A House-Senate committee has agreed a final tax reform bill —which will make sweeping changes to the income tax code.
The House and Senate had voted on and passed the bill on Wednesday, Dec 20, 2017, clearing the way for the President to sign it into law.
Individuals should consult with a tax professional to understand how changes to the tax code may impact their strategies for deductions, estate planning, education funding, and small-business-income.
The Implication on Small Business Owners
Corporate tax rates would be cut to 21% beginning in 2018. That tax cut is not scheduled to expire.
Pass-through businesses, businesses structured as sole proprietorships, partnerships, and S-corporations, would be taxed at individual tax rates, but would be able to deduct 20% of income. To prevent high-income individuals from taking advantage of this deduction, it would only be available to couples filing jointly with incomes below $315,000. For income above that level, the deduction would be limited to half of the W-2 wages or the individual’s portion of the pass-through entity’s income.
Both plans would let businesses fully expense new equipment right away, but the provision would eventually expire.
Bottom Line: It is a double whammy for Small Business Owners to use Schedule C in 1040 to report their business income (paying Self Employment Tax and no 20% deduction). They should set up S-Corp or partnership for reporting their business income.