Currently, for 2017, C-Corp rates range from 15% to 39% (except for personal service corporations which are taxed at 35%) while individual tax rates range from 10% to 39.6%. So if you have a sole proprietorship, an LLC or an S-Corp, you have a pass through business and your business income is taxed at your personal rate.
The new tax law now provides for a flat 21% tax rate for C-Corps. Individual rates have decreased slightly with the highest rate now at 37%. And people with pass through businesses will get a new deduction of up to a 20% on Qualified Business Income (QBI). But the QBI deduction is complicated.
For personal service business, including realtors, attorneys, architects, engineers and brokers, the 20% deduction is only available for married couples filing jointly with incomes up to $315,000 and $157,500 for single taxpayers.
S-Corps get even more complicated. How much you save is dependent on how much of your S corp. is comprised of salary versus pass-through income. Since an attorney or realtor has to take a salary, the 20% deduction is only applied to whatever amount of income is leftover as specifically the pass-through portion.
While S-Corps business owners may be tempted to shift funds around and take a smaller salary in order to get a larger deduction, the Internal Revenue Service (IRS) has been diligently auditing businesses to determine how much money is pass-through and how much is salary.
For other employee-driven businesses, like restaurants and manufacturers, the deduction for S-Corps is dependent on your payroll. The 20% deduction is limited to 50% of your payroll.
For example, a restaurant making $1 million, with $600,000 in total expenses and an owner’s salary of $100,000, nets $300,000. But if it pays $400,000 in payroll, the deduction is 20% of $300,000 and limited to 50% of total payroll, so the deduction would be $60,000 in this case and could be no greater than $200,000.
The new law seems to reward companies that have a lot of employees and essentially provides an incentive to go out and hire new workers.
No matter your business, it's is a good time to be a small business owner with the new Qualified Business Income Deduction. If you have any questions please contact me.
Hi! I'm Jaimie and I have a B.A. in Accounting, an MBA with an emphasis in Accounting and a CPA license. I worked for about 10 years in CPA firms doing audits and reviews and then for about 10 years in private companies managing accounting departments. I've learned a lot about accounting, finances and taxes over the last 20 years! And now I want to share my knowledge with you here!