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Republican lawmakers and President Donald Trump claimed to have passed the biggest tax reform bill in over 30 years. President Trump signed it into law just before Christmas, 2017. Reporters, writers, experts, so-called journalists and ordinary folks like you and me have been analyzing the details and trying to figure out exactly how it will affect each of us.
I came across one interesting article on CNBC.com that shed some light on some specific ‘pass-through’ rule details. If you can get past the obvious anti-Trump bias and the apparent hatred towards wealthy business owners – the article actually highlights a few points that will benefit small business owners and internet entrepreneur’s, like myself.
The 20 Percent Business Income Deduction
The provision creates a 20 percent business income deduction, with some limits, for sole proprietors and owners in partnerships and other non-corporate enterprises.
If you are a small business owner or entrepreneur (like me), then you report your business income and deductions as a sole proprietor on your personal taxes. Even if you have a business entity (like an LLC), you still report your business income on your personal taxes. In reality – your business income ‘passes through’ your personal finances and you end up paying your personal tax rate on your business income.
The December 2017 tax reform bill creates massive tax breaks for corporations and large businesses. Thankfully, they also added this ‘pass-through’ provision so that smaller businesses can also benefit from a much-needed tax break.
I’m not sure exactly how it works – but if I’m reading and understanding it correctly – it appears that sole proprietors will be able to deduct 20 percent of their business income (with some limits).
Note: The original article from CNBC.com was published on December 20, 2017 – before the final tax reform bill was signed into law. I’m not 100% sure this pass-through provision even exists in the bill that was signed by Donald Trump on December 22, 2017.
The Pass-Through Provision Explained
Here’s how it works – if, in fact, this provision did make it through the final bill that was signed by President Trump…
I’m going to highlight 2 hypothetical examples that could easily apply to internet entrepreneurs.
Making Money Online as a Side Hustle
This one applies to me. I work a full-time day job as an employee to a large employer and I also earn money on the side as an internet entrepreneur. I have to pay taxes on my total day job income minus deductions – plus my total net internet income (income minus expenses).
Under this new provision – I will still have to pay taxes on my total day job income minus deductions – but I will get to deduct 20% of my internet income meaning I will only pay taxes on 80% of what I earn online!
Example: Let’s say my day job income is $65,000 and I have $15,000 in deductions meaning I have to pay taxes on $50,000. Let’s say that my internet side hustle net income is a nice round number of $20,000.
Before this tax reform bill (with this provision) – I simply tack that extra $20k onto the $50k and I end up paying taxes on $70,000!
After the tax reform bill – I get to deduct 20% of the side hustle net income ($4,000), meaning I only add $16,000 of my internet income to the $50k and I end up paying taxes on $66,000! This isn’t a huge tax break for somebody in a situation like this – but something is better than nothing.
Making a Full-Time Living as an Internet Entrepreneur
Using similar figures – let’s say I earn a full-time living online and my net income (income minus expenses) is another nice round number of $85,000. This would be the same income as the example above (the person with the day job) – except that ALL of the income is classified as business income.
In this example – I get to deduct 20% of the entire $85k, meaning I subtract $17,000 leaving me with $68,000. If I have the same $15,000 in other personal deductions that I can claim – then I’m left paying taxes on only $53,000! What an awesome tax advantage JUST for owning and running my own small business as opposed to working for somebody else as an employee!
Note: These numbers and figures are just hypothetical examples based on my loose understanding of what I think might be in the final tax bill. Please consult a tax professional to see how your personal situation will actually be affected as a result of the December 2017 tax reform bill.
Tax Bill is Great for All Business Owners
As highlighted in my 2 hypothetical examples above – business owners are the clear winners as a result of this tax reform bill. Contrary to what the CNBC.com article would like you to believe – it’s not just wealthy business owners and real estate developers (like Donald Trump) who will benefit. Even modest income earners, who make their full-time living as business owners and entrepreneurs, will benefit greatly as a result of this tax reform legislation!
So, maybe your tax break isn’t so great if you don’t own a business. But the good news is – pretty much anybody in America can start and own and run their own business. It’s really not that hard to get started. The tax advantages of owning your own business are clear – so why not get started with your business idea today?
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