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.

Ref: HR 1, Tax Cuts and Jobs Act

First read our article regarding non-service businesses.

Service business: Any trade or business in the fields of health, law, consulting, athletics, financial services, brokerage services, OR any trade or busineess where the principal asset of such trace or business is the reputation or skill of one or more of its employees or owners.  The IRS will cast a wide loop here. We’ll be waiting for regulations more specific to this definition.

This is a highly complex calculation.  Your starting point is the calculation as if the business was not a service business (see prior article).

Individual return taxable income:  If your individual return is as follows, further restrictions may apply:

Joint filers taxable income under $315,000 (no further restrictions)

Joint filers taxable income over $415,000 (no pass-through deduction allowed)

Joint filers taxable income between $315k and $415k: A complex set of nested calculations must be executed to determine the allowable pass-through deduction.

Single filers:  The above amounts are replaced with $157,500 (no limitation); $207,500 (no pass-through deduction); and between $157,500 and $207,500 the complex set of nested calculations.

Example: A sole proprietor filing as a single male has net income of $187,500 from his service business.  There is no wage limitation (see prior article for non-service businesses).  After the complex nested calculations, his deduction is NOT 187,500 * 20% = $37,500.  With the service business limitations, the deduction in this case is $12,000.

Due to the very complex nature of this calculation, each tax situation will have to be carefully calculated separately.

Ref: HR 1 Tax Cuts and Jobs Act

Assumption: You receive income from your sole proprietorship, S corporation, LLC , partnership or other pass through entity.  Also, that entity is NOT a service business.  Example: Retail, manufacturing or leasing personal property.

Simple example:  Net income from the business is $350,000 and the business paid total W2 wages of $100,000.  Assuming no equipment placed in service in the year, the deduction would be the lesser of 20% of $350k ($70k) OR 50% of wages of $100k = $50k.  The pass through deduction is $50k.

This deduction is taken on page 2 of the Form 1040 when determining taxable income.  It is NOT taken into account in dertmining Adjusted Gross Income (AGI) on page 1 of the return.

This is a simple example.  Your pass through deduction should be calculated specifically to your tax situation.

Ref: HR 1, “Tax Cuts and Jobs Act”

NOW is the time to negotiate with your employer for 2018.  If you are an employee tasked with paying many unreimbursed costs for your employer, work with the company to set up a qualified reimbursement plan.

GONE ARE:

1. MILEAGE DEDUCTION
2. BUSINESS MEALS DEDUCTION (i.e., entertaining customers)
3. TRAVEL EXPENSE DEDUCTION INCLUDING PER-DIEM
4. EMPLOYEE HOME OFFICE DEDUCTION
5. ALL OTHER UNREIMBURSED DEDUCTIONS

Nearly all of these can be reimbursed by your employer.  If so, the employer gets a deduction and you DON’T have reportable income.  (Big exception… even the employer doesn’t get a business meals / entertainment deduction in 2018).

SELF EMPLOYED:  The above DOESN’T apply to self employed.  This change only applies to W2 employees who in 2017 and before took an itemized deduction for unreimbursed employee expenses. For self-employed, see our post dateed Jan 24, 2018.