Pass-throughs & the New Tax Rates
Reminder: Corporate tax filing deadline is fast approaching! Corporation tax returns (C & S) and partnerships are due March 15th. If you haven’t started putting together your year end for your tax accountant, then it should be a priority for you in the next 2 weeks.
The new tax law brings a lot of changes for businesses but for the current year’s tax return (2017) the old laws still apply. For 2017 Corporation filings, the top tax rate is 35%, Sec 179 expense is $500,000 on “New” capital purchases, and bonus depreciation is set at 50% on new capital purchases.
For 2018 the tax law changes. Filing deadlines remain the same, but the new tax law provides businesses with many changes. Below are some of the business changes to expect next year when you file your 2018 business taxes:
1. Lowers the corporate tax rate to 21% starting 2018 (was 35%)
2. Establishes a 20% deduction of qualified business income from certain pass through businesses i.e.: S-corps, LLC’s.
3. Increases the Sec 179 deduction of capital equipment from $500,000 to $1M starting in 2018.
4. 100% bonus depreciation deduction (new and used) starting in 2018 for 5 years through 2022.
5. Eliminates net loss carry backs and limits net loss carry forward to 80% of taxable income.
I mentioned these in my last blog. I also gave you a simple example of how a business will save with the new corporation tax rate. In this article, I'm providing a simple example of how a small pass-through business will save with pass-through 20% credit.
A very basic example of an S-Corp with taxable income in current tax system of $500,000 and had $1.25M of “used” capital equipment purchases.
Sec 179: $0
Depreciation Allowed: $250,000
Tax $500,000 X .30 (Marginal tax rate)= $150,000
With the new 2018 tax law:
Sec 179: $1M
Bonus: $1.25M - $1M = $250,000 X 100%= $250,000 Depreciation Allowed: $1.25M
Taxable income ($500,000+$800,000) - $1.25M = $50,000
Pass through Credit $50,000 X .20 = $10,000
Taxable income $50,000-$10,000 = $40,000
Tax $40,000 X .14 (Marginal tax rate) = $5,600
As you can see with this very simplified example the new 2018 tax changes for businesses, will definitely benefit S-Corps.