Tidbits 101 by Theresa Norwood
January 27, 2019
New Tax Law – How it May Affect Freelancers & Small Business Owners
Whether you approve of our current government operations and law changes, or not, if you are an avid Freelancer or Small Business Owner you will want to check out some of the key changes that may affect you under the new “Tax Cuts and Jobs Act”, which was signed into law on December 22, 2017, and went into effect on January 1, 2018.
Here is a snippet of what you will definitely want to know:
- There is a New 20% Deduction for “Pass-Through” Income – This is income that is reported by individuals from smaller business entities (S-Corps, Partnerships, LLC, Sole Proprietorships, Schedule C). These smaller business types are not subject to corporate tax guidelines; rather, they will count their own profits and then the income will be passed through to the owners (which will then be taxed as ordinary personal income on their tax filings).
Prior to this new tax law, “Pass-Through” Income could be taxed up to a max of 39.6%.
- You can include the FULL COST of MOST Business Equipment as a Tax Deduction UPFRONT – This is in reference to “Capital Assets”, which are considered to be any long-lasting item that you will be utilizing for your business over time. This could be computers, Software, Cars, and other business equipment.
Prior to this new tax law, you were not allowed to deduct the full purchase value of these assets; rather, you would be required to depreciate its’ value over the years. You are now allowed to deduct the FULL COST of these “Capital Assets” for the FIRST YEAR you purchase it.
- “Business Meals & Entertainment Expenses” – You can no longer deduct “Entertainment Expenses”; however, you CAN still deduct 50% of your “Business Meal Expenses” that are NOT entertainment expenses.
- Business Interest Deductions – Prior to this new tax law, businesses were allowed to deduct any interest paid on business loans. Businesses will now only be able to write off interest expenses that are equal to 30% of its’ adjusted taxable income.
- Business Loss Deductions – Otherwise known as “Net Operating Loss (NOL) Deductions” are now limited. Under the new tax law, the “NOL” can only be CARRIED FORWARD, and is LIMITED to 80% in any given year. Whatever “NOL” amount you do not use can be carried over to future years.
Prior to this new tax law, businesses had the option to use business losses to (a) reduce any taxes paid in the prior 2 tax years, or (b) to reduce any future taxable income for the next 20 years.
- Your business had a $100k loss for 2018 (“NOL”)
- In 2019, your business made $100k
- You can use up to 80% of your “NOL” from 2018 ($80k) to reduce your taxable income for 2019.
- If you choose not to use the full 80% ($80k) for 2019, you can carry the unused NOL amount over to future years. (capped at 80% total max deduction, combined)
Please take note that in order to take any deduction, you will always need to be able to prove your fees/costs paid. Meaning, you need to keep all receipts, and in an organized manner.
You can find more “DETAILED INFORMATION” at this link: https://www.irs.gov/publications/p334#en_US_2010_publink100025401
Disclaimer: I am not a Tax Professional and am not offering any tax advice with any of my posts. J I am merely offering you tidbits of information that I have knowledge of, which you are free to take and file away into your memory banks, do your own research on how it can benefit you, and to pass along to all of your friends and family who may also be an Entrepreneur or Small Business Owner.
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