President Donald Trump signed the Tax Cut and Reform Bill on Friday. (Photo by Brendan Smialowski/AFP/Getty Images)
The dust has mostly settled, and the GOP tax cut bill has gone to President Trump's desk, where it is sitting in a big stack of other bills awaiting the chief executive's signature. Ha! Just kidding about that last bit — this is shaping up to be the least productive Congress in a generation. In fact, President Trump signed the bill into law Friday morning, just in time for Christmas.
So what kind tax cut can small business owners expect? Most small businesses are organized as pass-through entities: instead of the business paying tax on its own income, the profit (or loss) is passed through to the owner, who reports it as personal income. Those owners may see their tax cut two ways. (For the record, most of the people who report pass-through income are not in fact small-business owners in the conventional sense but are professionals like lawyers, doctors, and accountants, or simply wealthy investors.)
First, many people will pay a lower rate on their taxable income. House Republicans had hoped to make income tax flatter by compressing seven tax brackets into three, but the new law will retain the seven brackets, with lower rates that in many cases reach up to include higher income.
2018 tax rates under the Tax Cuts and Jobs Act.
Not in every case, though: individuals with taxable income between $200,000 and about $425,000 — a cohort that no doubt includes many business owners — will actually face a rate hike, from 33 percent to 35 percent. (Married couples filing jointly with taxable income between $400,000 and $417,000 can expect the same rate hike.)
But those people need not get too worked up about the nominally higher rate, because the bigger windfall comes as a deduction of pass-through income. Owners of pass-through entities will be able to shave 20 percent off their earnings before paying taxes on it. (The deduction follows the contours of the Senate proposal, which initially put the deduction at 17 percent. It passed the chamber as a 23-percent deduction.) But of course, there are exceptions to the rule.
First, Congress tied the deduction to an investment in the business of one kind or another. It is capped at either half of the company's total wages (as reported on W-2 tax forms) or by a formula that takes into account both wages and capital investment — and here's where it start's to get (more) complicated. Specifically, the maximum deduction allowed under this formula is 25 percent of total W2 wages plus 2.5 percent of the purchase price, or "unadjusted basis," of all of the business' "qualified property." Qualified property is basically anything the business has bought and is still using — the law allows owners to factor that piece of property, whether it's an office building or a desk in that office building, into the deduction for as long as it can be depreciated, but for at least ten years.
">President Donald Trump signed the Tax Cut and Reform Bill on Friday. (Photo by Brendan Smialowski/AFP/Getty Images)
The dust has mostly settled, and the GOP tax cut bill has gone to President Trump's desk, where it is sitting in a big stack of other bills awaiting the chief executive's signature. Ha! Just kidding about that last bit — this is shaping up to be the least productive Congress in a generation. In fact, President Trump signed the bill into law Friday morning, just in time for Christmas.
So what kind tax cut can small business owners expect? Most small businesses are organized as pass-through entities: instead of the business paying tax on its own income, the profit (or loss) is passed through to the owner, who reports it as personal income. Those owners may see their tax cut two ways. (For the record, most of the people who report pass-through income are not in fact small-business owners in the conventional sense but are professionals like lawyers, doctors, and accountants, or simply wealthy investors.)
First, many people will pay a lower rate on their taxable income. House Republicans had hoped to make income tax flatter by compressing seven tax brackets into three, but the new law will retain the seven brackets, with lower rates that in many cases reach up to include higher income.
2018 tax rates under the Tax Cuts and Jobs Act.
Not in every case, though: individuals with taxable income between $200,000 and about $425,000 — a cohort that no doubt includes many business owners — will actually face a rate hike, from 33 percent to 35 percent. (Married couples filing jointly with taxable income between $400,000 and $417,000 can expect the same rate hike.)
But those people need not get too worked up about the nominally higher rate, because the bigger windfall comes as a deduction of pass-through income. Owners of pass-through entities will be able to shave 20 percent off their earnings before paying taxes on it. (The deduction follows the contours of the Senate proposal, which initially put the deduction at 17 percent. It passed the chamber as a 23-percent deduction.) But of course, there are exceptions to the rule.
First, Congress tied the deduction to an investment in the business of one kind or another. It is capped at either half of the company's total wages (as reported on W-2 tax forms) or by a formula that takes into account both wages and capital investment — and here's where it start's to get (more) complicated. Specifically, the maximum deduction allowed under this formula is 25 percent of total W2 wages plus 2.5 percent of the purchase price, or "unadjusted basis," of all of the business' "qualified property." Qualified property is basically anything the business has bought and is still using — the law allows owners to factor that piece of property, whether it's an office building or a desk in that office building, into the deduction for as long as it can be depreciated, but for at least ten years.
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