Tax Changes for the Small Business Owner

This tax season will be like none other in recent history for owners of pass through small businesses.   By far the most important change will be the 20% tax deduction for self-employed filers.

What is the 20% tax deduction?

The new law allows a brand-new tax deduction on all qualified business income for owners of pass-through entities.  This includes partnerships, S corporations, limited liability companies (LLCs) and sole proprietors.

Qualified business income includes:

• Business income from services and from rental real estate.
• Sole proprietorships and pass-through income from partnerships, S-corporations, estates and trusts qualifies for this deduction.
• It is only on U.S. source income.

What else do you need to know about this deduction?

• The deduction will reduce taxable income on the federal tax return.
• The deduction only applies for income tax purposes and not for self-employment tax purposes.
• The deduction is limited to 20% of the lesser of:
  • Net qualified business income
  • Taxable income before the deduction and after reduction for any net capital gains
• The deduction may be phased down based on taxable income
• Although the effect of the phase-out is different for “specified” service businesses and other businesses, the phase-out ranges for both are the same:
  • Married filing joint: $315,000–$415,000
  • All other filing statuses: $157,500–$207,500

Now here is the really weird part which actually has some tax professionals scratching their heads.

What is a “Specified” service business?

Examples include:

• Health care services performed by doctors, nurses, and dentists
• Law, accounting, and actuarial services (including anyone preparing taxes)
• Performing arts
• Consulting
• Athletics

When combined with the phase-out ranges, Individuals in certain service professions that are traditionally high-paid, such as physicians and attorneys, may not qualify for any deduction. However, many truly small business owners, such as myself, “should”  be OK.

The deduction for taxpayers in other businesses can vary widely.

If you think this has the potential to be confusing, you’re correct.  All this, remember, comes from the IRS.

Here is a quick 😉 article which does as good a job as one can trying to convey the important 187 page IRS guidance document into one post.

I am heading into uncharted waters as a small business owner and I have to admit this part of running the business has me more than a bit cautious.

I have signed up with Intuit, the parent company of TurboTax, to help with tracking expenses, income and deductions and they say “don’t worry, we’ve got you covered” but I am thinking that I may just sign up for their extra “just in case you need an audit lawyer” service before filing taxes just to be sure.