Depending on where you fall on the political spectrum, the last few years have been undeniably mercurial. There have been changes, tidal shifts even, spanning varied issues like immigration, the EPA, and health insurance. Whether you’re aware of it or not, another area that has recently undergone a seismic shift is tax laws.
The good news is that it’s a very good time to be running or thinking about starting a business; the bad new is you still have to pay taxes.
Tax Cuts and Job Acts
Otherwise known as the 2018 tax bill, it made very important changes to how much businesses pay in taxes. One of the most crucial elements is the elimination of the marginal tax rate system.
How much you paid in taxes on your profits used to depend on how much you made. The more money you earned the more taxes you paid. However, the recent tax bill changed this to a flat 21% tax on all profits. This means you only pay 21% tax on your profits, ever.
So if you own a business and it’s doing well, you’re sitting pretty.
Built from the bottom up
There are different business structures:
- Sole ownership
- S Company
- C Company
To truly understand the new tax laws and how they affect you, you’ll need a basic understanding of these different types.
One is the loneliest number
Sole proprietorship means many things, and total control and total responsibility are just two of them. (If you don’t claim a business structure, the government will assume you’re running this type of business.) Sole proprietorship means you get all the profits, but you also get all the debts and costs. If you decide to shutter your business, you’ll be solely responsible for all of these payments.
Limited partnerships (LP) and limited liability partnerships (LLP) are two of the simplest business structures if you’re starting a business with someone else. In a LP, only one person in the partnership has unlimited liability. This also means that that person can be held accountable for any fines or violations the company accrues. The other partners have limited liability, which means limited control as well.
In a LLP, partners are all legally protected equally from debts or legal claims.
Working for yourself
A limited liability corporation or LLC tries to protect owners by separating their personal assets from the business. Earnings and losses can go through to an owner’s personal assets without corporate tax, but as an owner of a LLC, you’re considered self-employed and you’ll pay self-employment taxes.
Gotta keep ‘em separated
C companies aim to completely separate personal and business accounts. They require a lot of paperwork, but the C company structure offers the most protection. The hitch – profits are taxed twice, corporately and on shareholders’ personal tax returns. The benefits – if the business changes hands, shareholders can rest assured that it will keep running smoothly.
No taxation without representation
S companies are structured to avoid double taxation, like C companies, and there are a lot of stipulations too. Along with extra paperwork, there’s a limit to the number of shareholders this type of business can have, as well as other margins.
For the common good
Non-profits are usually charities or other organizations with educational, literary, scientific, or religious bents. These institutions can be exempt from taxes as their work benefits the public.
That’s a lot of information, but it’s important, especially to understand the awesome benefits to those with sole ownership, a partnership, a LLC, or a S business structure. All business income from these types of companies passes through to the owners’ personal tax refunds. That’s why they call these pass-through businesses.
Additionally, small business owners like these will be able to claim 20% of their income on their taxes. This means if you make $100,000 in one year, you can deduct $20,000 before normal income taxes apply. That’s a lot of greenbacks.
Call an expertAs you can tell, this is tangle of laws, limits, and stipulations. Best left to those who know it best, like the tax experts at Cape Coral Accounting Service, Inc.