If you own a small business, then you put all of your energy into maximizing your bottom line and your tax refund. However, you might be concerned with how the new tax laws, such as those associated with partnership and sole-proprietorship taxes, that were passed this year will affect the future of your business. So, below is a guide to how pass-through income, such as the income of small businesses, will be calculated and how it will impact your tax filings and tax prep.

What Is Pass-Through Income?

Pass-through income is revenue made by businesses that aren’t considered C corporations and, therefore, don’t pay corporate income tax. Pass-through businesses include S corporations, partnerships, and sole proprietorships. 

What Are the Tax Advantages of Having a Pass-Through Business?

Pass-through business income, like C corporation revenue, still follows the tax rules for inventory accounting and depreciation. However, one advantage of pass-through income is that it’s only taxed once through the owner’s personal tax return.

For example, if you own a sole-proprietorship, you file the profits from your company on your personal tax return. Your sole-proprietorship taxes would then be calculated from regular income tax rates. C corporations are taxed twice: once through corporate tax rates and again when shareholders receive dividends, sell stock, and realize capital gains. 

How Is Pass-Through Income Calculated Under the New Tax Laws of 2018?

With the new tax laws of 2018, pass-through income will still be calculated through the owner’s personal return. However, a new rule will decrease pass-through business dues, such as sole-proprietorship taxes, that will increase their bottom line. Business owners may receive tax deductions of 20% from their qualified business income. This law means that certain pass-through businesses, with the exception of service businesses like financial services and consulting, will only have 80% of their income taxed.

If you own a small business and have questions about tax reform, the team at ZP Tax in Silver Spring, MD, can provide the tax help and personal attention you need to feel secure with your financial situation. They stay updated on the latest tax laws and handle any questions or concerns you have, such as those involving LLC and sole-proprietorship taxes. In addition to tax prep for individuals and businesses, they also perform bookkeeping and payroll services to keep your company running smoothly. Give them a call at (301) 587-4829 or visit their website to learn more about why they’re the trusted tax experts.