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 business owners, owning pass-through businesses is even more enticing than ever.
What Are Pass-through Businesses?
Nearly 95 percent of businesses in the U.S. are pass-through organizations and for a good reason. The structure is designed to reduce double taxation, or taxing a business both at a corporate level and at the owners’ level.
Instead of a twofold hit, company profits and losses are sent straight to owners/shareholders without a corporate pit stop. Business owners then file and pay taxes through their individual returns (not corporate returns). Sole proprietorships, partnerships, and S corporations all enjoy this no-double-taxation life. Most pass-through businesses are small, but a limited number of large businesses account for most of the profits and economic activity from pass-through entities.
Tax Reform Wins: How Business Owners Can Save Money
2018 is looking up for business owners all over the board thanks to the new bill. Pass-through entities can now 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. The single-filing threshold is $157,500 and the joint-filing threshold is $315,000.
Pass-through structure not in your cards? C Corporations will catch a break with the new tax bill, with a cutting the corporate tax rate cut from 35 percent to 21 percent.
Are you above the 20-percent deduction threshold? Is your business under a different tax classification? A tax professional can help calculate your breaks.
Not every situation has a cookie-cutter solution when it comes to business taxes. If you’re a business owner, a tax professional can also help you decide on the most cost-efficient business entity and what tax reform means for you.