small business pass-through tax deductions

Many small businesses are pass-through companies, those with sole proprietorship, limited liability corporations, S-corporations and partnerships. These businesses do not pay corporate taxes, filing income from the business through the owner’s personal tax returns. The 2018 Tax Cuts and Job Act (TCJA) offers a 20% deduction of taxable income for all pass-through businesses if they meet specific criteria to use the deduction.

Is the 20% an Itemized Deduction?

The tax deduction is called a below-the-line deduction, which refers to adjusted gross income (AGI) where personal exemptions, tax credits and itemized deductions are applied. Because the 20% falls below the line, a company’s taxable income can be lowered, although the AGI is not less. The tax law eliminates several itemized deductions allowed through 2017. Many pass-through businesses are using the standard deduction for the first time and can use the 20% in addition to the standard deduction.

What Types Businesses May Not Benefit From the 20% Deduction?

Service businesses like doctors, lawyers, athletes and financial advisers must first determine if their income is too high to take the deduction. Income totals must come below the thresholds of $157,500 for single filers and $315,500 for married taxpayers, filing jointly. The deduction phases out at $207,500 (single) and $415,000 (married/jointly).

Why Can’t My Business Partner Take the Deduction When I Can?

It depends on how each of you qualifies as a taxpayer. If your business income is less than the threshold, you can take the 20 percent. Income above the limit is subject to stipulations. If your partner is married, filing jointly and has a spouse with a high-paying job, their combined income may prevent a benefit from the deduction.

When Would It Benefit Me to Incorporate?

Incorporating can help protect your assets and make it easier to obtain a loan. Before jumping to incorporate, though, analyze your business structure. Is it still working for you? Crunch the numbers. See if incorporating brings more advantages than headaches. Some of the 2108 changes for small businesses are confusing. When in doubt, seek the help of a tax professional like a certified CPA or tax lawyer. Our job is to study these changes and we can help you decide your best option.

Dutton Legal Group – Indiana’s Tax Resolution Law Firm

We know small business is big in Indiana. Dutton Legal Group helps the people and businesses of our state navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Stop worrying about your company taxes and get back to business. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.