How the Tax Cuts and Jobs Act Affects Small Businesses

 Posted on January 17, 2018 in Taxation Law

The United States Congress passed a major tax reform bill in December 2017, and lawmakers stated that one of their top priorities was to help grow the country’s economy by alleviating the tax burden on small businesses. While the full effect of the Tax Cuts and Jobs Act of 2017 has yet to be felt, the reform bill contained a number of provisions that will affect the taxes which small businesses pay. Therefore, small business owners should take steps to understand how to make the most of these changes.

Tax Deductions for Pass-Through Businesses

Pass-through companies, in which income is taxed at the rate of the individual business owner rather than through the corporate tax structure, account for 95 percent of businesses in the United States and include sole proprietorships, partnerships, and S corporations. Under the new tax law, pass-through businesses can take a 20 percent deduction on their taxable income, providing them with some financial relief and allowing them to reinvest these tax savings to grow their business. The deduction is subject to several limitations based on the type of business, its financial condition, and the taxpayer’s income.

Individual business owners in service industries (such as law firms or doctor’s offices) must make less than $157,500 per year to claim the deduction, and married couples who own a business must make less than $315,000 in combined annual income. However, since most pass-through businesses are small, this limitation will not apply in most cases.

With this change, lawmakers hope to provide small businesses with some of the same tax relief provided to large corporations—businesses that will benefit from a reduction of the corporate tax rate following the passage of the tax bill. Certain workers, such as independent contractors, may also benefit by classifying the income they earn as business income, allowing them to take advantage of lower tax rates than they would pay in individual income taxes.

Contact a San Jose Tax Attorney

Under the new tax plan, determining which deductions a small business is eligible to take, as well as calculating the correct amount of pass-through income, can be a complicated matter. Moreover, it can be especially difficult when factoring in employee payroll, the costs of purchasing and maintaining equipment, and the reinvestment of income. If you need help understanding how these changes will affect the taxes you pay and the deductions you can claim, John D. Teter Law Offices can work with you to determine the best approach you should take as you continue to build your business. Contact our San Jose, CA business tax lawyer today at 408-866-1810.

Sources:

https://www.businessnewsdaily.com/10357-small-business-tax-reform-changes.html

https://www.nytimes.com/interactive/2017/12/20/us/politics/small-business-tax-cut-pass-throughs.html