Small businesses can benefit from the new 20 percent deduction on pass-through income, but there are a lot of “ifs” to sort through first. The deduction is subject to limitations that keep it from being a free-for-all for every entrepreneur, including income limits, restrictions on the business types, and how the business is organized.
Darla Mercado, personal finance writer for CNBC, runs through some of the fine print and shows businesses some of the issues they should consider.
“Under the old tax code, income from these small businesses would ‘pass-through’ to the owner on her own taxes and were subject to individual income tax rates as high as 39.6 percent,” she writes. “Now, entrepreneurs are subject to a tax break on the income their businesses generate, but many of them face a key decision: Is it now time to incorporate — and if so, what entity should you choose?”
For starters, to qualify for the full deduction, taxable income must be below $157,500 if single or $315,000 if married and filing jointly. Anything over those thresholds limits who can take the break.
Also, entrepreneurs should consider more than just the taxes before forming an S corporation or LLC.