Best Practices, Operations, V4I2

Shed Builders and Tax Reform

Mike Slack

As the 2018 tax season progresses, shed builders may be wondering how the Tax Cut and Jobs Act passed late in 2017 will impact their businesses.

“There are many variables in the law that will impact each business differently,” says Mike Slack, lead tax research analyst at The Tax Institute at H&R Block.

While there is a lot going on in the new law, Slack notes that are three areas that will impact businesses, like shed builders, most: the new 20% deduction from business income for pass through businesses, a reduced C corporation rate, and the elimination of the corporate AMT.

Deduction for Pass Through Businesses

Many shed builders are small businesses, organized as sole proprietorships, partnerships, and S corporations. Slack says the Act establishes a 20% deduction of net income for businesses of this size, known as pass through businesses.

The name comes from the fact that instead of paying a corporate tax, business profits “pass through” to the owners, who report it on their individual tax returns.

“This deduction is essentially a 20% ‘haircut’ off the top of a business’ otherwise taxable profit, as it requires no additional capital outlay on the business to be eligible,” Slack says.

However, he notes that the deduction becomes limited once income levels exceed $157,500 ($315,000 for joint return filers).

Slack notes that the 20% deduction will expire at the end of 2025, as the law stands today.

New Tax Rate for C Corporations

While many shed builders operate as small businesses with “pass through” incomes, some may be organized as C corporations, which are taxed separately from the owners.

According to Slack, one of the more significant new law provisions cuts the tax rate for C corporations to a flat 21%.

Prior to the Act, C corporation rates were graduated, he says, starting at 15% for taxable income up to $50,000, 25% for income between 50,001 and $75,000, 34% for income between $75,001 and $10 million, and 35% for income above $10 million.

“Businesses operating as C corporations are likely to see a more favorable tax bill overall due to a flat tax rate of 21%,” notes Slack. “At the same time, they will also have new or expanded tax benefits. They should reevaluate their tax planning and strategies to make sure they’re getting the best outcome.”

Slack adds that the Act also eliminated the corporate AMT (alternative minimum tax) starting in 2018. The corporate AMT was meant to make corporations pay a minimum tax of 20% if breaks made their taxes too low.

“That being said, businesses with AMT credit carryforwards may continue to partially use those through 2021,” he says.

Employee Wage Withholding

Finally, Slack says the Act eliminated personal exemptions, and this will require many employees to update their Form W-4 withholding allowances.

“The IRS released the new tables in February, and employers must adjust the withholding from their employee’s checks to account for the removal of those personal exemptions,” he says.

Note: This article is for informational purposes only. Consult a tax adviser regarding your own tax questions.

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