Tax Cuts and Jobs Act

It’s still early in 2018, but the Tax Cuts and Jobs Act passed at the end of last year seems to be having a positive effect on the economy and business in general.

Here’s a quick summary of the main benefits for business owners:

  • There’s a 20 percent deduction for all pass-through businesses.
  • Married individuals who own service-based businesses like law and accounting firms can only receive the 20 percent deduction if they make under $315,000 per year ($157,500 if single).
  • The corporate tax rate will drop from 35 to 21 percent.
  • The alternative minimum corporate tax rate will be eliminated.

Tax Cuts and Jobs Act

The main provisions in the final bill are a reduced corporate tax rate and a significant deduction for all pass-through businesses and that is where a huge number of people who benefit from pass-through

 

business income benefit most. Almost 25 million people filed Schedule C attachments to their tax returns, which is how most people account for pass-through income. It averages out to about one of every six taxpayers.

Now consider who files a Schedule C; sole proprietors, partnerships, limited liability companies, independent contractors, and free-lancers. All will benefit from the 20% deduction on pass-through income with one limitation: married individuals who own service-based businesses like law firms or doctor’s offices can only claim the deduction if their annual income is below $315,000 ($157,500 if single).

For example, A single independent contractor with a net income of $40,000 a year who takes the 20% income deduction and the standard personal deduction would save $960 in federal income taxes compared with an employee with the same W-2 income. The tricky part about this new addition to the tax code is how the 20% deduction works and who exactly gets to take it. You will want to discuss this with a CPA or tax professional who has a thorough understanding of the new rules before diving in at the end of 2018.
The new law had minimal impact on individual deductions businesses can take to lower taxable income however, so tracking expenses is still just as important now as it has ever been. Deductr will continue to be a valuable tool for any small business owner who needs to track and document every potential deduction including mileage.
Over the next year, you’ll have ample opportunity to look at ways in which recent tax law changes have affected your situation. Often, you’ll find that contrary to popular opinion, there will be ways you can turn the new laws into tax savings even if you’re not a “big business”.

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