Small Business Owners Get Unprecedented Tax Break – Make Sure Your Company Gets Theirs

There are a whole host of new tax rules designed to lower the tax burdens for all companies. It is important that you are aware of the changes to ensure you get the benefits.

The larger corporations (C-corporations) that pay taxes themselves, rather than passing the tax burden onto their shareholders, received a big tax rate reduction this year. But the small businesses got a huge reduction as well in the form of a new, special deduction just for them.

Generally, the income, losses, deductions and credits of an S-corporation, partnership or LLC are passed through to the owners, to be reported on their tax returns. Sole proprietors also report business income and deductions on their personal tax returns.

A new 20 percent income tax deduction for companies, other than C-corporations, comes into play. With the Tax Cuts and Jobs Act, pass-through entities received this new deduction that begins in 2018 and expires after 2025. It is measured by 20 percent of their business income.

This is a new concept, so it is worth understanding. The rules themselves become rather complex, at times even calling for the taxpayer to distinguish the income or loss of each separate trade or line of business.

The business generally needs to be an active one, but passive investors with flow-through income from an active business may benefit. Wage income to the owners doesn’t qualify for this deduction, but within the complex new rules, it helps to weigh owner wage payments and/or capital expenditures in the context of their impact on this deduction. Wage payments and/or capital expenditures are sometimes necessary to maximize this new deduction.

Subchapter S income from an active business may qualify, but payments out of the S-corporation to owners can affect the computations, depending on whether they are wages to the owner-employees or just dividends. Wage levels of owners or guaranteed payment levels to partners can be important planning aspects of this new deduction. The ability to achieve the largest deduction is directly tied to good, timely planning.

With the new deduction, decisions about electing to expense capital expenditures (Section 179) need to be weighed in the context of the impact on this new deduction. The 20 percent deduction may focus on taxable income rather than business income, when taxable income is less. So, the expensing of purchased equipment will reduce taxable income, however it will also reduce the new deduction.

This deduction is available whether or not the tax payer itemizes or uses the standard deduction.

There is a lot of math and complicating factors involved in considering this new rate reduction. Even itemized deductions, such as charitable contributions, can at times impact the measurement of this new deduction.

A 20 percent reduction in your taxable business income is an incredible benefit, so it is worth it to spend the time to ensure you maximize the savings.

Please contact your tax professional to make sure they are fully informed about this tax saving opportunity, including the recently issued, and very extensive IRS Regulations covering the requirements and limitations. Getting a 20 percent discount on your company’s tax is a great benefit, make sure you don’t miss out on it.

If you have further questions, contact Joseph Hardick, CPA, CCIFP, tax partner with Dannible & McKee, LLP.