by Michelle Cote
The new tax law was passed late in 2017 with much fanfare and discussion. Will it affect your 2018 taxes positively or negatively? The bottom line: overall, it will lower most people’s taxes, though in certain states, some higher-bracket taxpayers will see their tax burden increase. Read on for some of the changes that may affect you and your business—for better or worse.
For many small businesses, the biggest change will be the pass-through deduction of 20 percent. Under the new law, if you make, for example, $100,000 as a sole proprietor, partnership, S corporation, or limited liability company or partnership (LLC or LLP), when that income is passed to your individual tax return, you’ll get a $20,000 deduction—and pay taxes on only $80,000. This deduction represents a significant benefit, worth on average about $4,000, for any profitable small business.
The new law also changes depreciation for small businesses. For studio owners, a significant change is the generous depreciation that can now be taken in a single tax year for property improvements. Previously, if you made an improvement to your studio (whether owned or leased), you had to depreciate that cost over 39 years. Now you can fully expense many such costs, made between 2017 and 2023, in a single tax year.
Corporate tax cut
This change was widely discussed in the press; however, most dance studios are not taxed at the corporate level. For those few of you readers who run a C corporation, the corporate tax rate is now a flat 21 percent. This is a massive tax cut and simplification of the corporate tax code.
Individual tax law changes
You will notice many changes in the individual tax law, and they affect everyone—some positively, some negatively. The biggest change is that the new law limits your total state and local tax (SALT) deduction to $10,000. This will most affect those in high-tax states, such as New York, New Jersey, California, Connecticut, Massachusetts, Texas, Pennsylvania, and Illinois.
To offset the SALT limit, the standard deduction has nearly doubled for all tax brackets. For example, the “married filing jointly” standard deduction has increased from $13,000 to $24,000. This means significantly fewer people will itemize; in fact, the Joint Committee on Taxation estimates that the percentage of taxpayers who itemize will drop from 30 percent to 6 percent.
Another change is the ability to withdraw your child’s 529 plan funds without penalty to pay for K–12 private school or even tutoring expenses. Of course, using these funds too early is not recommended, because you won’t have time to take advantage of tax breaks on your investment earnings.
Other less dramatic changes that come down on the positive side of the ledger are an increase in the child tax credit and the repeal (in 2019) of the Affordable Care Act (i.e., Obamacare) penalties for not carrying health insurance. However, there are negatives as well, such as the limitation on deducting mortgage interest on loans over $750,000 and the elimination of deductions for unreimbursed employee expenses, moving expenses, and other miscellaneous expenses.
Consult your tax advisor
In general, most of you will see lower taxes as a result of the 2017 tax law. I recommend reading up on these changes and considering how they will change your business plans. As always, consult your tax advisor before making big decisions.
Michelle Cote, CPA, holds a BA in economics and an MA in accounting. She specializes in small-business tax and consulting for Dennis & Associates in Quincy, Massachusetts. She loves to help small businesses become successful.