While most companies are preparing their taxes for 2017, owners need to also now understand how small business taxes are changing in 2018. While many of the details of the “Tax Cut and Jobs Act of 2017” still need to be interpreted.
Here are how small business tax rates will be changing:
1. Owners may get lower taxes
Most small businesses are structured as a “pass-through” entities like “S” and “LLC” corporations. That means, like in the past, any income generated from these companies will be taxed at the owner’s individual tax rates. The new small business tax law promotes pass-through corporations since these rates will be lower than ones for individual income tax payers. Owners of these types of companies will now be able to deduct 20 percent off their earnings before paying taxes on it. Please note that under the new tax law, companies that provide “professional services” may not qualify for the entire pass-through deduction.
2. Beware of the limits
The law includes limits on who can take the deduction, but they may not begin until $157,500 in taxable income for singles and $315,000 for couples. Most “non-business” pass-through owners in the U.S. make less than that and would qualify for the full 20 percent deduction.
3. Check restructuring to a “C” corporation
Under the new tax law, these types of corporations now will have the lowest tax rate at 21 percent. Many small business owners are now considering converting to a “C” legal structure to take advantage of the lower rate. This is an easy process in most states and can be done in less than a week. But, depending on the company’s profit, there may be a double taxation element at the corporate and personal level, so consult with an accountant before doing anything.
4. The individual tax rate
For those making between $200,000 and about $425,000, taxes may actually go up from 35% to 37%, so some small business owners could face an increase. As Forbes states, the math is very complicated and now includes a calculation called “qualified business income (QBI)”.
5. Personal assets
The value of an owner’s home may go down especially in states with higher state income and property taxes as a result of the new limit to tax deductibility on these fees. Moody projects real estate prices to fall 5% to 10% especially in the geographies where the new tax law makes it less advantageous to own a home. This is important since a home is typically the small business owner’s largest asset and may hurt their ability to borrow capital for their company. While mass migrations of customers to lower taxed states is not expected, this may be another way local retail businesses may be hurt yet again in 2018.
Of course, talk to your tax advisor before following any of this advice since I am a business owner, not an accountant! They are quickly becoming the most popular people at any gathering!