How Sole Proprietors & Small Businesses Can Make the Most of the New Tax Bill’s Pass Through Deduction
If you were thinking of turning your side hustle into your main hustle, 2018 might just be the year! If you have not already joined the the 40 million taxpayers who claim passthrough business income, the new lower tax-rate is incentive to do so.
The new tax law not only gives corporations a new lower tax rate but also gives a substantial tax break to ‘pass-through’ business owners — including freelancers, side hustlers, sole proprietors, Limited Liabilities Companies (LLC), S-Corps, and partnerships.
Currently, pass-through businesses are taxed on the individual owners’ share of the profits and losses, rather than taxing the business as a whole. Individual tax rates can be as high as 39.6 percent. Although under the new plan individual tax rates will go down slightly, pass-through income will receive a 20% deduction off the top, meaning if you made $20,000 in profit, you would only be taxed on $17,000.
Things to Know About the New Tax Law
- If you are a small business and you draw down a salary in addition to receiving a share of profits, the salary portion of the income continues to be subject to the ordinary tax rate.
- The 20% deduction begins to phase out for those who earn more than $315,000 for couples and $157,500 for singles.
- For high-earners, the bill would use a calculation to cap the deduction. The limit would be the higher of 1) 50 percent of total wages paid or 2) 25 percent of wages plus 2.5 percent of cost of tangible depreciable property.
- According to Inc., business deductions taken on Schedule C form will not be affected by the new tax law.
- These new deductions are set to expire after 2025, so now is the time to maximize your pass-through income.
Three Things To Do Before the End of the Year
- Open a dedicated business bank (and yes — Azlo offers a free business bank account — so take advantage of opening one before the new year).
The easiest way to claim the 20% discount on pass-through income is to keep it separate from your personal account.
By keeping your income separate and using a Schedule C form to claim deductions, you will maximize your savings.
2. Make any big business purchases before the end of the year to lower your tax liability for 2017.
3. Push any year-end invoices to your customers in January of 2018 in order to take advantage of the new lower tax rate.
