I just got off the phone with my CPA. The GOP tax plan is going to cost me tens of thousands more in taxes for tax year 2018. Let me explain how I understand this:
Most businesses are small businesses. Small businesses like LLC’s, Schedule C corporations, and the like are called “pass through entities” and the IRS treats them as though they do not exist, for tax purposes. In other words, whatever income that your business has is your income.
Larger companies tend to be corporations. Those are considered to be corporate persons, meaning that their income is considered separate from the owners of the company, the stockholders.
(I am simplifying this to make it easy to understand, please don’t flame me.)
As a part of the tax code changes, the GOP plan calls for doubling the standard deduction, and then eliminating nearly all other deductions, including the individual exemption, and itemized deductions like attorney’s fees, paid accountant fees, deductions for mechanics who buy their own tools, security guards buying their own weapons, etc.
Because of this, pass through entities and individuals will lose out when they can no longer deduct the cost of carrying out their livelihoods, but corporations can still deduct those expenses from profits as a cost of doing business, AND the corporate rate is reduced. This is one time that the liberals are correct: this is a huge handout for corporate welfare, one that benefits the corporate taxpayer while screwing the small businessman.
Anonymous · December 10, 2017 at 3:47 pm
"going to cost me tens of thousands more in taxes"
This can not be true. I have to assume that what you mean is that because you don't get the same tax cut as a corporation you pay the same but you feel it should be tens of thousands less. Your taxes didn't go up so therefore you are not paying more.
You are talking apples and oranges. The corporation's profits are taxed twice while the small business is only taxed once. The small business already gets a break and didn't need another break in this legislation.
Divemedic · December 12, 2017 at 12:12 am
No, I meant what I said. Comparing the taxes I will pay next year under the old laws, versus the new ones, I will pay tens of thousands more in taxes under the proposed tax law than I would if the laws stayed the same.
Anonymous · December 12, 2017 at 2:28 am
Please explain. Did your marginal rate go up?
Divemedic · December 12, 2017 at 11:38 am
The law eliminates all itemized tax deductions. This means that there are no longer any deductions for personal expenses. A mechanic that buys his own tools, a sole prop who has legal expenses, a security guard who buys his own pistol, or any employee (including 1099 contractors) who is not being paid as a pass through entity is going to lose out on this one.
So while the marginal rate sees a slight decrease, my AGI goes up by nearly 40%. A family with kids and who always takes the standard deduction is a winner here, a billionaire who runs their business through an LLC is a winner, as long as that business isn't accounting, legal services, or medical (none of them get the advantages of other LLCs under this bill.) Those in the upper middle class take it in the shorts.
Anonymous · December 12, 2017 at 6:29 pm
OK. But how many tools and guns are you buying. Tens of thousands of dollars is a lot of guns.
Small business can deduct all legitimate business expenses. But once the "profit" is taken as income you pay income taxes on it. Now I am not a 100% fan of everything the new tax bill does but I can't figure out how it could cause tens of thousands in more taxes to a small business.
Please do not think I am being argumentative. I sincerely want to understand what you are talking about. I don't see it from my read of the yet unfinished tax bill. what can you tell me or explain to me so that I can understand your point?
Divemedic · December 13, 2017 at 1:20 am
Individuals cannot take business expenses, only pass through entities. There are no itemized expenses permitted under this new tax bill. I am not about to give you a copy of my tax return to show you what itemized expenses I have, but I can explain it a bit further:
There are two types of tax deductions. “Above the line” deductions are claimed on Page 1 of Form 1040 and reduce Adjusted Gross Income. “Below the line” deductions are claimed on Page 2 of the 1040 and reduce Taxable Income.
Businesses that are pass through entities (like LLCs) take expenses above the line, and are not subject to double taxation like corporations are. These above the line deductions reduce profits before taxes are calculated. Individuals make most deductions below the line.
The Republican plan eliminates below the line deductions and replaces them by doubling the standard deduction to $25,000. This is great if you are one of those taxpayers who previously had less than $25,000 in deductions. However, 30% of tax filers (myself included) itemize their deductions because they have more deductions than this standard deduction accounts for.
If you are in the 28% bracket and will lose $74,000 in below the line deductions under this bill, you will see an increase of more than $20,000 in your tax bill.
Anonymous · December 13, 2017 at 5:04 pm
OK. Fair enough. However that is true for individuals who are on payroll or own a small business. What I thought you were implying is that because you own a business your taxes would increase by tens of thousands while a corporations taxes are reduced.
For the record I am opposed to any taxing authority levying a tax on money that was already taken from the individual by another taxing authority. So in that I am in full agreement with you. I think all taxes should be deductible. I would even go so far as to say that sales tax on gasoline should not include that part of the fuel cost that is state and federal taxes.
My dog in this fight is that I think the insatiable appetite for taxes by all levels of our government is counter productive. If we would cut corporate taxes even more, perhaps to zero, we would enjoy a sustained economic boom that would benefit everyone. But our lawmakers in their desire for revenues prefer to push us all down rather than give up one penny in taxes.
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