Below is a synopsis of the applicable section of the 2017 Tax Reform legislation. Note that the income level specified in the second paragraph would be your projected 2018 “Taxable Income.” For reference, see your 2017 form 1040, line 43. Also, remember that this is income combined with your spouse, if filing jointly.
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- Sole Proprietors, S Corporations, and Partnerships/LLCs
The income generated by these entities flows through directly to the individual who owns the entity. Historically, the income from these entities would be taxed at the taxpayer’s individual income tax rate. As a result, the income from these entities could be taxed at rates as high as 39.6% under the current rate structure.
Under the new law, a 20% deduction on qualified business income has been established. Specific services industries, including health, law, and professional services, are excluded from this deduction. However, married taxpayers filing jointly with income below $315,000 and other filers with income below $157,500 would be allowed to claim the deduction from these service industries. This provision is set to expire on December 31, 2025. Please note there are several rules that have been put into place when claiming this deduction, please consult your tax advisor for specifics.
- “C” Corporations
The corporate income tax rate has been permanently reduced to a maximum rate of 21% from 35% beginning in 2018. The corporate alternative minimum tax has been effectively eliminated.
Other Business Related Changes
- The new law allows short lived capital investments to be fully expensed (through 2022), and has increased the Section 179 expensing cap from $510,000 to $1 million.
- Net interest expense will be limited to 30% of the adjusted taxable income for entities with average gross receipts in excess of $25 million.
- Net operating losses can no longer be carried back, and losses carried forward will be limited to 80% of taxable income.
- The domestic production activities deduction (Section 199) has been eliminated.
- The rules for allowing business entities to remain cash basis taxpayers have been changed, allowing for taxpayers to have higher average gross receipts and still maintain cash basis eligibility.