2019-09-28 13:41:15

The tax code at both the federal and state level continues to change.

Most recently the 2017 Tax Cuts and Jobs Act contained significant changes in a number of features of the federal tax code. Overall the majority of taxpayers experienced lower taxes as a result.

Small business owners gained some significant tax advantages with these new tax laws. Many of these tax code changes have created a situation whereby a taxpayer with income from a small business enjoys significant tax advantages over a similar income taxpayer that earns their income through a job that is reported on their W-2 form from their employer.

The small business income deduction feature of the Tax Cuts and Jobs Act came into effect for the 2018 tax year. This deduction allows many small business owners to effectively deduct 20% of the profit from the business in computing their taxable income for the owner.

As such, a small business owner ends up only paying tax on 80% of their business income rather than 100% of their business income. This represents a tremendous tax savings.

Schedule C income as well as pass through income from S corporations and partnerships generally qualify for this deduction.

This deduction amount ultimately depends on the taxpayer’s total taxable income, which also includes wages, interest, dividends, capital gains, and other income as well as the income generated by the business.

Once the taxable income exceeds $157,500 for a single taxpayer or $315,000 for a married taxpayer filing a joint return, then the calculation of the deduction becomes more involved. Above this threshold the type of business also becomes a factor in determining the actual amount of the deduction.

At all income levels below those figures the deduction is 20% of either taxable income or the Qualifying Business income, whichever is the lower figure.

At income levels above those figures, the deduction may be limited for deemed specified services businesses.

The 2017 Tax Cuts and Jobs Act eliminated the ability to deduct out-of-pocket business expenses for employees. This negatively impacts those employees that may incur costs necessary related to their employment that were previously deductible.

On the other hand, if a self-employed individual or small business owner incurred these same types of expenses they would be able to deduct these through the business as a necessary and proper business deduction. From cell phone usage, to business use of automobiles, to professional dues and subscriptions, this can amount to a significant amount of money that can be deducted by a small business owner, but cannot be deducted by an employee.

Ohio also has even more significant tax advantages.

Known as the Ohio small business income deduction, this deduction allows for qualifying business owners to exempt the first $250,000 of business income from state taxation. All business income in excess of this $250,000 figure is taxed at the reduced Ohio state tax rate of 3.0%. This includes both W-2 wages and net income from pass through entities.

Self-employed taxpayers reporting their income on Schedule C as well as taxpayers who own a partnership or S corporation qualify for this substantial tax-savings opportunity.

The recent changes in the tax laws may make it more enticing for a taxpayer to own their own business. For most taxpayers if they had the same income levels the self-employed taxpayer would pay significantly lower income taxes overall than the traditionally employed taxpayer counterpart.

With the economy still going strong and unemployment continuing to remain at record lows combined with these reduced tax rates for the self-employed, it may be time to consider going into business for yourself.



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