Recent reforms in the tax code will be a significant benefit for small business owners who claim company income on their personal tax returns, according to The New York Times.
When income is declared in this way, it is called pass-through income, and the legislation will impact as many as 40 million taxpayers with small businesses making up almost half that number and ‘non-business’ individuals making up the rest. In many cases, a full 20 percent of all pass-through business income will be deductible, and further changes to deductions for depreciable property can help certain types of businesses as well.
Individuals that operate sole proprietorships and contract out to other companies, as well as people that claim income from things like hobbies or vacation home rentals, will fall into the non-business category. Even before these changes, it was desirable to declare this income to make use of other deductions like home offices and equipment. With the new deduction on income, there will be further incentive for individuals to classify their earnings as income from their business to get a lower rate although there must be more than $15,000 total between deductions and income combined. There are some limits on the deduction that start to phase in at $157,500 for singles and $315,000 for married couples but won’t impact the majority of filers.
Traditional small businesses like accountants or restaurants with employees will be subjected to the same income limitations to get the full 20 percent deduction, but according to Inc. Magazine, they will also benefit from a change to the Section 179 deduction that handles the way depreciation is treated on newly purchased equipment and property. Currently, these items must be depreciated over a period of 2.5 years to several decades, and the change means full up-front deductions on these items each year for five years. As long as the business has less than $25 million in average revenue annually, there is no cap on this deduction or any mortgage interest paid by landlords.