Last month, the Republican Party signed off on their final version of the new tax bill, which will go into effect for the 2018 tax year. It applies sweeping changes to the way virtually every citizen will file their taxes in the future, adjusting tax brackets and making major adjustments to deductions.
But in addition to the changes that every other taxpayer will have to figure out, business owners and partners have another entire set of tax laws to muddle their way through. This blog will lay out the major changes for owners and partners in pass-through entities (such as S-corporations and partnerships) so that you can better understand what to expect in the future.
Please note that this new law does not apply to your current tax filings for 2017. If you have any questions about how the new tax bill will affect your future tax filings, please contact one of our Provo tax accountants.
A New Way to Calculate Deductions
For those with an interest in a pass-through entity, the new law offers a large deduction for pass-through income. The majority of small business owners and partners will be able to deduct up to 20 percent of their earnings prior to calculating their taxable income. This deduction does have a cap, and cannot exceed 50 percent of the wages paid out by the company, as reported on W-2 tax forms.
This deduction can help to offset the tax hike that many business owners will see on their taxable income. Single taxpayers with an income between $200,000 and $425,000—a common bracket for business owners and partners—will have a 35 percent tax on their income in 2018, as opposed to the previous 33 percent tax rate.
Exceptions and Alternate Calculations
As with any other tax law, this new deduction does have its exceptions, as well as another, more complicated way to calculate your maximum deduction. If you want to know more about how your deductions will be calculated for your pass-through income in the future, please speak to one of our Provo tax accountants.