Tax Breaks from Pass-through Entities

Hello you and Happy Monday! Thank you for being a part of our amazing audience today. Welcome to another read on The Keys. It’s your favorite Money Motivator – Growth Instigator, Erica Fields bringing you the keys to your financial house!!

For decades, small businesses have struggled to make their mark in many industries. Working against well-established big business has put a strain on their abilities to compete. Another hidden dagger that has proven to be a dream-killer is taxation of the little person trying to earn an honest living on his or her own.

Pass-through Entities

Pass-through entities are commonly defined by the IRS as sole proprietors, partnerships, corporations, and LLCs. The state you live in controls the formation, but the Internal Revenue Service imposes federal taxes on an annual basis. Selecting a business type will depend on liability, taxation, and record-keeping.

Prior Year Tax Rate

In 2017, the tax rate for pass-through entities was calculated based income brackets of the individual responsible for paying the taxes: the owners. The taxable income is measured against approved tax-deductible expenses leaving a profit or loss for the year. Either outcome is allocated to the owners by percentage of ownership. Once each taxpayer has identified their income for the year, the 2017 tax bracket is used to assess the tax owed. This has changed drastically in the upcoming season.

Current Year Tax Rate

Recent changes to the 2018 tax law for pass-throughs have given these entities a break. Not only did the 2018 tax bracket lower the tax rate for many, the first twenty percent of taxable profit for the year is no longer subject to tax unless you are in certain industries. In some cases, this will help lower the chances of the taxpayer paying a higher tax rate.

Summary

Having a tax professional on your team will help you keep your tax balances low or eliminated altogether. He or she should be very familiar with your industry and have a full understanding of which expenses you should incur and how much of them to deduct. If you feel you pay too much in taxes, or that you could save more than you are, it may be time to replace your current solution.


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