Across the country, CPAs are crunching (and crunching, and crunching) numbers to assess how their clients can benefit from the new tax reform law. And for small business owners, becoming a pass-through entity is even more enticing than ever. Learn the details of the new law and see how it may affect your small business.
What is a Pass-Through Entity?
Nearly 95 percent of businesses in the U.S. are classified as a pass-through entity, and for a good reason. The structure is designed to reduce double taxation, or taxing a small business both at a corporate level and on the owners’ level.
Instead of a twofold hit, company profits (and losses) are sent straight to owners or shareholders without a pit stop at the corporate level. Therefore, small business owners are then able to file and pay taxes through their individual returns rather than corporate returns. Sole proprietorships, partnerships, and S corporations all enjoy this escape from double-taxation.
Tax Reform Wins: How Small Business Owners Can Save Money
With the new tax reform bill, 2018 is looking up for small business owners all across the board. With these upcoming changes, a small business classified as a pass-through entity can deduct 20 percent of the business income that is passed to their individual return. This makes it a great option for low to mid-income businesses (single-filing threshold is set at $157,500 and the joint-filing threshold at $315,000).
If pass-through entity structure isn’t in the cards for your business, there are still ways to save with the new tax reform. For instance, C Corporations will also catch a break with the new tax bill, which will cut the the corporate tax rate cut from 35 percent to 21 percent. If you’re above the 20-percent deduction threshold, or if your business is under a different tax classification, you should consult your tax professional to help calculate your breaks.
Not every situation has a cookie-cutter solution when it comes to business taxes. If you’re a small business owner, a tax professional can help you decide on the most cost-efficient business entity and how tax reform will impact you.
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