“LET THEM EAT CRUMBS!”
We know that Large Corporations just received a reduction in their tax rates from 36% to 21% as a result of the Dec 2017 Tax Cuts and Jobs Act. Good for them and good for all their employees that eat “crumbs”
The TCJA also made available a 20% reduction of income tax for small business (SMB) owners. This is really great news for the SMBs that qualify (always a catch). SMBs and their owners have to qualify:
- By business entity: sole proprietor; partnership; S-corporation; trust; estate Ag Cooperatives
- By type of trade or business.
- A qualifying business could be a manufacturer or a contractor or a retailer
- A qualifying business can’t be: a business that is based upon the personal skill or competence of the SMB owner such as legal, accounting (ouch!), health, performing arts, consulting, athletics, and 10 more types UNLESS they have less than $157,500 of taxable income (See Example Exception Below)
- By conducting business in the US only. No foreign sales
- The deduction cannot include capital gains or losses, dividends, or interest
- The deduction is limited to the lesser of a) 20% of Qualified Business Income or b) 50% of the W-2 wages paid by the Qualified Business.
GETTING DIZZY? LET’STRY A SIMPLE EXAMPLE
Joe receives a salary of $100,000 from his job at XYZ Corp and $50,000 of Qualified Business Income from his SMB that he runs as a sole proprietor. Joe’s deduction for QBI in 2018 is $10,000 (20% of $50,000). Joe can claim the reduction to TAXABLE INCOME on his Form 1040. If Joe is in the 24% tax rate category he will save $2,400 in federal income taxes or approximately 1200 boxes of Italian Bread Crumbs.
Joe is an accountant, lawyer, hairdresser, or professional dancer and has W-2 wages of $100,000 and QBI of $40,000. Joe would be entitled to a deduction of income of $8,000 ($40,000 x 20%). Assuming Joe is in the 24% tax bracket, he would save $1,920.
NOT DIZZY, BUT CONFUSED?
Obviously the TCJA is complicated. But it has significant tax benefits for SMBs. To see if your SMB will pay 20% less in 2018 call for an appointment to discuss your particular opportunity.
“Stay with me, Mr. Parker (SMB Owner)!