Source: HR1 Tax Cuts and Jobs Act (TCJA)

As it stands on January 30, 2018, a sole proprietorship, LLC or partnership with no wages would be precluded from any pass-through deduction under the TCJA.

However, Parker Tax Publishing, a major tax analysis service, points out:

“Caution: There’s no indication that the sharply divergent tax results discussed above were intended by Congress. By enacting Code Sec. 199A, Congress clearly chose to favor business owners over employees on the theory that doing so would promote job creation. But did it also intend to favor S corporation shareholders over partners and sole proprietors? Probably not. So, there’s a pretty good chance that the provisions for determining W-2 wages will eventually be changed (or interpreted by the IRS) in a way that puts the different types of entities on more equal footing.”

NO GUARANTEE, but we’ll all have to watch carefully to see how the IRS interprets the new law through regulations.  Stay tuned!

Reference: HR1 Tax Cuts and Jobs Act

For passenger autos with a gross unloaded weight of under 6k pounds, the maximum amount of allowable depreciation is $10,000 for the first year, $16,000 for the second year, $9,600 for the third year and $5,760 for the fourth and later years.  These amounts will be increased for inflation.

These are significant improvements over prior law.

Section 179 deduction for SUVs over 6,000 pounds GVW continues to limit at $25,000 for the year placed in service.

Reference: HR1, Tax Cuts and Jobs Act

The “Kiddie Tax” was simplified under the new Act… and not in a good way.  This tax on the unearned income (e.g. interest, dividends, capital gains, etc) of children will no longer be taxed at the parents rates.  Instead, it will be taxed on the return of the child using the rates for trusts and estates.

Unearned income above $2,550 will be taxed at 24%; above $9,150 at 35%; above $12,500 at 37% federal tax rates.

Although the IRS has not yet issued regulations as of January 2018, apparently the parents will no longer have the option of reporting the unearned revenue of their dependent children on the parents return.

Reference: HR1, Tax Cuts and Jobs Act

If you are a successful sole proprietor with no employees, consider converting to S corporation early in 2018 to take advantage of the new pass-through deduction as well as the ongoing tax saving opportunities offered through S corporations.

Fix: In simple form, convert to S corporation, pay a reasonable wage, and take advantage on the new break as well as possible limitations to total Social Security taxes paid.

Example: “Fred” is single and has converted to an S corp.  He makes machined parts and has no employees other than himself.  In the S corp, he pays himself $50,000 W2 salary and has corporate net income of $100,000 after his salary is deducted.  He has no other income on his individual return.  His pass-through deduction is $20,000 under the new law.

Non-tax feature:  An S corporation can acquire a “business identity” until itself which may be marketable upon retirement.  Such a transfer of the business isn’t available to a sole proprietorship.

Call so we can discuss your specific situation.