Top Five for Small Business - How Tax Reform Will Affect Your Business (and You Personally)

 

The last few months have been a busy time in the tax world as major changes have been signed into law. The unofficial title of the new tax bill is the Tax Cuts and Jobs Act and is the most sweeping legislation since 1986 to impact the tax industry. Everyone, from large multinational businesses to individual taxpayers, will be affected in some way. Included in this group are small businesses. Rob Poterucha of Greater Des Moines (DSM) small business McGowen, Hurst, Clark and Smith, P.C. explains the new tax bill and how it will affect businesses and individuals in 2018 and beyond.

Small Business

Most American businesses that would be classified as small businesses are “pass-through” businesses which means the individual owners report the income and expenses on their personal returns. This new tax bill affects those owners by way of the qualified business income deduction. The qualified business income deduction (or QBI Deduction) will likely go down as the most scrutinized part of the new tax bill and will have a major impact on small business and how much they pay in taxes every year. 

The QBI deduction allows a small business owner to “write-off” 20 percent of their net income from that business. Before this deduction, small business owners would add up their income items, subtract their expenses and the resulting net income (or loss) would be reported on their personal income tax return. Now, taxpayers will report 80 percent (100 percent less the 20 percent QBI Deduction) of their net income from a business on their personal return.

That sounds relatively easy, right? Just take my net income and report 80 percent of that number on my tax return? That would be a hard and fast no with about twenty-five exclamation points. The IRS usually makes nothing as simple as it sounds and this is the case with this new QBI deduction. There are all sorts of limitations, phase-outs and phase-ins that go into this calculation.

Individual

You might be thinking, “Well, I don’t own a business, so my taxes will be the same.” This couldn’t be further from the truth. Individuals will be impacted in a large way by reduced tax rates, the limitation of certain deductions and the expansion of the child tax credit.

Learn about other Accounting & Taxes resources in The Partnership’s Small Business Resources Hub or sign up for the Small Business Resources newsletter and stay connected for information about upcoming events, other resources and the latest announcements in the small business community in DSM.