This article is part of Inc.'s Ultimate Guide to the New Tax Law for Business Owners
If you have a pass-through business (sole proprietorship, partnership, limited liability company, or S corporation), the Tax Cuts and Jobs Act has changed your federal tax picture. New rules will likely have an impact whether your business is profitable or shows a loss. Here's why.
If it's been a good year
You may be able to reduce your personal tax bill by using a new write-off called the qualified business income (QBI) deduction. This deduction on Form 1040 may be as high as 20 percent of your net business income. This deduction effectively cuts the tax rate you pay on this income. For example, if you are in the 24 percent tax bracket, the tax rate you effectively pay on your business income is 19.2 percent (24 percent tax bracket x 20 percent QBI deduction).
But the deduction has numerous limitations that can curtail or kill entirely this great opportunity:
- If your taxable income is high and you're in a specified service trade or business, such as accounting, law, medicine, or performing arts, you may see little or no benefit from this new deduction.
- If you own rental property, you must determine whether your real estate activities are sufficient to be viewed as a business, rather than merely holding investment property. Only income from businesses is taken into account for the QBI deduction.
If it's been a bad year
Despite the solid U.S. economy, not all businesses are prospering. If your pass-through has a loss, a new rule may knock you for a loop. "Excess losses" can no longer be taken currently as a deduction. Excess losses are defined in 2018 are deductible business expenses in excess of business income plus $250,000 ($500,000, if married filing jointly). Instead, they are treated as a net operating loss (NOL). The NOL is carried forward and can offset 80% of taxable income in future years.
Review your business's key numbers to see where you stand. This can help you decide on measures to take when you file your return to optimize your tax position. Schedule time with your accountant or other business adviser to do your review.