Thoughts on the New Tax Regulations

This is far from an all encompassing look, but here are a few rules and regulations business owners and entrepreneurs should take into consideration.

Choice of Entity and Pass-Through Deduction

Under the new regulations C Corporations have the new flat tax rate of 21%, but they do not benefit form the 20% pass-through deduction.

A “pass-through” tax structure is a business (including a sole proprietor) with only one level of tax, which means essentially every business other than a C Corporation. If the business owner’s taxable income is less than $315,000 for married taxpayers, or less than $157,500 for single tax payers, the taxpayer will qualify for the 20% deduction. This deduction is phased out at $315,000 for married taxpayers, and $157,500 for single taxpayers.

Income from service businesses such as law, health, consulting, performing arts, and accounting, and other businesses where the principal asset is the skill of its owner won’t qualify for the deduction if the taxpayer’s income exceeds the income threshold mentioned above.

In summary, if your income is below the income threshold you will receive a deduction of 20% of the income of the business (however, it should be noted this doesn’t impact self employment tax). For other businesses where the taxable income is greater than the income threshold, the taxpayer will receive the 20% deduction up to 50% of the wages paid by the business.

Writing Off Entertainment Expenses

Previously, an individual or business could deduct up to 50% of entertainment expenses or for food and beverage if the expense is directly related to the active conduct of one's trade or business. Under the new law, no deduction is allowed for business-related entertainment expenses such as taking a client to a Giants game. The allowance of a 50% deduction for business related food and beverages is retained.