Investment Updates
How The New Small Business Tax Break Phases Out
Published Friday, May 25, 2018 at: 7:00 AM EDT
If you own a small business, you're likely eligible for a special 20% deduction on your profits. But getting the full benefit is tricky. Not everyone can claim it and some business owners are subject to a phase-out of the 20% deduction based on income.
Most small businesses are pass-through entities - sole proprietorships, limited liability companies, partnerships, and S corporations. They pay no taxes themselves. Their profits move untaxed until they fall into their owners' hands. The problem is, tax rates on individuals are higher than they are for C corporations (which mainly are larger businesses): 21% rate for C corps and a top rate of 37% for individuals.
If you can get it, the 20% pass-through deduction is a good deal. If this deduction applies, a pass-through owner is effectively taxed on only 80% of business income. Thus, the effective rate for pass-through owners in the top 37% tax bracket is 29.5%.
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