There is some confusion on what the knew tax cuts mean to individuals as well as businesses. With the tax year coming to a close in a few months, people are looking for answers. If you own a small business, this is one way the new tax laws will help you.
The 2017 Tax Cuts and Jobs Act is the biggest change to tax laws in 31 years and for C corporations it’s a big tax cut. Most large companies, like those listed on the stock exchanges, are C corporations. And they saw their tax rate drop from 35% to 21%.
But what about small business owners? What does the new tax reform bill do for you? Since most small businesses aren’t structured as C corporations, they won’t be receiving the large tax cuts. If you are a small business, you are more likely to be a Sole Proprietor, an S corporation, a Partnership, or a hybrid like an LLC.
Congress couldn’t just cut taxes for small businesses because Sole Proprietors and S corps and so on are pass-through-entities which don’t pay taxes themselves but Instead, as the business owner, you pay your business taxes on your personal tax return at the same individual rates as everyone else.
For these types of businesses, Congress came up with the 20% Qualified Business Income Deduction.
If your taxable income is less than $157,500 for individuals, or $315,000 for married taxpayers filing jointly, then your deduction is generally 20% of the net income of your business. What that means is that if your business’ taxable income was $100,000, then after the 20% deduction, you only have to pay taxes on $80,000.
That’s good news for the small business owners. There are also other new tax benefits that individuals as well as small businesses can take advantage of. See a tax professional for more information on how the Tax Cuts and Jobs Act can affect you.