Questions and Answers About the New Tax Bill
The Tax Cuts and Jobs Act of 2017 (referred to as “the new tax bill” throughout this post) will have an impact on every American taxpayer.
You’re probably wondering how it will impact you.
You can get an overview of the biggest changes for middle class American taxpayers and small business owners in the video below or by checking out this overview.
Then, in this regularly updated post, I will field questions on the new tax bill throughout 2018.
Questions (Newest Listed First)
Will small businesses need to change how they account for their income and expenses because of the new tax bill?
Q: Christine sent me a question through Facebook Messenger asking whether the new rules mean small business owners should be doing anything differently from an accounting standpoint to account for the change in the tax laws.
A: While there are some big tax cuts in the bill for small business owners, accounting for your small business income and deductions will be business as usual.
The one thing that small businesses won’t be able to deduct any more is entertainment expenses. But even nondeductible expenses like these need to be accounted for. Your tax preparer will know how to handle nondeductible expenses like these when they prepare your return.
More on the new 20% deduction for small business owners here.
How will the new tax law changes impact small, home-based businesses?
Q: Barb sent me a question through FB Messenger asking about whether home based small business owners will realize any benefits from the new tax bill.
More specifically, she was wondering if part-time direct sales and/or multi-level marketing businesses will benefit.
A: These businesses are eligible for the 20% small business deduction just like any other small business that isn’t organized as a taxable Corporation.
If you have a direct sales business that generates $10,000 in taxable profit you will pay income tax on $10,000 in 2017 but will only pay income tax on $8,000 in 2018 (subject to some potential limitations if you make over a certain amount of money, which are discussed here).
You’ll also still be able to take advantage of deductions like the home office deduction and deductions for your auto expenses or mileage, which employees will be losing starting in 2018.
How will the new tax law changes impact employee withholdings?
Q: Michelle sent me a message through Facebook Messenger asking if the new changes will impact employee payroll since personal exemptions are eliminated under the new rule.
A: The answer is yes, but the government is still working this all out.
Initially, it was expected that employees would have to fill out new W-4 forms (the payroll form you fill out when you are hired).
However, the latest guidance from the IRS suggests this is not the case, but adjustments will be made to employee withholdings.
It is unclear exactly when this is going to happen, but when it does, you will likely see a change in your take home pay.
Hopefully it will be a positive change!
I will keep you posted as the government provides further guidance on timelines and important changes, etc.
Will small businesses organized as S-Corps be able to take advantage of the 20% small business deduction?
Q: Dalia responded to my post on the new tax bill and asked me through Facebook Messenger if she will benefit from the new 20% tax break for small businesses.
Her business is set up as an S-Corporation and she pays herself a small wage.
A: The new 20% deduction will apply to S-Corp income.
However, it will not apply to the wages you pay yourself.
So, if your share of taxable income from your S-Corp after deducting your wage from that income is $50,000, and you pay yourself a wage of $25,000, you will get a 20% deduction on the $50,000 profit ($10,000).
You’ll pay income tax on the $25,000 wage and $40,000 of profit ($50,000-$10,000).
This 20% deduction is potentially subject to some limitations if you report over a certain amount of income on your personal tax return ($315,000 if you are married and $157,500 for everyone else).
Learn more here.
Will single member LLCs be able to take advantage of the new 20% small business deduction?
Q: Patrick responded to my Facebook post on the new tax bill and asked me through Facebook Messenger if he will benefit from the new 20% tax break for small businesses. His business is a single member LLC that is taxed as a sole proprietorship.
A: Sole proprietorships (and LLCs that are owned 100% by one person and taxed as sole proprietorships) will generally be eligible for the new 20% deduction.
For example, if your business has a taxable profit of $50,000, you will probably be able to reduce that amount by 20%, or $10,000 and only pay income tax on $40,000.
I say “generally” and “probably” because, if you make over a certain amount this deduction may be limited, especially if your business is “service based”.
For married taxpayers, the magic number is $315,000 in total income reported on your personal tax return.
For other taxpayers, the magic number is $157,500 in total income reported on your personal tax return.
The limitations if you make over these amounts are pretty complicated, but keep an eye out on this page and on my blog. I will write a blog post that breaks down the limitations and try my best to explain it simply!